Thank you for standing by. This is the conference operator. Welcome to the Nexus Industrial REIT Q3 2022 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 and zero. I would now like to turn the conference over to Kelly Hanczyk, Chief Executive Officer. Please go ahead.
Thank you. I'd like to welcome everyone to the 2022 Q3 results conference call for Nexus Industrial 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'll 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, and cautions regarding forward-looking information and for information about non-GAAP measures. I think it was another solid quarter in the books for the Q3.
I'm looking forward to the balance of 2022 and to 2023, where we will begin to see significant rental rate growth in the portfolio, especially in our Southwestern Ontario portfolio, and our development pipeline starts to ramp up. We are in the next phase of our evolution, where we will continue our repositioning with the high grading of our portfolio, creating one that is of an institutional quality. In Southwestern Ontario, our London portfolio is not only realizing but also applying for significant rental rate growth. We are also awaiting permit for the construction of a 100,000 sq ft addition to our building at 1285 Hubrey Road, which we hope to break ground early next year.
Which was originally planned as a speculative addition now looks very promising for being pre-leased as we are just awaiting on a signature on agreed upon terms on an LOI for the space. In addition, we are currently waiting for two existing tenants' approval on the southwestern Ontario portfolio to add another approximately 65,000 sq ft each of expansion space to their existing premises. As mentioned previously, the REIT has 22 acres of excess land at the Titan industrial site in Regina, Saskatchewan, that was acquired in February 2022, and we have submitted a design build package to an existing tenant in the REIT's portfolio to construct an approximately 300,000 sq ft build to suit. This looks very promising as the tenant is currently seeking approval from its parent company.
If successful, we would still have 6.5 acres of developable land left at this site. These aforementioned developments would be completed at an approximate return of 8%-10% to the REIT. As mentioned last quarter, we are under contract for three additional properties. A brand new build, strong covenant distribution center just outside 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 with a significant additional land to continue to expand the facility as the 10-tenant continues to grow.
Thirdly, an approximately 85,000 sq ft cross-dock facility to be built in Calgary, Alberta, with one of the REIT's existing tenants, which is expected to be completed in early to mid-2024. In the current quarter, we closed on a 94,000 sq ft, strong tenanted A-class industrial building in Quebec City, where we assumed debt in the rate of 3.63%. We also closed on a 75,000 sq ft sale-leaseback industrial facility in Montreal with an annual rental rate increases of 3.5%.
Subsequent to the quarter end, we have also closed on a small building in Cornwall, Ontario, with one of the REIT's existing tenants, which is the same tenant as the new build in Calgary, at a 7.25% cap rate as we have a long-standing relationship with the tenant, and we hope to continue to build on this relationship going forward. Finally, we closed on a four-building, approximately 450,000 sq ft industrial portfolio in Southwestern Ontario for approximately CAD 39 million at a very attractive cap rate of 7% and a price per square foot well below replacement value.
As you can see, we have and continue to have an active pipeline of off-market opportunities, and we will continue to recycle capital into both developing the aforementioned sites at higher returns within our existing portfolio and newer Class A industrial opportunities with solid annual increases. We have built strong relationships with several developers in the industry, which should continue to provide ample opportunities for the REIT in major markets going forward. In Richmond, BC, we continue with the redevelopment of the approximately 50,000 sq ft building for two tenants. One of the tenants commenced their lease on September 1, with the free rent period to expire on November 30, and the other is expected to commence very shortly. We also continue to plan for a 74,000 sq ft addition, which would provide significant lift to the REIT's NAV.
We're also applying for bonus density, which is, when it's approved and if it's approved, would allow for approximately 450,000 sq ft of additional usable square footage. Whether we build it or not, we will decide later, in our life cycle here, but it would provide huge additional value to the site. In Montreal, we continue to work with the developer on the sale of the excess land at Les Auberges Giguère . He's still working along with approvals from the city, but we anticipate closing of the transaction in February of 2023, which would allow us to realize our first payment from the developer.
