Earnings Call: Q4 2020

Mar 18, 2021

Earnings release

Welcome to the NexaSuite 20 24th Quarter and Year End 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. I would now like to turn the conference over to Kelly Hancic, Chief Executive Officer. Please go ahead, sir. Thank you. I'd like to welcome everyone to the 2020 year end results conference call for NEXUS REIT. Joining me today is Robert Chaitan, 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 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. The REIT closed 2020 on solid footing. We completed approximately $70,000,000 of industrial acquisitions in the year, building on our previously mentioned Strategy to focus on the industrial sector. Our payout ratio was slightly up for the quarter at 86% was a conservative 82.4% for the full year. Our occupancy for the quarter remained relatively stable to the prior quarter. In the quarter, we had a 25 1,000 Square Foot Vacancy effective November 1 at one of our industrial properties at 41 Royal Vista Drive in Calgary impact our NOI by approximately $55,000 per month. Offsetting this slightly will be a new lease that commenced February 1 on a formally vacant unit at 935 Rever Sean, in Quebec representing approximately $12,000 per month. In our last call, We mentioned some potential headwinds on office renewals. We'll have 126000 Square Feet Space at 400 Place Saint Jean In New Brunswick, come back to us on April 30. This is a former call center for IBM. We are in Close renewal discussions with them and then due to COVID, they have decided not to exercise the renewal option. The space is very well finished out And it's pretty much plug and play for new tenants, so we are aggressively marketing the space. While we may have had a small hiccup in the New Brunswick Portfolio, we have positive momentum at our development site in Richmond, BC. We received building permits in early March Construction to accommodate our 2 new leases for the former Wartsila industrial space, approximately 60,000 square feet. Construction is moving along quickly now as the site is prepped and ready to go once permits were in hand. Upon completion, which is expected to be in and around September sometime around there. Our NOI will increase approximately $165,000 per month. And as an additional positive, We continue to work with a developer in Montreal in the sale of the Nexus land, which should prove to be lucrative to the REIT at Realt St. Anjou Over the next several years, the developer is moving along with their approvals and the feedback so far from the city and everything we've had is very positive. So this looks Very likely to happen. On the acquisition front, we recently closed on the $14,200,000 industrial building portfolio In Edmonton, Alberta, expect to close on the 103,500,000 6 Building Industrial Portfolio in London, Ontario On April 1, the London portfolio, we're very excited about. We think it will provide significant upside as tenants roll over And believe there is significant opportunity to expand the existing tenants and there is some in the works as we speak. After the successful close of our $35,000,000 equity offering on March 4, the REIT is in strong cash position to continue to ramp up our acquisition program. We currently have 2 separate industrial deals for approximately $30,000,000 that we are putting under contract. That should be announced shortly. In addition, we are in various stages of negotiations on another $120,000,000 of industrial buildings. We're also in discussions and bidding on additional acquisitions and are hopeful 2021 will continue to be an exceptional year of growth on the acquisition side. On the disposition front, we sold 1 office property, small one, 10,330 Cote d'Ivoire in Lachine for 2,900,000 We just closed on that the other day. And then finally, as previously, press released, we graduated to TSX Now fully trade, a move that should bring additional investor interest greater liquidity to our unitholders and bring exposure to a larger investment base. I'll pass it over to Rob to give greater detail now of the REIT's financials. Thanks, Kelly. Collections remain strong, thanks again in large Our heavy industrial weighting and to the composition of our retail portfolio as mentioned on the last call. We had some items negatively impacting Q4 NOI as Kelly mentioned, namely $110,000 from vacancy at the Royal Vista Calgary property, dollars 150,000 of COVID-nineteen related allowances For expected credit loss, the vacancy of our retail space, which was early terminated in Q3, combined with Cost to repair the same space for tenancy, which totaled approximately $125,000 all happening at a time when we were no longer We had a contribution from our Accretive acquisitions during the quarter, which partially offset as well. Interest expense was in line with slightly higher expense in the Q4 related to the financing of newly acquired properties. We continue to have ample liquidity, particularly following The close of our $35,000,000 equity offering with no significant mortgage maturities until