Nexus Industrial REIT

TSX:NXR.UN

Q2-2025 Earnings Call

[Operator]

Thank you for standing by. This is the conference operator. Welcome to Nexus Industrial REIT Second Quarter 2025 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, executive]

I'd like to welcome everyone to the 2025 Second 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.

All right. The second quarter was our first as a pure-play Canadian focused industrial REIT, and I'm very pleased with the results. Despite selling our office and retail portfolios and some noncore industrial buildings over the past 12 months, which is 33 properties in total. Our net operating income increased this quarter by 1.7% to $32.2 million compared to a year ago. This is a fantastic achievement.

This growth can be largely attributed to 3 things: one, strong leasing and robust growth in the industrial same property NOI to the completion and tenanting of profitable development projects, and three, accretive capital recycling through the disposition of legacy noncore buildings and the acquisition of a high-quality tenant industrial properties. I will discuss each of these in more detail.

So the second quarter was another strong leasing quarter for Nexus. At the beginning of April, we facilitated an early lease termination at our 42nd Street East property in Calgary, and released from the property to a large multinational energy company effective August 1, under a very long-term lease with significant rent lift. The termination fee left us slightly ahead during the May to July fixturing period. Combined with a higher rent from the new tenant, we will earn an additional NOI of $175,000 in 2025 and $250,000 in 2026.

In total, we completed nearly 400,000 square feet of new leases and renewals and on these renewals realized a rent lift of 38%. The actions, combined with embedded escalation in our leases resulted in industrial same-property NOI growth of 2.8% in the quarter and 4.3% for the first half of the year. We are on track to hit our target of mid-single-digit industrial same-property NOI growth again in 2025. Of the approximately 1.7 square feet of GLA that was set to expire this year, we have leased over 90% and and we are in discussion with tenants in the remaining 10%.

You will recall that in the first quarter, we had 2 tenants enter creditor protection. I'm pleased to share that last week, we signed a 15-year lease with one of Canada's largest construction services firms for a 223,000 square foot building at Clark Road in London, Ontario. This building was vacated in April after Peavey Mart entered creditor protection. The new tenant has taken occupancy effective August 1.

During their 6-month fixturing period, the new tenant will invest approximately $8 million to $10 million to update the building and pay rent of $3 per square foot, roughly equivalent to Peavey Mart's exit rate. In January '26, the fixturing period ends and the rent ramps up to $7 per foot net and annual rent steps of $1 a foot until 2031. And then it goes thereafter. Our ability to quickly backfill this property is a testament to the strength of our operating team, our connections in the Southwestern Ontario market and the quality of our portfolio.

In April, Peavey Mart also located a second building at 40th Avenue in Red Deer, Alberta. We are in discussions with a few prospective tenants. However, it is not yet leased. The building is $190,000 per feet, which is large for that area. So we need a specific user. We're marketing it for both lease and for sale in the event we find an owner operator who is interested in it.

At our cross-dock facility at 102 Avenue in Southeast Calgary, the receiver has continued to pay rent and plans to vacate at the end of September. We have a tenant lined up to take possession shortly after the receiver vacates with a 2-month fixturing period. We expect to finalize the lease in the coming weeks once we receive official notice from the receiver.

In the second quarter, we advanced construction on 2 development properties. In August, we plan to complete construction of the new 115,000 square foot small bay industrial building at 102nd Avenue in Southeast Calgary. And leasing is on -- is ahead of schedule. We already have 8 tenants for 8 of the 9 units, 3 of which are firm and 5 are conditional, and we expect the cash flows to be fully stabilized by the end of the year, way ahead of our schedule. The total project cost is $15 million and will deliver an 11% unlevered return on investment.

By the end of August, we have substantially completed construction at our 345,000 square foot project at Dennis Road in St. Thomas, Ontario. We've been earning 7.8% on our development costs at this project as they are spent. However, effective September, having now met the criteria for substantial completion, the project will transition to earning a full 9% yield on development cost of $55 million.

