U.S. Markets closed

Edited Transcript of ED.UN.V earnings conference call or presentation 16-Aug-19 5:00pm GMT

Q2 2019 Nexus Real Estate Investment Trust Earnings Call

CALGARY Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Nexus Real Estate Investment Trust earnings conference call or presentation Friday, August 16, 2019 at 5:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Kelly Clark Hanczyk

Nexus Real Estate Investment Trust - CEO, President & Trustee

* Robert Paul Chiasson

Nexus Real Estate Investment Trust - CFO & Secretary

================================================================================

Conference Call Participants

================================================================================

* Alex Leon

Desjardins Securities Inc., Research Division - Associate

* Bradley Sturges

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Thank you for standing by. This is the conference operator. Welcome to the Nexus REIT Q2 2019 Conference Call. (Operator Instructions) I would now like to turn the conference over to Kelly Hanczyk, CEO. Please go ahead, sir.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I'd like to welcome everyone to the 2019 second quarter 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 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 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.

The second quarter of 2019 was another excellent quarter for the REIT. We continued on our path of completing acquisitions, which are accretive to AFFO per unit, to drive unitholder value without raising equity in the public markets. Our recently completed accretive industrial transaction has reduced our payout ratio to approximately 80%, while keeping our debt to gross book value conservative at 51.7%. We expect this trend to continue throughout the year.

From a leasing perspective, the overall portfolio ended the quarter at approximately 94.8% occupancy, down slightly from the previous quarter. This is mainly the result of the termination of a 26,400 square foot struggling tenant in LE Centre de Victoriaville, Québec, in June of this year. We have replaced this tenant with a strong covenant in the brick who are currently in a fixed ring period and rent will begin in mid-October of this year.

We've had strong leasing this summer, and we'll see the occupancy number increase through the next few quarters. Notably, the last remaining full-floor vacancy representing 9,277 square feet, half this amount at our interest, at 2045 Rue Stanley has a binding deal with the Québec government and an additional space of 5,000 square feet, which again half of this amount at our interest, has just received an offer from one of our existing tenants looking to expand. So this will take occupied and committed space at Stanley to over 95%. Both leases will begin in 2020 and will further enhance the REIT's cash flow next year.

In addition, one of our largest expiries in the portfolio at Place 400 in St. John, New Brunswick, representing approximately 57,000 square feet and expiring in December of this year, is also renewing.

In Richmond BC, we are close to finalizing plans to move forward with the Phase 2 development, which would see existing 16,000 square foot industrial tenant vacate and be replaced with 2 new tenants at a significant lift in rental rates. This phase should hopefully begin in the fall and be completed in early 2020, creating a significant lift in the value of the property. In addition, zoning would allow for a Phase 3 with the ability to add additional square foot in the future, if we decide.

We've also identified with our partner, Sandalwood Management, potential future value-add sites in and around the Greater Montreal area. On the disposition front, we continue to list for sale 2 of our smaller properties in Montréal, which represents approximately $6 million to $6.5 million in value.

On the acquisition front, we are in late stages of a negotiation on a purchase and sale agreement to firm up another deal, which would be settled entirely in units. This would allow us to place debt on the property on favorable terms, which would provide cash we could use to complete additional acquisitions later in the year.

We've been patient and have laid the groundwork for the future. Our industrial holdings account for approximately 47% of our NOI. Our payout ratio continues to be low and continues on a downward trend since inception, giving us flexibility for the future. We've remained conservative in our approach to our debt to gross book value. Our portfolio is strong, and with the excellent leasing performance we have had over the summer, it'll put us in into an even stronger financial position in future quarters.

Rob will speak more to the specific debt renewals. But once again on a positive note, successful renewal of this year's expiring debt will result in significant savings.

Our unitholder base is diverse with extremely strong support from institutional holdings. We have value-add opportunities that we will be moving forward with that will further lift our NAV per unit, and we have identified potential future growth areas within our existing portfolio. Finally, we continue to prove we can successfully complete acquisitions that are accretive to AFFO per unit. The future is bright for Nexus REIT.

I'm going to now pass it over to Robert Chiasson to review the financials.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Kelly. Our portfolio continues to deliver consistent results. Same-store NOI was up by approximately $100,000 quarter-over-quarter. We had a few tenant turnover in the quarter, and while our occupancy was slightly lower quarter-on-quarter, our committed occupancy was stable, and we will see replacement tenancies contribute to NOI in future quarters.

