Earnings Call: Q3 2019

Nov 20, 2019

Earnings release

Welcome to the NexSys REIT Third 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 Hancic, Chief Executive Officer. Please go ahead, sir. Thank you. First of all, I would like to welcome everyone to the 2019 Q3 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 once again, this has been a solid quarter for the REIT. I feel like I'm a broken record sometimes, but the Q3 of 2019 continues to pass. It has followed since the inception of the REIT. It's steady as she goes. We've seen a considerable increase in the liquidity of the REIT's units, which is positive and now have a 10% participation rate in the DRIP, which we believe will continue to grow. Our payout ratio for the quarter once again has continued to drop to approximately 78.9%, while keeping our debt to gross book value conservative at 51.4%. These are compelling best in class metrics, especially when combined with the current trading price well below our current NAV of $2.30 a unit. In Richmond, BC, 1771 Savage Road, we've entered into an agreement to terminate the Wartsila lease effective December 15th this year. We are working on 2 new leases that have been agreed to in principle. We want to do it right and the devil is in the details and that we are currently working through and sorting out. It is anticipated that these leases once finalized would commence in the fall of next year. On the disposition front, we are under contract to sell 2 of our smaller properties in Montreal and represent approximately $7,000,000 in selling price. 1 is expected to close in mid December and 1 by mid January. On the acquisition front, it's been very active. We are in due diligence on a 230,000 square foot industrial deal in Saskatchewan, which we would be settled entirely in units. This would allow us to place debt on the property on favorable terms, which would provide cash we could use to complete additional acquisitions. In addition, we are negotiating purchase and sale agreements on 2 acquisitions representing approximately 340,000 square feet of industrial product. There's been a robust pipeline of late as we are in negotiations with several other vendors on additional acquisitions, all with similar balance of payment between the cash and the REIT units. I'm going to pass it off to Rob Chason now to give greater detail of the REIT's financials. Thanks, Kelly. While NOI was down slightly quarter on quarter owing to tenancy changes discussed in last quarter's call, our portfolio continues to deliver consistent results. Occupancy remained at 94% at September 30, consistent with June 30. Interest expense in the 3rd quarter was down approximately $125,000 as compared to the 2nd quarter when we backed out a $575,000 repayment fee in the Q2 on debt that was assumed on acquisitions completed in 2017. Lower deferred financing amortization charges with the maturity of our credit facility and lower principal and interest rates contributed to the savings and interest expense. Our quarter on quarter AFFO payout ratio of 78.9% was lower than 80.5% for Q2 twenty nineteen and 82.6% for Q3 twenty eighteen. Lower interest expense and higher contribution from our Roost Stanley property, which is owned in a joint venture boosted AFFO in the quarter. And this combined with an accretive acquisition completed in Q1, 2019 boosted year over year AFFO per unit. Looking to the balance sheet, our debt to total assets decreased from 51.7% at June 30, 2019 to 51.4% at September 30. With respect to debt, we completed the refinancing of our $65,000,000 credit facility on September 13 and we were able to achieve fixed interest rate of 3.15 percent by way of floating rate debt with a swap in place. $15,000,000 of mortgages were renewed subsequent to quarter end and approximately $5,000,000 of mortgages were repaid in the 3rd quarter with proceeds from refinancing the credit facility. Bond yields continue to be at relatively low levels. However, they are up slightly from the recent lows they hit on August 15, which were discussed when we last spoke. We refinanced the majority of our mortgage maturities and have another $40,000,000 that we will be refinancing in 2020 where we could benefit from positive pricing. I'll now pass it back to Kelly. All right. Well, I'm going to hand it over to open up the call to any questions. Thank you. We will now begin the question and answer session. Our first question comes from Brad Sturges with IA Securities. Please go ahead. Hi, there. Hey, Brad. Just starting with Richmond. In terms of Phase 1, what's the timing there for completion? Is it still the end of the year? Or does that slip into Q1 next year at all? It will slip into Q1 of next year. So would that be would the rents be fully reflected in Q1 or there's still some work to be done I guess in the quarter? Yes. In Phase 1, the rent is either paid by the tenants or by the vendor. Yes. So the rent is complete. The construction level and effectively turned over to tenants in Q1? I think what we'll see is at the end of Q1 and into April, we'll see the construction end and we'll see the other income that's we're currently reporting on our P and L replaced with NOI for the accounting rules as we start to collect the rents directly from the tenants. Okay. And then for Phase 2, is the budget still roughly 7,000,000 dollars based on these expected tenants coming in? Yes. It's kind of in and around there. We're working through those details now. And construction would start early next year, I guess? I'd say, would be yes, that's good. Yes. Yes, that's the plan. Assuming we can get everything done with the tenants and the leases finalized and all the details complete. Okay. So the leases will be commencing theoretically in fall next year. Is that both rent and the occupancy starting at a time? Or would there be a gap between occupancy and then the rent payments? It will depend on when construction finishes, but if it's early occupancy, there'd be a gap, a slight gap on occupancy and actual third of the lease dates. Okay. In terms of the pending acquisitions on the industrial side there, can you give an average cap rate you're expecting to achieve? Yes. Actually, I can. So I think if I looked at all