Nexus Industrial REIT

Thank you. I'd like to welcome everyone to the 2024 fourth 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 Web site and at sedar.com for cautions regarding forward looking information and for information about non-GAAP measures. In 2024, we executed the strategic repositioning of Nexus to be the Canadian focused pure play industrial REIT, which has been several years in the making.

First, we invested to improve our business. Our goal was to high grade and optimize our portfolio, taking advantage of uncertain economic backdrop and weaker real estate market to acquire and develop high quality assets at attractive prices.

In the year, we made three targeted industrial acquisitions [Technical Difficulty] completed three industrial development projects and advanced two more. Next, we focused our portfolio by selling our legacy office, retail and non-core industrial assets.

These sales transitioned our net operating income to nearly 100% industrial and strengthened our balance sheet as we used the sale proceeds to reduce debt. Finally, we executed operationally, delivering strong industrial same property NOI growth through a combination of proactive leasing, realization of mark to market lift on renewals and annual rental steps that are embedded into our leases.

I'll dive into each of these actions in more detail. Starting with the development, this quarter was our first full quarter benefiting from our new Hubrey Road industrial intensification project, which added 300,000 of NOI in the quarter.

We completed this 96,000 square foot building in July and it is yielding 8.4% in its first year on cost of $14 million with significant rent escalations thereafter. It also builds on our leadership position in the highly desirable London market, which continues to be one of the tightest industrial markets in Canada.

Our recently completed Titan Park property in Saskatchewan completed 500,000 of NOI this quarter. We finished construction on time and within budget in April and the primary tenant took occupancy immediately.

A second tenant for the remaining 112,000 square feet has now taken occupancy. The property adds annual stabilized NOI of $3.8 million, representing a 7.9 cap rate on our investment of $48 million.

We're currently looking for a tenant for our 115,000 square foot Glover Road new build in Hamilton, which we completed in the summer. We own 80% of the property and we'll earn a $5.9 million yield on our 25 million share of the development costs.

The market has definitely slowed in Hamilton but we're optimistic that it should be leased within the year. In the fourth quarter, we advance construction at our Dennis Road property in St.

Thomas, which is scheduled for completion in the early third quarter of 2025. This project is a 325,000 square foot expansion for an existing tenant at an estimated cost of $55 million.

The tenant pays us $7.8 interest on the development costs that we incurred during the construction phase, so there's no financing drag on our cash flow. Upon completion, the tenant will pay us rent equal to 9% yield on the development cost.

This quarter, we also started construction on a new 115,000 square foot small bay industrial building on a vacant land that we hold at 102 Avenue in Southeast Calgary. The total project cost is $15 million and expected to deliver at 12% unlevered return.

Scheduled to be completed in August, it is already generating a lot of rental interest and it looks like we have tenants lined up for approximately seven of the 10 units already. Turning to asset sales.

Through 2024, we furthered our transition to a pure play industrial REIT by selling our legacy office and retail properties as well as four non-core industrial buildings. In the fourth quarter, we closed on the sale of two of the office buildings, one mixed use industrial property and four non-core industrial buildings for total proceeds of $48 million.

We also sold another office property for $4 million, which closed in February of 2025 and we're closing this month the sale of our legacy retail portfolio except for one building for $47 million. Combined as part of the transition, we have sold a total of $120 million in properties at a blended cap rate of 7.1%.

We're using the proceeds to reduce our debt and to fund the remaining development. Following these sales, our industrial NOI concentration will be nearly 100%.

We will be left with one retail building and two office buildings. The retail building is Les Galeries d'Anjou in Montreal has surplus land and we are selling that separately from the building.

Once this land is sold to a condo developer that we've been working with over the last couple years to get approval and it looks like it's imminent, we'll then sell the building. Our partner in the project has already expressed their desire to own the property so we expect a smooth sale midyear.

The final two office buildings are joint ventures where we generate significant asset management fees and we are not currently marketing them. Turning to operating performance.

We had a strong fourth quarter. Our normalized FFO improvement improved 2.7% to $0.192 per unit and our normalized FFO improved 2.5% to $0.161 per unit.

