Thank you for standing by. This is the conference operator. Welcome to the Nexus REIT second quarter 2021 conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Mr. Kelly Hanczyk, CEO. Please go ahead.
Thank you very much. I'd like to welcome everyone to the 2021 second quarter results conference call for Nexus REIT. Joining me today, as usual, is Robert Chiasson, 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. During this call, we will be discussing non-GAAP measures. Please refer to our MD&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. All right. In 2014, we began as 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 returned to our roots, focused on acquiring industrial properties. We are executing on our strategy at a pace much greater than I originally expected. For the second quarter, we have closed on CAD 148.3 million of industrial acquisitions and subsequently have closed on another CAD 76 million. This morning we announced we have waived conditions on another CAD 19.7 million 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 4th, we closed a CAD 35 million offering, and on April 1st, we closed on the London transaction. Subsequently, we entered into a new CAD 40 million 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 sq ft 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 26,000 sq ft office space at Place 400 in Saint John, New Brunswick, that came back to us on April 30th, as we previously announced. We've been actively marketing this space and have subsequently leased about 5,000 sq ft of it.
We currently have about 3 possible groups interested in different portions of the remaining space, which should help mitigate the loss of the rent. In Richmond, B.C., we're progressing quickly and nearing substantial completion and turnover to our 2 tenants on the repurposing of the 60,000 sq ft former industrial space into much higher yielding skatepark and hockey tenancies. As mentioned previously, upon completion, which is expected to be in and around September or October, our NOI will increase by approximately CAD 165,000 per month. We also have the ability to add an additional 74,000 sq ft right now to this project in the future, and we're currently in for permitting with the city. In Montreal, we continue to work with the developer on the sale of the excess land, as mentioned before, at Les Halles d'Anjou.
The developer is moving pretty quickly now. It looks like their approvals are coming a little quicker than we thought. It looks positive for late 4th quarter. On the disposition front, we've targeted 6 potential high-quality retail and office 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, and will give us additional funds to redeploy the proceeds from the sales into additional industrial product. I will now hand it over to Rob to give some greater detail on the REIT's financials.
Thanks, Kelly. Between the CAD 35 million offering in March and the London vendors taking back a significant portion of the purchase price in units, we had approximately CAD 75 million of cash to deploy, allowing us to complete approximately CAD 200 million of cash acquisitions. In mid-June, we completed approximately CAD 45 million of cash acquisitions. As a result of completing these acquisitions towards the end of the quarter and having cash left to deploy, our per unit measures were diluted, and 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 deploy this cash. We revalued our portfolio in the second quarter, seeing fair value increases primarily in our industrial portfolio. Montreal industrial cap rates have come down significantly over the past 2-3 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 Saint 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&A expense was lower in 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 CAD 40 million, which was undrawn at quarter end, and we continue to have ample liquidity. I'll now turn back to Kelly.
All right. Well, I'm going to open it up to any questions.
Certainly. Our first question is from Lee Chen with iA Capital Markets. Please go ahead.
Hi. Good afternoon, guys. First question for Rob. If you combine cash on hand as at Q2 and post Q2 subsequent financings, 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 CAD 100 million worth of deals on top of the CAD 20 million deal that we announced yesterday, where we waived conditions. About 125 total, and 20 will be used for that acquisition. We've got the capacity to do about another CAD 100 million.
Great. Thank you. That's great. 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 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. On the pipeline, I think we've been pretty successful in completing deals above a 6% cap rate. 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 it's a healthy amount of deals that we're looking at. I think going forward, we'd be in the 5.5%-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. We've been pretty successful in the markets we're in on finding pretty good deals. We'll just continue to source those right now.
Like I said, we do have a pretty active pipeline, so you'll see a pretty active fall for us, I'm assuming.
Perfect. That's great. Thanks for the color. Thanks, guys.
Thank you.
Our next question is from Brad Sturges with Raymond James. Please go ahead.
Hi, guys.
Hey, Brad.
During the quarter, you had a CAD 10 million asset classified for sale. Is that the excess land at the Halles d'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.
No. To sell to a purchaser.
Well, purchaser will acquire.
Yeah.
We're subject to some confidentiality under the PSAs. We're being a bit intentionally vague, but it is a retail property.
Would that be included in your six identified assets then for the fall?
