Nexus Industrial REIT

Thank you very much. I'd like to welcome everyone to the 2021 second quarter results conference call for Nexus REIT.

Joining me today as usual 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. In 2014, we began as a very small pure-play industrial REIT.

In 2017, we pivoted to diversify to accretively grow and gain access to the Quebec market. Since 2017, we have returned to our roots focused on acquiring industrial properties.

We are executing on our strategy and at a pace much greater than I originally expected. For the second quarter, we have closed on $148.3 million of industrial acquisitions and subsequently have closed on another $76 million.

And this morning we announced we have waived conditions on another 19.7 million strong covenant industrial distribution center in Alberta with a 10-year lease term. We have an extremely full pipeline right now.

The deal flow is huge. And at the moment, we are quickly increasing our industrial weighting and will continue to do so throughout the year.

Our NOI generated from our industrial properties will easily exceed the previous target set of 75% by the end of the year. Our fundamentals continue to be strong on March 4, we closed a $35 million offering.

And on April 1, we closed on the London transaction. Subsequently, we entered into a new $40 million credit facility and placed on three of the London properties.

We are well on our way to deploying this liquidity. Our occupancy for the quarter was up slightly from last quarter.

In the industrial portfolio, our vacancy continues to be mainly a 25,000 square foot industrial space at 41 Royal Vista Drive in Calgary. We are encouraged by recent leasing inquiries and we're hoping soon we'll see some paper on that space.

We also have a 26,000 square foot office space of Place 400 in St. John, New Brunswick that came back to us on April 30, as we previously announced.

We've been actively marketing the space and have subsequently leased about 5,000 square feet of it and we currently have about three possible groups interested in different portions of the remaining space which should help mitigate the loss of the rent. In Richmond BC, we're progressing quickly and nearing substantial completion and turnover to our two tenants on the repurposing of the 60,000 square feet former industrial space into a much higher-yielding skate and hockey tenancies.

As mentioned previously, upon completion which is expected to be in and around September or October, our NOI will increase by approximately $165,000 per month. We also have the ability to add an additional 74,000 square feet right now to this project in the future and we're currently in for permitting with the city.

In Montreal, we continue to work with the developer on the sale of the excess land, as mentioned before at Les Galeries d'Anjou. The developer is moving pretty quickly now and it looks like their approvals are coming a little quicker than we thought.

So it looks positive for late fourth quarter. On the disposition front, we've targeted six potential high-quality retail and office properties for sale in the fall.

While we're not really in a rush to move assets, we believe they'll garner much attention in the marketplace and a lot of interest and will give us additional funds to redeploy the proceeds from the sales into additional industrial products. I will now hand it over to Rob to give some greater detail on the REIT's financials.

Thanks, Kelly. Between the $35 million offering in March and the London vendors taking back a significant portion of the purchase pricing units, we had approximately $75 million of cash to deploy, allowing us to complete approximately $200 million of cash acquisitions.

In mid-June, we completed approximately $45 million of cash acquisitions. As a result of completing these acquisitions towards the end of the quarter and having cash left to deploy, our unit measures -- our per unit measures were diluted and our payout ratio has increased.

As Kelly mentioned, we will see the benefit of deploying the proceeds of the raise and balancing out our capital structure in the coming quarters, as we fully deployed this cash. We revalued our portfolio in the second quarter, seeing fair value increase primarily in our industrial portfolio.

Montreal industrial cap rates have come down significantly over the past two to three quarters. We also saw industrial cap rate compression in Ontario and some movement in Calgary.

While we are aware of activity in the Edmonton market that may suggest cap rate compression there too, this is not yet reflected in published cap rates. Same-store NOI was down in the quarter, primarily as a result of two vacancies Kelly mentioned, a 25,000 square foot industrial vacancy in Calgary and 26,000 square feet of space in an office building in St.

John, New Brunswick, which came back to us at the end of April. There has been encouraging leasing activities on both of these vacancies.

G&A expense was lower Q2 as compared to Q1, with TSX graduation costs hitting in Q1 and with -- due to the timing of period costs. We entered into a new revolving credit facility in June for $40 million, which was undrawn at quarter end and we continue to have ample liquidity.

I'll now turn it back.

All right. Well, I'm going to open it up to any questions.