In both cases, the increase was driven by strong net operating income and our industrial portfolio, which was up 1.3% or $400,000 compared to last quarter. Compared to a year ago, our total net operating income was up 10% or $2.9 million to $32.1 million in the quarter.

The NOI increase was largely driven by three factors, acquisitions, organic growth and development. New properties that we acquired in the past year contributed $2.2 million to NOI.

Same property NOI increased by $1.2 million, driven by 5.1% industrial same property NOI growth from the lease up of our Richmond BC property, as well as mark-to-market lift on renewals and embedded rent steps in our leases. Our recent developments at Titan Park in Regina and Hubrey Road in London contributed $800,000 in the quarter.

On a full year basis, the actions we've taken in the embedded rent escalation in our leases resulted in industrial same property NOI growth of 4.7%. Looking forward to 2025, we have already renewed or are extremely close to renewing approximately 65% of our leases or 1.1 million square feet of the GLA that was set to expire this year.

The growth in expiring rents for these renewals is 32%, representing $3.2 million of additional NOI. We are in discussion with the tenants of the remaining 35% or 700,000 square feet.

Of this amount, the largest chunk 280,000 square foot is our Chatham, Ontario property tenanted by our London property who has indicated that they will renew. We recently become aware of two tenants in the portfolio who have entered a creditor protection that could impact results beginning Q2.

Peavey Mart is a tenant at one of our buildings located at 40 Avenue in Red Deer and at Clark Road in London. So we own their Eastern Canada Distribution Center and their Western Canada Distribution Center.

If they early terminate, which we expect them to do probably effective, it's either in April or May, it will take us time to find a new tenant in Red Deer as the building is quite large for that market and it generates an annual NOI of about $1.3 million. In contrast, I anticipate we will be able to quickly find a new tenant in London.

And given it's currently leased well, well below market, I expect we'll be able to remain whole in this building for 2025 if all goes well. The second tenant occupies our cross-dock facility at 102 Avenue in Southeast Calgary.

If required, we should be able to find a new tenant quickly here too. However, there is a good possibility that the new owner -- that a new owner will step into the business and take on the lease, mitigating any impact to Nexus.

Despite these potential headwinds due to our solid leasing activity on a full year basis, I expect we will be able to achieve mid single digit industrial same property NOI growth for the year. In summary, we continue to advance our strategy in 2025 as Canadian pure play industrial REIT.

We are making excellent headway on our developments, which will be completed in Q2, Q3. We have firm sales contracts for our retail portfolio, which closes in March and will further focus our portfolio and delever our balance sheet.

And we'll continue to realize organic growth through embedded rent steps and positive mark-to-market on renewals. I'll now turn the call over to Mike to give some more color on our financials.

Thank you, Kelly. Good morning, everyone.

Starting with the headline earnings in the quarter, net income was $49.7 million, a $47.5 million increase compared to a net income of $2.1 million last year. The increase was primarily due to a higher gain on the fair value adjustment of Class B LP units by $49.6 million, a higher gain on derivative financial instruments by $24.5 million, a higher NOI by $2.9 million and a lower general and administrative expenses by $1.4 million, partially offset by a lower gain on investment properties by $27.5 million and higher net interest expense by $1.6 million.

As Kelly mentioned, our Q4 net operating income increased 10% or $2.9 million year-over-year to $32.1 million. Of this amount, new acquisitions accounted for $1.6 million, an increase in same property NOI added an additional $1.2 million and development projects accounted for $0.5 million.

Of this -- this growth was partially offset by $0.5 million relating to asset dispositions made since the third quarter of 2023. Normalized AFFO for the period was $0.161 per unit compared to $0.15 per unit a year ago, primarily driven by higher net operating income.

Total general and administrative expenses for the quarter were $1.7 million, which was $1.4 million lower than a year ago, predominantly due to lower severance and one time compensation expense. Net interest expense in the quarter was $14 million, a $1.6 million increase from the same period last year.

The increase was primarily due to a higher outstanding average debt balance resulting from borrowings to fund acquisitions and development as well as lower capitalized interest due to the completion of development projects. At December 31, 2024, our NAV per unit was $13.19, a $0.13 per unit increase from last quarter.

