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 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 hand the conference over to Kelly Hanczyk, Chief Executive Officer. Please go ahead, sir.
Welcome, everyone, to the 2018 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. We've had a very successful year on the acquisition front, completing CAD 91.5 million in new deals, and are currently in due diligence on approximately another CAD 50 million in assets. That if all go well, we will close in the first quarter of next year.
In the quarter, we concluded on an all-unit deal for CAD 6.6 million retail property in Beamsville, Ontario. Once again, like our other deals, was completed at 210, 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 two-tenant industrial building on Rue Griffith in the Montreal area, as we are not able to accommodate the tenant's need to expand. There's positive news on the leasing front for our asset at 2045 Rue Stanley, a property we own 50% interest in, where an entire 7,100-square-foot floor was leased. 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. We will begin to collect rent on an additional 6,100 square feet in December, 8,200 square feet in June of next year, 7,100 square feet in August of next year. The Sandalwood portfolio continues to remain consistent with our underwriting at approximately 91% occupancy, or 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'm going to hand it over to Robert Chiasson now to review the financials.
Thanks, Kelly. As Kelly mentioned, our portfolio once again performed to expectation in the quarter. NOI increased CAD 360,000 in the quarter as compared to Q2. We closed on an acquisition on August 1st that added approximately CAD 100,000 of NOI in the quarter as compared to Q2. Properties acquired partway through Q2 contributed approximately CAD 370,000 of incremental NOI as compared to Q2. Partially offsetting that, dispositions completed in April of Q2 generated approximately CAD 60,000 of NOI in Q2 and no NOI in Q3. As mentioned in our previous call, the property we acquired in Richmond, B.C., 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've normalized FFO and AFFO to include this. Normalized AFFO per unit increased 0.7% and rounded to CAD 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 2018. Looking at the balance sheet, our debt to total assets decreased from 54.3% at June 30th to 53.6% at September 30th. 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. 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 your 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 Stephane Beaulac 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?
Yeah. We are in due diligence. There's two separate ones we're looking at right now. Call it one is about close to CAD 20 million, the other is in around CAD 30 million. That one is just outside of Montreal. We're in due diligence, which probably concludes early December. We'd be looking at closing that sometime in January.
That's the one at CAD 20 million?
Yeah, approximately.
Okay. Also, it was discussed in the last quarter that you intend to issue units to the vendors. Are we talking about the same kind of transaction for both of these?
The exact same sort of transactions that we've done in the past. Absolutely.
Okay.
I'd say from a loan-to-value type of range that we've been completing in the past. Yep.
Okay, perfect. Also, can you give us an update on Richmond and if your budget has changed so far?
Explain that a little bit. There's a backlog of permits in Richmond, which has caused a delay on the phase one. There are existing tenants in place. 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. What it's really done is just move our start date of the leases, which we've extended with amending agreements, so everyone's fine. It'll continue to go, but I would say now we're looking kind of completion in the first quarter, is my guess, of 2019. 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 two.
That would then now more realistically be in 2020 type of completion.
Okay, perfect. That answers my question, actually. On the lighter side, I would say, it appears that the G&A is slightly lower this quarter, and I was wondering if you could provide some details and what could explain that, and obviously if this is sustainable going forward.
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 two different periods of 2017 due to the transaction with Nobel. Some of those period costs were incurred in Q2 that didn't repeat in Q3. I'd say CAD 700,000 a quarter is a good run rate. As our business grows, we may add a little bit of staff, but in and around that range is probably a good run rate.
Okay, excellent. Just a final one. Can you just confirm the cap rate on Calgary? I believe it was around 6.5%, or is it still the case?
Yeah, it was around 6.5%.
Excellent. Perfect. That's it from me. Thank you.
Thanks, Stephane.
Once again, if you have a question, please press star one. Our next question comes from Brad Sturges with Industrial Alliance. Please go ahead.
Hi there.
Hey, Brad.
For the CAD 50 million in acquisitions you're working on right now, is it still safe to say that cap rate range is in the 6.5%-7% range?
I'll give you a little guidance. It's in the seven to nine.
Seven to nine. Okay. In terms of Richmond, when you say 2020, I guess you would say early 2020 instead of late 2019 is now the potential for the phase II?
