CA - Nexus Industrial REIT (EFRTF) Q1 2023 Earnings Call Transcript
2023-05-15 14:59:03 ET
Nexus Industrial REIT (EFRTF)
Q1 2023 Earnings Conference Call
May 15, 2023, 11:00 ET
Company Participants
Kelly Hanczyk - CEO & Trustee
Robert Chiasson - CFO & Secretary
Conference Call Participants
Frederic Blondeau - Laurentian Bank Securities
Michael Markidis - BMO Capital Markets
Bradley Sturges - Raymond James
Kyle Stanley - Desjardins Securities
Himanshu Gupta - Scotiabank
Jimmy Shan - RBC Capital Markets
Matt Kornack - National Bank Financial
Presentation
Operator
Thank you for standing by. This is the conference operator. Welcome to the Nexus Industrial REIT First Quarter 2023 Results Conference Call. [Operator Instructions].
I would now like to turn the conference over to Kelly Hanczyk, Chief Executive Officer. Please go ahead.
Kelly Hanczyk
Thank you. I'd like to welcome everyone to the 2023 First Quarter Results Conference Call for Nexus Industrial REIT. Joining me today 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. For 2023 has begun as expected, with our Southwestern Ontario portfolio providing strong rental rate growth on renewals. We'll continue to see strong growth in this market for this year as rates are now pushing in the $11 to $12 range. This will be tempered by a 26,400 square foot vacancy in Fort St. John, BC that vacated on April 30 that we're working to fill.
In the quarter, we purchased a 532,000 square foot brand-new Ford distribution center in Ottawa, Ontario and sold one of our grocery-anchored retail properties in Victoria, Quebec. In addition, we closed on a 264,600 square foot distribution center adjacent to the London, Ontario Airport, where in-place rents are approximately 260% below market with a short weighted average lease term of just over 2 years. This increased our weighting to the industrial sector to just over 9% of the REIT's NOI. We'll see this continue to grow in 2023 as we add another 970,000 square feet of industrial properties throughout the year.
Comprised of 191,000 square foot Class A distribution facility with Yokohama tire, a tenant in Montreal and a 304,000 square foot Class A distribution facility in London, Ontario, which is anticipated to close on June 1, plus 141,000 square foot Class A distribution facility in Burlington, Ontario, and then finally, another 335,000 square foot distribution center in London, Ontario. That's expected to close, I believe, in August. Our weighting will continue to grow as we close on these assets and recycle out of our retail and our office portfolio in the balance of the year.
On the development front, we have broken ground on 2 sites, approximately 96,000 square foot addition to our building at 1285 Hubrey Road in London, Ontario, where we are awaiting finalization of a deal that will provide us an outside return of over 10% upon completion.
As mentioned previously, we have broken ground on the 312,000 square foot new building on 22 acres of excess land at the Titan industrial site in the Regina, Saskatchewan that was acquired in February of 2022. We have a signed lease in place for a minimum 200,000 square feet with a strong covenant tenant from the REIT's portfolio, and we are fairly certain they will sign on for the majority of the balance of the space. This is scheduled to be complete for the late spring 2024 delivery. It also looks like we'll be proceeding in the fall with the expansion of an existing tenant in our Southwestern Ontario portfolio to add another approximately 70,000 square feet to their existing premises.
We will be purchasing 18 acres of land adjacent to this site to accommodate this expansion. This site is across from the newly announced Volkswagen Lithium plant in St. Thomas, Ontario. In Richmond, BC will continue working to complete the space for the greater Vancouver Sports Club. The site is progressing along they are currently taking memberships and hope to have them live and operational somewhere sometime in August. This will be a significant boost to our FFO once the tenant commences operation. I'll now hand it over to Rob Chiasson to go over the REIT's financials.
Robert Chiasson
Thanks, Kelly. Year-over-year same-property NOI was up $900,000 or 4.4% for the quarter, benefiting from strong renewals in Southwestern Ontario. Ontario accounted for just under 40% of same-store NOI growth. Alberta, where we have a number of leases with embedded CPI increases and where occupancy at one of the REIT's properties improved in Q1 2023 as compared to Q1 2022, accounted for just under 20% of the increase. Approximately 20% or $150,000 of the same-store NOI improvement related to our St. John New Brunswick office property where there were free rents in Q1 of 2022 that did not recur in Q1 2023.