Our weighted average cap rate increased 1 basis point to 5.82% compared to 5.81% at September 30th. The carrying value of our investment properties increased by $8.2 million in the quarter, primarily due to development spend of $18.9 million, capital expenditures and tenant incentives of $5.8 million and $11.6 million of positive fair value adjustments, partially offset by a $27.8 million reduction from the disposal of four industrial properties located in Saskatchewan.

I'll now turn the call back to Kelly.

Thanks, Mike. Our strategy to be a can Canada focused pure play industrial REIT is now complete.

I'm excited by the progress that we have made and believe in the turbulent market that we have today, we have set a solid foundation on which to build in the future. So with that, operator, please open up the lines to questions.

Appreciate the comments on the space that you might get back or the CCAA exposure at the moment. Just I guess I want to clarify that is baked into your mid single digit guidance like that includes any change in occupancy?

Absolutely, yes.

I want to give a little color on it. The [PV-1] is the larger one, two warehouses.

The London one, we are working on a tenant that for approximately half the -- a little over half the building but their rent is so low that if we were able to lease it at even slightly below what market is, it would make the whole building whole on what we were receiving from them on rent but it also gives us a parcel of land. I think it's about 10 acres that was connected to the lease but it is separately parceled that we're getting work done right now to be able to potentially build about 150,000 square footer in the future if we want.

So if there's ever a positive could come out of a negative, I would say it's that building.

And just I guess, when you think about the portfolio as a whole, like is there other space you're expecting it back or maybe more specifically, how should we think about the average occupancy on a same store basis for the portfolio -- the industrial portfolio as it relates to the guidance?

So right now, we're at 96% occupied and that's really down due to two things. One is the Glover Road property, which came on board in Q3, that new build and secondly, we had a bit more vacancy this quarter at our 855 Park Street in Saskatchewan, about another 100,000 came up.

And we expect we'll be able to fill those during the year. So that should get us back up to the high 90s.

In terms of the '25 expires, no material non-renewals at this stage in terms of what you're working on?

No, in fact in that 65% renewed, I'm just waiting for the -- it's a deal that's been agreed to with our tenant at Robins Hill Road at 1,250 a foot. That effectively starts Jan 1 of this year, so backdated to Jan 1.

So that, if you remember, I think our expiring rent was $4.40 or something along those lines. So on the 260,000 square foot building, it's a significant renewal, early renewal for us.

Congratulations on the year-over-year growth put up in Q4. Just curious if you could give us a sense of any change in the market given the on and off threats of tariffs in your leasing discussions with tenant prospects?

Yes, it's been very, very interesting. So I can say that definitely that Hamilton corridor, that market has slowed significantly.

The amount of tenants kicking tires right now is pretty low that I feel that I would say the majority are -- have a wait and see aspect to their decisions that they're never used to have. On a positive, the Calgary small bay that we're building, August finish, I think that thing will be 100% pre-leased in another month or so, because it's generating significant amount of activity.

So it's a little all over the place. Montreal, we've completed some renewals and some new tenants at pretty decent rates.

But I would say, in general, the overall theme on the market is tenants are taking a much longer time to make a decision and really waiting to see how this whole thing wraps up. So I would say 2025 is going to be -- I'm glad we're 65% done and we have our partner already saying that they're going to renew at the other one, because it takes us not a lot left at least for the year.

So I think it will be a challenging year because guys are taking a long time.

Maybe I can jump in a little more color to you. I think one thing that we're very happy with now is the mixture of tenants that we have.

We have really -- we're really focused on Canadian distribution and Canadian 3PL. And that's I think reduced our overall exposure to this geopolitical turmoil.

Roughly 85% of our tenants sit in that -- in those kind of -- in those sectors. So they would be -- have much less exposure to any cross border issues.

And then another piece, which is just fallen nicely for us is our longer weighted average lease term. It's having -- the fact that we have a seven year [indiscernible] and have fewer leases coming up for renewal this year and the fact that we're well ahead of the game in renewing sets us up pretty well for this year.

And Kelly, I wonder if -- you mentioned Hamilton. Any specific comments on the London market?

