Nexus Industrial REIT (OTC:EFRTF) Q1 2024 Earnings Conference Call May 15, 2024 10:00 AM ET
Company Participants
Kelly Hanczyk – Chief Executive Officer
Michael Rawle – Chief Financial Officer
Conference Call Participants
Michael Markidis – BMO Capital Markets
Brad Sturges – Raymond James
Sam Damiani – TD Cowen
Kyle Stanley – Desjardins
Himanshu Gupta – Scotiabank
Anthony Bogdan – National Bank Financial
Jimmy Shan – RBC Capital Markets
David Chrystal – Echelon Capital Markets
Sumayya Syed – CIBC
Operator
Thank you for standing by. This is the conference operator. Welcome to the Nexus Industrial REIT First Quarter 2024 Results Conference Call. As a reminder, all participants are in the 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 Mr. Kelly Hanczyk, Chief Executive Officer. Please go ahead.
Kelly Hanczyk
I’d like to welcome everyone to the 2024 first 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 regarding forward-looking information and for other information about non-GAAP measures.
In the first quarter, we continued to pursue our strategy as a Canada-focused pure-play industrial REIT. We made great progress at our development projects, which will soon transition from cash-out to cash-in as construction is completed and tenants move in.
As we expected, this quarter was impacted by temporary vacancies at two of our properties, which was largely due to tenants transitioning to larger spaces within our portfolio, which I will explain in a moment. But while it resulted in a challenging quarter, we will benefit from it in the longer term.
We’re also starting to see the positive impact of our acquisitions. Properties that we acquired over the past 12 months contributed $4.4 million to our net operating income in the quarter and were the primary reason why our net operating income grew 15% to $29.5 million year-over-year.
Our industrial same-property net operating income was $21.5 million in the quarter, which about $200,000 increase from a year ago. Rental steps contributed to $700,000 of growth. But much of this was neutralized by $500,000 of industrial vacancies that we saw coming.
We realized these vacancies at two properties. The first property was our 29,000-square foot specialty cross-dock building and associated excess land located at 102 Second Avenue in Southeast Calgary.
Our tenant outgrew the location and moved to another building of ours, a newly acquired 83,000-square foot facility at High Plains Drive in Rocky View, Northeast of Calgary. This left the property vacant for the part of the quarter. However, we have leased this space to a new tenant for the building portion effective August 1st.
And since the excess land is well located and is not required by the new tenant, we have an opportunity to construct a new 115,000-square foot small bay industrial building on the property, a highly desirable build in this location. At market rates, this will return approximately a 12% yield on a $15 million investment, which we expect to complete in early 2025. Combined, this will bring us ahead of where we were with the Canada Cartage as a sole tenant.
The second property was our 220,000-square foot Exeter Road building, multi-tenant property in London, Ontario. During the quarter, one of our tenants vacated to upsize from their 44,000-square foot space to a 70,000-square foot space in another one of our buildings at a significant rental lift.
At the same time, we had a second tenant vacate from a challenging office portion of space adjacent to this, leaving us with a total of 68,000 square feet vacant. We’re currently in the final negotiations with a new tenant for the full 68,000 square feet with significant rental lift for occupancy expected to be in August.
It is a testament to the strength of our portfolio that when our tenants looked upsize, they look to do so with us. Similarly, I’m impressed at how quickly and profitably we have been able to backfill the space. So while we face challenges in the quarter, the headwinds will indeed be temporary. And I expect it will lead to favorable upcome overall.
On a full year basis, I expect that the actions we have taken and the positive benefit of embedded rent escalation will drive mid-single-digit same-property NOI growth in our industrial portfolio. Looking beyond 2024, I continue to expect to earn a healthy rent lift on renewals due to the industrial market rents that are, on average, 25% above in-place rents and from rent escalation embedded into our lease contracts.
Turning to our development projects. This quarter, we made good progress at our four industrial projects. These developments are scheduled for completion throughout the year. And it will add incremental annual stabilized NOI of approximately $10.3 million combined.
We have completed construction at our Park Street intensification project in Regina. On April 1st, the primary tenant took occupancy of 200,000 square feet. And we are marketing the remaining 109,000 square feet. This project will contribute a yield of about 7.5% and total development costs of $48 million. We’re very hopeful that the existing tenant is going to expand into the 109,000 square feet. And we should know relatively soon on this.
