Thank you for standing by. This is the conference operator. Welcome to the Nexus Industrial REIT Fourth Quarter 2023 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 and zero. I would now like to turn the conference over to Kelly Hanczyk, Chief Executive Officer. Please go ahead.
Thank you. I'd like to welcome everyone to the 2023 Fourth Quarter Results Conference Call for Nexus Industrial REIT. Joining me today on this inaugural call is Mike Rawle, 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 and at sedar.com for cautions regarding forward-looking information and for information about non-GAAP measures. In the fourth quarter, we continued to benefit from our strategy as a Canada-focused pure-play industrial REIT. Despite a challenging market backdrop, we delivered another quarter of solid results.
This year, we are well-positioned for the next phase of growth as we expand same property NOI, capitalize on recent acquisitions, and bring four exciting new development projects online. Our industrial NOI weighting now sits at 93%, and we plan to further increase this and strengthen our balance sheet at the same time through sales of our legacy retail office and non-core industrial assets. Beginning with our operating results, fourth quarter net operating income grew a healthy 17.1% year-over-year to CAD 29.2 million as we benefited from CAD 378 million of strategic acquisitions that we made over the past year. The portfolio also experienced healthy same-property industrial NOI growth of 2.9% compared to the fourth quarter of 2022 and 4.3% for the full year.
This growth is a testament to our strategy of embedding annual rental steps into our leases and to healthy rent lifts we are earning on renewals due to market rents that are on an average 29% above. It's actually 24% above in-place rents. We will continue to benefit from these attributes for the next several years. On a total company basis, same property NOI in the quarter grew 1.3% compared to a year ago as some of the strength in our industrial portfolio was offset by a temporary contraction in our legacy office and retail portfolios. Looking to 2024, due to a key vacancy which I mentioned last quarter, I anticipate slightly softer same property NOI for the first quarter.
However, for the remainder of year, I expect that we will be benefiting from positive lease renewals and that we will average mid- to high single-digit Same Property NOI growth for the full year. Compared to last year, we experienced lower normalized AFFO per unit and consequently an elevated payout ratio for the quarter. This was mostly due to higher interest expense on a per-unit basis. This temporary circumstance will normalize as our Titan Industrial Development Park comes online in the second quarter. For the full year 2024, we expect our normalized AFFO payout ratio to average in the mid-90s. The leasing market was strong through the majority of 2023. However, it has shown signs lately of decelerating. In anticipation of a deceleration in early 2023, we deployed a leasing strategy to early renew large tenants that had leases expiring the next three years.
As a result, our industrial occupancy improved compared to the third quarter, growing to 99%. Our high occupancy is a testament to the quality of our portfolio anchored by strong tenants and a proactive leasing strategy. On December 31st, 2023, our NAV per unit was CAD 12.87, a CAD 0.68 per unit increase from a year ago. Our weighted average cap rate increased by 86 basis points to 5.89% in the fourth quarter compared to 5.03% a year ago. During the quarter, we engaged external appraisers to value properties totaling approximately CAD 200 million, leading to a net write-up of CAD 13.5 million for those properties. Overall, the fair value of our investment properties increased by CAD 35.5 million in the quarter. In the fourth quarter, we continued to high-grade our portfolio with the acquisition of a 336,000 sq ft newly expanded Class A distribution center in London, Ontario.
The property is leased to a single tenant with contractual CPI rent growth. We purchased it for CAD 55.8 million, which was satisfied through the issuance of 2.4 million Class B LP units at 1,130 per unit and cash consideration of CAD 29 million. In addition, on January 3rd, 2024, we closed on the acquisition of a single tenant Class A 82,500 sq ft industrial building in Calgary, Alberta, for cash of CAD 35 million. This property was newly built for one of our existing tenants and is under a long-term lease with embedded contractual rent growth. Over the past three years, we have invested roughly CAD 1.4 billion in strategic acquisitions, and I'm very pleased with the outcome. However, our focus now will turn instead to deleveraging through orderly sales of properties that no longer fit into our long-term strategy.
