Nexus Industrial REIT

Welcome to Nexus Industrial Geek second quarter of 2025 results conference call. As a reminder, all participants are in 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 your cell phone keypad. Should you need assistance in the conference call, you may press signal and operate by pressing star then 0. I would now like to turn the conference over to Kelly Henshicks. Chief Executive Officer. Please go ahead.

I'd like to welcome everyone to the 2025 Second 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-draft measures. Certain statements made during this conference call may constitute forward-looking statements which reflect the REIT's current expectations and projections of our future results. Also during this call, we'll be discussing non-draft measures. Please refer to our MD&A and the REIT's other securities patterns, which can be found on our website and at cdr.com for cautions regarding forward-looking information and for information about non-GAAP measures. All right, the second quarter was our first of the PurePlex Canadian-focused industrial REIT, and I'm very pleased with the results. Despite selling our office and retail portfolios in some non-core industrial buildings over the past 12 months, which is 33 properties in total, Our net operating income increased this quarter by 1.7% to $32.2 million compared to a year ago. This is a fantastic achievement. This growth can be largely attributed to three things. One, strong leasing and robust growth in this industrial-planned property NOI. Two, the completion and tenanting of profitable development projects. And three, accretive capital recycling through the disposition of legacy non-core buildings and the acquisition of high-quality tenants and industrial properties. I will discuss each of these in more detail. So the second quarter was another strong leasing quarter for Nexus. At the beginning of April, we facilitated an early lease termination at our 42nd Street East property in Calgary and re-leased from the property to a large multinational energy company effective August 1st under a very long-term lease with significant rent loss. The termination fee left us slightly ahead during the May to July picturing period. Combined with the higher rent from the new tenant, we will earn an additional NOI of $175,000 in 2025 and $250,000 in 2026. In total, we completed nearly 400,000 square feet of new leases and renewals, and on these renewals realized a rent lift of 38%. These actions combined with embedded red escalation in our leases resulted in industrial-stained property NOI growth of 2.8% in the quarter and 4.3% for the first half of the year. We are on track to hit our target of mid-single-digit industrial-stained property NOI growth again in 2025. Of the approximately 1.7 square feet of GLA that was set to expire this year, we have leased over 90%, and we are in discussion with tenants on the remaining 10%. You will recall that in the first quarter, we had two tenants enter credit or protection. I'm pleased to share that last week, we signed a 15-year lease with one of Canada's largest construction services firms for our 223,000-square-foot building at Clark Road in London, Ontario. This building was vacated in April after PV Mart entered credit or protection. The new tenant has taken off since the effect of August 1st. During their six-month fixing period, the new tenant will invest approximately $8 to $10 million to update the building and pay rent of $3 per square foot, roughly equivalent to PV Mart's exit rate. In January 26, the fixing period ends, and the rent ramps up to $7 per foot net, and the annual rent steps of $1 a foot until 2031, and then it goes 2% thereafter. Our ability to quickly backfill this property is a testament to the strength of our operating team, our connections in the southwestern Ontario market, and the quality of our portfolio. In April, P.G. Martin also vacated a second building at Fort 40th Avenue in Red Deer, Alberta. We are in discussions with a few prospective tenants, however, it is not yet leased. The building is 190,000 square feet, which is large for that area, so we need a specific user. We are marketing it for both lease and for sale. in the event we find an owner-operator who is interested in it. At our cross-stock facility at 102 Avenue in Southeast Calgary, the receiver has continued to pay rent and plans to vacate at the end of September. We have a tenant lined up to take possession shortly after the receiver vacates, with a two-month fixing period. We expect to finalize the lease in the coming weeks once we receive official notice from the receiver. In the second quarter, we advanced construction on two development properties, In August, we plan to complete construction of the new 115,000 square foot small bay industrial building at 102nd Avenue in southeast Calgary. And leasing is ahead of schedule. We already have tenants for eight of the nine units, three of which are firm and five are conditional. And we expect the cash flow to be fully stabilized by the end of the year, way ahead of our schedule. The total project cost is $15 million and will deliver an 11% unlevered return on investments. By the end of August, we will have substantially completed construction at our 325,000 square foot project at Dennis Road in St. Thomas, Ontario. We've been earning 7.8% on our development costs at this project as they have spent. However, effective September, having now met the criteria for substantial completion, the project will transition to earning a full 9% yield on development costs of $55 million. We are still looking for a tenant for our 115,000 square foot rubber road new build in Hamilton, which we completed last summer. We own 80% of the property and expect to earn a 5.9% building yield on our $20 million share of the development costs. There's been a challenging market in Hamilton. It is very much slowed over the summer months, but we do have a brand new state of art 40 foot clear leaf certified product, and I'm optimistic that it will be leased in the fall when the market starts to pick up. This summer has been pretty slow in that market. In the second quarter, we announced two additional development projects, which will get underway in Q3, Q4. First, we acquired the land surrounding our industrial building at 555 Adams Road in Kelowna, B.C. for $19 million, composed of $12 million in cash and our vacant industrial property in Fort St. John. We are in the planning process to build small bay industrial units on this property. In view of the demand for more space at our Richmond property, we will add an additional 52,000 square feet for an estimated cost of about $29 million. Cost will be paid in REIT units, issued at $10.50 per unit. REIT will earn 6% of cost during construction period and will earn a contractual 5% yield upon completion. Construction is scheduled to begin in the fourth quarter or early first quarter of next year. Nexus has a track record of opportunistic capital recycling through the disposition of legacy buildings and acquiring newer, high-quality tenant industrial buildings. In the second quarter, recent acquisitions contributed approximately $600,000 to NOI compared to the same quarter last year. During the quarter, we also sold two empty, non-core industrial buildings for a total proceeds of $11.2 million. The proceeds were recycled to acquire vacant land for future development and for debt reductions. We are also under contract to sell our excess land at a remaining retail property at Aldonju. We expect the land sale to close in August, so scheduled for about mid-August right now, which will give us past proceeds of $8.5 million after we will look to then sell our 50% ownership in the mall. So the mall is an attractive asset and it cash flows well historically, so we expect it to have quite a bit of interest. In summary, we continue to advance our strategy in 2025 as a Canada-focused pure-play industrial league. We will continue to realize organic growth through embedded rent steps and positive mark-to-market on renewal. And we've made excellent headway on our developments, two of which will be completed in August. So I'll now turn the call over to Mike to give some more comment on our financial.

