Thank you for standing by. This is the conference operator. Welcome to The Nexus Industrial REIT Second Quarter 2022 Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there'll 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 Mr. Kelly Hanczyk, Chief Executive Officer. Please go ahead.
Okay. Well, thank you. I'd like to Welcome everyone to The 2022 Second Quarter Results Conference Call for Nexus Industrial REIT. Joining me today is Robert Chiasson, the 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 in 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. It was another solid quarter in the books.
As mentioned in the previous quarter, we look forward to the balance of 2022 and 2023, where we will begin to see significant rental rate growth in the portfolio, especially in our Southwestern Ontario portfolio. In the second quarter, we closed on an 80% interest in development land with RFA Capital in Hamilton, Ontario, where we plan to build a 250,000 sq ft industrial building with completion in late 2024. This is our second parcel of land in Hamilton with RFA for future development. Subsequent to the quarter, we have closed on a third development parcel. In Southwestern Ontario, our London portfolio is not only primed for significant rental rate growth, but also has the ability to add additional square footage to our existing facilities.
We have submitted for permit for the construction of 100,000 sq ft addition to our building at 1285 Hubrey Road, which we hope to break ground early next year. In addition, we currently are negotiating with existing tenants in the portfolio for another approximately 100,000-125,000 sq ft of expansion to their existing premises. The REIT has 22 acres of excess land in the Titan industrial site in Regina, Saskatchewan, that was acquired in February 2022, and we have completed a design-build package, and we're actively marketing to build approximately 300,000 sq ft this year. We also have the option to transact on 10 additional acres of additional land at the Acropolis warehouse facility located on the Edmonton Airport grounds.
As mentioned last quarter, we are under contract for three additional properties, a brand new strong covenant distribution center in Ottawa to be completed in January 2023. One in London, which is a unit deal, which is in the process of having a 150,000 sq ft new addition being built and expected to be completed mid-2023. This is an extremely valuable site as there is significant additional land to continue to expand the facility as the tenant continues to grow. Thirdly, an approximately 85,000 sq ft cross-dock facility to be built in Balzac, Alberta, with one of the REIT's existing tenants, which is expected to be completed in late 2023.
Subsequent to the quarter end, we closed on a 94,000 sq ft strong tenanted A Class industrial facility in Québec City, where we assumed debt at the rate of 3.63%. We have also waived conditions on a 75,000 sq ft industrial facility in Montreal, where we will see annual rental rate increases of approximately 3.5%. We are also in due diligence on a four-building, approximately 450,000 sq ft industrial portfolio in Southwestern Ontario for approximately CAD 37 million, which is at a very attractive cap rate and a price per square foot that we believe will provide considerable value to the REIT. As you can see, we have an active pipeline of deal flow, but we will slow this process after these transactions and focus on developing the aforementioned sites and higher returns within our existing portfolio.
In Richmond, B.C., we continue with the redevelopment of approximately 60,000 sq ft building for two tenants. It is now expected that completion and possession to occur in mid-September as the final setup of their spaces is nearing. This will be a world-class facility upon completion. We're also planning a 74,000 sq ft addition, which would provide significant lift to the REIT's NAV. We're also applying for bonus density, which, if approved, would allow for approximately 450,000 sq ft of additional usable square feet to be built in the future, providing additional value to the site. In Montreal, we continue to work with our developer on the sale of the excess land at Mirabel, D'Auteuil. The developer is still moving along with approvals from the city.
It is expected now that our first payment from them will be in February 2023. On the disposition front, we have sold a retail property located in Châteauguay, Québec, for CAD 8.3 million, and the purchaser has waived conditions on a mixed-use property in Longueuil, Québec. Post sale, post sales and post closing of our industrial acquisition, the REIT's holding will increase to approximately 87% of NOI derived from the industrial sector. Our three-building office portfolio will be relaunched in the fall when it is anticipated that interest rates stabilize and the acquisition market begins to open up.
In addition, our retail mall in Victoriaville, Québec, will be launched for sale in the fall now that we have completed our lease extension and expansion with our largest tenant. We've also continue to negotiate a deal with an unsolicited offer for a portfolio of non-core assets that would allow us to recycle this capital in the future. I will now hand it over to Rob Chiasson to give greater detail of the REIT's financials.
