Nexus Industrial REIT

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00:39 I'd like to welcome everyone to the twenty twenty one third quarter results conference call for Nexus REIT. Joining me today is always is Robert Chiasson, Chief Financial Officer of the REIT.

00:49 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.

01:04 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.

01:18 The twenty twenty one continues to be a game changing year for the REIT. As we continue to rapidly execute on our strategy of becoming Canada's next pure-play industrial REIT.

For the third quarter, we closed on ninety five point five million dollars of industrial acquisitions and subsequently closed on another two hundred and eighty six million dollars. 01:36 We are preparing to close at the end of the week on a nineteen point seven million dollars strong covenant industrial distribution center in Alberta with a ten-year lease term which will be acquired at a very attractive cap rate.

We continue to have a very active pipeline of deal flow, and you can see from our balance sheet, we have the liquidity to be able to execute on a significant amount of additional industrial acquisitions. 02:01 Our occupancy for the quarter was up slightly from last quarter and in the industrial portfolio, our vacancy continues to mainly be a twenty five thousand square foot industrial space at 41 Royal Vista Drive in Calgary.

The good news is that we're in final negotiations on a deal that is scheduled to commence in January. The Place 400 in St.

John, New Brunswick, we have had some modest success in some of the twenty six thousand square feet that came back to us on April first. We have leased six thousand five hundred and fourteen of that now, and we continue to have additional groups enquiring.

We've actually targeted this property for a disposition in early twenty twenty two. 02:41 In Richmond BC, we are continuing with the redevelopment of an approximately sixty thousand square foot building for two tenants.

Timelines have been extended from what we originally anticipated as we ran into some supply chain issues with the delivery of steel trusts for completely roof over one of the two tenants and for the delivery of the main chiller plant for the ice surfaces. 03:03 We are now in possession of the chiller and hope to have it installed and connected this month to allow rental payments to begin for one of the two tenants in December on approximately thirty four thousand four hundred and fifteen square feet at thirty four point two five dollars per square foot.

The space for the second tenancy, which is twenty six thousand three hundred and nineteen square feet that thirty three dollars a foot should hopefully be complete by the end of December or January. This tenants rent will commence once they take possession of space.

Its effectively in all new builds for this space. 03:34 As mentioned previously, upon completion, our NOI will increase by approximately one hundred and sixty five thousand per month.

We're also close to having building permits in hand to add an additional seventy four thousand square feet to the project, which once complete which would hopefully be in about a year. We would expect this to create approximately twenty one million dollars in value creation.

03:57 In Montreal, we continue to work with a developer on the sales of some excess land at Les Galeries d'Anjou. The developer is moving along quickly still with their approvals from the city, it looks positive that we'll close this transaction in April, beginning of April, which will allow us to realize our first payments from the developer.

So we'll receive two of our payments in April and one embedded year from them. 04:20 In London, we are working towards adding one hundred and fifty thousand dollars to two hundred thousand square foot that once feet at one of our properties beginning next year currently in the planning and costing phase of this project.

We have sixteen acres at another site that we are beginning to clear to get ready to develop in this near future. Vacancy in London is at an all-time low little new builds scheduled in the near future, so it bodes well for us with some development activity there.

04:48 On the disposition front, we have three of our suburban Montreal office properties and two smaller retail properties under contract or under PSA negotiation. These would be expected to close in January and targeted four additional properties for sales in the early New Year, which would being combination of retail and office.

05:08 I will now hand it over to Robert Chiasson to give greater detail of the REIT’s financials.

05:13 Thanks, Kelly. Subsequent to completing the thirty five million dollars offering in March and one hundred and three point five million dollars in London acquisitions where repaid approximately sixty five percent of the purchase price by issuing Class B LP units and subsequently balancing out our capital structure, we completed approximately ninety five million dollars of cash deals through the end of Q3 and we also completed a forty four million dollars unit deal.

