Nexus Industrial REIT

Thank you. I'd like to welcome everyone to the 2025 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 Web site and at sedar.com for cautions regarding forward looking information and for information about non-GAAP measures. This quarter we closed on the sale of 15 of our 16 retail properties.

This marks the completion of our strategic repositioning to make Nexus the only Canada focused pure play industrial REIT. This transition 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 an uncertain economic backdrop and weaker real estate market to acquire and develop high quality assets.

Next, we focused our portfolio by selling our legacy office and retail assets, making Nexus a pure play industrial REIT. Today, our NOI is now over 99% industrial on a pro forma basis.

We have used the sale proceeds to strengthen our balance sheet and to construct three development properties and to advance two more. Thirdly, we delivered operationally driving robust industrial same property NOI growth through a combination of proactive leasing, realization of mark-to-market lift on renewals and annual rent steps that are embedded into our leases.

So we'll dive into our Q1 details and our actions in a minute. However, before I do, I would like to address the recent tariff induced economic turmoil and Nexus positioning in this uncertain environment.

Overall, the tariff war is clearly negative for the [Canadian] [Technical Difficulty] sector. There is no denying that.

However, so far our operations have performed very well. Despite the economic turbulence, our industrial occupancy increased in the first quarter to 97%, and we maintained momentum with our renewals by completing three exceptional leases, which I'll expand on later.

We also made headway with pre-leasing at our Calgary Small Bay Development, which is exceeding our expectations. Structurally, we are well positioned to weather the tariff induced turmoil.

Only about 6% of our NOI is related to the auto manufacturing supply chain. In fact, approximately 85% of our NOI is derived from tenants who are Canadian distribution and third party logistics.

Our leases have a relatively long wall of seven years, which reduces renewal risk and our leases are on average 20% below market rates, which gives us pricing flexibility on renewal. Our portfolio is well diversified across Canada and we have strong tenant relationships as evidenced by frequency of our tenant upsizing and development partnerships.

Turning to our recent dispositions. As I mentioned, we closed on the sale of our 50% ownership stake in 15 of our 16 retail properties this quarter for a total of $47 million, representing a 6.8 cap rate on in place rents.

Net of our share of the mortgages of $32 million in transaction fees, we received proceeds of $15 million. We used the proceeds to reduce our debt and also to fund our two in process development projects.

Following the sale apart from our industrial portfolio, we are left with 150% owned retail property, which is [Les Galeries d'Anjou] and 250% owned office properties. At [d'Anjou], we have several severed a portion of land and now have the land under contract for sale, which we expect will close in July for cash of about $6 million and a vendor take back of about $3 million.

The mall is an attractive asset that cash flows well for us. However, we received a lot of unsolicited interest, so I expect that it will sell relatively quickly.

And I expect our joint venture partner in the project likely to buy out our share at or above our current carrying value. This would leave us with approximately 50% ownership in two office properties, one in Montreal where we have our Montreal office and one in Gatineau.

Given their low value and the nature of partnership agreements, I expect that selling them will be a longer term project. During the quarter, we advanced our two in flight development projects.

At Dennis Road in St. Thomas, we are completing a 325,000 square foot expansion for an existing tenant.

We have now spent $49 million of the estimated $55 million total cost. The tenant pays us 7.8% interest on the development costs incurred during the construction phase, so there is no financing drag on our cash flow.

Upon completion, which we now expect will be in the third quarter, the tenant will pay us rent equal to a 9% unlevered yield on the total development costs. At 102 Avenue in Southeast Calgary, we are developing a new 115,000 square foot small bay industrial building on vacant land that we currently hold.

We have spent approximately $11 million of the $15 million project cost. We expect the project to also be completed in the third quarter and to deliver an approximately 11% unlevered return.

The building will consist of nine units, which we started marketing to prospective tenants at the beginning of the quarter. So far, I'm very pleased with the high level of interest and we have already signed conditional leases for seven of the nine units.

We are still looking for a tenant for our 115,000 square foot project in Glover Road in Hamilton, which we completed last summer. We own 80% of the property and expect to earn a 5.9% going in yield on our $25 million share of the development costs.

