CA - Nexus Industrial REIT (EFRTF) Q3 2023 Earnings Call Transcript
2023-11-15 15:41:02 ET
Nexus Industrial REIT (EFRTF)
Q3 2023 Earnings Call Transcript
November 15, 2023 01:00 PM ET
Company Participants
Kelly Hanczyk - CEO
Robert Chiasson - CFO
Conference Call Participants
Fred Blondeau - Laurentian Bank Securities
Mike Markidis - BMO Capital Markets
Brad Sturges - Raymond James
Kyle Stanley - Desjardins
Himanshu Gupta - Scotiabank
Jimmy Shan - RBC Capital Markets
Presentation
Operator
Thank you for standing by. This is the conference operator. Welcome to the Nexus Industrial REIT Third Quarter 2023 Results Conference Call. As a reminder, all participations are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. [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 would like to welcome everyone to the 2023 third 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.
The third quarter has gone as expected with a portfolio delivering 2.5%, same property, and NOI growth as compared to Q3, 2022. During the quarter, we purchased 141,000 square foot newly built distribution center in Burlington, Ontario for $48 million. And subsequent to the quarter, we closed on a 336,000 square foot newly expanded distribution center in London, Ontario. In it -- in the unit deal priced at 11.30 a unit with our largest unit holder. We have one more acquisition to close in mid-December and 84,000 square foot new build in Calgary, Alberta for one of the REIT's existing tenants.
After this, we'll be putting the brakes on acquisitions for the time being until market conditions improve. Our industrial NOI weighting is now approximately 91% and will continue to grow in 2023 as we shrink the footprint of our remaining retail and office assets. Although there were new dispositions announced in the quarter, we are in various stages of due diligence of our three suburban Montreal office assets as well as our office property, Class 400 located in St. John, New Brunswick. It sees about a 50% probability of completion of these deals in today's current market.
On the development front, steel is up on the 96,000 square-foot, 40-foot clear height addition to our building at 1285 Hubrey Road in London, Ontario, where we are continuing negotiations with several groups that should provide us with an outside return of approximately 10% upon completion. This is scheduled to be in about May or June of next year. At the Titan industrial site in Regina, Saskatchewan that was acquired in February 2022. The walls are erected, the slab is poured and interior finishes are being completed on the 312,000 square foot avenue build. We are constructing on 22 acres of excess land. As mentioned previously, we have a signed lease in place for 200,000 square feet at the site, and are in discussions with few different groups on the balance of the space. This is still on schedule to complete for an April 2024 delivery.
As mentioned last quarter, we will also be proceeding in the fall, late fall, with the expansion of an existing tenant in the Southwestern Ontario portfolio to add what was supposed to be an approximately 70,000 square foot addition, but it looks likely to grow to a 240,000 square foot addition. We are purchasing 18 acres of land adjacent to the site to accommodate the expansion in the -- and upon completion we will earn somewhere around the 9%. It could be higher, percent cash on cash return and will not be a drag on earnings, as we will generate a return throughout the construction process as we incur costs to build.
In Richmond, BC, we have received partial occupancy and are still awaiting to receive full occupancy permits for the newly named Belvedere Sports Club. This has been a tedious process, but it looks like occupancy should be in hand by the end of November. We are working feverishly to get the tenant up and running, so we can commence rental payments in the new year.
This quarter our NAV per unit has increased to $12.89 versus $12.49 last quarter. We engaged external appraisers to value properties totaling approximately $489 million in the quarter, resulting in a net write up of income-producing properties of approximately $26.9 million. One property in particular account for approximately 84% of the $26.9 million net write up, resulting from external appraisals.
In addition, an investment property in London, Ontario acquired in the second quarter with in place rents well, well below market, and purchased for approximately $24 million left and appraised value was also revalued, generating a fair value increase of approximately $19.1 million in the quarter. In the development properties, we recorded gains of $16.6 million according to the percentage of construction complete as of September 30th, relative to as complete appraised value. Partially offsetting these fair value gains were adjustments totaling just over $24 million relating to primarily to cap rate expansion, which we have applied to the REIT's properties in Calgary, Montreal, and BC.
