Thank you for standing by. This is the conference operator. Welcome to the Nexus Industrial REIT first quarter 2023 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 2023 1st quarter 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 will be discussing non-GAAP measures. Please refer to our MD&A and the REIT's other securities filings, which can be found at SEDAR.com, for cautions regarding forward-looking information and for information about non-GAAP measures. 2023 has begun as expected with our Southwestern Ontario portfolio providing strong rental rate growth on renewals.
We'll continue to see strong growth in this market for this year as rates are now pushing in the $11-$12 range. This will be tempered by a 26,400 sq ft vacancy in Fort St. John BC that vacated on April 30th that we're working to fill. In the quarter, we purchased a 532,000 sq ft brand new Ford distribution center in Ottawa, Ontario, and sold one of our grocery anchored retail properties in Victoriaville, Quebec. In addition, we closed on a 264,600 sq ft distribution center adjacent to the London, Ontario Airport, where in-place rents are approximately 260% below market with a short weighted average lease term of just over two years.
This increased our weighting to the industrial sector to just over 9% of the REIT's NOI. We'll see this continue to grow in 2023 as we add another 970,000 sq ft of industrial properties throughout the year, comprised of 191,000 sq ft Class A distribution facility with Yokohama Tire as a tenant in Montreal, and a 304,000 sq ft Class A distribution facility in London, Ontario, which is anticipated to close on June 1st, plus 141,000 sq ft Class A distribution facility in Burlington, Ontario. Finally, another 335,000 sq ft distribution center in London, Ontario. That's expected to close, I believe, in August.
Our weighting will continue to grow as we close on these assets and recycle out of our retail and our office portfolio in the balance of the year. On the development front, we have broken ground on two sites, approximately 96,000 sq ft addition to our building at 1285 Hubrey Road in London, Ontario, where we are awaiting finalization of a deal that will provide us an outside return of over 10% upon completion. As mentioned previously, we have broken ground on the 312,000 sq ft new building on 22 acres of excess land at the Titan industrial site in Regina, Saskatchewan, that was acquired in February 2022.
We have a signed lease in place for a minimum 200,000 sq ft with a strong covenant tenant from the REIT's portfolio. We are fairly certain they will sign on for the majority of the balance of the space. This is scheduled to be complete for the late spring 2024 delivery. Also looks like we'll be proceeding in the fall with the expansion of an existing tenant in our Southwestern Ontario portfolio to add another approximately 70,000 sq ft to their existing premises. We'll be purchasing 18 acres of land adjacent to this site to accommodate this expansion. This site is across from a newly announced Volkswagen lithium plant in St. Thomas, Ontario. In Richmond, BC, we continue working to complete the space for the Greater Vancouver Sports Club. The site is progressing along.
They are currently taking memberships and hope to have them live and operational, somewhere at some time in August. This will be a significant boost to our FFO once the tenant commences operation. I will now hand it over to Rob Chiasson to go over the REIT's financials.
Thanks, Kelly. Year-over-year, Same Property NOI was up CAD 900,000, or 4.4%, for the quarter, benefiting from strong renewals in Southwestern Ontario. Ontario accounted for just under 40% of same store NOI growth. Alberta, where we have a number of leases with embedded CPI increases and where occupancy at one of the REIT's properties improved in Q1 2023 as compared to Q1 2022, accounted for just under 20% of the increase. Approximately 20% or CAD 150,000 of the Same Property NOI improvement related to our Saint John, New Brunswick office property where there were free rents in Q1 2022 that did not recur in Q1 2023. As Kelly mentioned, we'll experience some headwinds from an April 30th expiry in Western Canada.
We expect significant rental rate growth on lease renewals, Southwestern Ontario lease renewals in Q2 2023. Notably, we have a contractual rental step of CAD 0.78 per sq ft on 1 million sq ft that is effective August first. As Kelly mentioned, the repositioning of approximately 60,000 sq ft at our Richmond, BC property is anticipated to complete in the third quarter. Upon completion, this is expected to have an approximately CAD 700,000 positive quarterly NOI impact. Q1 2023 general and administrative expense increased as a result of timing of RSU grants, one-third of which vested in Q1 2023. There was also a severance cost in the quarter. These two items primarily accounted for the increase in general admin expense in Q1 2023 as compared to Q4 2022. Interest expense was relatively flat in the first quarter as compared to the fourth quarter.