We continue the process of reallocating and high-grading our portfolio by selling some of its office, retail, and non-core industrial buildings and reinvesting proceeds to acquire high quality industrial buildings, creating an institutional quality portfolio. On August third, we sold a retail property tenanted by RONA. That's 41 Saint-Jean-Baptiste Boulevard in Châteauguay for CAD 8.3 million. On October fourth, the REIT closed on the sale of a retail property at 1,185 Chemin de Tremblay in Longueuil for CAD 11.85 million. We're also under contract right now to sell a property portfolio of smaller industrial properties in Saskatchewan, and we currently have an executed LOI for a grocery-anchored retail property in Victoriaville, Quebec. A three-building office portfolio will be relaunched when it is anticipated that interest rates stabilize and the acquisition markets for suburban office begins to open up.
We'll continue to look for other non-core industrial and slowly phase out of those and redeploy that capital into Class B facilities probably mostly in Montréal area in Ontario. Post-sale of our Victoriaville property and post-closing of our Ottawa acquisition, the REIT's holdings will increase to approximately 90% of NOI derived from the industrial sector, so it's moving along quite quickly. I'll now hand it over to Robert Chiasson to give greater detail on the REIT's financials.
Thanks, Kelly. As Kelly mentioned, Q3 was a solid quarter for the REIT in line with our expectations. We completed CAD 40.5 million of acquisitions in the Q3 and a CAD 39 million acquisition subsequent to quarter end. The weighted average cap rate on this CAD 80 million of acquisitions is 6.2%. We assumed CAD 9.5 million of debt at 3.63% on these transactions with balance financed through new debt. The impact of our acquisitions, combined with positive same-store NOI, saw our AFFO payout ratio decrease from 90.3% for Q2 to 88.9% for Q3. Q3 per unit measures were once again impacted by foreign exchange losses of CAD 0.006 per unit.
Absent the impact of the CAD 460,000 unrealized foreign exchange loss in the quarter, the payout ratio would have been 86.1%. We increased our credit facility by CAD 100 million in the quarter, with the increase secured against 10 previously unencumbered properties. On the investment property valuation front, we applied some cap rate expansion or valuation to the REIT's retail and office assets. We also applied some cap rate expansion in our valuation of some of our industrial assets. However, that was more than offset by increases to stabilized NOI. The recently announced Summit transaction implies that there is significant value in Ontario and Montreal industrial assets in particular. For the remainder of 2022, we have approximately CAD 5 million of mortgage at a weighted average 3.55% interest rate that will mature.
In 2023, we'll have approximately CAD 50 million of mortgages with a weighted average interest rate of 4.35% that will mature. The bulk of the REIT's in-place mortgages mature 2026 on, and we're not significantly exposed to renewal rates. I'll now turn the call back to Kelly.
Thanks, Rob. We'll open up the call to any questions that you 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. The first question comes from Brad Sturges with Raymond James. Please go ahead.
Hi, guys. Brad. Just starting on the development pipeline and discussion that you have there, obviously, you just identified a few projects that you're advancing on. Would all those projects that you just highlighted potentially break ground next year?
I would say that definitely the 100,000 sq ft would break ground next year. If we're successful in the 300,000 in Regina, that would break ground next year, for sure. We have plans getting ready to go. It literally is just one of our tenants was purchased by company in Britain. They have to go for approval to their parent on that one. We're kind of hopeful for that one. The other two, I believe it's one of the tenants is awaiting on a contract, and if they get it, that will break ground relatively quickly as soon as permits are in hand. The other one, that one, they're making a decision in January. Most of them, I would say, would break ground next year.
I think in the summer, you bought a couple development sites with RFA, in Hamilton. Are those scheduled for construction next year as well?
One of them is, I guess, the first one that we have a 20% interest in is probably further out. That one's not serviced yet. The other two are probably start next year or the year after.
How much potentially could you seek to develop next year, I guess, if everything kind of hits? Do you have a rough budget of what that might cost?
