Earnings Call: Q2 2021

Aug 12, 2021

Earnings release

You for standing by. This is the conference operator. Welcome to the Nexo Street Second Quarter 2021 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. Call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Mr. Kelly Hancic, CEO. Please go ahead. Thank you very much. I'd like to welcome everyone to the 2021 Q2 results conference call for Nexus REIT. Joining me today as usual is Robert Chafon, Chief Financial Officer of The REIT. Before we begin, I'd like Caution with regard to forward looking statements and non GAAP measures. Certain statements made during this conference call may constitute Please refer to our MD and A and the REIT's other securities filings, which can be found at sedar.com, for cautions regarding forward looking information and for information about non GAAP measures. In 2014, we began with a very small pure play industrial REIT. In 2017, we pivoted to diversify to accretively grow and gain access to the Quebec market. In 2017, we have returned to our roots, focused on acquiring industrial properties. We are executing on our strategy and at a pace much greater than I originally expected. For the Q2, we have closed on $148,300,000 of industrial acquisitions and subsequently have closed on another $76,000,000 And this morning, we announced We have waived conditions on another $19,700,000 strong covenant industrial distribution center in Alberta with a 10 year lease term. We have an extremely full pipeline right now. The deal flow is huge. And at the moment, we are quickly increasing our industrial weighting and will continue to do so throughout the year. Our NOI generated from our industrial properties will easily exceed the previous target set of 75% by the end of the year. Our fundamentals continue to be strong. On March 4, we closed a $35,000,000 offering. And on April 1, we closed on the London transaction. Subsequently, we entered into a new $40,000,000 credit facility and placed on 3 of the London properties. We are well on our way to deploying this liquidity. Our occupancy for the quarter was up slightly from last quarter. In the industrial portfolio, our vacancy continues to be mainly a 25,000 square foot industrial space at 41 Royal Vista Drive in Calgary. We are encouraged by recent leasing inquiries and we're hoping soon we'll see some paper on that space. We also have a 26 1,000 square foot office space at Place 400 in St. Jean, New Brunswick that came back to us on April 30 as we previously announced. We've been actively marketing this space and have subsequently leased about 5,000 square feet of it. And we currently have about 3 possible groups interested in different portions of the remaining space, which should help mitigate the loss of the rent. Richmond, BC, we're progressing quickly and nearing substantial completion and turnover to our 2 tenants on the repurposing of the 60,000 square feet Former industrial space into a much higher yielding fleet and hockey tendencies. As mentioned previously, upon completion, which is expected to be in and around September or October, Our NOI will increase by approximately $165,000 per month. We also have the ability to add an additional 74,000 square feet right now to this project in the future, and we're currently in for permitting with the city. In Montreal, we continue to work the developer on the sale of the excess land, as mentioned before, at Le Als d'Anjou, the developer is moving pretty quickly now, and it looks like their approvals are coming a little Properties for sale in the fall, while we're not really in a rush to move the assets, we believe they'll garner much attention in the marketplace and a lot of interest It will give us additional funds to redeploy the proceeds from the sales into additional industrial products. I will now hand it over to Ross to give some greater detail on the REIT's financials. Thanks, Kelly. Between the $35,000,000 offering in March the London vendors taking back a significant portion of the purchase price in units, we had approximately $75,000,000 of cash to deploy, allowing us to approximately $200,000,000 of cash acquisitions. In mid June, we completed approximately $45,000,000 of cash acquisitions. As a result of completing these acquisitions towards the end of the quarter and having cash left to deploy, our unit measures our per unit measures were diluted Our payout ratio was increased. As Kelly mentioned, we will see the benefit of deploying the proceeds of the raise and balancing out our capital structure in the coming quarters as we fully deployed this cash. We revalued our portfolio in the 2nd quarter, seeing fair value increases primarily in our industrial portfolio. Montreal industrial cap rates have come down significantly over the past 2 to 3 quarters. We also saw industrial cap rates compression in Ontario and some movement in Calgary. While we are aware of activity in the Edmonton market that may suggest cap rate compression there too, this is not yet reflected in published cap rates. Same store NOI was down in the quarter, primarily as a result of 2 vacancies Kelly mentioned, a 25,000 square foot industrial vacancy in Calgary and a 26,000 square feet of space in an office building in St. John, New Brunswick, which came back to us at the end of April. There has been encouraging