Hi. Good afternoon, guys.

First question for, Rob. If you combine cash on hand as at Q2 and post Q2, subsequent to financings, what would be your current cash position and what would be your buying capacity going forward?

Okay. Thank you for the question.

I think, right now, we're sitting with the capacity to do about $100 million worth of deals on top of the $20 million deal that we announced yesterday, where we waived conditions. So about $125 million total and $20 million will be used for that acquisition.

So we've got the capacity to do about another $100 million.

Okay. Thank you.

That's great. And I guess last question for, Kelly.

I was just wondering if you could provide some color on just the overall environment and conditions for any -- like, any potential future acquisitions and more specifically as to timing cap rates and any other potential new markets?

We're active in the markets we're in. And so, on the pipeline like, we've been pretty successful in completing deals above a six cap.

So, that's been going pretty well. We have a number of deals in different stages of negotiations.

I don't want to give a number. But I mean, it's a healthy amount of deals that we're looking at.

So, I think going forward, we'd be in the 5.5 to 6.8 range I think overall of the product that we look at. It's what we focus on.

You're not going to see that in GTA or Vancouver or in some parts of Montreal, but we've been pretty successful in the markets we're in on finding pretty good deals and we'll just continue to source those right now. And like I said, we do have a pretty active pipeline.

So, you'll see a pretty active fall for us I'm assuming.

Perfect. That’s great.

Thanks for the color. Thanks guys.

Thank you.

Hi guys.

Hi Brad.

During the quarter, you had a $10 million asset classified for sale, is that the excess land at or is that something else?

It's something else. It's a retail property that we have a firm offered to acquire from a purchaser.

No.

Well, purchaser will acquire. And we're subject to some confidentiality under the PSA.

So we're being a bit intentionally vague, but it is a retail property.

And would that be included in your six identified assets then for the fall?

No. No, that's above and beyond.

Above and beyond

So Yes, when I talk about the six, it's kind of six, I call them relatively prime assets that we have that will garner quite a bit of attention. They're pretty solid.

And what would be the -- if you were to sell all six in the fall, what's the quantum of proceeds you think you could get from that at this point?

Yes, I'd say it's between in and around $100 million, $110 million in that range.

And where would you be in the process on in terms of monetizing some of the excess land?

Yes. It's funny you ask that.

I was in Montreal two days ago and I actually sat down with the buyer, interesting gentleman, who has actually some other opportunities that might work out well for the REIT down the line. But he said, it's going extremely well.

He considers a done deal. So, we're hoping to have the paper signed pretty soon because it looks like it's a go from the city on his viewpoint.

Okay. So let's say that's Q4 as well?

Yes, I think so. And remember, that it goes in stages as well, right?

That's not one big lump sum. It's a staged payout.

Yes. Okay.

Maybe switching gears just to the fair value gain. Obviously, a good chunk of that with Richmond.

What would that imply in terms of the cap rate from Richmond? And then, can you just talk about the loan to value on the property and the potential refinance?

Yes. So on Richmond, we've got about a $30 million loan right now.

So there's a good opportunity to leverage that up. We ended up valuing it at about $125 million, which works out I think somewhere around a four cap give or take.

And we've got appraisals -- we've got an appraisal that we've commissioned that's in process. We'll get that back shortly and we'll reevaluate $125 million at that time.

Yes, the building is not yet done. So, we took it call it a partial write-up and then we're finalizing with appraisals in the process which will kind of show up I think in the next quarter.

Okay. And then you would revisit the loan-to-value or try to upsize that?

Yes, if we were lucky and we got a permit the cost of construction could be funded rate out from the increase in pulling out cash on that asset plus still give us substantial because. Like we said, we're going to be sitting here with a fairly large substantial asset that only has $30 million of debt on it.

Okay. And would that be your plan maybe to take out cash from the assets to pay part of the profit share or how do you feel about -- how you would pay for the profit-sharing arrangement for what you owe to the developer?

Yes, well, we have an agreement with them. So, there is a mechanism in place on price for the units.

So, we're still going through that old process. So, kind of finalizing what the final lift calculation would be.

So, we can do it in units. We have a number of options.

So, there would be an opportunity to fund that through the upsizing of the upsizing of the loan on that property.

