Earnings Call: Q2 2019

Aug 16, 2019

Earnings release

Welcome to the Nexus REIT Q2 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 Henzik, CEO. Please go ahead, sir. I'd like to welcome everyone to the 2019 Q2 results conference call for NEXUS REIT. Joining me today is Robert Chaisson, 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 in 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. The Q2 of 2019 was another excellent quarter for The REIT. We continued on our path of completing acquisitions which are accretive to AFFO per unit to drive unitholder value without raising equity in the public markets. Our recently completed accretive industrial transaction has reduced our payout ratio to approximately 80%, while keeping our debt to gross book value conservative at 51.7%. We expect this trend to continue throughout the year. From a leasing perspective, the overall portfolio ended the quarter at approximately 94.8 percent occupancy, down slightly from the previous quarter. This is mainly the result of a termination of a 26,400 foot struggling tenant in Le Centre de Victorio Ville, Quebec in June of this year. We have replaced this tenant with a strong covenant in the who are currently in a fixturing period and rent will begin in mid October of this year. We've had strong leasing this summer and we'll see the occupancy number increase through the next few quarters. Notably, the last remaining full floor vacancy representing 9,277 Square Feet, half this amounted our interest at 2,045 Rue Stanley has a binding deal with the Quebec government and an additional space of 5,000 square feet, which again half of this amounted our interest, has just received an offer from one of our existing tenants looking to expand. So this will take occupied and committed space at Stanley to over 95%. Both leases will begin in 2020 and will further enhance the REIT's cash flow next year. In addition, one of our largest expiries in the portfolio at 57,000 square feet and expiring in December of this year is also renewing. In Richmond, D. C, we are close to finalizing plans to move forward with the Phase 2 development, which would see existing 16,000 square foot industrial tenant vacate and be replaced with 2 new tenants at a significant lift in rental rates. The phase should hopefully begin in the fall and be completed in early 2020, creating lift in the value of the property. In addition, zoning would allow for a Phase 3 with the ability to add additional square foot in the future if we decide. We've also identified with our partner, Sandalwood Management, potential future value add sites in and around the Greater Montreal area. On the disposition front, we continue to list for sale 2 of our smaller properties in Montreal, which represents approximately $6,000,000 to $6,500,000 in value. On the acquisition front, we are in late stages of a negotiation on a purchase and sale agreement to firm up another deal, which would be settled entirely in units. This would allow us to place debt on the property in favorable terms, which would provide cash we could use to complete additional acquisitions later in the year. We've been patient and have laid the groundwork for the future. Our industrial holdings account for approximately 47% of our NOI. Our payout ratio continues to be low continues on a downward trend since inception giving us flexibility for the future. We have remained conservative in our approach to our debt to gross book value. Our portfolio was strong and with the excellent leasing performance we have had over the summer, it will put us into an even stronger financial position in future quarters. Rob will speak more to the specific debt renewals, but once again on a positive note, successful renewal of this year's expiring debt will result in significant savings. Our unitholder base is diverse with extremely strong support from institutional holdings. We have value add opportunities that we will be moving forward with that will further lift our NAV per unit and we have identified potential future growth areas within existing portfolio. Finally, we continue to prove we can successfully complete acquisitions that are accretive to AFFO per unit. The future is bright for REIT. I'm going to now pass it over to Robert Chaisson to review the financials. Thanks, Kelly. Our portfolio continues to deliver consistent results. Same store NOI was up by approximately $100,000 quarter over quarter. We had a few tenants turn over in the quarter. And while our occupancy was slightly lower quarter on quarter, our committed occupancy was stable, and we'll see replacement tenancies contribute to NOI in future quarters. Interest expense in the 2nd quarter included a $578,000 debt repayment fee that was associated with debt that was assumed 2017. This amount has been removed from normalized FFO and normalized AFFO. NOI was bolstered by the completion of a 9.3% cap rate acquisition at the beginning of the quarter, which contributed to reducing our quarter on AFFO payout ratio from 81.5 percent to 80.5 percent and increasing quarter on quarter AFFO per unit by 1.3%. Looking to the balance sheet. Our debt to total assets was 51.7% at June 30. The average remaining term on mortgage debt increased from 2.59 years at March 31 to 3.6 years at June 30. We will see further growth in the remaining term as we renew additional debt. We've extended the term on our credit facility and are finalizing renewal, which is expected to be priced in the low 3% range. In April, we completed $37,000,000 of 5 to 10 year term mortgage refinancing at rates between 3.67% and 3.87%. Bond yields continue to be at relatively low levels and swap rates are also trending lower, holding well for terms that we may be able to get refinancing. I'll now pass it back to