leasing activities on both of these vacancies. G and A expense was lower Q2 as compared to Q1 with TSX graduation costs hitting in Q1 and due to the timing of period costs. We entered into a new revolving credit facility in June for $40,000,000 which was undrawn at quarter end, and we continue to have ample liquidity. I'll now turn it back to Kelly. All right. Well, I'm going to open it up to any questions. Our first question is from Lee Chan with IA Capital Markets. Please go ahead. Hi, good afternoon, guys. First question for Rob. If you combine cash on hand as a Q2 and post Q2 Subsequent financing. What would be your current cash position and what would be your buying capacity going forward? Okay. Thank you for the question. I think right now, we're sitting with the capacity to do about $100,000,000 worth of Deals on top of the $20,000,000 deal that we announced yesterday where we waived conditions. So about 125 Total $20,000,000 will be used for that acquisition. So we've got the capacity to do about another 100,000,000 Great. Thank you. That's great. And I guess last question for Kelly. I was just wondering if you could provide some color on just The overall environment and conditions for any like any potential future acquisitions and more specifically as to timing, Cap rates and any other potential new markets? We're active in the markets we're in. And so on the pipeline, we've been pretty successful in completing deals above 6 cap. So that's been going pretty well. We have a number of Deals in different stages of negotiations. I don't want to give a number, but I mean it's a healthy amount of deals that we're looking at. So I think going forward, we'd be in the 5.5% to 6.8 range, I think, overall of the product that we look at, it's what we focus on. You're not going to see that in GTA or Vancouver or in some parts of Montreal, but we've been pretty Pipeline, so you'll see pretty active fall for us, I'm assuming. Our next question is from Brad Sturges with Raymond James. Please go ahead. Hi, guys. Hi, Brad. The During the quarter, you had a $10,000,000 asset classified for sale. Is that the excess land at the Hall of Anjou or is that something else? It's something else. It's a retail property that we have a firm offer to acquire from a purchaser. Yes, to sell. Well, purchase or will acquire. And we're subject to some confidentiality under the PSA, so we're being a bit intentionally vague. But It is a retail property. And that would that be included in your 6 identified assets then for the fall? No. No. That's above and beyond. So, yes, when I talk about the 6, it's kind of Six, I call them relatively prime assets that we have that will garner quite a bit of attention. They're pretty solid. And what would be the if you were to sell all 6 in the fall, what's the quantum of proceeds you think you could get Yes. I'd say it's between in around $110,000,000 in that range. And where would you be in the process on whole VINCIUM in terms of monetizing some of the excess land? Yes, it's funny you asked that. I was in Montreal 2 days ago and I actually sat down with the buyer, Interesting gentleman who has actually some other opportunities that might work out well for the REIT down the line. But He said it's going extremely well. He considers it a done deal. So we're hoping to have the paper signed pretty soon because it looks like it's a go from the city on his Okay. So that's like let's say that's Q4 as well? Yes, I think so. And remember that It goes in stages as well, right? That's not one big lump sum. It's a staged payout. Yes. Okay. Maybe switching gears to the fair value gain. Obviously, a good chunk of that's with Richmond. What would that imply into the cap rate for Richmond? And then Can you just talk about the loan to value on the property and the potential refinance? Yes. So on Richmond, we've got about a $30,000,000 loan right now. So there's Good opportunity to leverage that up. We ended up valuing it at about $108,500,000 which works out, I think, somewhere around a 4% cap, give or take. And we've got appraisals We've got an appraisal that we've commissioned that's in process. We'll get that back and We'll reevaluate $100,500,000 at that time. Yes. The building is not yet done. So we did It's okay to call it a partial write up. And then we're finalizing with appraisals in the process, which will kind of show up, I think, in the next quarter. Okay. And then you would revisit the loan value or try to upsize that? Yes. Absolutely. If we were lucky and we got a permit, the cost of construction could be funded right out from the increase in pulling out cash on that asset, Plus, that will be a substantial because like you said, we're going to be sitting here with a fairly large substantial asset that only has $30,000,000 of debt on it. Okay. And would that be your plan maybe to take out cash from the assets to pay part of the profit share? Or How do you feel about how you would pay for the profit sharing arrangement for what you owe to the developer? Yes. Well, we have an agreement So there is a mechanism in place on price for the units. So we're still going through that whole process. So And finalizing what the final lift calculation would be. So we can do it in units. We have a number of new options. If that doesn't have the tax loan, there would be an opportunity