Thank you for standing by. This is the conference operator. Welcome to the Nexus REIT Q2 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 an 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 second quarter results conference call for Nexus. Joining me today is Rob Chiasson, CFO 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. With the first half of the year in the books, Nexus continues to execute on all measures. Our AFFO payout ratio continues to be low at 83%. It has been a highly successful first half of the year on the acquisition front.
To date, we have closed and waived conditions on CAD 83 million of acquisitions, which represents approximately CAD 35 million in new equity being issued to vendors of each property at CAD 2.10 a unit, a premium to our current trading price. On April 30th, we closed on Savage Road in Richmond, B.C., that we expect to contribute a considerable lift to the REIT's NAV. We purchased the property for significantly less than appraised value and intend to reposition a portion of the property. Two industrial properties in Nisku, Alberta, closed on June 7th, and an additional industrial property in Regina, Saskatchewan, closed on June 27th, strengthening our industrial profile. Subsequent to quarter end on August 1st, we concluded an all-unit deal for a CAD 6.6 million service retail property in Beamsville, Ontario. This property appraised at CAD 8.25 million, and once again, we issued units at CAD 2.10 per unit.
Again, a premium to our trading price. From a leasing perspective, the overall portfolio ended the quarter at 94.2% occupancy. Excluding 2045 Rue Stanley, which is currently at 55%, our occupancy was 94.8%. Approximately 74% of the GLA of Rue Stanley is occupied or committed. Now that the construction holidays have ended in Quebec, we are hopeful that we will ink a deal in the next few weeks on one of the prospects that we are currently in late stages with. Each floor we lease represents approximately CAD 100,000 to CAD 175,000 of income improvement. The Sandalwood portfolio remains consistent with our underwriting at 90.4% occupancy, and the former Edgefront portfolio continues to perform well and continued 100% occupancy since inception. In the former Nobel portfolio, occupancy sits at 94.5% at quarter end, with vacancy mainly concentrated in five assets.
On the acquisition front, we are in advanced negotiations now on two additional properties representing approximately CAD 27 million of new real estate and approximately CAD 8.5 million of units in the REIT being issued to the vendors, again, at a premium to our current trading price. Successful completion of these acquisitions will bring our total acquisitions for the year to date to approximately CAD 110 million and new equity issued to vendors at approximately CAD 43 million. We continue to have a strong acquisition pipeline, and we expect to continue our path of growth. I'll now pass it over to Rob to review the financials.
Thanks, Kelly. As Kelly mentioned, our portfolio performed to expectation in the quarter. We sold two properties in the quarter and acquired three properties. Q2 NOI of CAD 8,235,670 was CAD 305,743 higher than Q1 NOI. Acquisitions contributed approximately CAD 240,000 of NOI in the quarter, and dispositions accounted for approximately CAD 120,000 lower NOI as compared to Q1. Apple-to-apples NOI for Q2 was up by CAD 185,000 as compared to Q1, with higher construction management fees accounting for approximately CAD 40,000 of that CAD 185,000 increase. Property 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 is guaranteed NOI until the 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 of CAD 0.048 for Q2 2018 increased 2.4% as compared to Q2 2017 AFFO per unit of CAD 0.047 and increased 3.7% as compared to Q1 2018 AFFO per unit of CAD 0.046. Adjusted normalized AFFO payout ratio for Q2 2018 of 83.4% is down from 85.2% for Q2 2017. The Q2 2017 payout ratio was adjusted for the impact of an equity raise the REIT completed on June 30th, 2017, in which 33,350,000 REIT units were issued on the last day of June and distributions were paid on these units. On April 30th, 2018, 9,666,667 units were issued in connection with the Richmond acquisition, and distributions were paid on these units for the month of April. Adjusted distributions for Q2 2018 exclude these April distributions on these units.
Looking at the balance sheet, our debt to total assets increased slightly to 54.3% at June 30th, as compared to 53.7% at March 31st. We had more cash on hand at the end of this quarter than the previous quarter, and that cash was used to pay down revolving debt subsequent to quarter end. Now I will pass it back to Kelly.
