Net Operating Income grows 14.2% as recent investments begin yielding returns
TORONTO, Aug. 14, 2024 (GLOBE NEWSWIRE) — Nexus Industrial REIT (the “REIT”) (TSX: NXR.UN) announced today its results for the second quarter ended June 30, 2024.
“We have entered a new phase as we begin to benefit from our recent investments. We have high-graded our portfolio, and invested in our development projects” said Kelly Hanczyk, CEO of Nexus Industrial REIT.
“Our Q2 results clearly demonstrate this shift in our trajectory, and I expect that our momentum will accelerate from here, as we now have resolved key vacancy headwinds, have three remaining development projects coming online, and will also benefit from contractual rent lift and renewals,” continued Kelly.
“I am thrilled with the progress that we have made, and I am confident that our strategy to be a Canada-focused pure-play industrial REIT will continue to be meaningful and rewarding for our stakeholders.”
Second Quarter 2024 Highlights:
- Net income was $43.5 million driven by net operating income (“NOI”)(1) of $31.6 million, gains on fair value adjustments of Class B LP Units of $21.1 million and of investment properties of $13.6 million.
- NOI increased 14.2% year over year to $31.6 million from the acquisition of high-quality, tenanted income-producing industrial properties, and growth in industrial Same Property NOI which totaled $0.8 million or 3.5% compared to a year ago (1).
- Advanced the construction of a new 96,000 sq. ft. intensification industrial project in London, ON, which is expected to earn an 8% return. The building was completed and tenanted in July.
- Completed the sale of an office property for $5 million and have contracted for the disposition of 28 non-core properties for a total of $107 million.
- Normalized FFO(1) per unit was $0.178 and Normalized AFFO(1) per unit was $0.148, a reduction of $0.018 and $0.017 versus a year ago.
- NAV(1) per unit of $13.2 grew $0.71 or 5.7% versus a year ago.
Subsequent events:
- Acquired a 62,000 sq. ft. new industrial building in Sherbrooke, QC on July 2, 2024 valued at $16.6 million. The purchase price was satisfied through the issuance of 456,700 Class B LP Units at a deemed value of $10 per unit and cash.
(1) Non-IFRS Financial Measure
Summary of Results
| (In thousands of Canadian dollars, except per unit amounts) | Three months ended June 30, | Six months ended June 30, | |||||||
| 2024 | 2023 | 2024 | 2023 | ||||||
| $ | $ | $ | $ | ||||||
| FINANCIAL INFORMATION | |||||||||
| Operating Results | |||||||||
| Property revenues | 43,910 | 38,419 | 85,507 | 75,895 | |||||
| Net operating income (NOI) | 31,617 | 27,689 | 61,154 | 53,417 | |||||
| Net Income | 43,525 | 77,222 | 87,196 | 80,939 | |||||
| Funds from operations (FFO) (1) | 16,576 | 16,775 | 30,931 | 33,223 | |||||
| Normalized FFO (1) (2) | 16,642 | 17,266 | 31,885 | 33,717 | |||||
| Adjusted funds from operations (AFFO) (1) | 13,770 | 14,100 | 25,358 | 28,048 | |||||
| Normalized AFFO (1) (2) | 13,836 | 14,591 | 26,312 | 28,542 | |||||
| Distributions declared (3) | 14,970 | 14,192 | 29,910 | 28,234 | |||||
| Same Property NOI (1) | 24,867 | 24,063 | 48,452 | 47,766 | |||||
| Weighted average units outstanding (000s): | |||||||||
| Basic (4) | 93,541 | 88,310 | 93,441 | 88,027 | |||||
| Diluted (4) | 93,717 | 88,412 | 93,617 | 88,129 | |||||
| Per unit amounts: | |||||||||
| Distributions per unit – basic (3) (4) | 0.160 | 0.160 | 0.320 | 0.320 | |||||
| Distributions per unit – diluted (3) (4) | 0.160 | 0.160 | 0.320 | 0.320 | |||||
| Normalized FFO per unit – basic (1) (2) (4) | 0.178 | 0.196 | 0.341 | 0.383 | |||||
| Normalized FFO per unit – diluted (1) (2) (4) | 0.178 | 0.195 | 0.341 | 0.383 | |||||
| Normalized AFFO per unit – basic (1) (2) (4) | 0.148 | 0.165 | 0.282 | 0.324 | |||||
| Normalized AFFO per unit – diluted (1) (2) (4) | 0.148 | 0.165 | 0.281 | 0.324 | |||||
| AFFO payout ratio – basic (1) (3) | 108.7 | % | 100.7 | % | 118.0 | % | 100.7 | % | |
| Normalized AFFO payout ratio – basic (1) (2) (3) | 108.2 | % | 97.3 | % | 113.7 | % | 98.9 | % | |
| As at June 30, 2024 and December 31, 2023 | 2024 | 2023 | |||||||
| $ | $ | ||||||||
| PORTFOLIO INFORMATION | |||||||||
| Total Portfolio | |||||||||
| Number of Investment Properties(5) | 118 | 116 | |||||||
| Number of Properties Under Development | 3 | 4 | |||||||
| Investment Property Fair Value (excludes assets held for sale) | 2,408,859 | 2,364,027 | |||||||