Yeah. The ones I mentioned, I think we've got pricing somewhere between CAD 120 and CAD 130 a foot. That would equate it to about CAD 500 and change per foot.
Okay. The two just remind me the Hamilton sites that are closer to breaking ground, how much would that be?
Next year, I don't anticipate there'll be significant cash required for those, because we have VTBs and other financing in place, and we'll have construction financing.
Yeah.
The Hamilton ones, I would think, if anything, they would be either late next year to probably 2024.
All right. Okay. Maybe just thinking more generally about development and how you're thinking about pursuing specific projects. Are there certain kind of criteria or aspects you're looking for to pursue a project? Is it, you know, related to, you know, being approached by a tenant and their specific needs or return profile capital requirements? Like, is there a couple of factors that you're really focused on in terms of what makes a project worthwhile pursuing?
Really it's our return. You know, we're looking at developing the land that we have now. The Regina, we had 22 acres. That was a no-brainer to go forward and try to find a tenant, which we found within our existing portfolio. We approached them. They love the site, and it works for them. Let's see if they get approval. Again, we're looking at a little bit outsize returns here. We can get, you know, the one in London and the other two, we've kind of already looking at around a 10% return on those. We're just striving for that, probably more like 8.5%-10%, and if we're really lucky, 11%. Really that's what we're looking at.
We were just lucky in Windsor. One is in Windsor that site has the ability to expand on. The other one is in St. Thomas, Ontario, which has pretty good land to expand on. The London, we have an abundance of land. We're looking at the London portfolio in particular because we do have in the overall portfolio quite a bit of land. We're kind of looking at it and saying, "Well, what's next after the 100?" We'll go from there. Yeah, we're looking from a return base.
Okay. Just on the Richmond there, one tenant commenced their occupancy and had a free rent period. Did the second tenant also have a free rent period, or when would you expect?
I'm hoping it's December first. It doesn't have a free rent period.
Okay. You could see some contribution in Q4.
Yeah.
Okay. I guess you're going through the permitting process for the next phase. You know, where would that stack up in terms of priority, and where do you be in that sort of process?
Well, we've submitted it also for the bonus density, so it'll probably take maybe a little bit longer to get that through because the bonus density is very valuable, and that's a little trickier to get. I think the Richmond elections have some new people in council, and they're pretty keen on the project as a whole. I'm fairly positive that we're gonna get it, but we will soon see.
Okay.
To add a little to my response earlier, we're looking at about CAD 17 and a half million of capital towards the end of 2021 of the RFA development project, and then the other small amount, I guess, in April, roughly CAD 4 million.
Okay. That's helpful. I'll turn it back to Claude.
Thank you.
The next question comes from Kyle Stanley with Desjardins. Please go ahead.
Thanks. Hi, guys.
Hey.
Hey, Kyle.
I'm just looking at the dispositions. You know, I'm just wondering what kind of pricing you expect, you know, specifically you mentioned Victoriaville and the portfolio in Saskatchewan, just, like, an overall high level price that you might get for that.
Yeah. Victoriaville will be right around our book value. The Saskatchewan portfolio pretty much is bang on or slightly above our book value as well that we're currently carrying it. Fairly strong pricing on both of them.
Okay. Maybe in the press release, there was commentary about, you know, leases that commenced in the Q3 at CAD 1.35 per sq ft spread over the expiring and in the Q4, CAD 2.50. Could you provide either what the expiring rate was before or actually what the percentage increase was?
I could. If you give me a minute, we can come back to that one.
Okay. No, no problem. I guess just look, you mentioned it, actually I'm gonna ask Rob this question, so it may stop you from looking. As you look to refi the CAD 50 million of mortgage debt maturing next year, I'm just wondering, I guess, what the cadence of the maturities are, if they're kind of front-end loaded, back-end loaded in the year, and then where you're seeing the potential rate on that currently.
