Earnings Call: Q4 2019

Mar 13, 2020

Earnings release

Welcome to the Nexus REIT 4th 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. I would now like to turn the conference over to Kelly Hanzick, the Chief Executive Officer. Please go ahead. I'd like to welcome everyone to the 2019 Q4 year end results conference call for Nexus REIT. Joining me today is Robert Chastain, 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. Once again, this has been a strong quarter for the REIT. We are 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 $31,000,000 of accretive industrial acquisitions in the year and recently closed on the $17,400,000 acquisition of industrial properties in February 3, 2020. Our normalized AFFO payout ratio for the year of 79.4% was down from 82.9% for the year ended December 31, 2018. And our Q4 2019 normalized AFFO payout ratio was 77%. Our debt to total assets remained 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 2 vendors. We're actively pursuing 2 other large industrial portfolios. We're working on a significant value creation opportunity with the retail site we own in the Bureau of Montreal Hall of Dhanjou. The new main bus station and the extension of the Blue Metro line has been announced and will terminate across the road from our site. The mall has significant residential development potential and we are exploring a number of possibilities with our partner, Sandler Wood Management. In Richmond, D. C, 1771 Savage Road, we will be signing 2 new leases for the former Road Cilla building, both are at $33 a set. It is anticipated these leases will be executed very shortly and details will be press released next week. On the disposition front, we sold 1 of our smaller properties in Montreal, 2301 Versailles, a mixed use property for $3,700,000 and we continue the market for sale of our office property located at 10,030 Port Phillipa. In regards to the impact of the coronavirus on our tenancies, we're not yet aware of any 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 Chason to give greater detail of the week'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 $150,000 higher than those earned in Q4 2019, with 2,045 Bruce Stanley nearing full occupancy. We completed an early termination of 60,000 square feet, which will reduce our Q1 occupancy by approximately 1.5% and will reduce NOI by approximately $200,000 a quarter. While this will have a short term drag, it frees up 60,000 square feet 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 mall theme at this property. Interest expense in the 3rd quarter sorry, 4th quarter was up approximately 30 $3,000 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 percent for Q3 2019 and 79.4% for Q4 2018. Looking to the balance sheet. Our debt to total assets decreased from 51.4% at September 30 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 $40,000,000 that we will be refinancing in 2020 where we could benefit from positive pricing. 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. Our first question comes from Stefan Brier with Echelon Wealth Partners. 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. But I'm going to ask it away. So 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. And 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 cost to you that we should factor in our models? I don't see any right now at this time. So I guess that's my answer. I can't identify any right now. Right. Okay. And besides the 2 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 or as the situation is still uncertain? Or will you just continue to pursue the acquisitions as planned? Yes. Well, we decided the 2 that we're well into right now, we have another couple of large portfolios, and one of them would probably be negotiated, and these are Ontario industrial and would probably be more like next year, early next year, I would think. And 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. So, they would probably be a little bit more down the line somewhere towards where we would possibly head into due diligence. So, we have some time to monitor and look at every situation as we go along. So, we'll continue to talk and pursue them now. Okay. And so, on that in that case, from a base case scenario, how much do you expect to acquire then for the rest of the year? Including the 2 LOIs that we have? I mean, we still have to we'd have to head into due diligence on them, but those would be in the $85,000,000 range. And then the other ones are, I would say, $80,000,000 range $60,000,000 range. So it depends on how fast and these would be kind of unit possible unit deals as well. So they take a little longer to negotiate. So that's kind of the size that we're looking at here. Okay. Okay. That's good. And sorry if I missed it, but can you give us an update on the Orzula lease that was terminated in December? Has it been released so far? And if so, can you give us an idea of the spread between the old lease and the new one? Yes. The Wartsila terminated in December, I believe. And our new lease rates are going to be $33 while our old lease rate was about $10 Great. Our next question comes from Brad Sturges with Industrial Alliance Securities. Please go ahead. Following up on that question, it might be tough to predict when you could get permitting, but at this stage, do you have a rough guess of when for those 2 new tenants into Phase 2 to replace Portzilla could be rent producing? Yes, I'm hopeful for late fall. It's kind of, but it will be a little bit dependent on the permitting. But the drawings and everything are well underway to submit to the city. So I'm hopeful those will be done quickly. We can get them in and then we can get going. So that's kind of my time frame right now is, I'd say, late fall. And for the first phase, what's left to do there? And again, can you just give an update on timing at this stage? Day 1, we're just waiting on the final permit. It's the foundation. The slab is ready to pour. So hopefully, we get that any week now. And then the good thing is the next level, the next two levels go up pretty quickly. They can do a slab a week. So that's positive. And then the day 4, the last day, is kind of tied in will be tied in with one of the leases on the other side. So again, those drawings are submitted and we're waiting on approval. So, it's really once the approval comes, we're ready to go. So, I'm thinking both of those kind of in the same timeframe as late fall. Okay. So it could be all both phases kind of getting completed all around the same time at this stage? Yes, that's what I would think. Okay. Yes. But we did in the Bay 3 that we are working on, the swim and then the other side of that, 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-nineteen yet. I guess just want to understand in terms of the leasing that needs to be get done this year, I think it's about 400,000 square feet. Can you give a little bit more context of where that is and initial expectations at least at this stage? I think we've so a good chunk of that is in the Old Montreal portfolio, the office portfolio, where our partner, Sandwood, has already been in negotiations and discussions. We have some repositioning of tenants from one building to another building and units within the building. So a lot of that space is already dealt with. And we do try to get 12 months 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-nineteen. Time will tell. And with those renewals, are you expecting a rent uplift? A little bit. Not great, not huge increases in rent, but we're seeing we're at least seeing at the same rate, so it'll require a little bit better. Okay. And then how are you thinking about asset sales this year? Could we see that activity start to pick up a little bit more? Yes, 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 2 or 3 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. So I think by next quarter, I'll be able to get 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 square foot industrial space that comes up in August of this year that's already been they've already exercised their option. So 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 ton category in my head. But 150,000 square feet is already dealt with in that case as well. Okay. So at this stage, nothing material to the non renewals for 2020? Yes, yes. Okay. And then just lastly on the asset sales, so 2 or 3 is like in terms of dollar amount, how should we think about that at this stage? Is that $25,000,000 to $50,000,000 of assets? Then? I would say, how is this? Possibly, yes. 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 list on that way. Possibly, they make an offer to buy it at a significant premium because of the location and the development potential. So a number of things that we're looking and exploring for the year. Okay. I'll turn it back. Thank you. Our next question comes from Alex Lyon with Desjardins Capital Markets. Please go ahead. Good afternoon. The REIT has $38,000,000 of mortgages maturing principally. Sorry, we can't hear you. Could you just speak louder or clearer for the quarter? Kai, is this better? Yes, that's better. So yes, you guys have $38,000,000 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, etcetera? Yes. So I mean, 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. 1 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 2 weeks. But the properties that are up for financing are well penetrated, and I don't anticipate any problems refinancing. And I think we should have some upside on rate. This concludes the question and answer session. I would like to turn the conference back over to Kelly Hanzick 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.