| Gross leasable area (“GLA”) (in millions of sq. ft.) (at the REIT’s ownership interest) | 12.9 | 12.5 | |||||||
| Industrial occupancy rate – in-place and committed (period-end)(6) | 98 | % | 97 | % | |||||
| Weighted average lease term (“WALT”) (years) | 6.9 | 6.9 | |||||||
| Estimated spread between industrial portfolio market and in-place rents | 25.1 | % | 29.0 | % | |||||
| FINANCING AND CAPITAL INFORMATION | |||||||||
| Financing | |||||||||
| Net debt | 1,296,226 | 1,203,432 | |||||||
| Net Indebtedness Ratio | 49.97 | % | 48.90 | % | |||||
| Interest coverage ration (times) | 1.61 | 1.72 | |||||||
| Secured Indebtedness Ratio | 28.1 | % | 30.4 | % | |||||
| Unencumbered investment properties as a percentage of investment properties | 41.8 | % | 35.6 | % | |||||
| Total assets | 2,593,924 | 2,463,067 | |||||||
| Cash and cash equivalents | 7,868 | 5,918 | |||||||
| Capital | |||||||||
| Total equity (per condensed consolidated financial statements) | 1,080,195 | 1,000,329 | |||||||
| Total equity (including Class B LP Units) | 1,235,819 | 1,199,434 | |||||||
| Total number of Units (in thousands) | 93,628 | 93,201 | |||||||
| NAV per Unit | 13.20 | 12.87 | |||||||
(1) See Non-IFRS Financial Measures.
(2) See Appendix A – Non-IFRS Financial Measures
(3) Includes distributions payable to holders of Class B LP Units which are accounted for as finance expense in the consolidated financial statements.
(4) Weighted average number of units includes Class B LP Units.
(5) Includes 26 properties classified as assets held for sale.
(6) Includes committed new leases for future occupancy.
Non-IFRS Measures
Included in the tables above and elsewhere in this news release are non-IFRS financial measures that should not be construed as an alternative to net income / loss, cash from operating activities or other measures of financial performance calculated in accordance with IFRS and may not be comparable to similar measures as reported by other issuers. Certain additional disclosures for these non-IFRS financial measures have been incorporated by reference and can be found on page 3 in the REIT’s Management’s Discussion and Analysis for the three and six months ended June 30, 2024, available on SEDAR at www.sedarplus.ca and on the REIT’s website under Investor Relations. See Appendix A of this earnings release for a reconciliation of the non-IFRS financial measures to the primary financial statement measures.
NOI
Net Operating Income for the three months ended June 30, 2024 was $31.6 million or $3.9 million higher than Q2 2023, which was primarily due to $3.9 million from acquisitions of industrial income producing property completed subsequent to Q2 2023 and an increase in Same Property NOI of $0.8 million principally due to the completed lease up of 1751-1771 Savage Rd, Richmond, BC, partially offset by $0.4 million relating to redevelopment of an investment property that was reclassified to properties under development during the quarter, $0.2 million relating to dispositions completed since Q2 2023, and a lower termination fee of $0.1 million.
Net Operating Income for the six months ended June 30, 2024 was $61.2 million or $7.7 million higher than the same period in 2023, which was primarily due to $8.3 million from acquisitions of industrial income producing property completed subsequent to Q2 2023, an increase in Same Property NOI of $0.7 million and $0.2 million higher straight-line rents largely attributed to recent acquisitions, partially offset by $0.6 million relating to redevelopment and $0.7 million relating to dispositions completed since Q2 2023.
Fair value adjustment of investment properties
The fair value adjustment of investment properties for the three months ended June 30, 2024, totaled $13.6 million which was primarily due to $13.7 million fair value gains resulting from appraisals received during the quarter, principally due to an $11.8 million write-up for an industrial property in Edmonton, AB; $8.4 million fair value gains relating to properties held for development based on development progress relative to the as-completed appraised value; and $3.0 million net fair value gains relating to changes in NOI/market rent assumptions. Offsetting the gains were net write-downs of $10.5 million to align values that are currently listed as assets held for sale with their expected disposal amounts, and a $1.0 million loss relating to investment property sale price adjustments and transaction costs.