Thank you, Kelly, and good morning, everyone. Starting with headline earnings in the quarter, we posted a net loss of $7.6 million, a $51.2 million decrease compared to a net income of $43.5 million last year. The decrease was primarily due to a lower fair value adjustment on Class B LT units by $35.8 million and a lower fair value adjustment on investment properties by $24.7 million, partially offset by a higher fair value adjustment on derivative financial instruments of $7.7 million and a lower finance expense by $1.2 million. As Kelly mentioned, our Q2 net operating income increased by 1.7% or half a million dollars year over year to $32.2 million. Of this amount, opportunistic lease terminations and tenant reimbursement of capital improvements accounted for $1.5 million. New acquisitions accounted for $600,000. An increase in same-property NOI added an additional $400,000, and development projects added $200,000. This growth was partially offset by $2.2 million relating to asset dispositions made since the second quarter of 2024. Normalized FFO for the period was 18.8 cents per unit an increase of 6% compared to 17.8 cents from a year ago, and normalized ASFO for the period was 15.9 cents per unit, an increase of 7% compared to 14.8 cents from a year ago, primarily driven by lower interest expense due to higher capitalized interest and by the higher net operating income that I just mentioned. Total general and administrative expenses for the quarter were $2.2 million, which was $300,000 higher than a year ago, predominantly due to higher compensation expense. Net interest expense in the quarter was $12.7 million, a $1 million decrease from the same period last year. The decrease was primarily due to higher capitalization of interest expense on development properties of $700,000 and due to lower interest on mortgages by $300,000, resulting from property dispositions. At June 30th, Our NAD per unit was $13.17, a 4 cents per unit decrease from last year. Our weighted average cap rate increased by 6 basis points to 5.87% in the quarter, compared to 5.81% at March 31. The carrying value of our investment properties increased by $11.5 million in the quarter, primarily due to $18.8 million of acquisitions, namely the land in Kelowna, B.C., development spend of $8.5 million, and capital expenditures and tenant improvements of $4.2 million. This was partially offset by $10.8 million of negative fair value adjustments and a $9.2 million reduction from investment property reclassified to assets held for sale. Subsequent to quarter end in August, we upsized our existing syndicated committed credit facility by $160 million to a total of $785 million and expanded its expiry by 1.5 years. It now consists of a $200 million term loan expiring in August 2027 and a $585 million revolving facility expiring in August 2028. I will now turn the call back to Kelly.

