Nexus Industrial REIT

Thank you for standing by. This is the conference operator. Welcome to the Nexus Industrial REIT First Quarter 2025 Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star, then 1 on a telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and then 0. I would now like to turn the conference over to Kelly Hansen, Chief Executive Officer. Please go ahead. Thank you.

I'd like to welcome everyone to the 2020 First Quarter Results Conference Call for Nexus Industrial REIT. Joining me today is Mike Law, Chief Financial Officer of REIT. Before we begin, I'd like to caution with regard to forward-looking statements and non-JAP measures. Certain statements made during this conference call may constitute forward-looking statements which reflect the REIT's current expectations of the -the-Bowse teaching results. Also during this call, we'll be discussing non-JAP measures. Please refer to our MDNA and REIT other securities filings which can be found on our website and our QRR.com for cautions regarding forward-looking information and for information about non-JAP measures. This quarter, we close on the sale of 15 of our 16 retail properties. This marks the completion of our strategic repositioning to make Nexus the only Canada focused pure play industrial REIT. This transition has been several years in the making. First, we invested to improve our business. Our goal was to high grade and optimize our portfolio taking advantage of an uncertain economic backdrop and we can real estate market to acquire and develop high quality assets. Next, we focus our portfolio by selling our legacy office retail assets making Nexus a pure play industrial REIT. Today, our NOI is now over 99% industrial on a post-forma basis. We've used the sale proceeds to strengthen our balance sheet and to construct three development properties and to advance two more. Thirdly, we delivered operationally driving robust industrial same property NOI growth through a combination of proactive leasing, realization of -to-market lists on renewals, and annual rent steps that are embedded into our leases. So we'll dive into our Q1 details and our actions in a minute. However, before I do, I would like to address the recent tariff induced economic turmoil in Nexus positioning in this uncertain environment. Overall, the tariff war is clearly negative in the Citi sector. There is no denying that. However, so far our operations have performed very well. Despite the economic turbulence, our industrial occupancy increased in the first quarters to 97%. And we maintain momentum with our renewals by completing three exceptional leases that we'll expand on later. We also made headway with pre-leasing at our Calgary small bay development, which is exceeding our expectations. Structurally, we are well positioned to weather the tariff induced turmoil. Only about 6% of our NOI is related to the auto manufacturing supply chain. In fact, approximately 85% of our NOI is derived from tenants who are Canadian distribution and third party logistics. Our leases have a relatively long walt of seven years, which reduces renewal risk and our leases are on average 20% below market rates, which gives us price and flexibility on renewal. Our portfolio is well diversified across Canada, and we have strong tenant relationships as evidenced by frequency of our tenant upsizing and development partnerships. Turning to our recent distribution, as I mentioned, we closed on the sale of our 50% ownership stake in 15 of our 16 retail properties this quarter for a total of $47 million, representing a 6.8 cap rate on in-place rents. Net of our share of the mortgages of $32 million in transaction fees, we received proceeds of $15 million. We use the proceeds to reduce our debt and also to fund our two in-process development projects. Following the sale, apart from our industrial portfolio, we are left with one 50% owned retail property, which is Rayal, Downsville, and two 50% owned office properties. At Downsville, we have severed a portion of land and now have the land under contract for sale, which we expect will close in July for cash of about $6 million and a vendor take back of about $3 million. The mall is an attractive asset that cash flows well for us. However, we receive a lot of unsolicited interest, so I expect that it will sell relatively quickly, and I expect our joint venture partner in the project likely to buy out our share at or above our current sharing value. This would leave us with approximately 50% ownership in two office properties, one in Montreal, where we have our Montreal office, and one in Gatineau. Given their low value and the nature of partnership agreements, I expect that selling them will be a longer-term project. During the quarter, we advanced our two in-flight development projects at Dennis Road in St. Thomas. We are containing a 325,000 square foot expansion for an existing tenant. We have now spent $49 million of the estimated $55 million total cost. The tenant pays us .8% interest on the development cost, encouraging the construction phase, so there is financing drag on our cash flow. Upon completion, which we now expect will be in the third quarter, the tenant will pay off then equal to a 9% unliberated yield on the total development cost. At 102 Avenue in Southeast Calgary, we are developing a new 115,000 square foot small bay industrial building on vacant land that we currently hold. We have spent approximately $11 million of the $15 million project cost. We expect the project to also be completed in the quarter and to deliver an approximately 11% unliberated return. The building will consist of nine units, which we started marketing to protect the tenants at the beginning of the quarter. So far, I'm very pleased with the high level of interest, and we've already signed conditional leases for seven