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Edited Transcript of ED.UN.V earnings conference call or presentation 13-Mar-20 5:00pm GMT

Q4 2019 Nexus Real Estate Investment Trust Earnings Call

CALGARY Mar 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Nexus Real Estate Investment Trust earnings conference call or presentation Friday, March 13, 2020 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kelly Clark Hanczyk

Nexus Real Estate Investment Trust - CEO, President & Trustee

* Robert Paul Chiasson

Nexus Real Estate Investment Trust - CFO & Secretary

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Conference Call Participants

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* Alex Leon

Desjardins Securities Inc., Research Division - Associate

* Bradley Sturges

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

* Stephan Boire

Echelon Wealth Partners Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the Nexus REIT Fourth Quarter 2019 Conference Call. (Operator Instructions). The conference is being recorded. (Operator Instructions).

I would now like to turn the conference over to Kelly Hanczyk, the Chief Executive Officer. Please go ahead.

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Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [2]

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I'd like to welcome everyone to the 2019 Fourth Quarter and Year-end Results Conference call for Nexus REIT. Joining me today is Robert Chiasson, Chief Financial Officer of the REIT.

Before we begin, I'd like to caution with regards to forward-looking statements and non-GAAP measures. Certain statements made during this conference call may constitute forward-looking statements, which reflect the REIT's current expectations and projections about future results. Also during this call, we will be discussing non-GAAP measures.

Please refer to our MD&A and the REIT's other securities filings, which can be found at sedar.com, for cautions regarding forward-looking information and for information about non-GAAP measures.

Once again, this has been a strong quarter for the REIT. We were recently recognized as a top 50 Venture Exchange company in the 2020 TSX Venture 50. This will provide a good segue with our anticipated move to the TSX in April.

We completed $31 million of accretive industrial acquisitions in the year and recently closed on the $17,400,000 acquisition of industrial properties on February 3, 2020.

Our normalized AFFO payout ratio for the year of 79.4% was down from 82.9% for the year ended December 31, 2018, and our Q4 2019 normalized AFFO payout ratio was 77%.

Our debt to total assets remained conservative at 49%. We're hopeful 2020 will be a milestone year for the REIT.

The acquisition pipeline is fairly strong with LOIs currently being negotiated with 2 vendors, and we're actively pursuing 2 other large industrial portfolios. We are working on a significant value creation opportunity at the retail site we own in the Greater Montreal, Halles d'Anjou, the new main bus station and the extension of the Blue Metro line has been announced and will terminate across the road from our site. The mall has significant residential development potential, and we are exploring a number of possibilities with our partner, Sandalwood Management.

In Richmond, BC, 1771 Savage Road, we'll be signing 2 new leases for the [former] Wrtsil building both are at $33 a foot. It is anticipated these leases will be executed very shortly and details will be press released next week.

On the disposition front, we sold one of our smaller properties in Montral, 2301 Versailles, a mixed use property for $3.7 million, and we continue to market to sell office property located at 10330 Cte-de-Liesse.

In regards to the impact of the coronavirus on our tenancies, we're not yet aware of any -- at this time of any significant impacts to them beyond the impact that the general economy is facing.

I'll now hand it over to Rob Chiasson to give greater detail of the REIT's financials.

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Robert Paul Chiasson, Nexus Real Estate Investment Trust - CFO & Secretary [3]

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Thanks, Kelly. Our portfolio continues to deliver consistent results, driven by stable occupancy and many long-term tenancies. Same-store quarter-over-quarter NOI was flat, construction management and leasing fees earned in Q4 2018 were approximately $150,000 higher than those earned in Q4 2019 with 2045 Rue Stanley nearing full occupancy.

We completed an early termination of 60,000 square feet, which will reduce our Q1 occupancy by approximately 1.5% and will reduce NOI by approximately $200,000 a quarter. While this will have a short term drag, it frees up 60,000 square feet for value-add development, which will result in earning significantly higher rent per square foot on the space from a use, which is complementary to the sports mall theme at this property.

Interest expense in the third quarter -- sorry, fourth quarter was up approximately $33,000 as compared to Q4 2018, lower interest rates on the credit facility almost offsetting higher principal balances related to financing Q1 2019 acquisitions. Our normalized AFFO payout ratio decreased to 77% for Q4 2019 from 78.9% for Q3 2019 and 79.4% for Q4 2018.