I know you're having some good traction on the one building there, but just bigger picture in London, is it being impacted by the tariff discussions?

I would say, yes. There just wasn't a lot of space available in London to begin with, available space.

I know our partner actually got back about 750,000 square feet from a bankruptcy in their own portfolio, which will be coming back to the market. So that's a big absorption there that has to be done.

So I would say overall, I'd say all markets, London was a little better in that, really had almost zero vacancy of anything of quality at the time. So I don't know.

I -- we're talking with groups on the Peavey building and it was going along but we have a tenant who are very, very interested in the kind of -- it's a slow process, because they're waiting to see what happens with the tariffs. So I think, overall, everything is going to be affected until this gets straightened out with some sort of certainty.

But overall, we're on it and we still see some positive -- this is our like real first vacancy to deal with there, so we'll see how it all pans out. But the good thing is it is a very low expiring rent.

And last one for me, just on the balance sheet. I mean, you've repositioned the portfolio basically as a pure play industrial balance sheet at 49% now.

Where do you expect to run the REIT over the next couple of years in terms of how much of that disposition capital would you redeploy or are you happy with the leverage and kind of want to keep it in this zone? How should we think about modeling over the next couple of years?

I would say, hopefully, it downticks a little bit, where we maybe call the portfolio here and there of smaller non-core assets if we do. But our development has been going along pretty well.

So that's a positive for us. So redeploying at higher going in yields is something we're always looking at.

So I would think the 47, somewhere around there, I would think we'd like to sort of target for now.

I think, Sam, just to add to what Kelly was saying. The -- clearly, we have the retail, which is under contract, which will close imminently and we'll use the proceeds for that to delever further, which will get us down into the 48 range.

And then as Kelly mentioned, we'd look to continue delevering this from our cash flows with a view to getting to investment grade that's really our target. We feel we're getting pretty close.

There are a few metrics that we're looking to hit to get there. And this is -- maybe it's a 2025 thing, maybe it's an early 2026 thing but that's really our target is to get there and get access to investment grade markets.

Just wanted to clarify your comment on the Robins Hill Road asset and the lease there. Did you say that your expectation is that would be retroactive to January 1st?

Because I think I remember that lease being more -- it was year end weighted, right?

Yes, it was a December 31st of this year expiry. And once I have it signed in my hand, it's been all agreed to.

So I never say until it's actually signed but it's retroactive to Jan 1 this year.

So then it would actually impact for the entire year, which would probably be a nice boost to your growth. Okay, that makes sense…

It'll definitely be a nice set off to the [PV] if that transpires shortly.

Just sticking with your 2025 maturities, I'm just looking at Alberta and Saskatchewan, the expiring in place rate is a little bit above, I think where you kind of mentioned market is. I'm just curious, is there something specific with those assets that allows you to get that higher rate or is there risk of a roll down on just a few of those?

To be honest, I'll have to get back to you, because offhand I can't think of what expires we have left there. I'll have to look it up and follow up with you after the call.

The last filing -- the guidance we've given on mid single digits for the year incorporates that. So I think that's kind of a good guiding light for you guys is to base it off of the mid single digit growth -- same property NOI growth for the year.

And then the last one for me, I was just wondering if you could elaborate a little bit more on that non-cash FX loss that was added back to your FFO in the fourth quarter. Just curious about the drivers there and how to think about it.

Yes, that's the revaluation on the deferred purchase obligation from our old Loblaw portfolio. We have about 250,000 a quarter US that we pay on that.

And given the jump in the US dollar strengthening US dollar last quarter, there was an unrealized loss on the revaluation of that payable. And so that's -- we've added that back.

It just came to me, Kyle, just before you jump off that the Saskatchewan part of the reason the jump in the Saskatchewan portfolio is due to the sales of the four properties that we disposed of.

So just on this St. Thomas development.

So is the completion getting pushed to Q2 or should we still expect Q1 there?

Yes, it's -- I believe the completion date is scheduled for July 13th or 14th right around there.

And then the tenant starts paying rent from July itself and I think you are getting some interest during the development as well.

