Earnings Call: Q2 2020

Aug 14, 2020

Earnings release

Thank you for standing by. This is the conference operator. Welcome to the Nexus REIT 2020 Second Quarter 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 Hanzick, Chief Executive Officer. Please go ahead. I'd like to welcome everyone to our 2nd quarter results conference call for Nexus REIT. Joining me today is Robert Chason, 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. So the Q2 was another solid quarter for the REIT. I'm not really going to spend much time going over the Q2 results. I'll let Rob go into more detail on our financials and our collections. As mentioned in our press release, we have decided to move forward with our move to the TSX. We are hopeful this will be done by mid September. At this time, we will look to complete a share consolidation on a 1 for 4 basis. We believe this move will bring exposure to a much larger investor base and should result in positive momentum for our unit price going forward. Operationally, we continue to monitor and work closely with our tenants. Occupancy for the quarter remained stable at 94.9 percent. And in April, we lost a 16,000 square foot tenant at 935 Reverchon, one of our industrial properties, but have seen interest in the space, so we hope it will be leased over the next quarter. This was more than offset by approximately 8,000 square foot at our interest of new revenue coming from our office building at 2,045 Rue Stanley in Montreal. We'll see a small uptick in vacancy in the Q4 as we have a 25,000 square foot industrial unit at 41 Royal Vista Drive in Calgary coming back to us at the end of October. We have a good handle on renewals for the balance of the year as the larger renewals are all complete or very close to being complete with only a few small retailers left, and we have had a strong start to our 2021 renewals. In Richmond, D. C, we are continuing the process of repurposing 1771 Savage Road, withdrawing packages submitted to the City of Richmond on May 15 to accommodate our 2 new leases that have been signed. With delays in permitting due to the city employees working from home, we expect a delay in completion, but are hopeful the leases will still commence in 2020. In addition, we continue to work on the drawing for a planned 70,000 square foot addition to the property so that we will be in a position to prelease and break ground hopefully in 2021. On the acquisition front, we have 2 potential industrial asset acquisitions under due diligence, a 95,000 square footer strong covenant non oil and gas related property in Alberta on 10 acres and one in the GTA, which would be a half interest on approximately 500,000 square feet with a strong, very strong multinational covenant. The acquisitions are expected to be funded with a combination of cash on hand, proceeds of mortgage financing and $2,750,000 Class B LP units of a subsidiary limited partnership of the REIT. The units will be issued at a contractual price of $2 per unit and exchangeable for REIT units on a one to one basis. On the disposition side, we are marketing 2 Quebec properties, the small office properties that we have been marketing in Machine, 10,330 Cote d'Ivoire and are quietly marketing our large 380,000 square foot non enclosed strong covenant retail center in Victorville, Quebec. If successful, we would use these proceeds to continue to increase our exposure to the industrial real estate sector, which is currently fit at about 50%. I'll now hand it over to Rob Chason to give greater detail of the REIT's financials. Thanks, Kelly. We've been pleased with the resilience of the majority of our tenants through COVID-nineteen. Our rent collections remain strong. Looking at our rent collections, excluding amounts that have been deferred and that will be satisfied through the Canada Emergency Commercial Rent Assistance or CEECRA program, We collected 97.1% of April May, 97.9% of June and 98.1% of August. We're still determining to what extent we may participate in SECRET for August and almost all deferral arrangements have ended. We have also seen rents being paid slower since the start of COVID-nineteen and expect additional payments to come through the balance of the month of August. We placed mortgages on previously unencumbered properties in the quarter generating just over $14,000,000 and had cash on hand at the end of the quarter of just under $19,000,000 We also had access to an additional $5,000,000 under our credit facility. We're in the process of refinancing an $18,000,000 retail mortgage that comes due on October 1, and we have 2 smaller industrial mortgages coming up in September December. Our balance sheet is strong enough to begin looking at acquisition opportunities again. The office building that we co own in Montreal is at approximately 97 percent economic occupancy with long term stable tenants and is making a positive contribution to our results. Our NOI for the quarter was up slightly as compared to Q1 with COVID-nineteen reducing NOI by approximately $175,000 offset by lower operating costs, including seasonal expenses. General and administrative expenses were down primarily due to timing of expenses related to our RSU program and other period costs, but also due to decreased travel and related