05:39 We began to see the positive impact of deploying our capital in Q3 and we'll see further benefit in Q4 and Q1 as further capital is deployed to acquire properties. On August twenty third, we completed one hundred and twelve million dollars offering, approximately fifty five million dollars of those proceeds were implemented on October first to complete the two hundred and thirty million dollars acquisition that will loan loss distributions center portfolio.

06:02 Per unit measures and our pay-out ratio will improve in future quarters as all of this capital is put to work. We ended the quarter with sixty three million dollars of cash, full availability of forty five million dollars of credit facilities and sixty three million dollars unencumbered properties.

We're currently under contract in negotiations to sell five office and retail properties as Kelly mentioned for an aggregate sale price of forty five point seven million dollars. We’re busy deploying our available capital and a strong pipeline of potential acquisitions.

06:32 In Q3, we saw further fair value gains on our properties, and in particular, the carrying value of our Richmond BC property was written up by eleven million dollars based on an appraisal received in the quarter. We also realized some gains on our Ontario industrial portfolio and a small increase in our old Montreal office portfolio.

06:52 Same store NOI was down in the quarter primarily as a result of the two vacancies as Kelly mentioned and twenty five thousand square foot industrial vacancy in Calgary and twenty six thousand square foot space in an office building in St. John, New Brunswick, which came back to us at the end of April.

As Kelly mentioned, we're making progress on releasing these spaces. 07:10 Our debt to GBV was thirty six point six percent at quarter end due to cash on our balance sheet from the August offering, and due to having completed acquisitions in the quarter without placing mortgages on these properties.

07:21 I'll now turn it back over to Kelly.

07:23 Thanks, Rob. I'm now going to open up the line to any questions that you have.

7:57 Thank you and good afternoon. Just a quick question from me, just regards to the Richmond property and in the context of significant portfolio repositioning done this year.

I was just wondering, if you could give us a sense of optionality and fund raised asset more specifically in terms of ?

8:19 Yes. So we're in commit on the seventy four thousand square foot, which quite frankly as a pretty big value creation opportunity for .

Once we're in the ground starting and going along, people are going to take a look at potentially adding additional square footage to the site. So there need to be but we could add industrial square footage on second year .

So we're contemplating that, that’s fairly large square footage. So I think we'll evaluate it over the next months.

And then at the end of the day, if this project, if you choose not to do that, it would be one that eventually would probably look to sell as it doesn’t fit our industrial strategy for se. So it does have an opportunity perhaps that we can add significant square footage and I don't know, if they knows the price of land and the value of land in NBC and Richmond in particular, things are going for almost nine million dollars an acre.

So the ability to build up and do tiered industrial, it's kind of exciting. So, as we go along next year, we're going to look and evaluate the opportunity further.

09:44 That's great. Thanks, Kelly.

That's it for me. I'll turn back.

09:47 Thanks.

09:56 Hi, good afternoon. I guess, starting with the lease, on the leasing side, so good news in Calgary in terms of leasing out some vacant space?

How would the new rents compared to the previous rents for that space?

10:11 Yeah. Its below what we had before, at the end of the day and I think we'll see rental flows start to come in, in January, where ramps up by probably April.

We're still in negotiation association on it. So I don't one hundred percent know where it's going to pan out yet.

10:33 Okay. And I guess, you had a pretty strong liquidity position and the quarter, but lots of acquisitions announced still pending post quarter plus you highlighted some of the asset sales on a kind of more pro forma basis, where do you see liquidity and leverage being once all the contemplated transactions close?

11:00 Yes. So, we've got a number of properties that are under LOI or PSA.

I would say that we have liquidity to close most -- all of them, I guess. We do have some that are -- we have quite a long pipeline in terms of acquisitions with the ones that we're in LOI – signed LOI and PSA.

We do have liquidity closed, and probably push our debt to GBV up somewhere around fifty three point five percent or something like that. Closing on those if we did it by leveraging up some of the unencumbered assets in placing mortgages, so yeah.

11:40 And beyond what's been announced from an acquisition point of view, Kelly, are you seeing more -- are you still seeing a balance I guess between deals you can do in cash versus deals that you would potentially, as you talk to vendors or do you see that strategy transitioning a bit from historically what you've been able to achieve from an acquisition point of view?

