Nexus Industrial REIT (NXRUN) Earnings Call Transcript

Welcome to the Nexus Industrial REIT Second Quarter 2026 Results Conference Call. As a reminder, all participants are in a 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.

Thank you. I'd like to welcome everyone to the 2026 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 within forward-looking information and for information about non-GAAP measures. The second quarter was an excellent quarter for Nexus. We delivered sequential and year-over-year growth in revenue, net operating income, realized FFO and the last 12 months adjusted EBITDA. These improvements reflect strong operating results, while we also advanced 3 transformative strategic initiatives. First, early in the quarter, we obtained an investment-grade credit rating and completed an inaugural bond offering. Second, we advanced our capital recycling program by closing on the sale of surplus land and advancing 2 other dispositions. Third, we advanced our development projects in British Columbia, which has the potential to be significant growth opportunities for Nexus. I will first review our operating performance, then provide an update on financing, capital recycling and development before closing with our outlook for the balance of 2026. In the quarter, we grew occupancy significantly to 97%. This improvement came primarily from 2 properties in Alberta, at 8 St in Nisku, where we signed a lease for the full 40,000 square feet at a 15% increase over expiring rent. And 40 Avenue in Red Deer, where we have sold a 190,000 square foot property, and the buyer is paying us a healthy 10% yield on the purchase price until they are able to close, which we expect to be any day now. I'm very happy with this progress, and I expect occupancy to improve further to our long-run average of 98% to 99%. Apart from leasing up of these vacant units, we also made excellent headway renewals, completing 380,000 square feet of renewals at an average lift of 6% over expiring and in-place rents. This demonstrates our continued ability to capture the market lift on lease renewals. At June 30, we had an attractive average spread between market and in-place rents of 14.9%. Looking at the remaining renewals for 2026, we have approximately 600,000 square feet coming up for renewal in the second half of the year. Of this amount, we have already renewed or expect to renew over 400,000 square feet. The remaining space includes a 90,000 square foot strategic vacancy in Montreal where the tenant was paying $9 per square foot, which is well below market rent. This lease comes due at the end of November. The remaining space also includes 80,000 square feet in London, where the tenant is paying $8 per square foot rent also well below market rent and the lease comes due at the end of December. It's early on this one, but we are in close discussions with a new tenant for this space in London. The occupancy improvement, combined with our recent completed developments, expansions and acquisitions grew net operating income by 6.2% from a year ago to $34.1 million. Normalized FFO increased to $17.9 million and on the last 12 months basis, adjusted EBITDA grew to $121.8 million. For the quarter, we posted normalized AFFO per unit of $0.154, resulting in a year-to-date payout ratio of 99.3% as we remain on track to deliver a full year 2026 payout ratio below 100%. Turning to our strategic initiatives. At the beginning of the quarter, we received an investment-grade rating and completed inaugural bond issuance of $500 million. The debentures were issued in 2 tranches, $300 million of 3-year bonds with a coupon of 4.236% and $200 million of 5-year bonds with a coupon of 4.641%. These issuances marked a significant milestones in our evolution, and I'm incredibly proud of this achievement. Looking forward, access to the bond market should help reduce financing costs, increased funding flexibility and reduce financing risk over time. We also have continued to make good headway on our capital recycling program. In the quarter, we sold our 80% interest in development land and South Service Road in Hamilton for $14.1 million. The property no longer fit into our plans, and we were able to use the sale proceeds to reduce debt. Since we are familiar with the project, we have agreed to guarantee the construction debt on a secured basis for a fee of 1%. We have also entered into an agreement to sell nearly 14 acres of excess land in Blackfalds, Alberta. Previously, the land had been leased, along with the building on an adjoining property. Upon renewing the tenant, we severed off the unused land and have found a buyer at $184,000 per acre, which we expect to close in October. We will use the proceeds of $2.5 million to reduce our debt. As mentioned earlier, our building at 40 Avenue in Red Deer, Alberta is under firm sale contract for $11.25 million. This building went vacant when Peavey Mart filed for CCAA in April 2025. The buyer is obtaining a development permit from the city after which the sale will close, which we said will be any day. In the meantime, the buyer is paying us monthly rent, which is a great outcome for us. In Hamilton, we are looking for a buyer or a tenant for our 115,000 square foot new build on Glover Road. We own 80% of the property and has been a challenging market in Hamilton. In July, we advanced the sale by issuing our partner, our 20% partner with a right of first offer notice to acquire the property. They did not exercise the offer. And as a consequence, we now have the ability to market 100% of the property for sale. Selling the building would contribute meaningfully to our AFFO per unit as the carrying costs are significant and sale proceeds could be used to pay down debt. Turning to development. We have launched a sub strategy within our portfolio to consider development of data infrastructure projects where such investments meet our investment objectives and our disciplined approach to capital allocation. We believe that 1751 Savage Road in Richmond and 555 Adams Road in Kelowna have the existing electrical infrastructure, available power capacity and strategic locations that may provide a competitive advantage in pursuing possible digital infrastructure opportunities. At our Savage Road property in Richmond, BC, we have transitioned the planned development from adding additional tenants -- to a combination of tenants court and micro industrial units that may be used individually or combined as data infrastructure. At this time, we do not anticipate any changes to the development cost of $41.3 million, and we expect the project to continue to generate a minimum unlevered return on investment of 6%. In saying that, however, the project has a potential for much, much greater returns if the micro industrial units are used as data infrastructure. During the quarter, permitting was completed and construction commenced. At our Adams Road property in Kelowna, we are developing micro industrial units as well, which may also be used individually or combined as data infrastructure. We do not anticipate any change in development costs of $47.3 million, and we expect the project to generate a minimum unlevered return on investment of 6%. And again, the project has a much greater potential for returns if the micro industrial units are used as data infrastructure. The planning phase has been completed and the construction permit application has been submitted for a review. Overall, our outlook for 2026 remains unchanged. We continue to expect Nexus to deliver strong 2026 driven by our completed development projects, some big rent steps, the lease-up of vacant space and the re-leasing of space at market rents above expiring rents. We anticipate mid-single-digit industrial same property NOI growth for the year and expect our normalized AFFO payout ratio to average well below 100% for the full year. With that overview, I'll now turn the call over to Mike for more color on our financial results.