December of this year when a mortgage on our old Montreal office portfolio will mature. We expect to be able to refinance without much difficulty. The equity we issued in the offering which closed on March 4th will have a slight drag on our results until cash raised is deployed to acquire industrial properties. Any acquisitions at a 6 cap And as Kelly mentioned, he is busy sourcing industrial acquisitions, which we will put our cash to use to acquire. Partially offsetting the drag from undeployed cash, the Ajax Acquisition completed on December 31 was an all cash deal, which will be nicely accretive to our results. We expect to be able to pull out a significant amount of equity on Following the completion of the London deal with 63% of the purchase price being satisfied through the issuance of units. I'll now turn it back to All right. Thanks, Rob. We'll open up the line now to answer any questions that you have. Thank you. We will now begin the question and answer session. The first question comes from Fred Flondeau from IA Capital Markets. Please go ahead. Thank you and good afternoon. Two quick questions from me. First, Cali, maybe you could give us A bit of the update on the Richmond project. And what's the action plan there at this stage? Yes. So while we were waiting for permits, they were busy, I guess, erecting walls and doing everything they could in the vacant Building, waiting for the permit. So everything was pretty much pre built. So they are now I think we got all the permits at the beginning of this month, so about 18 days ago, and they're in their erecting walls, pouring slab floors And going quite quickly. So it's moving along nicely. And by the time the interior finishes, etcetera, That's all complete. I'm looking at September is my guess right now, is kind of where we're targeting. So whether we beat that in this August So whether we're slightly above in this beginning of October, so it's going to be in and around there. So there's been more or less a 6 month delay, if I remember well. You were planning March 1st and then now September? Yes. Just with COVID, the permanent office in Richmond has And brutal, lack of staff, but they were working with them closely. We got put to the top of the pile and finally we got So we're booming away now. Okay. That's great. And then my second question, it's a 2 part question. You mentioned The lease expiries for office, what would be your scenario for this year and next in terms of retail leases? Retail is actually pretty strong, Fred, and we don't have any large leases Is that a terming? If we look at our retail occupancy quarter over quarter, very stable. And yes, so we actually don't have a lot of exposure on the retail side in the next 12. Okay. That's good. And also looking at the current schedule, it looks like things will intensify Starting in 2023, what are your views today on that front? Sorry, in terms of COVID or what? No, no, no, In terms of expiries, sorry. Expires of leases? Yes. Yes. So You know what, I have the next 12 months on my radar screen. Beyond that, I'm not aware of any big lumpy expiries. Kelly, are you Yes. We look things out 12, 18 months out and is our focus. So The 3 year line is a little bit far out right now. Okay. That's fair. Thank you. That's it for me. Thank you. Thanks a lot, Ted. The next question comes from Kyle Stanley from Desjardins. Please go ahead. Hey, good afternoon guys. Maybe just following on with Fred's questioning there, just on the leasing. Do you have a breakdown of what your 2021 lease maturities are kind of by asset class, Did you give us an idea? We could provide something after the call. I don't have it in front of me right now. Okay. No worries. Give me a minute or 2. I can give you the numbers. Sure. I mean, I guess, if you follow on maybe as a question more for Kelly, still along the lines of leasing, but how have your discussions been going? Do you have any like early expectations With where leasing spreads may trend, just your thoughts there. Yes. In the office, I see Office is up in the year right now overall, but I don't see too much more expiring in the next A little while. On the industrial side, we've done quite well. So, that's pretty stable. Save and accept For the one vacancy that we experienced here, overall, new leasing is going well, especially in Montreal where we've seen some lift in rents and some positive activity where we leased the 16,000 Feet that we had vacant for a while, had an increase over the exiting rent, which is great, Probably about $0.50 $0.75 over that. And on the retail, It's a mixed bag. Our partner, Sandler, handles most of the retail leasing and they've managed Do pretty well in keeping things tenanted and we've seen increases in some units as we go along. So It's going to be a mixed bag on the retail side. Office, I'd say definitely that's flat when I look at things. So Kyle, just to add on to that and to answer your previous question, we have about 87,000 square feet on the industrial side that These are expiring in 2021. We have about 125,000 square feet on retail