Earnings Call: Q3 2018

Nov 22, 2018

Earnings release

Thank you for standing by. This is the conference operator. Welcome to the Nexus REIT Q3 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 I would now like to hand the conference over to Kelly Hancic, Chief Executive Officer. Please go ahead, sir. Welcome everyone to the 2018 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. We've had a very successful year completing $91,500,000 in new deals and are currently in due diligence on approximately another $50,000,000 in assets that if all go well, we will close in the Q1 of next year. In the quarter, we concluded on an all unit deal for 6 $600,000 retail property in Beamsville, Ontario, and once again, like our other deals, was completed at $2.10 a premium to our trading price. From a leasing perspective, the overall portfolio ended the quarter at approximately 94% occupancy, down slightly from the previous quarter. This is mainly attributable to a recent vacancy of 23,000 square feet at a 2 tenant industrial building on Rue Griffith in the Montreal area as we are not able to accommodate the tenant's need to expand. There is positive news on the leasing front for our asset at 2,045 Ruth Stanley, a property we own 50% interest in, where an entire 7,100 Square Foot Floor was leased. So occupied or committed space in this property currently sits at approximately 84%, up from 68% at the end of the previous quarter. Rent on 7,600 square feet at this property commenced in November and we will begin to collect rent on an additional 6,100 square feet in December, 8,200 Square Feet in June of next year and 7,100 Square Feet in August of next year. The Sandalwood portfolio continues to remain consistent with our underwriting at approximately 91% occupancy, however, up slightly from 90.4% in the previous quarter. Former Edgefront portfolio continues to perform as expected with continued 100% occupancy since its inception. I'll then hand it over to Rob Chaisson now to review the financials. Thanks, Kelly. As Kelly mentioned, our portfolio once again performed expectation in the quarter. NOI increased $360,000 in the quarter as compared to Q2. We closed on an acquisition on August dollars of incremental NOI as compared to Q2. Partially offsetting that, dispositions completed in April of Q2 generated approximately $60,000 of NOI in Q2 and no NOI in Q3. As mentioned in our previous call, the property we acquired in Richmond, BC is undergoing tenant setup and the vendor is obligated to complete the build out at the vendor's cost and is guaranteed NOI until the build out is complete and tenants are occupying and paying rents for 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 increased 0.7% and rounded to 0 point sorry, $0.048 for both Q3 and Q2 2018. The normalized AFFO payout ratio for Q3 of 82.6% was down from 83.4% for Q2 of 2018. Looking at the balance sheet, our debt to total assets decreased from 54.3 percent at June 30 to 53.6% at September 30. I'll now pass it back to Kelly. Thanks, Rob. I'm now going to open up the line to any questions that you may have. Thank you. We will now begin the question and answer session. Our first question comes from Stephane Boire with Echelon Wealth Partners. Please go ahead. Thank you. Good afternoon. Kelly, I'm sorry if I missed it, but did you or can you provide an update on the acquisition in Montreal that was discussed last quarter? Yes. So we are in due diligence and there's 2 separate ones we're looking at right now, call it, one is about close to $20,000,000 and the other is around 30,000,000 dollars And that one is just outside of Montreal. We're in due diligence, which probably concludes early December. So we'd be looking at closing that sometime in January. That's the one at 20,000,000 dollars Yes, approximately. Okay. Okay. And also it was discussed in the last quarter that you intend past. Absolutely. Okay. So I'd say from a loan to value type of range that we've been completing in the past. Yes. Okay, perfect. Also can you give us an update on Richmond and if your budget has changed so far? So explain that a little bit. There's a backlog of permits in Richmond, which has caused a delay on the Phase 1. So there are existing tenants in place. And so we're just waiting to plow forward on the construction, which really doesn't affect us because the vendor guarantees the income until the units are fully built out and then they roll off and their obligation comes off. So what it's really done is just move our start date of the leases, which we've extended with the mending agreement. So everyone's fine. And it will continue to go. But I would say now we're looking kind of completion in the Q1 is my guess of 2019. And then once we have big progress and we're going and we have the tenants taking the space and moving on, we'll