We’ve also made excellent progress at our Hubrey Road development in London, Ontario. Construction has progressed ahead of schedule. And we have it leased to an existing tenant from within the REIT’s portfolio effective July 1st, when it is expected to be complete. This is becoming a major tenant within the REIT’s portfolio.
The project will contribute a yield of over 8% in the first year with significant yearly rental steps thereafter. The project also reinforces our leadership position in the highly desirable London market, which continues to be one of the tightest industrial markets in Canada.
Construction is progressing ahead of schedule at our 116,000-square foot Glover Road development in Hamilton. The walls are up, the flooring has been poured and is on track to be ready for a tenant in July. This property has industry-leading 40-foot clear height and is expected to be LEED-certified. We own 80% of this property. And we’re hopeful that we’ll see positive leasing action on this space now that it’s nearing completion.
I also have good news from our 240,000-square foot Dennis Road project in St. Thomas, Ontario. Development costs are coming in about 10% below budget at roughly $45 million. We’re currently laying the foundation and expect the project to be completed on time in the late fourth quarter of this year.
Expansion is from an existing tenant. And we earn a development fee during construction to eliminate any cash flow drag. Upon completion, the tenant will pay a contractual rent equal to a 9% yield.
In Richmond, BC, the newly constructed Belvedere Club is ready to receive final city approvals. I expect the tenant will take occupancy very shortly. We are currently working on start date details with the tenant. I’m very pleased with the outcome. I expect this property to be a strong contributor to our results for years to come.
Compared to last quarter, we experienced lower normalized AFFO and, consequently, an elevated payout ratio in the quarter. This was mostly due to our stronger net operating income being overshadowed by higher interest rate expense.
This temporary circumstance will normalize as the development projects come online over the coming quarters and our vacant space begins to cash flow. Our payout ratio has peaked. And I’m confident this will improve to a more sustainable level for the balance of the year.
At March 31st, 2024, our NAV per unit was $13.09, a $0.96 per unit increase from a year ago. Our weighted average cap rate increased by 12 basis points to 5.84% in the quarter compared to 5.62% a year ago. The fair value of our investment properties increased by $15.2 million in the quarter, driven by gains of $9.4 million at our development properties as construction progressed and $5.7 million resulting from an increase in stabilized rent at our income-producing properties.
We have built a strong institutional quality asset base. And our focus is now to trim the few properties that no longer fit into our long-term strategy. These include our legacy retail and office assets, including our seven Old Montreal office buildings as well as some non-core industrial buildings.
Selling these assets has two significant benefits. It will increase the percentage of our portfolio allocated to industrial assets. And it will delever our balance sheet. We expect to complete these sales in the second half of this year and to generate approximately $200 million in proceeds.
We continue to advance our strategy as a Canada-focused pure-play industrial REIT. In the remainder of the year, we will benefit from the industrial same-property NOI growth from selling the vacancies. We will begin to reap the benefit from our four new development projects. And we will further focus our portfolio and delever our balance sheet through strategic dispositions.
I’ll now turn the call over to Mike to give some more color on our financials.
Michael Rawle
Thank you, Kelly. Good morning, everyone. Starting with headline earnings in the quarter. Net income was $43.7 million, a $40 million increase compared to a net income of $3.7 million last year.
The increase was primarily due to a positive fair value adjustment on investment properties of $15.2 million in the quarter compared to a negative adjustment of $2.7 million in 2023. In addition, we recognized a $10.8 million fair value gain on Class B LP units and a $7.5 million unrealized gain on derivative hedges in the quarter due to higher mid-term interest rates.
As Kelly mentioned, our net operating income increased 15% or $3.8 million year-over-year to $29.5 million. Of this amount, new acquisitions accounted for $4.4 million, partially offset by $0.7 million relating to asset dispositions made since Q1 2023 and a reduction in same-property NOI of $0.4 million due to the vacancies that Kelly discussed earlier.
Normalized AFFO for the period was $0.134 per unit, a decline of $0.025 from a year ago as the benefit from higher per unit net operating income was more than offset by higher interest expense per unit.
Total general and administrative expense for the quarter was $2.4 million, which was flat on a year-over-year basis. Net interest expense in the quarter was $13.2 million, a $5.1 million increase from the same period last year. The increase was primarily due to a higher outstanding average debt balance resulting from borrowings to fund acquisitions and development expenses.
I’m pleased to share that earlier this month, we added a further $100 million of five-year pay fixed, receive floating core interest rate swaps at a blended rate of 3.44% to hedge our outstanding debt. These swaps are cancelable at the counterparty’s option after one year. After adjusting for the applicable credit spread, this will reduce our all-in interest rates on our drawings by approximately 160 basis points.