I hope. There's a bunch of steps we have to do, really, I want to get phase I complete and then start to really plow forward. There'll be a number of things, the leases in place and things that we have to get to move forward and still have it approved through our system and everything once again. I'm looking probably, I would say, first half of the year of 2020 would be a good guess for me right now.
You're still in the, I guess, discussion phase for leasing that second phase up?
Yeah. We're still in the design and the whole approval process and that side of things as well.
Got it.
Yeah.
In terms of maybe looking at leasing, if you could provide a little guidance, what would your view be for same property NOI for 2019 in terms of growth guidance?
I think it'd 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'll come in through income from equity accounted joint venture. I don't think there's a lot of vacancy in the portfolio that is problematic. We did leave some space in Victoriaville 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've 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. I don't think we have a lot of GLA that's problematic that we have great opportunity to lease up.
no major non-renewals you're expecting for 2019 at this stage?
We do have one Yellow Pages at Place 400 in New Brunswick. I believe they're 8,000 sq ft, Kelly?
8,000 sq ft. Yeah. They vacate at the end of this year. That is one. I would say that's probably one of the more bigger ones for us. We have two in Montreal currently. I mentioned the one at Rue Griffith, and then another 10,000 sq ft vacant at our property at Rivershaw. I'm hopeful that we'll have those leased because those are both fairly, I'd say, historically in-demand areas close to the airport, and they're industrial. 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. They're fairly desirable units, so hopefully we can lease those, and that'll offset something like a Yellow Pages going vacating.
Cote-de-Liesse has been a little bit challenging. I think that's one other asset that's been a little bit challenging. Any progress on those assets in terms of leasing them back up?
Yeah, we have two. We have Mascouche and Cote-de-Liesse. Cote-de-Liesse is a bit of a challenge. It's an office building near the airport, so in a very industrial area, which has proven to be a challenge to look at and lease. We may look at getting rid of that one in the near future or putting it up for sale. Mascouche, we do have someone who we are talking to that potentially could take a lease up the remainder of the building. Again, I think that one, hopefully in the next quarter or two quarters, we can have dealt with as well. Yeah, definitely I would say Cote-de-Liesse is the biggest leasing challenge in the portfolio.
More likely, you're putting up for lease or for sale, I guess, at this stage?
Yeah, I think either or. At this point, we've had it, been carrying the vacancy, and probably look if we can, we'll continue to lease, continue to look to lease, but also can look at pursuing a sale.
Got it. All right. Thank you. I'll turn it back.
Thanks, Brad.
Once again, if you have a question, please press star one. Our next question comes from Himanshu Gupta with GMP Securities. Please go ahead.
Thank you, good afternoon, guys.
Hey, Himanshu.
Just a question on 2045 Rue Stanley property. The committed occupancy is now 84%. What is your expected stabilized occupancy on this property, and by when you can achieve that?
We have one more full floor, the ninth floor, vacant right now that we are in discussions with someone. If we were able to lease that in due time, that would take us to over 90. I think that's a good number, then it leaves a spattering of one, two, three, four, three smaller units, plus another 5,000 sq ft. I think if we looked at it, probably 94% is a good number. 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. If we could lease the full floor and then the 5,000 square footer, which are our two decent units, at least three smaller units remaining to lease, I think that'd be a good number.
Somewhere around 70% occupancy would be our break even. Anything above that, we're generating NOI. The leases in place or the committed space, some of that rent doesn't kick in until the future.
While we're 84% committed, as Kelly mentioned, some of those rents come online June and August of next year. Certainly by June, I would think we'd be stabilized.
By June, you'll be stabilized. While I have you around here, 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. You're still carrying it. I think the appraisal value was much higher than what you are carrying in the books right now.
I don't think there will be a huge pickup. When we merged with Nobel, we took a look at it, we did a discounted cash flow and figured out what our leasing costs, et cetera, would be.
The carrying amount is slowly building towards, I believe it was appraised at around CAD 30 million.
Correct.
It sits just below that, as we spend a little bit more on the property, it'll reach close to that CAD 30 million 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. I think you'll see cap rates have come down, and appraised value may end up being higher.
Got it. Okay. Thanks for that. Just to follow up on the Richmond property, I know it's already been asked a number of times. Just for my clarification purposes, there was a vendor NOI guarantee of around, I think, CAD 640,000 or something in the quarter. That is expected to continue till the end of phase 1 or phase 2?
