Nexus Industrial REIT Q3 Earnings Call Highlights

Key Points

• Operating performance improved: Q3 net operating income rose 7.8% to CAD 34.7 million, while normalized AFFO increased to CAD 0.166 per unit. Nexus renewed 225,000 square feet at rents averaging 29% higher and ended the quarter with 97% occupancy.
• Richmond data infrastructure plans are advancing, with CAD 60.3 million in potential development and infrastructure costs; Nexus says it will only spend the additional CAD 19 million on data infrastructure if it secures a lease. The project’s power capacity expansion depends on BC Hydro, and the REIT has not yet disclosed a projected yield.
• Financing and asset sales support the strategy: Nexus issued CAD 300 million in bonds at a 4.563% coupon to repay credit-facility borrowings and expects to fund most data-strategy costs from operating cash flow. It also completed or agreed to several Alberta property and land sales.

Nexus Industrial REIT TSE: NXR.UN reported higher third-quarter operating income and per-unit cash flow as it renewed industrial leases at higher rents, while executives outlined plans to develop potential data infrastructure at properties in British Columbia.

Net operating income rose 7.8% from a year earlier to CAD 34.7 million. Normalized adjusted funds from operations, or AFFO, increased to CAD 0.166 per unit from CAD 0.146, with a quarterly payout ratio of 95.6%. The REIT reported net income of CAD 31.9 million, compared with CAD 3.4 million a year earlier.

Chief Executive Officer Kelly Hanczyk said Nexus expects full-year industrial same-property net operating income growth of 3% to 4%. He cited the planned sale of a Calgary property and slower leasing at another Calgary building and a London, Ontario, property. The REIT continues to expect its normalized AFFO payout ratio to average well below 100% for 2026.

Higher rents and leasing activity

Nexus renewed 225,000 square feet during the quarter at an average rent increase of 29% over in-place and expiring rents. That included a 150,000-square-foot renewal in London, where net rent rose to CAD 9.75 per square foot from CAD 7.50 under a seven-year lease with annual escalators of 2.75%.

The REIT also leased 36,000 square feet of vacant space, bringing occupancy to 97% at September 30. Industrial same-property net operating income grew 4.2% in the quarter, and the average spread between market and in-place rents was 14.6% at quarter-end, Hanczyk said.

About 270,000 square feet remained up for renewal in the fourth quarter, including more than 75,000 square feet already renewed or expected to be renewed. The balance included a 90,000-square-foot strategic vacancy in Montreal and an 80,000-square-foot space in London, both at rents Hanczyk described as well below market.

In Hamilton, Ontario, Nexus expects to finalize a 10-year lease for its 115,000-square-foot Glover Road building, in which it owns an 80% interest. Hanczyk said the lease is expected to begin in the second quarter of 2027, with an initial incentive rate rising to market rent in the third year. Nexus had also leased eight of nine units at a newly built 115,000-square-foot building in Calgary.

Data infrastructure plans take shape

Nexus is exploring data infrastructure as a portfolio development strategy, with its Richmond, British Columbia, project the immediate focus. At Savage Road, the REIT is building micro-industrial units that could be used for data operations, industrial activity or storage.

The Richmond project has anticipated development costs of CAD 41.3 million, plus CAD 19 million for data infrastructure and fixtures, for a combined CAD 60.3 million. Hanczyk confirmed that Nexus would not incur the additional data infrastructure spending if it did not secure a data center lease.

The site currently has 2.1 megawatts of electrical capacity available, with conditional approval for increases to 6.6 megawatts and ultimately 9.9 megawatts. Hanczyk said he was hopeful the 6.6-megawatt capacity could be available in the second quarter of 2027, though the timing depends on BC Hydro.

Hanczyk said leasing interest was strong but declined to provide a projected yield before agreements are finalized. “It’s not a matter of if anymore, it’s a matter of when,” he said, adding that the REIT would disclose more when it had an agreement to announce. If data operations do not proceed, the units could be used for micro-industrial or storage purposes.

Under a profit-sharing agreement with its development partner, Studio Events Ltd., data revenue would first cover operating costs, after which Nexus would receive a prescribed return and remaining net operating profits would be split equally. Hanczyk said Nexus would finance and build the project, while Studio Events would hold a head lease and sublease to end users.

A second project in Kelowna, British Columbia, has an expected development cost of CAD 47.3 million and a minimum unlevered return target of 6%. It could also accommodate data infrastructure, though Hanczyk emphasized that Richmond is the current priority.

Financing and property sales

Chief Financial Officer Mike Rawle said Nexus issued CAD 300 million of three-and-a-half-year bonds at a 4.563% coupon during the quarter, using the proceeds to repay credit-facility borrowings. Its CAD 585 million credit facility was left virtually undrawn, he said. Rawle expects the financing to reduce borrowing costs and said the REIT expects to fund most of the data strategy from operating cash flow.

Nexus also completed an CAD 11.25 million sale of a Red Deer, Alberta, building and sold surplus land in Blackfalds, Alberta, for CAD 2.5 million after quarter-end. It has agreements to sell an Edmonton building for approximately CAD 12 million and a Calgary cross-dock facility for CAD 12.5 million, with closings scheduled for November and December, respectively.

About Nexus Industrial REIT (TSE:NXR.UN)

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 87 properties comprising approximately 12.3 million square feet of gross leasable area. The REIT has approximately 97,097,000 voting units issued and outstanding, including approximately 73,490,000 REIT Units and approximately 23,607,000 Class B LP Units of subsidiary limited partnerships of Nexus, which are convertible to REIT Units on a one-to-one basis.

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