Nexus Industrial REIT

TSX:NXR.UN

Q3-2025 Earnings Call

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Nexus Industrial REIT Third Quarter 2025 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. Please go ahead.

[Kelly Hanczyk, executive]

I'd like to welcome everyone to the 2025 Third 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 the third quarter, we took another step in our journey as Canada's industrial building partner by completing 2 exciting new industrial developments and by completing another strong quarter of leasing. Combined, our new developments will add 440,000 square feet of additional GLA and will generate $6.6 million of annual stabilized NOI, representing an enviable 9.4% unlevered return on development costs.

On the leasing front, we continue to drive strong organic growth, completing the backfill of 2 of the 3 properties vacated by CCA tenants earlier in the year, advancing leasing on the remaining 2025 and upcoming 2026 renewals and delivering healthy same-property NOI growth in the quarter.

I will dive into both the development and leasing achievements into more detail. But first, I'd like to reflect on how far we've come in the last 12 months. In September 2024, we were growing industrial REIT, but we still had 16 retail buildings with over 1.6 million square feet of GLA. We also still had 6 office buildings with nearly 0.5 million square feet, having just closed on the sale of 6 other office buildings. We had completed 3 development projects, but still had significant work to do on our largest project in St. Thomas, and we hadn't yet broken ground at our 102 Avenue project in Calgary.

Today, 1 year later, we are in a completely different position. We have nearly sold all of our retail and office buildings at good prices and have used the proceeds to reduce debt and complete development. We are now a pure-play industrial REIT with over 99% of our NOI derived from industrial assets. In this quarter, we completed 2 more attractive projects. We have come a long way in a short time, and I'm immensely proud of our team and the work that we have done.

Looking more closely at the development projects that we finished during this quarter, the larger property was a 325,000 square foot expansion, our largest development yet of our building at 70 Dennis Road in St. Thomas, Ontario. This expansion was for an existing tenant, Element5, a leading laminated timber manufacturer. The project was originally planned at 70,000 square feet, but as the tenants' needs grew, we worked with them to adjust the building scope. This resulted in a huge win-win. Element5 has a North American flagship facility, while Nexus owns a well-located high-quality building under a long-term lease. During construction, we earned 7.8% on the development spend. However, effective September, having now met the criteria for substantial completion, the project transitioned to yielding 9% on the completed development cost of $55 million.

The second property that we finished was a new 115,000 square foot small bay industrial building at 102 Avenue in Southwest Calgary. We built this on spec, on empty land adjacent to one of our buildings. We completed construction in August and leasing is tracked ahead of plan. We already have tenants for 8 of the 9 units, 5 of which are now firm. We expect the building to begin cash flowing in the fourth quarter and to be fully stabilized in the second quarter of 2026. Once stabilized, the building will generate an 11% unlevered return on its development cost of $15 million and contribute an annual net operating income of $1.6 million.

We are still looking for a tenant for our 150,000 square foot Glover new build in Hamilton, which we completed last summer. We own 80% of the property and expect to earn around a 5.9% going yield on our $20 million share of the development costs. It's been a challenging market in Hamilton lately, but we do have a brand new state-of-the-art 40-foot clear LEED-certified product, and we actually will have some pretty good news on that very shortly as things are looking pretty good for us there. But it's a little premature to announce anything, but we'll wait for the next few weeks.

We also recently announced 2 additional development projects, which will get underway in the first half of 2026. We are going to build small bay industrial units on vacant land surrounding our industrial building at Adams Road in Kelowna, BC. And at our Richmond property, we're adding 52,000 square feet for an estimated cost of $29 million. The cost is being paid in REIT units issued at $10.50 per unit. We'll earn 6% on our costs during the construction period, and we'll earn a contractual 6% yield upon completion. We expect the construction to begin in the first half of 2026.

The third quarter was another strong quarter of organic growth for Nexus. In total, we completed nearly 150,000 square feet of renewals at an average rent lift of 13%. Year-to-date, we have completed a total of 1.1 million square feet of leasing and realized an average leasing spread of over 60% in expiring and in-place rents. In the quarter, our industrial occupancy grew 1% to 96%. Combined with embedded rent escalation in our leases, our leasing activities drove industrial same-property NOI growth of 2.9% in the quarter and on a year-to-date basis. For the full year 2025, we expect to realize same-property NOI growth of approximately 3%.

