Earnings Call: Q1 2021

May 14, 2021

Earnings release

Thank you for standing by. This is the conference operator. Welcome to the NexSys REIT First Quarter 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 I would now like to turn the conference over to Kelly Hamzick, Chief Executive Officer for opening remarks, please go ahead. I'd like to welcome everyone to the 2021 Q1 results conference call for Nessus REIT. Joining me today is Robert Chaisson, CFO 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 forward looking statements, which reflect the REIT's current expectations and projections about future results. Also during this call, we will be discussing non GAAP measures. 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. All right. To say the REIT is off to a fast start in 2021, I think, is a little bit of an understatement. To date, we have closed on $117,500,000 of well tenanted industrial deals, adding approximately 1,300,000 square feet to the portfolio. 6 of these properties are located in London, Ontario, where we expect to see significant upside as leases roll over and renew at higher rents. We have the potential to expand the buildings here in London, so I think this was an excellent purchase for us. We have waived conditions on an additional 3 single tenant industrial properties 400,000 square feet of GLA to be acquired for $44,750,000 2 of these three assets are new builds. We're under conditional purchase sale agreements and due diligence on another 600,000 square feet of industrial properties to be acquired for 100,000,000 We expect to close on those in June, July. In addition, we are in various stages of discussions on another approximately $125,000,000 of I think with these deals, we are well on our way to increasing our industrial weighting and our NOI generated from our industrial property And once cash from our recent equity raise is deployed, we expect our payout ratio to be back in the low 80s or better. Our occupancy for the quarter was up slightly from last quarter. In the industrial portfolio, our main vacancies our main vacancy It's a 25,000 square feet industrial space at 41 Royal Vista Drive in Calgary. We're hopeful we will get this leased over the summer as we've Seeing some recent activity at the site. In our last call, I mentioned we will have 126,000 square foot office space At last 400 in St. John, New Brunswick come back to us on April 30. So we've been marketing this space and we are seeing interest and we're in discussions with 3 separate groups for portions of the space. So over the summer, we hope we can mitigate the impact of this vacancy. Over the next 12 months, we have approximately 291,000 square feet of expiries, including the 25 The 26,000 mentioned above, where approximately 77,000 has been renewed or in discussion to renew and we're moving along well on the Attention front here. In Richmond, D. C, we're progressing nicely with our renovations to fit out the space for new tenants. As mentioned previously, upon completion, which is expected to be in and around September, October, our NOI will increase approximately $165,000 per month. We also expect a significant bump to our net asset value upon completion. Additionally, cap rates in Richmond continue to trend lower, so this bodes well. We also have the ability to add additional square footage to this project in the future, which we will be looking at shortly. In Montreal, we continue to work with a developer on Citi and after a redraft of the plans and meet the Citi concerns, it looks positive for a late Q4 or early Q1 of next year approval. On the disposition front, we recently received offers for a small retail property in Bainsville, Ontario that we're working with the group for the sale of this asset. We'll continue to look at other non core office and retail assets over the next several months and looking at the vesting of some there as well. I will now hand it over to Rob Chason to give greater detail of the REIT financials. Thanks, Kelly. I'd first like to just clarify. At March 31, we had 291,000 square feet of expiries over the next 12 months, of which approximately 77% Has already been renewed or is in discussions. I think we may have said 77,000 square feet previously, but 77%. So We're well advanced in discussions and renewals on those properties. We successfully completed our $35,000,000 equity offering on March 4, Issuing 4,255,000 units, including the full exercise of the over allotment. This put us in the position to be able on the acquisition of a number of industrial properties. And as Kelly mentioned, we've been successful in putting properties under contract. In the quarter, our weighted average number of units outstanding increased by 1,323,788 units On account of the offering, we paid $227,000 of distributions on the units issued in the March 4 offering. This had the impact of increasing our AFFO payout ratio from 84.2%, which it would have been, if not for the offering, to 87.7% and impacted our per unit measures by approximately 0 0.07 dollars As we put our equity To work and close on the recently announced and other acquisitions we're working on, we will see our payout ratio and per unit measures improve. On April 1, we closed on the $103,500,000 acquisition of 6 industrial properties in London, Ontario. We issued approximately 65% of the purchase price in units and have the ability to increase our debt on these properties to acquire additional industrial assets. We expect that we will not see the full benefits of rebalancing our capital structure following the London deal and deploying proceeds from the equity raise More than offsetting the impact of the 25,000 square foot vacancy in Calgary that Kelly mentioned. G and A expense was higher in the quarter with Approximately $207,000 of onetime TSX listing fees