Thank you, Kelly, and good morning, everyone. Starting with headline earnings in the quarter. Net loss was $12.8 million, a $5.2 million decrease compared to a net loss of $7.6 million last year. The fluctuation is due to lower fair value adjustments on derivative financial instruments and Class B LP units of $5.5 million and $3.2 million, respectively, and a higher net interest expense of $2 million. These costs were partially offset by a higher fair value adjustment of investment property by $3.5 million and a higher NOI of $2 million. As Kelly mentioned, our Q2 net operating income increased 6.2% or $2 million year-over-year to $34.1 million. This was primarily due to the completion of our St. Thomas and Calgary developments, which together added $1.3 million, an increase in same-property NOI, which added $900,000 and the acquisition of the 2 Montreal buildings in November 2025, which added $700,000. This was partially offset by lower termination fee income by $1.2 million and $200,000 relating to dispositions completed since Q2 2025. Normalized AFFO for the period was $0.154 per unit compared to $0.16 from a year ago. primarily due to an increase in the average number of units outstanding and higher interest expense due to having more debt outstanding. This was partially offset by the higher NOI that I just mentioned. Total general and administrative expenses for the quarter were $2.2 million, which was consistent with a year ago. Net interest expense in the quarter was $14.7 million which was $2 million higher than a year ago, mainly due to a higher debt balance and the noncash write-off of deferred financing costs associated with the $200 million term loan that we retired early with the proceeds from our inaugural bond issuance in April. In addition, capitalized interest in the quarter was $300,000 or $700,000 lower than a year ago. The carrying value of our investment properties decreased by $15.7 million in the quarter, primarily due to the sale of our 80% interest in the development land at 1540 South Service Road for $14.1 million as well as fair value adjustments on properties of $7.6 million partially offset by investment in development and capital expenditures, tenant improvements and leasing costs. At June 30, our NAV per unit was $13.23 and a $0.06 per unit decrease from last quarter. Our weighted average cap rate increased by 1 basis point to 5.95% in the quarter compared to 5.94% at March 31. I will now turn the call back to Kelly.

Thanks, Mike. We're working hard at turning over every stone to create value for our unitholders. We're advancing our strategy as Canada's industrial building partner by continuing to realize organic growth through embedded rent steps and positive mark-to-market on renewal, we'll continue our track record of accretive capital recycling through opportunistic acquisitions, dispositions and development. With that, operator, please open the line to any questions.

[Operator Instructions] The first question today comes from Brad Sturges with Raymond James.

Just, I guess, hitting on your -- the strategic updates on the development side, Richmond and Kelowna. I guess specifically with Richmond, you put in kind of new language around the potential for digital infrastructure use along with the micro industrial. I guess from the concept perspective today, it sounds like the plan is to build more -- or do the -- build out the shell for now. I think I guess the leasing will dictate sort of what the use could be. Just could you walk through that a bit more in terms of the initial plan and what to expect in terms of construction? And then I just would like to understand how Power would be secure for -- in case there is data center users.