In the third quarter, we signed a 15-year lease for our 223,000 square foot building at Clark Road in London, Ontario with one of Canada's largest construction service firms. This building was vacated in April after Peavey Mart entered creditor protection. The new tenant took occupancy August 1. In their 6-month fixturing period, the tenant will invest between $8 million to $10 million to update the building and pay net rent of $3 per square foot, roughly equivalent to Peavey Mart's exit rate. In January 2026, the fixturing period ends and the rent ramps up to $7 a foot with annual dollar rent steps until 2031 and then 2% thereafter. Our ability to quickly backfill this property is a testament to the strength of our operating team and the quality of the portfolio. It's a really good deal for us. This brings a very strong large tenant, and the reduced rent was due to the fact that we had to put nothing in it and it was an older building, lower clear heights and the rent ramps up relatively quickly back up to market. So we're really pleased with this deal.

In April, Peavey Mart also vacated a second building at 40 Avenue in Red Deer, Alberta. We're in discussions with a few prospective tenants. However, it is not yet leased. The building is 190,000 square feet, which is very large for that area. So we're marketing it both for lease and for sale in the event we find an owner operator who is interested. Our cross-dock facility at 102 Avenue in Southeast Calgary, the receiver continued to pay rent through to the end of September, which was longer than what we thought, but we have now a new tenant lined up for December 1. The tenant will pay nominal rent to cover costs during a short fixturing period. And then upon conclusion of the fixturing period, which will be approximately February of 2026, the rent steps up to $27.83 for the 29,000 square foot building. And this is approximately 45% higher than the outgoing rent of $19 per square foot.

Overall, while we saw strong organic growth in the quarter, we expect to realize an even bigger benefit in early '26 and from rent steps at Clark Road and 102 Avenue. We've also made good progress on our 2026 renewals. In total, we have 765,000 square feet coming for renewal in 2026. Roughly 50% of this or 385,000 square feet comes due in the first 9 months and the remaining 50% in the fourth quarter. As of today, we have tenants lined up for 90% of the January through September expires, and we will soon begin working on the fourth quarter expires. Nexus has a track record of accretive capital recycling through the disposition of legacy buildings and acquiring newer high-quality tenant industrial buildings. During the quarter, we sold a noncore industrial building located in Saint-Laurent, Quebec for total proceeds of $9.2 million and an implied cap rate of 5.5%. The proceeds were used for debt reduction and for development. After the quarter end, we also closed on the sale of excess land at our remaining retail property, Galeries d'Anjou for cash proceeds to us of $8.5 million. We're now marketing our 50% share of the retail mall for sale. The is an attractive asset in cash flow as well. So we hope it sells in due time.

In summary, we continue to advance our strategy in 2025 as Canada's industrial building partner. We will continue to realize organic growth through embedded rent steps and positive mark-to-market on renewal. We will continue our track record of accretive capital recycling through opportunistic acquisition and development.

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, net income was $3.4 million, a $49.4 million increase compared to a net loss of $46 million last year. The increase was primarily due to higher fair value adjustments on Class B LP units by $43.3 million compared to a year ago and higher fair value adjustments on derivatives by $20.9 million compared to a year ago, partially offset by lower fair value adjustments on investment properties by $15.4 million and further offset by lower net interest expense by $900,000.

Our Q3 net operating income decreased 1.1% or $400,000 year-over-year to $32.2 million. This was primarily due to a $2 million decrease resulting from property dispositions completed since Q3 2024, partially offset by an $800,000 increase in same-property NOI, higher straight-line rent adjustments of $500,000 and a $200,000 increase from completed developments and expansions. Normalized AFFO for the period was $0.146 per unit compared to $0.157 from a year ago, primarily driven by the lower NOI, lower straight-line rent adjustments by $0.5 million and a $300,000 increase in general and administrative expenses from higher compensation and legal expenses.