This will include our legacy retail assets, our seven Old Montreal office buildings, and our three suburban Montreal office buildings, which are in various stages right now of sale process. In addition, we are looking at the potential disposition of a group of non-core industrial buildings. In total, this would equate to approximately CAD 200 million in sales. Despite the weaker office market, our properties are generating significant interest. We are not in a rush to sell them, so we are moving forward in an orderly manner to ensure that we maximize our value. I expect the property sales to close in the second half of the year and plan to use proceeds to reduce our debt balance. In 2024, we expect to benefit from the completion of 4 significant industrial development projects. Combining these properties will add annualized stabilized NOI of approximately CAD 11 million.
Our 312,000 sq ft Park Street intensification project in Regina is nearly complete. The primary tenant is taking 200,000 sq ft and has begun to move in. Their occupancy officially starts in April. We are marketing the remaining 112,000 sq ft and hope to have at least shortly. This project will contribute a yield of about 7.5% of total development costs of CAD 48 million. At Hubrey Road in London, Ontario, construction is moving along nicely. Leasing interest is picking up as the building is taking shape, and we hope to have good news on the leasing front shortly. This project will contribute about a 9% yield on total development costs of CAD 15 million when it is completed in the third quarter. The project further strengthens our leadership position in the highly desirable London market, which continues to be one of the tightest industrial markets in Canada.
At our 116,000 sq ft Glover Road development in Hamilton, the steel framing is up, the roof deck is complete, and the flooring is being poured. The property has industry-leading 40-foot clear height and is expected to be LEED certified. We are in the process of finding a tenant, and it is to be cash- flowing in the second half of the year. We own 80% of the property, and we'll earn about a 5.6% going-in yield on development costs of CAD 33 million. Steel has been ordered, and earthworks are currently underway at our 240,000 sq ft Dennis Road expansion project in St. Thomas, Ontario. This expansion is for an existing tenant, and we will earn a development fee through construction to eliminate any kind of cash flow drag.
We expect construction to be complete by the end of the year, at which point the tenant will pay contractual rent equal to a 9% yield on the estimated development cost of CAD 15 million. Richmond, BC, again, we are just hoping occupancy is soon approved by the city. There is very little left to do in the Boulevard Club, so we're expecting it any day. It has been a frustrating process, but last week I went to see it in person. It's actually a really beautiful property. They've done a great job. The landscaping, glass- walled squash courts, the only ones in Canada, padel courts, pickleball, and top-tier swimming pool. So we believe the facility will be bustling when it finally gets to open. We expect the club will be able to hopefully take occupancy in the second quarter of the year.
2023 demonstrated the strength of our strategy as Canada-focused pure-play industrial REIT. In what was a tough year for the real estate industry, we were able to continue to grow, add value, and deliver solid results. The good news is we are not finished yet. In 2024, we will have a full year's contribution from our acquisitions. While in the first quarter we anticipate slightly softer same-property NOI, for the remainder of the year, we expect to benefit from positive lease renewals resulting in, call it mid- to high-single-digit same-property NOI growth for the full year. Also, we will complete our four exciting new development projects and begin to have them cash flow. Lastly, we will focus on our portfolio through the strategic dispositions and use the proceeds to delever our balance sheet going forward.
I'll now turn the call over to Mike to give some color on our financials.
Thank you, Kelly. Good morning, everyone. Starting with the headline earnings in the quarter, net income was CAD 2.1 million, an impressive CAD 19 million increase compared to the net loss of CAD 16.9 million last year. The increase was primarily due to a positive fair value adjustment on investment properties of CAD 35.5 million in the quarter compared to a negative adjustment of CAD 8.1 million in 2022. This was partially offset by unrealized losses on interest rate hedges of CAD 21.9 million in the quarter due to falling midterm interest rates. As Kelly mentioned, net operating income continued to be strong, increasing 17% or CAD 4.3 million year-over-year to CAD 29.2 million. Of this amount, new acquisitions accounted for CAD 4.5 million, and Same Property NOI growth added CAD 300,000 from embedded rent steps, CPI increases, and renewal lease lift.
This growth was partially offset by the absence of CAD 800,000 of NOI earned in the fourth quarter of 2022 from properties that have since been sold. Normalized AFFO for the period was CAD 0.151 per unit, a decline of CAD 0.026 from a year ago as the benefit from higher per unit net operating income was more than offset by higher interest expense per unit. Total general and administrative expense for the quarter was CAD 3.2 million. Excluding severances and one-time compensation-related expenses, G&A was CAD 1.5 million, which was flat on a year-over-year basis. Net interest expense for the quarter was CAD 12.4 million, a CAD 4.2 million increase from the same period last year. This increase was primarily due to a higher outstanding average debt balance during the period.