Yeah. I'd say CAD 30 million of it is towards the end of April. That's the bulk of it. We're gonna see. I mean, we have the weighted average that was in the MD&A and that I talked to. Right now we'd probably be looking at, if we put 5-year mortgage financing on probably the low 5s, low 5% range. We're developing an overall debt strategy right now looking at we draw down some funds on the credit facility that are in variable rate form BA plus. We're taking a look and seeing whether it makes sense at this point to either swap or to enter into 5-year vanilla mortgages.
Yeah, we'd expect refinancing if doing 5-year mortgage probably in and around the low 5s based on today's rates. I think the bond yields factor into more increases to the overnight rate. My crystal ball is a little bit murky in terms of where interest rates are going.
Well, fair enough. I think that makes sense. Just looking at acquisitions, I mean, you had some commentary in your prepared remarks, but I guess just how are you thinking about acquisitions going forward? You know, still seeing a deep pipeline. Curious on where you're willing to take leverage to get anything done. Then Kelly, in your comments you said focusing more on Montreal and Ontario. Is that, you know, can we take from that that maybe it'll be less active in Western Canada going forward?
Yeah. I think at the end of the day where we're evolving to right now is major markets, Montreal, Ontario. I think you'll see over the next little while continue that transition. I think we'll slow down on the Western front. We have a lot of opportunity here through relationships we've built, so off market opportunities, which is good. Still our London family as well have some nice assets to roll in when the time is right there, and those would be a unit deal. You know, we're gonna continue to recycle that capital. We'll look at identifying some other ones towards the end of this year to kind of launch maybe January, February. That will allow us.
Because remember, a lot of things that we have closing come later in the year, next year. We're staggered throughout the year in our future PSAs. We'll just continue to recycle that capital, take it out of smaller sites, and they'll continue with some of the retail and office if we can. We'll just keep continuing to recycle that back into the, I call them A class newer assets, where we would see deals with pretty significant rental increases, you know, where we're in the 4%-5% per year on new deals. Where I'd take leverage too, it's gonna depend on our sales program as well. I'm trying to balance the purchases with sales at the same time, I guess.
Okay.
I'll just come back to your earlier question. On the Q3 renewals, we started out at about CAD 425 a foot. The reason that number is low is we have Stryker in there who was in at a fairly low rate. Our lift in the first year, our going in lift, is not as high as our ultimate lift will be. I think we're gradually increasing the rent for the replacement tenant at that location. Kelly's booked in some good steps. That's the reason the starting rate's a little bit lower there is because we're easing the tenant into market rents. We've got 745 is roughly the starting rent for the Q4 expiries that we've renewed.
Okay, great. Thanks for the color. I will turn it back.
Thank you.
The next question comes from Mark Rothschild with Canaccord Genuity. Please go ahead.
Thanks. Good afternoon, guys. Kelly, when you spoke about the 8%-10% return on projects, and of course, I guess I assume you meant unlevered, but can you comment on how that will work with new development projects such as in Regina? It wasn't clear to me. I didn't think you were talking about those projects as well, but maybe just expand on what your target range would be.
Yeah, it's pretty simple. We're looking at, you know, what is our spend. If it's CAD 130 bucks a foot on a 100,000 sq ft addition, we'll get 13 bucks a foot in it. You know, that's how we look at when we're looking at that return. That's kind of the deals that we're doing down in London right now. Hopefully those come to fruition. Now, Regina, we're pricing out for the tenant right now. Might be slightly under 10, but I'm thinking that's between an 8%-10% return, straight on our cash in.
Okay, great. Maybe this is connected. When you look at acquisitions, and it seems like the replacement cost is going up quite a bit, but properties aren't necessarily trading at replacement cost.
How do you look at that? In the short term, does replacement costs matter when you're looking at new acquisitions in a market where the rent is gonna be stable and growing?
I'd say it depends, right? It depends on the asset. It depends on everything. Like we're a little bit on shifting, I guess, shifting gears here. I do call it the evolution of the company. You know, we have. There's some that's been taken out and, you know, sort of leaves us as the only industrial option. What we're trying to do is build an institutional grade portfolio going forward. We have, I think, succeeded in doing that in what we've recently purchased. At the end of the day, depends on what area you're in. Like in Windsor that we bought before us, it's well below replacement cost. Newer product that we'll roll in, it's new product that would be, you know, like it's brand new.
