Nexus Industrial REIT

Welcome everyone, to the 2026 First 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 [Technical Difficulty] for cautions regarding forward-looking information and for information about non-GAAP measures.

In the first quarter income of $33.8 million, an increase of 5.4% compared to last year, and normalized FFO increased to $17.7 million. On a last 12-month basis, adjusted EBITDA grew to $121.3 million, and this quarter marked the first quarter in 10 quarters of a sub 100% payout ratio as we posted a normalized AFFO payout ratio of 96.6%, resulting from a strong normalized AFFO per unit of $0.62 -- $.0162 NAV grew...

[Technical Difficulty]

Once again, I'd like to welcome everyone to the 2026 First 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 sedar.com for cautions regarding forward-looking information and for information about non-GAAP measures.

In the first quarter, we delivered healthy net operating income of $33.8 million, an increase of 5.4% compared to last year, and normalized FFO increased to $17.7 million. On a last 12 months basis, adjusted EBITDA grew to $121.3 million, and this quarter marked the first quarter in 10 quarters of a sub 100% payout ratio as we posted a normalized AFFO payout ratio of 96.6%, resulting from a strong normalized AFFO per unit of $0.162.

NAV grew $0.07 compared to December 31, 2026, ending the quarter at $13.29 per unit. While I'm very pleased with these headline earnings, the results were impacted by a number of different puts and takes, which I'll outline in a minute.

The quarter, we also made good headway on several strategic initiatives. We advanced our leasing.

We were granted an investment-grade credit rating from DBRS, which led to our inaugural bond offering in April. And lastly, we have firm sales for 2 of the 4 buildings that we had for sale at year-end and also advanced our development.

I will now discuss each of these items in more detail. Starting with our operating performance.

We made good progress this quarter. We completed roughly 41,000 square feet of new leases at an average rent lift of 32% over expiring and in-place rents.

This demonstrates our continued ability to capture the market lift on lease renewals, which bodes well for our future since March 31, we had an attractive average spread between market and in-place rents of 15.8%. From an occupancy perspective, the progress we made on renewals was overshadowed by two unplanned vacancies in the quarter, which led to a drop in occupancy to 95%, but which interestingly also had a positive impact on our financial results.

Roughly half or 0.5% of the occupancy decrease came from our property at 4590 Portland Boulevard in Sherbrooke, Quebec. We early terminated the tenant for non-payment.

This resulted in additional termination income of approximately $1.2 million since we expect to fully collect on a guarantee from the tenant's parent company. So while this quarter, our NOI and AFFO benefited from the lease termination, the 62,000 square foot property is now vacant and will likely take several months to find a new tenant.

Overall, on a full year basis, I don't expect any impact. The benefit from the lease termination income that we earned this quarter will be offset by some downtime over the next couple of quarters, leaving us whole on a full-year basis.

The remaining vacancy came from our building at 1020 Adelaide Street in London. A tenant who had 88,000 square feet decided to vacate at the end of February.

The tenant was paying gross rent of only $6.80 per square foot, which is significantly under market. We have already had good interest and expect to fill it over the next couple of quarters at market rents of about $9 to $10 per square foot, net resulting in a significant longer-term value creation for us.

In total, we delivered industrial same-property NOI growth of 1% in the quarter as our positive leasing activities outweighed the impact of the temporary vacancies. In 2026, a total of 990,000 square feet of gross leasable area was scheduled to expire.

To date, the REIT has successfully renewed 510,000 square feet at an average increase of 7% over the expiring rental rates. We had one reset renewal in Alberta that was a long-term deal that expired and that has dragged this percentage down.

If we exclude this, the rental lift was 26%. Of the 380,000 square feet remaining for the year, we are currently in solid discussions with two tenants that represent 240,000 square feet that expires in Q4.

Of the remaining expiring GLA, 140,000 square feet is represented by mostly three strategic vacancies where we anticipate achieving higher rents upon re-leasing. Overall, our outlook for 2026 remains unchanged.

We continue to expect our industrial same-property NOI to be in the mid-single digits for the year. And we expect our normalized AFFO payout ratio to average below 100% for the full year.

In the first quarter, DBRS granted Nexus an investment-grade rating of BBB -- BBB low, stable in April, we completed an inaugural bond issuance of $500 million. The debentures were issued in two tranches, $300 million of a 3-year bond with a coupon of 4.236% and $200 million of a 5-year bond with a coupon of 4.641%.