I'm also pleased to share that a couple of days ago, we added a further CAD 100 million of committed capacity to our unsecured credit facility, bringing the total facility size to CAD 625 million. We also extended the maturity by an additional year to March 2027. This larger facility gives us a significant liquidity cushion and the ability to continue our transition to an unsecured borrower, which will ultimately give us access to a wider range and deeper pool of capital. I'll now turn the call back to Kelly.
Thanks, Mike. I'm very excited about our positioning heading into 2024. Our strategy to be a Canada-focused pure-play industrial REIT is enduring and lucrative. We're nearing an inflection point as we benefit from contractual rent lift and renewals, cash- flowing development projects, and further optimization of our portfolio of high-quality industrial assets. Confident these factors will drive meaningful positive impact on our financial performance over the next two years. With that, operator, please open the lines to any questions.
Certainly. 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're using a speakerphone, please pick up your headset before pressing any keys. To withdraw your question, please press star, then two. The first question comes from Brad Sturges with Raymond James. Please go ahead.
Hey, guys. Good morning.
Hey, Brad.
Maybe on the leasing front, I think 700,000 sq ft in the quarter, you talked about being a little bit more proactive in addressing upcoming expiries. Of the leasing that was done in Q4, how much of that would have been effective during Q4? And then can you just talk through the timing of, I guess, when the other leases would become effective?
I don't have that detailed rate in front of me. We might have to get back to you on that one.
Okay. What would be the update on you're expecting a little bit of transitional vacancy at West that you talked about before? What would be the update there?
Are you talking about the vacancy?
Yes.
Yeah. So that was Canada Cartage. So we actually purchased Canada Cartage's new facility in Balzac, which is just north of Calgary. They simply just outgrew our facility, so we ended up buying that, and we have it vacant. So we do have a plan for it. We have fairly decent leasing interest on it right now, although it seems people are just taking longer to make a decision and depending on when, I guess, they expire. And then what we're probably going to do is it's on, I think, effectively 11 acres, call it. So there's a crossdock facility with a shop on five acres, and then there's another six acres that was effectively used for truck parking.
To get back to our total NOI, I believe what we're going to do, and we've already gone forward with drawings into the city, we're going to develop probably about 130,000 sq ft small bay facility, industrial facility on the additional six acres. When we're done and that is complete, it would kind of get us back to our hole of where we were before Canada Cartage left. It's a way to mitigate the loss of them leaving. We're going with small bay because in Calgary, the small bay are seeming to be flying off the shelf in leasing pretty easily. Call it 10,000-20,000 sq ft. That's our plan for that, to bring the NOI back to where it was.
Okay. That's helpful. I guess your commentary around some of the assets you've been working on for a while here seems optimistic that you're making some progress for the back half of the year. Just at this point, how would you describe where you are? Is it just pretty advanced on discussions, or do you have potentially some deals under contract right now?
So I'm always remiss in Montreal because I find Montreal a very interesting market with the buying pool there. But on the three office assets, we are drafting a PSA right now. So I'll give you a fulsome update here. A PSA, we had about three or four offers, and I actually chose the one that I believe the buyer is real in that they're closers. So I'm very optimistic that that should close in the second half as we're going under purchase and sale agreement. The Old Montreal portfolio, we do have an offer on, and I believe, again, it's a real buyer. I met with them on Monday. So we're in the process of just finalizing a PSA on those. Our retail portfolio, our half, so our half of that, we are going to market. So we've engaged a co-brokers on this one.
We do have some random offers, but we're going to go to full market on that portfolio. So I'm optimistic that we're going to get a bid that we like and move forward, hopefully. And then on our non-core, that would be that West Can portfolio that we identified in prior quarters. It sounds pretty good that we're going to have a buyer. They're looking to see if they are able to get the debt that they require on it. But from a pure numbers standpoint, we're there on an agreement with them. So it's whether they can get the debt level that they require, and if they can, that looks pretty good as well. So those assets make up about roughly CAD 200 million-ish, give or take, of sales.