related to our graduation from the TSX lead to the TSX And RSU expenses were approximately $210,000 higher in Q1 as compared to Q4, just due to the timing and investing of the RSU grants. We continue to have strong liquidity and had $50,000,000 of cash on our balance sheet at the end of the quarter, ready to deploy for acquisitions. Cash collections continue to be strong with 97.9 percent of Q1 rents having been collected to date. I'll now turn it back to Kelly. Thanks, Rob. I'll open up the line to answer any questions that you guys may have. We will now begin the question and answer session. The first question comes from Fred Wanda with IA Capital Markets. Please go ahead. Thank you and good afternoon. It looks like there is a fair amount of new supply of industrial space coming across the I was wondering what your views are on the new supply and what do you see on the ground in your current and target markets? Yes. The things that we have right now, there isn't a lot of guys Coming up for renewal, so we're in good shape on the industrial side for sure. And then a lot of the recent deals we've done are longer Term leases, the 2 new builds are 10 15 years, so it really wouldn't even affect us. But the demand for industrial right now It's huge. So I think when we're talking about new supply, you're looking at a lot in GTA and things like that. If you look down in London where we've just purchased, There is very little new supply right now coming on. So that bodes very well for our renewals going forward, especially in that market. So it is one. It's very, very tight, and I think it's one that we're going to excel in. So Overall, I think our portfolio really isn't affected too much on with that. You're talking about Big box new warehousing being built and it's the majority of it is in GTA. You've got Stuff in Calgary, ball back in areas like that are going to continue to expand. But I just see it as a positive. The take up on it It is largely there is big demand for industrial space right now. Is it fair to say that you have positive views on pretty much All your current markets or there might be some of them that you have more on the radar in terms of supply? Yes. Well, London is a big one now, right? And so there's no concerns there. We're in Cambridge and the tenant's been there They're not going to leave, Barry, same thing. I look at Calgary in that area, and we have Some, I guess, longer term tenant stills in there, so it doesn't really affect us. Our Montreal portfolio, As we see things roll, we've seen positive on the rental rates there in Montreal. Montreal has That's huge demand as well. So, I think our portfolio is just situated a little differently, I would say overall. So, I just see positive Right now. Okay. That's great. That's fair. And it looks like you'll be at that 75 Exposure to industrial fairly shortly. If we exclude Richmond, I mean, How should we view the rest of the portfolio? What should we be expecting in the short term? From what do you mean by that? Like what's your year to month goal? I mean, would you like to be more in the 90% to 100% exposed to industrial or yes, so my question is Yes. We're continuing to Everything we look at, everything we have under contract, everything that we're looking at is in the industrial sector. So we'll Start to look at divesting some of our other assets, especially maybe perhaps some of the wholly owned assets that we have in Montreal That's in retail. So that alone will move that weighting significantly up as well. So as we continue to add industrial products, You'll just see that, that weighting continue to grow. We're ultimately, I don't want to peg us, but If things are going in the first half of the year, second half of the year like they're going in the first half of the year on the pipeline, it's very active. So That number can move significantly, especially if we move a couple assets on the retail side or on the office. Right. That makes full sense. And so I guess in that sense, I mean, is it fair to say that the rest of the portfolio should be somewhat Consider non core or it's still a bit too early to call that non core at this stage? Yes. I'd say it's still a bit too early, but we are moving towards an ultimate goal of The industrial weighting being the majority of our portfolio. So whether that is 90% or 95% down the line, it's going to take us a little bit to get there, but that is our ultimate goal. Yes, got it. That makes total sense. Last one for me. Would you contemplate any development projects on the industrial Saib or again, it would be a little bit too early to Yes. No. To be honest, In our Richmond facility, we can add on immediately a 70,000 square foot building, and we're looking at that and then working with the developer there, The vendor of what we're going to build and we could do some stacked industrial, we can do that at the site. So That's a possibility for us there. There's a couple of other sites that there's a potential to do kind of a development play with them on those. Our London guys, I think we could add up to about 500,000 square feet. So we are trying to do that right now. So On the greenfield side, we're not really but expanding our buildings and looking at it more from that front. I think definitely. It's just on the greenfield side, it's just putting that capital to work. Right now, I think at the stage of our growth, that will come along in the next couple of years for us. No, that makes a lot of sense. Thank you very much. That's it for me. Thanks, Fred. This concludes the question and answer session. I would like to turn the conference back over to Kelly Hancic for any closing remarks. Yes. I want to thank everyone for taking the time to be on the call. And hopefully, over the next This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.