expenses. Our payout ratio was up slightly from Q1 to 79.8 percent with an all unit acquisition having been completed in February and impacting slightly. Proceeds from mortgages put on the acquisition properties will likely be deployed to complete acquisitions that balance out the capital structure of that deal. We had other income in the quarter relating to an increase in the amount of vendor rent obligations we expect to receive from the Richmond, BC property vendors through to the completion of build out of tenant spaces. We've normalized the FFO and FFO as well as our payout ratios to exclude this income. Also on April 1 and through the Q2, we issued units to the Richmond, BC vendor for the development management agreement we ventured into and as described in the notes to the financial statements. A portion of these units is held in trust by the REIT to be released to the vendor over time. While these units are held by the REIT, they do not accrue distributions. While units are this is what led to a reduction in our distribution per unit for Q2 to distribution per unit for Q2 to $0.309 per unit. I'll now turn it back to Kelly. We'll now open up the call to The first question comes from Karl Sandler from Desjardins. Please go ahead. Hey, good afternoon, guys. Congrats on the quarter. Thank you. Thank you. So just looking at the COVID impact during the quarter of $175,000 the seeker abatement was $150,000 So I'm just wondering can you reconcile the difference there? And then maybe what are your thoughts on how that trends into the second half? Without wanting to get into specifics, we did benefit from a wage subsidy through 1 of our partners that property manages for us. And so their savings were passed along to us. We also incurred some incremental operating expenses in terms of health and safety at some of our properties. And so the net of some concessions offered, the net of the 25% abatement for provinces outside of Quebec under the secret program and the 12.5 percent abatement within the province of Quebec, where the Quebec government has announced a program that would reduce the landlord exposure to half what it is in the rest of Canada. That's how we come out for the 175,000. Okay. And then the 150,000 related to CECL, so that adjusts for the 25% landlord abatement outside of Quebec as well as the 12.5% in Quebec? Correct. Okay, perfect. And then so about $100,000 or $1,200,000 of rents were deferred during the quarter. Were there any abatements outside of that and then not related to the secret program? Yes. There was a small amount of abatement, just over $100,000 And those would be tenants that primarily are retail, would not qualify for Seagra, but had demonstrated financial distress during COVID. Okay. And also large enough to negotiate such concessions. Yes. No, that makes sense. Okay. Just looking at Richmond quickly here. So there was $110,000 of incremental NOI this quarter from the tenants the new tenants paying rent. I'm just wondering in discussions with those tenants, how are operations going at the facility so far? And then how do you expect to see kind of that NOI contribution ramp up a bit? Yes. Well, they were closed, obviously, with COVID because the 3 that are open were closed. But they're all open and operating now, albeit by the new rules, which is probably a little tougher. So we're deciding what to do in August for them. But going forward, they be fully operational and expect to be paying full rent. Okay, great. And then I think there's one space left to be leased up there. So is there any development on that front? No, the spaces are leased. We're just waiting for the permitting to be able to build them. Fair enough. Okay, perfect. Yes. And then the vendor guarantee for until those come on. Right. Yes. Okay. Just two quick ones for me here. The mortgage on the Victorioville property that thought it was maturing in July, but it sounded like maybe it's now in October. I'm just wondering what are the thoughts there? Yes. So we extended that one 3 months. Obviously, July was not a great time to be refinancing As we were in discussions through April, May, June on that mortgage, most of our tenants across our portfolio or many of our tenants, I should say, across our portfolio on retail were not operating. At that particular property, I'd say about 50% to 60% of our tenants are national credit tenants, Canadian Tire, Dollarama, Metro. We've got a brick there, Marks Work Warehouse and then some other regional retailers. So just the underwriting environment wasn't conducive to refinancing that mortgage in July. So we got a 3 month extension from the lender and we're in discussions with various lenders on that now. Okay, great. And then just the last one. Do you have any idea on timing of the potential graduation with TSX? I know, obviously, it depends on their approval, but just what are your thoughts there? Yes. We're looking at September. Again, it is dependent on their approvals and us getting them all the information they need on a timely basis, but we're pushing to graduate as quickly as we can. Okay, great. That's it for me. I'll turn it back. Thanks. Great. Thank The next question comes from Terry Fisher from CIBC. Please go ahead. Hello. Hi there. Okay. Congratulations, guys. Looks