of the nine units. We're still looking for a tenant for our 115,000 square foot project in Glover Road in Hamilton, which we completed last summer. We own 80% of the property and expect to earn a .9% growing yield on our 25 million share of the development cost. It has been a challenging market in Hamilton, but we have a brand new AVR 45th year LEED certified product, and I'm optimistic that it'll be leased this year. Subsequently, quarter end, we closed on the purchase of land surrounding our industrial building at 555 Adams Road in Kelowna, DC for $18.9 million, components of $12 million cash, and our vacant industrial building in 14th town DC, which was a problem for us. Beginning of July, we will invest $6 million over 12 months to build a small bay industrial condominiums on the site, which we will sell as we go along and fund further development on that project. Due to the demand for more space and parking from our tenant at Richmond, DC property, we'll add an additional 51,000 square feet for an estimated cost of $29 million. This cost will be paid in REIT units, issue that $10.50 per unit. The REIT learned 6% of the cost during the construction period, and the land of contraction will 6% yield upon completion. Conception is scheduled to begin in the third quarter. Turning to operating performance, our operations continue to perform very well. In the first quarter, the net operating income of our industrial portfolio improved 1 million or .4% compared to the previous quarter. This was in part due to an increased industrial occupancy ratio, which rose to 97% in the quarter. Compared to a year ago, our total net operating income was up 2.6 million or .6% to 32.1 million. This increase is largely driven by three factors, acquisitions, organic growth, and development. New properties that we acquired in the last year contributed $1.1 million to the NOI. Same property NOI increased by $1.6 million, driven by .6% growth in the industrial same property NOI from the lease up of our Richmond, DC property, as well as -to-market lifts on the meals and embedded vent steps in our leases. Our EC developments at Titan Park in Regina and Hooby Road in London contributed $1.6 million in quarter. Looking forward to the remainder of 2025, we have already renewed over 80% or 1.4 million square feet of GLA that was set to expire this year. The growth on expiring rents for these renewals is 30%, representing $3.5 million of additional NOI. This includes three value-ad renewals that combined will contribute $2.6 million of additional NOI in 2025 and $2.9 million in 2025 and 2026 and increasing thereafter. The first of these renewals occurred at our 255,000 square foot industrial building at Robin Hills Road in London. Here we completed an early blend and extend with the existing tenants for a three-year lease, resulting in a rent increase from $4.35 percent, 4,35 cents net per square foot to $12.50 per square foot net. The agreement was updated to January 1 of this year, so we are receiving a full year of benefit in 2025. The agreement has 7% annual rent escalation in 2026 and 2027. At our 293,000 square foot industrial building on Riverview Drive in Shadow, Ontario, we completed a lease expansion in a five-year renewal with the primary tenant. Effective June 1, the tenant will increase their occupancy to 269,000 square feet, absorbing 31,000 square feet from the tenant who recently departed with a nice rent lift from $450 to $960 per square foot, an annual rent steps thereafter. In total, this will add approximately $175,000 to the NOI in 2025 and $250,000 in 2026. The third renewal occurred at our 165,000 square foot building located at 42nd Street East Calgary where we facilitated an early lease termination effective March 1st at the tenant's request in return for an 800,000 termination fee. The fee was received in April and leaves us slightly ahead for May through July when the building will be empty. Effective August 1, we have leased the building to a large multinational energy company under a 15-year lease term for 15.41 cents per foot with annual rent steps thereafter compared to the out-boring rent of $4.50 per square foot. Overall, this adds about $240,000 to the NOI in 2025 and $275,000 in 2026. As mentioned in March, we are aware of two tenants who have entered credit and protection that could impact our 2025 results. Through to the end of April, these tenants have continued to pay rent. PV Mart, tenants at our building, is located at 40th Avenue in Red Gear and Clark Road in London. They have terminated their leases effective April 25th and will take us some time to find a new tenant in Red Gear. In contrast, I anticipate we would be able to quickly find a new tenant in London and given the property had a long-term lease well below market at approximately $4.00 net, releasing this property will be positive for us. We have strong tenant interest from three different groups as we speak and hope to have an office sign in the next few weeks. The second tenant, Grace Road Lines, occupies the site at 102 Avenue in South East Calgary but is anticipated to be either the end of May or June. Similar to London, we should be able to find a new tenant quickly. We are currently marketing it and have strong interest from a We will proactively minimize any downtime on these sites. Due to our solid operational performance, I continue to expect that we will choose -single-digit industrial same property and a wide growth for the year. In summary, we continue to advance our strategy in 2025 as Canada focuses peer-play industrially. We're making excellent headway on our development. We will continue to recycle capital and we will continue to realize organic growth through embedded steps and positive market on renewal. I'll now turn the call over to Mike to give some more color on our financial.