to fund that through the upsizing of the loan on that property. Okay. And then just in terms of lease commencements, is that all in place and can the rent start by the end of the quarter? So I think sorry, I think one way to one of them, I think we'll commence real soon, but there is I believe there's a couple there's 2 months free rent on it. So The rent would probably kick in, say, if it's mid August now. What is that? October. Yes, in Q4. And then the other one, there was just there's a slight delay just from it is really hard to get steel right now. But we ended so there was a delay because it actually has a new roof on that portion that goes in. But we've got it in now and they're blasting away on it. So I'm hoping that, that will be done September and then that kind of kicks in, in the October range is what I'm hoping for right now. So Q4, you might get a pretty close full run rate on the NOI? Yes, yes, for sure. Okay. Very close. And for Phase 3, have you already started preleasing discussions there? Or how do you think about when that would definitely ramp up? Yes. So we have the project actually garnering a lot of interest in Richmond. So it's become quite A big deal out there. So we have 3 guys that really want in and we'll put paper the minute we start to get When we know where when and at what point we're going to have that approval from the city. So when we have the permit in hand, We'll get leases signed up. And then once we have the leases signed up, which shouldn't take too long, then we'll break ground. Okay. I'll turn it back. Thank you. Okay. No problem, Spire. The next question is from Kyle Stanley with Desjardins. Please go ahead. Thanks. Hey, guys. Hi. So just looking at the acquisition environment, you've talked about it a little bit. We've all seen a number of high profile transactions announced lately. Are you seeing any significant changes in the competitive environment or the types of buyers that you may be competing against. I mean, I know historically you've leveraged your network to source off market deals. Just wondering, I guess, the runway for you to continue sourcing those off market deals? Or at a certain point, do you anticipate having to enter more competitive bidding processes? So, I'll say that our runway is still pretty large on off market deals. So You'll see significant amount that will come in off market. So that is ongoing right now. We have bid on some and have not been successful. A couple we I believe we only On one of the ones that we're actually under contract on that with the bidding process, And we won that one and we weren't even in the hot to bid, but we still managed to win it. Others, I'll give you an example. We bid on 1 in Edmonton. We kind of looked at it. It was brought to us and it went out and it sold At a low forecast, and I was kind of bewildered a little bit. And so we do see that in some of the markets Montreal is very competitive. We missed out on one last week that I thought we had. We're pretty close on it. And so it is competitive. It's really competitive. But in saying that, we do have a pretty large pipeline of non marketed opportunities. So I feel We can add a significant amount of property still without getting into that hugely competitive bid process. Okay. That makes sense. Not to pin you down on any specific number at all, but just relative to maybe what was announced or completed in the first half, How do you think the volume could look in the second half? I'll say this. I think it's going to be substantial. Every time I give out a number, we seem to blow rate by it. So I'm hesitant. We're we have quite a bit in the hopper right now that we're In various stages of negotiation and due diligence and whatnot. So it will still be extremely active second half of the year, 2nd, especially last quarter. Okay. And then I guess just shifting to the operations in the portfolio And as the portfolio has transitioned to being primarily industrial, do you have a sense of the potential rent growth we could see from the industrial assets over the next Year or 2? I mean, in the more primary markets, we've seen some pretty aggressive mark to market opportunity. Just wondering in your More secondary market portfolio, what you're seeing? Yes. So Kyle, we don't actually have a lot of lease renewals coming up in the next year or 2 on the Industrial side, where we do see some opportunities is the London portfolio that was acquired in April. There's some 2022, 2023 Lease renewals there where we should be able to get some pretty significant upside. But due to the longer term leases generally we have In our industrial portfolio, we don't actually have a lot coming up for renewal. We We had one space that came up in Montreal that we got pretty good lift on, and we'd expect to continue to see that as leases do renew. But just 2020 the rest of 2021 into mid-twenty 22, we won't see a lot of renewals. And then we'll see some opportunity In 2022 on that London portfolio and then into 2023, 2024, 2025. Okay, great. And just one more for me. Just on industrial intensification or expansion within the portfolio, could you comment a little bit about the Yes. In London, we have it's pretty large. We're Getting drawings together for probably, I'd say, 550,000 square feet of So that one that portfolio alone has a significant amount