Nexus Industrial REIT

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

I'd like to welcome everyone to the 2025 Fourth Quarter Results Conference Call for Nexus Industrial REIT. Joining me today is Mike Rawls, 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 the 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 and at cedar.com, for cautions regarding forward-looking information and for information about non-GAAP measures. I'm delighted to share that we are entering 2026 with good momentum and well-positioned growth. And despite challenging economic backdrop, 2025 was a very successful year for us. For the full year 2025, we delivered record net operating income of $129 million and an increase of 2.8% compared to last year. We generated record adjusted EBITDA of $120 million and also grew our per unit metrics compared to last year. FFO per unit increased to $0.61 and our NAV grew to $13.22 per unit. Impressively, we grew despite selling our retail portfolio at the beginning of the year, completing our transition to a pure play industrial REIT. This sale raised $47 million and focused our business so that today 99% of our net operating income comes from industrial assets. As a result, we fulfilled our vision to be Canada-focused pure play industrial REIT. and have now moved forward adopting our new purpose to be Canada's industrial building partner with a vision to be the first choice provider of high-quality industrial properties in Canada. During the year, we strengthened our industrial portfolio by completing two transformative developments and two opportunistic acquisitions. At 7 Dennis Road in St. Thomas, we added 325,000 square feet for an existing tenant, We completed the project in September and are now earning a 9% contractual yield on the $55 million of development costs. At 4750-102AV in Calgary, we completed construction in August of 115,000 square feet of small bay industrial units on vacant land that we had adjacent to another building. We have leased five of the nine units and have an additional lease for one more unit under negotiation and offers on two additional units. After a good start, the leasing progress slowed as a prospective large tenant unexpectedly retired. Nevertheless, interest remains high for the property, and I expect that we will have it fully leased by late summer. Overall, the construction costs $15 million and will deliver a healthy 11% cash-in-cash return when stabilized. Turning to the acquisitions, at the end of November, we had a rare opportunity to acquire two high-quality industrial buildings while located in Montreal at a very attractive price. The opportunity arose due to our strong network and our reputation as a reliable partner. A private equity firm that we've worked with in the past was acquiring an operating business and they didn't want the business real estate. They didn't want to have to pay for the real estate. So we worked with them to acquire the two buildings and entered into a sale lease back agreement under a long-term lease agreement. We acquired the buildings for $40 million at a going and cap rate of 6.6%. However, the lease rate resets to market in 2028. which at current rates works out to a stabilized cap rate of approximately 10.4%. The buildings added 283,000 square feet of high-quality real estate to our portfolio at a purchase price of approximately $145 per square foot, where similar real estate typically trades in the range of $215 to $235 per square foot. We had the buildings appraised at year-end and realized a significant mark-to-market lift of approximately $23 million. We also sold several properties during the year. In October, after a complex land zoning and severance process, we sold surplus land at our last remaining retail property for $8.5 million and used the proceeds to deliver. The sale appeared well-timed as the land was zoned for condominium development, a segment of the market which has shown signs of slowing since the sale was completed. Now that we have completed the land sale, we are soft-marketing our 50% share of the retail mall for sale. It's a well-located, high-quality property that cash flows well for us, so we don't feel rushed to force to make a sale. During the year, we opportunistically sold three industrial buildings. In April, we sold a vacant property in Fort St. John above our carrying value of $7 million and used the proceeds to offset the acquisition of land surrounding our building in Kelowna, BC, where we saw a development opportunity. In June, we sold another small building in Edmonton, that we viewed as non-core that had been vacant for nearly a year, to an owner-user for $4.2 million, which was in line with our carrying value. We used the proceeds to reduce debt. In September, we sold a third industrial building in Saint-Laurent, Quebec, to an owner-user for $9.2 million. This exceeded our carrying value and equaled a 5.5 cap rate. After year end, we closed on the sale of a fourth small industrial building. On February 20th, we sold a 35,000 square foot building in Calgary at a 5.7% cap rate to the existing tenant