Welcome to the Nexus REIT Q4 2018 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 operator by pressing star and zero. I would now like to turn the conference over to Kelly Hanczyk, Chief Executive Officer. Please go ahead.
Welcome everyone to the 2018 year-end and Q4 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. 2018 was another solid year for the REIT. Once again, we have had a very successful year continuing to build on our core fundamentals. From our inception in January 2014, we have focused on having a conservative balance sheet and have grown the REIT patiently with accretive acquisitions.
Our AFFO payout ratio has continued to drop from 99% at our inception down to 83% over this time, while keeping our debt-to-GBV at a relatively low 51.7%. We completed CAD 91.5 million in new deals in 2018, growing our asset base to approximately CAD 550 million. Yesterday, we announced that we closed on another highly accretive industrial deal, bringing the industrial sector exposure to approximately 50% based on NOI. We funded this purchase with approximately CAD 15 million in units issued at CAD 210 per unit, with the balance funded from five-year debt at 3.47%. From a leasing perspective, the overall portfolio ended the quarter at approximately 94.6% occupancy, up from the previous quarter of 93.9%, with gains across the entire portfolio. At 2045 Rue Stanley, occupied or committed space in this property currently sits at approximately 82%, the same as the previous quarter.
Keeping in mind our interest is 50% of this jointly owned property, rent will commence in June on 8,200 sq ft and another 7,100 sq ft in August of this year. We continue to market the vacant spaces and are hopeful to see some more activity in the coming months. After experiencing permitting delays, which have now been resolved, tenant improvements at our Richmond, B.C. asset are moving along and expected to completion scheduled by the end of the year. Until complete, the vendor is responsible to fund the rental obligations, which will be replaced by lease revenue out throughout the year. We have delayed the phase II plan until we have substantial completion of the build-out for existing tenants. I'll now hand it over to Rob Chiasson to review the financials.
Thanks, Kelly. Our portfolio continues to deliver consistent results. We acquired a property in Calgary, Alberta on October 17th, and the Beamsville, Ontario acquisition completed on August 1st contributed NOI for the full Q4. Excluding the increase in NOI related to these acquisitions, NOI remains relatively consistent. Included in NOI for the Q1 are approximately CAD 75,000 of leasing fees related to the 2045 Rue Stanley property, which we co-own through a joint venture. This is a one-time NOI improvement. Subsequent to the end of 2018, we filled a 23,000 sq ft vacancy at our Griffith Street, Saint-Laurent property, and rents commenced March 1st. This space was vacant in the Q4. In the Q1 of 2019, we'll see the benefit of contractual CPI increases of approximately CAD 50,000 for the quarter, as well as the impact of snow removal and utility costs.
I'll remind those listening that the property we acquired in Richmond, B.C. is undergoing tenant fit-out, and the vendor is obligated to complete the build-out at the vendor's cost and has guaranteed NOI until build-out is complete and tenants are occupying and paying rents per their leases. For IFRS accounting purposes, this vendor income guarantee is not included in NOI, and accordingly, we have normalized FFO and AFFO to include this. Normalized AFFO per unit for the quarter of CAD 0.049 increased 2% compared to Q4 2017 normalized AFFO, and increased 1.4% compared to Q3 2018 normalized AFFO. Normalized AFFO payout ratio for the year of 83.3% is down from 83.6% for the year ended December 31st 2017. Q4 2018 normalized AFFO payout ratio of 81.6% decreased from 82.6% for Q3 2018.
Looking at the balance sheet, our debt to total assets decreased from 53.6% at September 30th to 51.7% at December 31st. The decrease was largely driven by IFRS valuations, which increased the carrying value of our assets. Fair value adjustments of investment properties totaled approximately CAD 19 million in the quarter. We increased the debt on one of our properties by CAD 4 million in the quarter to add strength to our balance sheet. The proceeds were used to pay down our revolving credit facility, and the change was slightly positive to interest expense. Our CAD 65 million credit facility matures in July of this year, and we have CAD 60 million of principal maturities on mortgage debt coming up in 2019. Of the CAD 60 million of mortgage maturities, we've entered into a new mortgage commitment with respect to CAD 37 million of mortgage principal maturing this month.