You're trading it, getting it at call it replacement cost. Now, at the end of the day, it's a mixture of both that we're looking at. We'll continue to get Class A industrial brand new products. We have fairly strong relationships that we can take that down pretty easily. We also have strong relationships in London and other places that, while not brand new, but pretty new, stuff. We're getting new relationships every day, with guys interested in possible unit deals. I think, where we're going right now is it's either, again, under market rents that we see value in listing or relatively higher increases on a year-over-year basis, where it might be at market or slightly below market, but they've negotiated 4%-5% a year rental rate increases or CPI.
That's some of the mantra going forward right now.
Okay, great. Thanks. Well, that's helpful. Thanks.
Yeah. Thank you.
The next question comes from Matt Kornack with National Bank Financial. Please go ahead.
Hi. Just quickly with regards to the forward purchase assets, can you give us an update as to where those are in the construction process and when you'd be likely acquiring them? Has anything changed there?
Yeah. I believe the Ottawa site is due January or February. I think it's actually March. That one's March. And then the one in Calgary, I believe they haven't broken ground yet. They're anticipating end of next year. I think it's going to be more like May of the following year. And then the London deal where it's a unit deal, that should be in the summer, and I'm contemplating around June for that one.
Okay. In terms of near-term commitments, it's really the Ottawa asset. What is the dollar value for that one in particular, if you can provide it? I don't know if that's possible.
Let me just have to look it up here. Yeah. It's CAD 115 million.
Okay. In terms of financing that on completion, I assume you'd get secured financing for a portion of it. Do you need asset sales to kind of fund the balance, or is this new credit facility availability that you have enough to kind of bridge that equity component?
Yeah. I mean, I think between the credit facility, the undrawn amount there, and we've got some unencumbered assets, you know, the CAD 40 million acquisition that we just completed is unencumbered. We've got other assets, a couple other assets that are unencumbered. We have funds to finance the purchase of the Usselman property and probably about CAD 300 million or so of acquisitions.
Okay. Perfect. That's good to know. London, the full equity component is going to be units. Is that fair to assume?
Yeah. We would assume the existing debt. I think that was the deal struck before, I believe. It's all units and existing debt on that one.
Okay. Perfect. Just with regard to the acquisition in Tilbury and Windsor, would they—I mean, I guess if you impute rents at something like a CAD 6 a sq ft rent to get to a 7% cap, is that market? I'm not as familiar with that market? Or is there some potential capture on upside as well?
Yeah. It's a longer term lease, but it's well below market. Market in Windsor is about CAD 9.50 a foot. You're bang on right around the rent, the existing rent.
Okay. Longer term as in 10 years or?
I'm just trying to remember. If you give me two seconds, I'll tell you. I'm trying to find it here in front of me. It is 2031. It expires.
Okay. Perfect. You've been very active. The same property portfolio isn't really indicative of kind of actual portfolio trajectory. Can you give some sense? I mean, A, like I can't remember what your policy is in terms of inclusion in the same property portfolio. Does it have to be in for the full year to date? Maybe if you could give a sense as to what's not in the same property portfolio, how that's the trajectory of that relative to kind of the same property portfolio.
Yeah. In order to include something in the same property in the full quarter for both Q3, 2022 and Q3, 2021. In terms of trajectory, I mean, I think Kelly mentioned we have, and I think we mentioned in the press release that we have quite a number of sq ft that's coming up for renewal, where we expect pretty good lift in rental rates. I'd expect same store LOI to continue to increase upward trajectory for sure.
Okay. Yes, that makes sense. Last one for me, just quickly. The lease maturity profile that you show, I mean, there's not much that matures in the balance of 2022, but that doesn't necessarily show what you may have signed in prior quarters. Is that essentially what I'm saying, is that a net number as if like you-
Correct.
Okay. Do you have a sense as to how much actually matures and at what rent spread it's maturing in Q4 itself?