And that CAD 200 million, that's pretty consistent to what you thought potential gross proceeds could have been when you started this process. That hasn't changed too much.
Yeah. Call it CAD 210. I just rounded it to CAD 200. But yeah, it's right around there.
Yeah. Okay. I'll turn it back to the call.
Okay.
The next question comes from Kyle Stanley with Desjardins. Please go ahead.
Hey. Good morning, guys.
Hey, Kyle.
Just on your guidance, and thank you for providing that in a more formalized fashion now. That's great. Just wondering, what's captured in your outlook for the year? Would that include NOI from expansions and potentially Richmond coming online?
So same property overall, yes. Total guidance would, but what we gave there was mid to high single-digit same property growth, right? So we wouldn't include Richmond in the same property growth.
Okay. Fair enough. And then maybe just sticking with Richmond, can you just remind us of the net FFO impact on Richmond? I know, obviously, a portion is included in the vendor rent guarantee, but I do believe there is another portion to come online afterwards as well.
So it's, call it, I think it's 60,000 sq ft. That's the club as a whole. Oh God. If we can get occupancy, it's so frustrating. Originally, I think it was going to be like CAD 225,000 a month. I'm going to have to ramp that up. So I believe from the start, for the first year, it's probably going to be more like CAD 125,000 a month, and then we're going to step up to the full amount over the next few years to let the club, it's been such a delay. They're sitting with a waiting list of members that haven't been able to play, even though it is effectively complete. But we're going to have to let them ramp up and get their business operating to make it a successful club.
I think for the first year, it's probably going to be, and I'm working through this now with them, but probably in the CAD 125,000 to CAD 130,000 a month range of additional income when that comes on.
Okay. Thank you for that. That's helpful. Just two other quick ones. You mentioned seeing some nice interest in the Old Montreal office assets. Can you remind us of the value you might expect to get on those?
Sure. It's in and around call it the CAD 45 million to CAD 50 million range asset as a whole. So our half, call it CAD 23 million to CAD 24 million, somewhere around there. It's going to be somewhere around CAD 23 million to CAD 25 million, I believe, when we're all said and done.
Okay. Perfect. And then just the last one, a modeling question. Just on G&A, how should we think about that in 2024? I think you've been pretty consistent over the last number of quarters. What would you say for 2024?
We're going to be consistent again. I think we're staffed pretty well. The finance team is ramped up. We have a number of new people. So I think our disclosures are better, and they'll continue to get better throughout the year. And so I think from a G&A perspective, we're not expecting anything out of the norm.
Yeah. The G&A was abnormally high this quarter. We had a one-time hit of about CAD 1.6 million. So I think you're probably fair to look long-term around the CAD 1.5 million, which I think is what we've averaged in prior quarters.
Okay. Perfect. I will turn it back. Thanks, guys.
The next question comes from Sam Damiani with TD Cowen. Please go ahead.
Thanks. Good morning. Just on the same property guidance, I just want to clarify. I think it was Brad's question earlier. Just on what is included in there, I think you mentioned Richmond is not included in there, but does it include all of the properties that were in the Q4 same property pool plus the expansions coming online in 2024? And does it also include the Canada Cartage vacancy coming up?
It does not include. So it does not include Richmond. It does not include new expansions coming on board. And Canada Cartage, it would include the impact of Canada Cartage.
Okay. Great. Just on the Q4 NOI, was there any unusual items either in the rental revenue side or the operating cost side that impacted Q4 NOI that won't continue into 2024?
Yes. We sold Victoriaville in Q2 of last year, and that had a straight-line rent adjustment of just under CAD 500,000. I think it was CAD 400,000. And so that discontinued this quarter. So you see that as a bit of a difference between our same property NOI and our FFO and our same property NOI.
Okay. But there's nothing unusual on the operating cost side because the costs seem to really tick up over the third quarter.
Oh, so we did have actually, just Kelly's reminding me. We had a seasonal drag on retail. So we had outperformance in our growth in our industrial, and then our legacy retail and office were slightly behind last quarter on a sequential basis. And the retail was due to seasonality, effectively snow removal in the business. And on the office side, there was a vacancy in one of our Montreal offices, which did hurt us.