These issuances marked a significant milestone in our evolution, and I'm incredibly proud of this achievement. The capital pool company that we started 13 years ago with $5 million in cash is now investment-grade rated with assets of nearly $2.7 billion, has created nearly $1.3 billion equity for our Class A and B unitholders while also having paid cumulative distributions of $361 million.

Looking forward, the ability to access bond markets will save on financing costs and will significantly increase funding flexibility and reduce financial risk. At the year-end, we had 4 buildings identified as being held for sale, and we have already addressed 2 of them.

In February, we closed on the sale of 41 Royal Vista Drive in Calgary, an existing tenant in the building submitted an unsolicited offer above our market value to secure long-term control of the site. They offered us $8.5 million, which was equal to a cap-rate of 5.7%.

Given the competitive pricing and strategic rationale, we accepted the offer and closed the sale. We have used the proceeds to repay debt.

Our building at 40th Avenue in Red Deer, Alberta, is under firm sale contract for $11.25 million. This building went vacant when Peavey Mart filed for CCAA in April 2025.

At 190,000 square feet, it is large for the area and was challenging to release. The buyer is obtaining a development permit from the city after which the sale will close.

In the meantime, the buyer is paying us monthly rent starting in May of $95,000, which is a great outcome for us. In Hamilton, we are still looking for a buyer or a tenant for 115,000 square foot new build in Glover Road.

We own 80% of this property and it has been a challenging market in Hamilton, but we have a brand-new facility. Once sold, it will contribute significantly to our AFFO per unit as the carrying costs are significant, and we'll be able to use the sale proceeds to pay down debt.

The last building is our sole remaining retail property, [indiscernible], which we are marketing gently. The cash flows well for us, so we're not in a rush to make a sale.

In addition, we are closed on a deal to sell our 80% interest in development land on South Service Road in Hamilton. The property doesn't fit into our strategy anymore, and we will use the sale proceeds to reduce debt.

As we shared in March, we are in the planning stage of two additional development projects, which will get underway later this year. At our Savage Road property in Richmond, BC, we're adding 80,000 square feet for a combination of cash and $29 million in REIT units issued at $10.50 per unit.

We'll earn 6% on the REIT units issued during the construction period and we'll earn a contractual 6% yield upon completion. At Adams Road property in [Kelowna], we'll build up to 180,000 square feet of micro industrial units on vacant land surrounding our existing industrial building for a total estimated cost of approximately $47 million.

Turning to our outlook. We continue to expect NEXUS to deliver a strong 2026, driven by our completed development projects, embedded rent steps, the lease-up of vacant space and the re-leasing of space at market rents above expiring rents.

We see no change in our outlook and anticipate mid-single-digit same-property NOI growth in our industrial portfolio for the year and normalized AFFO payout ratio to an average below 100% for the full year. 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, net income was $32.2 million, a $1 million decrease compared to a net income of $33.2 million last year.

The decrease was primarily due to lower fair value adjustments on our investment properties by $6.8 million and a decrease in the Class B LP unit fair value adjustments by $5.6 million, partially offset by higher fair value adjustments on derivative financial instruments by $11.3 million and an increase in net operating income by $1.7 million. As Kelly mentioned, our Q1 net operating income increased 5.4% or $1.7 million year-over-year to $33.8 million.

This was primarily due to the completion of our St. Thomas and Calgary developments, which combined added $1.3 million, the acquisition of the two Montreal buildings in November, which added $700,000 and an increase in lease termination income by $600,000 from the eviction of the tenant at 4590 Portland Boulevard in Sherbrooke that Kelly spoke about.

NOI also benefited from a change in how we treat improvements and leasing commissions to better align our approach with our peers. For this quarter onwards, we have stopped amortizing TIs and LCs, and instead, we are now adjusting these balances through fair value.

When compared to prior periods, this resulted in a $400,000 benefit to NOI this quarter and has no impact to other metrics such as net income, FFO or AFFO. In the quarter, the benefits to NOI were partially offset by a one-time write-off of straight-line rent of $600,000 resulting from a lease change and a $600,000 decrease from foregone rents from properties that we have sold since Q1 2025.

Normalized AFFO for the period was $0.162 per unit compared to $0.154 from a year ago, primarily due to a higher normalized AFFO of $1.2 million, driven by the higher NOI discussed earlier, partially offset by higher interest expense of $700,000 and a $200,000 increase in general and administrative expense due to higher compensation and legal fees. Total general and administrative expense for the quarter was $2.5 million, which was $200,000 higher than a year ago, predominantly due to higher non-recurring compensation costs and legal fees.

