Nexus Industrial REIT

Great thanks. I'd like to welcome everyone to the 2022 first 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 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 other securities filings which can be found at sedar.com for cautions regarding forward looking information, for information about non-GAAP measures.

So as we look forward to the balance of 2022, we continue to be focused on growing our platform that continued high grading of our portfolio and executing on a capital recycling program as we move out of some retail assets, as well as some non-core industrial assets. In the first quarter, we have closed on an additional 9 high quality Industrial buildings totaling 236.5 million square feet at a blended cap rate of 5.12.

In addition, we are under contract 4 additional properties. A brand new build, strong covenant distribution center in Ottawa to be completed in January of 2023.

One in London, which is in the process of having 150,000 square foot new edition being built. And expected to be completed by mid-2023, an approximately 85,000 square foot building new build to be built in Balzac, Alberta with one of the reads existing tenants, which is expected to be completed in the late fall of 2023.

Read is also in due diligence on a 94,000 square foot strong tenant in industrial facility in Quebec City. There's several additional assets that we're in varying stages of discussions on that we hope to come to fruition over the next several months.

As you can see, we have an active pipeline of deal flow with our current liquidity and available funds from our capital recycling program, we'll be able to execute on a significant amount of additional industrial acquisitions throughout the balance of 2022. We have 22 acres of excess land at Titan industrial site in Regina, one that we recently closed on, that was acquired in February 2022.

We also have the option to transact on 10 additional acres of land at the Acropolis warehouse facility located on the Edmonton airport grounds. We have engaged in architect and are having rendering created for these parcels of excess land.

So we plan on presenting these renderings to some existing tenants to find one that we can complete a build-to-suit. One of the reads existing tenants in Edmonton has expressed a possible level of interest in both of the sites.

Also in the process of submitting to the City of London on a 100,000 square foot spec addition at our property at 1285 Hubrey, and a 33 thousand square foot expansion for one of our existing tenants at five cutting in London. We are also exploring a development program with RFA capital, where the right we participate in the development which would provide a pipeline of high-quality distribution facilities in the future.

In Richmond, DC, we continue with the redevelopment of our 60,000 square foot building for two tenants. All tenants ' rent will commence once they take possession of the space.

It's still expected completion and possession to occur sometime in July of this year. As mentioned previously, upon completion, our NOI will increase by approximately a $165 thousand dollars a month.

We also are planning the 74 thousand square foot edition, which would provide a significant lift to the rights now, will also be applying at the same time for bonus density, which if approved would allow for additional square foot to be built in the future. In Montreal, we continue to work with the developer on the sale of some excess land and they all .

Developers still moving along nicely with their approvals from the city and it is this still anticipated a closing of the transaction towards the end of the year, which will allow us to realize our first payment from the developer. In our recently acquired London portfolio, 2022 is a solid year for renewals and new leasing, we'll see huge growth there.

We have approximately 345,000 square feet expiring throughout the year and it looks like we're averaging and overall, 30% increase in rental rates, with significant yearly increases. The portfolio also has a similar renewal square foot profile in 2023, which we are expecting to renew at approximately, I'd say 50% to 75% premium to the existing rates.

Vacancy in London continues to be an all-time low and the fundamentals remain really strong. From the disposition front, we still have our three suburban Montreal office properties currently being marketed.

A mixed-use office retail and a single tenant retail property are about to go under purchase and sale agreement. In addition, our retail mall in Victoriaville will be launched for sale once we have completed a lease extension and expansion with one of our largest tenants, which is expected to be in our hand shortly.

We're also in the process of dealing with a non-solicited offer for portfolio of non-core assets, that would allow us to recycle this capital in the future. I'm also pleased to announce as part of their semi-annual review announced last evening, Nexus Industrial REIT has been added to the MSCI small cap index, which changes will take effect on May 31st, so very positive for us.

Now I'm going to hand it over to Rob Chiasson to give greater detail of the REIT's financials.

Thanks, Kelly. In November 2021, we issued approximately $13.4 million units primarily in respect to the bought deal equity offering.

Roughly half those units were included in our weighted average units outstanding for Q4, and they were fully included in Q1 2022. We started Q1, 2022 with $82.3 million of cash on our balance sheet, which was deployed as partial purchase price consideration in the completion of $236.4 million of acquisitions.

At the end of one, we had a $150 million of recently acquired properties that were un -levered representing capital to redeploy for future acquisitions. Acquisitions completed in Q1, 2022 generated approximately $1.6 million of cash, NOI and are expected to generate approximately $1.5 million of additional cash NOI in Q2, 2022.

The timing of our RSU grant between investing in the quarter increased G&X expense for Q1 for 2022. G&X expense related to RSU will be approximately $500,000 lower in Q2, 2022.

