[Mr. Shining Pai], this is the conference operator. Welcome to Nexus Industrial REIT Second Quarter 2025 Results 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, then zero. I would now like to turn the conference over to Kelly Hanczyk, Chief Executive Officer. Please go ahead.
Like to welcome everyone to the 2025 Second Quarter Results Conference Call for Nexus Industrial REIT. Joining me today is Mike Rawle, 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'll be discussing non-GAAP measures. Please refer to our MD&A and the REIT's other securities filings, which can be found on our website and at cedar.com for cautions regarding forward-looking information and for information about non-GAAP measures. All right, the second quarter was our first of the pure play Canadian-focused industrial REIT, and I'm very pleased with the results.
Despite selling our office and retail portfolios and some non-core industrial buildings over the past 12 months, which is 33 properties in total, our net operating income increased this quarter by 1.7% to $32.2 million compared to a year ago. This is a fantastic achievement. This growth can be largely attributed to two things: one, strong leasing and robust growth in the industrial same-property in Hawaii; two, the completion and tenanting of profitable development projects; and three, accretive capital recycling through the disposition of legacy non-core buildings and the acquisition of high-quality tenanted industrial properties. I will discuss each of these in more detail. The second quarter was another strong leasing quarter for Nexus.
At the beginning of April, we facilitated an early lease termination at our 42nd Street East property in Calgary and re-leased the property to a large multinational energy company effective August 1st, under a very long-term lease with significant rent lift. The termination fee left us slightly ahead during the May to July fixturing period. Combined with a higher rent from the new tenant, we will earn an additional NOI of $175,000 in 2025 and $250,000 in 2026. In total, we completed nearly 400,000 sq f t of new leases and renewals. Non-lease renewals realized a rent lift of 38%. These actions, combined with embedded rent escalation in our leases, resulted in industrial same-property NOI growth of 2.8% in the quarter and 4.3% for the first half of the year. We are on track to hit our target of mid-single-digit industrial same-property NOI growth again in 2025.
Of the approximately 1.7 million sq ft of GLA that was set to expire this year, we have leased over 90%, and we are in discussion with tenants in the remaining 10%. You will recall that in the first quarter, we had two tenants enter creditor protection. I'm pleased to share that last week, we signed a 15-year lease with one of Canada's largest construction services firms for a 223,000 sq f t building at Clark Road in London, Ontario. This building was vacated in April after Peavey Mart entered creditor protection. The new tenant has taken occupancy effective August 1. During their six-month fixturing period, the new tenant will invest approximately $8 million- $10 million to update the building and pay rent of $3 per sq f t, roughly equivalent to Peavey Mart's exit rate.
On January 26, the fixturing period ends, and the rent ramps up to $7 per foot net, with annual rent steps of $1 a foot until 2031, and then it goes 2% thereafter. Our ability to quickly backfill this property is a testament to the strength of our operating team, our connections in the Southwestern Ontario market, and the quality of our portfolio. In April, Peavey Mart also vacated a second building at 40th Avenue in Red Deer, Alberta. We are in discussions with a future prospective tenant; however, it is not yet leased. The building is 190,000 sq f t, which is large for that area, so we need a specific user. We're marketing it for both lease and for sale in the event we find an owner-operator who is interested in it.
At our cross-dock facility at 102 Avenue in Southeast Calgary, the receiver has continued to pay rent and plans to vacate at the end of September. We have a tenant lined up to take possession shortly after the receiver vacates with a two-month fixturing period. We expect to finalize the lease in the coming weeks once we receive official notice from the receiver. In the second quarter, we advanced construction on two development properties. In August, we plan to complete construction of the new 115,000 sq f t small bay industrial building at 102 Avenue in Southeast Calgary, and leasing is ahead of schedule. We already have eight tenants for eight of the nine units, three of which are firm and five are conditional, and we expect the cash flows to be fully stabilized by the end of the year, way ahead of our schedule.