In our transition to an unsecured borrower, we have built a sizable unencumbered asset pool, which will afford us financial flexibility for the long term. This will provide us with access to a wider range and deeper pool of capital resources, including the potential to pursue an investment grade rating and issuance of public bond securities in the medium term. We successfully upsized our unsecured bank debt facility in the quarter to $525 million, demonstrating continued institutional support for our portfolio and strategy.
This bank debt facility is critical to our transition. We have also entered into a swap agreement in order to reduce our overall cost of debt, $440 million swapped at 5.2%, which removes our exposure to movements in interest rates in the near-term. The swap represents the most cost-effective structure, while providing maximum flexibility to achieve our overarching strategy.
I will now turn the call over to Robert Chiasson to discuss the financials further.
Robert Chiasson
Thanks, Kelly. As Kelly mentioned, we completed the $48 million acquisition of the Burlington, Ontario property on July 4th, funded with borrowings on our credit facility. We acquired the $56 million London property at a 6 cap on November 1st, with $27.1 million of the purchase price settled in units issued at $11.30 per unit, and the remainder with borrowings on our credit facility. Our properties performed well. Year-over-year same-store NOI growth was 2.3% for the quarter, with some Western Canada vacancies putting pressure on the figure. Without those two tenant vacancies, same-store NOI would have been 3.9%.
G&A was stable for the quarter. FFO and AFFO were slightly impacted by an approximately $175,000 unrealized foreign exchange loss in the quarter. For the remainder of 2023, we have approximately $30 million of mortgages maturing at a weighted average 2.36% interest rate, including a $15 million non-interest-bearing VTB that brings the weighted average interest rate down. In 2024, we'll have approximately $37 million of mortgages with a weighted average interest rate of 4.3%. That will mature with the bulk maturing March 31st of next year.
In September, 2024 at $65 million credit facility fixed at 3.15% interest will mature. As Kelly mentioned, we've put in place a number of swaps between August and November, which immediately reduced our interest costs by approximately 130 basis points and significantly reduced variable rate exposure.
I'll now turn the call back to Kelly.
Kelly Hanczyk
Thanks, Rob. I'll open up the lines to any questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]. The first question comes from Fred Blondeau with Laurentian Bank Securities. Please go ahead.
Fred Blondeau
Thank you. And good afternoon. Two quick questions for Kelly. First just looking at your lease expiries, I guess, $816,000 and $1.5 million in ’24, ’25. Could you remind us, where does RTL Westcan fit in your schedule today? And I guess what are your general views on expiries for the next two years?
Kelly Hanczyk
Yeah, so we have a pretty good handle on for the next two years. We have actually extended RTL Westcan recently. We added five years of term, I believe they expire end of the end of 2025. So, we've added five years of term to their lease with a continuation. So, no step back in rent. So, I believe it's just with the 2.5% increase year over year that will just continue on in that portfolio. So, we have that completed already, which bodes really well cause I think that will be one, that we have marked for disposition. It doesn't really fit into our long-term strategy.
And it's a solid portfolio and I think, where we struggled before on, our thoughts of taking it to market it only had two years left of term. So, with seven years left of term on it with renewal options that they've put in, I think it's very, very sellable and we've got pretty good interest on it.
The balance, I think through next year we're probably about 40% complete already on renewals next year. One of them in Cambridge that's fairly big, I think 150,000 square feet where we're going to see about, call it about just under $5 of lift on that, on renewal, which we've signed the offer to lease and it's just the lease amending the lease amendment being drafted. So, it's effectively done. So, we've got pretty good progress. Another one for next year that's a big one is 238,000 square feet with our partner in London, Ontario, which is about 99.9% likely to renew. We're just discussing rates with them on that. So overall next year with that one we'd probably be about 70% renewed already. So, and we're in discussions with everybody already and have quite a few renewed, so it's looking pretty good.
Fred Blondeau
Got it. And then just to be sure, there's no RTL West Cannon or 2025 expiries at $1.5 million and it’s all been pushed to 2030, correct?
