Nexus Industrial REIT (N/A) has reported a robust fourth-quarter performance for 2023, with a 17.1% year-over-year increase in net operating income, reaching $29.2 million. The growth is attributed to strategic acquisitions and rental steps in leases. Despite a decline in Normalized Adjusted Funds From Operations (AFFO) per unit due to higher interest expenses, the company's net asset value (NAV) per unit rose to $12.87. Nexus Industrial REIT plans to focus on its Canada-centric industrial real estate strategy, expecting to see mid- to high single-digit same-property net operating income (NOI) growth in 2024.
Key Takeaways
- Nexus Industrial REIT's Q4 2023 NOI increased by 17.1% YoY to $29.2 million.
- Same-property industrial NOI grew by 2.9% in the quarter and 4.3% for the full year.
- The company's NAV per unit increased to $12.87, with investment property values up by $35.5 million.
- Normalized AFFO declined to $0.151 per unit due to higher net interest expenses.
- Nexus Industrial REIT plans to sell non-core assets and focus on industrial properties, expecting to deleverage with $200 million from property sales.
- The company secured an additional $100 million in its unsecured credit facility, now totaling $625 million.
- New development projects in 2024 are projected to add $11 million in annualized stabilized NOI.
Company Outlook
- 2024 outlook includes mid- to high single-digit same-property NOI growth, with a softer performance expected in Q1.
- Four new development projects aim to contribute approximately $11 million to the annualized stabilized NOI.
- The company will focus on deleveraging through asset sales, targeting a leverage ratio of around 50%.
- Payout ratio is projected to be in the low to mid-90s range, factoring in planned dispositions.
Bearish Highlights
- Normalized AFFO per unit decreased due to an uptick in net interest expenses by $4.2 million.
- Seasonal factors and vacancy issues caused a drag on retail and office segments.
- The sale of Victoriaville led to a $400,000 straight-line rent adjustment, impacting Q4 NOI.
Bullish Highlights
- Strategic acquisitions and rental escalations have bolstered the company's income and property values.
- The NAV per unit increase and additional credit facility capacity signal financial strength.
- The sale of non-core assets is expected to improve the balance sheet and support growth initiatives.
Misses
- The company reported a decline in Normalized AFFO per unit in Q4 2023.
- There was a misstatement with industrial assets' mark-to-market, which is 24%, not the previously reported 29%.
Q&A Highlights
- Nexus Industrial REIT clarified the industrial mark-to-market rate and the effective interest rate for 2024.
- The company discussed the potential development upside of the Alberta acquisition and plans for the Richmond property sale in 2025.
- Management expressed confidence in the industrial REIT strategy and financial performance for the upcoming years.
Full transcript - None (EFRTF) Q4 2023:
Operator: Thank you for standing by. This is the conference operator. Welcome to the Nexus Industrial REIT Fourth 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'd like to welcome everyone to the 2023 fourth quarter results conference call for Nexus Industrial REIT. Joining me today on this inaugural call 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 GAAP measures -- non-GAAP measures. In the fourth quarter, we continued to benefit from our strategy as a Canada-focused pure-play industrial REIT. Despite a challenging market backdrop, we delivered another quarter of solid results. And this year, we are well positioned for the next phase of growth as we expand same-property NOI, capitalize on recent acquisitions, and bring four exciting new development projects online. Our industrial NOI weighting now sits at 93%, and we plan to further increase this and strengthen our balance sheet at the same time through sales of our legacy retail office and noncore industrial assets. Beginning with our operating results. Fourth quarter net operating income grew a healthy 17.1% year-over-year to $29.2 million as we benefited from $378 million of strategic acquisitions that we made over the past year. The portfolio also experienced healthy same-property industrial NOI growth of 2.9% compared to the fourth quarter of 2022 and 4.3% for the full year. This growth is a testament to our strategy of embedding annual rental steps into our leases and to healthy rent lift we are earning on renewals due to market rents that are on an average 29% above 20 -- it’s actually 24% above in-place rents. We will continue to benefit from these attributes for the next several years. On a total company basis, same-property NOI in the quarter grew 1.3% compared to a year ago as some of the strength in our industrial portfolio was offset by a temporary