Thanks, Kelly. As Kelly mentioned, we put some more of our capital to work on July eleventh when we acquired a CAD 19 million property in Québec, and we have a firm deal on another CAD 18 million acquisition and another CAD 37 million deal under diligence. The acquisitions completed in Q1 contributed to the REIT's results for a few full quarters in Q2, and we saw our AFFO payout ratio come down from 96.7% in Q1 to 90.3% in Q2. Absent the impact of a CAD 460,000 unrealized foreign exchange loss in the quarter, the payout ratio would have been 87.4%. The unrealized FX loss negatively impacted per unit measures by CAD 0.006.
We have approximately CAD 150 million of recently acquired properties that are unlevered, and we'll begin to borrow against these properties in the third quarter to close the properties we have under contract. As anticipated, acquisitions completed mid Q1 generated an additional CAD 1.5 million of NOI in Q2 as compared to Q1, partially offset by higher associated interest expense. Our Q2 G&A was approximately CAD 500,000 lower than Q1, primarily due to the timing of RSU expense, expenses driven by vesting. Q3 will see the positive impact of rental rate growth recorded in our Q2 MD&A, as well as leasing deals concluded subsequent to quarter end. All of this contributed to an increase in normalized FFO per unit from CAD 0.19 for Q1 to CAD 0.20 for Q2, CAD 0.21 excluding the unrealized foreign exchange loss in the quarter.
AFFO per unit increased from CAD 0.165 for Q1 to CAD 0.177 per Q2, and it would've been CAD 0.183 excluding the unrealized foreign exchange loss in the quarter. For the remainder of 2022, we have approximately CAD 20 million of mortgages at a weighted average interest rate of 3.55% that will mature. In 2023, we'll have approximately CAD 50 million in mortgages with a weighted average interest rate of 4.26% that will mature. Bond yields have come back recently, almost 100 basis points off the recent highs. I'll now turn the call back to Kelly.
All right. Thanks, Rob. We will 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 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 Brad Sturges of Raymond James. Please go ahead.
Good morning.
Hey, good morning.
I appreciate the additional disclosures on the leasing front there. Just on the 191,000 sq ft you're kind of in advanced negotiations on in terms of renewals. You know, can you give us a sense of what you're expecting from a rent spread perspective?
I think, let me just look here. Trying to just see what's included in that. We have CAD 156 million. I'd say overall on there, you're probably around a 100% spread. I'm trying to figure what's in the CAD 191 million.
Is that CAD 191 million, that's mainly in London. Is that correct?
Yeah, majority of it. When I look at, you know, the balance. In April of next year, we have 35,000 sq ft where we'll probably see approximately CAD 8 a sq ft, CAD 7 or CAD 8 a sq ft lift on that. We have another one that comes at the end of January of next year, about 115,000 sq ft, where we'll probably see about CAD 4.50 a sq ft on that. Then we had, you know, 44,000 sq ft come up starting in July of this year, where we saw, I think it's CAD 2 and change on that 44,000. Then another one that comes up and starts in November, where we see about CAD 1.20 lift on that.
Okay. Just so from more from a model perspective, but how should we think about, you know, the non-industrial expiries coming up there? Would it be kind of more stable rents on renewal, or how should we think about the spread there?
Yeah. When I'm looking at the next 12 months on the retail portfolio, from a larger scale here, we're probably faring fairly well, to be honest. It'll be kind of, I'd say slight growth, not extreme, maybe 1% or 2%, on the retail portfolio. When I go down to look at the office side of things, I think that would be probably stable or, yeah, right around stable. No real growth there.
Okay. Just turning to the asset sale side, obviously starting to prepare, complete some transactions there. How is pricing still trending relative to your book value and where your expectations were maybe at the start of the process? Have valuations so far held into your expectations?
Yeah. With the two that we did sell, I would say we're just slightly below book value. We pulled the three building portfolio because when we were marketing it, interest rates were driving up significantly, everybody seemed to have pens down. We pulled it, and we're holding it to the fall because I think now that interest rates have stabilized, they'll generate greater amount of interest. That's what we kind of have planned for Victoria Building, the three office assets. It's hard to tell right now because the institutional side of buyers and that have gone pens down for a while just until interest rates stabilize. I think hopefully, you know, September, October, November, that will turn around once things are clearer in the market.
You're working through the process on the Western Canadian industrial-
Yeah.
potential bid there. I mean, where are you in that process? You know, can you give any thoughts in terms of a potential transaction at this point?
It's a little bit early, but what I can say, we've been back and forth a few times, and we've put our final kind of terms to paper, and they're in the process to see if that works for them in their financing. I'm cautiously optimistic that we'll have a deal, but you never know.
Okay. I'll turn it back. Thanks, Rob .
Okay, thanks.
Our next question comes from Kyle Stanley of Desjardins. Please go ahead.