for 8.5 million. We have used the proceeds to pay down debt. We are currently working on three more asset sales. As I mentioned earlier, we are currently soft marketing our 50% share of our last retail property, Les Halles d'Anjou. In Hamilton, we're looking for a buyer or a tenant for our 115,000 square foot new build on Glover Road. We had a buyer lined up for the property, had it under contract at an attractive price. However, the deal fell through at the last minute. We own 80% of the property and it has been a challenging market in Hamilton, but we have a brand new state-of-the-art 40-foot clear lead certified product. Once sold, it will contribute significantly to our FFO per unit as we will immediately reduce the carrying costs and be able to use that equity to pay down debt. In Red Deer, Alberta, we have a firm sale contract for our 190,000-square-foot building at 40th Avenue. This building went vacant when PVMark filed for CCAA in April 2025. We have been marketing the building for lease and for sale, and we now have it under firm contract to close in April for a little over $11 million. We will also look to sell our 80% interest in development land on South Service Road in Hamilton in the near future and be able to utilize the proceeds to further reduce our debt. Turning to our operating performance, we had a strong fourth quarter. In total, we completed nearly 117,000 square feet of renewals and an average rent lift of 2%. Year-to-date, we have completed a total of 1.2 million square feet of leasing and realized an average leasing spread of 60% over expiring and in-place rents. In the fourth quarter, our industrial occupancy held steady at 96%. Combined with embedded rent escalation in our leases, our leasing activities drove industrial same property NOI growth of 2.8% in the quarter and 2.6% for the full year in line with our guidance. Our financial results also improved in the quarter. Normalized FFO grew 3.3% versus Q3 to 18.6 cents per unit, and our normalized FFO rose 3.4% to 15.1 cents per unit. In both cases, the increase was due to strong net operating income, which was up 2.5% or $800,000 compared to last quarter and up 2.7% compared to the prior year. This NOI increase largely resulted from the completion of a development project in St. Thomas. The two Montreal building acquisitions as well as same property NOI growth partially offset by foregone rent from properties we sold since Q4 of last year. At our cross-stock facility at 102 Avenue in Southeast Calgary, the new tenant that we had lined up for December 1 reneged on the deal after fully negotiating a lease agreement. Accordingly, we are marketing a 29,000 square foot building for lease and anticipate renting it quickly. We had a lot of interest in the building and had recent follow-up showing, so we're pretty optimistic. Overall, while we saw strong growth in 2025, and we expect to realize an even bigger benefit in 2026 from our completed development projects, embedded rent steps, and lease up of our vacant space, and the releasing of space at market rents above expiring rents. We are anticipating mid-single-digit at-same-property NOI growth in our industrial portfolio for the year, and we expect our normalized ASFO payout ratio to average below 100%. We have made good progress on our 2026 renewals. In total, we had about 990,000 square feet coming for renewal in 2026. Roughly 415,000 square feet comes due in the first nine months and the remaining 575,000 square feet in the fourth quarter, late in the fourth quarter. As of today, we have committed tenants for approximately 65% of the January through September expiries and we're making good headway on our Q4 renewals. For Q4, 405,000 square feet comprised of three large tenants, and we fully expect them all to renew. And 140,000 square feet are strategic vacancies. Another 140,000 square feet are sort of strategic vacancies where we believe we can increase the rent on renewal. We also recently announced two additional development projects, which will get underway in the first half of 2026. We're going to build up to 1,880,000 square feet of micro-industrial units on a vacant land surrounding our industrial building at Adams Road in Kelowna for a total estimated cost of approximately $47 million. And our Savage Road property in Richmond, B.C. will be adding another 28,000 square feet. Time to the 52,000 square feet that we announced in November for a total of 80,000 square feet. Additional 28,000 square feet expect to cost about $19 million. As I shared previously, the original 52,000 square foot expansion is being paid in REIT units at $10.50 per unit. We'll earn about 6% on the REIT units issued during the construction period, and we will earn a contractual 6% yield upon completion. Expect construction will begin in the first half of 2026. In 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-mark on renewal. and we will continue our track record of accretive capital recycling through opportunistic acquisition and development. I'll now pass the call over to Mike, who will give some more color on our financials.