While it's early, we're in discussions with respect to the remainder of debt maturing in 2019. Bond yields are at relatively low levels, and if they remain at these levels, we may be able to replace maturing debt on favorable terms. I'll now pass back to Kelly.
Thanks, Rob. I'll now open up the call to any questions.
Thank you. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. Once again, to join the question queue, please press star, then one. Our first question comes from Brad Sturges of Industrial Alliance Securities.
Hi, guys.
Hey, Brad.
Rob, just on your commentary with the financing, the CAD 37 million, can you give a little bit of color in terms of expected interest rate and term?
Yeah. It's broken out into three tranches, three equal tranches, five-year, seven-year, and 10-year money. Right now, based on where interest rates are sitting, we're expecting rates to be somewhere in the 3.6% range.
Okay. For the remaining piece of debt that you would look at renewing this year, refinancing this year, what would be your expectations for rates there? Would it be similar rates or, I guess, depending on the assets?
Yeah, it depends on the assets, and it depends on spreads that lenders either maintain or adjust. In terms of underlying bond yields, if we were to look at on the revolving credit facility, there's CAD 30 million of that's fixed at 3.9%, then there's another approximately CAD 20 million that's fixed at 3.63%. If we look at bond yields compared to when those loans originated to now, bond yields have gone down a little bit. I expect we'd be able to renew that on similar terms, perhaps a little bit better. Then the remainder of that revolving debt is either prime advances at just over 5% currently or BA advances. While longer-term rates have come down, shorter-term rates, BA rates, have gone up. We could, again, have a bit of an opportunity to replace that at lower interest rates.
In terms of the mortgage maturities, those are maturing. Aside from the little more than half of the mortgages that we've already dealt with, most of those come up in the later quarters of 2019. It depends a little bit on where bond yields are at that time. Right now, it's looking favorable that we may have some lower interest costs on some of those renewals.
Okay, that's good color. Kelly, you just closed the most recent acquisition. I think there was mention in the last press release about a Montreal acquisition in negotiation. Where does that stand?
Yeah, we're a little bit delayed on that one, where we've got some lease issues that we're hammering out with the vendor. We'll see how those go. Right now, I would say it's, I don't know, 60/40 that we would complete it or not. It depends on if we can hammer out the terms that we want on the deal. We'll see in the next quarter, probably.
Okay. In terms of the acquisition pipeline overall, what are you seeing, and is it a fairly active pipeline right now?
Yeah, I think you'll see the same sort of type of transactions that we've done in the past. We're looking at a couple right now in addition to that other one in early stages. They keep popping up. We keep plugging along and manage to complete a decent chunk, it seems, every six months. I'd say it's kind of the normal pipeline that we've seen in the past several years.
With Richmond, any update on phase II planning right now?
No, I guess, planning-wise, we were delayed on phase I because of the permit problems with the City of Richmond. That's been resolved now. They're moving along. We'll just wait till they get further along, I'd say towards the later part of the year, Q3, Q4, then we'll start earnestly looking at a planning for phase II again. We just want to be prudent, and make sure we're along on phase I before we commit to phase II.
Perfect. Thank you.
Thanks, Brad.
Our next question comes from Mike Markidis of Desjardins.
Hey, thanks, guys. Bit of a laundry list here.
No worries.
Good. Thanks. Rob, the lease at 3490 Griffith. I can't remember if you said beginning of March or end of March. That'd be question one. What's the rent on that building, on that lease?
Beginning of March, and I don't know if we want to disclose the exact rent. It's a single tenant that's occupying that space.
I'd say to our results, it represents probably about CAD 225,000 annually, like in overall rent.
CAD 225,000 annually.
Yeah.
Okay. Is a net lease?
It's a net lease, but if you take the net plus the additional, yeah.
Okay, perfect. The fee income, I think you said it was CAD 75,000 during this quarter, so that was just the leasing component. What's the total fee income for this quarter?