make a big push for Phase 2. So that would then now more realistically be in 2020 type of completion. Okay, perfect. That answers my question actually. And also on the lighter side, I would say, it appears that the G and A is slightly lower this quarter and I was wondering if you could provide some details and what could decline that and obviously if this is sustainable or sustainable or going forward? Yes, it was really just we had some period costs in Q2 with our Annual General Meeting. We also had some higher professional fees. We had tax returns that we had to file for 2 different periods of 2017 due to the transaction with Nobel. So some of those period costs were incurred in Q2 that didn't repeat in Q3. I'd say $700,000 a quarter is a good run rate. I mean, as our business grows, we may add a little bit of staff, but it's in and around that range is probably a good run rate. Okay, excellent. And just a final one. Can you just confirm the cap rate on Calgary? I believe it was around 6 0.5% or is it still the case? Yes, it was around 6.5%. Excellent. Perfect. That's it for me. Thank you. Thanks, Our next question comes from Brad Sturges with Industrial Alliance. For the $50,000,000 in acquisitions you're working on right now, is it still safe to say that cap rate range is in the 6.5% to 7% range? I'll give you a little guidance. It's in the 7% to 9%. 7% to 9%. Okay. And in terms of Richmond, so when you say 2020, is that I guess you would say early 2020 instead of late 2019 is now the potential for Phase 2? I hope. I mean, there's a bunch of steps we have to do. And really I want to get Phase 1 kind of complete and then start to really plow forward. So there'll be a number of things, the lease is in place and things that we have to get to move forward and still have it approved through our system and everything once a day. So I'm looking probably, I would say, first half of the year of twenty twenty would be my good guess for me right now. So you're still in the, I guess, discussion phase for leasing that second phase up? Yes. Yes. We're still in the design and the whole approval process on that side of things as well. Got it. Yes. In terms of maybe looking at leasing, what is your if you could provide a little guidance, what would your view be for same property NOI for 2019 in terms of growth guidance? It can be relatively stable. I think throughout 2018, we haven't had an awful lot of vacancy. We'll definitely see some greater occupancy at the Stanley property. And that will come in through equity accounted income from equity accounted joint venture. But I don't think there's a lot of vacancy in the portfolio that is problematic. We did lease some space in Victorierville to a restaurant bar operation. We also leased some space in Magog, which I think somebody had asked about in the last call and it would have been a good opportunity for us to update that. We leased some less than ideal space that had been previously vacant for some time in that location. But we don't really have a lot of I don't think we have a lot of GLA that's problematic that we have great opportunity to lease up. So no major non renewals you're expecting for 2019 at this stage? We do have 1 yellow pages at Platts 400 in New Brunswick. And I believe they're you had 8,000 square feet, Kelly. 8,000 square feet. Yes. So they vacate at the end of this year. So that is one. I would say that's probably one of the more bigger ones for us. We have 2 in Montreal currently. So I mentioned the one at Roo Griffith and then another 10,000 square feet vacant at property at Reverchamps. And I'm hopeful that we'll have those leases because those are both fairly, I'd say, historically in demand areas close to the airport, in their industrial. So they currently sit vacant that hopefully will kick on and that will add to cash flow and offset any kind of losses that we have. So, and they're fairly desirable units. So hopefully we can lease those and that will offset something like a Yellow Pages going vacating. And the Coata lease has been a little bit challenging. I think there's one other asset that's been a little bit challenging. Any progress on those assets in terms of leasing them back up? Yes. We have 2. So we have Mascoutche and Cote D'Az. Cote D'Az is a bit of a challenge. It's an office building near in the airport, so in a very industrial area, which is proven to be a challenge to look at and lease. But we may look at getting rid of that one in the near future or putting it up for sale. The Skouche, we do have someone who we are talking to that potentially could take lease up the remainder of the building. So again, I think that one hopefully in the next quarter or 2 quarters we can have dealt with as well. But yes, definitely I would say Cote d'Ivoire is the biggest leasing challenge in the