Thank you, Kelly, and good morning, everyone. Starting with headline earnings in the quarter, net income was $30.6 million, a $19.1 million decrease to last year. The fluctuation was due to a decrease in the fair value adjustment on Class B units by $31 million, and fair value losses on our Montreal office building joint venture of $4.2 million, partially offset by an increase in fair value adjustments of investment properties of $10.6 million, and an increase in fair value adjustments on derivatives of $3.9 million. As Kelly mentioned, our Q4 net operating income increased 2.7%, or $800,000, year over year, to $33 million. This was primarily due to the completion of our St. Thomas development and the Montreal building acquisitions, which combined added $1.5 million in the quarter and an increase in same property NOI of $700,000 and higher straight line rent adjustments of $500,000. These increases were partially offset by $1.4 million of NOI associated with properties that we have sold over the past year. Normalized AFFO for the period was 15.1 cents per unit compared to 15.3 cents a year ago, primarily due to the issuance of 2.8 million Class B units for prepayment of the development in Richmond, B.C. This was partially offset by higher normalized AFFO by $300,000, resulting from higher net operating income. Total general and administrative expenses for the quarter were $2 million. which was $200,000 higher than a year ago, primarily due to higher compensation, legal, and professional fees. Net interest expense in the quarter was $14 million, which was consistent with last year. The carrying value of our investment properties increased by $31.3 million in the quarter, primarily due to the $40.1 million acquisition of the two industrial properties in Montreal, $18.7 million of fair value gains, and $3.7 million of development expenditures, partially offset by $34.8 million of investment properties that were reclassified to assets held for sale. At December 31st, our NAV per unit was $13.22, a $0.03 per unit increase from last quarter. Our weighted average cap rate increased by three basis points to 5.88% in the quarter. compared to 5.85% at September 30th. I'll now turn the call back to Kelly.

Thanks, Mike. With that, operator, open up the line to any questions.

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, then two. We will pause for a moment as callers join the queue. The first question comes from Mark, pardon me, sir, Mark Markitis with BMO. Please go ahead.

No trouble, operator. It's a tricky one. Thank you, and good morning, Kelly and Mike. Kelly, you have some pretty good color on the 2026 lease maturity, so I apologize if I've missed some of the detail, but did you mention an average spread expectation for the 2026 program?

We didn't. We didn't. I think at the end of the day when I'm looking at them, you know, in the last half of the year when I look at there's three large ones that uh make up and i'd say they're on an average of about 850 nets um where i think will be somewhere around 10 11 on those um and then one of them uh 90 000 square footer in montreal was is an intentional one and that one um we worked out a deal with those guys because they had a very low rental rate and they had three five-year option to renew at, um, very little to no, um, uh, So we worked out a deal. We gave them a one-year renewal last year at a higher rent, still below market, but at a higher rent to get it back and to lose those renewals and be able to lease it at a decent rate. So that makes up, I mean, that makes up about 500,000 square feet, I believe. So I think on all of those, we're probably at $1, $1, $50, maybe $2 increase per square foot.

Sorry, and so that's for the 500 or for the full 900? Because I think you've got 65% of the Jan to September done, right?

Yeah, there's, like, I don't know if I, I don't have the average spread of what we've completed.

Okay. I think, Mike, also another way of thinking about it is the SPNOI guidance we give in the mid-single digits will help anchor you.

No, that's fair. That's fair. Just on the – there's different methodologies around the space, and I haven't looked into your MDA to confirm exactly, but I'll just ask the question. For your SPNY, does that include the contribution from intensifications, or is it a pure number? It includes that. It includes that. So Denny Road and 102 Avenue, so each would be a – Sorry, I've been corrected. It's excluded. Excluded. Okay. Good to know. All right. And then just, I guess, last question for you before I turn it back, just on the future developments, it looks like Adams Road is, you're going to commence construction, it sounds like, or is that one already under construction?