As Kelly mentioned, we'll experience some headwinds from April 30 expiry in Western Canada. However, we expect significant rental rate growth on lease renewals Southwestern Ontario lease renewals in Q2 2023. Notably, we have a contractual rental step of $0.78 per square foot on 1 million square feet that is effective August 1. As Kelly mentioned, the repositioning of approximately 60,000 square feet at our Richmond BC properties anticipated to complete in the third quarter. Upon completion, this is expected to have an approximately $700,000 positive quarterly NOI impact.
Q1 2023 general and administrative expense increased as a result of timing of RSU grants, 1/3 of which vested in Q1 2023. There was also a severance cost in the quarter. These 2 items primarily accounted for the increase in general admin expense in Q1 2023 as compared to Q4 2022. Interest expense was relatively flat in the first quarter as compared to the fourth quarter. $117 million acquisition of the Ottawa, Ontario area Ford distribution center closed on March 1 and was financed with variable rate debt drawn on the REIT's unsecured credit facilities, which will increase Q2 interest expense.
Debt to total assets was 47.3% at March 31, 2023. We had $200 million undrawn on our unsecured line of credit and we had $455 million in our unencumbered asset pool supporting the unsecured credit facility. I'll now turn the call back to Kelly.
Kelly Hanczyk
All right. Thanks, Rob. We'll open up the line to questions.
Question-and-Answer Session
Operator
[Operator Instructions]. The first question comes from Fred Blondeau with Laurentian Bank Securities. Please go ahead.
Frederic Blondeau
It looks like you continue to see solid traction in Southwestern Ontario and in Montreal. That said, looking at Toronto and Montreal, they were in negative absorption territory in Q1. I was wondering if you could give us color on what you see on the ground in terms of new supply, tenant decision-making process and whether you see -- I guess, at the end of the day, whether you see increasing risks in some of your markets, at least for the rest of the year or beginning of next year.
Kelly Hanczyk
Well, let me start -- London, definitely we are seeing huge traction. Just I swear about a month ago, we were looking at $10 rents now all of a sudden we're pushing $11, $12. So there is significant demand in that market. For example, on that 96,000 square feet, we're holding out to one of our existing tenants because we were -- we have negotiated a deal that we're trying to finalize that we'll see pretty large returns on that expansion of, It could be over 12%. And we have 2 or 3 other tenants clamoring for this space. So leasing that is not difficult. Anything that comes up is taken right away. So the demand is extremely strong. We're looking at [indiscernible] breaking ground in the fall in a site in Hamilton that we have and there's been fairly significant activity, and we haven't even got to the groundbreaking or the design phase being marketed.
So the fundamentals are still very, very strong. Haven't seen any kind of let up yet, Montreal. Same thing. I'd say maybe on the outskirts of Montreal, you'd see it's taking a little bit longer. But overall, in general, I guess, atmosphere in the environmental for industrial space, there is still significant demand and we'll see over the next -- I guess, 1.5 years in GTA and Montreal as basins delivered. But in Montreal, for the most part, that space has been already absorbed fairly well. So and in GTA. So I think overall, fundamentals are still really strong. I don't see any sign of let ups yet, could be next year, things start to ease off slightly, but that's to be seen yet.
Frederic Blondeau
That's great and the 12%, you mentioned that's unlevered, correct?
Kelly Hanczyk
That be unlevered, yes.
Frederic Blondeau
Yes, perfect. And then congrats on the disposition of Victoriaville. Are you able to give us kind of a range on the implied cap on that one?
Robert Chiasson
I believe it's around 7%.
Operator
The next question comes from Mike Markidis with BMO Capital Markets. Please go ahead.
Michael Markidis
Thank you, operator. Kelly and Rob. Just with the -- I think last call, we got to 4% being your outlook for same property growth this year. Obviously, you did that a little bit better than that in the first quarter be also flagged that temporary Fort St. John vacancy. So just with all those puts and takes, would 4% still be your expectation for the full year?