We are still looking for a tenant for our 115,000 square foot Glover Road new build in Hamilton, which we completed last summer. We own 80% of the property and expect to earn a 5.9% going-in yield on our $20 million share of the development costs. It's been a challenging market in Hamilton. It is very much slowed over the summer months. But we do have a brand-new state-of-the-art, 40-foot clear LEED certified product, and I'm optimistic that it will be leased in the fall when the market starts to pick up. The summer has been pretty slow in that market.

In the second quarter, we announced 2 additional development projects, which will get underway in Q3, Q4. First, we acquired the lands surrounding our industrial building at 555 Adams Road in Kelowna, BC for $19 million, composed of $12 million in cash in our vacant industrial property in Fort St. John. We're in the planning process to build small bay industrial units on this property. And due to the demand for more space at our Richmond property, we will add an additional 52,000 square feet for an estimated cost of about $29 million. Costs will be paid in REIT units issued at $10.50 per unit. The REIT will earn 6% on cost during construction period and will earn contractual 6% yield upon completion. Construction is scheduled to begin in the fourth quarter or early first quarter of next year.

Nexus has a track record of opportunistic capital recycling through the disposition of legacy buildings and acquiring newer high-quality tenant industrial buildings. In the second quarter, recent acquisitions contributed approximately $600,000 to NOI compared to the same quarter last year. During the quarter, we also sold 2 empty noncore industrial buildings for total proceeds of $11.2 million. The proceeds were recycled to acquire a vacant land for future development and for debt reduction. We are also under contract to sell our excess land at our remaining retail property Les Halles d'Anjou. We expect the land sale to close in August, so scheduled for about mid-August right now which will give us cash proceeds of $8.5 million after we will look to then sell our 50% ownership in the mall. So the mall is an attractive asset and the cash flow as well historically. So we expect it to have quite a bit of interest.

In summary, we continue to advance our strategy in 2025 as a Canada-focused pure-play industrial REIT. We will continue to realize organic growth through embedded rent steps and positive mark-to-market on renewal, and we've made excellent headway on our developments, 2 of which will be completed in August.

So I'll now turn the call over to Mike to give some more color on our financials.

[Michael Rawle, executive]

Thank you, Kelly, and good morning, everyone. Starting with headline earnings in the quarter, we posted a net loss of $7.6 million, a $51.2 million decrease compared to a net income of $43.5 million last year. The decrease was primarily due to a lower fair value adjustment on Class B LP units by $35.8 million and a lower fair value adjustment on investment properties by $24.7 million, partially offset by a higher fair value adjustment on derivative financial instruments of $7.7 million and a lower finance expense by $1.2 million.

As Kelly mentioned, our Q2 net operating income increased by 1.7% or $0.5 million year-over-year to $32.2 million. Of this amount, opportunistic lease terminations and tenant reimbursement of capital improvements accounted for $1.5 million. New acquisitions accounted for $600,000, an increase in same-property NOI added an additional $400,000 and development projects added $200,000. This growth was partially offset by $2.2 million relating to asset dispositions made since the second quarter of 2024. Normalized FFO for the period was $0.188 per unit, an increase of 6% compared to $0.178 from a year ago. and normalized AFFO for the period was $0.159 per unit, an increase of 7% compared to $0.148 from a year ago, primarily driven by lower interest expense due to higher capitalized interest and by the higher net operating income that I just mentioned.

Total general and administrative expenses for the quarter were $2.2 million which was $300,000 higher than a year ago, predominantly due to higher compensation expense. Net interest expense in the quarter was $12.7 million, a $1 million decrease from the same period last year. The decrease was primarily due to higher capitalization of interest expense on development properties of $700,000 and due to lower interest on mortgages by $300,000, resulting from property dispositions.

At June 30, our NAV per unit was $13.17 a $0.04 per unit decrease from last year. Our weighted average cap rate increased by 6 basis points to 5.87% in the quarter compared to 5.81% at March 31. The carrying value of our investment properties increased by $11.5 million in the quarter, primarily due to $18.8 million of acquisitions, namely the land in Kelowna BC; development spend of $8.5 million and capital expenditures and tenant improvements of $4.2 million. This was partially offset by $10.8 million of negative fair value adjustments and a $9.2 million reduction from investment property reclassified to assets held for sale.