In connection with the acquisitions completed in the first quarter, we entered into mortgages totaling approximately a $130 million including 3 mortgages with an aggregate value of a $109 million which were financed per terms of 710 years at rates of 3.18% and 3.28%. Our same score NOI for the quarter was impacted by vacancy, at our office property in Brunswick where the impact of the pandemic had 25,000 square feet come back to us last April and a further 13,000 square feet come back to us at the end of November.

We also had a 22,000 square foot industrial space that was vacated on November 1st. There are currently discussions with three potential tenants for this space.

Acquisitions completed over the course of the last year were the primary contributors, approximately $800,000 of straight line rent in the quarter, properties acquired have embedded steps in rent. As Kelly mentioned, we expect to see some significant lift in new leases and lease renewals in the second half of the year, particularly in London, Ontario, which will bolster our same-store NOI.

100,000 square foot edition at the Ajax property that we co-own was completed at the beginning of the quarter. This brought online approximately $100,000 of quarterly NOI.

The redevelopment of a 60,000 square foot space at our Richmond BC property is expected to be completed in the second half of the year. And we'll see approximately $165,000 a quarter of sorry -- a month of incremental NOI.

For the remainder of 2022, we have approximately $24.5 million of mortgages at a weighted average, 3.17 interest rates that will mature. In 2023 we'll have approximately $49 million of mortgages with a weighted average interest rate of 4.26% that will mature.

So we're not significantly exposed to the recent rising interest rate environment. I'll now turn it back to Kelly.

Thanks, Rob. I will open up the line for any questions that you may have.

Hey, guys. I'm going to pull the .

I was trying to keep up with some of the initiatives you're working on and trying to keep pace of that you've got a lot going on. I guess I just want to start with -- on the intensification of excess land, the expansion opportunities.

Can you just walk through some of the opportunities again on Edmonton and Regina, just the size and scope of the projects potentially and what type of returns did you get there.

Yeah, I'm not 100% sure yet. So Regina has 22 acres of land and we're in the process of getting gotten architect drafting for that and possibly in Edmonton.

So on the 10-acre, so I'm not sure the size and scale yet in Regina it's a separate parcel. So we have the choice of we could do one facility or we do three the way it's laid out.

So I don't know honest square footage yet and we haven't gone on pricing. But I would imagine it be somewhere with costs where they are probably in the 6% to 7% yield, I would say, or maybe closer to seven.

Okay.

So it's still too early to provide guidance on that yet. Okay.

And London's a little different. So London, where we actually are in the process of going to the city with a 100,000 square feet of spec.

And I would think somewhere around 7% development yields, we can get on that one. And then our 33,000 square foot expansion, that's pretty far down the line as well.

And we know that's going to be somewhere between around the 10% yields.

At this time, would more of this pipeline be starting construction maybe 2023, at this point,

Yes. Yes.

Once we get approval right. Then we would have to order the steel and whatever in the steel is quite a still apparently quite a lease time.

Understood, on that front. Can you just touch on a little bit more to the extent you can on the unsolicited offer for some of the onshore assets, I assume that more on the some of the if the industrial assets that you've identified last call that could be.

Potential for capital recycling, could you just touch on that a bit more?

Yeah. It's fairly significant.

And it's a won't mentioned it because it is something we're looking at doing so and it's fairly we do have an offer, in our hands, we haven't press listed, so I'm not going to say the size and scale, but it would be what we would call our non-core distribution. Our core assets now or distribution centers and things like that.

So would've been earlier assets that we picked up, and there is still in a share bit of negotiation back and forth that has to be done. So I'm hoping to have more information relatively soon, which at that point we would -- we would issue a press release.

Okay. Makes sense.

Just last question, before I turn it back, just on the asset sale side for the -- I guess the $55 million listed for sale, does the changing or evolving as to the environment that has that impact of potential pricing at all there? Are you still pretty comfortable in terms of achieving your expectations for pricing there?

Yeah, it's going to be -- I would say it is affecting it. I think things are changing slightly we did have 2 of them under contract that have dropped off with someone.

And so we've remarketed them and we have significant interest in them. It's whether we get what we want, so that's what -- it's going to be close I think.

To our ask is my best guess, but there's still significant interest and I think the big one that will have garner the most will be the mall in Victoriaville because that has very strong tenant base with good term and service oriented to the entire Dollarama metro, so very well tenanted. And so there's pretty good demand for that side products.

So I think that one will garner huge amount of interest in, I think that pricing on that will still be pretty good.

Okay. That's great.

I will turn it back. Thanks.

Thanks. Morning, guys.

Hey, good morning.

Morning.

Just one question with regards to the mark-to-market and the leasing spreads you're seeing. It sounds like the rent growth opportunity in London and your Montreal industrial portfolio is very strong.