Net interest expense in the quarter was $14.1 million, a $700,000 increase from the same period in 2025, driven by higher interest on the credit facility by $800,000 resulting from higher borrowings during the period to fund mortgage maturities and development expenditures and lower capitalized interest by $400,000 due to the completion of development properties. These increases were partially offset by a lower mortgage interest by $500,000, resulting from principal repayments and property dispositions.

The carrying value of our investment properties increased by $14.3 million in the quarter, primarily due to capital expenditures, tenant improvements and leasing costs by $7.8 million, $4.2 million of development expenditures and $2.1 million of fair-value gains. At March 31, our NAV per unit was $13.29, a $0.07 per unit increase from last quarter.

Our weighted average cap rate increased by 6 basis points to 5.94% in the quarter compared to 5.88% at December 31. I will now turn the call back to Kelly.

Thanks, Mike. I will now pass it back to the operator to open up the line for questions.

Congrats on the investment-grade credit rating. Just curious, with the unwind of some of the currency swaps, would there be a one-time cost associated with that, that we should expect in Q2?

No income impact because it's already been accrued. The derivatives are already carried at fair value.

But there was a cash impact of just under $2 million.

Appreciate that. And then just given the lease termination fee income in the quarter, but no change in the guidance, would that assume, I guess, the guidance is including the lease termination fee income going forward?

And then if so, I guess, if we were to strip that out, what would be the growth guidance for the rest of the year?

No, it is stripped out from that SPNOI. So that would be another $1.2 million we could add if we were to include it in that calculation.

Okay. So no major changes to the guidance, as you said.

Okay. Understood.

I guess my last question would be on Kelowna. I guess you're making progress on that front.

When would the project be complete from a construction point of view? And when would you be looking to start the sales process on the micro units?

Yes. I think we're just still in the drawing phase right now, finalizing.

So I think probably not until the end of the year start. Richmond is a little different.

And that one will -- we're in for permit on that one as we finalize design, it's kind of a unique cool design. And there could be further upside there.

So at the end of the day, each of them kind of will go in stages.

Maybe just going back to the guidance kind of that Brad asked about there. So, obviously you reiterated the guidance, softer print this quarter, we understand because of the vacancy, but that would imply a pretty significant acceleration into the last 3 quarters of the year.

I'm just wondering where is that growth really coming from over the balance of the year? Like what are the drivers that maybe didn't contribute this quarter that we should expect to really ramp?

Yes, that's a fair comment, Kyle. A couple of things there.

One is the primary thing is leasing of empty space. So we had a big one that was a drag versus prior year is 102 Avenue in Calgary.

So that was the old Peavey Mart space that was occupied Q1 of last year, and it was vacant this year, and we anticipate filling that later this year. Another one is the other Peavey Mart space that we're looking at selling.

So we have that under firm contract now, and we're actually going to receive rent from it from May forwards before it ends up closing -- the sale ends up closing in October. So those will both benefit SPNOI going forward.

Okay. Would you say just as you look forward, I think you highlighted -- I just want to confirm another maybe 140,000 square feet of expected nonrenewals later this year.

Is that correct?

That's correct.

Okay. So would you say anything has changed in the leasing environment?

Is it more challenging maybe than it was? Is there different areas of strength or weakness or secondary markets coming under any pressure?

Or just would love to hear, I guess, your thoughts on the leasing environment.

Yes. So we have one in Montreal.

It's a 91,000 square footer. That tenant -- I think I mentioned this before, but that tenant had three 5-year renewal options at no more than, I think, 2.5% of their expiring rent.

So last year, we -- they wanted to stay for 1 year, and so we moved their rent to $9 from like $5. So that was strategic.

We knew it would be a 1-year hit. $9 is still well under market for that area in Montreal.

So that comes up at the end of the year. That's one of them.

Another one, a 20,000 square footer in London, where they were paying $6 gross. So $6 gross is very, very under market, not willing to pay the increase.

So we're out to market with that. And then another one in Ajax, where they were sitting at, I believe, $11 a square foot.

No, $13 a square foot. So we'll get an uptick on that.

And we also did a buyout with them a termination. So we got full income until the end of the year from them.

So at the end of the day, those were all strategic where we saw a significant amount of upside. So to answer your question on the actual leasing, I feel London is -- I wouldn't say slowed down.

People are just more cautious. So it is a little bit harder to get the deals done right now, although the leasing market is still pretty healthy.

We have 2 larger ones that we're in paper with back and forth that we hope to have wrapped up in the next quarter or so. That represents, call it, 230,000 square feet.

So I'm still pretty positive on those to renew. So overall, I think things have calmed down, but it's still a fairly healthy leasing market.

