Thank you for standing by. This is the conference operator. Welcome to the Nexus REIT Fourth Quarter 2019 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 one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Kelly Hanczyk, the Chief Executive Officer. Please go ahead.
I'd like to welcome everyone to the 2019 fourth quarter and year-end results conference call for Nexus REIT. Joining me today is Robert Chiasson, Chief Financial Officer of the REIT. Before we begin, I'd like to caution with regards 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&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. Once again, this has been a strong quarter for the REIT. We were recently recognized as a Top 50 Venture Exchange company in the 2020 TSX Venture 50. This will provide a good segue with our anticipated move to the TSX in April.
We completed CAD 31 million of accretive industrial acquisitions in the year and recently closed on the CAD 17,400,000 acquisition of industrial properties on February 3, 2020. Our normalized AFFO payout ratio for the year of 79.4% is down from 82.9% for the year ended December 31, 2018. Our Q4 2019 normalized AFFO payout ratio was 77%. Our debt to total assets remain conservative at 49%. We're hopeful 2020 will be a milestone year for the REIT. The acquisition pipeline is fairly strong, with LOIs currently being negotiated with two vendors. We're actively pursuing two other large industrial portfolios. We're working on a significant value creation opportunity with a retail site we own in the borough of Montreal, Les Halles d'Anjou. The new main bus station and the extension of the Montreal Metro Blue Line has been announced and will terminate across the road from our site.
The mall has significant residential development potential, we are exploring a number of possibilities with our partner, Sandalwood Management. In Richmond, B.C., 1771 Savage Road, we will be signing two new leases for the former World Solar building. Both are at CAD 33 a foot. It is anticipated these leases will be executed very shortly, details will be press released next week. On the disposition front, we sold one of our smaller properties in Montreal, 2301 Rue Versailles, a mixed-use property, for CAD 3.7 million, we continue to market to sale our office property located at 10330 Boulevard de l'Acadie. In regards to the impact of the Coronavirus on our tenancies, we're not yet aware at this time of any significant impacts to them beyond the impact that the general economy is facing. I'll now hand it over to Rob Chiasson to give greater detail of the REIT's financials.
Thanks, Kelly. Our portfolio continues to deliver consistent results driven by stable occupancy and many long-term tenancies. Same store quarter-over-quarter NOI was flat. Construction management and leasing fees earned in Q4 2018 were approximately CAD 150,000 higher than those earned in Q4 2019, with 2045 Rue Stanley nearing full occupancy. We completed an early termination of 60,000 sq ft, which will reduce our Q1 occupancy by approximately 1.5% and will reduce NOI by approximately CAD 200,000 a quarter. While this will have a short-term drag, it frees up 60,000 sq ft for value add development, which will result in earning significantly higher rent per square foot on the space from a use which is complementary to the sports small theme at this property. Interest expense in the fourth quarter was up approximately CAD 33,000 as compared to Q4 2018.
Lower interest rates on the credit facility almost offsetting higher principal balances related to financing Q1 2019 acquisitions. Our normalized AFFO payout ratio decreased to 77% for Q4 2019 from 78.9% for Q3 2019 and 79.4% for Q4 2018. Looking at the balance sheet, our debt to total assets decreased from 51.4% at September 30th to 49.1%, due in large part to cap rate compression, which led to increasing the carrying value of several of our investment properties. Bond yields are at historical lows following a 50-basis-point cut in the U.S. and Canada last week and further dropped since. We have another CAD 40 million that we will be refinancing in 2020, where we could benefit from positive appraisal. I will now pass it back to Kelly.
Great. Thanks, Rob. I will now pass it back to the operator to open up the line for any questions.
Thank you. We will now begin the question-and-answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. Our first question comes from Stephan Boire with Echelon Wealth Partners. Please go ahead.
Thank you. Good afternoon. I feel like most of my questions, if not all of them, are going to be a complete shot in the dark for you guys to answer, given the current situation.
Yeah.
I'm going to ask anyway. It looks like Montreal downtown is progressively shutting down, and I think it's safe to say that many other cities in Canada will likely follow or have already done so. I want to know if, the situation is still unfolding, but at this stage, can you discuss whether the virus and all the shutdowns are expected to cause additional costs to you that we should factor in our models?
I don't see any right now, at this time. I guess that's my answer. I can't identify any right now.
Right. Okay. Besides the two LOIs currently in discussion, can you tell us if, for the rest of the year, if you expect to be on the sidelines on the acquisition front as the situation is still uncertain, or will you just continue to pursue the acquisitions as planned?
Yeah. Besides the two that we're well into right now, we have another couple of large portfolios. One of them would probably be negotiated. These are Ontario Industrial, and would probably be more like next year, early next year, I would think. One of them is, I guess, a portion of a large portfolio, well-tenanted, Industrial Ontario again, that we're just having initial chats on. They would probably be a little bit more down the line, summer, towards where we would possibly head into due diligence. We have some time to monitor and look at the situation as we go along. We'll continue to talk and pursue them now.
Okay. In that case, from a base case scenario, how much do you expect to acquire then for the rest of the year?
Including the two LOIs that we have?
Yeah.
We'd have to head into due diligence on them. Those would be in the CAD 85 million range. The other ones are, I would say, in the CAD 80 million range and CAD 60 million range. Depends on how fast, and these would be kind of possible unit deals as well. They take a little longer to negotiate. That's kind of the size that we're looking at here.