The fair value adjustment of investment properties for the six months ended June 30, 2024, totaled $28.7 million, which was primarily due to $16.9 million value gains relating to properties held for development based on development progress relative to the as-completed appraised value; $13.7 million fair value gains resulting from appraisals received during the period, principally due to an $11.8 million write-up for an industrial property in Edmonton, AB; $12.5 million net fair value gains relating to changes in NOI/market rent assumptions. Offsetting the gains were net write-downs of $10.5 million to align values that are currently listed as assets held for sale with their expected disposal amounts, $2.9 million in capital expenditures fair valued to zero and $1.0 million loss relating to investment property sale price adjustments and transaction costs.
Outlook
The REIT is focused on delivering total unitholder return through profitable long-term growth, and by pursing its strategy as a Canada-focused pure-play industrial REIT.
Through the remainder of 2024, the REIT expects to benefit from positive rental fundamentals in the markets in which it has leases expiring. Overall, the REIT anticipates mid-single digit Same Property NOI growth in its industrial portfolio for the full year.
In 2024, the REIT expects to benefit from the completion of four significant development projects. Combined, these properties will add annual stabilized NOI of over $10 million when complete:
- In the second quarter of 2024, the REIT completed the Park Street intensification project in Regina, SK. The primary tenant took possession on April 1st, and once fully tenanted, will contribute an estimated yield of 7.5% on total development costs of $48 million.
- In the third quarter of 2024, the REIT also completed construction of the 96,000 sq ft Hubrey Rd. expansion project in London, ON. This project was tenanted in July, and will contribute a going-in yield of 8.0% on total development costs of $14 million.
- In the third quarter of 2024, the REIT completed the 115,000 sq ft Glover Rd. new development in Hamilton, ON. This project will contribute an estimated going-in yield 5.9% on total development costs of $25 million (at the REIT’s 80% interest). The Glover Rd. property is actively marketed for a tenant.
- The REIT now expects to complete its 325,000 sq ft Dennis Rd. expansion project in St. Thomas, ON in the first quarter of 2025. This project is being constructed for an existing tenant. The REIT earns 7.8% on capital expenditure during the construction phase, and will earn a contractual going-in yield of 9.0% on the total development costs of $46 million upon completion.
The REIT will continue to prioritize unitholder distributions. The REIT believes that its normalized AFFO payout ratio peaked in the first quarter of 2024 and will improve to a more sustainable level for the balance of the year.
The REIT is focused on building its industrial portfolio. As a result, the REIT is disposing its legacy retail and office properties and a group of non-core industrial buildings. The REIT no longer expects to sell its portfolio of western Canada truck terminals. Consequently, the REIT is now targeting non-core assets sales of approximately $110 million in the second half of 2024, and will use the proceeds to reduce its debt balance.
Earnings Call
Management of the REIT will host a conference call at 10:00 AM Eastern Standard Time on Thursday August 15, 2024 to review the financial results and operations. To participate in the conference call, please dial 647-484-8814 or 1-844-763-8274 (toll free in Canada and the US) at least five minutes prior to the start time and ask to join the Nexus Industrial REIT conference call.
A recording of the conference call will be available until September 15, 2024. To access the recording, please dial 1-412-317-0088 or 1-855-669-9658 (toll free in Canada and the US) and enter access code 2847948.
About Nexus Industrial REIT
Nexus is a growth-oriented real estate investment trust focused on increasing unitholder value through the acquisition of industrial properties located in primary and secondary markets in Canada, and the ownership and management of its portfolio of properties. The REIT currently owns a portfolio of 119 properties (including two properties held for development in which the REIT has an 80% interest) comprising approximately 13.0 million square feet of gross leasable area. The REIT has approximately 94,152,000 voting units issued and outstanding, including approximately 70,742,000 REIT Units and approximately 23,410,000 Class B LP Units of subsidiary limited partnerships of Nexus, which are convertible to REIT Units on a one-to-one basis.
Forward Looking Statements
Certain statements contained in this news release constitute forward-looking statements which reflect the REIT’s current expectations and projections about future results. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects” or “does not expect”, “is expected”, “estimates”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases or state that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the REIT to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this news release. Such forward-looking statements are based on a number of assumptions that may prove to be incorrect.