12:07 Yes. I think it's transitioning with a great cost capital for us and when we were struggling to equity most of the ones we're looking at right now are cash deals.

The portfolio that families still owns upwards of four million square feet. So you could see additional product come in there over time, and those would tend to be unit deals.

So that would be our pipeline there. But everything I'm seeing right now and what's happening in the market, it's a lot of guys want cash, but I still think that are the unit.

The unit deals that we were doing is still relatively attractive for others. So I don't think if you'll see an end of that it'll just become a smaller percentage of what we do.

12:54 Right. And last question just in terms of acquisition strategy, you've been getting a little bit more active, I guess from a primary market perspective, how do you see the balance between primary market, secondary market transactions as you high grade more towards higher quality, higher growth markets?

13:16 Yeah. The things that we have under contract right now in that we're going to close on are all pretty high quality assets.

And if the mixture of some lower cap rate mix with some higher cap rate. We're closing on one this week that's actually quite a high cap rate and it's a balance for me.

And we want to high grade that portfolio, get some exposure to some of the major markets. But we don't want to lower our brains out either.

So it's a mixture of both where made high-high quality assets, we will target some of those and then also high quality assets that might be in that Tier 2 market, so but have a better cap rate. So we kind of look at a blend there.

So I think if you were looking at it, I'd say it's probably fifty/fifty maybe sixty/forty where forty percent is the more attractive Montreal, et cetera, et cetera. So, I think at the end of the day, we will make some headway in those markets, but we will always be active in the other markets where we're seeing better cap rates.

14:26 Thanks, Kelly.

14:37 Thanks. Good afternoon, guys.

Just maybe along the lines of, you mentioned the acquisition that you're supposed to close at the end of this week, you mentioned a favorable cap rate. Would you be able to just provide a range that we might be able to expect there?

14:51 I think that one was in the seven percent range.

14:52 Yeah. That's in the seven.

14:55 Okay. Great.

Thanks. And then with regards to the four London based assets that you're supposed to be closing on early twenty two, do you have a timeline there just for modeling purposes?

15:09 Sorry the…

15:11 For London, I think it’s January fourth.

15:12 It should be January fourth or six that's one of the first date.

15:18 Okay. Great.

Thank you.

15:21 There's another asset that they're adding an addition and that we closed later on next year at the end of the year, hopefully, if they're done, and that will be a fantastic asset because that one they're adding one hundred and seventy five thousand square foot brand new distribution addition on there. And when we take it, it will still have the ability to put another one hundred thousand square foot on this ever required.

So still has expansion the ability to it so fantastic unit.

15:52 Okay. Great.

You said hopefully by the end of next year, if…

15:56 That they're going to be able to have it complete and turn over to the tenant by the end of next year. Let's schedule right now.

16:04 Okay. That’s fantastic.

which I think was disclosed in the prospects and press release. When we did an offering back in August.

Okay. Thanks.

Just looking at your lease expiry next year, I believe there is five hundred and thirty five thousand square feet, , do you know the proportion that would be related to industrial assets and then is there an expectation or do you have an idea what the mark to market opportunity could be there?

16:34 Yes. So, a good chunk of that is actually in the London portfolio and now maybe let Kelly speak to in a little bit further be some good opportunities.

16:41 Yeah. There's significant so in a lot of the stuff that expires, we're sitting in about seven dollars growth and I think that will be seven dollars to nine dollars triple net, one renewal there and I believe if I'm not mistaken, there is one of our buildings in Saskatchewan in Regina, that comes up next year and without has some fairly significant mark to market increase as well that could be significant.

So certainly stages on that one. But I think next year will be a pretty decent year on the industrial side of things on the renewals.

17:24 Okay, great. The only -- the last one for me.

So we saw your IFRS cap rate compressed by ten beats sequentially. I'm just wondering do you see more compression within the existing asset based, is there more valuation work to be done into year ended into twenty two?