of them combined, I would probably be slightly over 7% cap. Okay. On the asset sales, can you comment on cap rate? I guess one of the assets is the purchaser is waived diligence. The other asset is still in diligence. So I don't know. It might be a little bit premature, but we're selling them at a gain to what we have on the books for and we're happy with the sale price. Okay. I'll turn it back. Thanks. Okay. Our next question comes from Stephane Boire with Echelon Wealth Partners. Please go ahead. Thank you. Good afternoon, guys. Good afternoon. Okay. I just got a couple of questions for you. First on the acquisition front again. Kelly, you mentioned I believe last quarter that you were there was roughly $15,000,000 to $20,000,000 property in the pipeline or you were in advanced negotiations on. Can you give us an update on that? Or is it I'm guessing or I'm assuming it's part of the Saskatchewan and the other properties we mentioned earlier, right? Yes. That one's on the Saskatchewan property. So it's about 230,000 square feet. Great little property, I would say, out west non oil and gas, has some development potential to it. So I think strong property for us. So we're in due diligence on that, which would be expected to waive towards the end of December. So I guess closing would be towards the end of January or sometime in January. Okay. So you don't necessarily expect anything to close before year end. Is that right? That's right. Okay. Okay. And I guess in that sense, it seems like a few of the acquisitions this year either didn't materialize or there were delays. And I was just wondering if you could give us some details on what were the main factors or the main reasons behind that? And if you can quantify the volume of acquisitions that you expect for next year? I that's one we've been looking at. We've been it was in negotiation for a while. So it sometimes takes a while when it's a unit deal and especially when it's for all units. It's a little bit of a different animal. But we did have one earlier in the year in Montreal area that we decided to drop at the end once we did our due diligence. We decided to drop it. So this one looks pretty good. I'm pretty sure we will close once we waive conditions on that. So that's a positive deal. Other ones we've been working on for a while and they've kind of now we're in the purchase and sale agreement stage of negotiating back and forth. So I would assume you would be looking at December, like January, February closing maybe on some of them, on a couple of them. And then there's 2 or 3 that were in the LOI stage on negotiating. So all combined that's I mean take out the one well actually all combined that'd be $80,000,000 So that would kind of be if we were lucky to do them all and went through due diligence and it was positive, it would probably be about $80,000,000 in the first half of the year, I'd say first half first 4 or 5 months. Okay. And I don't want to put words in your mouth, but would roughly $150,000,000 for next year, would this be reasonable? I think $100,000,000 to $150,000,000 would be a pretty good number. Okay. That's good. Scott is really active lately. So there's a number of opportunities we're looking at. Okay. Okay, perfect. Thanks. And still on the acquisition front, do you have a time horizon that you expect or that yes, that you expect to acquire additional properties maybe from Sandalwood? Is it still something that's on the table? Yes. It's something we always bounce around a little bit, especially on our side. But we haven't got anything, I don't know, it could be a year, it could be 2 years, 5 years. It really depends on their motivation. Right. Okay. Makes sense. And on the as for last quarter also, you mentioned that you were looking to dispose of $6,000,000 to $6,500,000 in properties just in the Montreal area. And obviously, you announced you just announced 2 more, I think, will link $7,000,000 in Montreal plus the one in Las Cruces for $3,700,000 So can you again quantify the amount of disposition you'd be looking at for the Montreal area and in general for the entire portfolio maybe for next year? Right. So Stephane, it seems like maybe we have you double counting a little bit. The $6,000,000 to $6,500,000 that we talked about last quarter is actually the $7,000,000 We ended up getting pricing levels that we were happy with that exceeded what was projected last quarter. And so it's really only the 2 properties that we're disposing of at this time. Okay, okay. Thanks for clarifying. Okay. And so no more dispositions or nothing planned in the next 12 months? Well, nothing earmarked right now, but I would say in first quarter, we would probably look at it. And there are a couple of small outliers that perhaps we'd look at, but nothing from a major size. Okay. Makes sense. Thanks. And on the on a different topic, the G and A this quarter and also in Q2 was a bit higher than last year, which obviously seems to be attributable to salaries and professional fees. Just should we from a modeling standpoint, should we consider $2,500,000 to be a good annual run rate going forward? First, and do you think that you are at a scalable level at this point where even if you make any additional acquisitions, it won't necessarily have a material impact on the G and A? So I think $2,500,000 might be a little bit low. I mean, if you look at the $850,000,000 and you annualize that, we're at $3,200,000,000 4, somewhere in there. So I think that might be a little bit light. And I think we are at a point where we have some scale and we wouldn't have to add staff as we add properties. The other nice thing about the properties we tend to add is they tend to be triple net and single tenant carefree to us in many cases. And so they don't require a lot of overhead. Yes. And Stephane, we ramped up staff a little bit. I'd say the second half of this year in anticipation of a move to the TSX, so that we're in a good position staff wise. Okay. Okay. Perfect. And just a last one before I turn it back. Can you give us some color on the same property? I'm sorry if I missed it. Maybe Rob, you mentioned it, but the same property NOI growth in dollar and percentage term and also more specifically maybe on the