The total project cost is $15 million and will deliver an 11% unlevered return on investment. By the end of August, we'll have substantially completed construction at our 325,000 sq f t project at Dennis Road in St. Thomas, Ontario. We've been earning 7.8% on our development costs at this project as they are spent. However, effective September, having now met the criteria for substantial completion, the project will transition to earning a full 9% yield on development costs of $55 million. We are still looking for a tenant for our 115,000 sq p t Glover Road new build in Hamilton, which we completed last summer. We own 80% of the property in a sector and a 5.9% building yield on our $20 million share of the development costs. It has been a challenging market in Hamilton.
It has very much slowed over the summer months, but we do have a brand new state of the art 40-foot clear lease certified product, and I'm optimistic that it will be leased in the fall when the market starts to pick up. The summer has been pretty slow in that market. In the second quarter, we announced two additional development projects, which will get underway in Q3, Q4. First, we acquired the land surrounding our industrial building at 555 Adams Road in Kelowna, BC, for $19 million, composed of $12 million in cash, and our vacant industrial property in Fort St. John. We are in the planning process to build small bay industrial units on this property. Due to demand for more space at our Richmond property, we will add an additional 52,000 sq f t for an estimated cost of about $29 million.
Costs will be paid in REIT units issued at $10.50 per unit. The REIT will earn 6% in costs during the construction period and will earn a contractual 6% yield upon completion. Construction is scheduled to begin in the fourth quarter or early first quarter of next year. Nexus has a track record of opportunistic capital recycling through the disposition of legacy buildings and acquiring newer high-quality tenant industrial buildings. In the second quarter, recent acquisitions contributed approximately $600,000 to NOI compared to the same quarter last year. During the quarter, we also sold two empty non-core industrial buildings for total proceeds of $11.2 million. The proceeds were recycled to acquire vacant land for future development and for debt reductions. We are also under contract to sell our excess land at our remaining retail property at [Old Elms Ute].
We expect the land sale to close in August, scheduled for about mid-August right now, which will give us cash proceeds of $8.5 million. After, we will look to then sell our 50% ownership in the mall. The mall is an attractive asset and it cash flows well historically, so we expect it to have quite a bit of interest. In summary, we continue to advance our strategy in 2025 as a Canada-focused pure play industrial REIT. We will continue to realize organic growth through embedded rent steps and positive mark-to-market on renewal, and we've made excellent headway on our developments, two of which will be completed in August. I'll now turn the call over to Mike to give some more color on our financials.
Thank you, Kelly, and good morning, everyone.
Starting with headline earnings in the quarter, we posted a net loss of $7.6 million, a $51.2 million decrease compared to a net income of $43.5 million last year. The decrease was primarily due to a lower fair value adjustment on Class C LP units by $35.8 million and a lower fair value adjustment on investment properties by $24.7 million, partially offset by a higher fair value adjustment on derivative financial instruments of $7.7 million and a lower finance expense by $1.2 million. As Kelly mentioned, our Q2 net operating income increased by 1.7%, or $0.5 million, year- over- year to $32.2 million. Of this amount, opportunistic lease terminations and tenant reimbursement of capital improvements accounted for $1.5 million. New acquisitions accounted for $600,000 , an increase in same-property NOI added an additional $400,000 , and development projects added $200,000 .
This growth is partially offset by $2.2 million relating to asset dispositions made since the second quarter of 2024. Normalized FFO for the period was $18.8 per unit and increased 6% compared to $17.8 from a year ago, and normalized AFFO for the period was $15.9 per unit and increased 7% compared to $14.8 from a year ago, primarily driven by lower interest expense due to higher capitalized interest and by the higher net operating income that I just mentioned. Total general and administrative expenses for the quarter were $2.2 million, which was $300,000 higher than a year ago, predominantly due to higher compensation expense. Net interest expense in the quarter was $12.7 million, a $1 million decrease from the same period last year.