Net interest expense in the quarter was $13.1 million, a $900,000 decrease from the same period last year. The decrease was primarily due to lower credit facility interest expense of $400,000, resulting from more favorable borrowing rates during the period and lower interest on mortgages by $400,000 resulting from property dispositions. At September 30, 2025, our NAV per unit was $12.98, a $0.19 per unit decrease from last quarter, primarily due to the issuance of 2.7 million Class B units in the quarter at $10.50 per unit to fund additional development at our property in Richmond, BC. Our weighted average cap rate decreased by 2 basis points to 5.85% in the quarter. The carrying value of our investment properties decreased by $5.4 million in the quarter, primarily due to the reclassification of our building at 41 Royal Vista Dr, Calgary to assets held for sale.

As Kelly mentioned, this quarter, we finished 2 development projects. The completion of these projects will have accounting impacts on our financial results in the future. At our 70 Dennis Road property in St. Thomas, Ontario, the tenant is now paying rent equal to a 9% yield on the $55 million of development costs compared to a 7.8% yield during development. As a consequence, we will generate additional cash flow of approximately $220,000 each quarter.

In addition, from an accounting perspective, the full quarterly rent of $1.25 million generated by the building now qualifies as net operating income. This means that it will be included in our FFO and AFFO metrics. Up until September, the 7.8% yield on this expansion was capitalized to property under development and did not qualify as net operating income, FFO or AFFO. So going forward, our key financial metrics will be higher and paint a more accurate picture of our cash earnings. Since we have now completed both the Dennis Road and 102 Avenue projects, we will no longer be able to be capitalizing interest on these buildings, which in the third quarter amounted to approximately $500,000 for the 2 of them combined.

I will now turn the call back to Kelly.

[Kelly Hanczyk, executive]

All right. Thanks, Mike. We will now pass the call over to the operator to open the line for questions.

[Operator]

[Operator Instructions] The first question today comes from Kyle Stanley with Desjardins.

[Kyle Stanley, analyst]

Just looking at the slight downward revision to your guidance for 2025 on the same property front, I'm just curious what changed, I guess, between August and today that would have driven that? And how much maybe was related to just getting the timing of getting income online? Or was it something more long term in nature that could have an impact to your 2026 growth outlook? I guess, in another way, just trying to think about the slight revision for Q4, does it have an impact on the outlook for '26?

[Michael Rawle, executive]

Kyle, yes, good question. No impact on '26. It's really -- it was driven by primarily 2 different buildings, slightly slower lease-up than we had anticipated. At our 102 Avenue in Southeast Calgary, the receiver stayed in position longer than we had hoped, and it took us a little longer to get -- it will take us a little longer to get the new tenant in at that healthy $27.83 rent because there's a bit of a fixturing period. So they're coming in, in February instead of in 2025, early in 2025. So that's one.

And the second one is our lease-up at 855 Park Street in Saskatchewan. We had an expectation to get the new tenant in there a little earlier, and they are lined up for the back half of this year, but it's not as early as we had hoped back in August.

[Kyle Stanley, analyst]

Okay. Okay. That's helpful. So limited impact, I guess, on '26, maybe a month in Calgary, to your point, on getting that tenant in, in February.

[Michael Rawle, executive]

Yes, exactly as I told.

[Kyle Stanley, analyst]

Okay. Just moving over to your debt stack. Hypothetically, if you were to get an investment-grade credit rating tomorrow, looking at where rates are in the markets, it does look like there would be some pretty significant savings for you. With your swap book, how quickly would you be able to unwind that? And would it be at significant cost? Or -- just walk me through, I guess, your thoughts on that?

[Michael Rawle, executive]

Yes. Good question. So I mean, yes, we've been pretty, I guess, pretty clear that we're heading for an investment-grade credit rating, which is -- we're working through that with the agencies at the moment, but that's probably a back half of 2026 thing. And as far as pricing goes, yes, very attractive rates right now. You're right, there's some benefit there. So we're trying to push the rate a little and get there as soon as we can, but there are limitations.