like another good quarter. And not only that, I'm just reading through the MD and A, good progress on all the other things you've been working on in spite of the virus. It doesn't seem to be slowing you down that much. My question really relates to the little pie chart that is in the MD and A. If I'm reading it correctly, and I'm assuming this is as of the end of the quarter, you're at 48.5% industrial. Is that the way I'm reading this? That sounds about right, yes. Where would you see it if everything goes according to plan exiting the year? If everything went to plan, I mean, with the acquisitions that we have going right now, it takes it to about 52%. My goal, I mean, if we were successful in selling our enclosed or non enclosed retail center in Victoria, that's a fairly large center that would make a fairly significant swing. Probably, I would think, closer to approaching 60%. We're ultimately, I think, down the line, I'd like to see that number approach 75%. Most of the opportunities that we're looking at and we're exploring are in the industrial sector. Okay. And if you are successful in everything that you would like to divest, say, by the end of the year, would you do you think there are enough opportunities in the I think it would take a little bit of time, but we are working on a number of other opportunities. So we have strong connections with some, I guess, you would call it families that have possible opportunities for us. So if we have we're in a cash position, I think we could deploy it relatively quickly. Right. Yes, I'm familiar with that because we've talked about it before, and I think that's a great plus for the REIT. Final question, and we talked about this in the last call. You're still committed to the DRIP and to the 4% discount? We are right now, yes. We don't have a huge uptake in participation. So I mean, it's I think participation went too high, we'd probably have to look at reducing it. But the way I look at it, it's rewarding the unitholders that have been there for a long time for us, and that's the way we look at it. So from our perspective, it's staying where it is for now. Well, as a former investment banker, my sort of advice would be that and this is not hard and fast, run it by your own advisers, obviously, but coming into the TSX listing, first of all, you're going to get some additional spotlight on you just when that happens. But this to me would be a it adds a bit of luster to the story. And if you want to discontinue, it might wait until that event takes place, assuming it does take place. So at least that's my view of it. I don't know whether you guys agree with that or not, but We're not looking at discontinuing it at this point. All right. Okay. Well, I think it's good. We talked last time too about if you had any ideas about repurposing any of the properties or in order to attract a different kind of tenant to some of the space that might be problematic. I mean, we've had government money bridge people until we're theoretically post an Irish or post the subsidies. But once we get to that, the businesses have to live or die based on what the consumer behavior is or whatever other business they're doing. And I don't know whether we're fully into that transition yet or not. But yes, I know it's becoming a shrinking part of the total exposure that you have. But is there any update on any of that now that we're further along in the virus process? Yes. I'd say in the retail side, it's kind of been with our partner, all hands on deck and really monitoring the tenants and working with them. So our concepts on some of our sites in Montreal where we're talking about multifamily perhaps down the line, it's still moving, but just slower than what we would have because obviously we've been focused elsewhere. Right. Okay. Well, I think you guys are you could claim that the quarter was successful given what you had to deal with. And so congratulations, and that's all for me. Thanks. Thank you. This concludes the question and answer session. I would like to turn the conference back over to Robert Chesson. Please go ahead. Hi. I'd just like to quickly clarify my comments on in terms of rent collections. So we collected 97.1% for the month of April, 97.9% for the month of June and 98.1% for the month of July. I misspoke earlier and said August. For the month of August, we're still determining to what extent we might participate in Seacra and deferrals are still deferrals are falling off the table. For April to date, we're sitting at about 90% collection. So that doesn't apply any assumptions with respect to ongoing secret participation month of August, sorry, 90% for the month of August, applying no assumptions in terms of CCREP. And also, we've seen rents roll in a little bit slower as we entered COVID with the payables groups of our tenants working from home and for various other reasons. So we expect that 90% for the month of August to be similar to what we've seen for April, May June. But for now, in terms of unadjusted collections, we're sitting at about 90% for the month of August. I'd like to turn the call back over to Kelly. All right. Well, I want to thank everyone for taking the time to call in. I look forward to the next results call when hopefully we've graduated to the TSX.