contraction in our legacy office and retail portfolios. Looking to 2024. Due to a key vacancy, which I mentioned last quarter, I anticipate slightly softer same-property NOI for the first quarter. However, for the remainder of the year, I expect that we will be benefiting from positive lease renewals and that we'll average mid- to high single-digit same-property NOI growth for the full year. Compared to last year, we experienced lower normalized AFFO per unit, and consequently an elevated payout ratio for the quarter. This was mostly due to higher interest expense on a per unit basis. This temporary circumstance will normalize as our Titan industrial development park comes online in the second quarter. For the full year 2024, we expect our normalized AFFO payout ratio to average in the mid-90s. The leasing market was strong through the majority of 2023. However, it has shown signs lately and decelerating. In anticipation of a deceleration in early 2023, we deployed a leasing strategy to early renew large tenants that had leases expiring in the next three years. As a result, our industrial occupancy improved compared to the third quarter growing to 99%. Our high occupancy is a testament to the quality of our portfolio, anchored by strong tenants and a proactive leasing strategy. At December 31, 2023, our NAV per unit was $12.87, a $0.68 per unit increase from a year ago. Our weighted average cap rate increased by 86 basis points to 5.89% in the fourth quarter compared to 5.03% a year ago. During the quarter, we engaged external appraisers to value properties totalling approximately $200 million, leading to a net write-up of $13.5 million for those properties. Overall, the fair value of our investment properties increased by $35.5 million in the quarter. In the fourth quarter, we continued to high-grade our portfolio with the acquisition of a 336,000-square-foot newly expanded Class A distribution center in London, Ontario. The property is leased to a single tenant with contractual CPI rent growth. We purchased it for $55.8 million, which was satisfied to the issuance of 2.4 million Class B LP Units at $11.30 per unit and cash consideration of $29 million. In addition, on January 3, 2024, we closed on the acquisition of a single-tenant Class A 82,500-square-foot industrial building in Calgary, Alberta for cash of $35 million. This property was newly built for one of our existing tenants and is under a long-term lease with embedded contractual rent growth. Over the past three: years, we have invested roughly $1.4 billion in strategic acquisitions, and I'm very pleased with the outcome. However, our focus now will turn instead to deleveraging through orderly sales of properties that no longer fit into our long-term strategy. This will include our legacy retail assets, our seven old Montreal office buildings, and our three suburban Montreal office buildings, which are in various stages right now of the sale process. In addition, we are looking at the potential disposition of a group of noncore industrial buildings. In total, this would equate to approximately $200 million in sales. Despite the weaker office market, our properties are generating significant interest. We are not in a rush to sell them, so we are moving forward in an orderly manner to ensure that we maximize our value. I expect the property sales to close in the second half of the year and plan to use proceeds to reduce our debt balance. In 2024, we expect to benefit from the completion of four significant industrial development projects. Combined, these properties will add annualized stabilized NOI of approximately $11 million. Our 312,000-square-foot Park Street intensification project in Regina is nearly complete. The primary tenant is taking 200,000 square feet and has begun to move in. Their occupancy officially starts in April. We are marketing the remaining 112,000 square feet and hope to have it leased shortly. This project will contribute a yield of about 7.5% of total development costs of $48 million. At Hubrey Road in London, Ontario, construction is moving along nicely. Leasing interest is picking up as the building is taking shape, and we hope to have good news on the leasing front shortly. This project will contribute about a 9% yield on total development costs of $15 million when it is completed in the third quarter. The project further strengthens our leadership position in the highly desirable London market, which continues to be one of the tightest industrial markets in Canada. At our 116,000-square-foot Glover Road development in Hamilton, the steel framing is up, the roof deck is complete, and the flooring is being poured. The property has industry-leading 40-foot clear height and is expected to be LEED certified. We are in the process of finding a tenant and it is to be cash flowing in the second half of the