Phase 1.
Of the project.
So-
Of the phase 1, okay.
Phase 1 and the tenants move in, the rental obligations drop off one by one as the tenants move in and start to pay.
Right. Phase 1, Kelly, is still end of quarter 1 now, or when does this NOI guarantee run off?
It doesn't expire, it continues on until the tenants take possession and start paying. I think, depending on the city of Richmond, that's been a little slow on the permitting side.
that I would think, my guess is end of quarter one, March, April, it should be built out and the tenants in occupancy.
Gotcha. Okay.
Yeah. Because there are tenants in occupancy.
Right. Apart from the delay in the project pursuit, there is no change to overall project economics as such? I mean, in terms of your return expectations.
No.
Your CapEx to be spent out.
Yeah. Same economics. The CapEx is the vendors to spend to fit up. Really the benefit is it's a delay in start terms, we actually will have longer lease terms at the end of the day.
Got you.
If someone signs a 10-year lease and it was supposed to commence in August, it now is going to commence in, let's call it March.
Got you.
We just picked up more term.
Right. It's a matter of delay of few months here and there, I guess.
Yeah.
Turning to Sandalwood portfolio. It's been over one 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. Looking at Q3 over Q3 for Sandalwood. Sorry, looking at Q3 over Q3 for Sandalwood, we're down a little bit. We also had CAD 150,000-
Termination. Yeah
termination fee.
Right.
I'd say we're probably down about CAD 150,000 quarter-over-quarter at varying locations.
Right.
I think that's more Q3 2017 was a fairly strong quarter. Things have been progressing positively quarter-to-quarter. Q3 versus Q2, we picked up a little bit on the Sandalwood portfolio. Just that year-over-year, we also had some straight line rents that we talked about, I think, in the first quarter, that were being booked at one of the properties in the Sandalwood portfolio that were higher than perhaps they should've been. All in all, adjusting out the termination fee and adjusting out the straight line rents, I'd say it's pretty stable.
Right. I guess the occupancy is 91%. 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. 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 and a half, and on the upside to 92. That's my guess for that portfolio. If we're really lucky, up to 93. That's kind of the way I look at it for next year.
Right. Just a reminder, 2-year lock-in period will expire in, I think mid next year, I believe, right? Then you have an option to purchase a balance of 2%.
Yeah. I think we could always negotiate something if Sandalwood's willing, there's no mechanism that guarantees us a purchase.
Got you.
Yeah. There's nothing, like I said 100 times, we've had a fantastic relationship with the group itself as a whole. 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, it is something that's always been discussed, we always keep bouncing around.
Got it. Okay. Just shifting gears to the Montreal property under due diligence. You mentioned the cap rate to be in the range of 7%-9%. I just want to get a sense of how competitive is the process out there. We keep hearing a lot of bids for Montreal industrial properties and much lower cap rates. Just wanted to get a sense of, are you competing against other guys? If you can elaborate there.
Not typically. Typically, we get them off market, we begin discussions. It's a whole different negotiation because it's a unit deal. Takes a little longer, and it's a little bit more arduous. 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. We have had the opportunity. This deal was introduced to us by RFA.
Okay.
Through them. 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.
In that range of 7%-9%, there's also properties outside of the Montreal area.
Yeah
on the CAD 50 million under diligence. Some of that is Western Canada as well.
Oh, okay. It's like a portfolio kind of. Okay, I think that's good. Maybe just one last question. I just wanted to have your thoughts around the target AFFO payout ratio. Payout ratio is still low. Have you had any discussions around the distribution going forward? What's your target payout ratio?
Yeah, I would like to see it hit, quite frankly. If we could get successful on leasing, because we've been hovering around the 83%, we do have some deals coming on that should prove to be accretive. We do have some interest rate exposure for next year. My goal is to get it into the 70%-75% range. That is my goal. 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? We haven't got there yet. I would like to see it try to get to the 75% range over the next year.
Got it. You mentioned about the interest rate exposure. Are you talking about the credit facility, which is coming for renewal in July?
It's just that we have current mortgages on our balance sheet that we'll be renewing in 2019.
Okay.
As you know, interest rates have been creeping up. We may have incremental interest costs. Well, 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 Hanczyk 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.