Okay. That's good. Sorry if I missed it, but can you give us an update on the Wärtsilä lease that was terminated in December? Has it been re-leased so far? If so, can you give us an idea of the spread between-
Yeah.
the old lease and the new one?
Yep. Wärtsilä terminated in December, I believe. Our new lease rates are going to be CAD 33, while our old lease rate was about CAD 10.
Great. Okay. Okay, perfect. That answers my question. Thank you so much.
Okay. No problem.
Our next question comes from Brad Sturges with Industrial Alliance Securities. Please go ahead.
Hello. Just following up on that question. It might be tough to predict when you could get permitting. At this stage, do you have a rough guess of when those two new tenants into phase two to replace Wärtsilä could be rent-producing?
Yeah. I'm hopeful for late fall. It's kind of, it will be a little bit dependent on the permitting. The drawings and everything are well underway to submit to the city. I'm hopeful those will be done quickly. We can get them in, and then we can get going. That's kind of my timeframe right now, is I'd say late fall.
For the first phase, what's left to do there? Again, can you just give an update on timing at this stage?
Bay 1, we're just waiting on the final permit. It's the foundation. The slab's ready to pour. Hopefully we get that any week now. The good thing is the next two levels go up pretty quickly. They can do a slab a week, so that's positive. The Bay 4, the last bay, will be tied in with one of the leases on the other side. Again, those drawings are submitted, and we're waiting on approval. It's really once the approval comes, we're ready to go. I'm thinking both of those kind of in the same timeframe of late fall.
Okay. It could be all phases kind of getting completed all around the same time at this stage?
Yeah. That's what I would think. Yeah.
Okay.
But we did-
Go ahead.
Bay 3 that we were working on, the suite, and then the other side of that's all complete, and they're in and functional and operational.
Just maybe to go back to your earlier comments on no impact from COVID-19 yet. I guess, just want to understand, in terms of the leasing that needs to get done this year, I think it's about 400,000 sq ft. Can you give a little bit more context of where that is and initial expectations, at least at this stage?
A good chunk of that is in the old Montreal portfolio, the office portfolio where our partner, Sandalwood, has already been in negotiations and discussions. We have some repositioning of tenants from one building to another building and units within the building. A lot of that space is already dealt with. We do try to get upwards to 12 months ahead of our releasing, so we're already in advanced stages on most of that. We don't know what impact coronavirus could have on the economy in general, but we don't, at this point, anticipate or foresee any significant delays with leasing on account of COVID-19. Time will tell.
With those renewals, are you expecting a rent uplift?
A little bit. Not great. Not huge increases in rent. We're at least seeing at the same rates or a little bit better.
Okay. How are you thinking about asset sales this year? Could we see that activity start to pick up a little bit more?
Yeah, I think so. We're looking at a few that we're potentially identifying. I don't want to name them yet because we haven't picked them, but there's two or three that we have our eye on that could possibly be sold. Non-industrial, would be more on the retail side or office side in particular. I think by next quarter, I'll be able to give more clarity on actually which ones we're going to market.
Sorry, Brad, just to add to my earlier comments. We also have 150,000 sq ft industrial space that comes up in August of this year that they've already exercised their option. We're working on these things well ahead of time, and I missed talking to that one because it's already been put in the done category in my head. Yeah, 150,000 sq ft is already dealt with in that case as well.
Okay. At this stage, nothing material in terms of non-renewals for 2020?
Yeah.
Okay. Just lastly on the asset sales, so two or three is like, in terms of dollar amount, how should we think about that at this stage? Is that CAD 25 million-CAD 50 million of assets then?
I would say, how this, possibly, yeah. I think that's fairly good. We're looking at a bunch of things. Our site in Anjou, if it all went well, we'll either get a JV partner to do something, and we'll take a less on that way. Possibly they make an offer to buy it at a significant premium because of the location and the development potential. A number of things that we're looking and exploring for the year.
Okay. I'll turn it back. Thank you.
Sure.
Once again, if you have a question, please press star then one. Our next question comes from Alex Leon with Desjardins Capital Markets. Please go ahead.
Good afternoon. The REIT has CAD 38 million of mortgages maturing.
Sorry, we can't hear you. Could you just speak louder or clearer? Talk closer.
Hi, is this better?
Yeah, that's better.
Yeah. You guys have CAD 38 million of mortgage principal maturing in 2020. I was just wondering if you guys have had any discussions with lenders and maybe what you're hearing from them in terms of financing rates, term availability, et cetera.
Certainly bond yields are at all-time lows and cost of debt is quite low right now. A lot of those maturities, though, are later on in the year. One of them is in July. We've started some initial contact, but we haven't really started any fulsome discussions. One thing we're looking at internally is whether we pay some yield maintenance and renew some of these early, given what's happened with rates, in particular in the last two weeks. The properties that are up for financing are well tenanted, and I don't anticipate any problems refinancing, and I think we should have some upside on rates.
Okay, that's awesome. Thanks. That's it for me. I'll turn it back.
Thanks, Alex.
This concludes the question and answer session. I would like to turn the conference back over to Kelly Hanczyk for any closing remarks.
I'd just like to thank everyone for taking the time to attend our call, and I'll see you next quarter.
This concludes today's conference call. You may disconnect your lines.