17:39 Yes, I think, in particular in Western Canada, we're starting to see some movement and some competition for assets. So, yeah, I think there could be more valuations or revaluations and we're certainly seeing a lot of competition per product in Ontario that's driving cap rates down as well.

So yes, we certainly could have additional revaluation that your at.

18:05 Okay, great. That's it from me.

Thanks, guys.

18:08 Thanks, Kyle.

18:17 Good morning, guys. Just wanted to clarify, sorry go back to the previous question on the pro forma leverage I heard the fifty three percent.

Is that just after the closing for what you disclosed for October and November? Or does that include some of the other things that are in the pipeline right now?

18:35 That includes undisclosed that includes staff that’s under USA. So everything that we've -- everything that we're working towards tying up we could close on all that.

18:48 Okay. And can you just remind us again, where kind of you are target leverage would be that you're comfortable with?

18:58 I'd say our target leverage would be below fifty percent somewhere in forty five percent to fifty percent and we're likely kept there, shortly after I don't know for sure that we'll be able to close on everything in the pipeline. But if we did we have the cash to do it put our GBV at around fifty three percent or five percent.

We may not get that high. And if we do, we'd look to then subsequently bring it back down.

19:26 Okay. And I guess, with just the October and November acquisition so far, would your leverage kind of be -- kind of in the mid to high forties right now excluding that's in the pipeline.

19:41 Modeled it as it of today, but we completed the lead on October one, that was a two thirty million dollars deal with hundred seventy two million dollars in mortgage financing and then we completed the Royalty Growth deal, which was the unit deal. So those being the main transactions that we need to be modeled out to get to today's that's cheap.

20:07 Okay. And I guess, obviously you mentioned that the acquisition pipeline remains very strong, which is encouraging, but I guess, are there any particular preferred markets that you guys are targeting right now?

20:23 Yeah. I mean, we all around London and Western Ontario, the Cambridge channels, that whole side of things Montreal, we're fairly active in trying to do some Edmonton and Calgary, definitely so looking at that's one and affect as well.

So those are over the markets we're targeting right now.

20:48 Got it. Okay.

And I guess earlier you mentioned, just cap rates kind of range. And what would you say, would be on the higher end of the cap rate range for some of the acquisitions you're looking to underwrite and what would be cap rate at the lower end, what you are at right now?

21:08 I'd say it's going to be a mixture between four point two to six point seven five. So I think that's six point seven fifty seven dollars that we are targeting and things that we're looking at.

So mixture.

21:29 Okay. That's very helpful.

Thank you very much guys. I’ll turn it back.

Thank you.

21:41 Hi, guys. Congratulations on the quarter.

Just noting that your normalized AFFO payer ratio has been increasing, last year was around eighty percent and now it's cut up to about ninety six percent. So just hoping to understand how you guys planned up pay out ratio going in the future.

Are you guys closing some recent deals, where you issued more class units, the dividend as well. So just trying to see how you guys are planning on something that going into the future?

Thanks.

22:13 Yeah. So, as mentioned, we did a thirty five million dollars offering in March and then we did the London portfolio deal in April one.

The London portfolio deal three point five million dollars deal that under took back about five percent of the purchase pricing units. And so it's sort of inverse of our capital structure.

But it did allow us an opportunity to put at a facility on stream and the properties that gave access to forty million dollars which we could then use to acquire further properties. So that combined with the offering that we closed at the end – beginning of August all had the impact of increasing our payout ratio and as we execute on these acquisitions there at pipeline line will be the operational come down into the low eighties and slightly below that into seventy payout ratio has been bit higher due to .

We'll continue vendors reducing our payout ratio year over year.

23:24 Do you have any guidance on when we will start to see that sales come down in the next one, two, three years?

23:32 Well, it'll be in the next one, two quarters, we'll starting to come down as we continue to execute on acquisitions that we have.

23:40 All right, sounds good. Thank you.

23:43 Thank you.

23:53 All right. Thank you everybody for attending and we will see you next quarter.