Thank you for standing by. This is the conference operator. Welcome to the Nexus 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. To join the question queue, you may press star one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star zero. I would now like to turn the conference over to Kelly Hanczyk, Chief Executive Officer. Please go ahead, sir.
Thank you. First of all, I would like to welcome everyone to the 2019 third- quarter 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 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&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 solid quarter for the REIT. I feel like I'm a broken record sometimes, but the third quarter of 2019 continues the path that 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 CAD 2.30 a unit. In Richmond, B.C., 1771 Savage Road, we've entered into an agreement to terminate the Wärtsilä lease effective December 15th of this year, and we are working on two 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 two of our smaller properties in Montreal that represent approximately CAD 7 million in selling price. One is expected to close in mid-December, and one by mid-January. On the acquisition front, it's been very active. We are in due diligence on a 230,000 sq ft 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 two acquisitions representing approximately 340,000 sq ft 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 Chiasson 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 30th, consistent with June 30th. Interest expense in the third quarter was down approximately CAD 125,000 as compared to the second quarter when we backed out a CAD 575,000 repayment fee in the second quarter 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 2019 and 82.6% for Q3 2018. Lower interest expense and higher contribution from our Rue Stanley property, which is owned in a joint venture, boosted AFFO in the quarter.
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 30th, 2019 to 51.4% at September 30th. With respect to debt, we completed the refinancing of our CAD 65 million credit facility on September 13th, and we were able to achieve a fixed interest rate of 3.15% by way of floating REIT debt with a swap in place. CAD 15 million of mortgages were renewed subsequent to quarter end, and approximately CAD 5 million of mortgages were repaid in the third 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 15th, which were discussed when we last spoke.
We refinanced the majority of our mortgage maturities but have another CAD 40 million that we will be refinancing in 2020 where we could benefit from positive pricing. I will now pass it back to Kelly.
All right, Rob. 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. To join the question queue, you may press star one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up the handset before pressing any keys. To withdraw your question, please press star two. We will pause for a moment as callers join the queue. 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 one, 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'll slip into Q1 of next year.
Would the rents be fully reflected in Q1, or there's still some work to be done, I guess, in the quarter?
Yeah. In phase one, the rent is either paid by the tenants or by the vendor.
Yeah.
The rent's complete.
The construction, though, will end and effectively turn over to the 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 we're currently reporting on our P&L replaced with NOI for the accounting rules as we start to collect the rents directly from the tenants.
Okay. For phase two, is the budget still roughly CAD 7 million based on these expected tenants coming in?
Yeah. It's kind of in and around there. We're working through those details now.
Construction would start early next year, I guess?
Yeah. That's good. Yeah. That's the plan. Assuming we can get everything done with the tenants and the leases finalized and all the details complete.
Okay. The leases be commencing theoretically in fall of 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'll depend on when construction finishes, but if it's early occupancy, there'd be a slight gap on occupancy and actual start of a lease date.
Okay. In terms of the pending acquisitions on the industrial side there, can you give an average cap rate you're expecting to achieve?
Yeah. Actually, I can. I think if I looked at all of them combined, I would probably be slightly over seven cap.
Okay. On the asset sales, can you comment on cap rate?
I guess one of the assets is the purchaser has waived diligence. The other asset is still in diligence. I don't know. It might be a little bit premature, but we're selling them at a gain to what we have them 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 Stephan Boire with Echelon Wealth Partners. Please go ahead.
Thank you. Good afternoon, guys.
Happy noon.
Okay. I just had a couple of questions for you. First, on the acquisition front again. Kelly, you mentioned, I believe, last quarter that there was roughly CAD 15 million-CAD 20 million in property in the pipeline, or you were in advanced negotiations on. Can you give us an update on that, or I'm guessing, or I'm assuming it's part of the Saskatchewan and the other properties you mentioned earlier, right?
That one's on the Saskatchewan property. It's about 230,000 sq ft. Great little property. I would say out west, non-oil and gas. Has some development potential to it. I think strong property for us. We're in due diligence on that, which would be expected to waive towards the end of December. I guess closing would be towards the end of January or sometime in January.
Okay. You don't necessarily expect anything to close before year-end. Is that right?
That's right.
Okay. I guess in that sense, it seems like a few of the acquisitions this year either didn't materialize or there were delays. 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.
This one we've been looking at, it was in negotiation for a while. 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. We did have one earlier in the year in the Montreal area that we decided to drop.
At the end, once we did our due diligence, we decided to drop it. This one looks pretty good. I'm pretty sure we will close once we waive conditions on that. 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. I would assume you would be looking at December, January, like January, February closing maybe on some of them, on a couple of them. There's two or three that were in the LOI stage on negotiating. Well, actually all combined, that'd be CAD 80 million.
That would be if we were lucky to do them all and went through due diligence and it was positive, it would probably be about CAD 80 million in the first half of the year. I'd say first half. First four or five months.