If you had to today, where would you peg the mark-to-markets portfolio-wide?

So we're in the process on that, or we don't have it done, we'll hopefully have we're going to have it out there for next quarter. On the industrial, it gets mixed up with some of the retail employee and we do have a large number of retail tenants right now still.

So the London, that's the big one, right? And Montreal too, but we just don't have as much expiry in the short-term in Montreal, but I feel that's stuff that we have done, so we've done I think a new lease with .

Kind of 15,000 square feet where I think we achieved $12 rents, where the exiting rent was six and one of the tenants who took it as our existing tenant, he's expanded, so he's done an early renewal. And you want to secure the rates.

So I think he's locked in at 12 and he's expiring at around six as well. So in the Montreal and things that we do have coming up or expiring we'll see 50% to 100% increase in rent from where we are.

And in in London this -- we're pretty close on all these deals here, so it looks to be a blended overall, like above 30%, but then with some significant yearly increases as we get guys rate up to market. And then next year, when I look at that profile expiring there, so it's over 300,000 square feet again, and I think that was more towards 50% to 75% premium to the existing rates because some of them are pretty low compared to market.

So those are our big expiries coming up and those are the ones that are big drivers of our growth.

Okay. Makes sense.

Thanks for that. Just moving to, I guess, the acquisition side of the business, your commentary suggest the pipeline remains very strong.

It sounds like you've got some more deals under contract that are new. In the context of the rising rate environment, do you expect that to impact acquisition volumes this year?

And are there any larger portfolios out there that maybe you could take a run at or is it really going to be kind of one-off two-off type transactions?

So let me put it in context. So I think the cap rate environment has changed things a little bit.

I've seen things. On some of the pricing, maybe it's 50 beeps on a cap rate.

Here and there where guys, we're looking for 4 now, there are at 4.5 or whatever, but the things that we're looking at here or that we have our I'd say some of them we had already. Done their future PSA, but new newer deals are in the 5's.

And we are looking at something, believe it or not, in a 7. So we're kind of targeting in that 5 cap range now.

That's overall product that we're trying to secure. Unless they have some significant growth -- rent growth opportunity in it.

And there are some big portfolios, there are some out there right now. There's some $300, $400 million portfolios that are floating around.

And I would say the odds of us going after one is slim right now is just considering our cost of capital and the size of them. So now, in saying that if we're lucky and recycling the capital that we think we could, that's just thing.

So it's a moving puzzle right now to put all the pieces together, but we're doing it as some deals come to fruition. And if we're successful on recycling, the capital, well, that puts us in a fairly liquid position.

So really going to depend.

Okay. And just last one for me.

Looking at Richmond, you mentioned applying for maybe some additional development space. Are you able to provide any details there?

Yeah, sure. So we are going to go in and redo for a permanent for the 74 thousand square footage addition.

I'd put it on hold for now, but I think we will go because I think the amount of lift that we can get from that project is huge. So getting the bonus density and going for it now, whether we build it or whether we just have that value attached to the projects, it's extremely valuable.

So as you know, Richmond has no land. Land is $8 to $10 million an acre.

So to be able to have that density too whether we stayed in the projects or we moved on or where we kept going because I don't see that many opportunities that you can get that type of lift just from the demand for product there. So cap rates really low, rental rate is really high.

It's a good combination for us, but that would be down the line. Getting the bonus density and having that, it would just be extremely valuable.

Okay, great. That's it for me.

I will turn it back. Thanks.

Thank you. And good morning, everyone.

Morning.

Morning.

I have two quick questions, and I'll begin with the first one. Now we've seen the Amazon jitters persist among equity market investors.

Just from your viewpoint, how do you think investors should think about the Amazon narrative and focusing on markets such as London, and some of the investment markets that you are targeting in your acquisition pipeline.

Listen, our London portfolio, I'm extremely high on, the demand is through the roof right now and there's no supply, so there's not much coming on either. We're hugely positive on Southwestern Ontario.

We've mentioned some development opportunities with RFA capital. We're in Hamilton area, which I think is another future node right by the airport that's going to be hugely successful for us, Edmonton and Calgary.

You're starting to see rental rate traction and growth there, that we were in there before was great. Amazon, maybe they had with COVID and the amount of demand on online.

Them slowing down, I don't think is a huge deal to be honest, like there still building 3 million square feet in London and that's -- that's some huge project. And so I think slowing down still being -- there's the whole absorbed taking on a huge amount of space.

And when you look at the market as a whole, right? I think where we're situated if we're going to going to go into Hamilton.

If we're in Southwestern Ontario these moves by Amazon into London can only benefit the existing guys are we have right?

Right.

So I'm hugely positive on the market we're in.