Yeah, it's not.

It's not under construction yet. We're in the permitting phase. Okay, gotcha. And then Savage Road. So, and you gave the detail on the yield for Savage Road, I guess 8% converting to 6% on completion. And then, so for Adams Road, I guess what's the anticipated deal on that? And just with both projects, where do you expect the completions to line up?

I think they would probably be complete some point next year, and it depends on how fast we can get going. Adams, it's a little different because we are looking at building micro-industrial, and right now I'm working on the difference between either pre-leasing them or pre-selling or selling them as we go in funding the next batch. So it's a little up in the air as we haven't really – fully started the project yet. We're in the planning phase and it could be a mixture where we lease some and we sell some because from a sale on a per square foot basis, we expect to get, because they are micro-industrial and these are small units. So it's a good user, owner-user opportunity where I think we can hit better returns. So I'd say it's probably going to be, let's call it a seven overall between seven and 10. Understood. Thanks for that. I'll send it back. Okay.

Thanks. The next question is from Sam Damiani with TD Cowan. Please go ahead.

Thanks very much. Good morning. Maybe just on the deputy EBITDA, it remains elevated near 11 times. I'm just wondering if you have a year-end target for 2026.

We haven't given guidance to that, but we do see it pretty rapidly levering this year. And so our goal is the way of thinking about it is our goal is to hit investment grade balance sheet this year. And the guidance we've been given from DBRS is that they're looking for mid-nines to achieve that. So that's our target is to get to that IG rating.

So is that something you're shooting for by the end of the year, sort of mid-nines?

Yeah, I think that's fair to say. like mid-nights would be our target, and that would get us the IG rating.

Right. And just on the Belvedere Club, I'm just wondering if you could maybe expand on or go into some detail on what the expansion phase, what the scope of work for that latest expansion phase you've announced.

Yeah. So it's the same like Adam's. It's micro-industrial units on land that's available for us to build.

Oh, so it's not part of the racket club?

No, no, second. We've redone the drawings to create a series of micro-industrial units.

Got it. And I guess last one for me, on the fair value gains, there's a nice one on the Montreal acquisitions there. Just wondering, did you revisit the Voila CFC in Montreal in light of Empire's announcement earlier this year?

Yeah, actually, I was there last week and did a tour. And it's my understanding the Montreal facility has the largest market share of home delivery in Quebec. So I think just a very different circumstance. The brand is pretty large in Quebec. So from everything I see, it was full steam ahead. They were pretty busy.

Excellent. Thank you in all terms.

Yeah, another, just a little more color on that is there's a long lease on that building, too. So, this isn't one that we're concerned about.

Clearly. Yeah, that's right. It couldn't get much longer. Okay. Thanks very much.

The next question is from Brad Sturges with Raymond James. Please go ahead.

Hey, good morning. Maybe switching gears a bit, obviously, you did the two acquisitions in Montreal. How do you think about acquisitions this year? Obviously, the focus is to de-lever and to get that investment grid ready. How do you think about, you know, opportunistically on the growth side?

Yeah, so I think... Reality is if we are looking, I am in the process of working through a bunch of different things, but they would be more geared towards unit deals. So we wouldn't be purchasing anything from cash. It would be a unit transaction. So if you see us do anything this year, it would 99% likely be a unit deal transaction.

And how does that pipeline look today in terms of potential deals you're working on?

Yeah, I mean, I'm working on one. It's early phase, but it would be, you know, it's a three building that would fit nicely into the portfolio and see if I can get it done. It's tough when the units are trading down at this level, but we'll see what we can do. Okay.

I'll turn it back next.

Again, if you have a question, please press star, then one. The next question is from Jimmy Shan with RBC Capital Markets. Please go ahead.

Thanks. So just going back to that $40 million Montreal deal, you gave pretty good color on sort of the deal dynamic. But I'm still trying to get my head around, you know, how is it that you're able to still get a very low basis for it and kind of why would the PE firm be willing to accept? I guess ultimately this would be like a 10% cost for them, right? And so kind of what's What are the other nuances that are part of the deal that way you're able to get such a good deal?