Kelly Hanczyk
It would be, yes.
Michael Markidis
Okay. And just to clarify, does that include the 700,000 quarterly contribution from the Richmond property?
Kelly Hanczyk
It does not.
Michael Markidis
It does not. Okay. Great. Awesome. For the 3 projects, active development projects that you have underway. Thank you very much for your disclosure and the yield expectations and total costs. The figure is probably not that significant in terms of total investment to date, but I just wonder if you have the actual remaining capital required to fund those projects.
Robert Chiasson
Yes. So we haven't -- we've spent a couple of hundred thousand dollars so far, I think, on the Hubrey, London project. So I mean, pretty much higher the entire cost of the expansion is still outstanding?
Kelly Hanczyk
Yes, we've just begun. So the incurred costs now are just really for drawing permit applications.
Michael Markidis
Okay. And for [indiscernible] on expansion, what's the -- is there existing financing on the asset? And then I'm not sure if you're going to just fund it through your line or put some construction financing on the project to complete the expansion. But just maybe if you could discuss that dynamic and then if you do put construction financing, how you handle the takeout if there's existing financing on the asset.
Robert Chiasson
Yes. So currently, we're looking at financing it under the unsecured credit facilities, which is a little bit cheaper in terms of upfront fee and ultimately growing cost, interest expense as well. So that's the plan. I think these properties sit in part of our unencumbered asset pool. And so construction financing would be problematic anyway. So yes, that's ...
Michael Markidis
Okay. So they're in the pool for your unsecured line.
Operator
The next question comes from Brad Sturges with Raymond James.
Bradley Sturges
Just to, I guess, follow on the lines of the development disclosures and pipeline. I just want to clarify, is your expectation for now just only commence St. Thomas in the back half of the year or Is there anything else that could maybe break ground this year at this point?
Kelly Hanczyk
It looks like we'll break ground on 1 of the Hamilton assets that we currently have. So it's about 115,000 square . Probably, I would say, late fall on that one.
Bradley Sturges
Okay. And everything else that's in the planning stage, the -- how much of that in theory could break ground next year?
Kelly Hanczyk
Well, I'd say probably -- definitely, there's the potential for 1 in wins or 65,000 square footer that we're just waiting on approval to go ahead with from the tenant. So the other ones would probably be later in the year. I'm imagining because it does take a little bit of planning with the city as the majority of them are in London, expansions on that we have. So it takes a little bit longer to work through permitting and approvals from the city.
Bradley Sturges
Given that you have a decent pipeline here and you're working through the various opportunities, is there an ideal amount of development that you want to take on any given time just maybe from a capital allocation or just amount of development exposure that you do even want to have at any given time?
Kelly Hanczyk
Yes. I'd say what we're building this year is kind of what we would target. It's -- we're lucky to have the land to be able to build on. And the returns that we're going to be getting are much better, obviously, than what we can -- what you can buy in the market for that type of product. We're talking 9 to 12 unlevered. So I would say that next year, if all went well, we could be somewhere around the same.
Bradley Sturges
Okay. Just switching gears, just on the asset sale program, congrats on Victoriaville. Just curious, I guess you've got a small handful of assets listed for sale built today. I think we've talked about it in the past is where would you be on those assets on selling those assets? Are they on the market today? And what's your, I guess, current timing for when those transactions could occur.
Kelly Hanczyk
I'm hoping if all goes well that we get the majority of it this year. So the 3 stand-alone office properties that we own 100%, I would look to be getting out of, hopefully, in the next 2 quarters. And then I would say the majority of left is the large Sandalwood portfolio, which I have had pretty solid discussions with them on that front. So we have some interested parties in that takeout of our portion. So I'm optimistic that something will be done by the end of this year on that. So hopefully, all goes well. And by that point, with what we have closing and if we sold that, we would be pushing probably 98% industrial just left with a spattering of assets here and there that we would end the rest of next year. So we're well on our way to see that 100% number.