No. That's above and beyond.
Above and beyond.
Yeah. When I talk about the six, 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.
If you were to sell all six in the fall, what's the quantum of proceeds you think you could get from that at this point?
Yeah, I'd say it's between in around CAD 100 million, CAD 110 million, in that range.
Where would you be in the process on Halles d'Anjou in terms of monetizing some of the excess lands?
Yeah, it's funny you ask that. I was in Montreal 2 days ago, 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. He said it's going extremely well. He considers it a done deal. We're hoping to have the paper signed pretty soon because it looks like it's a go from the city on his viewpoint.
Okay, let's say that's Q4 as well.
Yeah, I think so. Remember, it goes in stages as well, right? That's not one big lump sum. It's a staged payout.
Yeah. Okay. Maybe switching gears just to the fair value gain. Obviously, a good chunk of that's with Richmond. What would that imply in terms of the cap rate for Richmond? Can you just talk about the loan to value on the property and the potential refinancing?
On Richmond, we've got about a CAD 30 million loan right now, there's a good opportunity to leverage that up. We ended up valuing it at about CAD 108.5 million, which works out I think somewhere 4% cap rate, give or take. We've got an appraisal that we've commissioned that's in process. We'll get that back in a short week.
At that time, yeah, the building's not yet done, so we took it, call it a partial write-up, and then we're finalizing with appraisals in the process, which will show up, I think, in the next quarter.
Okay. Then you would revisit the loan value or try to upsize that?
Yeah, 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 they'll give us substantial, because like you said, we're going to be sitting here with a fairly large, substantial asset that only has CAD 30 million of debt on it.
Okay. Would that be your plan maybe to take out cash from the asset to pay part of the profit share? How do you feel about how you would pay for the profit-sharing arrangement for what you owe to the developer?
Yeah. Well, we have an agreement with them, so there is a mechanism in place on price for the units. We're still going through that whole process, so kind of finalizing what the final lift calculation would be. We can do it in units. We have a number of options.
If it doesn't impact, though, there would be an opportunity to fund that through the upsizing of the loan on that property. Okay. Just in terms of lease commencers, is that all in place and still going to start by the end of the quarter?
I hang on. Let me read out those. One of them, I think, will commence real soon. I believe there's two months' free rent on it. The rent would probably kick in, say, if it's mid-August now, what is that? October. Yeah, in Q4. The other one, there's a slight delay just from, it is really hard to get steel right now. There was a delay because it actually has a new roof on that portion that goes in. We've got it in now, and they're blasting away on it. I'm hoping that that'll be done, September, and then that kind of kicks in in the October range, is what I'm hoping for right now.
Q4, you might get a pretty close or full run rate on the NOI?
Yeah. For sure.
Okay. Pretty close. For phase 3, have you already started pre-leasing discussions there, or how do you think about?
Yeah
fully ramp up?
Yeah. We have the project that's actually garnering a lot of interest in Richmond, so it's become quite the big deal out there. We have three guys that really want in, and we'll put paper the minute we know when and at what point we're going to have that approval from the city. 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 back. Thank you.
Okay, no problem. Bye.
The next question is from Kyle Stanley with Desjardins. Please go ahead.
Thanks. Hey, guys.
Hi.
Just looking at the acquisition environment, you've talked about it a little bit, I mean, we've all seen the 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 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?
I'll say that our runway's still pretty large on off-market deals. You'll see significant amount that will come in off-market. That is ongoing right now. We have bid on some and have not been successful. A couple, I believe we only bid on one of the ones that we're actually under contract on, that was a bidding process. We won that one, and we weren't even the high bid, but we still managed to win it. Others, I'll give you example. We bid on one 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. We do see that in some of the markets, like Montreal is very competitive. We missed out on one last week that I thought we had.
We were pretty close on it. It is competitive. It's really competitive. In saying that, we do have a pretty large pipeline of non-marketed opportunities. 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 right by it. We have quite a bit in the hopper right now that we're in various stages of negotiation and due diligence and whatnot. It'll still be extremely active second half of the year, especially last quarter.
Okay. Then I guess just shifting to the operations of 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 two? In the more primary markets, we've seen some pretty aggressive mark-to-market opportunities. Just wondering in your more secondary market portfolio, what you're seeing?