The decrease was primarily due to higher capitalization of interest expense on development properties of $700,000 and due to lower interest on mortgages by $300,000 resulting from property dispositions. At June 30, our NAV per unit was $13.17, a $0.04 per unit decrease from last year. Our weighted average cap rate increased by six basis points to 5.87% in the quarter compared to 5.81% at March 31. The carrying value of our investment properties increased by $11.5 million in the quarter, primarily due to $18.8 million of acquisitions, namely the land in Kelowna, BC, development spend of $8.5 million, and capital expenditures and tenant improvements of $4.2 million. This was partially offset by $10.8 million of negative fair value adjustments and a $9.2 million reduction from investment property reclassified to assets held for sale.
Subsequent to quarter end in August, we upsized our existing syndicated committed credit facility by $160 million to a total of $785 million and extended its expiry by 1.5 years. It now consists of a $200 million term loan expiring in August 2027 and a $585 million revolving facility expiring in August 2028. I will now turn the call back to Kelly.
Fantastic, Mike. We will open up the line for questions.
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 questions, please press star then two. We will pause for a moment as callers join the queue. The first question comes from the line of Brad Sturges with Raymond James. Please go ahead.
Hey, good morning, guys.
Morning.
I guess just starting on the leasing front and just thinking about the back half of the year, obviously you've got success releasing from the Peavey Mart space, but you're getting some space back in Alberta. Where do you think occupancy could end up by the end of the year, and what would be baked into your same core guidance at this stage?
Our change core guidance of mid-single digits is unchanged. We're still pretty comfortable with that number. That would include the lease out of the space, the Peavey vacated space in London. We have now just leased up effective August, and that's effectively it. That and just general expectations around normal renewals. At this point, we've now renewed upcoming renewals in 2025. We renewed over 90% of the expiry, so pretty comfortable with where we're sitting for the rest of the year. Those are at a, on a year-to-date basis, overall lift of 26% rent lift. No, our FTNOI growth for the remainder of the year would not assume lease up in the other Peavey vacated space in Red Deer.
Okay. That makes sense. Just looking at, given your direct motors of the 2025, just thinking about 2026 lease expires, a lot of it's weighted to Ontario again. Anything that stands out in terms of potential for non-renewal, or how are you thinking about at least the early stage of your 2026 lease expires?
I think actually we're off to a pretty good start on 2026. We had a couple that we were thinking maybe there's another valid building in Manitoba, just outside Winnipeg, but it sounds to me like they're going to renew there. I think things are actually looking pretty good for next year overall since we think we're from last, seeing a number of about 40% of next year's renewals are already kind of done. I think it looks pretty good for next year.
Yeah. I think the one that we've spoken to, which is we're optimistic about, is obviously a priority for us, is the new building in Hamilton, 190 Glover. That's a focus for us. Clearly, our remaining Peavey Mart location in Red Deer.
Sounds good.
Looking at the 2026, just given rents are still pretty below market in Ontario, I guess you're still expecting some pretty decent rent lifts for next year overall on a blended basis.
Yeah.
Okay, I'll turn it back. Thank you.
Thank you. Next question comes from the line of Kyle Stanley. This is [David Adling]. Please go ahead.
Thanks. Morning, guys.
Morning, Kyle.
Maybe just sticking with the commentary on 2026, I think you've kind of walked through how things shake out. You've given your mid-single digit same-property growth outlook for 2025. Is there anything to suggest that that changes materially in 2026?
Kyle, I mean, it's really for us to really give guidance for 2026. I think we're very happy with the progress we've made for 2026, but I don't want to give specific guidance around that at this point. I mean, you can see the rent lifts that we expect are pretty solid, and we're very comfortable with the quality of our portfolio and the development that we have coming on board now and that that will contribute to next year.
Okay. No, fair enough. This quarter, and you mentioned it in your prepared remarks on the lease termination income, was there anything more one-time? I mean, lease termination income tends to be one-time, but anything more specific about the income that was realized this quarter that you can elaborate on?
I think it's important to call out that that lease termination income really is not, I wouldn't consider that one-time. That was really to indemnify us for downtime. We facilitated an early lease termination for the tenant there in order to get a new tenant in because the existing tenant wanted to leave.