Thanks, Mike.

We will open up the line for questions. Thank you.

We will now begin the question and answer session. To join the question queue, you may press star then 1 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 questions, please press star then 2. We will pause for a moment as callers join the queue. The first question comes from the line of Brad Stooges with Raymond James. Please go ahead.

Hey, good morning, guys. Morning. I guess just running on the leasing front and just thinking about the back half of the year, obviously you've got, you know, success releasing some of the TV market space that you're getting, so space back in Alberta. Where do you think I can see could end up by the end of the year, and what would be baked into your same score guidance at this stage? So our change score guidance of mid-single digits is unchanged, so pretty comfortable with that number. That would include the lease-up of the space, receiving daycare space in Rundance. we assert that we have now, you know, just reached that effective August. And it would, that's effectively it. I mean, that and then, you know, just general expectations around, you know, normal renewal. At this point, we've now renewed, of the upcoming renewals in 2025, we've renewed over 90% of the expiry, so pretty comfortable with where we're sitting for the rest of the year. And those are at a, on a year-to-date basis, overall risk of of 26% red list. But no, our SPNY growth for the remainder of the year would not assume lease up in the IFPB vacated space in red year. Yeah. Okay, that makes sense. And just looking at, given that you addressed most of the 25, just thinking about 26 lease expires, a lot of it's with Ontario again. Anything that stands out in terms of potential for non-renewal, or how are you thinking about at least the early stage of your 2026 lease expires?

I think that actually we're off to a pretty good start on 2026. We had a couple that we were thinking maybe there's another Ballard building in Manitoba, just outside Winnipeg. but it sounds to me like they're going to renew there. So I think things are actually looking pretty good for next year overall, since we think we're, from last thing I remember, about 40% of next year's renewals are already kind of done. So I think it looks pretty good for next year.

Yeah, I think the other one that you've spoken to, which is... We're optimistic about it, but it's obviously a priority for us, is the new building in Hamilton, one-minded lover. So that's a focus for us, and then clearly it's a remaining season right location in right here.

Sounds good.

And because looking at the 26th, it's given, you know, rents are still pretty low market in Ontario. I guess you're still expecting some pretty decent rent lifts. production overall on a blended basis. Yeah. Okay.

I'll turn it back to you.

Thank you. Next question comes from the line of Kyle Stanley with Big Garden Physical Writing. Thanks, my guy.

My guy. maybe just sticking with the commentary on 2026, you know, I think you've kind of walked through how things shake out. You've given your mid-single-duty same-property growth outlook for 2025. Is there anything that suggests that that, you know, changes materially in 2026? So, Kyle, I mean, it's really for us to really give guidance for 2026. I think we're, you know, very happy with the progress we've made for 2026, but don't want to give specific guidance around that at this point. I mean, you can see the rent list that we expect are pretty solid, and we're very comfortable with the quality of our portfolio and the development that we have coming on board now and that that will contribute to next year. Okay. Well, fair enough. This quarter, and you mentioned it in your prepared remarks, the company's least termination income, Was there anything more one-time, I mean, lease termination income tends to be one-time, but anything more specific about the income that was realized this quarter that you can elaborate on? Yeah, I think it's important to call out that that lease termination income really is not, I wouldn't consider that one-time. That was really to indemnify us for downtime. We facilitated an early lease termination for the tenant there. in order to get a new tenant in, because they, you know, the existing tenant wanted to leave.