Bradley Sturges
So that I mean that's good to hear. I'm just -- I'm curious if that would it also include your 50% interest in Stanley Street.
Kelly Hanczyk
I would say that would probably be next year. But yes, it would be something that we would be looking at as well. We do have an office there and it's our -- It's in Canada, our Montreal head office. So as eager to get out of that, I mean, it's not a huge part of our NOI. So at the end of the day, if I did, it would be probably next year.
Bradley Sturges
And at this point, I guess the focus would still be the nonindustrial assets. Are you contemplating anything in terms of asset sales on the industrial side? Or you've got enough to work through, I guess, on the nonindustrial assets that you're working through?
Kelly Hanczyk
Yes. We do get calls for Western Canada though there's nothing out here that we want to get rid of. We've had some guys we've tried to do swaps with certain assets, which could still happen. But I would look at some of our smaller if the prices were right out in Western Canada. I think that over the next 6,8 months, maybe we've moved 1 or 2 smaller ones. And I don't see anything probably too much more than that, but we do get inbounds quite a bit. So we'll see how the rest of the year goes on those.
Operator
The next question comes from Kyle Stanley with Desjardin.
Kyle Stanley
So just given the significant rent increases you talked about in Southwestern Ontario and more specifically, London, it does seem like demand is still strong, but are you starting to get any pushback from tenants? Or are they in realization this is just market at this point?
Kelly Hanczyk
Yes. You know what, I think, guys are realizing what's happening to the market and what actually seeing guys are scrambling to get into it now before things keep increasing. So the one we purchased that we just purchased in London sits with like $4.50 rent, and that's going to be a huge win for us in a couple of years when that comes up strategically located. And I am positive we will have a problem either renewing or releasing that space at those rents. It's well located to fantastic assets. So I think tenants are slowly and especially in Southwestern Ontario starting to realize rents are no longer $7 a foot. And so it's been an interesting and a very rapid progression.
Kyle Stanley
Okay. That makes sense. And just on the just under 160,000 square feet you renewed in Ontario this quarter. What was the annual escalator that you achieved?
Robert Chiasson
Contractual increases. To be honest, I'd have to get back to you that Kyle, because I have to just see what goes into that, which ones, but I think it's. Yes, A couple of them are in London and they're pretty strong rental rate increases. So I'll just -- we'll get back to you on the actual details.
Kyle Stanley
Sure, no problem. And then just the last 1 for me. You're talking about St. Thomas. Obviously, you have the Volkswagen facility going in there. So 2 things, I guess, how much would you expect to spend on the 18 acres to facilitate that expansion? And then secondly, is this now a market that you already do have exposure there, but would you be looking to ramp up that exposure? And have you seen any changes in pricing at this point?
Kelly Hanczyk
Land is starting to go up. So that's very interesting. But this one in particular, I think for the purchasing 18 acres -- 18 acres at about 400, I believe it's like $4.5 million for 18 acres. Our total costs would probably be in and around $18 million, $18.5 million for that site. But we've -- in this whole negotiation, we have a specified return. So it's literally, it's taking a return apply to a rental rate and away we go, but to answer the question on actively looking, we have a fairly substantial pipeline of assets down the line with our partner that will roll in over the next several years. So actively looking or -- where we're looking for more deals that where we can see significant upside on renewal like we just pulled off on the one that we closed on.
So I'd say, outside of the family that we are looking for the lower in-place rents that we think we can release that much higher.
Kyle Stanley
Okay. Fair enough. That's it for me. I will turn it back.
Operator
Next question comes from Matt Kornack with National Bank Financial.
Matt Kornack
Just wanted to quickly get a sense on the financing side, whether your intent is to use kind of unsecured facilities to finance the assets on the debt side. versus secured financing against them? And just what would be the relative cost. I know that you've swapped some of the interest expense. Any color on that front?
