Earnings Call: Q1 2018

May 31, 2018

Earnings release

Welcome to the Nexus REIT Q1 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 I would now like to turn the conference over to Kelly Hancic, Chief Executive Officer. Please go ahead, sir. Thank you. Welcome, everyone. 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 of our 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. 2018 is turning out to be another really strong growth year for the REIT. Today, we have closed and waived conditions on approximately $76,000,000 of acquisition, which represents $27,900,000 in new equity being issued to vendors of these properties at a premium to our current trading price. 1 of our recently announced transactions located at Savage Road in Richmond, BC, which closed subsequent to the quarter end is expected to provide the REIT with a significant value creation opportunity in the near future. Phase 2 of expanding on the multi kids sports mall concept is currently being planned out. On the operations front, we have hired a new Vice President of Eastern Canada, Joe Armenio. Joe has significant experience in the Quebec market and brings many years of REIT experience along with him. From a leasing perspective, the overall portfolio excluding 2,045 Reef Family ended the quarter at approximately 94.5% occupancy. 2,045 Reef Family ended the quarter at 53% occupancy. Committed space in this property currently sits at approximately 68 percent, with an additional with 4,244 Square Feet commencing the pay rent in June 1, 7613 square feet commencing to pay rent on November 1 and 6,130 square feet commencing December 1. We're getting close on the 3 additional deals, representing approximately 11,000 square feet. This would take us up to close to about 78% if you're lucky on getting these. The Stenwood portfolio remains consistent with our underwriting at approximately 90.4% occupancy. The former Edgefront portfolio continues to perform well and continues with 100% occupancy since its inception. In the former Nobel portfolio, occupancy sits at 94.5% at the quarter end. Vacancy is mainly concentrated in 5 assets. 10,330 Cote D'Ivoire remains a challenge for us and the new mandate with a national broker is being prepared for the property. On the acquisition front, we are in advanced negotiations on 2 additional properties representing approximately $25,000,000 of new real estate and approximately $12,500,000 of units in the REIT being issued to the vendors at a premium to our current trading price. We're successful in completion of these acquisitions and bring our total new equity issued to vendors for the year to approximately $40,000,000 I'll now hand it over to Rob Chason to review the financials. Thanks, Kelly. We came into Q1 2018, not strong Q4 2017 results. In the 4th quarter, we had a total of approximately $1,000 of management fees included in income. Included in that figure were construction management fees that were approximately $160,000 higher than those earned in Q1 2018. Percentage rents in the Q1 were approximately $100,000 lower than the Q4 of 2017. Most tenant sales thresholds are met for percentage rents towards the end of the calendar year. While the majority of the REIT's approximately 500 leases are triple net, we do have some government and other leases that are gross and utilities and snow removal costs for the quarter were up seasonally by approximately $500,000 as compared to Q4. General and admin expense for the Q1 was down $236,000 as compared to Q4. And as mentioned in our last call, full year's bonuses were accrued and expense in Q4 2017 as compared to 1 quarter's expense in Q1 2018. In the quarter, the REIT adopted the real tax definitions of FFO and AFFO, which were published in February of 20 18, which provided guidance with respect to adjustment to stock compensation. As a result, the REIT's FFO and AFFO were adjusted downward by approximately $50,000 in the quarter. Q1 2018 AFFO per unit was $0.046 per unit, down from $0.048 per unit for Q4 2017, and the AFFO payout ratio for the quarter was up slightly to 86.2% compared to 83.6% for Q4. Fed's total assets was down to 53.7% compared to 55.2% for Q4 2017. I'll now pass it back to Kelly. Thanks, Rob. I'll now open up the line to answer any questions that you may have. We will now begin the question and answer session. The first question comes from Brad Sturges of Industrial Alliance Securities. Please go ahead. Hi, guys. Hey, Brad. Just starting off with your commentary on, I guess, a few of the more challenging assets in the Nobel portfolio of higher Dick Snowbroker. Would you be potentially considering selling those assets? Or is it mainly a focus right now on trying to improve the leasing, the occupancy levels of those assets? Yes. I think right now, we're looking at leasing them up as quick as possible. A couple of them, in particular, the institution, totally out there are a little bit of a challenge. 2 more, Reverchon, it has 10,000 square feet that came from restructuring of leases and moving people around to accommodate an expansion, but it's a very in demand industrial building. So I don't imagine that unit's going to stay along there. So the Miskiuche and Costa Vieques, I think our focus will be on filling them up and then we'll have a good hard look at them as whether they stay in the portfolio going forward or what we do with them. But I would think down the line, once we've stabilized them a little more, we would possibly look to better. Highest. Okay. And when you look at the other the rest of the portfolio, you've had a couple of small asset sales at West. Just curious to get your thoughts besides those assets you're looking at lease up first. Are there other potential asset sales at this time? Or you is it more just focused on the acquisition growth part of the equation, I guess? I think a little bit about we talked at a board level yesterday coming up with an asset recycling plan. So I think by the next quarter, we'll kind of target maybe 3 or 4 additional assets that we would look at potentially divesting of later in the year. And do you have a ballpark at this stage of what the proceeds would be from those 3 or 4 assets? So I don't I think it's until we pinpoint them, but I don't think we'll be talking to it wouldn't be in the It's a modest amount is what you're saying. Yes, it would be smaller. Okay. Smaller. And