I do, but I don't have it on me. I have it in a couple of different files that I need to add together. I think we said about 17,000 sq ft was what hasn't been renewed yet. I'd have to get back to you on the other number.
Sure. I guess we could take a typical kind of proration of normal and apply kind of a pretty good spread using the numbers that you maybe disclosed last quarter in terms of relative weighting. Anyway, it's okay. We'll figure something out, but sounds good. Thanks. Yes.
Thanks. Yeah, no worries.
No problem.
1,000 sq ft press release.
The next question comes from Gaurav Mathur with iA Capital Markets. Please go ahead.
Thank you and good afternoon, everyone.
Hey.
Just quickly on renewals, and you're just beating the recession drum here. Are tenants continuing to have renewal conversations earlier than usual, or is that changing in any manner?
I think it depends on the market you're in. In London, we're pretty on top of things, and we're well into discussions. I'd say out west it's a little slower, happening out there right now. Montreal, again, pretty quick. In Montreal, I'd say Montreal and Ontario, you're having them now well in advance of the year. I know in Montreal, a couple of our sites we've done renewals, completed a few renewals where the tenant doesn't even need to renew until end of next year and early 2024. Again, I think it depends on the market.
Okay, great. Just on the acquisition front for industrial properties in your targeted markets, can you talk about how the stabilized yields have moved, you know, when you're comparing it to the beginning of the year?
Yeah, it's gonna depend, right? It depends on the asset. If you're sitting on an asset with a 1% a year increase, that has been affected probably, I'd say by about maybe 50 basis points. If you have newer assets that have, you know, 4%-5%, which is the norm, or CPI in there, you're still seriously high in demand. I don't think that cap rate has moved at all.
Okay.
really depends on your rental stream.
Okay. Perfect. Just lastly, we noticed the uptick in leverage this quarter. Is there a range that we should think about going forward?
Yeah, we'll continue to add debt as we acquire. You know, we will see ourselves pushing 50%. Yeah, and then like I said, it's gonna depend on the success of moving some of the older stock and the remainder of the office and some of the other things that we are trying to move. Again, it's just that repurchasing of the capital.
Right. Okay. Well, thank you for the color, Kelly and Rob. I'll turn it back to the operator.
Thank you.
Once again, if you have a question, please press star then one. The next question comes from Jimmy Shan with RBC Capital Markets. Please go ahead.
Thanks. Hey, Kelly. I just wondered if you could just talk in general what you're seeing in the acquisition market as a follow-up in terms of, you know, depth of bids, appetite. You know, we just heard from that call earlier that core industrial are not clearing the prices that, you know, that were trading earlier in the year or last year. Kind of wonder what you are seeing.
I'd say definitely in Montreal and Toronto, like I said, and it really does depend on the rent spreads, and it depends on what increases we've negotiated in the leases. Those haven't moved hardly at all. Other assets that may have like 1% increase or no increase or every five years. Those definitely have been affected. I've seen portfolios where they haven't traded. I've seen portfolios where I was surprised at the price that they got 'cause I thought it was overpriced. I think it's just like market by market, and it's almost building by building. You can't just look at one trade and say, well, here's the new norm. It really is what's the lift in the portfolio and what are the embedded rental rate increases.
That's really determining the sale price right now.
The evolution you speak of in terms of moving to more institutional quality before, would that take you to, you know, GTA or other major markets? Is that the plan?
Yes. Yes. We will. You will see us over time, you know, continue Ontario, and GTA is pretty wide range, but Southwestern Ontario is still a big one for us. Montreal, we're seeming to get pretty good traction in right now. We're going to start over time to rotate out of some of our older assets in Alberta and rotate back into Ontario and Montreal. We really have developed some pretty good relationships that I think we can do quite well over here.
Okay. Great. Thanks.
All right.
This concludes the question-answer session. I would like to turn the conference back over to Kelly Hanczyk for any closing remarks.
All right. Thanks everyone for joining, and we will see you next quarter.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.