Thank you, Kelly and good morning everyone. Starting with headline earnings in the quarter, net income was $33.2 million, a $10.5 million decrease compared to last year primarily due to a higher loss from the fair value adjustment of the derivative financial instruments by $15.5 million and a lower gain on investment properties by $6.3 million, partially offset by a higher gain on the fair value adjustment of high speed LT units by $8.2 million and higher and net operating income of $2.6 million. As Kelly mentioned, our Q1 net operating income increased .6% or $2.6 million year over year to $32.1 million. On this amount, the increase in same property NOI added an additional $1.6 million, development projects accounted for $1.6 million and new acquisitions added a further $1.1 million. This growth was partially offset by $1.4 million relating to dispositions made since the first quarter of 2024. Normalized ASFO for the period was .15.4 per unit compared to .13.5 per unit from a year ago, primarily driven by higher net operating income. Total general and administrative expense for the quarter was $2.3 million, which was $100,000 lower than a year ago, predominantly due to lower compensation expense. Net interest expense in the quarter was $13.3 million, a $200,000 increase from the same period last year. This increase was primarily due to the lower capitalization of interest expense on development properties of $200,000 and due to higher deferred financing cost and revitalization by $100,000, resulting from the property dispositions. At March 31, 2025, our NAV per unit was $13.21, a $0.02 per unit increase from last quarter. Our weighted average path rate decreased by one basis point to .81% in the quarter compared to .82% at December 31, 2024. The carrying value of our investment properties increased by $10.9 billion in the quarter, primarily due to development spend of $7.1 million, capital expenditures and tenants' incentives of $3.6 million, and $11.6 million of positive fair value adjustments, partially offset by an $11.5 million reduction from investment properties we classify as a hell for sale. I'll now turn the call back to Kelly.

All right, James Mike, with that, operator, please open up the lines for any questions.

Thank you. We will now begin the question and answer session. To join the question, too, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star and then two. We will pause for a moment as callers join the queue. And your first question today will come from Brad Sturgis with Raymond James. Please go ahead.

Hey, guys. Just want to start off on the announcement with the expansion at Richmond. Just want to understand, I guess, a little bit more how the C or the Class B issuance would work. Is there certain milestones that we could think about in terms of how that would that payment would happen?

Yeah, they get the lease on as construction progresses. So, drawings and permits, foundation, etc., etc., as it goes. So, they get the lease and call it five, five percent, five percent, five percent, ten percent as the project moves along.

Gotcha. And what's the timeline for the project in terms of commencing and then completing?

I think it'll probably, I mean, the drawings are being completed now. Then it's in for permits. And we're kind of expecting end of the third quarter, I think, for commencement and it'll be about a year. Perfect.

Last question, obviously, you guys have done a lot of heavy lifting on rebalancing the portfolio and, you know, you hit your target in terms of your industrial weighting. How do you think about further rebalancing or capital recycling on the industrial side? Should we expect to see some activity going forward in terms of hydrating the industrial side or you think you're pretty stabilized at this point beyond the development or acquisition?

Yeah, I think the overall portfolio quality is really, really strong now. But we've had interest from some groups on individual assets out there. So, I've probably targeted, we'll see what the pricing looks like. But initial discussions, it seems okay, pretty good. So, I've targeted maybe call it five assets that maybe will recycle capital on, move out of them because we are looking at a few that kind of have fairly good significant mark to market list on So, if we can recycle those, we'll cycle back into some other ones. We're seeing a lot of stuff in Montreal area that I think can give us some pretty positive rest going forward. So, there'll be a little bit of capital recycling for the balance of the year. That's what I'm expecting. So, a little bit, like opportunistically,

a little bit out of west and maybe come back. Set them up to get that. That's the way it plays out. Okay. Exactly. Perfect.

Thank you.

And your next question today will come from Mike Markitis with BMO Capital. Please go ahead.

Operator, good morning guys. So, I think this person's asked on the Robinson Road late 50s, I think, for you guys. But maybe just give us a little bit more color on the negotiation and why a three-year term was selected as opposed to something a bit longer.

Yeah, so they had a renewal option that was fairly lengthy. And so, at the end of the day, they have a contract and that contract expires at the end of the three-year term. So, that's how we were, it was either to stick them with the five-year or five-year plus term or shorten that period and taking it now. Now, that ten-year has been in there for a couple decades. I don't anticipate they're going to leave, but it is a big U.S. multinational and the local guys are only given the money to renew as long as the term of their current contract. But that contract has kind of been renewed over and over and over again. So, I don't anticipate the meeting, but that's why the three-year term versus something longer. Got it. Thanks

for that. Okay, and then just touching on Richmond a little bit more. Maybe you could just help us understand, like I think the tenant in place is still not paying full rent on the existing. So, maybe walk us through how you're comfortable funding the expansion on the remainder.