Thanks. Morning, guys.
Morning.
Would you be able to just talk about the contractual escalators you're getting on your leases across the portfolio and, you know, just generally maybe where you see the average escalation currently?
Yeah. You know, we have our CPI increases outlined. When I look at what we've done and what we're doing in Southwestern Ontario right now, I'd say there's significant contractual escalation. We would do one, I believe, at 7.50%. They then go to, you know, 8.25%, 9.75%, something along those lines. They're in Southwestern Ontario. They're kind of averaging, I'd say 7%-10% on the renewals that we've recently done.
Okay. Okay, perfect. Maybe just switching over to your view of the acquisition market currently. I mean, it sounds like obviously you've got a portfolio under diligence. You know, are you seeing the same volume of off-market deals that you have in the past? Then, you know, how are you thinking about capital allocation here? You did mention.
Yeah.
Maybe slowing down a little bit once maybe you can finalize this portfolio in Southwestern Ontario and moving over to development. Maybe just a bit more information there on that portfolio in Southwestern Ontario.
Sure.
Is that from your existing vendor, or is this a new relationship?
Yeah. Let me see. We had the Québec City one under contract before, so we closed on it. It's a solid asset, great addition to the portfolio. The one that we have waived due diligence on, sale-leaseback, nice property again in Montréal area, with 3.5% negotiated rental rate increases. It's good on the rental rate increases. The Southwestern Ontario kind of fell in our lap, and the cap rate is just extremely attractive, and so nicely accretive for us. It's well on the price per square foot. It's very cheap, and from an in-place rental rate standpoint, it's well below market. We looked at that transaction and nicely accretive for us.
We're going to move forward with it. If due diligence all pans out, which we're in the process of doing right now. After that we've kind of gone pens down. That may change, you know, when we see how the Western Canada portfolio goes on the sale process, because then we will have some cash again. We're being more selective because we can see we have a number of development opportunities. We will need cash to complete those. Those are higher returning for us. We're kind of focused a little bit right now on that development side, ensuring through what we have.
You know, I'd say be very opportunistic on the acquisition side if we see a deal like the one in Southwestern Ontario, which I forgot to answer is a separate vendor than our London vendor. If we see that kind of deal come forward, we'll act on them. This one was just the pricing was exceptional and we jumped on it.
Okay, thanks for that. Just two kind of quick housekeeping, modeling questions. The vendor rent obligation added to FFO was up, you know, maybe about CAD 150,000 . I'm just wondering how we should interpret that, about your expectation of kind of the NOI, you know, once that becomes fully operational.
Yeah, I think we added August and July. You know, we amortize in the amounts that are current, and we accrue two months up till December first, I believe. I think that there's roughly about CAD 200,000 a month of vendor rent obligation that'll come back to NOI once that phase one is fully tenanted and the tenants are paying rent.
Oh, there's a-
There's two adjustments happening. There's the adjustment for future, like the adjustments going through other income for future NOI. Then there's the stuff that we would have accrued last quarter that we're adjusting in our normalized AFFO for.
Okay. No, that makes sense. Just the last one is, are you able to provide a little more detail on the FX loss and maybe why it's just not added back to your FFO?
Well, we follow the REALPAC white paper, and it doesn't seem to allow for a FFO add back. It allows for an add back where you have foreign investments that are being translated back, but doesn't allow for any other add backs. We've got about a $10 million US liability that sits on our balance sheet relating to an acquisition that we completed in 2021. When we fair value that to the FX rate at the end of the quarter, it generated the $500,000 FX loss.
Okay, understood. Thanks for that. I'll turn it back.
All right. Thanks, Gavin.
Our next question comes from Gaurav Mathur of iA Capital Markets. Please go ahead.
Thank you, and good morning, everyone. A couple of quick questions at my end. You know, we've seen this period of price discovery happen across most industrial markets in Canada, even though there has still been a record high demand for assets. Just in your opinion, do you think we're closer to finding a tentative floor price in some of these markets, or are there still some ways to go, given that underwriting remains extremely strong and rents continue to grow?
Yeah. It's an interesting time right now, right? Because of interest rates and where they're gonna settle. It looked like, I don't know, a month ago, three weeks ago, the five-year was so expensive that we thought there'd be some cap rate decompression. Now it's going the other way. It's an interesting time just to see where demand is going from an acquisition side. A lot of guys have gone pens down, so the number of buyers there right now are fewer. I expect that to ramp up in the fall. Then from a rental rate standpoint, I think there's still significant room to grow. You're seeing it in the GTA, you're seeing it in Southwestern Ontario. You know, I think in London, they quoted new rental rates of 11 and change.
