Nexus Industrial REIT

Thank you for standing by. This is the conference operator. Welcome to the NEXUS Industrial REIT third 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 one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star to zero. I would now like to turn the conference over to Kelly Hansik, Chief Executive Officer. Please go ahead.

I'd like to welcome everyone to the 2025 Third Quarter Results Conference Call for Nexus Industrial REIT. Joining me today is Mike Rall, Chief Financial Officer of the REIT. Before we begin, I'd like to caution with regard to forward-looking statements and non-GAAP measures. Certain statements made during this conference call may constitute forward-looking statements, which reflect the REIT's current expectations and projections about future results. Also during this call, we'll be discussing non-GAAP measures. Please refer to our MD&A and the REIT's other securities filings, which can be found on our website, netcedar.com, for cautions regarding forward-looking information and for information about non-GAAP measures. In the third quarter, we took another step in our journey as Canada's industrial building partner by completing two exciting new industrial developments and by completing another strong quarter of leasing. Combined, our new developments will add 440,000 square feet of additional GLA and will generate $6.6 million of annual stabilized NOI, representing an enviable 9.4 unlevered return on development costs. On the leasing front, We continue to drive strong organic growth, completing the backfill of two of the three properties vacated by CCA tenants earlier in the year, advancing leasing on the remaining 2025 and upcoming 2026 renewals, and delivering healthy same-property NOI growth in the quarter. I will dive into both the development and leasing achievements into more detail, but first I'd like to reflect on how far we've come in the last 12 months. In September 2024, we were growing industrial REIT, but we still had 16 retail buildings with over 1.6 million square feet of GLA. We also still had six office buildings with nearly half a million square feet, having just closed on the sale of six other office buildings. We had completed three development projects, but still had significant work to do on our largest project in St. Thomas, and we hadn't yet broken ground at our 102 Avenue project in Calgary. Today, one year later, we are in a completely different position. We have nearly sold all of our retail and office buildings at good prices and have used the proceeds to reduce debt and complete development. We are now a pure play industrial REIT with over 99% of our NOI derived from industrial assets. And this quarter, we completed two more attractive projects. We have come a long way in a short time, and I'm immensely proud of our team and the work that we have done. Looking more closely at the development projects that we finished during this quarter, the larger property was a 325,000 square foot expansion, our largest development yet, of our building at 770 Dennis Road in St. Thomas, Ontario. This expansion was for an existing tenant, Element 5, a leading laminated timber manufacturer. The project was originally planned at 70,000 square feet, but as attendance needs grew, we worked with them to adjust the building scope. This resulted in a huge win-win. Element 5 has a North American flagship facility, while Nexus owns a well-located, high-quality building under a long-term lease. During construction, we earned 7.8% on the development spend. However, effective September, having now met the criteria for substantial completion, the project transitioned to yielding 9% on the completed development cost of $55 million. The second property that we finished was a new 115,000 square foot small bay industrial building at 102 Avenue in southwest Calgary. We built this on spec on empty land adjacent to one of our buildings. We completed construction in August. and leasing is tracked ahead of plan. We already have tenants for eight of the nine units, five of which are now firm. We expect the building to begin cash flowing in the fourth quarter and to be fully stabilized in the second quarter of 2026. When stabilized, the building will generate an 11% unlevered return on its development costs of $15 million and contribute an annual net operating income of $1.6 million. We are still looking for a tenant for our 150,000-square-foot Glover new build in Hamilton, which we completed last summer. We own 80% of the property and expect to earn around a 5.9% going in yield on our $20 million share of the development costs. It's been a challenging market in Hamilton lately, but we do have a brand-new, state-of-the-art, 40-foot clear lead-certified product, and we actually – We'll have some pretty good news on that very shortly as things are looking pretty good for us there. But it's a little premature to announce anything, but we'll wait for the next few weeks. We also recently announced two additional development projects, which will get underway in the first half of 2026. We're going to build small bay industrial units on vacant land surrounding our industrial building at Adams Road in Kelowna, B.C., And on our Richmond property, we're adding 52,000 square feet for an estimated cost of $29 million. The cost of being paid in REIT units issued at $10.50 per unit. We'll earn 6% on our costs during the construction period, and we'll earn a contractual 6% yield upon completion. We expect construction to begin in the first half of 2026. The third quarter was another strong quarter of organic growth for Nexus. In total, we completed nearly 150,000 square feet of renewals, an average rent lift of 13%. Year-to-date, we have completed a total of 1.1 million square feet of leasing and realized an average leasing spread of over 60% in expiring and in-place rents. In the quarter, our industrial occupancy grew 1% to 96%. Combined with embedded rent escalation in our leases, our leasing activities drove industrial same property NOI growth of 2.9% in the quarter and on a year-to-date basis. For the full year 2025, we expect to realize same property NOI growth of approximately 3%. In the third quarter, we signed a 15-year lease for our 223,000-square-foot building at Clark Road in London, Ontario, with one of Canada's largest construction service firms. This building was vacated in April after PV Mart entered creditor protection. The new tenant took occupancy August 1st. Their