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. Just 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 had 1 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. Just the rest of 2021 into mid-2022, we won't see a lot of renewals. We'll see some opportunity in 2022 on that London portfolio, and then into 2023, 2024, 2025.
Okay, great. Just one more from me. Just on industrial intensification or expansion within the portfolio, could you comment a little bit about the opportunity that maybe exists there for you?
Yeah. In London, it's pretty large. We're getting drawings together for probably, I'd say, 550,000 sq ft of potential that we're looking at. That one, that portfolio alone has a significant amount right there. I know one of our buildings down in St. Thomas has the ability to expand significantly on. We do have quite a few that have quite a large land portion. 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. I think by the time we would be going, we would have it filled. 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?
Yeah, I think it would be around 8%, is my guess right now. Depending on where construction costs came in and everything. Which would be decent because you'd probably look at a value of, I'm hearing now crazy enough, sub 5% in London. Things are moving across the board.
Okay, great. That's good color. I'll turn it back. Thanks.
Thanks.
The next question is from Joanne Chen with BMO Capital Markets. Please go ahead.
Hi, good afternoon. Maybe just with respect to the acquisition side of things, the market's focus right now, even in this environment, is still kind of similar to what you guys have been targeting?
Yeah. I guess I'd call it opportunistic. We're pretty active in the markets that we're in. I am actively looking in Quebec, Montreal area. I'm actively looking in and around the GTA, and I'm trying to find things that make sense for us from a cap rate perspective. We are seeing deals, we're seeing a number of them, overall, I'd say you just see us continue to grow in the markets that we're in right now.
Okay. I guess, this was kind of already brought up, but given a lot of new stats and data came out this week amongst our peers, it hasn't really changed in terms of some of your negotiations or whatnot. You haven't really seen that, you've just given that most of the deals that you guys are targeting are off-market, right?
Yeah, they're off market. We've had a number of them that we've been working on for a while, that bodes well for us. We do have a vendor in London that has substantial portfolio that we're continuing to talk with on additional product there. It looks pretty good for the next several quarters anyway. I think it's going to be pretty active.
Good to hear. Sorry, excuse me. I know, it was nice to see that there could be the compression in cap rates since the beginning of this year. Could you maybe provide some color on your portfolio cap rates by region and where most of that compression came from?
Yeah. I think we did provide a little bit of detail on the industrial compression in the MD&A by region. Montreal accounted for, I think, upwards of CAD 20 million of compression. Ontario, roughly another CAD 33 million. In Western Canada-
Okay
another two and a half, CAD 3.5 million. There's Richmond, separate to that
Okay. Oh, yeah, sorry. I did see that. I just thought maybe in terms of on the actual percentage-wise, maybe you can provide some color there.
Yeah, I don't have the percentages in front of me, but just based on the absolute number, I could get back to you.
Okay. No, yeah, no problem. Yeah. Okay, that's confirming. I'll turn it back. Thanks very much, Brad.
Okay.
We have a follow-up question from Brad Sturges with Raymond James. Please go ahead.
Hey. Just following on lots of questions on the acquisition pipeline. I guess if you were to characterize what you are seeing right now in terms of two bucket deals that you would settle in cash and deals that could be vendor take-back of shares, how would those two 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. Yeah, maybe it's 60/40 cash to units on side, like deals that we have flowing.
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 that robust, would you consider maybe your portion of the Sandalwood portfolio to help fund that? How do you think about the timing of pursuing a larger disposition program like that?
Yeah, I think that will end up becoming a little bit of a legacy asset. That's a little bit harder to unwind. What we're targeting are the ones that we wholly own, and then we do have some others that would be easier to move. We're kind of looking at everything, and it depends on the type and how fast we execute on it. The reality is we do have some liquidity right now, so that's great. Then we move a couple assets here and there. That's additional liquidity. We have liquidity in Richmond that we can pull out on. At the end of the day, I think we're fairly liquid right now. I think things are pretty strong on the acquisition from being able to pay for a fairly decent sized transaction.
Good stuff. I'll turn it back. Thanks a lot.
Okay, thanks, Brad.
This concludes the question and answer session. I'd like to turn the conference back over to Kelly Hanczyk for any closing remarks.
Perfect. I just want to say thanks for 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.