Thanks, Rob. I'll now open up the line to any questions that anyone has.
Certainly. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. Our first question comes from Stephane Bois from Echelon Wealth Partners. Please go ahead.
Thank you. Good afternoon. I was wondering if you could provide an update on the leasing activity for the more challenging assets, such as Côte-de-Liesse, Mascouche, or Magog.
Yeah, sure. Côte-de-Liesse and Mascouche have been very slow. We're probably looking at those as underperforming assets and possibly look to roll those out of the portfolio at some point.
Both in challenging markets. Côte-de-Liesse is an office building in a very industrial node over by the airport. We will probably look at doing something sooner than later.
Okay. What about Magog? I think there was one with a slightly lower occupancy.
Yeah. Magog's at its historical occupancy, and it's at the level roughly that we bought it on.
We're not suffering from the lower occupancy there, but it is sort of at its average historical levels.
Okay. Can you give us some color on the redevelopment at 2045 Stanley and if your budget has changed?
We're pretty much done on the base building side. We've completed some base building renovations on three floors. We've come in a little bit better than budget on some of those demolition. We don't expect a significant change in the construction budget.
All right, perfect. Finally, could you give us a little more details regarding the CAD 6.6 million acquisition in Beamsville and the other two additional acquisition that, Kelly, you mentioned earlier, including the cap rate and occupancy?
The Beamsville asset is a food court asset with A&W, KFC, Subway, and Tim Hortons among the tenants there, as well as a gas station. It's 100% occupied. The cap rate on that.
I believe it was about a 7.2, somewhere around there.
Okay.
Okay.
The acquisition in Regina was 100% occupied. Forgive me, I don't have the cap rates all offhand, but I do have a file here.
I believe that was close to seven and a half on that one. The Nisku properties, just bear with me. I believe that was in the seven and a half range.
Right. The Nisku was a 7% cap rate. The Beamsville was at roughly 7.2. Regina was 7.9.
Okay. Sorry about that, those aren't additional acquisitions, right? They were mentioned earlier in previous calls.
The ones we're looking at right now are about a six and a half to seven.
That's the one for CAD 27 million, right?
Yes.
Okay.
That'd be two assets that we're looking at.
Okay.
They'd be 100% occupied.
Yes.
Okay. Perfect. All right. I don't have any more questions. Thank you.
Thanks, Stephane.
Thanks.
Once again, if you have a question, please press star one. Our next question comes from Brad Sturges with Industrial Alliance Securities. Please go ahead.
Hi there. Just on the two assets you're looking at right now, can you give us a sense of what type of assets they are or where they're located?
Sure. One's in Calgary, it's industrial. One's in Montreal, and it's more retail office.
Both long-term leased, I guess?
Montreal area.
Both long-term leased?
Yeah. The Calgary would be long-term leases, multi-tenant. The Montreal one would be relatively long-term leases, yes.
Okay. In terms of Savage Road, can you just give an update on when you expect, I guess, phase 1 to be stabilized from the rent perspective? Any updates on looking at what phase 2 could How that could start? How that could look from this, I guess, currently anyways?
Yeah, for sure. Phase 1, to put it in perspective, we get full rent from it. The vendor is obligated to give us full rent and it's backed by security. There's two tenants that are in place operating. The other ones are in various stages of construction. I expect it kind of to be done and turn over all tenants by January 1st. There's a little bit of a staggered schedule, say October to January 1. That would be then fully operational, fully paying, no more of the vendor support on that phase 1 of the property. Phase 2 would take a while because it would be a bit of a process.
We're working on getting leases in place. Once we get leases in place, then we would look at the existing deal that we have and to see at what stage we could have that vacated out. My guess for that, to be honest, is probably about a year to 14 months kind of process for that.
Does the income support work just for phase 1 or would that include redeveloping on phase 2 as well?
No, that's phase 1. Phase 2, that lift that we will create is capital that we would spend to create that additional value.
We have come up with a plan that would minimize vacancy. If we get an early termination with the existing tenant, we have a plan whereby a majority of the work could be done with the tenant still in place.
Yeah. There would be no downtime on the switchover as we're guaranteed that rent as well.