six-month fixturing period, the tenant will invest between $8 to $10 million to update the building and pay net rent of $3 per square foot, roughly equivalent to PV Mart's exit rate. In January 2026, the fixturing period ends and the rent ramps up to $7 a foot with annual dollar rent steps until 2031 and then 2% thereafter. Our ability to quickly backfill this property is a testament to the strength of our operating team and the quality of the portfolio. It's a really good deal for us. This brings a very strong, large tenant, and the reduced rent was due to the fact that we had to put nothing in it. It was an older building, lower clear heights, and the rent ramps up relatively quickly back up to market. So we're really pleased with this deal. In April, PV Mart also vacated a second building at 40 Avenue in Red Deer, Alberta. We're in discussions with a few prospective tenants. However, it is not yet leased. The building is 190,000 square feet, which is very large for that area. So we're marketing it both for lease and for sale in the event we find an owner-operator who's interested. The cross-stock facility at 102 Avenue in Southeast Calgary, the receiver continued to pay rent through to the end of September, which was longer than what we thought. But we have now a tenant, new tenant lined up for December 1. The tenant will pay nominal rent to cover costs during a short fixturing period. And then upon a conclusion of the fixturing period, which will be approximately February of 2026, the rent steps up to $27.83 for the 29,000 square foot building. And this is approximately 45% higher than the outgoing rent of $19 per square foot. Overall, while we saw strong organic growth in the quarter, we expect to realize an even bigger benefit in early 26 and from rent steps at Clark Road and 102 Avenue. We've also made good progress on our 2026 renewals. In total, we have 765,000 square feet coming for renewal in 2026. Roughly 50% of this, or 385,000 square feet, comes due in the first nine months and the remaining 50% in the fourth quarter. As of today, we have tenants lined up for 90% of the January through September expires, and we will soon begin working on the fourth quarter expires. Nexus has a track record of accretive capital recycling through the disposition of legacy buildings and acquiring newer high-quality tenant industrial buildings. During the quarter, we sold a non-core industrial building located in Saint-Laurent, Quebec, for total proceeds of $9.2 million and an implied cap rate of 5.5%. The proceeds were used for debt reduction and for development. After the quarter end, we also closed on the sale of excess land at a remaining retail property, Les Halles d'Anjou, for cash proceeds to us of $8.5 million. We're now marketing our 50% share of the retail mall for sale. The mall is an attractive asset in cash flow as well, so we hope it sells in due time. Summary, we continue to advance our strategy in 2025 as Canada's industrial building partner. We will continue to realize organic growth through embedded rent steps and positive mark-to-market on renewal. We will continue our track record of accretive capital recycling through opportunistic acquisition and development. 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 $3.4 million. a $49.4 million increase compared to a net loss of $46 million last year. The increase was primarily due to higher fair value adjustments on Class B LP units by $43.3 million compared to a year ago and higher fair value adjustments on derivatives by $20.9 million compared to a year ago, partially offset by lower fair value adjustments on investment properties by $15.4 million and further offset by lower net interest expense by $900,000. Our Q3 net operating income decreased 1.1% or $400,000 year over year to $32.2 million. This was primarily due to a $2 million decrease resulting from property dispositions completed since Q3 2024, partially offset by an $800,000 increase in same property NOI higher straight-line rent adjustments of $500,000 and a $200,000 increase from completed developments and expansions. Normalized AFFO for the period was 14.6 cents per unit compared to 15.7 cents from a year ago, primarily driven by the lower NOI, lower straight-line rent adjustments by half a million dollars, and a $300,000 increase in general and administrative expenses from higher compensation and legal expenses. Net interest expense in the quarter was $13.1 million, a $900,000 decrease from the same period last year. The decrease was primarily due to lower credit facility interest expense of $400,000 resulting from more favorable borrowing rates during the period and lower interest on mortgages by $400,000 resulting from property dispositions. At September 30th, 2025, our NAV per unit was $12.98 and 19 cents per unit decreased from last quarter, primarily due to the issuance of 2.7 million Class B units in the quarter at $10.50 per unit to fund additional development at our property in Richmond, BC. Our weighted average cap rate decreased by two basis points to 5.85% in the quarter. The carrying value of our investment properties decreased by $5.4 million in the quarter, primarily due to the reclassification of our building at 41 Royal Vista Drive, Calgary, to assets held for sale. As Kelly mentioned, this quarter we finished two development projects. The completion of these projects will have accounting impacts on our financial results in the future. At our 70 Dennis Road property in St. Thomas, Ontario, the tenant is now paying rent equal to a 9% yield on the $55 million of development costs, compared to a 7.8% yield during development. As a consequence, we will generate additional cash flow of approximately $220,000 each quarter. In addition, from an accounting perspective, the full quarterly rent of $1.25 million generated by the building now qualifies as net operating income. This means that it will be included in our FFO and AFFO metrics. Up until September, The 7.8% yield on this expansion was capitalized to property under development and did not qualify as net operating income, FFO, or ASFO. So, going forward, our key financial metrics will be higher and paint a more accurate picture of our cash earnings. Since we have now completed both the Dennis Road and 102 Avenue projects, we will no longer be capitalizing interest on these buildings. which in the third quarter amounted to approximately $500,000 for the two of them combined. I will now turn the call back to Kelly.