portfolio. More likely you're putting up for lease or for sale I guess at this stage? Yes. I think eitheror. I mean, at this point, we've had it been carrying the vacancy and probably look if you can we'll continue to lease, continue to look to lease, but also look at pursuing a sale. Got it. All right. Thank you. I'll turn it back. Thanks, Brad. Our next question comes from Himanshu Gupta with GMP Securities. Please go ahead. Thank you and good afternoon guys. Hey, Hamedesh. Just a question on 2,045 Bruce Stanley property. The committed occupancy is now 84%. What is your expected stabilized occupancy on this property? And by when you can achieve that? So we have one more full floor, the 9th floor vacant right now that we are in discussions with someone. So if we were able to lease that in due time, that would take us to over 90. And I think that's a good number. And then it leaves a spattering of 1, 2, 3, 4, 3 smaller units plus another 5,000 square feet. So I think if we looked at it, probably 94% is a good number that and I think when we did our due diligence and ran our numbers, I think that was kind of the number that we always ran with. So if we could lease the full floor and then the 5,000 square footer, which are 2 decent units, at least 3 smaller units remaining to lease. And I think that'd be a good number. Somewhere around 70% occupancy would be our breakeven. And so anything above that we're generating in Hawaii. The property is or sorry, the leases in place or the committed space, some of that rent doesn't kick in into the future. So while we're 84% committed, as Kelly mentioned, some of those rents come online June August of next year. But certainly by June, we would be I would think we'd be stabilized. By June, we'll be surprised. And while I mean, I have you around here. So in terms of fair value pickup on this property from an accounting perspective, I guess there will be a fair value pickup once the full property is stabilized. I mean, you're still getting it. I think the appraisal value was much higher than what is you are getting in the books right now. Well, I mean, I don't think there will be a huge pickup. When we merged with Nobel, we took a look at it and we did a discounting cash flow and figured out what our leasing costs, etcetera, would be. And the carrying amount is slowly building towards, I believe, it was appraised at around 30,000,000 dollars and it sits just below that. And as we spend a little bit more on the property, it will reach close to that $30,000,000 mark without having to do a fair value adjustment. I think though the positive on it, I think the appraised value at the time was based before Montreal really took off. So I think you'll see cap rates have come down and appraised value may end up being higher. Got it. Okay. Thanks for that. And just to follow-up on the Richmond property, and I know it's already been asked number of times. Just for my clarification purposes, so there was a vendor NOI guarantee of around, I think, $640,000 or something in the quarter. That is expected to continue till the end of Phase 1 or Phase 2? Phase 1. As you've got, okay. So as that as Phase 1 and the tenants move in, the rental obligations drop off 1 by 1 as the tenants move in and start to pay. Right. And Phase 1, Kelly, is still end of quarter 1 now? Or I mean, when does this NOI guarantee run off? It doesn't expire. So it continues on until the tenants take possession and start paying. So I think, depending on the City of Richmond and that's been a little slow on the permitting side, that I would think my guess is end of quarter 1, March, April, it should be built out and the tenants in occupancy. So March or April, okay. Yes. Because there are tenants in occupancy. Right. But apart from the delay in the project, there is no change to overall project economics as such? I mean, in terms of your return expectations or your CapEx to be spent out? Yes. Same economics, the CapEx is the vendors to spend to fit up. So really the benefit is it's a delay in start terms, so we actually will have longer lease terms at the end of the day. Got you. If someone signed a 10 year lease and it was supposed to commence in August, it's now going to commence in, call it, March. So we've picked up more term. Got it. I don't mind, it's a matter of maybe a few months here and there, I guess. Yes. And turning to Sandalwood portfolio, it's been over 1 year now since you acquired the portfolio. Do you have a sense of same store NOI growth you achieved on this property? We're relatively stable year over year. So looking at Q3 over Q3 for Sandalwood, right, looking at Q3 over Q3 for Sandalwood, we're down a little bit, but we also had $150,000 termination fee. I'd say we're probably down about $150,000 though quarter over quarter at varying locations. Q3 but I think that's