Okay. I don't want to put words in your mouth, but would roughly CAD 150 for next year, would this be reasonable?
I think CAD 100-CAD 150 would be a pretty good number.
Okay. That's good. Excellent.
It's gotten really active lately. There's a number of opportunities we're looking at.
Okay. Perfect. Thanks. Still on the acquisition front, do you have a time horizon that you expect to acquire additional properties, maybe from Sandalwood? Is it still something that's on the table?
Yeah. It's something we always bounce around a little bit, especially on our side. We haven't got anything. I don't know. It could be a year, it could be two years, five years. It really depends on their motivation.
Right. Okay. Makes sense.
Yeah.
As for last quarter also, you mentioned that you were looking to dispose of CAD 6 million to CAD 6.5 million in properties just in the Montreal area. Obviously, you just announced two more, I think totaling CAD 7 million in Montreal plus the one in [audio distortion] for CAD 3.7. 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. Stephan, it seems like maybe we have you double counting a little bit.
Oh, sorry.
CAD 6.5 million that we talked about last quarter is actually the CAD 7 million. We ended up getting pricing levels that we were happy with that exceeded what was projected last quarter. It's really only the two properties that we're disposing of at this time.
Okay. Thanks for clarifying. 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. There are a couple small outliers that perhaps we'd look at.
Nothing from a major size.
Okay. Makes sense. Thanks. On a different topic, the G&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. From a modeling standpoint, should we consider CAD 2.5 million to be a good annual run rate going forward first? 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&A?
I think CAD 2.5 might be a little bit low. If you look at the CAD 850 and you annualize that, we're at CAD 3.2, CAD 3.4, somewhere in there. I think that might be a little bit light.
Okay.
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.
Yeah. Stephan, 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. Perfect. 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 CAD and percentage term, and also more specifically maybe on the Sandalwood portfolio.
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. The Brick, I think we talked a little bit about these last quarter. The Brick is in fit out right now, fixturing period. Same-property NOI is actually down quarter-over-quarter by about CAD 100,000. Mostly owing to those temporary changes.
Okay. All right. Perfect. That's good. Thank you. That's it for me. Thank you for all the details.
Thank you.
Sure.
Once again, if you have a question, please press star one. Our next question comes from Terry Fisher with CIBC Private Wealth. Please go ahead.
Yeah. 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's the kind of targeting. 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.
Our focus is mainly industrial, so the stuff that we are looking at. When I quote a pipeline of that CAD 80 million, those are all industrial assets. 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. I'd say the rest of Canada, we're more focused on the industrial market.
Yeah. It's been a competitive space, though, and so it's nice to see those kind of cap rates going in that space. Of course, it's a desirable space, I think, from an investor's point of view, certainly from mine. The only other question I had was, one of the things I find most intriguing 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?
The one we have that we're close on is an all-unit deal, so it's fairly significant. The other four or five or six that we're looking at are a mixture of units and cash. The same structure, the same thing we've been executing on for the last, call it two years. We look to do them at a premium. As our share price starts to creep up, which it's starting to do, we'll look at increasing the price that we're doing those transactions on.
Yeah. 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.
Yeah.
Possibly, hopefully, some additional analyst coverage. I don't want to see competition for the guys on the call, but that will always help.
Yeah. Well, we're working on that, hopefully, in the near future, we have a few more. The unit 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. 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. 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, at something called Invesque, IVQ is the ticker. It's IVQ.U for the U.S. units. They've just recently done the same thing, where they've issued units, prefers actually, at a premium in order to get the size of the business up. Just another, so that you're not out there alone doing this, you can see that there are other examples of it.
Yeah. No, perfect. Yeah, it really is a good tool.
Okay. Yeah. Look, thanks very much. I'm done.
Thank you.
Our next question comes from Benjamin Goisman, a private investor. Please go ahead.
Hi. Thank you so much for taking my question. I have a question with regard to the dividend, considering the AFFO payout has creeped a little lower, which is good. Can we expect, in the near future, some kind of increase in dividend from CAD 0.16 annually to maybe CAD 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 Wärtsilä to get ready for a new deal there. That will be a temporary drag on our cash flow. We do have positive momentum on leasing and others. I think as we go along the year, we'll take another hard look at it. 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. We put ourselves in a really good position to weather any kind of storm, and that's what we've done to date. It's a little early.
We'll have a strategy meeting 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&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 will be?
Yeah, the cost of graduation's going to be CAD 200,000. That'll probably hit in Q1 2020.
Okay. 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 same-property NOI next year?
Yeah. 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'll be relatively stable.
Okay, great. Thank you.
Thanks, Brad.
This concludes the question and answer session. I would like to turn the conference back over to Kelly Hanczyk for any closing remarks.
Well, I want to thank everyone for taking the time to be on the call. I look forward to our next results call. If anyone has any additional questions, please feel free to call either Robert or myself.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.