All right. Thanks, Mike. We will now pass the call over to the operator to open the line for questions.

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 and two.

We will pause for a moment as callers join the queue. The first question today comes from Kyle Stanley with Desjardins.

Please go ahead.

Thanks. Good morning, guys. Just looking at the slight down revision to your guidance for 2025 on the same property front, I'm just curious what changed, I guess, between August and today that would have driven that and how much maybe was related to just getting the timing of getting income online or was it something more long-term in nature that could have an impact to your 2026 growth outlook? I guess in another way, just trying to think about The slight revision for Q4, does it have an impact on the outlook for 26?

Hi, Kyle. Yeah, good question. No impact on 26. It's really driven by primarily two different buildings, slightly slower lease up than we had anticipated. At our 102 Avenue in southeast Calgary, the receiver stayed in position longer than we had hoped, and it took us a little longer to get, it will take us a little longer to get the new tenant in at that healthy 2783 rent because there's a bit of a fixturing period. So they're coming in in February instead of in 2025, early in 2025. So that's one. And the second one is our lease up at 855 in Park Street in Saskatchewan. We had an expectation to get the new tenant in there a little earlier, and they are lined up for the back half of this year, but it's not as early as we had hoped back in August.

Okay, okay, now that's helpful. So limited impact, I guess, on 26, maybe a month in Calgary, to your point, on getting that tenant in in February.

Yeah, exactly, precisely.

Okay, just moving over to your debt stack. Hypothetically, if you were to get an investment-grade credit rating tomorrow, looking at where rates are in the markets, it does look like there would be some pretty significant savings for you. With your swap book, you know, how quickly would you be able to unwind that? And, you know, would it be at significant cost or, you know, just walk me through, I guess, your thoughts on that?