year. We own 80% of the property, and we're in about a 5.6% going-in yield on development cost of $33 million. Steel has been ordered and earthworks are currently underway at our 240,000-square-foot Dennis Road expansion project in St. Thomas, Ontario. This expansion is for an existing tenant, and we will earn a development fee through construction to eliminate any kind of cash flow drag. We expect construction to be complete by the end of the year, at which point the tenant will pay contractual rent equal to a 9% yield on the estimated development cost of $50 million. Richmond BC, again, we are just hoping the occupancy is soon approved by the city. There is very little less to do in the Boulevard Club, so we're expecting it any day. It's been a frustrating process, but last week, I went to see it in person. It's actually a really beautiful property. We've done a great job, the landscaping, glass-walled squash courts, the only ones in Canada, padel courts, pickleball, and top-tier swimming pool. So, we believe the facility will be busting when it finally gets to open. We expect the club will be able to hopefully take occupancy in the second quarter of the year. 2023 demonstrated the strength of our strategy as a Canada-focused pure-play industrial REIT. In what was a tough year for the real estate industry, we were able to continue to grow, add value and deliver solid results. The good news is we are not finished yet. In 2024, we will have a full year's contribution from our acquisitions. And while in the first quarter, we anticipate slightly softer same-property NOI, for the remainder of the year, we expect to benefit from positive lease renewals resulting in, call it, mid- to high single-digit same-property NOI growth for the full year. Also, we will complete our four exciting new development projects and begin to have them cash flow. Lastly, we will focus on our portfolio through the strategic dispositions, and we'll use the proceeds to delever our balance sheet going forward. I'll now turn the call over to Mike to give some color on our financials.
Mike Rawle: Thank you, Kelly, and good morning, everyone. Starting with the headline earnings in the quarter. Net income was $2.1 million, an impressive $19 million increase compared to the net loss of $16.9 million last year. The increase was primarily due to a positive fair value adjustment on investment properties of $35.5 million in the quarter compared to a negative adjustment of $8.1 million in 2022. This was partially offset by unrealized losses on interest rate hedges of $21.9 million in the quarter due to falling midterm interest rates. As Kelly mentioned, net operating income continued to be strong, increasing 17% or $4.3 million year-over-year to $29.2 million. Of this amount, new acquisitions accounted for $4.5 million, and same-property NOI growth added $0.3 million from embedded rent steps, CPI increases, and renewal lease lift. This growth was partially offset by the absence of $0.8 million of NOI earned in the fourth quarter of 2022 from properties that have since been sold. Normalized AFFO for the period was $0.151 per unit, a decline of $0.026 from a year ago as the benefit from higher per unit net operating income was more than offset by higher interest expense per unit. Total general and administrative expense for the quarter was $3.2 million. Excluding severances and onetime compensation-related expenses, G&A was $1.5 million, which was flat on a year-over-year basis. Net interest expense for the quarter was $12.4 million, a $4.2 million increase from the same period last year. This increase was primarily due to a higher outstanding average debt balance during the period. I'm also pleased to share that a couple of days ago, we added a further $100 million of committed capacity to our unsecured credit facility, bringing the total facility size to $625 million. We also extended the maturity by an additional year to March 2027. This larger facility gives us a significant liquidity cushion and the ability to continue our transition to an unsecured borrower, which will ultimately give us access to a wider range and deeper pool of capital. I'll now turn the call back to Kelly.
Kelly Hanczyk: Thanks, Mike. I'm very excited about our positioning heading into 2024. Our strategy to be a Canada-focused pure-play industrial REIT is proving lucrative. We're nearing an inflection point as we benefit from contractual rent lifts and renewals, cash flowing development projects, and further optimization of our portfolio of high-quality industrial assets. Confident these factors will drive meaningful positive impact on our financial performance over the next two years. With that, operator, please open the lines to any questions.
Operator: [Operator Instructions] The first question comes from Brad Sturges with Raymond James. Please go ahead.