Yes, we get 7.8% as we spend going along.

So what happened there, Himanshu is the scope increased, there's been a further develop -- the tenant decided they'd like to do further development of the mezzanine level there. And from our perspective, that's great news, because it -- we get paid as a rate on the total development spend.

So development spends gone up another $5 million and that means that we'll earn a higher rent at the end of the day.

And then on the Glover Road, and thanks for the commentary already. It is like one year now expectation, like by end of the year or more into next year in terms of lease up of the Glover Road asset?

So I don't know. I would love to say, we did have a tenant kind of in hand in our zoning, didn't allow it, and we had to -- we couldn't meet their time frame for the zoning change.

So there's been a couple that have been kicking around and we have made a broker change. And so I think we're well positioned.

It's just it's getting lucky to get the right tenant for there in our reforecast what we look at, we've tentatively scheduled something around November is what we're thinking.

And then on the Calgary small bay, I mean, looks like pretty good demand so far. Would you say your Calgary market like growing stronger or relatively better than Hamilton Corridor or London Corridor or even Montreal?

And is Calgary demand mostly for small bay or like overall market looks still better than the others?

I think overall market is still pretty good from the stats I've been reading. And honestly, we're not finished till August.

And so I think we've signed the 30,000 square feet and then that's three bays and there's another four bays that we're back and forth on and we're only March. And so it's a little skewed there, that that node where that property is and where we're building has huge demand for small bay.

So it seems to lease pretty quickly in that market. So I'd say the small bay market there is definitely performing extremely well.

And from the stats I see, Calgary as a whole is still performing pretty well.

And then on the Richmond property, I think you received around $1 million in Q4. Is that the run rate or should we expect any ramp up in Q1 and onwards?

This is just a little over that. But yes, it's just over $1 million and it does step up, I think it's in another in a year.

But for this next year, this is -- that's probably the -- fair to keep the runway stays current for this year.

Maybe just one last question, on the legacy retail portfolio. When are you expecting that to close and have you recorded any [Technical Difficulty] value losses on that same property?

I think that closing is scheduled for mid month, so not too far off from now.

And we don't expect to have to record any change in value. We're carrying it at $47 million, which is where we're looking to sell it.

So you called out Hamilton as being relatively weak. I was just curious as to what is it about that market that makes it particularly weak, is it the type of tenants that tend to do more cross border business there and maybe any color there?

And then any -- are there any other large tenants that sort of are on your watchlist right now?

So when I call Hamilton being a little bit weak, there is a bunch of new development all in around Glover, around the airport where we are. And so there's absorption to have to get taken in.

It's just slow. I mean, no different than Guelph, Cambridge, that whole node, I'd say, Brantford has slowed from what was a torrid pace to now things of -- the actual amount of tenant, large tenants looking right now are fewer and far between.

So I don't think it's anything to do with the location. The location is great, right by the airport.

It's a great node, access to Niagara, access down through quarter down to Windsor. So overall, that's a great node for future holding.

It's just it's the amount of tenants out looking and banging doors in a market now that that whole kind of horseshoe there is slowed significantly.

And any other large tenants that sort of where are you right now?

So there's nothing on the radar right now. We do have some in Windsor that are attached to the automotive industry.

I believe AP Plasman would be one, [indiscernible] some like aluminum extrusion type guys, we'll see how that all goes. But overall, I think still strong.

But if I'm watching that's the area I'm kind of watching right now.

Last classification, [indiscernible] you mentioned 1.3 million of annualized NOI. Was that for combined the Red Deer property and the London property?

Sorry, say that again, Jimmy.

Say that again, Jimmy…

1.3 million of NOI, I think I heard…

Of annualized NOI…

For which PV…

Yes, that was -- so that's just for the -- so Clark Road is about -- it's about 1 to 1.2. I mean, it's -- I can give you the number.

The Clark Road one is 220,000 square feet, that's $6 a square foot gross. And the Red Deer property at 40th Avenue is 190,000 square feet and it's currently at $7 a square foot net.

So combined, they're kind of in the order of 2.5 million if you're looking on a net basis.

I want to thank you everybody for attending. And we will be chatting next quarter.