Yeah, good question. So, I mean, yes, we've been pretty, I guess, pretty clear that we're heading for an investment-grade credit rating, which is, you know, we're working through that with the agencies at the moment, but that's probably a back half of... of 2026 thing. Um, uh, and as far as pricing goes, yeah, very attractive rates right now. You're right. There's, you know, there, they, they are, there's some benefit there. So we're trying to push the, you know, push the, push the, the, the rate a little and get there as soon as we can. But, um, There are limitations. As far as unwinding the hedge book, at the moment, we actually want the hedge book because that effectively keeps us in position for... There's a really strong correlation between swap rates and GOCs and government and investment-grade borrowing yields. So this effectively is like a bond lock for us now. So we would unwind the swap book when we issue investment-grade debt. But up until that point, it basically acts as a good hedge on that bond issuance. So no desire to unwind it at this point, but when we do, it would just be a standard transaction with our counterparties, which are our regular banking partners, so very easy to unwind them at that point.

Okay, no, fair enough. And then just last one for me, Kelly, you mentioned Glover and Hamilton making progress. That's great to hear. Obviously still in negotiations, but how would you say the rent is looking versus maybe what your underwriting had called for? And do you expect a more significant PI package required to get someone in place?

Yeah, a little different route here, Kyle. We are working through an offer to purchase. So I think hopefully that gets wrapped up and we get something firm and wave and away we go. So I think at the end of the day, a little different version. It would be a strong deal for us. We'd free up capital. and reduce any burn that were existing on the asset rate now as it sits empty. So I think that's the play that's going to happen here.

Okay, so just to confirm, you'd be looking to sell it to a potential end user or something like that? That's what you're saying? Yes, correct. Okay, perfect. Okay, thank you for that. I will turn it back.

The next question comes from Brad Sturgis with Raymond James. Please go ahead.

Hey, guys. Good morning. Just to follow up on that line of questioning on Hampton, just would the purchase price be more than the original construction cost, or how do we think about that?

I guess my answer would be yes.

Okay. Understood. Just on the guidance Revision, obviously, a little bit related to timing of leasing. Just what would that imply from an occupancy rate by the end of the year? Just to round that discussion off.

Yeah, I'd have to do the calculation. It's, I think, looking pretty healthy. I mean, if you back up and look at where we're at today, we have about 475,000 square feet. of vacant space, and that is predominantly four different buildings. So one is Glover, the other is 7740, the Red Deer, the XPV building in Red Deer. And we have 855 in Saskatchewan, which we have a tenant lined up for. And then the final one is the new development at 102 Avenue, which we also have eight of the nine units already lined up, and so it's just a matter of the tenants coming in. So, you know, leasing for 2025 is in great shape.

I guess once the new leasing kicks in, start of next year, after the fixturing period, do you think that organic growth would kind of get back into that mid-single-digit range?

Yeah, I think a little early for us to give guidance for next year as we're working through our budgeting process now. but next year does look very, I mean, just from what we've disclosed so far, next year looks really strong with the development coming on board and the embedded rent steps that we have. So, yeah, next year should be a good year for us.

And nothing material at this point from a non-renewal perspective for next year?

No, it's looking pretty good. Like... Three of them, fairly large. What is this total? 1, 2, 60, 2, 63, 20, like 400,000 square feet or so. Comes up from October 31st to December 31st. We fully expect all three of those to renew. It's all in London. So all three are kind of long-term hold tenants for us. Another one, in November in that batch was a 91,000 square footer in Montreal in this tenant, just to explain this one. So if anyone's going to leave, it's this one. They were in at a $6 rate, and I think they had like three renewal options, five-year renewal options for like 2% each renewal option flat. And they were looking to consolidate their operations. So we did a one-year deal with them at $9 per square foot, and I expect them to vacate possibly at the end of November in that we think we can release that in the low teens. So that's the one that possibly, but that's end of the year, November 30th, and we've made good progress already on the first half of the year. So things are looking pretty good.

Yeah, so just to reiterate a couple of Kelly's comments on the call, the for next year's renewals, half of this GLA renews in the first nine months. And of that, we've done 90% of it already. So we've got it lined up, got tenants lined up. So, you know, really good jump on that.