with the sports complex in Richmond, BC, obviously working on plans for Phase 2, what's at this stage, what's the potential timeline where we could start to see work at the property? It's a little too early to tell. I just got a plan for Phase 2 the other day. So I have to review it in a meeting with the group next week. But it looks exciting, the ability to add on to the properties, almost conjoin them, as you would say, and then that would kind of be the Phase 2 additional square footage and then the Phase 3 would be to deal with a larger property. We have an existing tenant there. But I think down the line, whether it's a year, 1.5 years, Phase 3 would look at possibly taking back that space and continue on with the program. So I think but that also has to be worked out. But definitely, the Phase II is something we're looking at and sooner than comfortable with the plan and everything that we've created there, we'll take it to the Board for approval. But it's exciting because I think the rendering and the plans that I've seen are starting to look very exciting and I think the value creation opportunity there is going to be very large. Okay, great. Thank you. The next question comes from Steven Boyer of Echelon Wealth Partners. Please go ahead. Hi, good afternoon. Hi. Hey, Smith. Hi. I was just wondering, would it be possible for you to give us the cap rate on the Nisku and Regina acquisitions? Yes. I believe the Regina was about a 7.5%, and I think Nisku was at 7.2%. Okay, good. And also more generally speaking, what do you see in terms of the cap rate environment right now? I mean, it's all over the place. It depends on where you're looking, what you're looking at. I mean, if you're looking at Class A, office downtown or Montreal, it's getting costly. The things we have been looking at and been completing and I would call them off market, so it's a little different. But I'd say in Montreal, anywhere in the office, this year in the 6 caps, forget the Vancouver area, that's it's insane cap rates. But Alberta, depending on the property, you've got anywhere in the 6.5 Cap all the way up to 9 Cap. So it depends on the location and where you're looking. Okay, great. And in terms of your current acquisition pipeline, do you see further opportunities within the Ascendor portfolio? Notably in regards to the 24 co owned properties? So I'll answer that with a very big topic that's possible. I won't be timing it, but we have discussed it briefly, the concept, the idea, but we're quite a ways off on still having to try to figure out what something would look like. So I don't know if that's in a year, 2 years, 3 years, but we have a very strong relationship with the owner. And for me, they've been a great operator for us, and it's definitely something that we're interested in. Okay, great. Perfect. And finally, just regarding the Richmond property, Kelly, I know you mentioned that it's still very soon to give some color on the timeline. But can you give us an expected stabilized cap rate on this property at this point? Or is it still too soon again? It's I mean, we purchased that at 7.6 I'm sorry, 6.5 percent cap rate. So that's our going in cap rate based on the existing tenancies. And then in terms of the returns of the Phase II, we have done some modeling. But until we've finalized Phase 2, we will be adding GLA and essentially in Phase 3, as Kelly mentioned, converting tenant to the sports ball concept, which would mean increased rents per square foot. So there's still a few moving targets. So to quantify the total returns of Phase II and Phase III is probably a bit premature, but we did buy the 6.5 cap based on in place. The next question comes from Himanshu Gupta from GMP Securities. Please go ahead. Good afternoon, guys. Just a follow-up on the Richmond property and I know you mentioned 6.5% going in cat fade and too early to tell the returns. How much CapEx is expected to be spent in the redevelopment over the time? I would say about 15,000,000 to 20,000,000. Dollars $15,000,000 to $19,000,000 And this includes in terms of adding the GLA on the existing property? Yes. This would, I call it, 3 phases, call. There's the original Phase 1 that was the original building. Phase 2, it would be a structure to combine the 2 together. And Phase 3 would be the development of the existing industrial building with Fort Sill in it. So that would be somewhere in the 15,000,000 to 20,000,000 dollars for the entire project. Got it. So Phase 2, Phase 3. Yes. And in terms of time lines, probably 12 to 18 months, is that reasonable or? Yes. I mean, from a pure operation standpoint, we have to look at it and have got to we'd have to approve the plan, then we have to go for permits and that type of thing. So I would imagine once we're in play that we'd be looking at maybe a late fall, winter or Q1 of next year, I would think kind of where we would be ready to go. Okay, got it. And just switching gears on the quarter one performance. So my question is regarding the sequential drop in NOI. I understand the asset and construction management fee of around $200,000 was in quarter 1 NOI numbers. It was not in Q4. So the drop is actually $450,000 somewhat. So can you break it down? How much was seasonal factors? How much was that lower percentage rents? And how should we model it going forward? Yes. So I'd call it approximately $100,000 of percentage rents. And there was $170,000 adjustments or true up on straight line rents. And that's that doesn't fall to ASR full because it gets added back. But there's a straight line rent adjustment that accounted for 170 $1,000 of percentage rents. There was some seasonality. There were some other smaller items that added up. For example, there were some bad debt expense in Q4 that was recovery in Q1. Those are the big items within there. Okay. That's helpful. And I guess one just final question on 2,045 Stanley. And I know you're working towards the lease up. Are we still expecting $900,000 of annualized NOI once the asset is fully stabilized? Yes. Okay. Awesome. I'll turn it back. Thank you. Thank you. There are no more questions at this time. This concludes the question and answer session. I would like to turn the conference back over to Kelly Hancic for any closing remarks. Well, I want to thank everyone for calling in, and I look forward to our next results call next quarter.