I’ll now turn the call back to Kelly.
Kelly Hanczyk
Thanks, Mike. We will open up the call for any questions.
Question-and-Answer Session
Operator
Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mike Markidis from BMO. Please go ahead.
Michael Markidis
Thank you, operator. Good morning, Mike and Kelly. Just starting off with the — congrats on getting the new Canada Cartage facility on the books. It looks like a really nice building. I think you mentioned it was a 7% cap rate. Can you just provide us some incremental color with respect to the term of the lease and the contractual rent growth in there, please?
Kelly Hanczyk
Yes. Off my head, I believe it has 2.5% contractual rental rate increases on that one.
Michael Rawle
That sounds about right, yes.
Kelly Hanczyk
Yes.
Michael Markidis
And just the term of the lease?
Kelly Hanczyk
10-year.
Michael Markidis
Okay. Great. Thanks. Also really good news on getting 102, the existing building, backfilled. It sounds like that’s coming in on August 1st. Do you have the rate offhand in which that was backfilled at?
Kelly Hanczyk
Yes. It was about, I believe, it’s $19 a foot. Let me just — I want to clarify that a little bit. So when Canada Cartage was in there, there were two kind of rent structures there. There was the existing rent on the building and then the existing rent on the land. So that’s what combined with the income on that site. So we backfilled the building portion at $19 versus, I think, they were paying $23 on that space. But the $19 ramps up pretty quickly. And then that leaves the land portion, which we’re going to build the building on because that’s — the small bay is very much in demand in that area and leases up pretty quickly. So to get back to a whole and greater, which we will at the end of the day, we will be building that building, which will take us greater combined income on that site than when it was just Canada Cartage. So I hope that kind of clarifies it.
Michael Markidis
Yes. No, that does. And then $19, it sounds really high. What is it about that building that allows such a strong rent? Because I mean, I guess, there was a little —
Kelly Hanczyk
It’s not that high. Yes, cross-dock facilities are always higher than normal industrial rents.
Michael Markidis
Got it. Okay. Thanks for that. Okay, I guess, just sounds like you —
Michael Rawle
I’ll add more color. Just a little bit more color, the $19 that Kelly quoted goes up to $24 by 2031, so we have embedded rental steps there.
Michael Markidis
Great. Okay. No, that sounds great. Thank you. Just with respect — so I guess, you got on Exeter and the 102 Avenue property, you got backfill, that helps you out. Just in terms of thinking about the same property for the industrial portfolio you’re thinking about, where are sort of the other drivers of the increase that you expect to see over the back half of this year? Is there anything that sticks out in particular? Or is it just weighted average contractual rent increases? Was there any big leasing successes? Just trying to get a picture of what the driver is.
Michael Rawle
Yes, that’s number one. Plus we have coming, we have about 500,000 remaining of leases to come — that come up this year, which are well on the way of being renewed. But we expect some significant rental lift as those are finalized.
Michael Markidis
Okay, perfect. Last one for me, just see the notable increase in your asset held for sale balance, which is a good new sign. So I guess, sticking with the disposition target, I guess, there will be some more that you’ll start to market as well. Kelly, what should we be thinking about in terms of the disposition yield on the gross — the $200 million of gross proceeds that you expect to close on?
Kelly Hanczyk
It would probably be, I mean, they’re different. So the — we’ve got the Montreal office, which would be a lower-yielding, the Montreal, Old Montreal portfolio, which would be a lower yield, probably in the 6% or even sub 6% range. The three Montreal office buildings that we’re talking about, when we had them under contract, the suburban office, sorry, had them under contract, they dropped out. We now have one of them under contract. And it actually will be a quick close. And hopefully, this buyer buys another one, leaving us with one left. So those would be in a higher cap rate, probably in the 9s, in that range. And then there would be the retail portfolio, which we’re working our way through here, that would probably be in and around the 7% range on that, I believe, and then would be our, call it, non-core industrial that I believe is right around that 7% range, so somewhere right around there.
Michael Markidis
Okay. So blending it all together, if I just look at those numbers, 7%, 7%, 9%, 6%, somewhere in the 7% range all-in-all?
Kelly Hanczyk
Yes, I would say, yes, the Old Montreal brings it down and the retail and the office is smaller, so, yes, would be right around that 7%.
Michael Markidis
Okay. That’s wonderful. I’ll turn it back. Thanks so much.
Kelly Hanczyk
Thanks.