Sandalwood portfolio? Yes. So on the Sandalwood portfolio in one property in particular, we had a turnover in tenancy where we had a furniture store that left and gave way to a brick and the brick is in I think we talked a little bit about these last quarter, but the brick is in fit out right now, fixturing period. So same store NOI is actually down quarter over quarter by about $100,000 and so mostly owing to those temporary changes. Okay. Okay. All right, perfect. That's good. Thank you. That's it for me. Thank you for all the details. Thank you. Our next question comes from Terry Fisher with CIBC Private Wealth. Please go ahead. Hi, guys. Congratulations on another good quarter. I also want to ask about the cap rate question, but that's been answered and it's nice to see that that's the kind of targeting. But could I also ask about properties that you're looking at? Is there a theme in terms of your focus? I'm sensing maybe industrial is what you'd be targeting over perhaps other types of real estate? Yes. Our focus is mainly industrial The stuff that we are looking at, so when I quote a pipeline of that $80,000,000 those are all industrial assets. Now and that's located right across Canada. In Montreal, we have a fairly strong operational staff. So we would look to do other type of deals in Montreal. If one comes along, that's a reasonable cap rate in our range. So I'd say the rest of Canada, we're more focused on the industrial market. Yes, it's been a competitive space though. And so it's nice to see those kind of cap rates going in if you in that space. And it's of course, it's a desirable space, I think, from an investor's point of view, certainly from mine. So the only other question I had was, one of the things I find most intriguing and why I think we have invested in it for our clients is the unit financing for these acquisitions and that being done at a premium to the market price. Is that something we can keep anticipating going forward? So the one we have that we're close on is an all unit deal. So it's fairly significant. And then the other 4 or 5 or 6 that we're looking at are our mixture of units and cash. So the same structure, the same thing we've been executing on for the last, call it, 2 years. And we look to do them at a premium. And as our share price starts to creep up, which it's starting to do, we'll look at increasing that the price that we're doing those transactions on. Yes. I think it's a great formula, particularly the level of capitalization you are now to build up to a level where people are going to finally take notice. And then I think we're into a whole different valuation set of metrics. Yes. And possibly, hopefully, some additional analyst coverage. I don't want to see competition for the guys on the call, but that will always help. Yes. We're working on that and hopefully in the near future, we have a few more. And the union acquisitions have been a huge positive for us. It's allowed us to grow really without doing dilutive equity raises at this point where our price is. So it's been very positive. We've managed to complete a number of them. They're all been relatively highly accretive to our AFFO per unit. So it's something that we'll continue to execute on. Just as a parallel because it's in your industry and you like to look at other real estate, particularly publicly traded real estate businesses that would have a similar kind of approach. I recommend you look at, if you haven't already, has something called Invesque, IVQ is a ticker, it's IVQ apostrophe U for the U. S. Units. But they've just recently done the same thing where they've issued units at pre preferreds actually, but at a premium in order to get the size of the business up. But just another so you're not out there alone doing this, you can see that there are other examples of it. Yes. No, perfect. Okay. Yes. Look, thanks very much. I'm done. Thank you. Thank you. Our next question comes from Benjamin Grossman, a Private Investor. Please go ahead. Hi. Thank you so much for taking my question. I have a question with regards to the dividend considering the AFFO payout has crept a little lower, which is good. Can we expect in the near future some kind of increase in dividend from $0.16 annually, maybe $0.18? We haven't gone over that at the Board level yet. We're going to see how next year goes. We do have a drop in our cash flow a little bit with vacating Wartsila to get ready for a new deal there. So that will be a temporary drag on our cash flow. But we do have positive momentum on leasing and others. So I think as we go along the year, we'll take another hard look at it. But for us at this point, we like to stay relatively conservative because you never know when you have that one tenant who vacates on you and then you're scrambling. So we put ourselves in a really good position to weather any kind of storm And that's what we've done to date. So it's a little early. We will have a strategy or a meeting next early next year and we'll take a look at it then. Thank you so much. All right. Thank you. You're welcome. Our next question comes from Brad Sturges with IA Securities. Please go ahead. Hi. Just going back on the G and A, I guess with the move to the TSX there should be some one time costs I guess creeping in the next couple of quarters. Do you have a rough estimate on what that cost would be? Yes. The cost of graduation is going to be $200,000 and that will probably hit in Q1 2020. Q1, okay. And then in terms of same property NOI, I guess for next year, are there any lease maturities you're expecting not to renew? Or how should we think about SPNOI next year? Yes. So we do have a couple of changes in tenancy next year. We recently reviewed our budget for next year, however, and we think our same store NOI will hold. There'll be some puts and takes and it will be relatively stable. Okay, great. Thank you. Thanks, Matt. This concludes the question and answer session. I would like to turn the conference back over to Kelly Hancic for any closing remarks. Well, I want to thank everyone for taking the time to be on the call and I look forward to our next results call. And if anyone has any additional questions, please feel free to call either Rob or myself.