CAD 117 million acquisition of the Ottawa, Ontario area Ford distribution center closed on March 1st and was financed with variable rate debt drawn on the REIT's unsecured credit facilities, which will increase Q2 interest expense. Debt to total assets was 47.3% at March 31st, 2023. We had CAD 200 million undrawn on our unsecured line of credit, and we had CAD 455 million in our unencumbered asset pool supporting the unsecured credit facilities. I'll turn the call back to Kelly.
All right, thanks, Rob. We'll open up the line to questions.
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're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. The first question comes from Fred Blondeau with Laurentian Bank Securities. Please go ahead.
Thank you. Good morning. Looks like you continue to see solid traction in Southwestern Ontario and in Montreal. That said, when looking at Toronto and Montreal, they were in negative absorption territory in Q1. I was wondering if you could give us color on what you see on the ground in terms of new supply, your tenant decision-making process and whether you see, I guess at the end of the day, whether you see increasing risks in some of your markets, at least for the rest of the year or beginning of next year?
Let me start, London, definitely we are seeing huge traction. Just, I swear about a month ago, we were looking at $10 rents. All of a sudden we're pushing $11, $12. There is significant demand in that market. For example, on that 96,000 sq ft, we're holding out for one of our existing tenants 'cause we have negotiated a deal that we're trying to finalize that will see pretty large returns on that expansion. Could be over 12%. We have two or three other tenants clamoring for the space, leasing that is not difficult. Anything that comes up is taken right away, the demand is extremely strong.
You know, we're looking at also breaking ground in the fall in a site in Hamilton that we have. There's been fairly significant activity, and we haven't even got to the groundbreaking or the design phase being marketed. The fundamentals are still very, very strong. Haven't seen any kind of letup yet. Montreal, same thing. I'd say maybe on the outskirts of Montreal, you'd see it's taking a little bit longer. Overall, the general, I guess, atmosphere in the environment for industrial space is there is still significant demand. You know, we'll see over the next, I guess, 1.5 years in GTA and Montreal as space is delivered. Montreal, for the most part, that space has been already absorbed fairly well in GTA.
I think overall fundamentals are still really strong. I don't see any sign of letup yet. Could be next year things start to ease off slightly, but that's to be seen yet.
No, that's great. Thank you. The 12% you mentioned, that's unlevered, correct?
That'd be unlevered, yep.
Yeah. Perfect. Thank you. Congrats on the disposition of Victoriaville. Are you able to give us kind of a range on the implied cap on that one?
I believe it's around 7%.
Okay. That's great. Thank you.
Yeah.
The next question comes from Michael Markidis with BMO Capital Markets. Please go ahead.
Thank you, operator. Hey, Kelly and Rob. Just with the I think last call we got to 4% being your outlook for same property growth this year. Obviously, you did that a little bit better than that in the first quarter, but you also flagged that temporary Saint John vacancy. You know, just with all those puts and takes, would 4% still be your expectation for the full year?
It would be, yep.
Okay. Just to clarify, does that include the CAD 700,000 quarterly contribution from the Richmond property?
It does not.
It does not. Okay, great. Awesome. For the three projects, active development projects that you have underway, thank you very much for the incremental disclosure and the yield expectations until the costs, the figure's probably not that significant in terms of total investment to date, but I just wonder if you have the actual remaining capital required to fund those projects.
We've spent CAD 200,000 so far, I think, on the Hubrey Road London project. I mean, pretty much higher the entire cost of the expansion is still outstanding.
Yeah, we've just begun, the incurred cost now is just really for drawing permit applications.
Okay. For Wellington expansion. What's the approach? Is there existing financing on the asset? You know, I'm not sure if you're gonna just fund it through your line or put some construction cost financing on the project to complete the expansion. Just maybe if you could discuss that dynamic, and then if you do put construction financing, how you handle the takeout, if there's existing financing on the asset.
Currently we're looking at financing it under the unsecured credit facilities, which is a little bit cheaper in terms of upfront fee, and ultimately borrowing cost, interest expense as well. That's the plan. I think these properties sit in as part of our unencumbered asset pool. Construction financing would be problematic anyway. Yeah, that's being done.
Okay. They're in the pool for the unsecured line. Got it. Okay. That's it for me. I'll turn it back. Thank you.
Thank you.
The next question comes from Brad Sturges with Raymond James. Please go ahead.
Hey, guys. good morning.
Good luck.
Just to, I guess follow on the lines of the development disclosures and pipeline, I just wanna clarify. Is your expectation for now, just only commence St. Thomas in the back half of the year? Is there anything else that could maybe break ground this year at this point?
It looks like we'll break ground on one of the Hamilton assets that we currently have. It's about 115,000 square footer. Probably, I would say late fall on that one.