Yeah. Our existing tenant had it up for stub lease, and they found this tenant, a big U.S. multinational, and they needed a fixturing period. We had term with them. What we said is, "That's fine, but you're going to effectively continue to pay the rent until they finish fixturing." That was like four months, and they just paid in a lump sum to us just to get out of all their obligations. That's how that all came together.
Okay. Thank you for that. That makes sense. Just the last one, the $77 million of assets held for sale in retail, assuming that is the Old Elms Ute, is that a good estimation for what you think your 50% interest is worth today in the private market?
All right. We're carrying it at, I think it's around $26 million of that. It's about $8.5 million. $8 million is the land, and then $17.5 million is sharing value for the mall.
Okay. Thank you for that. I will turn it back.
Thank you. Next question comes from the line of Matt Kornack. National Bank Financial. Please go ahead.
Hey, guys. Just trying to understand the lease termination and Peavey impact a little bit more in the quarter. If we think of this that you got four months instead of three months for the lease that was terminated, but it was otherwise vacant during the quarter. Also, on Peavey , it was vacant for, I think, two of the three months in the quarter, but it will get released. If you could give us a sense, Mike, in terms of how the accounting for the lease step-ups will look as well.
I think fair to say that the termination fee that we got really just backfilled us, kept us whole, you know, maybe slightly more, but not materially so for April, May, June, July. That was effectively the fixturing period when the new tenant was coming in. The new tenant has now come in at $15.41 a square foot, and Peavey was at $12.50. You know we'll see that uplift starting in August when the new tenant took possession.
Okay. Sorry, I paused. Maybe I heard a lot.
No, sorry.
That is.
You missed up, yeah, just Peavey and Valor and Baker Hughes.
Oh, sorry.
Sorry, he didn't even say Peavey . Baker Hughes is a new tenant. Valor was the old. We got somewhere around a $3 lift on that.
$16.41 from $12.50. Okay. That one is the one that starts in three, and you get three until the end of the year, then it's seven for 2026 and increases by a dollar a year thereafter.
No. The Peavey one is the three bucks. The work the.
Let me just say, the one, Baker Hughes in Calgary, that's the new deal that took over from Valor. That is about almost a $3 a foot lift. The escalations going forward, Peavey is the one that's in London. That had, we call it a fixturing period because they're going to spend about $8 million- $10 million on that site. We gave them a break for this fixturing period. That's why it's $3 for this to the end of the year on that site, which begins in August. We had it vacant, I think, from April, I believe. Is it the end of April? May, June, July was vacant. August 1, the new tenant starts, and that's a $3 a foot. In January, that goes to $7. Every year, there's a $1 a foot escalation to 2031.
Okay.
It goes 2% after that.
I guess in this quarter, if you stripped out the lease termination income, I mean, I think you did that for your same-property NOI growth number, and that's why the same-property NOI growth was lower than kind of you would have thought.
It's lower because we're lapping a higher number in Q2 2024.
Was there anything one-time in nature in Q2 of 2024? I know it did go from negative up to.
It was leased up of Richmond. Richmond started leased up, and that's why.
Okay, I think I'm good, but I may need a follow-up call later.
Okay. I apologize. I'll look up that answer.
Okay. Take care, guys.
Thanks.
Thank you. Next question comes from the line of Jimmy Shan with RBC Capital Markets. Please go ahead.
Thanks. Just a follow-up on the Peavey lease in London.
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I think he disconnected everyone.
Yep. What we can do is we can just wait for them to call us back. Just a moment. Let's take a moment.
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To all the participants, please press star and one to ask a question. Once again, a reminder to all the participants that you may press star and one to ask a question. A reminder to all the participants that you may press star and one to ask a question. Ladies and gentlemen, please stand by. We'll begin the conference shortly. Ladies and gentlemen, we have an issue. If you have any questions, you can reach out to Mike Rawle directly. Thank you. I'll just hand over the call to Kelly Hanczyk for closing remarks. Please go ahead.
Sorry for the operator having technical difficulties. If anyone has any questions, can you just please call Mike or myself? We'll get back to you right away.
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