Kelly Hanczyk
There's one, there's only one site that we have which is in.
Robert Chiasson
So, Fred, the reported numbers for RTL Westcan, they are in those, they are in the reported GLA numbers for, I believe they were in the recorded GLA numbers for 2025, because as at September 30th, the…included.
Fred Blondeau
Yeah. Okay. Got it. Okay. And there's one remaining correct, or 2025.
Kelly Hanczyk
It's the only one. It's a small one, but it's contingent on them renewing next door to us, which is on the land lease that we don't own. So, they're in negotiations on that or we expect that one to renew as well.
Fred Blondeau
Okay, that's great. And then, just following up on Richmond, wanted to see if you're still on track for an exit during summer next year or around some summer next year.
Kelly Hanczyk
Yes, that's hopefully the plan. Working hard to try to get occupancy. We thought we had it, but they found some water in one in the elevator pit, which you need the elevator to work, so we have to do some special paint treatment on the elevator pit. Because there's a little water table there. But once that's done, I think, that's the final little phase to get signed off by the authorities and to give occupancy. So, it's -- the plan is to get it going, get it cash flowing, and then hopefully exit it summer or fall next year.
Fred Blondeau
Yes, no, that's great. And then, maybe one last for Rob, what would be your target that ratio for 2024? I guess it would be a function of dispositions, but I was wondering if you had a kind of a target for 2024 anyway.
Robert Chiasson
Yes, I'm not sure I can give a pre-precise answer to that, because as you say, it will depend on dispositions. We've got the retail and the office properties potentially, the west can portfolio that Kelly mentioned, but we should be comfortably below 50%. And depending on the success of some of those dispositions, lower than that. But I can't give a precise number except to say, we should be comfortably below 50%.
Fred Blondeau
That’s great. Thank you, so much. Very helpful.
Operator
The next question comes from Mike Markidis with BMO capital markets. Please go ahead.
Mike Markidis
And apologies, there's an alert of an alarm here in our building, so I apologize for the background talking, but here goes, first one's just a housekeeping question, Rob, I think you guys had a pretty substantial increase in capitalized interest this quarter, if I'm not mistaken. I think it was at $1.3 million. But I think you only deployed about $30 million or so of incremental capital developments. So, could you circle a square there in terms of what caused that, please?
Robert Chiasson
Yes, so if there's any catch up that's one quarter on the land related to the Regina property, but its primarily development funds deployed in the quarter.
Mike Markidis
Okay. Maybe we could follow up off on that one if you don't mind. Just I know the environment Kelly is pretty tough for the dispositions right now, and that's put a little bit of a kink in your plan, so to speak or so, but with all the RTL West Can, Richmond, I don't know where you stand on sandalwood if you're still thinking that gets done in 2024, ballpark figure realizing the range could be wide. Like what do you think the total amount of capital would be for those properties that you get to mark for disposition?
Kelly Hanczyk
Yes, I mean, I would be pretty surprised if we couldn't move the West Can portfolio. It's generated pretty good response and we're not even actively market marketing it right now, because we did just get the extension. I believe value on, that's probably somewhere around $80 million give or take. Sandalwood is the value is a call. It's in and around $110 million. And I was working with a group to try to do an off-market deal, kind of gone a little sideways, so we will be underwriting that right now. We do have some take up on it. We've had -- especially on the retail side a lot of inquiries as to it. So, I think we'll have some participation. It's really the office that I'm finding the real slowdown on a sale.
We have it under contract with someone right now, but I see 50% chance of that being concluded. I'll know end of the month. Because I believe that's when the due diligence period expires. Plus 400 in New Brunswick. We just put that under contract. So that's got a little bit of time on the due diligence. So, I would like be fairly confident that we could move through the sandalwood portfolio next year. And I would think the RTL Westcan portfolio. And the pre-office, if we can do, I'll be more than happy. But it's tough. I mean, they are good assets for us. They have term cash flow nicely, so it's not a desperation thing here for us. It makes sure we get a proper deal done.