Total fee income, we have a CAD 500,000 fee that we get from the Sandalwood portfolio. All in all, excluding that, we're about CAD 500,000 for the year in all of our fees, excluding that. We're about CAD 1 million in total. We also had fees at Gatineau and Stanley, that for the year totaled to CAD 500,000. It's CAD 500,000 in fees from Gatineau and Stanley, and then another CAD 500,000 in fees from Sandalwood portfolio.
Okay, perfect. Got you. Just with the sports mall, the Richmond asset, the vendor support, I understand that's in until all those tenants start occupying and paying their rent. Is that amount equivalent to the expected contractual income that's in place, or will there be a lift, or will it come down?
It's equivalent. When we did the purchase agreement, we determined what the underwritten NOI was and supported by leases.
Okay.
That's the amount that the vendor's paying until the tenants take occupancy.
Okay. Like I said, this is a bit of a laundry list here, the CAD 37 million of mortgage financing sounds like you got committed and will be a takeout. Is that a straight, this CAD 37 million, the amount of principal that's maturing, or are you guys actually pulling incremental capital out of that?
It's equal to the principal maturing.
Okay. Just given your short weighted average term for your debt, and given where the bond yields have come down to, is it at all possible that you guys might look to refinance early or defease, pay some penalties, and lock in rates for a longer term on some of the other stuff that you got coming maybe in the next 12 months?
It's something we can look at. We do have yield maintenance on a bunch of things, but sometimes it makes it economically difficult. Yeah, it's something we would consider.
Okay. Two more from me before I turn it back. You had a nice fair value right up this quarter. It looks like that was all cap rate compression. You did make a comment with respect to not including the vendor income support in the valuation, and it seems like you are now. I'm just trying to get a sense of what was the driver of that CAD 19 million change. Was it all cap rate compression, or was it also because you weren't including the income support before and now you're including that?
Well, actually, the income support doesn't impact. We acquired the Richmond property April 30th of 2018. Under IFRS, we carry that at the purchase price, which is seen as the best indication of fair value.
Okay.
Where we did adjust though is we have contractual rent increases on a number of properties, CPI and also step rate increases. We had six properties that were appraised externally, and those generated some pickup through a combination of cap rate compression and also higher NOI.
Okay.
We also acquired the Sandalwood properties last year in July of 2018. Those were carried, or sorry, July of 2017. Those were carried at purchase price as well. The purchase price on that portfolio was roughly CAD 10 million lower than the appraised value at the time we acquired. We increased it somewhere sort of in between the purchase price and the appraised values on the date of acquisition. We made some adjustments to stabilize NOI. Might arguably say I was a little bit conservative, but yeah. That's driving a good chunk. Then just the appraisal updates where we had higher NOI combined with a little bit of cap rate compression.
Okay. That's fair. Last one from me. Just on your 844 reserve, just looking at the fact that you guys had spent a decent chunk more than what you're reserving. The verbiage in there suggests that it was elevated because of the first full year of having Sandalwood, but that you expect it to remain elevated for the next two to three years. Just given the environment that we're in with retail, if you guys have given any thought to revisiting that reserve, in light of those sort of two facts.
Well, I guess there's a couple things. If you look at our historical, there was a long period of time where we were reserving and not spending. Now we're spending a little more than we're reserving, we had a major project at one of our locations, major repairs to a parking structure.
There was some deferred maintenance on these properties that we acquired, and that was part of the reason we were able to negotiate a CAD 2 million CapEx escrow. We don't talk about that, it goes a long way towards offsetting a lot of those CapEx. The other thing is we're adding the MasTec. We're adding the portfolio that we announced recently, in Western Canada. That's an industrial portfolio where it's fairly triple net and carefree to us as a landlord. We'll put a reserve against that, and we don't anticipate spending very much. Things will balance out.
We will also keep an eye on our reserve, we were anticipating a little bit of deferred maintenance and some higher spend initially on the Sandalwood portfolio in particular.