Last question, just from a modeling perspective, straight line rent, just given, you know, the moving parts around fixturing before rent payment, like how should we think about that over the next couple of quarters in terms of contribution FFO?

Yeah, it's elevated because with these new leases, we've been bringing in people with pretty rapid escalation to rent, so healthy rent steps. So it's higher than it has been in the past, and you saw that this quarter where straight-line rent is higher than where it has been in the past.

I guess it would be a similar level for Q4 relative to Q3, and then it kind of subs back to where you were. Yeah, I think so. That's probably it. That's probably a fair way of thinking about it.

Okay, I'll turn it back.

The next question comes from Matt Kornack with National Life Financial.

Please go ahead.

Hey, good morning, guys. Just quickly on the Alberta lease maturities, and you may have mentioned it, but I missed it. They're a bit higher rents, presumably it's the type of space that's maturing. But are you expecting kind of a newer renewal leasing spread consistent with the Alberta market on those? Or how should we think about the rents that you'd achieve on those?

I have to just see here what we have expiring.

No.

So it's not.

Matt, I have to get back to you because I'm not offhand know what the expiring rents are.

Okay. No, fair enough. Just to... One of the... I think it's 79,000 square feet. Yeah, 79,000 square feet at $17, and next year it's 47,000 square feet at $35. Yeah, I have to look at which ones those are.

I think one of them we will take a hit. I believe it's the Black Falls asset that was formerly or that is currently occupied by a subtenant of NASDAQ. And That one I know we would definitely take probably, I want to say maybe a $10 hit on, on that one. That's the one outlier.

Okay. If I look at it, I mean, we're at like mid 40% spreads for 26 across everything. Obviously London drives a bit of that, but I guess Alberta would maybe bring it down into the 30s.

somewhere in the 30s, I guess. Yeah, I mean, we don't have a lot of GLA in Alberta, right? It's renewing, so it's less than 50,000 square feet.

Okay. Nope, fair enough. And then just to confirm on St. Thomas, you had no NOI contribution in Q3. You'll get the full $1.25 million. and Q4, and obviously you have a step down in capitalized interest, but you're still going to have kind of $300,000 of residual capitalized interest against other assets still under development? Yeah, there will be.

So two questions, two answers. With St. Thomas, we had one month's worth of NOI contribution from it. So I think it was around so that it was in the September contribution. And you're right, there's about $300,000 of capitalized interest going forward from the other projects that we have underway.

Okay, and then for the $400,000 per quarter contribution from Calgary that you're going to get in Q2 of 26, should we assume kind of half of that you get before, or should we kind of split it out over... The next couple of quarters, I think it was 33% at least as of Q3, so it's going to ramp up, but just wondering how we should think about that.

Yeah, I mean, I would just move it over the months, assume a straight linear ramp up.

Okay, fair enough. Thanks, guys.

As a reminder, if you would like to ask a question, please press star then one to join the question queue. The next question comes from Sam Damani with TD Cowen. Please go ahead.

Thanks, good morning. Question for me just on the use of proceeds from the dispositions coming up in the Q4. Will the REIT take the opportunity to de-lever or redeploy into acquisitions? How are we thinking about, I guess, target leverage as you head toward investment-grade rating next year?

Yeah, so ultimately we're looking to achieve investment-grade rating. Our focus now from a levered perspective is to get to below 10 times. And we have a clear path to that by mid-next year-ish. And so that's our target from that perspective. So, you know, going where we will use surplus capital or cash from sales will be de-levering and, you know, the development that we have in flight. And, you know, if there are just amazing opportunities that come up, we consider them. But really our focus at this point is getting to a mid, ultimately getting to a mid-nines leverage profile.

Perfect. That's all from me. Thank you.

This concludes our question and answer session.

I'd like to turn the conference back over to Kelly Hansik for any closing remarks.

All right. Thanks, everyone, for attending, and we'll chat next quarter.

And if any questions, just feel free to reach out to Mike or myself.

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