Robert Chiasson
Yes. So that's the discussion we had at the Board level on Friday in terms of hedging and swaps. So our swap -- the swap we entered into, I think, in March was 4.96%. And I think that 5-year swaps right now are running about 5.25%, somewhere in and around there. So we're trying to build the unencumbered asset pool, and we're trying to get ourselves to the place where we could become rated and potentially issue public unsecured debt. So as you mentioned, there is a bit of trade-off there. So putting a swap in place on the unsecured facility is probably about 40, 50 basis points higher interest cost than a vanilla mortgage.
And so that's something we're considering and sort of balancing off one option against the other but I think we'll likely continue to finance off the credit facility and look to swap out a greater portion of the credit facility.
Matt Kornack
And then so if I look at -- I think you have 6.6% financing on the bankers' acceptance component, but it looks like 100--a little less than half of it is currently swapped. If you go the route where you swap it as opposed to getting secured kind of traditional mortgages, would we expect that the swapped portion goes up and that rate comes down? And then, I guess, also if you could just give a sense as to where your unencumbered asset pool is right now .
Robert Chiasson
Yes. So the swap portion would go up -- and yes, exactly. And I think we did 400 unencumbered pools, $455 million as of March 31. And then we acquired the -- that would be subsequent to the acquisition of Castle [indiscernible], but about $455 million.
Matt Kornack
Okay. And do you have a sense as to how far off you would be potentially from an investment grade credit rating at this point?
Robert Chiasson
In terms of time, we're probably looking at next year. As, I mean there's no huge rush right now, I don't think, to be able to issue public debt. We can get similar pricing by way of financing on the facility with a swap. But we need to increase our EBITDA a little bit and work on some metrics. So probably looking at about next year -- early next year.
Operator
The next question comes from Himanshu Gupta with Scotiabank.
Himanshu Gupta
Thank you, and good morning. So just on the London, Ontario, I mean, obviously, the market is performing very well. You mentioned that rents are pushing higher as well. From IFRS perspective, did you make any adjustments this quarter for IFRS valuation for London portfolio?
Robert Chiasson
No. We built in market rents in Q4 in our stabilized NOIs and then present value . So there wasn't a need for adjustment [indiscernible].
Himanshu Gupta
Okay. And Rob, what kind of cap rate or on a dollar per foot basis, are you marking your lending portfolio for IFRS?
Robert Chiasson
I'd have to look it up. If you give me a minute, I can come back to you. Do you have other questions?
Himanshu Gupta
Sure. Absolutely. So okay. And then just moving to the development side of things. I think the Hamilton development at Global Road the cost of $30 million, is the development cost a bit higher than your initial expectations there? Any color on that?
Kelly Hanczyk
No, I think it's all within the model. So I think costs are coming in where we anticipated.
Himanshu Gupta
Okay. So Kelly the Hamilton market is now like the cost is like $260 per foot. So do you think the stabilized assets in the Hamilton are all like $300 per foot as well, just like the inside the GTA, inside [indiscernible]?
Kelly Hanczyk
Yes, yes. I mean cost of land, right? Cost of land has gone up significantly. So at the end of the day, for a new build anywhere you're probably in that $2.75 to $3 in change.
Himanshu Gupta
Okay. And then you have another Hamilton development coming up. So should we expect like similar kind of costing as well that property also.
Kelly Hanczyk
Yes, I believe so. And that's a bigger development. The second 1 that would go is -- wouldn't be until probably next year and the end of the year, I think. And you're looking at somewhere around -- it's a little bit over 1 million square feet that can be built there.
Himanshu Gupta
All right. And then just shifting on the leasing side. I'm looking at your Alberta industrial portfolio. So is there any fixed price renewal options in that portfolio in Alberta? Just trying to see if we should expect any more downside to the current .
Kelly Hanczyk
So for this year, I don't think there's any fixed renewals -- no fixed renewals, the 2 MasTec sites are the ones that are going to hurt us a little bit. Where they came off April 30. And when I look at the balance of the portfolio that comes up this year, Edmonton and it's pretty much Edmonton, and I believe the market rents are probably slightly below. So nothing crazy may be $1 above the flip on some smaller renewals that come up for the balance of the year.
Himanshu Gupta
Got it. And tell me, what about the next year in Alberta. So I see 250,000 square feet coming up almost $20 rents. Any thoughts on that?