Subsequent to quarter end, in August, we upsized our existing syndicated committed credit facility by $160 million to a total of $785 million and extended its expiry by 1.5 years. It now consists of a $200 million term loan expiring in August 2027, and a $585 million revolving facility expiring in August 2028.

I will now turn the call back to Kelly.

[Kelly Hanczyk, executive]

Thanks, Mike. We will open up the line for questions.

[Operator]

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

[Bradley Sturges, analyst]

I guess just starting on the leasing front and just thinking about the back half of the year. Obviously, you've got success releasing some of the Peavey Mart's base that you're getting some space back in Alberta. Where do you think occupancy could end up by the end of the year. And what would be baked into your same-store guidance at this stage?

[Michael Rawle, executive]

So our same-store guidance of mid-single digits is unchanged. We're still pretty comfortable with that number. That would include the lease-up of the space, the Peavey vacated space in London that we have now just leased out effective August. And it would -- that's effectively it. I mean that and then just general expectations around normal renewals. At this point, we have now renewed -- of the upcoming renewals in 2025, we renewed over 90% of the expiries. So pretty comfortable with where we're sitting for the rest of the year. And those are at -- on a year-to-date basis, overall lift of 26% rent lift. But no, our SPNOI growth for the remainder of the year would not assume lease-up in the other Peavey vacated space in Red Deer.

[Bradley Sturges, analyst]

Yes. Okay. Makes sense. And just looking at -- given that you addressed most of the '25, just thinking about '26 lease expiries, a lot of it's weighted to Ontario again. Anything that stands out in terms of potential for nonrenewal or how are you thinking about at least the early stage of your 2026 lease expiries?

[Kelly Hanczyk, executive]

I think actually, we're off to a pretty good start on 2026. We had a couple that we were thinking maybe there's another Valard building in Manitoba, just outside Winnipeg, but it sounds to me like they're going to renew there. So I think things are actually looking pretty good for next year. Overall, since we think we're -- from last thing I remember, about 40% of next year's renewals are already kind of done. So I think it looks pretty good for next year.

[Michael Rawle, executive]

Yes. I think the one that we've spoken to, which is we're optimistic about, but is obviously a priority for us is the new build in Hamilton 190 Glover Road. So that's a focus for us. And then clearly, the remaining Peavey Mart location in Red Deer.

[Bradley Sturges, analyst]

Sounds good. And if you kind of looking at the '26, just given rents are still pretty little market in Ontario, I guess, are you still expecting some pretty decent rent lifts for next year overall on a blended basis?

[Michael Rawle, executive]

Yes.

[Operator]

Next question comes from the line of Kyle Stanley with Desjardins .

[Kyle Stanley, analyst]

Maybe just sticking with the commentary on 2026. I think you've kind of walked through how things shake out. You've given your mid-single-digit same-property growth outlook for 2025. Is there anything to suggest that, that changes materially in '26?

[Michael Rawle, executive]

So Kyle, I mean we're too early for us to really give guidance for '26. I think we're very happy with the progress we've made for '26, but I don't want to give a specific guidance around that at this point. I mean you can see the rent list that we expect are pretty solid, and we're very comfortable with the quality of our portfolio and the development that we have coming on board now and that, that will contribute to next year.

[Kyle Stanley, analyst]

Okay. Fair enough. This quarter, and you mentioned it in your prepared remarks, just on the lease termination income. Was there anything more onetime and I mean, lease termination income tends to be onetime, but anything more specific about the income that was realized this quarter that you can elaborate on?

[Michael Rawle, executive]

Yes. I think it's important to call out that, that lease termination income really is not -- I wouldn't consider that onetime. That was really to indemnify us for downtime. We facilitated an early lease termination for the tenant there in order to get a new tenant in because the existing tenant wants to leave.

[Kelly Hanczyk, executive]

Yes. Our existing tenant added up for sublease. And they found this tenant, a big U.S. multinational, and they needed a fixturing period and we had term with them. So what we said is that's fine, but you're going to effectively continue to pay the rent until they finish fixturing. And that was like 4 months and these just paid in a lump sum to us. just to get out of all their obligations. So that's how that all came together.