It has been a challenging market in Hamilton but we have a brand new state of the art 40 foot clear LEED certified product and I'm optimistic that it will be leased this year. Subsequent to quarter end, we closed on the purchase of land surrounding our industrial building at 555 Adams Road in Kelowna, BC for $18.9 million composed of $12 million in cash and our vacant industrial building in Fort St.

John, BC, which was a problem for us. Beginning in July, we will invest $6 million over 12 months to build a small bay industrial condominiums on the site, which we will sell as we go along and find further development on that project.

Due to the demand for more space and parking from our tenant at our Richmond, BC property, we'll add an additional 51,000 square feet for an estimated cost of $29 million. This cost will be paid in REIT units issued at 10.50 per unit.

The REIT will earn 6% on the cost during the construction period and we'll earn a contractual 6% yield upon completion. Construction is scheduled to begin in the third quarter.

Turning to operating performance. Our operations continued to perform very well.

In the first quarter, the net operating income of our industrial portfolio improved $1 million or 3.4% compared to last quarter. This was in part due to an improved industrial occupancy ratio, which rose to 97% in the quarter.

Compared to a year ago, our total net operating income was up $2.6 million or 8.6% to $32.1 million. This increase is largely driven by three factors, acquisitions, organic growth and development.

New properties that we acquired in the last year contributed $1.1 million to the NOI. Same property NOI increased by $1.6 million, driven by 6.6% growth in industrial same property NOI 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 Hubby Road in London contributed 1.6 million in the quarter. Looking forward to the remainder of 2025, we have already renewed over 80% or 1.4 million square feet of GLA that was set to expire this year.

The growth on expiring rents for these renewals is 30%, representing $3.5 million of additional NOI. This includes three value add renewals that combined will contribute $2.6 million of additional NOI in 2025 and $2.9 million in 2026 and increasing thereafter.

The first of these renewals occurred at our 265,000 square foot industrial building at Robins Hills Road in London. Here we completed an early blend and extend with the existing tenant for a three year lease, resulting in a rent increase from $4 and 35% [indiscernible] net per square foot to 12.50 per square foot net.

The agreement was backdated to January 1 of this year, so we are receiving a full year of benefit in 2025. The agreement has 7% annual rent escalation in 2026 and 2027.

At our 293,000 square foot industrial building on Riverview Drive in Chatham, Ontario, we completed a lease expansion in a five year renewal with the primary tenant. Effective June 1, the tenant will increase our occupancy to 269,000 square feet, absorbing 31,000 square feet from a tenant who recently departed with a nice rent lift from 450 to 960 per square foot and annual rent steps thereafter.

In total, this will add approximately $175,000 to the NOI in 2025 and $250,000 in 2026. The third renewal occurred at our 165,000 square foot building located at 42nd Street East Calgary, where we facilitated an early lease termination effective March 31st at the tenants request in return for an $800,000 termination fee.

The fee was received in April and leaves us slightly ahead from May through July when we will -- the building will be empty. Effective August 1, we have leased a building to a large multinational energy company under a 15 year lease term for $15.41 per square foot with annual rent steps thereafter compared to the outgoing rent of $12.50 per square foot.

Overall, this adds about $240,000 to the NOI in 2025 and $275,000 in 2026. As mentioned in March, we are aware of two tenants who have entered creditor protection that could impact our 2025 results.

Through to the end of April, these tenants have continued to pay rent. PV Mart tenants at our buildings located at 40th Avenue in Red Deer and Clark Road in London.

They have terminated their leases effective April 25th and will take us some time to find an -- and it will take us some time to find a new tenant in Red Deer. In contrast, I anticipate we would be able to quickly find a new tenant in London.

And given the property had a long term lease well below market at approximately $4 net, re-leasing this property will be positive for us. We have strong tenant interest from three different groups as we speak and hope to have an offer signed in the next few weeks.

The second tenant, Grace Road Lines occupies the site at 102 Avenue in Southeast Calgary but is anticipated to vacate either the end of May or June. Similar to London, we should be able to find a new tenant quickly.

We are currently marketing it and have strong interest from a group, which hopefully will mitigate any impact to Nexus. We will proactively to minimize any downtime on these sites.

Due to our solid operational performance, I continue to expect that we will achieve mid single digit industrial same property NOI growth for the year. In summary, we continue to advance our strategy in 2025 as Canada focused pure play industrial REIT.