Looking to the balance sheet. Our debt to total assets decreased from 51.4% at September 30 to 49.1%, due in large part to cap rate compression, which led to increasing the carrying value of several of our investment properties. Bond yields are at historical lows following a 50 basis point cut in the U.S. and Canada last week, and further dropped since. We have another $40 million that we will be refinancing in 2020, where we could benefit from positive pricing.

I will now pass it back to Kelly.

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Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [4]

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Great. Thanks, Rob. I will now pass it back to the operator to open up the line for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Stephan Boire with Echelon Wealth Partners.

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Stephan Boire, Echelon Wealth Partners Inc., Research Division - Analyst [2]

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I feel like most of my question, if not, all of them are going to be a complete shot in the dark for you guys to answer, given the current situation, but I'm going to ask away.

So it looks like Montreal Downtown is progressively shutting down, and I think it's safe to say that many other cities in Canada will likely follow or have already done so. And I want to know, if the situation is still unfolding. But at this stage, can you discuss whether the virus and all the shutdowns are expected to cause additional cost to you that we should factor in our models?

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Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [3]

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I don't see any rate now at this time. So I guess, that's my answer. I can't identify any right now.

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Stephan Boire, Echelon Wealth Partners Inc., Research Division - Analyst [4]

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Right. Okay. And besides the 2 LOIs currently in discussion, can you tell us, if, for the rest of the year, if you expect to be on the sidelines on the acquisition front? Or has the situation is still uncertain? Or will you just continue to pursue the acquisitions as planned?

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Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [5]

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Yes. Well, we -- besides the 2 that we're well into right now, we have another couple of large portfolios. And one of them would probably be negotiated and these are Ontario Industrial. And it would probably be more like next year -- early next year, I would think. And one of them is, I guess, a portion of a large portfolio, well tenanted, industrial, Ontario, again, that we're just having initial chats on. So they would probably be a little bit more down the line summer towards where we would be possibly head into due diligence. So we have some time to monitor and look at every -- the situation as we go along. So we'll continue to talk and pursue them now.

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Stephan Boire, Echelon Wealth Partners Inc., Research Division - Analyst [6]

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Okay. And so on that -- in that case, from a base case scenario, how much do you expect to acquire then for the rest of the year?

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Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [7]

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In recruiting the 2 LOIs that we have, I mean, we still have to -- we'd have to head into due diligence on them, but those would be in the $85 million range. And then the other ones are, I would say, $80 million range and $60 million range. So depends on how fast and -- these would be kind of unit -- possible unit deals as well. So they take a little longer to negotiate. So that's kind of the size that we're looking at here.

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Stephan Boire, Echelon Wealth Partners Inc., Research Division - Analyst [8]

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Okay. That's good. Sorry, if I missed it, but can you give us an update on the Wrtsil lease that was terminated in December? Has it been re-leased so far? And if so, can you give us an idea of the spread between the old BC and the new one?

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Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [9]

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Yes. Wrtsil was terminated in December, I believe, and our new lease rates are going to be $33, while our old lease rate was about $10.

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Operator [10]

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Our next question comes from Brad Sturges with Industrial Alliance Securities.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [11]

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So following up on that question. It might be tough to predict, when you could get permitting, but at this stage, do you have a rough guess of when -- for those 2 new tenants into Phase 2 to replace Wrtsil could be rent producing?

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Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [12]

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Yes, I'm hopeful for late fall is kind of, but it will be a little bit dependent on the permitting, but the drawings and everything are well underway to submit to the city. So I'm hopeful, those will be done quickly. We can get them in and then we can get going. So that's kind of my time frame right now, as I say late fall.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [13]

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And for the first phase what's left to do there? And again, can you just give an update on timing at this stage?

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Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [14]

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Yes. They -- one, we're just waiting on the final permit. It's the foundation of slabs ready to pour. So hopefully, we get that any week now. And then the good thing is the next level -- but next few levels go up pretty, quickly. They can do a slab a week. So that's positive. And then we wait for the last day, it's kind of tied in, they'll be tied in with one of the leases on the other side. So again, those drawings are submitted and we're waiting an approval. So it's really -- once the approval comes, we're ready to go. So I'm thinking both of those kind of in the same time frame of late fall.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [15]

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Okay. So it could be all -- both phases kind of getting completed all or around the same time at this stage?