more Q3 2017 was a fairly strong quarter that more so than things have been progressing positively quarter over quarter to quarter. So Q3 versus Q2, we picked up a little bit on the Sandwood portfolio. But just that year over year, we had some we also had some straight line rents that we talked about, I think, in the Q1 that were being booked at one of the properties in the Sandwood portfolio that were higher than perhaps they should have been. So all in all, adjusting out the termination fee and adjusting out the straight line rents, I'd say it's pretty stable. Right. And I guess the occupancy is 91%. I mean, it's picked up a little quarter over quarter. What is your outlook in the next one year? I mean, next year where we can see the occupancy stable or do you see some low hanging fruits or some upside there in this portfolio? I think some of that vacancy is in locations that have historical occupancies that are not 80s, 90s. So I mean there is some opportunity, but I would expect that the number won't change very significantly. I think you'll see on the downside, it would swing to 90.5% and on the upside to 92%. That's my guess for the portfolio and if we're really lucky up to 93%. So that's kind of the way I look at it for next year. Right. And just to remind, the 2 year lock in period will expire in, I think, mid next year, I believe, right? And then you have an option to purchase a balance of 2%. Yes. I mean, I think we can always negotiate something if Sandwood is willing, but there's no mechanism that guarantees us a purchase. Yes. There's nothing but we like I said a 100 times, we've had a fantastic relationship with the group itself as a whole. So I think the expectation would be at some point in the future, we would probably complete more deals with them or roll additional property in. I just don't know when that time is, but it is something that's always been discussed and we always keep Got it. Okay. And just shifting gears to the Montreal property under due diligence. I mean, you mentioned the cap rate to be in the range of 7% to 9%. I just want to get a sense of how competitive is the process out there? I mean, because we keep hearing a lot of bids for Montreal Industrial Properties and much lower cap rates. So just wanted to get a sense of, are you seeing are you competing against other guys? And I mean, if you can elaborate? There. Not typically. Typically, we get them off market and we begin discussions. And it's a whole different negotiation because it's a unit deal. Takes a little longer and it's a little bit more arduous. But I think at this point in our REIT rather than raise equity dilutively at our current price, to complete acquisitions this way is much better. So we have had the opportunity. This deal was introduced to us by RFA. So through them. So at the end of the day, I think it's a good solid deal. It's not an industrial property. It's a mixture of kind of call it retail and office. Okay. Okay. In that range of 7% to 9%, there's also properties outside $50,000,000 under diligence. So some of that's Western Canada as well. Okay. So it's like a portfolio kind of. Okay. I think that's good. And maybe just one last question. I just wanted to have your thoughts around the target AFFO payout ratio. I mean payout ratio is still low. Have you had any discussions around the distribution going forward? And what's your target payout ratio? Yes, I would like to see it hit quite frankly. If we could get successful on leasing because we've been hovering around the 83 percent and we do have some deals coming on that should prove to be accretive, but we do have some interest rate exposure for next year. So my goal is to get it into the 70% to 75% range. That is my goal. And then from there with the Board, we'd have a discussion on do we keep that additional cash flow to reinvest or do we look at bumping the dividend? And we haven't got there yet. So I'd like to see it try to get to the 75% range over the next year. Got it. And you mentioned about the interest rate exposure. Are you talking about the credit facility which is coming from renewal in July? It's just that we have current mortgages on our balance sheet that we'll be renewing in 2019. And as you know, interest rates have been creeping up. So we may have incremental interest costs. So while we will have incremental interest costs as compared to some of the rates on maturing debt. Got it. Okay. Thank you, guys. I'll turn it back. Perfect. This concludes the question and answer session. I would now like to turn the conference back over to Kelly for any closing remarks. I just want to thank everyone for taking the time to call in, and we'll look forward to speaking again and updating on everything we've talked about in the next conference call. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.