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 the 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 2025 First Quarter Results Conference Call for Nexus Industrial REIT. Joining me today is Mike Wall, Chief Financial Officer of the 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 and suggestions about future results. Also, during this call, we'll be discussing non-GAAP measures. Please refer to our MD&A and the REAP Other Securities File Filings, which can be found on our website and at CEDAR.com, for cautions regarding forward-looking information and for information about non-GAAP measures. This quarter, we closed on the sale of 15 of our 16 recall properties. This marks the completion of our strategic repositioning to make Nexus the only Canada-focused pure-play industrial REAP. 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 weaker real estate market to acquire and develop high-quality assets. Next, we focused our portfolio by selling our legacy office and retail assets, making Nexus a pure-play industrial REIT. Today, our NOI is now over 99% industrial on a pro-forma basis. We have used the sale proceeds to strengthen our balance sheet and to construct three development properties and to advance two more. Thirdly, we delivered operations, dragging robust industrial claim property NOI growth through a combination of proactive leasing, realization of mark-to-market shifts 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 sheriff-induced economic turmoil and nexus positioning in this uncertain environment. Overall, the tariff war is clearly negative for the KD sector. There is no denying that. However, so far, our operations have performed very well. Despite the economic turbulence, our industrial occupancy increased from the first quarter to 97%, and we maintain the momentum with our renewals by completing three exceptional leases that I'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 vault of seven years. which reduces renewal risk and our leases are on average 20% below market rates, which gives us pricing 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 dispositions, 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 used the proceeds to reduce our debt and also to fund our two in-process development projects. Following the sale of Artformar Industrial Portfolio, we are left with one 50% owned retail property, which is Rayall-Denjou, and two 50% owned office properties. At Anjou, 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 the 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 values. 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 in the nature of partnership agreements, I expect us selling them will be a longer-term project. During the quarter, we advance 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 7.8% interest on the development cost incurred during the construction phase, so there is no 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% unlevered 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 third quarter and to deliver an approximately 11% unlevered return. The building will consist of nine units, which we started marketing to prospective 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 it's correct to earn a 5.9% 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 45-year LEED-certified product and I'm optimistic that it will be leased this year. That's the current quarter end. We closed on the purchase of land surrounding our industrial building at 555 Adams Road in Kelowna, D.C. for $18.9 million, components of $12 million in cash, and our vacant industrial building in Fort St. John, D.C., which was a problem for us. Beginning in July, we will invest $6 million over 12 months to build a small bay industrial condominium on the site, which we will... as we go along and fund further development on that project. Due to the demand for more space and parking from our tenant at our Richmond, D.C. 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 issued at $10.50 per unit. The REIT will earn 6% on the cost during the construction period and will earn a contractual 6% yield upon completion. Construction 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 3.4%, compared to last quarter. This was in part due to an improved 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 8.6%, 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 6.6% growth in industrial same property NOI from the lease-up of our Richmond, D.C. property, as well as market-to-market lift on renewals and embedded rent steps in our leases. Our recent developments at Titan Park in Regina and Hoover Road in London contributed $1.6 million in the quarter. Looking forward to the remainder of 2025, we have already renewed over 80% or $1.4 million per sheet 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 NOIs. This includes three value-add renewals that combined will contribute $2.6 million of additional NOI in 2025 and $2.9 million in 2026, and increasing thereafter. The first of these renewals occurred at our 265,000-square-foot industrial building at Robbins 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 per cent 4,300 cents net per square foot to $1,250 per square foot net. The agreement was backdated 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 Chatham, Ontario, we completed a lease expansion and a five-year renewal with a 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 step 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 determination effective March 31st at the tenant's request in return for an 800,000 determination fee. The fee was received in April and leaves us slightly ahead for May through July when the building will be emptied. August 1, we have leased the building to a large multinational energy company under a 15-year lease term for $15.41 per square foot, with annual rent steps thereafter compared to the outgoing rent of $1,250 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 or 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 buildings located at 40th Avenue in Red Deer and Clark Road in London, they have terminated their leases effective April 25th and it will take us some time to find a new tenant in Red Deer. 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 net, re-leasing 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 Southeast Calgary but is anticipated to vacate 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 the group, which hopefully will mitigate any impact to Nexus. We will ask proactively to minimize any downtime on these sites. Due to our solid operational performance, I continue to expect that we will choose mid-single-digit industrial-same property NOI growth for the year. In summary, we continue to advance our strategy in 2025 as Canada focuses pure play industrially, We're making excellent headway on our developments. We will continue to recycle capital, and we will continue to realize organic growth through embedded rent steps and positive market on renewal. I'll now turn the call over to Mike to give some more color on our financials.