I don't think there's any other nuance in that. So, we've done a deal with them before. We actually purchased our Windsor, part of our Windsor portfolio through them, I think is AP Plasmon. I think that was a four-building transaction. And we closed, and it was a smooth transaction, easy to complete. And I think at the end of the day, they're just not focused on the real estate. And we managed to negotiate a pretty sweet deal at $145 a foot. So we pounced on it. But there's no other nuances to the deal, really.

Okay. Okay. That's good. And then just on the swaps, I think you've got, pull up about $350 million of notional amount where it's callable by the counterparty. I'm just wondering, I guess rates have gone up since then. Are these likely to be called? Not at this point.

They're out of the money for them.

Okay. Maybe lastly, just on Glover, I guess what's the plan now to try to market that property? Are you trying to Yeah, absolutely.

I mean, our preference is to market it for sale. So we have it listed right now. and all we do is wait to get an offer. We had it under contract. It seemed to be going fine, and then at the last minute, the purchaser just dropped out, and it was an owner-occupier, which is even more strange. But, yeah, we're anxious to move that one because that frees up, quite frankly, a lot of capital and reduces the burn on RAFFO, so it has a meaningful effect once we're able to unload it.

Are you hopeful you'll be able to get something done this year?

Yeah, I'm hopeful for this year. I'm hopeful. I mean, it's March. Maybe we could close something, I would think, in, I would say, early fall. You know, that's what I'm hoping for. If we're lucky, maybe sooner. Okay, thanks.

The next question is from Tal Woolley with CIBC Capital Markets. Please go ahead.

Hey, good morning. Just on the renewal rents in Q4, they were a little bit lower than where they've been for the rest of the year. Anything special about that or anything, you know, just for – sorry, was that just sort of like a one-off kind of lease situation that created that, or is there something we should be reading into the market?

I don't think there's anything to read into it there. I think it's just the nature of the leases that we had.

coming up. I think also we had, if we look at some of the leasing that we did earlier in the year, there was some really big lifts that we had, you know, really low rates coming up.

Okay. And then just when you look at your outlook for 2026, like, do you sort of see that as, are there any big swing factors in there that could have you hit higher than that or not reach those targets? Are there any key sort of things coming up throughout the year that we should be particularly paying attention to?

Kelly, can I tell her? I think it's a pretty volatile world out there. I don't think anyone expected the geopolitical instability we saw last year, and I think we obviously – really happy with how our business performed during, you know, during all that upheaval. And so, but, you know, the answer is, you know, last year we had two complete CC, two tenants file CCA completely from left field, unaffected by the tariffs. They just, you know, went bust and that was three buildings that came back to us. And so I think we did a fantastic job of working through that. And we don't see anything like that on the horizon, but we didn't see it on the horizon last year. So, you know, I, I, Nothing that we're aware of, I think, to call out, but that doesn't mean things don't happen. And, you know, just happy with how well the team has responded to the challenges that have come up over the last year.

Yeah, and when I look out at the renewals in October, you know, we have 150,000 square foot, and I fully expect we have an offer out with them, and we're negotiating back and forth right now. End of December, we have two larger ones, $175,000 and $80,000, and we expect both of them to renew. I don't see any issue there, so there's a decent list there. The November 30th one, 90,000 square feet, that's the one we knew was coming back to us. We're hoping, and we have that listed now, so I mean, we're pretty hopeful. And then when I look at you know, the balance of kind of what comes up in the end of the year. We have one in Ajax, you know, it's not a lot, but they paid us an early termination fee and that comes back, but I think we'll get some lift on that one. And an early termination fee takes them to the end of their lease, which is, I believe, end of September. And then we have another 20,000 square footer in Saskatchewan. That's just a vacant, it's going to be a vacated truck courts. So like an exterior type space that they were renting, we're actually going to in the planning stage to finish the space when we get it back in full and add to the GLA and be able to charge much higher rents. And Saskatchewan seems to be a pretty solid market for us right now. So on the new deals and renewal deals, we're still pretty positive.