Interest expense in the second quarter included a $578,000 debt repayment fee that was associated with debt that was assumed on acquisitions completed in 2017. This amount has been removed from normalized FFO and normalized AFFO.

NOI was bolstered by the completion of a 9.3% cap rate acquisition at the beginning of the quarter, which contributed to reducing our quarter-on-quarter AFFO payout ratio from 81.5% to 80.5% and increasing quarter-on-quarter AFFO per unit by 1.3%.

Looking to the balance sheet. Our debt to total assets was 51.7% at June 30. The average remaining term on mortgage debt increased from 2.59 years at March 31 to 3.66 years at June 30. We will see further growth in the remaining term as we renew additional debt.

We've extended the term on our credit facility and are finalizing renewal, which is expected to be priced in the low 3% range. In April, we completed $37 million of 5- to 10-year term mortgage refinancing at rates between 3.67% and 3.87%. Bond yields continue to be at relatively low levels and swap rates are also trending lower, holding well for terms that we may be able to get for refinancing.

I'll now pass it back to Kelly.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Rob. I'm going to now open up the call to any questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Brad Sturges, who's with IA Securities.

--------------------------------------------------------------------------------

Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [2]

--------------------------------------------------------------------------------

Just on Richmond Phase 2, sounds like some good news there. Just wanted to get a little bit more color on the scope of work and what your CapEx budget would be for Phase 2.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

It's a little bit premature. So we have -- there's 3 phases. So one is dealing with the existing tenant, which we're in the process of; two is the 2 new tenancies, which we're currently pricing at what that fit up would be. So when I'm looking at it, I don't have the CapEx number, but I would roughly say it's probably in the $5 million to $7 million range, outside work on the building, bringing it more in line with the existing Phase 1 from a color perspective and some cleanup of the exterior. So not a whole renovation here. It's more of a tenant fit up with some cleanup of the outside. So that's one portion of it. And then finalizing 2 new deals with the 2 new tenants. So we're in the process of that. It's a little bit of a puzzle but it's going very well. Hopefully in the relatively near future, I can make a bigger announcement and give more detail.

--------------------------------------------------------------------------------

Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [4]

--------------------------------------------------------------------------------

In terms of theoretical timing, it would be potentially early next year when this could commence?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I think when I look at it, I think we would probably look to commence late fall of this year if all goes well and be done relatively early next year.

--------------------------------------------------------------------------------

Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [6]

--------------------------------------------------------------------------------

Okay. So tenant -- with the tenants in place by mid next year then, is that what you mean?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I'd probably say by the end of the first quarter.

--------------------------------------------------------------------------------

Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [8]

--------------------------------------------------------------------------------

Okay. And the rent lift you're speaking to, is that similar to what you've been thinking about in the past or what you've achieved so far in Phase 1?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I would say yes. The rent level looks pretty good right now. We're still in negotiations, so I don't want to kill that for me. So it is pretty strong, and I guess we'd be in the same range as the Phase 1.

--------------------------------------------------------------------------------

Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [10]

--------------------------------------------------------------------------------

Okay. And with -- it sounds like you've got the Rue Stanley leased up now potentially. Just give a context of when in 2020 would that potential lease start. And talk about the rent profile versus what you've been able to do so far in the building.

--------------------------------------------------------------------------------

Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [11]

--------------------------------------------------------------------------------

So the government tenant, that would start, I believe, March. I think it's March 1. The other one for the 5,000 square footer, I believe, is May, after fit up and work we have to do. The good thing about the government deal, it is effectively an as-is deal. So from a CapEx standpoint, there's really nothing for us to do, which is significant, which lend to a very solid NER for us on that one. But they range in the, call it, the $14 to $20 range per square foot.

--------------------------------------------------------------------------------

Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [12]

--------------------------------------------------------------------------------

Okay. And last question before I turn it back. On the Sandalwood value-add review, can you give a little bit more color on the context of what some potential opportunities you're seeing within Québec that would fit into those type -- into that opportunity with Sandalwood?

--------------------------------------------------------------------------------

Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [13]

--------------------------------------------------------------------------------

Yes. Absolutely. It's very early in the process. I sat with the head of Sandalwood and we just had a discussion and started to look at different areas. So we have ability to -- in 1 very solid site to build multifamily or condo in that density there. And another one, we've had some interest from a retirement side of things. So very early stages, but we're just looking for the future what opportunities lay in the portfolio.