Okay. everything else that's in the planning stage, you know, How much of that, in theory could break ground next year?
I'd say probably definitely, there's the potential for one in Windsor, 65,000 sq ft, that we're just waiting on approval to go ahead with from the tenant. The other ones would probably be later in the year, I'm imagining, 'cause it does take a little bit of planning with the city and as the majority of them are in London, expansions on land that we have. It take a little bit longer to work through permitting and approvals from the city.
It seems like you have, you know, a decent pipeline here, and you're working through, you know, the various opportunities. Is there an ideal amount of development that you wanna take on at any given time, just, you know, maybe, from a capital allocation or, you know, just amount of development exposure that you would wanna have at any given time?
Yeah. I'd say what we're building this year is kind of what we would target. It's, you know, we're lucky to have the land to be able to build on, and the returns that we're gonna be getting are much better obviously than what you can buy in the market for that type of product. We're talking 9%-12% unlevered. I would say that, you know, next year, if all went well, we could be somewhere around the same.
Okay. Just switching gears, just on the asset sale program, congrats on Victoriaville. Just curious, I guess you've got a small handful of assets looking for sale still today. I think we've talked about it in the past, is where would you be on those selling those assets? Are they on the market today? What's your, I guess, current timing for, you know, when those transactions could occur?
I'm hoping, let me say this. I'm hoping if all goes well, that we'd be out of the majority of it this year. The three standalone office properties that we own 100%, I would look to be getting out of hopefully in the next two quarters. Then I would say the majority of left is the large Sandalwood portfolio, which I have had pretty solid discussions with them on that front. We have some interested parties in that takeout of our portion.
I'm optimistic that something will be done by the end of this year on that. Hopefully all goes well and by that point with what we have closing and if we sold that, you know, we would be pushing probably 98% industrial just left with a spattering of assets here and there that we would then the rest of next year. We're well on our way to that 100% number.
That, I mean that's good to hear. I'm curious if that would it also include your 50% interest in Stanley Street?
I would say that would probably be next year, but yes, that'd be something that we would be looking at as well. We do have an office there, and it's our Montreal head office. I'm not as easy to just to get out of that. I mean, it's not a huge part of our NOI. At the end of the day, if I did, it would be probably next year.
At this point, I guess the focus would still be the non-industrial assets or are you contemplating anything on the industrial in terms of asset sales on the industrial side or you've got enough to work through, I guess, on the non-industrial assets that you're working through?
Yeah, we do get calls, you know, for Western Canada stuff. There's nothing out east here that we want to get rid of. We've had some guys we've tried to do swaps with certain assets, which could still happen. I would look at some of our smaller, if the prices were right out in Western Canada. I think that over the next six, eight months, maybe we'd move one or two smaller ones. I don't see anything probably too much more than that. We do get inbounds quite a bit, so yeah, we'll see how the rest of the year goes on this.
Okay. Sounds good. I'll turn it back. Thanks.
Okay. Bye.
The next question comes from Kyle Stanley with Desjardins. Please go ahead.
Thanks. Morning, guys.
Morning.
Just given the significant rent increases you talked about in Southwestern Ontario and more specifically London, you know, it does seem like demand is still strong, but are you starting to get any pushback from tenants, or are they in realization this is just market at this point?
Yeah. You know what? I think I think guys are realizing what's happening to the market and what I'm actually seeing, guys are scrambling to get into it now before things keep increasing. You know, the one we purchased, that we just purchased in London, it sits with a $4.50 rent, and that's going to be a huge win for us in a couple of years when that comes up, strategically located. I am positive we'll have zero problem either renewing or releasing that space at those rents. It's, it's well located, it's a fantastic asset. I think tenants are slowly, and especially in Southwest Ontario, starting to realize rents are no longer $7 a foot. It's been an interesting and a very rapid progression.
Okay, that makes sense. Just on the, you know, just under 160,000 sq ft you renewed in Ontario this quarter, what was the annual escalator that you achieved?
What was the renewal?
Contractual increases.
To be honest, I'd have to get back to you on that one, Kyle, because I have to just see what goes into that, which ones.
All good. No worries.
Yeah. A couple of them are in London, and they're pretty strong rental rate increases. We'll get back to you on the actual details.
Sure. No problem. Just the last one for me. You know, talking about St. Thomas, you obviously have the Volkswagen facility going in there. Two things, I guess, how much would you expect to spend on the 18 acres to facilitate that expansion? Secondly, you know, is this now a market that, you know, you already do have exposure there, but would you be looking to ramp up that exposure? You know, have you seen any changes in pricing at this point?