As far as unwinding the hedge book, at the moment, we actually want the hedge book because that effectively keeps us in position for -- like there's a really strong correlation between swap rates and GOCs and government -- investment-grade borrowing yields. So this effectively is like a bond lock for us now. So we would unwind the swap book when we issue investment-grade debt. But up until that point, it basically acts as a good hedge on that bond issuance. So no desire to unwind it at this point. But when we do, it would just be a standard transaction with our counterparties, which are our regular banking partners, so very easy to unwind them at that point.

[Kyle Stanley, analyst]

Okay. No, fair enough. And then just last one for me. Kelly, you mentioned Glover and Hamilton making progress. That's great to hear. Obviously, still in negotiations, but how would you say the rent is looking versus maybe what your underwriting had called for? And do you expect a more significant TI package required to get someone in place?

[Kelly Hanczyk, executive]

Yes. A little different route here, Kyle. We are working through an offer to purchase. So I think hopefully, that gets wrapped up and we get something firm and wave in a way we go. So I think at the end of the day, a little different version. It would be a strong deal for us, would free up capital and reduce any burn that were existing on the asset right now as it sits empty. So I think that's the play that's going to happen here.

[Kyle Stanley, analyst]

Okay. So just to confirm, you'd be looking to sell it to a potential end user or something like that. That's what you're saying?

[Kelly Hanczyk, executive]

Yes, correct.

[Operator]

The next question comes from Brad Sturges with Raymond James.

[Bradley Sturges, analyst]

Just to follow up on that line of questioning on Hamilton. Just would the purchase price be more than the original construction cost? Or how do we think about that?

[Kelly Hanczyk, executive]

I guess my answer would be yes.

[Bradley Sturges, analyst]

Okay. Understood. Just on the guidance revision, obviously, a little bit related to timing of leasing. Just what would that imply from an occupancy rate by the end of the year? What -- just to round that discussion off?

[Michael Rawle, executive]

Yes. I'd have to do the calculation. It's, I think, looking pretty healthy. I mean if you back up and look at where we're at today, we have about 475,000 square feet of vacant space, and that is predominantly 4 different buildings. So one is Glover. The other is 7740, the Red Deer, ex Peavey building in Red Deer. And we have 855 in Saskatchewan, which we have a tenant lined up for. And then the final one is the new development at 102 Avenue, which we also have 8 of the 9 units already lined up. And so it's just a matter of the tenants coming in. So leasing for 2025 is in great shape.

[Bradley Sturges, analyst]

I guess what's the [indiscernible] in start of next year after the fixturing period. Would you -- do you think that organic growth would kind of get back into that mid-single-digit range?

[Michael Rawle, executive]

Yes, I think a little early for us to give guidance for next year as we're working through our budgeting process now. But next year does look -- I mean, just from what we've disclosed so far, next year looks really strong with the development coming on board and the embedded rent steps that we have. So yes, next year should be a good year for us.

[Bradley Sturges, analyst]

And nothing material at this point from a nonrenewal perspective for next year?

[Kelly Hanczyk, executive]

No. It's looking pretty good. Like 3 of them, fairly large, what is this total -- like 400,000 square feet or so comes up from October 31 to December 31. We fully expect all 3 of those to renew. It's all in London. So all 3 are kind of long-term hold tenants for us. Another one in November in that batch was a 91,000 square footer in Montreal in this tenant, just to explain this one. So if anyone is going to leave, it's this one, they were in at a $6 rate, and I think they had like 3 renewal options, 5-year renewal options for like 2% each renewal option flat. And they were looking to consolidate their operations. So we did a 1-year deal with them at $9 per square foot. And I expect them to vacate possibly at the end of November and that we think we can re-lease that in the low teens. So that's the one that possibly, but that's end of the year, November 30. And we've made good progress already on the first half of the year. So things are looking pretty good.

[Michael Rawle, executive]

Yes. So just to reiterate Kelly's comments on the call, for next year's renewals, half of this GLA renews in the first 9 months. And of that, we've done 90% of it already. So we've got lined up, that tenant is lined up. So a really good jump on that.

[Bradley Sturges, analyst]

Last question, just from a modeling perspective, straight-line rent, just given the moving parts around fixturing before rent payment, like how should we think about that over the next couple of quarters in terms of contribution to FFO?