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 on the fair value adjustment of 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 tax fee LT units by $8.2 million and higher net operating income of $2.6 million. As Kelly mentioned, our Q1 net operating income increased 8.6% or $2.6 million year over year to $32.1 million. Of 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 cents per unit compared to 13.5 cents 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 lower capitalization of interest expense on development properties of $200,000 and due to higher deferred financing cost amortization by $100,000 resulting from the property dispositions. At March 31st, 2025, our NAV per unit was $13.21, a two cents per unit increase from last quarter. Our weighted average cap rate decreased by one basis point to 5.81% in the quarter compared to 5.82% at December 31st, 2024. The carrying value of our investment properties increased by $10.9 million in the quarter, primarily due to development spend of $7.1 million Capital expenditures and tenant 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 classified to assets held for sale. I'll now turn the call back to Kelly.

All right. Thanks, Mike. With that, operator, please open up the line if you have any questions.

Thank you. We will now begin the question and answer session. To join the question queue, 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 Sturges with Raymond James. Please go ahead.

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

Yeah, they get the lease on as... construction progresses, so drawings and permits, foundation, et cetera, et cetera, as it goes. So they get released and call it 5%, 5%, 5%, 10% as the project means along.

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

I think it'll probably, I mean, the drawings are being completed now. then it's in for permit. 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 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 do you think you're pretty stabilized at this point beyond 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 outlets 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 we'll recycle capital on, move out of them, because we are looking at a few that kind of have fairly good, significant mark-to-market lift on them. So, if we can recycle all 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 lift going forward. So, there'll be a little bit of capital recycling for the balance of the year. That's what I'm expecting.

It's a little bit, like opportunistically, a little bit out of west and maybe comes back. Yeah. That's the way it plays out. Okay. Exactly.

Exactly. Perfect. Thank you.

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

Thanks, operator. Good morning, guys. Kelly, maybe just first, congrats on the Robinson Road, at least, for the great win 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 stick them with the five-year or five-year plus term or shorten that period in getting it now. Now, that tenant 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 them leaving, 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 lander.

Yeah, well, they are paying full rent on the existing right now. And what's happened is that the club is now operating and running. and it's pretty busy and so this is to provide more courts and additional parking because the parking at this height is pretty tight um so parents 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 in a significant amount of bonus density And if we get that bonus density, it's huge valuation for that property. And I think it's at that time we would probably look at someplace to exit out, if we can, to sell it and sell it with that bonus density. So it's a little bit of a two-phase thing here. If we complete that addition, because some part of that, I have that club operating and you know, thriving and the parking is required and they will need additional ports. So, that's how it all came together.

Oh, okay. Interesting. So, that would be one of my next questions. So, this doesn't impact the potential for incremental density at the site. In fact, anything might facilitate it to some degree. Yeah. Okay.

The city's been, 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 probably one of the best projects in Richmond going on right now. So the mayor is really excited about it. Everybody is excited about it. So I'm pretty hopeful that they're going to allow some bonus density.

Okay. And then can you just remind us of the potential scale of the bonus density?

Yeah, upwards of, call it, 240,000 square feet.

And that's an industrial use?

Yeah, it'd probably be... But yes, yes. But something more along the lines of probably like a storage use or something along those lines that would fit in there.

Got it. Okay. And then just so I'm clear, so the existing... Because I think there was a rent break that was done initially. So that's now gone? 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 on to you. Thanks, Bob.

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

Thanks. Just to follow up on that Robbins Hill, London, UCL, yeah, it does look like a pretty good deal for translation, et cetera. 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 for us. Would that be your expectation, kind of a similar market rent for that site?

Okay, so on the PD site, we are in negotiations with someone pretty close. It'll be a little different. That building is a little bit older. The Robin Hills Road site is one of the best buildings in London. It's a really great site. The PD, half of it is lower tier height, so you 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, like, 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 a course of five years is kind of how we're structuring it. And that would be more on an as-is basis ticket and ticket right away. So that's what we're working on right now.

Okay. And then is the expectation still that, you know, once you do that deal, if you decide it'll it'll kind of make you whole on the whole. Even if you don't release the regular asset, you'd be able to, your NOI would sustain more or less.

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

Yeah, I think when we spoke 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 a toll on the whole PV portfolio. It was just on that one side. Yeah, got it.

And then my other question was, you mentioned your exposure to auto is 6%. I guess two questions. One is, do you have a sense of what your exposure to steel would be, steel-related tenants? And then when I look at your top ten tenants, You know, if you see Ford Mortar, Kanye West, I guess those would be the bulk of the auto sport.

So, I haven't included Ford in our price, or call it Stellantis, or West. Those are distribution centers. So, they're not manufacturing. They're part distributions. So one is for Eastern, like Quebec and parts of Ontario, and the other one is for the West. So those are the distributions. We don't foresee anything happening along those lines. I'd say, you know, Kenusa 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 Derry, Photomax that we have, that they do engineering and manufacturing, stamping, and one in Cambridge, and then a few Indians are more on the plastic side. So that's kind of, I'd say, the majority of our supporters.

Okay. Okay. Thank you.

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

Thank everybody for attending the call, and we'll see you next 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.