Operator
Thank you. The next question is from the line of Brad Sturges from Raymond James. Please go ahead
Brad Sturges
Hey, good morning. Just to follow on Mike’s line of questions there, just in terms of maybe thinking through the timing of some of the transactions you’re working on right now, I think on the office deals you were working on, you were thinking or had some optimism around maybe in the early to mid-summer in terms of getting some deals announced. I’m just curious if that’s still the rough timeline you’re working towards right now.
Kelly Hanczyk
Yes. So the Old Montreal portfolio is under contract. I think there’s a due diligence waiver date of mid to beginning of June with a scheduled closing, I believe, in July. And then the other single that asset we have, the suburban office one, I believe that will close in end of June, I believe, could be even earlier. So that’s scheduled for that. The retail is going to be later in the year by the time we work our way through that whole thing. And then the non-core industrial that we’re talking about, if all goes well with the buyer and it seems to be going well, they’re just looking for — throughout their own portfolio of selling some things to get the liquidity required to purchase it, but that’s kind of right now scheduled for in August, close date on that.
Brad Sturges
Okay. That helps. Maybe switching back to leasing front on Exeter, I know you’re trying to finalize terms of lease there. I wonder if you could give a rough sense of what that uplift on rents could be when you combine, I guess, the industrial and the office space together.
Kelly Hanczyk
Yes, I believe, combined, those probably blend to $6.50 range I think. $6.50, $7 range. And the new rate we’re talking about for that space is $10.
Brad Sturges
$10, okay. And my last —
Kelly Hanczyk
I was going to say I hope to have that completed today.
Brad Sturges
Okay. Very final stages then. Just on the guidance then, I guess, last quarter, you were guiding for mid-to-high single-digit organic growth. And that’s, I guess, now in the mid-single-digits. Is that just related to the Exeter transitional vacancy? Or what would be driving the adjustment on the same-property NOI guidance?
Michael Rawle
Yes, this is just to be a little, just to highlight, I guess, the current — the new one is for industrial. And before, we were talking total business. And given the timing of the sales, we felt it was — we have a little more — we have more confidence in predicting the industrial same property because of the impact of the sales in the office and retail portfolio.
Brad Sturges
So just on the industrial basis, would there be much of a change then or was it?
Michael Rawle
No.
Brad Sturges
Okay, perfect.
Michael Rawle
No. We gave the range before because the range really depend was driven by the timing of the sales and given [indiscernible] industrial.
Kelly Hanczyk
And I’ll clarify a little bit more, too, is when we were looking at our building in London on Robins Hill Road, we have a tenant that we were trying to early renew and it was looking good. As you remember, they’re sitting at $4 and change. And it’s in a $12 to $13 market for that building. So I’ve been working with their local people to have kind of an early extended blend and it was looking very good. And I’m not sure it’s going to happen. And we may have to wait until the lease expires, just it’s a US-owned company that moves very slowly. So I’ve kind of backed that out of our forecast for now.
Brad Sturges
Sorry. When is that lease expiry then?
Kelly Hanczyk
That’s the end of next year.
Brad Sturges
End of next year, okay. Okay, that’s helpful. I’ll turn it back.
Kelly Hanczyk
Okay, thanks.
Operator
The next question is from the line of Sam Damiani from TD Cowen. Please go ahead
Sam Damiani
Thanks. Good morning, everyone. First question, just to continue on the disposition line of questioning earlier, I believe last quarter, Kelly, you had mentioned an 8% targeted overall cap rate on those dispositions. And now it sounds like you’re targeting closer to 7%. I just wanted to clarify if that’s the case. And if so, I guess, what changed between then and now?
Kelly Hanczyk
Yes. It’s kind of I guess the moving target. The retail, we haven’t really fixed on yet. So it’s hard for me to judge where that pricing is going to come in. I know where we are on the Old Montreal. And I know where we’re going to be on the suburban office. So the Old Montreal is like 6%, sub 6% and the suburban office can be around the 9.5% to 9.75%, probably 10%. So those combined blend downwards. And the moving target will be the retail because I know where I’m going to be on the industrial non-core, call it, as we have that under contract. So it’s just where that retail portion will pan out to.
Sam Damiani
And just on the retail, Kelly, like is there — are you purposely sort of pushing that transaction back? Or where does that part of it stand right now? What’s the status on that listing?