I think that's slightly optimistic just because it was based on relatively few transactions. The rental rates are pushing and they're continuing to push. I think we still have, I think we have still quite a bit of steam in the rental rate growth and West End in Ontario and Québec. I think we will see pretty strong activity in the fall. That's what I'm predicting.
Okay. Fantastic. Just staying on the rental rate theme here.
Mm-hmm.
How are you thinking about leasing velocity going into 2023 with the upcoming lease renewals? I mean, is that something that's proving to still be a bit of a pens down situation amongst possible tenants or are tenants pushing forward and looking for space in the?
No.
Non-core markets?
No, for sure. Let's. You know, we're in discussions on expanding existing tenants in our portfolio, and we're lucky to have quite a bit of land that we can build on. You know, some of our largest tenants that really aren't going anywhere are looking to expand their space. I'm talking about, you know, a tenant that's in at CAD 4 and change, and that rental rate is gonna be significant. If we can build, you know, it's gonna be a nice return to us there. We're seeing rental rate growth across the board. I think overall, and even in Edmonton and Calgary, you're seeing movement, you're seeing strong demand. I think overall, the fundamentals in the industrial sector are still strong.
We'll see them strong in 2023.
I think we're seeing early renewal discussions more often than tenants putting off renewals.
Okay, great. Just lastly on this, how are you thinking about leasing costs going forward? Because I understand that tenant demand is there, but is there anything on the leasing costs which may surprise on the upside?
It depends. I mean, when we're talking about some of the ones that we have here, other than a possible broker commission, there's no significant leasing costs here. It's in the Southwestern one, which is Southwestern Ontario, which is the majority of our expiries. The demand is such that it's a landlord market, not a tenant market, so that bodes well.
Okay, great. Well, thank you for the color, everyone, and I'll turn it back to the operator.
Thanks.
Our next question comes from Jimmy Shan of RBC Capital Markets. Please go ahead.
Thanks. Good morning.
Morning.
With your expiring lease expiry schedule, there is in 2024 in Alberta about 245,000 sq ft coming due, and it's at CAD 19 rent. I just wondered if you could talk a little bit about that. I'm not exactly sure what that lease is. It just kind of stands out on the schedule.
I believe that's MasTec, one of our tenants in Blackfalds, Alberta. I think currently they're subletting, and there's a fair amount of land attached to that, which is why the rental rate is higher.
Yeah. To be honest, at this point right now, those markets are improving. I think we'd be a little bit high on a rental rate renewal, but it's a little bit too soon to tell. Okay. The majority of that 240,000 sq ft are those guys?
I think the other one in there is Canada Cartage towards the end of 2024. Yeah, you know, I honestly don't have 2024 in front of me, but I could certainly get back to you with more details off the call.
Okay, thanks. I guess similarly in Ontario, you know, in the next couple of years, you know, rents are kind of at mid-fives, high fives. You were saying earlier that, you know, Southwestern Ontario rents are around CAD 10-CAD 11. Is that about right?
They were 9%. Yeah, they were 9% and change. Last quarter in the last CBRE report had them at 11%. I think 11% was a little high. I think when I'm looking at things, we're looking at somewhere between 9% and 10% going forward.
Okay. I think I might have misheard, but when you're doing those lease deal, what are the contractual step ups? Is it the3%, 3.5% that you've just done recently?
No, it's more like 6%-9% on the ones that we've done recently.
I'm sorry, 6%-9% annually?
Yeah. For example, I guess it depends on the lease, but when I'm looking at two of the larger ones here, one has almost 10% annual increases, and the other one has probably more like 7%.
This is off a CAD 9-CAD 10 rent?
One of them is off a CAD 750 rent.
Okay.
It's a long-term tenant. Or a CAD 6.50 rent, and we kept it down to then increase him significantly throughout his term.
Okay. I see.
Yeah. Okay. It depends on where we started them.
Right. Okay.
Yeah.
Okay. Just on that Southwestern Ontario, that's in diligence, any, can you share maybe a range, a cap rate range? You talked about how it sounds like it's a really good deal.
Yeah.
You know, a range of price per foot.
Seven.
Seven. Okay.
Yeah.
Is it, I mean, obviously, that's not market, I would assume.
Mm-hmm.
Is there to provide some context as to the circumstance that has arose for you to get such a good deal?
Not really. I think the vendor chose to deal with us, knowing that we typically close and we're easy to deal with. It was. I wouldn't say necessarily, you know, so sophisticated real estate vendor, so that's not their business. I think it's just a strong deal, and we were happy to see it.