Brad Sturges: Maybe on the leasing front, I think 700,000 square feet in the quarter, you talked about being a little bit more proactive in addressing upcoming expiries. Of the leasing that was done in Q4, how much of that would have been effective during Q4? And then can you just talk through the timing of, I guess, when the other leases would become effective?
Kelly Hanczyk: I don't have the detailed rate in front of me. We might have to get back to you on that one.
Brad Sturges: Okay. What would be the update on -- I guess you're expecting a little bit of transitional vacancy at West that you'd talked about before. What would be the update there?
Kelly Hanczyk: Are you talking about the vacancy?
Brad Sturges: Yes, yes.
Kelly Hanczyk: So that was Canada Cartage. So, we actually purchased Canada Cartage's new facility in Balzac, which is just north of Calgary. They simply just outgrew our facility so we ended up buying that and we have it vacant. So, we do have a plan for it. We have fairly decent leasing interest on it right now, although it seems people are just taking longer to make a decision, depending on when, I guess, they expire. And then what we're probably going to do is it's on, I think, effectively 11 acres, call it. So, there's a cross-dock facility with a shop on 5 acres, and then there's another 6 acres that was effectively used for truck parking. To get back to our total NOI, I believe what we're going to do, and we've already gone forward with drawings into the city, we're going to develop probably about a 130,000-square-foot small day facility, industrial facility on the additional 6 acres. And when we're done and that is completely kind of get us back to where of where we were before Canada Cartage left. So, it's a way to mitigate the loss of them leaving. And we're going with small-bay because in Calgary, the small-bay are seemed to be flying off the shelf and leasing pretty easily, so the, call it, 10,000 to 20,000 square footers. So that's our plan for that to bring the NOI back to where it was.
Brad Sturges: Okay, that's helpful. Just, I guess, your commentary around some of the asset sales you've been working on for a while here. Seems optimistic that you're making some progress for the back half of the year. Just at this point, how would you describe where you are? Is it just pretty advanced on discussions or do you have potentially some deals under contract right now?
Kelly Hanczyk: So, I'm always remiss in Montreal because I find Montreal a very interesting market with the buying pool there. But on the three office assets, we are drafting a PSA right now so I'll give you a fulsome update here. A PSA, we had about three or four offers and we -- I actually chose the one that I believe the buyer is real in that they're closers. So, I'm very optimistic that, that should close in the second half as we're going under a purchase and sale agreement. The old Montreal portfolio, we do have an offer on, and I believe, again, it's a real buyer. I met with them on Monday. So, we're in the process of just finalizing a PSA on those. Our retail portfolio are half, so our half of that, we are going to market. So, we've engaged co-brokers on this one. We do have some random offers but we're going to go to full market on that portfolio. So, I'm optimistic that we're going to get a bid that we like and move forward, hopefully. And then on our noncore, that would be that Westcan portfolio that we identified in prior quarters. It sounds pretty good that we're going to have a buyer. They're looking to see if they are able to get the debt that they require on it. But from a pure numbers standpoint, we're there, I think, on an agreement with them. So, it's whether they can get the debt level that they require, and if they can, that looks pretty good as well. So that would -- those assets make up about roughly the $200 million-ish, give or take, of sales.
Brad Sturges: And that $200 million, that's pretty consistent to what you thought potential gross proceeds could have been, I guess, when you started the sales that hasn't changed too much?
Kelly Hanczyk: Yes, call it, $210 million. I just rounded it to $200 million. But yes, it's right around there.
Operator: The next question comes from Kyle Stanley with Desjardins. Please go ahead.
Kyle Stanley: So just on your guidance, and thank you for providing that in a more formalized fashion now, that's great. Just wondering, what's captured in your outlook for the year? Would that include NOI from expansions and potentially Richmond coming online?
Mike Rawle: So same-property overall, yes. Total guidance, what we gave there was mid- to high single-digit same-property growth, right? So, you wouldn't include Richmond in the same-property growth.