Land is starting to go up, so that's very interesting. This one in particular, I think we're purchasing 18 acres. 18 acres at about CAD 400. I believe it's like CAD 4.5 million for 18 acres. Our total cost would probably be in and around CAD 18.5 million for that site. We've in this whole negotiation, we have a specified return, so it's literally taking the return applied to a rental rate and away we go. Yeah, to answer the question on actively looking, we have a fairly substantial pipeline of assets down the line with a partner that will roll in over the next several years.
Actively looking are where we're looking for more deals that where we can see significant upside on renewal, like we just pulled off on the one that we closed on. I'd say outside of the family that we are looking for the lower in place rents that we think we can really set much higher.
Okay, fair enough. That's it from me. I will turn it back. Thanks.
The next question comes from Matt Kornack with National Bank Financial. Please go ahead.
Hey, guys. Just wanted to quickly get a sense on the financing side, whether your intent is to use kind of unsecured facilities to finance the assets on the debt side versus secured financing against them. Just what would be the relative cost? I know that you've swapped some of the interest expense, but yeah, any color on that front?
I think the discussion we had at the board level on Friday in terms of hedging and swaps, our swap, the swap we entered into, I think in March, was 4.96%. I think that five year swaps right now are running about 5.25%, somewhere in and around there. We're trying to build the unencumbered asset pool. We're trying to get ourselves to the place where we could become rated and potentially issue public unsecured debt. As you mentioned, there is a bit of trade-off there. Putting a swap in place on the unsecured facility is probably about 40-50 basis points higher interest cost than a vanilla mortgage. That's, you know, that's something we're considering sort of balancing balancing off one option against the other.
I think we'll likely continue to finance off the credit facility and look to swap out a greater portion of the credit facility.
If I look at, I think you have 6.6% financing on the Banker's Acceptance component, but it looks like 100, so a little less than half of it is currently swapped. If you go the route where you swap it as opposed to getting secured kind of traditional mortgages, would we expect that the swapped portion goes up and that rate comes down? I guess also if you could just give a sense as to where your unencumbered asset pool is right now value-wise.
Yeah. The swap portion would go up and yeah, exactly. I think we did. Our unencumbered pool is CAD 455 million as of March 31st. That would be subsequent to the acquisition of Casselman. Yeah, that's about CAD 455 million.
Okay. Do you have a sense as to how far off you would be potentially from an investment grade credit rating at this point?
In terms of time, we're probably looking at next year. I mean, there's no huge rush right now, I don't think, to be able to issue public debt. We can get similar pricing by way of, you know, financing on the facility with a swap. You know, we need to increase our EBITDA a little bit and, you know, work on some metrics. Probably looking at about next year, early next year.
Fair enough. That's very helpful. Thanks, guys.
Okay.
The next question comes from Himanshu Gupta with Scotiabank. Please go ahead.
Thank you and, good morning.
Morning.
Morning.
Just from the London, Ontario, I mean obviously the market is performing very well. You mentioned rents, you know, rents are pushing higher as well. From IFRS perspective, did you make any adjustments this quarter for IFRS valuation for London portfolio?
No. We built in, you know, market rents in Q4, in our stabilized analyze and then present valued back. There wasn't a need for adjustment in Q1.
Okay. Rob, what kind of cap rate or, you know, on a CAD per foot basis are you marking your London portfolio for IFRS?
I'd have to look it up. If you give me a minute, I can come back to you. Do you have other questions?
Sure. Sure, absolutely. You know, okay, thank you. Just moving to the development side of things, I think the Hamilton development at the Overlord, the cost of CAD 30 million is the development cost a bit higher than your initial expectations there? Any color on that?
No, I think, it's all within the model. I think costs are coming in where we anticipated.
Okay. Currently, the Hamilton market is now like the cost is like CAD 260 per foot. Do you think the stabilized assets of Hamilton are now like CAD 300 per foot as well, just like, you know, the inside the GTA, inside the Greenbelt?
Yeah. Yeah. I mean, cost of land, right? Cost of land has gone up significantly. At the end of the day, for a new build anywhere, you're probably in that CAD 275-C AD 3, and change.
Okay. Then you have another Hamilton development coming up. Should we expect like similar kind of costing as well, that property also?
Yeah, I believe so. That, that's a bigger development. The second one that would go, wouldn't be until probably next year, end of, end of the year, I think. You're, you're looking at somewhere around It's a little bit over 1 million sq ft that can be built there.
All right. Thank you. Then just shifting on the leasing side, I'm looking at your Alberta industrial portfolio. Is there any fixed price renewal options in that portfolio in Alberta? Just trying to see if we should expect any more downside to, you know, the current lease rents there.