Kelly Hanczyk
Yes. So it’s a little harder. So I’ve put them into two tranches now. So I have the retail portfolio and then we’ve removed out Les Halles d’Anjou, which is a different one. And I think if you remember, at Les Halles, we are in the throes of selling some additional land there. So we’re waiting for the developer to have his final approval from the city, which is currently fairly imminent. And once that happens, we get the first tranche of cash from that, which I believe is around $9 million at our interest. So it was difficult to put together a package while this was outstanding and up in the air. So we are looking at just the one portion of the retail portfolio. And then when we have d’Anjou figured out in that land portion, and we’ve received it, we’ll package that one separately. So there’s two bases. So we’ll work with our existing partner to perhaps take out our position. Or if not, then we will go out to market with that abridged portfolio less d’Anjou at the start and then we’d look at d’Anjou towards the end of the year.
Sam Damiani
Got it. Makes sense. And just on the Kelowna acquisition, what was the background on that? And are you — do you expect to make any more acquisitions this year?
Kelly Hanczyk
Yes. No, that’s one we had worked on, we had a PSA from a while ago. There could be one more acquisition as we are in due diligence on one on a unit deal basis, which at favorable unit price to the current trading price, very favorable. So after that, I don’t think you’ll see us making any more acquisitions. It will be focused on paring down the portfolio and continuing to, I guess, the high grade and what we’ve been doing over the last several years. So really focused on the balance of the year of getting out the retail and office portions, and so we’re not really actively looking at any more acquisitions.
Sam Damiani
Got it. Okay. And just last one for me, the London development yield went down, I think, to 8% from 10%, if I’m not mistaken. I’m just wondering if you could shed some light into what happened there.
Kelly Hanczyk
Yes. It was just that we originally we’re targeting like $14 a foot. And with this tenant, we put them in at $12 a foot, which is good, and we have $1 rental rate a year increases for the first three years and then a contractual percentage, I believe it’s 3.5%, a year after that. So existing tenant within our portfolio, existing expanding tenant, so they’re the tenant that we have at Wilton Grove Road, so very important tenant to us, very big, growing tenant in Southwestern Ontario. So we ramped up the rent as we went along versus — to give them a break to expand into our space.
Sam Damiani
Okay. So just the initial yield, okay.
Kelly Hanczyk
Yes, exactly.
Sam Damiani
Good. Thank you. Thank you. That’s it for me.
Operator
Thank you. The next question is from the line of Kyle Stanley from Desjardins. Please go ahead.
Kyle Stanley
Thanks. Good morning, guys.
Kelly Hanczyk
Good morning.
Kyle Stanley
So you’ve given a lot of good color on kind of the moving pieces on some of the vacancies. Just curious, at this point, is there anything else that you’re seeing over the next year or two, where you might expect to get those space back?
Kelly Hanczyk
So we have about, for 2024, I think it was 850,000 square feet of expiries. We’ve renewed about 310,000 right now at about a 19% growth rate in the industrial portfolio. We do — we have another 250,000 in Chatham that we know we’re fully expecting to renew. They’re just in discussions on the final rate. So that’s a fairly significant amount. So that’s about 65% would be taken care of by the end of May. We have a pretty good bead on another, I don’t quote the number, but another significant amount that is signaled that they’re renewing. We do have some that will vacate, probably about 120,000 square feet. But in some of them, they’re in pretty good locations that we have seen. We have some time on the renewals here or to backfill the space. So I think it’s in Regina, in one of our buildings in Regina and in Nisku, Alberta, which is actually a pretty hot market right now. So we think we’ll be able to backfill them in due time. So not too challenging from the 2024 market. And then in 2025, we’ve already renewed 45% of what was expiring that year with Westcan being one, an early renewal, and Chrysler being another one. And we have a pretty good bead on the other ones that are expiring. So 2025 looks pretty good as well as we’re already pretty well ahead of the game there.
Kyle Stanley
Okay, great. No, that’s very helpful. Obviously, you also gave a lot of good color on lease-up of your development assets. Just curious, so I think you’ve got Hubrey coming online July 1. You’ve got Regina effective April 1st. Is there any free rent with that? Or is that income-producing right away?
Kelly Hanczyk
Those both are income-producing right away.
Kyle Stanley
Okay, perfect.
Kelly Hanczyk
We’re hopeful that — we’re hopeful in Regina that — we’ll see, but we’ve been working closely with the existing tenant. He’s bursting at the seams there. We went and saw it a couple of weeks ago, and they are packed and they need the additional space. And they’re just trying to get approval for it. So if that was — in a perfect world, that would be the perfect scenario.