Kyle Stanley: Okay, fair enough. And then maybe just sticking with Richmond. Can you just remind us of the net FFO impact on Richmond? I know obviously, a portion is included in the vendor rent guarantee, but I do believe there is another portion to come online afterwards as well.
Kelly Hanczyk: Yes. So, it's the, call it, I think it's 60,000 square feet. That's the club as a whole. If we can get occupancy, it's so frustrating. Originally, I think it was going to be like $225,000 a month. I'm going to have to ramp that up. So, I believe from the start, like for the first year, it's probably going to be more like $125,000 a month, and then we're going to step up to the full amount over the next few years to let the club -- it's been such a delay. They're sitting with a waiting list of members that haven't been able to play even though it is effectively complete. But we're going to have to let them ramp up and get their business operating to make it a successful club. So, I think for the first year, it's probably going to be, and I'm working through this now with them, but probably in the $125,000, $130,000 a month range of additional income when that comes down.
Kyle Stanley: Okay, okay. That's helpful. Just two other quick ones. You mentioned seeing some nice interest in the old Montreal office assets. Can you remind us of the value you might expect to get on those?
Kelly Hanczyk: Sure, it's in and around, call it, the $45 million to $50 million range. That's as a whole, so our half, call it, $23 million, $24 million, somewhere around there. It's going to be somewhere around $23 million to $25 million I believe. And we're all saying that.
Kyle Stanley: Okay, perfect. And then just the last one modeling question. Just on G&A, how should we think about that in 2024? I think you've been pretty consistent over the last number of quarters. What would you say for 2024?
Kelly Hanczyk: We're going to be consistent again. I think we're staffed pretty well. The finance team is ramped up. We have a number of new people, so I think our disclosures are better and they'll continue to get better throughout the year. And so, I think from a G&A perspective, we're not expecting anything out of the norm.
Mike Rawle: Yes. The G&A was abnormally high this quarter. We had a onetime hit of about $1.6 million so I think you're probably fair to look long term around the $1.5 million, which I think is what we've averaged in prior quarters.
Operator: The next question comes from Sam Damiani with TD Cowen. Please go ahead.
Sam Damiani: Just on the same-property guidance, I just want to clarify, I think it was Brad's question earlier, just on what is included in there? I think you mentioned Richmond is not included in there, but does it include all of the properties that were in the Q4 same-property pool plus the expansions coming online in 2024? And does it also include the Canada Cartage vacancy coming up?
Mike Rawle: It does not include -- so it does not include Richmond. It does not include new expansions coming on board. And Canada Cartage, it would include the impact of Canada Cartage.
Sam Damiani: Okay, great. And just on the Q4 NOI, was there any unusual items either in the rental revenue side or the operating cost side that impacted Q4 NOI that won't continue into 2024?
Mike Rawle: Yes. We had -- we sold Victoriaville in Q2 of last year, and that had a straight-line rent adjustment of just under $0.5 million. I think it was $400,000. And so that discontinued this quarter. So, you see that as a bit of a difference between our same-property NOI and NOI -- sorry, our FFO and our same-property NOI.
Sam Damiani: Okay. And there's nothing unusual on the operating cost side because the costs seem to really tick up over the third quarter?
Mike Rawle: So, we did have, actually just Kelly reminding me, we had a seasonal drag on retail. So, we had outperformance in our growth in our industrial and then our retail -- legacy retail and office were slightly behind last quarter on a sequential basis. And the retail was due seasonality, effectively no removal in the business. And on the office side, there was some vacancy in one of our Montreal offices, which did hurt us.
Sam Damiani: Got you, okay. Final question for me is just on the dispositions. Good color in terms of sort of guidance there. Just wondering what the NOI yield are expecting a range of that NOI yield on that $210 million.
Kelly Hanczyk: That's a good question. Overall, probably, let me just think this through for a minute. Without having the numbers right in front of me, I'd probably say in and around eight probably combined, somewhere around there.