Mike Markidis
Of course. And so, if I add that all up, roughly RTL, sandalwood, and the office, I think that's 81, 10, and 30. And then Richmond, I think you have mentioned plans for that as well. So, what would that...
Kelly Hanczyk
That would probably be, call it, just in and around 100, could be 100 and 130.
Mike Markidis
Okay. Perfect. Last one for me before I turn it back. Just it sounds like you made good progress on your lease maturity heading into next year, 70% done or close to 70% done. Just given what you are seeing now and knowing what you have in the portfolio, what kind of upside do you see next year from the same property’s perspective?
Kelly Hanczyk
It's a little hard to guess, but when I am looking at some of the renewals we have, we have fairly significant, but we do have that one we mentioned before, Canada Cartage coming off that we will have to release. And that will make a dent on our same-store. But from a renewal standpoint, even in when I am looking at, Edmonton, we've completed one, at a buck higher on 72,000 square feet. We have got one at $5 higher on 150,000 square feet. So, we are making pretty good progress here.
But we did have the Northern Baton Bridge that we renewed next year. Our huge, I think our huge bump, so we do have a decent bump next year overall on the same-store. But our big, very large bump comes in 2025, where the recently purchased one in London sits at 450 in rent and we will probably end up somewhere around $12 on that site. It is 260 something 1,000 square feet. So, 2025 is the real big lift on the same-store.
Mike Markidis
Okay. And, can you just remind me on the NOI coming off and when it comes off for Canada Cartage?
Kelly Hanczyk
I believe we are in the transition. So, we purchased their new facility and then they move from one to the other. I believe it will come off at the end of December, is what I am thinking and then they start paying rent on the new facility that we purchased. So, the good news is, we do have someone interested that we are speaking with right now. So hopefully we can reset sooner than later.
Mike Markidis
Okay. That's around?
Robert Chiasson
$2 million a year of NOI, give or take.
Operator
The next question Comes from Brad Sturges with Raymond James. Please go ahead.
Brad Sturges
Just continuing on the one question there from Mike, just so I understand, beyond Canada Cartage, I think there was reference last quarter to Mastec space that you are getting back as well. Is that the only other vacancy you are expecting at this point? Or is there any other non-renewals?
Robert Chiasson
So, we got Mastec back, earlier this year. And we have a small, Grand and Toy, a small vacancy also in Alberta and Edmonton. But I think other than that, we are not expecting anything Kelly.
Kelly Hanczyk
There is nothing, I would say overly large. I would say, nothing over 30,000 square feet. I mean, we do have end of next year, but it's I mean, it's like 30,000 square feet that probably will vacate. But gives us a lot of time to back fill, so there is nothing, the Cartage is the biggest that we have.
Brad Sturges
And with the, the one in Cambridge and in London there is -- that's what the renewals that once you get that done that's like, that there will be no downtime or transition to a new tenant, that's just with existing kind of tenant.
Kelly Hanczyk
Yes. Cambridge is a renewal. And then the biggest one is in Chatham, and that is with our Annie McLaughlin in that, we're in discussions with. So, there is a 99% likelihood of that obviously renewing. But those are the two big ones that represents 200,000 square feet or 300,000 square feet almost 400,000 square feet.
Brad Sturges
Okay. I appreciate the comments just on the I guess the work or the effort on the disposition program. When you think about the potential buyer pool for sandalwood, what would that compensation look like in terms of profile a buyer or the types of groups that you could be talking to?
Kelly Hanczyk
Yeah, so the ones that have shown interest are private, private codes, so nothing from a public side. Private equity, different groups like that. So that's who's kind of shown some interest or we feel the calls from. Not sure if I'd have to split up between office and the retail. If something that may have to happen, we may lucky and have someone take the whole thing down. So, we'll have to see how it goes, but we're underwriting right now so that hopefully then we can December's probably not the best time. So, January probably a launch that we would go to a market.
Brad Sturges
And from a, like an industrial point of view, just beyond RTL, Westcan, would there be anything else, that you would have in the non-core bucket that could be opportunistic for sale at this point? Or is it really the focus would be RTL Westcan at this point?