We're making excellent headway on our developments. We will continue to recycle capital and we'll continue to realize organic growth through embedded rent steps and positive mark-to-market on renewal.

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 $33.2 million, a $10.5 million decrease compared to last year, primarily due to a higher loss on the fair value adjustment of derivative financial instruments by $15.5 million and a lower gain on investment properties by $6.3 million, partially offset by a higher gain on the fair value adjustment of Class B LP units by $8.2 million and higher net operating income of $2.6 million. As Kelly mentioned, our Q1 net operating income increased 8.6% or $2.6 million year-over-year to $32.1 million.

Of this amount, the increase in same property NOI added an additional $1.6 million, development projects accounted for $1.6 million and new acquisitions added a further $1.1 million. This growth was partially offset by $1.4 million relating to dispositions made since the first quarter of 2024.

Normalized AFFO for the period was $0.1504 per unit compared to $0.1305 per unit from a year ago, primarily driven by higher net operating income. Total general and administrative expense for the quarter were $2.3 million, which was $100,000 lower than a year ago, predominantly due to lower compensation expense.

Net interest expense in the quarter was $13.3 million, a $200,000 increase from the same period last year. This increase was primarily due to lower capitalization of interest expense on development properties of $200,000 and due to higher deferred financing cost amortization by $100,000 resulting from the property dispositions.

At March 31, 2025, our NAV per unit was $13.21, a $0.02 per unit increase from last quarter. Our weighted average cap rate decreased by 1 basis point to 5.81% in the quarter compared to 5.82% at December 31, 2024.

The carrying value of our investment properties increased by $10.9 million in the quarter, primarily due to development spend of $7.1 million, capital expenditures and tenant incentives of $3.6 million and $11.6 million of positive fair value adjustments, partially offset by an $11.5 million reduction from investment properties reclassified to assets held for sale. I'll now turn the call back to Kelly.

All right. Thanks, Mike.

With that operator, please open up the lines to any questions.

Just want to start off on the announcement with the expansion at Richmond. Just want to understand, I guess, a little bit more how the fee or the Class B issuance would work.

Is there certain milestones that we could think about in terms of how that would -- that payment would happen?

They get released on as construction progresses. So drawings and permits, foundation, et cetera as it goes.

So they get released in, call it, 5%, 10% as the project moves along.

And what's the time line for the project in terms of commencing and then completing?

I think it will probably -- I mean, the drawings are being completed now. Then it's in for permit.

I'm -- we're kind of expecting end of the third quarter, I think, for commencement and it'll be about a year.

Last question, obviously, you guys have done a lot of heavy lifting on rebalancing the portfolio and hit your target in terms of your industrial weighting. How do you think about further rebalancing or capital recycling on the industrial side?

Should we expect to see some activity going forward in terms of high grade in the industrial side or you think you're pretty stabilized at this point beyond like development or acquisitions?

I think the overall portfolio quality is really, really strong now, but we've had interest from some groups on individual assets out west. So I've probably targeted -- we'll see what the pricing looks like, but initial discussions it seems okay, pretty good.

So I've targeted maybe call it five assets that maybe we'll recycle capital on move out of them, and because we are looking at a few that kind of have fairly good significant mark-to-market lift on them. So if we can recycle all of those, we'll cycle back into some other ones.

We're seeing a lot of stuff in Montreal area that I think can give us some pretty positive lift going forward. So there'll be a little bit of capital recycling for the balance of the year, that's what I'm expecting.

So a little bit -- like opportunistically, a little bit out of west and maybe comes back to some opportunity in the east if that's the way it plays out?

Exactly.

Kelly, maybe just first congrats on the Robins Hill Road lease, it's a great win for you guys. But maybe just give us a little bit more color on the negotiation and why a three year term was selected as opposed to something a bit longer?

So they had a renewal option that was fairly lengthy. And so at the end of the day they have a contract and that contract expires at the end of the three year term.

So that's how we were -- it was either stick them with the five year or five year plus term or shorten that period and gain it. Now that tenant has been in there for a couple decades.

I don't anticipate they're going to leave but it is a big US multinational and the local guys were only given the mandate to renew as long as the term of their current contract. But that contract has kind of been renewed over and over and over again.

So I don't anticipate them leaving but that's why the three year term versus something longer.