For this year.
I don't think there's any fixed renewals. No.
No fixed renewals. The two Mastech sites are the ones that are gonna hurt us a little bit, where they came off April thirtieth. When I look at the balance of the portfolio that comes up this year, Edmonton and, pretty much Edmonton and I believe the market rents were probably slightly below. Nothing, nothing crazy, maybe CAD 1, CAD 1 a foot on some smaller renewals that come up the balance of the year.
Got it. Tell me what about the next year in Alberta? I see, you know, 250,000 sq ft coming up, almost $20 rents. Any thoughts on that?
I have to pull up next year's to see what we have expiring. I know we had a couple that have already renewed, and we've renewed them down to market. They're not massive sites. To be honest, I'd have to look at them and get back to you, Himanshu.
Sure, sure, fair enough. Rob, do you have your excess for London if you can?
Yeah. About 5.5 cap.
5.5 cap. Okay. Thank you, guys. I'll get back. Yeah.
The next question comes from Jimmy Shan with RBC Capital Markets. Please go ahead.
Thanks. On the contractual rent increase, I think you've been doing deals that are, or that have with higher rent escalators, of late. Do you have a sense of where contractual rent increase for the entire portfolio, what does that look like today?
We don't. That's something we're gonna look to add to our MD&A disclosure next quarter. It's not something that we've compiled yet.
I know on the recent ones in Southwestern Ontario have been either CPI, typically CPI or about 8%-12% depending on the lease that we've done.
Yeah. No. Yeah, I'm just trying to understand that in the context of the entire portfolio, just for us to be able to model it better would be super helpful.
As we said, we don't have that. We'll look to disclose that next quarter. We're looking at to our MD&A.
Okay. Kelly, I think you rounded off a few, the pending acquisitions over the next few months. Do you mind going through the properties again and the value of the assets and the timing of the closing of these deals?
Sure. Just give me a few seconds here so I can pull them up. The first one we have is in June. Bear with me. Okay, there we are. All right, the first one we have is in Montreal. It's in Laval. $65 million, 192,000 sq ft. That closes in June. We've got the other one in Southwestern Ontario, on Scanlan, which is about $56 million, 304,000 sq ft. That will close June 1st, I believe. That's a Class B LP unit deal. Then we have Burlington in Ontario, about forty-nine and a half million, 141,000 of GLA. That is, I believe, closing beginning of July.
We have the other one in London, Ontario, which again would be a unit deal. That is probably about CAD 51 million. I think the addition might be a little bit bigger, so that number might go up a little bit. 326,000 sq ft, that is expected when they've finished construction. I think it's going to be in August. It sounds like it's probably around August.
All right. Thank you.
No problem.
Thank you.
The next question comes from Gaurav Mathur with iA Capital Markets. Please go ahead.
Thank you, good morning, everyone. Just on the G&A expenses, we noticed the uptick that you reported. Just wondering what a fair run rate would be for the rest of the year?
Yeah. I think G&A was probably about CAD 700,000, give or take, CAD 700,000 higher than run rate. Yeah. If you take that off of Q1, probably get to a relatively decent run rate.
Okay. Okay, great. Just on the capital reserves as well, you know, we noticed that uptick there. Would that be a fair rate for the year ahead as well?
Yep. I mean, as we add new properties, we'll adjust our AFFO CapEx reserve. Yeah, that's probably a reasonable run rate.
Okay, great. Just, you know, switching to the acquisition pipeline, as you're looking at opportunities in the market, are vendors open to doing, you know, cash and stock deals, or certain assets, or is that something that vendors are shying away from currently?
No, we've still got opportunities to do unit deals. We have been working on a few here and there. So we'll see if we. I think there's still a little bit of a disconnect between sellers and buyers on cap rates. So that's still gotta settle in. It's all about valuation of the units. There's still demand for good quality assets, so it's a little tougher to do. You know, like I said, last quarter, I believe these things take a little bit longer to do because someone has to get pretty comfortable with the company.
Right.
What you're doing. They just typically take longer. We have been in discussions with a few, several different vendors about the possibility of unit deals going forward.
Okay, great. That's it on my end. Thank you for the call. I'll turn it back to the operator.
All right. Thank you.
Thank you.
This concludes the question- and- answer session. I would like to turn the conference back over to Kelly Hanczyk for any closing remarks.
All right. Thanks, everybody, for attending, and we'll chat next quarter, and hopefully we'll add some additional disclosure to our MD&A, going forward. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.