And 82,000 square feet on office. Okay, perfect. Thanks for that. Just taking a look at your collections, So they improved pretty nicely in the Q4 over the Q3. And I think some commentary on the call Last quarter, there was maybe a bit of a slower start to collections in the Q3 just given uncertainty around SIRS. So that was good to see. Collections look to be strong so far in the Q1, trending a little bit lower. Would that mostly relate So Quebec retail and government mandated closures? Or what are your thoughts there? Yes. It's a little bit of that. I mean, What we're hearing from tenants is that they're relying to a certain extent in some cases on Sears to pay their rent. But if we looked at this number a week ago for March, rather than having been 95.3% Collected. It's probably within 92%. And so we're seeing the money roll in. It's just rolling in slower. And That's been the story ever since we entered COVID. And if you take a look at the tail end of 2020, we're at 99% collection. I think that's where we're going to get to. It's just taking us longer to collect the receivables during COVID. Okay. That's fair. So as you kind of mentioned in your prepared remarks, You've been very acquisitive in the last 6 months or so, and it sounds like you have some other deals locked up. Are you able to disclose any kind of Cap rate pricing or whether it be a price per square foot and maybe the type of markets that some of these deals you might be looking at are in? Yes, yes, for sure. So we have a couple that are, say, they're imminent to being press release and one would be in 1 would be in Alberta and both are in the 6.5% to 7% cap. Newer products, solid products, one of them being brand new. So we've managed to source some of their off market deals. So it's going pretty well actually. We're in discussions on quite a bit right now, overall, and I'd say it's Ontario NOS, a mixture. So It's been a pretty good Q1 from an acquisition side just from sourcing and Negotiating with them and so we're quite pleased and you'd see cap rates in that 6.5% to 7%. And are you looking at any markets maybe outside of Ontario and Alberta? It seems like that's where a lot of your growth has come more recently. But is there any interest Whether it be other provinces or other cities? Yes, for sure. We're looking Winnipeg. We're in Saskatchewan. We've seen discussions on things. So we see that's a whole different cap rate gain than what we're able to participate in. In Quebec, we're looking at things all the time, trying to source stuff there too. So Yes. We're looking, I would say, Ontario, Quebec, Manitoba, Alberta and Saskatchewan mostly. The next question comes from Paul E. Durnan from Burlington Capital Partners. Please go ahead. Hi, Mr. Hancic. I'd have to say that I think management has done a pretty good job handling the COVID given the circumstances. That's for openers. Now, the stock trades at about 80% of book value, am I right on that? Yes. Yes, sure. Okay. Now every time you make an acquisition, you're issuing Bs And the fees are fully convertible into the common share. So you're really hurting the retail investor a little bit. You're Diluting the float. Now, you have instead of issuing the Bs, We are the interest rates are trending up over the last 6 months, the mortgage rates. I understand that. But over the long term, the average mortgage rate is something like about 7%. So we're still in very attractive mortgage rate territory. And So why not finance more of the acquisitions by taking out another mortgage and not diluting the float? That's What I'm really saying? Yes. So we can mortgage finance up to say 65%, 70% of an acquisition. There does need to be an equity component for each acquisition. And a Class B equity deal is no different than a REIT equity deal in terms of W and the float. And So we do look, we have levered up a little more on recent acquisitions than we did in the past, and we've bumped Up to 65%, 70% in some cases to take advantage of interest rates. However, we are mindful of our balance sheet And we like having a 50%, sub 50% conservative debt to assets. So we're trying to balance the 2. And certainly, we do look at opportunities to finance and to up finance. And so for example, on The London deal where we're issuing 63% of the purchase price through equity, we'll then refinance those properties and use that to take You take out cash and then use that cash to acquire further industrial properties and sort of rebalance our capital Structure. So the London deal is a little unusual in terms of the percentage of equity, But we'll balance that out through refinancing and through adding, as you suggested, adding to the mortgages. Yes. Well, I think that's in order. And like the idea of 50% debt to asset ratio is kind of a standard normal Long term idea, but it does not reflect these low, low rates. So taking the debt to asset ratio up higher It is, in my mind, in order. Yes. So I guess, in the current environment, we have low But those mortgages eventually mature and have to be refinanced. And we just are aware