[Kyle Stanley, analyst]

Okay. Okay. That makes sense. Just the last one, the $77 million of assets held for sale in retail, assuming that is the Halles d'Anjou. Is that a good estimation for what you think your 50% interest is worth today in the private market?

[Michael Rawle, executive]

So we're carrying it at, I think it's around $26 million of that about $8.5 million is our -- is the land and then $17.5 million is carrying value for the mall.

[Operator]

Next question comes from the line of Matt Kornack with National Bank Financial.

[Matt Kornack, analyst]

Just trying to understand the lease termination and Peavey impact a little bit more in the quarter. So should we think of it that you've got 4 months instead of 3 months for the lease that was terminated, but it was otherwise vacant during the quarter? And then also on Peavey, it was vacant for, I think, 2 of the 3 months in the quarter, but it will get released. If you could give us a sense, maybe Mike, in terms of how we'll be accounting for those lease-ups will look as well.

[Michael Rawle, executive]

So I think it's fair to say that the termination fee that we got really just backfilled us, kept us hold maybe slightly more, but not materially so for April, May, June, July. And that was effectively the fixturing period with a new tenant was coming in. The new tenant has now come in at $15.41 a square foot, and Peavey was at $12.50. So we'll see that uplift starting in August when we kind of took possession.

[Matt Kornack, analyst]

Okay. And sorry, I thought maybe I heard...

[Michael Rawle, executive]

You mixed up just Peavey and Valard and Baker Hughes.

[Kelly Hanczyk, executive]

Yes. So sorry, he didn't mean to say Peavey -- Baker Hughes is our new tenant dollared with the old. So we got somewhere around $3 a foot lift on that new lease.

[Michael Rawle, executive]

That's the important one from $12.50, yes.

[Matt Kornack, analyst]

Okay. So that one is the one that starts in $3 and you get 3 until the end of the year and then it's $7 for '26 and increases by $1 that you're thereafter.

[Michael Rawle, executive]

No. The Peavey one is the $3 than what the...

[Kelly Hanczyk, executive]

So let me just fit. So the one Baker Hughes in Calgary that's took over from Valard. That is about almost a $3 a foot lift plus sales going forward. Peavey is the one that has -- and that's in London, and that has -- we call it a fixturing period because they're going to spend about $8 million to $10 million on that site. So we gave them a break for this fixturing period. So that's why it's $3 for this -- to the end of the year on that site, which begins in August. So we had it vacant. I think from April, I believe, end of April. So May, June, July was vacant. August 1, the new tenant starts, and that's at $3 a foot in January, one that goes to 7. And then every year, there's $1 foot escalation to 2031.

[Matt Kornack, analyst]

Okay.

[Kelly Hanczyk, executive]

And yes, then it goes 2% after that.

[Matt Kornack, analyst]

And I guess this quarter, if you stripped out the lease termination income, I mean, I think you did that for your same-property analyst number, and that's why the same-property NOI growth was lower than kind of maybe you would have thought...

[Michael Rawle, executive]

It's lower because we're lapping a higher number in Q4 -- Q2 2024.

[Matt Kornack, analyst]

Okay. And was that -- was there any onetime in nature in Q2 of '24? I know it did go from negative up to...

[Michael Rawle, executive]

That was lease up of Richmond. So Richmond started leased up, and that's why.

[Operator]

Next question comes from the line of Jimmy Shan with RBC Capital Markets.

[Khing Shan, analyst]

So just a follow-up on the Peavey lease in London...

[Operator]

Ladies and gentlemen, the speaker line has been disconnected. Please be in hold while we quickly get them reconnected.

[Technical Difficulty]

Ladies and gentlemen, we have an issue. So if you have any questions, you can reach out to Mike Rawle directly.

Thank you I'll just hand over the call to Kelly Hanczyk for closing remarks.

[Kelly Hanczyk, executive]

Sorry for the operator having technical difficulties. If anyone has any questions, can you just please call Mike or myself. We'll get back to you right away.

[Operator]

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