Okay. No, that's fair. Thanks very much.
Thank you.
Our next question comes from Himanshu Gupta of GMP Securities.
Thank you and good afternoon.
Hi.
Hi. When do you plan to start reporting same property NOI growth numbers?
That's something we'll look to in 2019. Part of the issue, as you know, this year was we acquired or merged with Nobel April of 2017, we did the Sandalwood deal in July of 2017. The same store numbers were not very meaningful for a large chunk of the year. That is something we will look to reporting later in 2019.
Sure. You mentioned that quarter four versus quarter three, sequentially, NOI was pretty flat. Is it fair to say that?
Yeah.
On a same asset basis?
Yeah.
Right. Okay. Just moving on to the acquisition pipeline, just a follow-up on that question. Do you have a certain target exposure in mind in terms of the % of overall portfolio, like target exposure to industrial, retail, and the office? Just trying to gauge what is the acquisition criteria or the strategy going forward? I mean, do you have certain markets or cap rates?
I've always said we've been more focused on the industrial market. You can see the one we closed on yesterday was industrial. We have a few more industrials that we're looking at. Our 50%, where we are right now, will kind of be our guideline, I would say that we would stick to on the industrial side. With a scattering of office and retail in there as well. Most of the things we're seeing right now are in the industrial side.
Right. Kelly, you mentioned about the industrial portfolio you closed recently. How did you find this portfolio in the secondary market?
The interesting thing is once you do some of the unit deals and you get known for doing them successfully, the deals kind of come to you. We're known to do them out West, and we've been successful in completing them out West. We have a good partner in TriWest that knows the majority of the tenants and the things that we'd be looking at. We get some good due diligence from there. I'd say most of them are kind of word of mouth.
Right.
I think this particular portfolio came direct at one point.
Yeah
Resurfaced through a broker later.
Got you. Looks like a good transaction there. How deep are these markets? If a tenant were to leave, can you backfill the space here in some of these markets?
Yeah. It wouldn't be overly easy because it's a tougher market to re-lease, I guess it is. There's good, decent term on it. The covenant's really good. I guess I would call the facilities kind of mission critical to them. We know the covenant. It's doing extremely well. I've had good relationship with the CEO of the company. We're pretty certain that on a renewal that they would stay. We have pretty good confidence in it.
Got it. Well, thank you. Most of my questions have been answered, so I turn it back.
Great. Thanks, Himanshu.
Once again, if you have a question, please press star then one. Our next question comes from Steve McLean of Real Estate News Exchange.
Hi, guys. I'm wondering if you could provide a little bit more detail on the transactions and the properties themselves regarding the one just announced yesterday and the four announced at the end of February.
Yeah. It's a four industrial in Western Canada. It's a company called MasTec Canada.
Can you repeat that again?
MasTec, M-A-S-T-E-C.
Okay.
Is the tenant, good solid tenant. The financials are pretty good. It's a New York Stock Exchange-listed company. Overall, a very strong covenant for us.
For the property from yesterday?
Sorry, that was the close yesterday.
Okay. What about the one from February?
We didn't close on a property in February. We may have press released another property in Quebec that.
Yeah
In Quebec.
Yeah, you put out a press release on February 28th announcing four acquisitions.
Yeah. That's the one that we closed yesterday.
Okay. That's with the four properties?
Yeah.
Okay. Just wanted to make that clear. Thanks.
Oh, no worries. Thanks.
Thank you.
Once again, if you have a question, please press star then one. This concludes the question and answer session. I would like to turn the conference back over to Mr. Hanczyk for any closing remarks.
Yeah, I'd like to say it looks like for the balance of the year, we have pretty good leasing momentum, with filling our vacancy at Griffith, and with some other deals that we have. We have a pad site that's going to go ahead in Victoriaville, another one of our properties, with some leases coming on throughout the year at Stanley, and some renewals that we have and then some expansions. We're in pretty decent shape, I think, when you see the second half of the year. I look forward to the next conference call and issuing our next series of results.
This concludes today's conference call. You may disconnect your lines.