Yes. Okay. So I guess watch my word. So I'm looking at it like miners trying to find the diamond in the rough. So we have broken ground. We port foundation and shortly, we'll begin framing on a very unique design that I think we'll be able to deliver by the end of the year. Our engineers discover an opportunity, and we're exploring it very closely. So I think what we have is a great -- obviously, a great opportunity to create real value in the near term for the REIT. I'd say it's a little early to give too much detail. But I can say if we're successful, in landing the tenant. And we are speaking with a number in the reception has been very, very positive. It's going to be a diamond. So I say let's see how it all plays out, but I hope to have some positive news within a month, 1.5 months all goes well. The early conversations are going extremely well, but it's a bit too early to make that call. But we do have available power, we've been approved for additional power. So from that perspective, it looks pretty positive.

And I guess you used -- in the MD&A, used similar language around Kelowna, I guess it doesn't appear. It sounds like it's as far advanced as Richmond. Is that a fair assessment, but it could be a similar opportunity?

Yes, exactly. We're in for permit there on the same design. And when I'm able to and ready when we move closer and we land something, I'll give a fulsome -- fulsome probably press release on what we're doing. But it is very unique, very different. And I think what we have is something I think looks like really good from what we're seeing right now. So we kind of fell into it. But we -- at Richmond, we applied for additional power pretty early on a while back. So things have been going pretty well. Knock on wood. I don't want to jinx it and then come back and say, oh, we're just doing our standard 6% return. But I think right now it looks pretty positive.

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

Just sticking along the same lines as Brad -- Brad's questions there about the data infrastructure and data center opportunity. You talked about -- you have the permit existing for Richmond, you're in for permit in Kelowna. You mentioned giving us an update as you can. What is it that you're waiting for to provide the update? Is it a change of use at the site? Is it leasing discussions? Just curious what it is that we need to wait for before we can learn more.

Yes. It would be an update on leases on having it tapered in my hands. It's pricing. It gets price per kilowatt hour per month. What is the final pricing. I think we have something really unique in our design that is going to become very popular. And let's face it, the actual ability to deliver quickly is imperative in that world because if you consider a traditional data center, it takes probably 3, 4 years to finish off, probably more like 4, to be honest. We're in a little bit of a unique position that I think we can deliver at the end of the year. So I'm hoping -- I don't want to say too much because I don't want everyone going crazy and then all of a sudden, we can't secure the deal. This is kind of new for us, but it is going pretty positive.

Okay. No, fair enough. Just a follow-up there on the types of tenants that you might be engaging with, what are they large tech companies? Like if you could just give us a bit of a sense of the type of tenant that would be looking for a smaller footprint data center like this.

To be honest, all of them. From very, very large to smaller co-locators to different types of groups. There's just general in overall interest and there's a general shortage of available power to supply data right now that's available in the short term. So when I say everyone, it's pretty much everyone right now.

Okay. Interesting. And I know it's had one question, one follow-up. I'm going to ask one more quick one just on the actual industrial portfolio. Like where do you see industrial same-property NOI trending over time? Obviously, restated the mid-single digit. We've seen growth in the second quarter from the first quarter. But do you see that transitioning into like a more mid- to high single-digit range, like maybe aligning a little bit more directly with some of the other kind of Canadian peers at this point?

I think candidly, it's a little early for us to give longer-term guidance outside of this year. I'd say we're very comfortable with our guidance this year of the mid-single digits. So I think given where we're at today or on a year-to-date basis, fair to expect some acceleration from us in the back half of the year. But I think on the longer term, we don't want to give guidance into '27, '28 at this point.

[Operator Instructions] The next question comes from Matt Kornack with National Bank.

Just maybe a follow-up to Kyle's line of questioning there. But on the straight-line rent component, I know you guys have done some pretty creative leasing deals. So we expected it to go up, but how should we think of that translating into cash NOI over what period? Because I know there were some steps in some of the leasing that you did.

Yes, I don't really know how to answer that other than to say we typically have pretty -- I think our average rent steps are in the order of 2% to 3% per year on our portfolio overall. So I think if you're looking to kind of see how the kind of cash or in-place rents grow, that's probably a fair number to use. And then as you mentioned, there are a few -- we've tried to call them out specifically where they're abnormal, like, for example, 100 Clarke Road in London, which had a big step at the beginning of this year. And than the building we had in Calgary last year in March of last year, which had a big rent step, which we disclosed individually. But I think otherwise, fair to look at the portfolio as being kind of 2% to 3% as an underlying rent step.

Okay. That's fair. I was just thinking more in terms of like, I think, you have $1.3 million in straight-line rent. If I'm looking at this correctly, in this quarter, it was, what, $400,000?

Yes, I think Q2 run rate is pretty good. If we take straight-line rent in Q1 was lower because we had some adjustments and write-offs. So this quarter is more indicative of the future run rate.

Makes sense. And then maybe going back to the earlier discussion on the data center opportunity. Is it exclusive to those 2 properties that have been highlighted? Or do you think this is something that you could roll out more broadly across the portfolio?