Operator: [Operator Instructions] The next question comes from Matt Kornack with National Bank Financial. Please go ahead.
Matt Kornack: Just following up on Sam's question on the dispositions. Would that exclusively go towards, I guess, the development spend that you have currently underway and deleveraging? Or would you kind of initiate some of these other development projects that you've got planned but aren't in process on or acquire additional assets?
Kelly Hanczyk: Yes. No, I think overall, we would use the proceeds just to delever. We don't really have anything too big in the hopper from an acquisition side of things. Maybe a spattering here and there but nothing major. And so, we would use those proceeds to delever the balance sheet.
Matt Kornack: And just the timing of them?
Mike Rawle: Matt, the way the timing works is that most of the development spend will happen in the beginning half of this year, and most of the proceeds we expect to happen in the back half. So, from a cash flow perspective, that will be used to delever.
Matt Kornack: Okay. So, leverage will tick up a little bit in the next couple of quarters and then come back down a few…
Mike Rawle: It should be roughly around where it is today but like roughly right around the 50% number.
Matt Kornack: And on the Alberta acquisition post quarter, just could you give us a sense as to -- is that a land purchase or is it some sort of storage? It just looked high on a per square foot basis. I don't know if it's development related or...
Kelly Hanczyk: Yes. No, no, that's the Canada Cartage
Matt Kornack: Sorry. Yes, I got it. So that's where the development upside is potentially adding 100,000 square feet. Makes sense. And then lastly on Richmond, I can't -- I missed the breakdown of what was fully included in the $200 million, but I don't think that would have been in that number. Is it still something, again, once you get up and running, that you'd consider selling? Or given your commentary around the trajectory of the leasing, would that be a 2025 event at the earliest?
Kelly Hanczyk: I think that's more a 2025 event. I'm focused on getting it occupancy, so yes.
Operator: The next question comes from Sumayya Syed with CIBC. Please go ahead.
Sumayya Hussain: Just firstly on the outlook, which includes you're expecting your payout ratio to come down to low to mid-90s range. Just confirming that, that is inclusive of the impact of your planned dispositions.
Mike Rawle: Yes. We would probably be in the midrange including the dispositions depending on if we're able to execute on any kind of higher cap rate, high-quality assets. So, I would say, we'd be -- including the dispositions, it's probably in the mid-range.
Kelly Hanczyk: And just for clarity, that's full year guidance, right? It's not each quarter. We're looking to target that or hit that over the full year basis.
Sumayya Hussain: Right, okay. And then next, I want to touch on the disclosure around your industrial mark-to-market. And if you could remind us, what do you include in the other bucket for industrial? Just saw there was kind of a big jump in the mark-to-market for those assets from last quarter.
Kelly Hanczyk: Yes. So, in the mark-to-market, I believe -- what did we have in the MD&A, the mark-to-market? I believe it's 24% is the mark-to-market on the industrial.
Sumayya Hussain: Okay, so it's not 29%?
Kelly Hanczyk: No, I believe there's an error.
Mike Rawle: So total company is 24%, not 29%. And then the industrial -- yes, so total company is, right, 24%.
Operator: The next question comes from Sam Damiani with TD Cowen. Please go ahead.
Sam Damiani: Thank you. My question was asked.
Operator: The next question comes from Ananthan Vijayakumar with RBC Capital Markets. Please go ahead.
Ananthan Vijayakumar: Just a quick one here. So, I'm just trying to understand these interest rate swaps and the swaptions. Do you have like an effective interest rate that you expect in 2024 when this net out?
Mike Rawle: It's around 4.5%. The -- I mean, it's listed there in the MD&A. Basically, they range between 4% and 4.5% is where the swaption exercise price is at.
Ananthan Vijayakumar: And those -- would those swaptions net out on the interest rate swaps you had on the table above?
Mike Rawle: Exactly. Yes, that's exactly it. It's a one-time option for our counterparty to cancel those swaps.
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: Thanks, everybody, for attending, and I look forward to chatting 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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