Okay. That's it for me. I'll turn it back. Thank you.
Thanks, Brad.
Once again, if you have a question, please press star one. Our next question comes from Michael Markidis with Desjardins Capital Markets. Please go ahead.
Hey, guys. Kind of a laundry list of things here, please bear with me.
Sure.
Just on the Savage Road asset, when you're talking about the 12 to 14 months, I guess you're talking about lining up the leases and coming up with a deal to vacate, there'd be additional time to actually execute on phase two.
I would say we've worked out. We're in various stages of it right now, everything's got to come together. We would be able to do work on the existing buildings with the existing tenant there, once we came up with an agreement with that tenant, we would look to then move inside and continue on. Depending on how fast we could get this done, it could be three months, there'd be obviously a time for them to vacate, again from there to build out the tenant. I'm thinking 14 months, kind of in my timeframe window that I'm in my head that I'm looking at right now.
When you say 14 months, would that actually be?
Yeah.
the new tenant's in place or?
Three months. I'd say, yeah, 14, 15 months, I think we could probably have guys in place and turned over.
Okay. I think you mentioned there's an arrangement in place where you would not suffer any downtime, just the way that deal is structured in terms of income?
Yeah.
Okay.
If we had an early termination, we're still covered on that existing rent.
Okay. Can you remind me what the capital, roughly the incremental capital, would be required to execute on that? Would that include a potential fee to [Worsella] for an early termination?
It would not have a fee for an early termination. The capital, it's a little early right now, but I think to use a CAD 3 million-CAD 5 million number as just a general early number.
Okay.
I think somewhere around there.
Okay. The lift is that the rents for these sports-
Yeah
providers would be higher, presumably the cap rate would come down for that asset perhaps.
Exactly.
Okay. That's great. Thank you. On Rue Stanley, I just want to make sure. 55% is actually the in-place occupancy for the quarter, 74% is sort of the committed, all that comes online before year-end, the incremental of 24%?
No, there's two deals that we've done representing, just bear with me here, call it 6,200 sq ft that don't commence till June 1st.
June 1st, 2019?
Yeah.
Okay. It sounds like you were pretty optimistic about the remaining space. What does that pipeline look like, and what would your expectations be in terms of when that income might come on stream?
Well, I'm pretty optimistic that we're going to be able to get one floor done relatively soon. There is someone we're dealing with that is fairly down the line. That would take us to, I believe, about 80%, 81%, if we were able to get that, and then that would leave effectively one more full floor and then a couple other units. It has picked up. The construction holiday has ended, and we are seeing a lot more traffic and a lot more people coming through that seem to be very interested. The apartment building that was being built beside us, they've poured the slabs, everything's done, and they're completing the interior. It's opened up Rue Stanley a lot more than what it was in the past. It was a little bit of a construction nightmare.
Okay.
I think that tends to help the traffic flow.
Yeah, I was just about to ask, with the benefit of hindsight, I think the progress there has been a little slower than maybe what was thought kind of a year ago. I was just wondering, just given all the supposed strength we hear in the office market in downtown Montreal, what might be causing the difference versus the original expectations?
It really was. There were times when I would go to the building, and the entire street was closed off, and you got trucks parked in front. I think we felt the effect of that new property being built.
Yeah.
We've also made other changes, bringing on a national broker at the beginning of the year. Kelly also made a change in terms of bringing on a VP of Eastern Canada who's helping with Elisa. We finished the lobby. Originally, the lobby was being done last to preserve it so that there wasn't damage done to it through construction, but in hindsight, perhaps that should've been done first. There's a number of changes we're making that make the building show a lot better and give us better success.
Yeah, we've completed the east building demolition on the full floor vacant floors, so it shows pretty well.
Rob, I guess you guys are still getting the construction management fees on that, because I think the recurring fee stream you have on Sandalwood is kind of more in the CAD 125,000-CAD 150,000 range. When do you expect the elevated contribution on the construction management side will start diminishing through your P&L?
Really any time now. We'll get some construction management fees, I think, in Q3, we're pretty much done on the east building.
Okay.