Kelly Hanczyk
I would -- I have to pull up next year to see what we have expiring. I know we had a couple that have already renewed, and we renewed them down to market. They're not massive sites. So to be honest, I have to look at them and get back to you, Himanshu.
Himanshu Gupta
Fair enough. And Rob, do you have your IFRS for London if you can [indiscernible].
Robert Chiasson
5.5% cap.
Operator
Your next question comes from Jimmy Shan with RBC Capital Markets.
Jimmy Shan
So on the contractual rent increase, I think you've been doing deals that are with higher rent escalators of late. And so do you have a sense of where contractual rent increase for the entire portfolio? What does that look like today?
Robert Chiasson
We don't. That's something we're going to look to add to our MD&A disclosure next quarter, but it's not something that we [indiscernible].
Kelly Hanczyk
Yes. I know in the recent ones in Southwestern Ontario have been either CPI typically CPI or about 8% to 12% depending on the lease that we've done.
Jimmy Shan
Yes. No. Yes, I'm just trying to understand that in the context of the entire portfolio, just for us to be able to model it better, would be super helpful.
Robert Chiasson
As I said, we don't that we'll look to disclose that next quarter. We're going to want that, If we're looking at for M&A.
Jimmy Shan
Okay. And then, Kelly, I think you round off a few -- the pending acquisitions over the next few months. Do you mind going through the properties again and the value of the assets and the timing of the closing of these deals?
Kelly Hanczyk
Sure. Just give me 2 seconds here, so I can pull them up. So the first one we have is in June. bear with me. Okay, there we are. So the first one we have is in Montreal. It's in Laval, $65 million, 192,000 square feet that closes in June. We've got the other one in Southwestern Ontario. On Scanlon which is about $56 million, 304,000 square footer. and that will close June 1, I believe, and that's a Class BLP unit deal. And then we have Burlington in Ontario about of GLA. And that is, I believe, closing beginning of July. And then -- we have the other one in London, Ontario, which again would be a unit deal, and that is probably about $51 million, I think the addition might be a little bit bigger.
So that number might go up a little bit, 326,000 square feet and that is expected when they finished construction. I think it's going to be in August. It sounds like it's probably around August.
Operator
The next question comes from Garo Mato [ph] with IA Capital Markets.
Unidentified Analyst
Just on the G&A expenses, we noticed the uptick that you reported. Just wondering what a fair run rate would be for the rest of the year.
Kelly Hanczyk
Yes. So I think G&A was probably about 700,000 give or take, 700,000 higher than run rate. Yes. So if you take that off of Q1, probably get to a relatively decent run rate.
Unidentified Analyst
Okay. Okay. Great. And just on the capital reserves as well. We noticed that uptick there. Would that be a fair rate for the year ahead as well?
Kelly Hanczyk
Yes. I mean, as we add new properties, we'll adjust our AFFO CapEx reserve. But yes, it's probably a reasonable run rate.
Unidentified Analyst
And just switching to the acquisition pipeline, as you're looking at opportunities in the market, are vendors open to doing cash and stock deals over certain assets? Or is that something that vendors are shying away from currently?
Kelly Hanczyk
No, we still got opportunities to do unit deals. We have been working on a few here and there. So we'll see if we -- I think there's still a little bit of a disconnect between sellers and buyers on cap rates. So that's still got to settle in. And so all about valuation, valuation of the units, there's still demand for good quality assets. So it's a little tougher to do, but like I said last quarter, I believe that these things take a little bit longer to do because someone has to get pretty comfortable with the company and what you're doing.
So they just typically take longer, but we have been in discussions with a few several different vendors about the possibility of unit deals going forward.
Operator
This concludes the question and answer session. I would like to turn the conference back over to Kelly Hanczyk for any closing remarks.
Kelly Hanczyk
All right, Thanks everybody, for attending, and we'll chat next quarter. And hopefully, we will add some additional disclosure to our MD&A going forward. Thank you.
Operator
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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Nexus Industrial REIT (EFRTF) Q1 2023 Earnings Call Transcript