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Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [16]

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Yes, that's what I would think. Going to base rate that we are working on, the swim and then the other side of that, that's all complete. And we're in, and functional and operational.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [17]

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Just maybe to go back to your earlier comments on no impact from COVID-19 yet. I guess just want to understand, in terms of the leasing that needs to get done this year, I think it's about 400,000 square feet. Can you give a little bit more context of where that is and initial expectations, at least, at this stage?

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Robert Paul Chiasson, Nexus Real Estate Investment Trust - CFO & Secretary [18]

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I think we've -- so a good chunk of that is in the old Montreal portfolio, the office portfolio, where our partner Sandalwood has already been in negotiations and discussions. We have some repositioning of tenants from one building to another building and units within the building. So a lot of that space is already dealt with. And we do try to get 12 months -- upwards to 12 months ahead of our re-leasing. So we're already in advanced stages on most of that. We don't know what impact coronavirus could have on the economy in general, but we don't -- at this point anticipate or foresee any significant delays with leasing on account of COVID-19. Time will tell.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [19]

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So with those renewals, are you expecting a rent uplift?

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Robert Paul Chiasson, Nexus Real Estate Investment Trust - CFO & Secretary [20]

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A little bit. But not great, not huge increases in rent, but we're seeing -- we're at least seeing at the same rates or a little bit better.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [21]

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Okay. And then how are you thinking about asset sales this year? Could we see that activity start to pick up a little bit more?

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Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [22]

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Yes, I think so. We've -- we're looking at a few that would potentially identifying -- I don't want to name them yet because we haven't picked them, but there's 2 or 3 that we have our eye on, that could possibly be sold. Nonindustrial would be more on the retail side or office side, in particular. So I think by next quarter, I'll be able to give more clarity on actual, which ones were in market.

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Robert Paul Chiasson, Nexus Real Estate Investment Trust - CFO & Secretary [23]

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Sorry, Brad, just to add to my earlier comments. We also have 150,000 square foot industrial space that comes up in August of this year. That's already been -- they've already exercised their option. So we're working on these things well ahead of time, and I miss talking to that one because it's already been put in the ton category in my head. But yes, 150,000 square feet has already dealt with in that case as well.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [24]

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Okay. So at this stage, nothing material in terms of the nonrenewals for 2020?

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Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [25]

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Yes. Yes.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [26]

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Okay. And then just lastly on the asset sales. So 2 or 3 like -- in terms of dollar amount, how should we think about that at this stage of that $25 million to $50 million of assets?

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Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [27]

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I would say, how is it possibly? Yes. I think that's fairly good. We're looking at a bunch of things. Our site in d'Anjou, if at all went well, we'll be able get a JV partner to do something and we'll take a lift on that way. Possibly, they make an offer to buy that at a significant premium because of the location and the development potential. So a number of things that we're looking and exploring for the year.

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Operator [28]

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(Operator Instructions) Our next question comes from Alex Leon with Desjardins Capital Markets.

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Alex Leon, Desjardins Securities Inc., Research Division - Associate [29]

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The REIT has $38 million of mortgages maturing...

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Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [30]

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Sorry, we can't hear you. Could you just speak louder or clearer or closer?

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Alex Leon, Desjardins Securities Inc., Research Division - Associate [31]

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Is this better?

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Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [32]

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Yes, that's better.

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Alex Leon, Desjardins Securities Inc., Research Division - Associate [33]

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So yes, you guys have $38 million of mortgage principal maturing in 2020, I was just wondering, if you guys have had any discussions with lenders and maybe what you're hearing from them in terms of financing rates, term availability, et cetera?

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Robert Paul Chiasson, Nexus Real Estate Investment Trust - CFO & Secretary [34]

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Yes. So I mean, certainly, bond yields are at all-time lows and cost of debt is -- it's quite low right now. A lot of those maturities though are later on in the year, one of them is in July. We started some initial contact, but we haven't really started any wholesome discussions. One thing we're looking at internally is whether we pay some yield maintenance and renew some of these early, given what's happened with rates, in particular, in the last 2 weeks. But the properties that are up for financing are well-tenanted, and I don't anticipate any problems refinancing. And I think we should have some upside on rate.

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Operator [35]

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

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Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [36]

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I'd just like to thank everyone for taking their the time to attend our call, and I'll see you next quarter.

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Operator [37]

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