There are some TIs that we'll earn fees on. By the end of the year.
Most of the heavy lifting is done.
Yeah, most of the heavy lifting is done.
Okay. I have some more, but I'm going to turn it back, just in case, just to give somebody else a chance, and if not, I'll chime back in.
No problem. Thanks.
There is no one currently in the queue. Please go ahead, Mr. Markidis.
Okay, great. I don't even have to press star one. This is more of a technical question, I just noticed in your AFFO, you were talking about the reserve you use and how your spending this year has exceeded that due to the spending that was anticipated on Sandalwood. There's also mention of a CAD 2 million reserve that was undrawn. I guess I'm wondering if you're spending elevated amounts, why the reserve is still undrawn.
The intention would be to draw the reserve in the third quarter. It's just a timing thing.
Okay. Does the reserve sit on your balance sheet, or is that
It does. It sits, I believe it's another current asset. Either other current or other non-current. I believe it's other current, and it's detailed in the note.
Okay. Is that a use it or lose it thing? Do you have a timeline associated with drawing all that down or?
No, we don't.
Is that just your own capital that was put aside, basically?
Yeah, it's a portion of the purchase price that.
Purchase price, yeah.
decided to put half over there.
Okay. On the debt maturities, the rate on your credit facility and when that comes due is all pretty clear. I was just curious more about the remaining mortgages for 2018 and then the stuff that's coming due in 2019. I know the average rate for the mortgage pool is 4.14, but what does the maturing rate look like on the 2018 and 2019 maturities?
Yeah. I'll need to get back to you with the specific number. I don't have that in front of me. We did have a couple of mortgages that became current at the end of Q2.
Okay
because they're maturing within Q2 of 2019. I'll have to get back to you on the rates.
Yeah. That'd be great if you could. Last one for me, finally, is Kelly, you kind of mentioned that Sandalwood was performing in line with your underwriting. I guess the occupancy in that portfolio has remained stable. I think when you bought it, you guys talked about opportunities to maybe drive occupancy higher. I was wondering if you could just kind of talk about if those opportunities are still there and what the potential upside might be in the next 12 months.
Yeah, I think they will. They've been performing pretty well. When we had some head lease space there in Montreal, I know that they've replaced the head leases with new tenants that were paying a higher rate than what we had on that they were paying. When I look at a whole, we have given some deals and actually replacing the head leases as well, we got additional terms as well. We had then a couple vacated because they couldn't expand in the building. Very solid spaces. I think over the next little bit, you'll see a start to slightly uptick from what I'm seeing as the trend. It's If some guys don't vacate, and things stabilize, and we can support them, I think we'll start to see some uptick on the occupancy there.
Okay. On the leasing you've seen in that portfolio so far, are you guys getting any lifts at all, or has it been flat? Just going to get a sense of what the run has been like.
Yeah, I'd say definitely in the old Montreal portfolio, you're seeing lift over what we had underwritten.
In the old historical buildings, it's a very good note, and I think we'll continue to see that trend.
I mean, on the retail side, I think generally we're seeing favorable lease renewal terms.
Yeah, it's been pretty good, and even we're working on a new deal that the space was vacant for quite some time, a couple of years, and we've managed to do a deal on that space. Overall, I think it's fairly positive.
Okay. If I remember correctly, correct me if I'm wrong, please, you have a ROFO on the 50% that Sandalwood still owns. Do you have any sense, have you had any conversations with them in terms of what their outlook would be for keeping on, or do you think they might have an intention to exit the rest of that portfolio in the near term?
Yeah, I don't think near term. We do have a really strong close relationship with them. As we continue on and go, I think things will evolve and, hopefully, at some point, I could see the rest rolling in. That honestly would be also entirely up to them.
Yeah
Their plan. We really do have a strong relationship with them, so it's definitely a possibility.
Maybe they could take units at CAD 210 or CAD 220 like you were doing with everybody else.
That would not be so bad.
No, it wouldn't. All right. Thanks. That was a good update. Thanks, guys. I'll turn it back.
All right.
Thanks.
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'd just like to thank everyone for calling in, and we'll see you next quarter.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.