--------------------------------------------------------------------------------

Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [14]

--------------------------------------------------------------------------------

I guess intensification opportunities are the main...

--------------------------------------------------------------------------------

Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [15]

--------------------------------------------------------------------------------

Absolutely.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

(Operator Instructions) The next question comes from Alex Leon, who's with Desjardins Capital Markets.

--------------------------------------------------------------------------------

Alex Leon, Desjardins Securities Inc., Research Division - Associate [17]

--------------------------------------------------------------------------------

You mentioned in the press release that you have a property that's currently under advanced negotiations. I was just wondering if you could give us some color as to the dollar amount and maybe the geographic location.

--------------------------------------------------------------------------------

Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [18]

--------------------------------------------------------------------------------

Sure. It's out west, and it's in the -- and we're in negotiation still. And so I'll give you in between a $15 million and $20 million range.

--------------------------------------------------------------------------------

Alex Leon, Desjardins Securities Inc., Research Division - Associate [19]

--------------------------------------------------------------------------------

Okay. Great. And you mentioned $5 million to $7 million of CapEx relating to the Phase 2 development there. Does that include the space that's currently tenanted by [Ursula]?

--------------------------------------------------------------------------------

Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [20]

--------------------------------------------------------------------------------

It would be -- that's the site we're looking at, yes.

--------------------------------------------------------------------------------

Alex Leon, Desjardins Securities Inc., Research Division - Associate [21]

--------------------------------------------------------------------------------

Yes. Okay. Moving along, I have a question on the -- the weighted average cap rate I saw moved up slightly and that was due to increase to the higher end of the range from 9.5% to 10.1%. Is that related to specific properties or just kind of specific locations?

--------------------------------------------------------------------------------

Robert Paul Chiasson, Nexus Real Estate Investment Trust - CFO & Secretary [22]

--------------------------------------------------------------------------------

It's primarily related to the acquisition we completed in the quarter. So we purchased properties in Black Falls, Fort St. John, Estevan and Medicine Hat.

--------------------------------------------------------------------------------

Alex Leon, Desjardins Securities Inc., Research Division - Associate [23]

--------------------------------------------------------------------------------

Okay. Great. And then last one for me before I turn it back. The NOI at Rue Stanley was negatively impacted by the repair and maintenance expense there. I was just wondering if that would be recoverable.

--------------------------------------------------------------------------------

Robert Paul Chiasson, Nexus Real Estate Investment Trust - CFO & Secretary [24]

--------------------------------------------------------------------------------

A portion of it will be and it's treated as CapEx receivable. A portion of it may not be. But for the most part, it should be recoverable.

--------------------------------------------------------------------------------

Alex Leon, Desjardins Securities Inc., Research Division - Associate [25]

--------------------------------------------------------------------------------

Okay. I'm sorry, actually, one more. What was the management fee included in NOI this quarter?

--------------------------------------------------------------------------------

Robert Paul Chiasson, Nexus Real Estate Investment Trust - CFO & Secretary [26]

--------------------------------------------------------------------------------

So we're relatively consistent. We don't have any additional CapEx or leasing fees. So off the top, I don't have the number, but I can get back to you on that.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

(Operator Instructions) We have a follow-up question from Brad Sturges with IA Securities.

--------------------------------------------------------------------------------

Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [28]

--------------------------------------------------------------------------------

Just did I hear that correctly that there was a little bit of lease termination income during the quarter? Or...

--------------------------------------------------------------------------------

Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [29]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [30]

--------------------------------------------------------------------------------

No, there wasn't. Okay.

--------------------------------------------------------------------------------

Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [31]

--------------------------------------------------------------------------------

No, there wasn't.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

(Operator Instructions) There are no further questions at this time. I'd like to turn the conference back over to Kelly Hanczyk for any closing comments.

--------------------------------------------------------------------------------

Kelly Clark Hanczyk, Nexus Real Estate Investment Trust - CEO, President & Trustee [33]

--------------------------------------------------------------------------------

Well, I'd like to thank everyone for calling in, and I look forward to our next result call where I think you all can see significant announcements over the next -- probably by the next quarter. So I look forward to chatting again. Thanks.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

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