Okay. And then I guess just on the financing side, You guys have significant amounts of your debt sitting on credit facilities and your desire to get to investment grade rating. You've been very clear about that. Are you noticing any change from lenders in terms of the type of lending product they'd like you to take, like secure financing versus credit facilities? Or is it just sort of been business as normal and just trying to get a sense of the banks have really changed at all sort of as over the last couple of years?

Um, yes, in a very good way. And, you know, this is, it's interesting being at this end of the table, I guess, you know, when you start getting close to being an IG rate rated, uh, lender, a borrower, everyone wants to lend to you just before that because they want part of the debt deal. Right. So absolutely. We have a huge amount of support from our banking syndicate and, um, more banks wanting to join than we had ever hoped. And so it's a very good position to be in as we're just on that kind of cusp. And so, you know, we're pretty relaxed about the timing of when we get there, other than it's obviously substantial savings and additional flexibility to getting to IG. So that's the rush, not any kind of liquidity challenges. It's just there's tons and tons of support for us out there from our group of bankers.

And that mid-nine number, that would put you, like, you think at, like, triple B mid kind of rating?

No, I think when we go with the triple B minus is what we're trying to, you know, just try to get IG and then go from there. Okay. Got it. Thanks very much, gentlemen.

Thanks. The next question is a follow-up from Mike Markitis with BMO. Please go ahead.

Thanks, guys. It's been a while. I just wanted to recycle back on Savage Road. Okay. But I don't see unit deal, but I think you said micro-industrial units. So is that a similar plan to Adams where it might be a partial sale or just trying to get a sense of how that works?

Less possible there, but possibly. Yeah, it's possible. Okay. There's a possibility of I do half rental, half for sale, so we're just working through that now.

Okay. And then just so you're collecting as you issued the units or you will issue the units?

As we release the units. The distribution becomes payable and then we effectively get the distribution back.

Okay. Got it. So that that really hasn't happened yet, right? Because you got only like 7 million. I think we have one batch out. Okay. Yeah. Just under 500,000. Right, so can you just remind me why you go from an 8% to a 6% yield, like 8% return on your units, and then it goes down to 6% on completion?

Yeah, a 6 cap in Richmond is pretty attractive. We're looking at stuff right now, and everything we see is in the high 4s, low 5s, so it's still a fairly decent yield. It's a way to, I guess, build our market cap using our currency. I guess that's the best I can say.

No, no, I get that. It's an attractive stabilized yield. But what I'm trying to understand is, I think, unless I misunderstood, like you're getting an 8% return on the units you advanced, but then are you saying that the terminal value would be a 6? Are you saying that then the unlevered yield on completion is a 6? I'm just...

We did a 6% yield on the unit. So it's basically cash neutral to us.

So you're 8% in the interim, 6% on completion? No, no, 6% in the interim.

Oh, 6%. Okay. Yeah, because it's not today's yield, right?

It's at 1050. Okay. I understand. I apologize. I misunderstood. Thank you so much. Yeah, no worries.

The next question is a follow-up from Sam Damiani with TD Cowan. Please go ahead.

Thank you. I think you mentioned, Kelly, there's a tenant that paid an early termination fee in Ajax for taking, I guess, the lease wrap-up in September. Will that late lease termination fee go into same property NOI for this year?

Well, I think what that does is we account for it as rent, I believe, up until the end of the term. And if we lease it prior to that, then I will let Mike answer that. Yeah, no, it won't go into the same property anyway.

Okay. I appreciate that. And could you share with us what the expired rent is on that building or set of buildings?

It's one building. I cannot off my head remember what the expiry rent is at, but I know we'll have a list.

$13.50. $13.50. $13.50.

Yeah. So I think we'll have a pretty decent list on that one. Awesome.

Thank you very much, and I'll turn it back.

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

All right, everybody. Thanks so much, and we will see you next quarter.

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