Okay. Thank you.
Just getting back to your earlier question.
Yeah.
There's eight expiries in 2024 that are making up that total in Alberta. Oh, sorry, 97 that are making up that total in Alberta. They're roughly, you know, 20,000-50,000 sq ft. You know, I'd expect actually most of them will renew. But it's still early.
Definitely renew. They'll be renewing. Yeah.
I would think that the rents on renewal there would be relatively flat to slightly positive.
Okay. Even the one that's subletting the space, like, you think that you will be able to renew at the same high rate?
Yeah. The sublet, I think, is actually 2025. Yeah, like in 2024 Alberta, after having looked at the details, it's the number of smaller square footages, some light industrial, some warehousing. On average, I think we'll have-
Yeah. I'd say on it probably be flat. If anything, it's not too far below, because when I look at it's a mixed bag here.
Okay. Great. Thanks.
Thank you.
Oh. Operator.
This concludes.
You can take the last call in the queue.
Okay. Our final question comes from David Crystal of Echelon Capital Partners. Please go ahead.
Hey, thanks, guys. Just really quickly building on Jimmy's question there. Do you have a figure for maybe a portfolio-wide mark-to-market gap in the industrial portfolio?
We don't. We provided the leasing details by province, the expiries by province and to allow, you know, to allow for analysis. We're not publishing market rents. Yeah. We have significant lift in Ontario. Québec, we're probably relatively flat in Canada, I would say. Yeah, we don't have it in total.
Yeah. It'd be fair to say that, you know, I think you provided a lot of detail on Ontario there and kind of, you know, rents probably push into double digits. If I look at kind of Alberta, Saskatchewan, Québec, you know, broadly, there's not a huge amount of upside from current levels. Would that be fair to say?
I think Québec is fairly strong in terms of.
Yeah
The upside.
In the near term.
Yeah.
I guess you've just got, you know, 500,000 sq ft already that's at 14 level. It's a lot of the near term upside.
Yep. Yeah. There's not a lot of square footage coming up in Québec in-
Yeah
12 months. Yep. Agreed.
Okay. That's helpful. You know, maybe building on the other line of questioning there. You mentioned in Saskatchewan, in the MD&A, a roll down on one lease. Is there any other near-term risks of roll downs that you see?
I don't think near term. I think towards the end of next year we might see one or two . The one in Saskatchewan and a couple others where we might see a little bit. Those are properties that have quite a lot of land attached to them. Those markets, I mean, those markets are shifting a little bit. There's a lot more activity with oil prices increasing. We might see some decrease there. That's where those leases were in that CAD 19-CAD 20 range. You know, one of them is a little bit higher just due to the amount of land attached and a relatively smaller building.
Yeah, we could see towards the end of 2023 on some of those properties, some decreases, but should be offset by leasing at other properties in the market.
Okay. Fair. Maybe just quickly on development, you mentioned obviously, you know, the economics are superior and you're pursuing development where you can. Can you maybe talk about the delta on development yields vs transaction cap rates?
I mean, what we're expecting on the development on our existing portfolio, so especially in Southwestern Ontario, it's going to be somewhere between 8%-10%, which is very strong. I think in Saskatchewan, if we're able to secure a tenant for the 300,000 sq ft, it would be significantly well, probably about an 8%. And then in Ontario on those development projects we're probably 5.5%-6%.
Yeah. I'd say that the yield on the projects where we don't, where we didn't own the land and we're not adding square footage is gonna be lower, definitely so, yeah, in that maybe 5%-5.5% range.
Yeah. You know, the Southwestern Ontario portfolio is really good because you know, the one where we're adding 100,000 sq ft of spec, we could probably add on another 150,000 sq ft onto that site. One of the other ones that we're talking expanding the tenant, you know, by 70,000 to 125,000 sq ft, we potentially could add, and we're talking with the city about potentially adding another 200,000 sq ft on top of that. Then the one we close on next year in March or April, that is a very growing logistics company, strong growing Southwestern logistics company. I predict that by the time we take possession of that building, they're gonna come to us to ask to build another 150,000 sq ft.
The availability for us to develop on our own land in London is huge at those type of returns.
Okay. Perfect. That's helpful. I'll turn it back. Thanks.
Thank you.
This concludes the question and answer session. I would like to turn the conference back over to Mr. Hanczyk for any closing remarks.
All right, everybody, thanks so much. We look forward to next quarter's conference call and with where we start to see some of the significant rental rate increases. We will talk next quarter.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.