Kelly Hanczyk
Yeah, I think it would be RTL Westcan and there may be one or two small ones as people inquire on them. You know, we have some smaller stuff by the airport in Edmonton, that are well-tenanted and we possibly could look at those if we had interest on them. But nothing right now that's targeted per se, other than that.
Brad Sturges
Okay, thanks a lot. I'll turn it back.
Operator
The next question comes from Kyle Stanley with Desjardins. Please go ahead.
Kyle Stanley
Thanks guys. Just taking a look at your development disclosure, looks like the cost in Hamilton and Regina ticked up a little bit this quarter and there was a bit of an adjustment to the expected yield in Regina. I'm just wondering, if you could walk through, some of those changes?
Kelly Hanczyk
Yeah, so Regina I think was primarily an adjustment to layer on PST, which wasn't previously included in the construction costs. So, I think that's really what it is cause we have a fixed price, contract there. And then the Glover Road was a couple of variables we own, we have an 80% interest in that property. And so, we have to buy out the remaining 20% interest. And so, there were some changes in the assumptions in terms of the model in terms of, you know, rents are increasing and so we're going to be capping out a higher NOI on the purchase of the remaining 20%. And so that's really what led to the increase on Glover.
Kyle Stanley
Okay. No, no, that makes sense. And they weren't huge increases. Just digging into it a bit, you made some commentary about, potentially expanding the project in St. Thomas. A nice size expansion there. And you mentioned, a yield maybe in the 9% or better range. Just wondering, how are those conversations going and, what would the potential cost be there, and, potential timing on breaking ground and delivery. Just a, I guess, a bigger update on what's going on in St. Thomas.
Kelly Hanczyk
Yeah, so, I'm in the thick of it. So, they have requested 240, so we're in discussions. Originally, we had a 9% return on a 70,000 square foot edition. That might have to increase a little to get to 240,000 square feet in my mind. So, it's what I'm working on right now. I think the intent would to have that all figured out in December where I would think they would break ground January, February, weather permitted. So, I, that's kind of the schedule for there. It's probably somewhere, right now around $40 million would be the cost. The good one on that is that we don't really have a drag cause we did negotiate a return on costs as construction is completed. So, there'd be no real drag on our NOI from that.
Kyle Stanley
And would that negotiated return on your cost as the construction's completed? Would that line up with the call it at, you know, at least 9% return you're talking about? Or would it be any different?
Kelly Hanczyk
It would be a little lower than that.
Kyle Stanley
Okay. That makes sense. Last one for me, G&A was down sequentially this quarter, Rob. I'm just wondering could you provide us what a good run rate might be going forward?
Robert Chiasson
Well, there's always seasonality, I guess, in the G&A. So, our Q1 G&A is going to be a little bit higher with the timing of RSU best, et cetera. And it'll depend on the grants, but we're not -- I don't think we're significantly off this quarter and we probably at about run rate all else being equal.
Kelly Hanczyk
I would use our current run rate. I mean, ultimately our staff levels are staff levels and we're doing well with what we have. So, I don't see any huge change to the actual run rate.
Robert Chiasson
Yes, I think we had a bit of a spike in Q2, more so than a reduction in Q3, but call it $1.5 million somewhere in, around there is probably one rate.
Operator
The next question comes from Himanshu Gupta with the Scotiabank. Please go ahead.
Himanshu Gupta
So just on the credit facility swaps, I think your favorite of done during the quarter and post act, how much of these swaps the banks have one-year options on that?
Robert Chiasson
Right. So just one second. Let me, so there's a total of $300 million that was done for the banks have 1-time options to cancel one year out.
Himanshu Gupta
Okay. And that will be like September or will that be like November?
Robert Chiasson
It's August 31st, September 30 th , and October 31st, but primarily October 31st of next year.
Himanshu Gupta
October 31st. And what is the rate for one year right now on that $300 million swap? What is the interest rate on $300 million swap right now? Or put it this, what will the expiring rate, like one year from now when the banks, if they decide to cancel this swap?