Yeah, well, they are paying full rent on the existing right now. And what's happening is the club is now in its off-riding and running, and it's pretty busy. And so, this is to provide more course and additional parking because the parking at the site is pretty tight. So, hence it's a little more expensive than what is typically good, but there's going to be some additional underground parking, and that's at the front of the building close to the road. And at the same time, so while we build that, we're also going in for bonus density and a significant amount of bonus density. And if you get that bonus density, there's huge valuation for that property. And I think that at that time, we would probably look at some places to exit out if we can to sell it and sell it without bonus density. So, it's a little bit of a two-phase thing to complete that. It just doesn't become comparative that I have that club operating and driving, and the parking's required, and they will need additional course. So, that's how it all came together.

Oh, okay. Interesting. So, that was the one into my next question there. So, this doesn't impact the potential for incremental density site, in fact, then it might still have some degree of impact. Yeah. Listen,

the thingy thing, it was brutal to work with on permitting and getting everything done, and now they're kind of bending over backwards because the project is, it's probably one of the best projects in Richmond going on right now. So, the mayor's really excited about it, everybody's excited about it. So, I'm pretty hopeful that we're going to allow some bonus density.

Okay. And then, can you just remind us of the potential scale of the bonus density? That's it.

Yeah, upwards of, call it 240,000 per feet. And that's an industrial use? Yeah, it'd probably be, but yeah, yeah, but something more along the line, but probably like a storage use or something along those lines that would fit in there. Got

it. Okay. And then just so unclear, so the existing, because I think there was a rent break that was done initially, so that's now on or it's fully being paid?

Yeah. So, we originally reset the leases after this whole debacle of the permits and all that to the existing rental rate today. I think it steps up next year, and then I believe the year after as well. Okay. Got it. Okay. That's it. I'll turn it back. Thank you.

And your next question today will come from Jimmy Shen with RBC. Please go ahead.

Thanks. Just to follow up on that, that Robin Hill, London, you feel, yeah, it does look like a pretty good deal from translation, etc. Is that representative of what you could do today? And I guess I'm looking at your PV site and it looks like it's not fall off. Is that, would that be your expectation, kind of a similar market rent for that site?

Okay. So, on the PV site, we are in negotiations with someone pretty close. It'll be a little different. That building's a little bit older. The Robin Hills Road site is one of the best buildings in London. It's a really great site. The PV path is lower tier height. So, we either have to pump some money into it or we're going to structure a deal where it starts lower and then incrementally ramped up over the next five years. So, we're working on a long-term deal. So, it might start lower and then ramp it up to kind of market in over four or five years is kind of how we're doing it. And that would be more on an as-is basis ticket and take it right over. So, that's what we're working on right now.

Okay. And then is the expectation still that, you know, if once you do that deal on the PV site, it'll kind of make you whole on the whole, like even if you don't at least the regular asset you'd be able to, the NOI would sustain more or less.

Yeah, I would think by next year. So, you know, by the end of next year, we just kind of be whole, I think, on both of them.

Yeah, I think when we talked in the past about being whole, it was on that we were thinking about that we could rent half of the Clark Road London site and renting half of it would keep us whole on that site. So, it wasn't about keeping us whole on the whole PV portfolio. It was just on that one site. Okay, got it.

And then my other question was you mentioned your exposure to auto is 6%. I just do question one is just a sense of what your exposure to steel would be, steel related tenants. And then when I look at your top 10 tenants, you know, a juicy Ford, mortar, can you say I guess those would be the bulk of the auto quarter?

So, I haven't included Ford in our prize or call it the Lancet's, out west. Those are distribution centers. They're not manufacturing, they're part distribution. So, one is for Eastern, like Quebec and parts of Ontario and the other one is for the west. So, those are like distribution. We don't foresee anything happening along those lines. The, I'd say, you know, Kenisa is an auto parts distribution center. That's what they do. So, it's not like manufacturing. There are some aluminum and auto parts suppliers, one in Barrie, Fortimax that we have, but they do engineering and manufacturing, stamping, and one in Cambridge and then a few in Windsor more on the plastic side. So, that's kind of, I'd say, the majority of our supporters.

Okay. Okay. Thank you. Okay.

This concludes our question and answer session. I would like to turn the conference back over to Kevin Hansick for any closing remarks.

No, I just thank everybody for attending the call and we'll see you in this quarter.

This brings an end to today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.