Okay. And then just in terms of lease commencements is that all in place in the rent start by the end of the quarter?

I think -- so I -- one of them I think will commence real soon but there is -- I believe there's a couple there's two months free rent on it. So, the rent would probably kick in say if it's mid-August now whether that October yes, in Q4.

And then the other one there's a slight delay just from -- it is really hard to get steel right now. But we -- so there was a delay because it actually has a new roof on that portion that goes in.

But we've got it in now and they're blasting away on it. So, I'm hoping that that will be done September and then that kind of kicks in in the October range is what I'm hoping for right now.

So, Q4 you might get a pretty close to a full run rate on the NOI?

Yes. Yes for sure.

Pretty close.

And for Phase 3 have you already started pre-leasing discussions there, or how do you think about when that would really ramp up?

Yes. So, we have -- the project is actually garnering a lot of interest in Richmond.

So, it's become quite the big deal out there. So, we have three guys that really want in and we'll put paper the minute we start to get when we know we're -- when and at what point we're going to have that approval from the city.

So, when we have the permanent hand we'll get leases signed up. And then once we have the leases signed up which shouldn't take too long then we'll break ground.

Okay, I'll turn it back. Thank you.

Okay. No problem Brad.

Thanks. Hey guys.

Hi.

So, just looking at the acquisition environment you've talked about it a little bit. I mean, we've all seen a number of high-profile transactions announced lately.

Are you seeing any significant changes in the competitive environment or the types of buyers that you may be competing against? I mean, I know historically, you've leveraged your network to source off-market deals.

Just wondering, I guess, the runway for you to continue sourcing those off-market deals or at a certain point, do you anticipate having to enter more competitive bidding processes?

So, I'll say that, our runway is still pretty large on off-market deals. So you'll see a significant amount that will come in off market.

So that is ongoing right now. We have bid on some, and have not been successful.

A couple we – I believe we only bid on one of the ones that were actually under contract on that that was a bidding process, and we won that one. And we weren't even the high bid, but we still managed to win it.

Others, I'll give you an example. We bid on one in Edmonton.

We kind of looked at it. It was brought to us, and it went out and it sold at a low four cap and is kind of bewildered a little bit.

And so we do see that in some of the markets like Montreal is very competitive. We missed out on one last week that, I thought we had we were pretty close on it.

And so it is competitive. It's really competitive.

But in saying that, we do have a pretty large pipeline of non-marketed opportunities. So I feel we can add a significant amount of property still without getting into that hugely competitive bid process.

Okay. That makes sense.

And not to pin you down on any specific number at all, but just relative to maybe what was announced or completed in the first half? How do you think the volume could look in the second half?

I'll say this. I think it's going to be substantial.

Every time at a number, we seem to blow rate by it. So I'm hesitant where – we have quite a bit in the hopper right now that we're in various stages of negotiation and due diligence and whatnot.

So it will still be extremely active second half of the year second, especially last quarter.

Okay. And then I guess just shifting to the operations of the portfolio and as the portfolio has transitioned to being primarily industrial, do you have a sense of the potential rent growth we could see from the industrial assets over the next one year or two?

I mean, in the more primary markets we've seen some pretty aggressive mark-to-market opportunities. Just wondering in your more secondary market portfolio, what you're seeing?

Yeah. So Kyle, we don't actually have a lot of lease renewals coming up in the next one year or two on the industrial side.

Where we do see some opportunities is the London portfolio that was acquired in April. There's some 2022, 2023 lease renewals there where we should be able to get some pretty significant upside.

But just due to the longer-term leases, generally, we have in our industrial portfolio we don't actually have a lot coming up for renewal. We had one space that came up in Montreal that we got a pretty good lift on, and we'd expect to continue to see that as leases do renew.

But just 2020 – the rest of 2021 into mid-2022, we won't see a lot of renewals. And then we'll see some opportunity in 2022 on that London portfolio, and then into 2023, 2024, 2025.

Okay. Great.

And just one more for me. Just on industrial intensification or expansion within the portfolio, could you comment a little bit about the opportunity that maybe exist there for you?

Yes. In London, we have -- it's pretty large.

We're getting drawing together for probably, I'd say, 550,000 square feet of potential that we're looking at. So that when -- that portfolio alone has a significant amount right there.