[Michael Rawle, executive]

Yes, it's elevated because we've put in -- with these new leases, we've been bringing in people with pretty rapid escalation in rents. So healthy rent steps. So it's higher than it has been in the past, and you saw that this quarter where straight-line rent is higher than where it has been in the past.

[Bradley Sturges, analyst]

I guess it would be at a similar level for Q4 relative to Q3 and then it kind of slips back to where you were...

[Michael Rawle, executive]

Yes, I think so. It's probably a fair way of thinking about it.

[Operator]

The next question comes from Matt Kornack with National Bank Financial.

[Matt Kornack, analyst]

Just quickly on the Alberta lease maturities, and you may have mentioned it, but I missed it. They're a bit higher rents, presumably at the type of space that's maturing. But are you expecting kind of a new or renewal leasing spread consistent with the Alberta market on those? Or how should we think about the rents that you'd achieve on those?

[Kelly Hanczyk, executive]

I have to just see here what we have expiring. So it's not. Matt, I have to get back to you because I'm not offhand know what the expiring rents are.

[Matt Kornack, analyst]

Okay. Fair enough. Just to...

[Kelly Hanczyk, executive]

One of the...

[Matt Kornack, analyst]

I think it's 79,000 square feet at $17. And next year, it's 47,000 square feet at $30 -- is it $35.

[Kelly Hanczyk, executive]

Yes, I have to look at which ones those are. I think one of them, we will take a hit. I believe it's the Blackfalds asset that was formerly -- or that is currently occupied by a subtenant of MasTec. And that one, I know we would definitely take probably, I want to say, maybe a $10 hit on that one. That's the one outlier.

[Matt Kornack, analyst]

Okay. If I look at -- I mean, we're at like mid-40% spread for '26 across everything. Obviously, London drives a bit of that. But I guess Alberta would maybe bring it down into the 30s, somewhere in the 30s, I guess, on that.

[Michael Rawle, executive]

Yes. I mean -- we don't have a lot of GLA in Alberta, right, renewing. So it's less than 50,000 square feet.

[Matt Kornack, analyst]

Okay. Fair enough. And then just to confirm on St. Thomas, you had no NOI contribution in Q3. You'll get the full $1.25 million in Q4. And obviously, you have a step down in capitalized interest, but you're still going to have kind of $300,000 of residual capitalized interest against other assets still under development? Is that...

[Michael Rawle, executive]

Yes, there will be -- so two questions -- with St. Thomas, we had 1 month worth of NOI contribution from it. So I think it was around -- so that was in the September contribution. And you're right, there's about $300,000 of capitalized interest going forward from the other projects that we have underway.

[Matt Kornack, analyst]

Okay. And then for the $400,000 per quarter contribution from Calgary that you're going to get in Q2 of '26, like should we assume kind of half of that you get before? And -- or should we kind of split it out over the next couple of quarters? I think it was 33% leased as of Q3. So it's going to ramp up. But just wondering how we should think about that.

[Michael Rawle, executive]

Yes. I mean I would just move it over the months, assume a straight linear ramp-up.

[Operator]

[Operator Instructions] The next question comes from Sam Damiani with TD Cowen.

[Sam Damiani, analyst]

Question for me, just on the, I guess, the use of proceeds from the dispositions coming up in Q4. Will the REIT sort of take the opportunity to delever or redeploy into acquisitions? How are we thinking about, I guess, target leverage as you head toward investment-grade rating next year?

[Michael Rawle, executive]

Yes. So ultimately, we're looking to achieve investment-grade rating. Our focus now from a leverage perspective is to get to below 10x. So -- and we have a clear path to that by mid next year-ish. And so that's our target from that perspective. So going where we will use surplus capital or cash from sales will be delevering and the development that we have in flight. And if there are just amazing opportunities that come up, we consider them. But really our focus at this point is ultimately getting to a mid-9s leverage profile.

[Operator]

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

[Kelly Hanczyk, executive]

All right. Thanks, everyone, for attending, and we'll chat next quarter. And if any questions, just feel free to reach out to Mike or myself.

[Operator]

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