Kelly. Thanks, Rob. I'm going to now open up the call to any questions. Thank you. We will now begin the question and answer session. The first question comes from Brad Sturges, who is with IA Securities. Please go ahead, sir. Hi there. Good afternoon. Hey, Brad. Just on Richmond Phase 2, it sounds like some good news there. Just wanted to get a little bit more color on the scope of work and what your CapEx budget would be for Phase 2? It's a little bit premature. So we have there's 3 phases to it. 1 is dealing with the existing tenant, which we're in the process of. 2 is the 2 new tenancies, which we're currently pricing out what that fit up would be. So when I'm looking at it, I don't have the CapEx number, but I would roughly say it's probably in the 5 to $7,000,000 range. Outside work on the building, bringing it more in line with the existing Phase 1 from a color perspective and some cleanup of the exterior. So not a whole renovation here. It's more of a tenant fit up with some clean up over the outside. So that's one portion of it. And then finalizing 2 new deals with the 2 new tenants. So we're in the process of that. It's a little bit of a puzzle, but it's going very well. Hopefully, in the relatively near future, I can make a bigger announcement and give more detail. In terms of theoretical timing, it would be potentially early next year when this could commence? I think when I look at it, I think we would probably look to commence late fall of this year, if all goes well and be done relatively early next year. Okay. So tenant with the tenants in place by mid next year then, is that the time? I'd probably say by the end of the Q1. Okay. And the rent lifts you're speaking to, is that similar to what you've been thinking about in the past or what you've achieved so far in Phase 1? I would say yes. The rent level looks pretty good right now. We're still in negotiation. So I don't don't want to kill that for me. So it is pretty strong and I guess would be in the same range as the Phase 1. Okay. And with it sounds like you got the Ruth Stanley leased up now potentially. Just give a context of when in 20 20 would that potential lease start and talk about the rents the rent profile versus what we've been able to do so far in the building? So the government tenant that would start, I believe, March, I think it's March 1. The other one for the 5,000 square footer, I believe, is May, after fit up and work we have to do. The good thing about the government deal is effectively an as is deal. So from a CapEx standpoint, there's really nothing for us to do, which is significant which lend to a very solid NER for us on that one. But they range in the, I call it, the $14 to $20 range per square foot. Last question before I turn it back. Just on the Sandalwood value add review, can you give a little bit more color or the context of what the potential opportunities you're seeing within Quebec that would fit into those into that opportunity with Sandlerwood? Yes, absolutely. It's very early in the process. I sat with the Head of Sandozuil and we just had a discussion and started to look at different areas. So we have ability to in one very solid site to build multifamily or condo and add density there. And another one we've had some interest from a retirement side of things. So very early stages, but we're just looking for the future what opportunities lay in the portfolio. I guess intensification opportunities are the main. Absolutely. Okay. Got it. I'll turn it back. Thank you. Okay. No problem. The next question comes from Alex Lian, who's with Desjardins Capital Markets. You mentioned in the press release that you have a property that's currently under advanced negotiations. I was just wondering if you could give us some color as to the dollar amount and maybe the geographic location? Sure. It's out west and it's in the and we're in negotiations still and because I'll give you in between $15,000,000 $20,000,000 range. Okay, great. You mentioned $1,000,000 to $7,000,000 of CapEx relating to the Phase 2 development there. Does that include the space that's currently tenanted by Wartsila? It would be that's the site we're looking at. Yes. Yes. Okay. Moving along, I have the question on the weighted average cap rate I saw moved up slightly and that was due to increase to the higher end of the range from 9.5% to 10.1%. Is that related to specific properties or just specific locations? It's primarily related to the acquisition we completed in the quarter. So we purchased properties in Blackvault, Fort St. John, Esteban and Medicine Hat. Okay, great. And then last one for me before I turn it back. The NOI at Rue Stanley was negatively impacted by the repair and maintenance expense there. I was just wondering if that would be recoverable? A portion of it will be and it's treated as sorry, actually And sorry, actually one more. What was the management fee included in NOI this quarter? So we're relatively consistent. We don't have any additional CapEx or these increase. So off the top, I don't have the number, but I can get back to you on that. Okay, great. Thanks a lot. I'll turn it back. We have a follow-up question from Brad Sturges with IA Securities. Please go ahead, sir. Hi, there. Did I hear that correctly that there was a little bit of lease termination income during the quarter or No. No, there wasn't. Okay. No, there wasn't. Okay, perfect. Thank you. Okay, no problem. There are no further questions at this time. I would like to turn the conference back over to Kelly Hanzick for any closing comments. I'd like to thank everyone for calling in, and I look forward to our next results call where I think you can see significant announcements over the next probably by the next quarter. So look forward to chatting again. Thanks.