While the REIT anticipates that subsequent events and developments may cause its views to change, the REIT specifically disclaims any obligation to update these forward-looking statements except as required by applicable law. These forward-looking statements should not be relied upon as representing the REIT’s views as of any date subsequent to the date of this news release. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. The factors identified above are not intended to represent a complete list of the factors that could affect the REIT.
For further information please contact:
Kelly C. Hanczyk, CEO at (416) 906-2379 or
Mike Rawle, CFO at (289) 837-2650.
APPENDIX A – NON-IFRS FINANCIAL MEASURES
| (In thousands of Canadian dollars, except per unit amounts) | Three months ended June 30, | Six months ended June 30, | |||||||||||
| 2024 | 2023 | Change | 2024 | 2023 | Change | ||||||||
| FFO | $ | $ | $ | $ | $ | $ | |||||||
| Net income | 43,525 | 77,222 | (33,697 | ) | 87,196 | 80,939 | 6,257 | ||||||
| Adjustments: | |||||||||||||
| Loss on disposal of investment properties | 251 | 807 | (556 | ) | 251 | 807 | (556 | ) | |||||
| Fair value adjustment of investment properties | (13,560 | ) | (33,031 | ) | 19,471 | (28,743 | ) | (30,316 | ) | 1,573 | |||
| Fair value adjustment of Class B LP Units | (21,057 | ) | (25,129 | ) | 4,072 | (31,885 | ) | (22,521 | ) | (9,364 | ) | ||
| Fair value adjustment of incentive units | (138 | ) | (130 | ) | (8 | ) | (147 | ) | (121 | ) | (26 | ) | |
| Fair value adjustment of derivative financial instruments | 3,042 | (6,400 | ) | 9,442 | (4,449 | ) | (2,571 | ) | (1,878 | ) | |||
| Adjustments for equity accounted joint venture (1) | 113 | (158 | ) | 271 | 71 | (70 | ) | 141 | |||||
| Distributions on Class B LP Units expensed | 3,849 | 3,303 | 546 | 7,787 | 6,481 | 1,306 | |||||||
| Amortization of tenant incentives and leasing costs | 384 | 285 | 99 | 657 | 581 | 76 | |||||||
| Lease principal payments | (16 | ) | (17 | ) | 1 | (20 | ) | (32 | ) | 12 | |||
| Amortization of right-of-use assets | 30 | 23 | 7 | 60 | 46 | 14 | |||||||
| Net effect of unrealized f/x on USD debt and respective USD economic hedges | 153 | – | 153 | 153 | – | 153 | |||||||
| Funds from operations (FFO) | 16,576 | 16,775 | (199 | ) | 30,931 | 33,223 | (2,292 | ) | |||||
| Weighted average units outstanding (000s) Basic (4) | 93,541 | 88,310 | 5,231 | 93,441 | 88,027 | 5,414 | |||||||
| FFO per unit – basic | 0.177 | 0.190 | (0.013 | ) | 0.331 | 0.377 | (0.046 | ) | |||||
| FFO | 16,576 | 16,775 | (199 | ) | 30,931 | 33,223 | (2,292 | ) | |||||
| Add: Vendor rent obligation (2) | – | 691 | (691 | ) | 628 | 1,295 | (667 | ) | |||||
| Less: Other income (2) | – | (200 | ) | 200 | – | (801 | ) | 801 | |||||
| Add: Non-recurring personnel transition costs | 66 | – | 66 | 326 | – | 326 | |||||||
| Normalized FFO | 16,642 | 17,266 | (624 | ) | 31,885 | 33,717 | (1,832 | ) | |||||
| Weighted average units outstanding (000s) Basic (4) | 93,541 | 88,310 | 5,231 | 93,441 | 88,027 | 5,414 | |||||||
| Normalized FFO per unit – basic | 0.1780 | 0.1960 | (0.018 | ) | 0.3410 | 0.3830 | (0.042 | ) | |||||
| (In thousands of Canadian dollars, except per unit amounts) | Three months ended June 30, | Six months ended June 30, | |||||||||||
| 2024 | 2023 | Change | 2024 | 2023 | Change | ||||||||
| AFFO | $ | $ | $ | $ | $ | $ | |||||||
| FFO | 16,576 | 16,775 | (199 | ) | 30,931 | 33,223 | (2,292 | ) | |||||
| Adjustments: | |||||||||||||
| Straight-line adjustments ground lease and rent | (1,206 | ) | (1,125 | ) | (81 | ) | (2,373 | ) | (2,225 | ) | (148 | ) | |
| Capital reserve (3) | (1,600 | ) | (1,550 | ) | (50 | ) | (3,200 | ) | (2,950 | ) | (250 | ) | |