right there. So I know one of our buildings down in St. Thomas has the ability to expand significantly on. So we do have quite a few that have quite a large land portion. So London would be the one that we would focus on near term. Just from a supply demand, the vacancy there is pretty low And the demand is pretty high. So it makes sense for us to take some risk and perhaps build some on spec. And I think by the time We would be going, we would have it filled. So it's probably the market that you'll see us tackle first. Okay. Do you have any thoughts on what the development yield would be, whether it's an exact number or just a spread over stabilized? Yes, I think it would be around 8, is my guess right now and depending on where construction costs came in and everything. So which would be decent because you'd probably look at a value of, I'm hearing now crazy enough, Sub-five in London, so it's things are moving across the board. Okay, great. That's good color. I'll turn it back. Thanks. The next question is from Joanne Chen with BMO Capital Markets. Please go ahead. Hi, good afternoon. Maybe just looking on the with respect to the acquisition side of things, The markets focus right now in this environment is still kind of similar to what you guys have been targeting? Yes. We I guess I call it opportunistic. So we're pretty active in the markets that we're in. So and I am actively looking in Quebec's Montreal area. I'm actively looking in and around the GTA and Trying to find things that make sense for us from a cap rate perspective. So we are seeing deals. We're seeing a number of them. But Overall, I'd say you just see us continue to grow in the markets that we're in right now. Okay. And I guess, This was kind of already brought up, but given a lot of new stats and data came out this week amongst their peers, It hasn't really changed in terms of some of your negotiations or whatnot. You haven't really seen that yet, just given that most of the deals that you guys are targeting are off market, right? Yes. They're off market, and we've had a number of them that We've been working on for a while, so that bodes well for us. And we do have a vendor And that has substantial portfolio that we're continuing to talk with on additional product there. So It looks pretty good for the next several quarters anyway. I think it's going to be pretty active. Could you maybe just I know we thought it was nice to see that It's 60 beeps of the compression in cap rates since the beginning of this year. But Could you maybe provide some color on your portfolio cap rates by region and where most of that compression came from? Yes. So I think we did provide a little bit of detail on the industrial compression in the MD and A by region. So Montreal accounted for, I think, upwards $20,000,000 of compression and then Ontario, Roughly another $33,000,000 And then in Western Canada, yes, another And they're $2,500,000 $3,500,000 Hopefully that and then there's Bridgeman separate to that. Okay. I'm sorry. I did see that. I just thought maybe in terms of on the actual I thought it was maybe you could provide some color there. Yes, I don't have the percentages in front of me, but Just based on the absolute number, I could get back to you something. Okay. No problem. That's it. Yes. Okay. That's it from me. I'll turn it back. Thanks very much, guys. We have a follow-up question from Brad Sturges with Raymond James. Please go ahead. Just following on lots of questions on the acquisition pipeline. I guess if you were to characterize what you're seeing right now In terms of 2 bucket deals that you would settle in cash and deals that could be that entertain back a share, how would that How do those 2 buckets kind of look like as a percentage split? I'd say it's probably half and half Or maybe a little bit more leaning towards the cash purchase side of things now. So Yes, maybe it's sixty-forty cash to units on side like deals that we have Given how strong the pipeline is, obviously, you've highlighted some of the liquidity for more capacity And some asset sales that potentially could happen in the fall. If the deal flow is not robust, would you consider Maybe the your portion of the Sandler portfolio to help fund that? Or how do you think about the timing of Pursuing a larger disposition program like that? Yes. I think that will end up becoming a little bit of a legacy So that's a little bit harder to unwind. So what we're targeting are the ones that we wholly own. And then we do have some others that It would be easier to move. So we're kind of looking at everything. And it depends on the pipe and how fast we execute on it. So The reality is we do have some liquidity right now, so that's great. And then We move a couple of assets here and there. That's additional liquidity. We have liquidity in Richmond that we can pull out on. So At the end of the day, I think we're fairly liquid right now. So I think things are pretty strong on the acquisition from being able to This concludes the question and answer session. I'd like to turn the conference back over to Kelly Hancic for any closing remarks. Perfect. I just want to say thanks to everyone for attending. It's been a great quarter. Things are taking off, and we look forward to our next results call. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.