of that And don't want to find ourselves refinancing 4, 5 years down the road at high rates of leverage when interest rates may not be As low and as appealing, but we certainly are balancing out our capital structure to take advantage of low interest rates The next question comes from Terry Fisher from CIBC Private Wealth. Please go ahead. Good day, guys. Again, congratulations on the quarter and getting on to the TSX and Basically doing all the things you said you were going to do. I don't think there's anything the market likes better than the management that says we're going to do XYZ and then goes out and does it. But my question is regarding the industrial side. Given the things that you've already done plus the ones that look To be in the bag, where what would your percentage be of industrial when the next few Deals are done that you can see coming. And the related question is, how are you able to find these things when There's a lot of other competition out there from other REITs, Dream or whoever trying everybody wants to get into industrial, But you're able to find apparently some pretty good pieces of industrial real estate at pretty good cap rates. It It continues to surprise me at least. Anyway, those are my questions. Yes. So From an industrial standpoint, I think when we close on the London in the next few, we're going to be around 70%, I believe in and around there and if we continue to be successful Chewed on the amount that we're negotiating that will go up to 75 or above, probably 75 ish Pretty quickly. So sort of getting there quicker than what we thought, but that is what we've Strive to do and the interesting thing is, in some of the buildings and portfolios that we're building, Buying here, they already have inherent expansion ability That we're talking about even though we don't have them yet. So that could be a nice little pipeline for us to add square footage Yes, positive returns. So they've turned out really well. So how we're finding them, Some of them from long term relations that we've relationships that we've built and spent significant time building. Others, Word-of-mouth, others off market deals. So, I don't call it lucky, but, it seems to be going really well. Our reputation, I think, on closing and doing deals is pretty good. So, we've had a lot of word-of-mouth off market opportunities that have helped The next question comes from Frank Meyer from Vision Capital. Please go ahead. Good afternoon, guys. Thanks, Brett. On the book value of 10.16, could you Tell me what's the weighted cap rate you came up with in terms of calculating that number? So we just took book maps. So we basically We took equity added back to Class Bs and divided through by the units outstanding. So whereas the analysts would imply A cap rate to NOI. We're just doing it straight off the balance sheet. Could you opine as to what the Weighted cap rate based upon markets and based upon your knowledge of your properties, what the cap rate today would be of those properties? You know what, I couldn't offhand. I'd have to do some counts to back into it. Okay. Let me ask you a more general question. Do you think the number that you would come up with if you were to use a market cap rate Would be higher than 10.16 or lower than 10.16? I think it would be higher. Can I push it a little further and ask you, would it be modestly higher or significantly higher? Well, I guess the thing that I would say is, our Richmond property, which we acquired for roughly $57,000,000 we've continued to hold at 50 $7,000,000 until completion of Phase 1, which is building out for existing tenancies or existing leases. And then, we're also converting the Wartsila space, 60,000 square feet from industrial to Much higher yielding sports mall uses. We continue to hold that property at 57,000,000 Well, until those are complete, at which time we expect to have a pretty significant revaluation. Our book NAV or our carrying values of our investment properties are at Fair value in accordance with IFRS. However, I would say we are not aggressive in determining those Fair values and what we tend to find is that if we have a property updated by way of an external appraisal, The cap rates they're applying tend to be lower than the cap rates that we're applying internally. And then we use that information then to adjust Yes, I would say, Frank, I'd say overall probably in the industrial side of things, our number is conservative Because when we do appraise, they're coming back at very low cap rates. So I think you'd see in and around probably a 6 cap or even, yes, I'd say overall on the industrial side of things. So, the other ones Tend to stay fairly constant on any update you've done so far. So, right now you'd see some upward pressure definitely on the industrial side. Going to the London portfolio, which of course is a Very significant portfolio and we've discussed it in the past and it's a real coup I think for you to acquire that portfolio. If I remember correctly, Wasn't it a 6% cap rate? Yes. But aren't cap rates in London considerably lower