Nexus Industrial REIT (NXRUN) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the Nexus Industrial REIT Fourth Quarter 2024 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Kelly Hanczyk, Chief Executive Officer.

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 website 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 3 targeted industrial acquisitions -- sorry about that, acquisitions, completed 3 industrial development projects and advanced 2 more. Next, we focused our portfolio by selling our legacy office, retail and noncore industrial assets. These sales transition our net operating income to nearly 100% industrial and strengthen our balance sheet as we use 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 will 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 will earn a 5.9% going-in 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 advanced 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 a 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 is expected to deliver a 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 7 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 4 noncore industrial buildings. In the fourth quarter, we closed on the sale of 2 of the office buildings, 1 mixed-use industrial property and 4 noncore industrial buildings for total proceeds of $48 million. We also sold another office property for $4 million, which closed in February of 2025. We are closing this month with 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 are 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 1 retail building and 2 office buildings. The retail building is Les Halles 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 of years to get approval, and it looks like it's imminent, we will then sell the building. Our partner in the project has already expressed their desire to own the property, so we expect a smooth sale mid-year. The final 2 office buildings are joint ventures where we generate significant asset management fees, and we're 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 AFFO improved 2.5% to $0.161 per unit. In both cases, the increase was driven by strong net operating income in 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 3 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 have 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 2 tenants in the portfolio who have entered 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 Clarke 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 on this building for 2025, if all goes well. The second tenant occupies our cross-dock facility at 102 Avenue in Southeast Calgary. If acquired, we should be able to find a new tenant quickly here, too. However, there's a good possibility 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 a 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 we 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 30. 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 4 industrial properties located in Saskatchewan. I'll now turn the call back to Kelly.

Thanks, Mike. Our strategy to be a 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.

[Operator Instructions] The first question comes from Brad Sturges with Raymond James.

I 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?

Yes.

Yes, absolutely.

I want to give a little color on it. The Peavey one is the larger one, right, 2 warehouses. The London one, we are working on a tenant that for approximately half the -- a little over half the building, but the 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 are 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 that could come out of a negative, I would say it's that building.

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

Yes. So right now, we're at 96% occupied, and that's really down to 2 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. That's a guess [indiscernible] of high 90s.

In terms of the '25 expiries, no material nonrenewals 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 Robin's Hill Road at $1,250 a foot that effectively starts Jan 1 of this year, so back-dated 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.

The next question comes from Sam Damiani with TD Cowen.

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. I feel that I would say the majority are -- have a wait-and-see aspect to their decisions that they never used to have. On a positive, the Calgary small-bay that we're building, August finish, I think that thing will be 100% preleased in another month or so because it's generating a 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 to lease for the year because I think it will be a challenging year because guys are taking a long time.

Maybe I can jump in, a little more color, too. I think one thing that we're very happy with now is the mixture of tenants that we have. We have -- 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 has just fallen nicely for us is our longer weighted average lease term, having the fact that we have a 7-year WALT 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. Are there 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?

Yes. 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 0 vacancy of anything of quality at the time. So I don't know. We're talking with groups on the Peavey building, and it was going along, but we have a tenant who are very, very interested, and they've 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.

Exactly. 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 like 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 noncore 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.

Yes. I think, Sam, just to add to what Kelly was saying, the -- clearly, we have this -- 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 just 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.

The next question comes from Kyle Stanley with Desjardins.

Just wanted to clarify your comment on the Robin's Hill Road asset and the lease there. Did you say that your expectation is that would be retroactive to January 1? Because I think I remember that being more -- it was year-end weighted, right?

Yes. It was a December 31 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.

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

It will definitely be a nice setoff to the Peavey if that transpires surely.

Okay. No, that makes sense. 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 a 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 expiries we have left there. I'll have to look it up and follow up with you after the call.

I mean nevertheless, Kyle, like 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 a mid-single-digit growth -- same-property NOI growth for the year.

Okay. Fair enough. And then the last one for me. I was just wondering if you could elaborate a little bit more on the -- that noncash 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 USD 250,000 a quarter that we pay on that. And given the jump in the U.S. dollar -- strengthening U.S. 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 for Saskatchewan, part of the reason the jump in the Saskatchewan portfolio is due to the sales of the 4 properties that we disposed of.

The next question comes from Himanshu Gupta with Scotiabank.

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 13 to 14, right around there.

Okay. And then the tenant starts paying rent from July itself. And I think you were 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 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 we get paid as a rate on the total development spend. So development spend has gone up another $5 million, and that means that we'll earn a higher rent at the end of the day.

Got it. And then on the Glover Road, thanks for the commentary already. Is it like 1 year now an expectation, like by end of the year or more into next year in terms of lease-up of the Glover Road asset?

Glover. So I don't know. I would love to say we did have a tenant kind of in hand, and 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.

Okay. And then on the Calgary small-bay, I mean, it looks like pretty good demand so far. Would you say your Calgary market like doing 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 until August. And so I think we've signed 30,000 square feet. And then that's 3 bays, and there's another 4 bays that we're back and forth on, and we're only in March. And so it's a little skewed there. 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.

Awesome. 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 on? So just...

Yes. 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 fair to keep the run rate stays current for this year.

Awesome. Okay. Maybe just one last question. On the legacy retail portfolio, when are you expecting that to close? And have you recorded any fair value losses on legacy property?

I think the 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 now, which is where we're looking to sell it.

[Operator Instructions] Our next question comes from Jimmy Shan with RBC Capital Markets.

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's sort of on your watch list right now?

So when I call it 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 slowed. 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 have -- 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 the 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.

Okay. Got it. And any other large tenants that sort of worry 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 A.P. Plasman would be one. Can Art, 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.

Okay. Makes sense. Sorry, last clarification. Peavey Mart, you mentioned $1.3 million of annualized NOI. Was that for combined the Red Deer property and the London property?

Sorry, say it again, Jimmy?

$1.3 million of NOI. Yes, I think I heard combined.

Of annualized NOI.

For which?

Peavey.

Yes. That was -- so that's just for the -- so Clarke Road is about $1 million to $1.2 million. I mean it's -- I can give you the numbers. It's Clarke -- the Clarke Road one is 220,000 square feet at $6 a square foot gross. And the Red Deer property at 40 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.

This concludes the question-and-answer session. I would like to turn the conference back over to Kelly Hanczyk for any closing remarks.

I want to thank everybody for attending, and we'll be chatting next quarter.

This brings to an end today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.