Gotcha. Okay. Final question for me is just on the dispositions. Good color in terms of sort of guidance there. Just wondering what the NOI yield is or expected range of that NOI yield on that CAD 210 million.
That's a good question. Overall, probably let me just think this through for a minute. Without having the numbers right in front of me, I'd probably say in and around eight, probably combined somewhere around there.
Great. That's helpful. Thank you so much. I'll turn it back.
Okay. No problem.
Once again, if you have a question, please press star, then one. The next question comes from Matt Kornack with National Bank Financial. Please go ahead.
Hey, guys. Just following up on Sam's question on the dispositions, would that exclusively go towards, I guess, the development spend that you have currently underway and deleveraging, or would you kind of initiate some of these other development projects that you've got planned but aren't in process on or acquire additional assets?
Yeah. No. I think overall, we would use the proceeds just to delever. We don't really have anything too big in the hopper from an acquisitions side of things. Maybe a spattering here and there, but nothing major. And so we would use those proceeds to delever the balance sheet.
Just the timing of them, Matt, the way the timing works is that most of the development spend will happen in the beginning half of this year, and most of the proceeds we expect to happen in the back half. From a cash flow perspective, that'll be used to delever.
Okay. So leverage will take up a little bit in the next couple of quarters and then come back down as you spend.
It should be roughly around where it is today, but roughly right around the 50% number.
On the Alberta acquisition post-quarter, just give you a sense as to is that a land purchase, or is it some sort of storage? It just looked high on a per-square-foot basis. I don't know if it's development-oriented or.
Yeah. No. That's the Canada Cartage new.
Oh, sorry. I got it. So that's where the development upside is, potentially adding the 100,000 sq ft. Makes sense. And then lastly, on Richmond, I missed the breakdown of what was fully included in the CAD 200 million, but I don't think that would have been in that number. Is it still something, again, once you get up and running that you'd consider selling or given your commentary around the trajectory of the leasing? Would that be a 2025 event at the earliest?
I think that's more a 2025 event.
Okay. Fair enough.
I'll focus on getting a document, please.
Sure. Sure.
Yeah. Okay.
Sounds good. Thanks.
No problem.
The next question comes from Sumayya Syed with CIBC. Please go ahead.
Thanks. Good morning. Just firstly, on the outlook, which includes expecting your payout ratio to come down to the low-to-mid-90s range, just confirming that that is inclusive of the impact of your planned dispositions.
Yeah. We would probably be in the mid-range, including the dispositions, depending on if we're able to execute on any kind of higher cap rate, high-quality assets. So I would say it would be including the dispositions, it's probably in the mid-range.
Just for clarity, that's full-year guidance, right? It's not each quarter. We're looking to target that or hit that over the full-year basis.
Right. Okay. And then next, I want to touch on the disclosure around your industrial mark-to-market. And just if you could remind us, what do you include in the other bucket for industrial? Just thought there was kind of a big jump in the mark-to-market for those assets from last quarter.
Yeah. So in the mark-to-market, I believe what did we have in the MD&A? The mark-to-market. That's what she's asking. I believe it's 24% is the mark-to-market on the industrial.
Okay. So it's not 29%?
No. I believe there's an error.
So total company is 24%, not 29%. And then the industrial. T otal company is 20%. Y ou're right. 24%.
Okay. Great. Okay. That's all from me. Thank you.
The next question comes from Sam Damiani with TD Cowen. Please go ahead.
Thank you. My question was asked. Thank you very much.
The next question comes from Ananthan Vijayakumar with RBC Capital Markets. Please go ahead.
Hey. Good morning, everyone. Just a quick one here. So I'm just trying to understand these interest rate swaps and the swaptions. Do you have an effective interest rate that you expect in 2024 when these net out?
It's around 4.5%. I mean, it's listed there in the MD&A. Basically, they range between 4%-4.5% is what the swaption exercise price is at.
Would those swap options net out on the interest rate swaps you had in the table above?
Exactly. Yeah. That's exactly it. It's a one-time option for our counterparty to cancel those swaps.
Got it. Okay. Thank you. Turning back.
This concludes the question-and-answer session. I would like to turn the conference back over to Kelly Hanczyk for any closing remarks. Please go ahead.
Thanks, everybody, for attending, and I look forward to chatting next quarter.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.