So I know one of our buildings down in St. Thomas has the ability to expand significantly on.

So we do have quite a few that have quite a large land portion. So London would be the one that we would focus on near term.

Just from a supply/demand, the vacancy there is pretty low and the demand is pretty high. So it makes sense for us to take some risk, and perhaps build some on back.

And I think by the time we would be going we would have it filled. So it's probably the market that you'll see us tackle first.

Okay. Do you have any thoughts on what the development yield would be, whether it's an exact number or just a spread over stabilized?

Yes. I think it would be around 8% is my guess right now and depending on where construction costs came in and everything, so -- which would be decent, because you'd probably look at the value of I'm hearing now crazy enough sub-5 in London.

So it's -- things are moving across the board.

Okay. Great.

That's color. I’ll turn it back.

Thanks.

Thanks.

Hi. Good afternoon.

Maybe just sticking on the -- with respect to the acquisition side of things, does the market's focus right now in this environment is still kind of similar to what you guys have been targeting?

Yes. We -- I guess, I'd call it opportunistic.

So we're pretty active in the markets that we're in. And I am actively looking in Quebec, Montreal area.

I'm actively looking in and around the GTA and I'm trying to find things that make sense for us from a cap rate perspective. So we are seeing deals.

We're seeing a number of them, but overall, I'd say, you just see us continue to grow in the markets that we're in right now.

Okay. And I guess, I think this was kind of already brought up, but given a lot of new stats and data came out this week amongst your peers, it hasn't really changed in terms of some of your negotiations or whatnot.

You haven't really seen that you've just given that most of the deals that you guys are targeting are off market, right?

Yes. They're off market, and we've had a number of them that we've been working on for a while, so that bodes well for us.

And we do have a vendor in London that has substantial portfolio that we're continuing to talk with one additional product there. So it looks pretty good for the next several quarters anyway.

I think it's going to be pretty active.

That's good to hear. And -- sorry, excuse me.

Could you maybe just -- I know, we thought it was nice to see that 60 bps of compression in cap rates since the beginning of this year, but could you maybe provide some color on your portfolio cap rates by region and where most of that compression came from?

Yes. So I think we did provide a little bit of detail on the industrial compression in the MD&A by region.

So Montreal accounted for I think upwards $20 million of compression, and then Ontario roughly another $33 million. And then in Western Canada yes, another $2.5 million $3.5 million.

Hopefully that -- and then there's Richmond separate to that.

Okay. That's where I did see that.

I just thought maybe in terms of on the actual percentage-wise maybe you can provide some color there.

Yes, I don't have the percentage in front of me. But just based on the absolute number I could get back on something.

Okay. No problem.

That's -- okay. That’s it from me.

I will turn it back. Thanks very much, Robert.

Thanks, Joanne.

Okay. Just following on a lot of the questions on the acquisition pipeline.

I guess, if you were to characterize what you're seeing right now in terms of two buckets deals that you would settle in cash and deals that could be nor take back of shares how would that how those two buckets kind of look like as a percentage for it?

I'd say it's probably half and half or maybe a little bit more leaning towards the side of things now. So yes maybe it's 60-40 cash to units on like deals that we have slowing.

And given how strong the pipeline is obviously you've highlighted some of the areas of liquidity for more capacity and some asset sales that potentially could happen to fall. If the deal flow is that robust would you consider maybe the portion of the standalone portfolio to help on that, or how do you think about the timing of pursuing a larger disposition program like that?

Yes. I think that will end up becoming a little bit of a legacy asset.

That's a little bit harder to unwind. So what we're targeting are the ones that we wholly-own.

And then we do have some others that would be easier to move. So we're kind of looking at everything and it depends on the pipe and how fast we execute on it.

So the reality is we do have some liquidity right now. So that's great.

And then we move a couple of assets here and there that's additional liquidity. We have liquidity in Richmond that we can pull out on.

So at the end of the day, I think, we're fairly liquid right now. So I think things are pretty strong on the acquisition from being able to pay for a fairly decent-sized transaction.

Yes. I’ll turn it back.

Thanks a lot.

Okay.

Thanks, Brad.

Perfect. I just want to say thanks to everyone for attending.

It's been a great quarter. Things are taking off and we look forward to our next results call.