| Adjusted funds from operations (AFFO) | 13,770 | 14,100 | (330 | ) | 25,358 | 28,048 | (2,690 | ) | |||||
| Weighted average units outstanding (000s) Basic (4) | 93,541 | 88,310 | 5,231 | 93,441 | 88,027 | 5,414 | |||||||
| AFFO per unit – basic | 0.147 | 0.160 | (0.013 | ) | 0.271 | 0.319 | (0.048 | ) | |||||
| AFFO | 13,770 | 14,100 | (330 | ) | 25,358 | 28,048 | (2,690 | ) | |||||
| Add: Vendor rent obligation (2) | – | 691 | (691 | ) | 628 | 1,295 | (667 | ) | |||||
| Less: Other income (2) | – | (200 | ) | 200 | – | (801 | ) | 801 | |||||
| Add: Non-recurring personnel transition costs | 66 | – | 66 | 326 | – | 326 | |||||||
| Normalized AFFO | 13,836 | 14,591 | (755 | ) | 26,312 | 28,542 | (2,230 | ) | |||||
| Weighted average units outstanding (000s) Basic (4) | 93,541 | 88,310 | 5,231 | 93,441 | 88,027 | 5,414 | |||||||
| Normalized AFFO per unit – basic | 0.148 | 0.165 | (0.017 | ) | 0.282 | 0.324 | (0.042 | ) | |||||
(1) Adjustment for equity accounted joint venture relates to a fair value adjustment of swaps in place at the joint venture to swap floating rate bankers’ acceptance rates to a fixed rate and fair value adjustment of the joint venture investment property.
(2) Prior to Q2 2024, Normalized FFO and Normalized AFFO include adjustments for vendor rent obligation amounts related to the REIT’s Richmond, BC property, which were payable from the vendor of the property until the buildout of the property was complete and all tenants are occupying and paying rent. The vendor rent obligation amount was not included in NOI for accounting under IFRS, but the estimated total amount of vendor rent obligation was recorded in other income. Normalized FFO and Normalized AFFO excluded estimated future vendor rent obligation amounts included in other income in the consolidated statements of income and comprehensive income and included the scheduled quarterly rents receivable in the form of vendor rent obligation. During the quarter ended June 30, 2024, the vendor has settled all outstanding amounts, and the property is now fully leased-up and contributed NOI of $0.9 million for the quarter ended June 30, 2024.
(3) Capital reserve includes maintenance capital expenditures, tenant incentives and leasing costs. Reserve amounts are established with reference to building condition reports, appraisals, and internal estimates of tenant renewal, tenant incentives and leasing costs. The REIT believes that a reserve is more appropriate given the fluctuating nature of these expenditures.
(4) Weighted average number of units includes the Class B LP Units.
SAME PROPERTY RESULTS
| (In thousands of Canadian dollars) | Three months ended June 30, | Six months ended June 30, | |||||||||||
| 2024 | 2023 | Change | 2024 | 2023 | Change | ||||||||
| $ | $ | $ | $ | $ | $ | ||||||||
| Property revenues | 43,910 | 38,419 | 5,491 | 85,507 | 75,895 | 9,612 | |||||||
| Property expenses | (12,293 | ) | (10,730 | ) | (1,563 | ) | (24,353 | ) | (22,478 | ) | (1,875 | ) | |
| NOI | 31,617 | 27,689 | 3,928 | 61,154 | 53,417 | 7,737 | |||||||
| Add/(Deduct): | |||||||||||||
| Amortization of tenant incentives and leasing costs | 384 | 284 | 100 | 657 | 581 | 76 | |||||||
| Straight-line adjustments of rent | (1,203 | ) | (1,197 | ) | (6 | ) | (2,367 | ) | (2,214 | ) | (153 | ) | |
| Development and expansion | 45 | (309 | ) | 354 | (26 | ) | (619 | ) | 593 | ||||
| Acquisitions | (5,864 | ) | (1,989 | ) | (3,875 | ) | (10,616 | ) | (2,364 | ) | (8,252 | ) | |
| Disposals | (10 | ) | (190 | ) | 180 | (213 | ) | (883 | ) | 670 | |||
| Termination fees and other non-recurring items | (102 | ) | (225 | ) | 123 | (137 | ) | (152 | ) | 15 | |||
| Same Property NOI | 24,867 | 24,063 | 804 | 48,452 | 47,766 | 686 | |||||||