Robert Chiasson
Yes, so including spread, we're at about 5.9%, let's say on those, whoops, sorry. Yes, about 5.9% on those swaps. Excluding spread, we're at about give or take about 4.2%. And so, the question will be whether the four-year is greater than 4.2% a year out, if it is, we'll very likely get canceled. But the counter question is where does short-term money sit? If we've seen some correction of the inversion in the curve, then short-term money could actually be cheaper than longer-term money as it would be in a normal situation, I guess. But hopefully, that answers your question.
Himanshu Gupta
Sure. It does. Thanks for that. And then maybe like a bigger picture, what are your thoughts on distribution or the outreach for next year? I mean, especially in the context of you're talking RTO can position sand disposition as well, I'm assuming they're a bit high yielding assets. So, any thoughts on distribution or payout for next year?
Robert Chiasson
Yes, I think we've ran our -- we're not on the budget, but probably the payout starts to drift towards the lower nineties. So, while we'll have maybe some short-term strain on that payout, it starts to come down fairly quickly as our developments come on and as the new rents kick in. So, at the end of the day, it's not something that we've looked at to reduce for sure. So, everything right now is status quo. And it's not tops of mind to look at. So, I hear a lot of rumblings, but we haven't -- we don't think it's something that, we need to look at as it will naturally drift down towards the lower 90s throughout the year.
Himanshu Gupta
Got it. Okay. Awesome. Thank you. And maybe just one last question. That Calgary asset acquisition in December, I think that's scanned outage. What cap should we expect on that asset?
Robert Chiasson
Yes, it was lower, it was pre-done before, and I believe it's somewhere around 5.2, -- 5.25.
Himanshu Gupta
Okay. Thank you. Thank you, Kelly, and I'll jump back.
Operator
The next question comes from Jimmy Shan with RBC Capital Markets. Please go ahead.
Jimmy Shan
Thanks. So, maybe just a broader question on market rents and kind of how would you characterize, the most recent trends that you are seeing in asking rates in some of your key markets?
Kelly Hanczyk
Yes. So, it is actually been pretty good. Montreal is still holding up pretty well. We are asking in the $16 to $18 range in some of our assets there. Calgary and Edmonton, where I thought we would have a little pushback on some of the rents possibly, we actually are getting bigger increases than what we originally anticipated. We thought We would be flat on some of them, and we are actually getting some increases.
So, the market is still pretty robust. While it is, I guess, I think peaking in when we talk about the continued increase of rental rates, it is stabilized. And so, we have a bunch, I mean, forget Southwestern Ontario rent, rents are pushing and I think they are still continuing because there is no available space down there, that's a different market in its entirety. But, from what I see rates are stabilizing as a whole, but that still gives plenty of room for lift on in place rents across the portfolio.
So, I think you are starting to see peak rental rates in GTA Montreal. I would say, London is probably going to peak out hopefully a little higher, maybe around $14. So, we are talking to some people with that number in mind. So, depends on the facility, the building you have, but rental rates are still pretty strong right now.
Jimmy Shan
Okay. There is a bit of a narrative about kind of limited large bay requirements by tenants, but small and mid-day activity being pretty healthy. I don't know if that's a GTA comment or not. But I wondered if you had any thoughts there or if you are seeing any of that dynamic in your market?
Kelly Hanczyk
It is actually interesting because, in Regina, we have the 112,000 square feet, and we would prefer to lease it as one. But we have a couple of people that are each looking at perhaps half of it. So, it kind of does work. Same with London with our 96,000. We have users for a bit, for the whole thing, that we are speaking with and we have users for half. So there has been a resurgence I think in that, call it, in that 40,000 square foot to 50,000 square foot niche, that I am seeing lately.
Operator
This concludes the question-and-answer session. I would like to turn the conference back over to Kelly Hanczyk for any closing remarks. Please go ahead.
Kelly Hanczyk
Perfect. Thank you. Thanks, everybody for attending, and we will see you next quarter.
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) Q3 2023 Earnings Call Transcript