And then just touching on Richmond a little bit more. Maybe you could just help us understand, like I think the tenant in place is still not paying full rent on the existing, so maybe walk us through how you're comfortable funding the expansion on remainder?

Well, they are paying full rent on the existing right now. And what's happened is the club is now in is operating and running and it's pretty busy.

And so this is to provide more courts and additional parking. Because the parking at the site is pretty tight.

So hence it's a little more expensive than what it typically would, but there's going to be some additional underground parking and that's at the front of the building close to the road. And at the same time, so while we build that, we're also going in for bonus density in -- a significant amount of bonus density.

And if we get that bonus density, it's huge valuation for that property. And I think it's at that time we would probably look at some point to exit out if we can to sell it and sell it with that bonus density.

So it's a little bit of a two phase thing here to complete that addition, because it's imperative that I have that club operating and thriving and the parking's required and they will need additional courts. So that's how it all came together.

So that would -- you went into my next question there. So this doesn't impact the potential for incremental density at the site.

In fact, if anything it might facilitate it to some degree or it might be…

Yes, listen, the city's been -- it was brutal to work with on permitting and getting everything done. And now they're kind of bending over backwards, because the project is -- it's probably one of the best project in Richmond going on right now.

So the mayor is really excited about it. Everybody's excited about it.

So I'm pretty hopeful that they're going to allow some bonus density.

And then, can you just remind us of the potential scale of the bonus density that's there?

Yes, it's upwards of, call it, 240,000 square feet.

And that's an industrial use?

Yes, it'd probably be -- but yes, but something more along the lines of probably like a storage use or something along those lines that would fit in there.

And then just so I'm clear, so the existing -- because I think there was a rent break that was done initially, so that's now gone. They're it's fully being paid.

So we originally reset the leases after this whole debacle of the permits and all that to the existing rental rate today. I think it steps up next year and then I believe the year after as well.

Just to follow-up on that Robins Hill London lease deal. Yes, it does look like a pretty good deal, some translation, et cetera.

Is that representative of what you could do today? And I guess I'm looking at your Peavey site and it looks like it's not far off.

Is that -- would that be your expectation kind of a similar market rent for that site?

So on the Peavey site, we are in negotiations with someone, pretty close. It'll be a little different.

That building's a little bit older. The Robin Hills Road site is one of the best buildings in London.

It's a really great site. The Peavey, half of it is like lower clear height.

So we either have to pump some money into it or we're going to structure a deal where it starts lower and then incrementally ramps up over the next like five years. So we're working on a long term deal.

So it might start lower and then ramp it up to kind of market in -- over a course of five years is kind of how we're structuring it. And that would be more on an as is basis take it -- and take it right away.

So that's what we're working on right now.

And then is the expectation still that if -- once you do that deal, the Peavey site, it'll kind of make you whole on the whole, like even if you don't re-lease the Red Deer asset, you'd be able to your NOI would sustain more or less?

Yes, I would think by next year. So by the end of next year, we would kind of be whole, I think, on both of them.

Yes, I think I just -- when we spoke in the past about being whole, it was on that, we were thinking about that we could rent half of the half of the Clark Road London site and renting half of it would keep us whole on that site. So it wasn't about keeping us whole on the whole Peavey portfolio.

It was just on that one site.

And then my other question was, you mentioned your exposure to auto is 6%. I guess two questions.

One is, do you have a sense of what your exposure to steel would be or steel related tenants? And then when I look at your top 10 tenants, I do see Ford Motor, Can USA.

I guess those would be the bulk of the auto exposure?

So I haven't included Ford and Chrysler or call it, Stellantis out West. Those are distribution centers.

So they're not manufacturing. They're not -- they're parts distribution.

So one is for Eastern, like Quebec and parts of Ontario and the other one is for the West. So those are like just distribution.

We don't foresee anything happening along those lines. I'd say, Kenusa is an auto parts distribution center.

So those are like just distribution. We don't foresee anything happening along those lines.

The I'd say, Kenusa is an auto parts distribution center, that's what they do. So it's not like manufacturing.

There are some aluminum and auto parts suppliers, one in Berry, Protomax that we have but they do engineering and manufacturing, stamping and one in Cambridge and then a few in Windsor, more on the plastics side. So that's kind of, I'd say, the majority of our exposure.

Yes. I'd just thank everybody for attending the call, and we'll see you next quarter.