Yeah, our existing tenant added up the stub lease, and they found this tenant, a big U.S. multinational, and they needed a fixer-in period, and we had term with them. So what we said is that's fine, but you're going to effectively continue to pay the rent until they finish fixer-in. And that was like four months, and they still paid in a lump sum to us just to get out of all their obligations. So that's how that all came together. Okay. Okay. Thank you for that.

That makes sense. Just the last one, the $77 million of assets held for sale in retail, assuming that is the whole down due, is that a good estimation for what you think your 50% interest is worth today in the private markets? So we're carrying it at, I think it's around $26 million of that, about eight and a half. Eight is the land, and then 17 and a half is carrying value for the mall.

Okay. Okay. Thank you for that. I will turn it back. Thank you.

Next question comes from the line of Matt Cornett with That's the facts I mentioned before.

Hey, guys. Just trying to understand the lease termination and PV impact a little bit more in the quarter. So should we think of this that you got four months instead of three months for the lease that was terminated, but it was otherwise vacant during the quarter? And then also on PV, it was vacant for, I think, two of the three months in the quarter. But it will get released, if you give us a sense, in light in terms of how the accounting for those release step-ups will look as well. So I think, fair to say, that the termination fee that we got really just backfilled us, kept us whole, you know, maybe slightly more, but not materially so, for April, May, June, July. and that was effectively the fixturing period where the new tenant was coming in. The new tenant has now come in at $15.41 a square foot, and TV was at $12.50. So, you know, we'll see that uplift, you know, starting in August when the new tenant took possession.

Okay, and sorry, I paused.

No, sorry, you paused. You mixed up Piaget, Peavey, and Ballard in Baker Hughes. Oh, sorry. Yeah, sorry. He didn't mean Peavey. Baker Hughes is our new tenant. Ballard was the old. So we got somewhere around a $3 foot lift on that movie. Okay.

So that one is the one that starts in three, and you get three until the end of the year, and then it's seven for 26 and increases by a dollar the year after. No, no. The PG one is the three bucks, the one three.

So let me just say, so the one, Baker Hughes and Cowdery, that's the new deal that took over from Ballard. That is for almost a $3 foot lift plus escalation going forward. PD is the one that has, and that's in London, and that had... We call it a fiction period because they're going to spend about $8 to $10 million on that site. So we gave them a break for this fixturing period. So that's why it's $3 for this to the end of the year on that site, which begins in August. So we had it vacant, I think, from April, I believe. End of April. So May, June, July was vacant. August 1st, the new tenant starts. And that's at $3 a foot. And in January 1, that goes to $7. And then every year there's a dollar a foot escalation to $2,031. Okay. And then it goes 2% after that.

And I guess this quarter, if you stripped out the lease termination income, I mean, I think you did that for your same property and a wide growth number. And that's why the same property and a wide growth was lower than 10%. who you would have thought. It's lower because we're laughing a higher number in Q2 2024. Okay. Was there anything one time in nature in Q2 of 24? I know it did go from negative up to... That was leased up for Richmond. So Richmond started leased up, and that's why. Okay. I think I'm good, but I may need to follow

Thank you. Next question comes from the line of Tunisian with RBC Capital Markets. Please go ahead. Thank you.

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Ladies and gentlemen, we have an issue. So if you have any questions, you can reach out to Mike Rawls directly. Thank you. I'll just hand over the call to Kelly Hansik for closing remarks. Please go ahead.

Sorry for the operator having technical difficulties. If anyone has any questions, can you just please call Mike or myself, and we'll get back to you right away.

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