Okay, great. I think that's in line with what we're thinking as well.

Last question on I'm just want to come back to the acquisition pipeline again. You've mentioned, looking at, that going in cap rate, which is at the private cap and at a 7 cap, just out of curiosity, what would that mean on a stabilized basis?

Yes. So when we're looking at some of these, let me just think so.

One of them we have it's in the 5 caps and I believe it has 2.5, 3% increases. The one that would be the higher cap rate one is, I think one that would inside that cap rate, but would be bit of a new market for us.

And it would -- it also has some vacancy that could come up in 2 to 3 years that I think we could turn and get a higher rate on that. The other ones -- the other 2 new builds are kind of more stabilized assets that I mean, our London one, we know we have it at a 6 cap with a 150,000 square foot new edition.

So that will be at a 6 in it but it has also the ability to build another a 150,000 square feet on it. So we've just been a little bit pickier, I guess on assets we're chasing, and think we've seen it across the board in the acquisition.

Some guys have dropped out where maybe there's smaller investors there taking a breather in dropping out. We're not chasing 4.25 caps anymore but it's pretty tough to make that accretive.

So we're just looking at different opportunities and leveraging the relationships that we have.

That's great. Thank you for the call Kelly.

I'll turn it back to the Operator.

Hey guys. Just wanted to quickly follow up on that line of thought with regards to cap rate expansion.

I mean for a market like London where it seems like rent growth expectations have been out stripping inflation and expectations generally. Are you still seeing guys willing to bid aggressively?

You saw some pretty dramatic cap rate compression in that market but is it markets where you're not expecting to get the same level of rent growth that are seeing the expansion or is it across the board?

I'd say London is still a pretty active market, if anything maybe some smaller guys have dropped out but there's still a lot chasing, but there isn't a lot of product for sale right now there. So it's kind of stable.

I think where I saw some of the cap rates, it's maybe in the Edmonton area, our Calgary in it minor like you got to understand, Edmonton went from -- it went from sleepy where no one wanted to be in it to where all of us on a bunch of guys came in because the cap rate, different differentiation between there and Ontario, for example. So we saw new faces in their bidding against us.

And it started to push things up. So I think it's just kind of leveled off their little bit.

And so I'd say in Western Canada where rents aren't growing as rapidly, but they're starting to grow. And I think it's actually looks like they're getting significant traction now.

So I just feel that the market there was everyone was pushing forecasts and that was still Edmonton in the growth wasn't as robust as Ontario. So I think it's just come off for the brand new, high-quality assets.

Come off a little bit there. And when I say come off, when you look at those quarter-over-quarter CBRE reports or whatever, I always feel they're lagging a quarter or two, so it'll all come out in the next several quarters.

But I think the expectation of someone was out with a four and a cap -- four and a quarter cap portfolio. They're now thinking maybe it's 4.5, 4.6, so it has affected there, I don't think it's affected it in Ontario at all.

Fair enough. Now that that absolutely makes sense now, on the flip side does that present maybe, and opportunities to reengage in those markets or look back at them because, I don't know what your thoughts are, but looking just at the occupancy trend in both Edmonton and Calgary, it seems like we may have an Ontario type rent growth situation there a few years out from now, if that continues, but just -- just thoughts on that market generally.

Yeah, 100% and we were one of the first guys in there, and when everybody was getting up. So I think will be beneficial for us, especially on a lot of the assets that we just closed on.

So we have a fairly strong network there, so we're seeing a lot of assets there. And I think we'll still be highly active because I think you will start to see the rent growth occur there a little.

I don't think you're going to get Ontario like rent growth, but you're going to get pretty significant rent growth is my guess.

Okay. That's fair enough.

And then just your commentary around London and the near-term maturities. It looks like it's a little bit over half or around half of your maturing space.

Is the rest of that a mix of retail and industrial or is it more retail heavy? Just trying to gauge what spread would be and what impact that would have.

And I think Kyle addressed it, but any further color you can provide there would be helpful.

Yeah. I'm trying of -- so of the main portfolio.

It's about 1.2 million square feet, so call it half of it, is expiring in this year and next year. In the rest, and I'm looking, there's some longer-term deals; 2028, nothing too huge in 2024.

So the next two years, I think, are the big turn that we have. And the rest of is longer-term, but it's all it's all industrial.

Okay. Fair enough.

I'm just thinking relative to your total lease maturity profile over the next two years. It seemed like the London was around half of the amount of space maturing, but is the remainder industrial space outside of London or is it retail and office assets that are coming to maturity?

I would say it's a mixture of retail office, but the majority is on the industrial side.

Okay. Fair enough.

That's great. I appreciate the color and congrats on the quarter.

Okay. Thank you.

I want thank everybody for attending and we'll talk to you next quarter.