than that? Yes. Do you think any problems in closing that transaction? There will be no problems in closing the transaction. It's actually a portfolio I'm really excited about. We think there's significant lift in net rents as people grow, as they turn and go from probably Gross to net rents, we see a big lift there in a couple of years, especially. And even on top of that, they're great, great managers And have great relationships with the tenants and we're talking already about tenant expansions and the possibility there. That could be significant in the portfolio itself. So overall, it's a big win. You've mentioned expansion Space now twice. So can you give us some idea on that portfolio, the 105,000,000, how many square feet does it currently represent And how much expansion space do you see in that? Off my head, Rob, I'll pull up here. I can't remember. So 1,300,000 I think square feet. I think realistically you could see 250,000 to 400,000 square feet being built on addition there, if we're lucky. And The price that you're paying includes that expansion space. Is that a land for the expansion? Is that correct? Yes. Yes. Over what time period could you imagine building that extra 250,000 to 400,000 square feet? I'd say 2 years? 2, 3 years? I mean typically returns on development properties are considerably higher than Returns on leased properties that are acquired. Given the fact that the land would have like almost a zero cost, I guess, is it fair to suggest that returns could be in the 10% range, double digits? I'd say it is fair to suggest that the returns would be in and around 10%. And what would construction cost per square foot be in London? Do you have any idea? I do have a relative idea. It's probably in and around $90,000 $100 a foot. The partner that we have down there are very well connected and very well Yes, in the industry. And so I think overall, we would come out better than If we went to a 3rd party, so, their experience in building in taking buildings and refurbishing them, redoing them. So overall, I think we would be well represented by them and our costs would be on the lower side. The $90 to $100 does that include development charges? Yes. You're talking full expansion here. So yes, I think it's somewhere down around $100 a foot. And how much would land cost if you were to buy land de novo in London Per square foot? I don't know the land cost, but I'm you know what I'd be guessing right now. I've heard land in Toronto, it's like $3,500,000 an acre for a fine site. Yes. Toronto is off Starts in BC makes Toronto look cheap. So, yes. Obviously, London is not Toronto open. Yes. But you know what, there's low availability there and it's a good Solid market with very low vacancy. So we expect big things from it. And all goes well in the relationship, we'll be adding additional buildings. So from the same vendor, so I think the future is bright there. You made a reference to acquiring another 120,000,000 Does that include potentially some properties from the London vendor as well? No. That's Stuff that we're in different stages of negotiation on. So we'll see how they all pan out if we're successful. I'm hopeful of 80 of it and if we're really do well, it's about 100 and 20, 125 and We're bidding on some other things and the London, anything we add in and around there from the vendor would be Additional to that? Would it be comparable as a size of the $105,000,000 portfolio you're currently working on? No, it would probably be smaller. I mean, it would be 1, 2 buildings here and there As they look to roll more, 1, 2, maybe 3, but bigger they're all bigger buildings. Anything changed in the London industrial markets since you contracted to buy these properties? I mean, have rents increased, Vacancy has gone down, anything like that? Well, vacancy was already very, very extremely tight and rents are pushing. So Because there is nowhere to go and so especially for larger tenants. So at the end of the day, we see the rental stream from here increasing Thanks. Thanks. No problem. Thanks, Frank. Just to answer your earlier question, probably about a 6.5% cap. Thanks again. 6.5% I'm sorry, I don't remember what the capital was. What's the average cap rate that would be applied to arrive at The carrying value of our assets. 6.5? Yes. That's For the 10.16 or is that for the number that you haven't disclosed? Well, that's the 10.16 is our net assets. The 6.5 percent cap is our investment properties which make up the bulk of it, right? No, but I mean, What I'm confused about is you basically told me in response to an earlier question that most probably the number the 2 number was higher than that And 10.16. So what I'm asking is, is the 6.5 in reference to the 10.16 or is it in reference to the higher number you mentioned earlier? That would be in reference to the 10/16. Thank you. Thank you. This concludes the question and answer session. I would like to turn the conference back over to Mr. Hansek for any closing remarks. Thank you. This concludes today's conference call. You may disconnect your lines.