Okay. Just the last one for me.

Just on the -- just wondering where we stand on the stabilization of the Calgary kind of industrial condo development. How much NOI was realized this quarter versus how much you expect it to ramp throughout the year?

It was 56% occupied. We probably had about half -- at the end of the quarter, we had probably about half of that contributed during the quarter.

So we have full -- that full 56% we'd receive next quarter. And we see -- we've made pretty good progress in the leasing.

I think there's one out for signature of the remaining 4 units, 2 are in negotiation and then 1 we're still looking for tenants. So our expectation is to have that done by the end of September, have it fully stabilized in September.

And I'll echo the congratulations on the investment grade and the inaugural debenture offerings. And just on that, Mike, how do you see the interest cost run rate changing in, I guess, Q3 will be the first clean quarter with the debentures versus the $14 million booked in Q1?

I think overall, the benefit of the bonds where credit spreads are, they will save us in the order of 10 to 20 basis points. But that is -- that's very -- that's like variable depending on credit spreads of the credit facility at the time.

So -- but yes, what we've locked in there is basically 10 to 20 basis points relative to what we were paying.

So you're saying the -- all else the same in terms of debt levels, the interest cost should be a snick lower on a run rate basis by Q3, I guess.

On the $500 million that we've raised.

On the $500 million. Got it.

Okay. Okay.

And then just on the new vacancies in the quarter, and thank you for, I guess, the color you provided there. I'm just curious, could you identify who the parent company is of the, I guess, the former tenant at Sherbrooke?

Yes. It's -- I believe it's Coco Frutti.

Okay. And then the tenant in London, what was the reason they chose to vacate the premises there?

And was there -- like was that at the end of their lease term? Or was that they have an early termination right?

Yes. No, that was an expiry.

It actually was -- I call them our partner, Amy McLaughlin, who had...

Okay. That's my thought.

80,000 square feet at a gross rent of $6.80. We want more.

They have some of their own vacant space in one of their buildings that was an old manufacturing site that they just moved into to take some of that space there. So it's pretty good space and at only $6.80 gross, we see upside there.

Just a follow-up on that interest savings comment of 20 -- 10 to 20 basis point savings. I just want to make sure I understand.

So the debenture blended rate is about 4.4%. And isn't the term facility at 5.3%?

The term facility was -- so the term facility was 170 basis points over CDOR or CORRA. We still have the swaps in place -- well, some of the swaps in place, I guess.

So -- or said another way, we have unwound the swaps, we have the impact of the swaps because we've paid them off. So we have the additional debt of the swaps.

So the real savings here is the credit spread that we're paying. And so we're paying effectively the credit spread is slightly tighter, 10 to 20 basis points tighter than the effective credit spread on the credit facility.

All right. I think I get it.

The -- maybe just in general then on the leasing comments, where are you seeing potential tenant stress? And then you made a comment about leasing people a little bit more cautious.

Can you kind of -- what would you attribute that to? Is it the oil environment, the tariff that you could point out?

I'd say Alberta and [West] is still really strong. There's no doubt.

Montreal, I see a slight -- I mean, it's a slowdown in Montreal from what it used to be. London, Southwestern Ontario, it's an interesting, interesting market.

Windsor, for example, has literally almost no availability. And you think that would be the opposite of what's happening in the auto industry.

So it's a little bit bizarre, but Windsor itself has like very little vacancy at all. And London, we've just seen some larger manufacturers that kind of have disappeared that have led a big space, like the one that our partner has, it's a pretty big building.

But on that note, they're making pretty good headway of filling it back up. So in -- subdividing it into warehousing.

So I feel that when you look at the tenant base right now, they're having trouble forecasting what's going to happen. So the growth plans have paused.

And I think until we get through the tariff thing, I think that's going to be the case. Guys are just pausing on decisions and taking their time and waiting.

And so until that, it's just going to be uncertain times. But overall, it hasn't hurt us too much.

The ones that we have are kind of planned ones because we're going to get a pretty good lift. When you think about $6.80 gross, that sits down to $4 and something, $4.20 net rent that we can take to $9 or $10.

So the short downtime is worth the lift that gives.

Just on the Glover Road development, do you have an estimate of like what your quarterly carrying costs are on that asset right now?

I believe somewhere around in between $80,000 and $90,000 a month. So it's significant.

And when we sell a significant improvement to our NOI.

Okay. And in terms of price talk around the asset, are you comfortable you can -- you'll be recoup your development costs, here?

Yes, we believe so.

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