Kyle Stanley
Right, yes. That would be the easiest course for sure. Okay. Moving to Savage Road, you made the comment that occupancy should be imminent. Last quarter, I think you’d highlighted maybe gradually ramping the rent. Just curious if you can talk about that, I mean, I think you mentioned you’re kind of working through that and optimistic about the outcome. But just maybe elaborate a little bit more, especially for how we kind of bring the income trajectory online.
Kelly Hanczyk
Yes, I think from a — if I look at it, it’s probably equates from a pure base rent, it’s going to be somewhere around $100,000 a month additional income that will come online from that. I’m just negotiating right now where that start date. So it could be — it will be this quarter, it could be even partially through the last quarter. So there could be a little back catch-up to do, so in part and parcel with me negotiating a reduced rate to let them ramp up and go. So it’s a little moving piece right now, but we’re almost there.
Kyle Stanley
Okay, perfect. And one last one, more technical. I did notice there was the reclassification of your Class B this quarter to the current liability section of the balance sheet from noncurrent. I’m just curious, is there anything to read into there? Or is that something more normal course?
Michael Rawle
No, that’s fully due — no change at all in any of the — from our perspective, the structure of the units. What drove it was IAS 1 came effective January 1st. So it’s just an accounting pronouncement or accounting guidance that came out January 1st, became effective January 1st. And that gave a little more guidance on how to classify equity or equity-like debt. And given that the Class B units, all of these — some of the Class B units are already convertible into equity, we have to carry them as short-term equity. But if they are not convertible within the next 12 months, then they’re carried as longer-term debt or longer-term liabilities. So it’s just an IAS announcement that came — pronouncement became effective January 1st.
Kyle Stanley
Okay, perfect. That clears it up. Thank you very much. I’ll turn it back.
Operator
Thank you. The next question is from the line of Himanshu Gupta from Scotiabank. Please go ahead.
Himanshu Gupta
Thank you and good morning. So just on lease expiries, and thanks, Kelly, for providing some color there, so it looks like 120,000 square feet is expected to come back. Can you tell like when are we expecting that space back? And what could be the NOI impact associated with that?
Kelly Hanczyk
I don’t have the NOI impact here, Himanshu. I’ll have to get back to you on that. I believe they’re later in the year, in the third and fourth quarter. Two of them are in our Titan Business Park, when we just completed the new space. So it’s two of those existing tenants in the older building. And then I’m looking here, it’s really, it’s 120,000, the other one, two are in Edmonton, one in Edmonton and one in that. And so I believe towards the end of the year. But I’ll have to get back to you on the rate and the vacate date. But it’s given us enough time, we know, so it’s given us quite a bit of time to market them.
Himanshu Gupta
Got it. So just to clarify, both the vacancies are in Regina and Edmonton, so that’s pretty much four.
Kelly Hanczyk
Yes, there’s four, two in Regina, two in Edmonton.
Himanshu Gupta
Okay, fantastic. And then the other one that you mentioned, 250,000 square feet, you said that’s pretty much a done deal. Any sense like what kind of rental spreads are we doing on that?
Kelly Hanczyk
I have to wait and see what the final rate is on that, but it will be greater than the exiting rate.
Himanshu Gupta
Got it. Okay. Fair enough. And then thanks for the color on the same property for this year. Any thoughts into 2025, next year?
Kelly Hanczyk
2025 should be pretty good. If we classify HCL Logistics in Robins Hill Road, when they’re sitting at $4 and change and we’re talking about a $12 to $13, $14 renewal, that alone is 260,000 square feet. So it will be — that one will be pretty big. But overall, I don’t have that guidance yet.
Himanshu Gupta
Fair enough, yes. So we could expect some kind of acceleration from 2024, given that some of these vacancies would be backfilled as well.
Kelly Hanczyk
Yes. Where it looks is we dropped throughout this year, next year at ’25 looks good, ’26 is spectacular. So the ’25 and ’26 are pretty strong go-forwards from a cash flow basis.
Himanshu Gupta
Awesome. Okay. And then on the core development projects, so Glover Road, Hamilton is the only one which is not leased up yet. Any thoughts there? How is the response there on that asset?
Kelly Hanczyk
It’s been pretty good. I mean, it’s a good asset. The market has slowed a little bit. So — and I found that like even look at our Hubrey, we thought we’d have that leased way before. And now that it’s literally nearing completion, we had someone step up and take it right away. So I’m hoping as — the Hamilton one was supposed to be done in November. But with no snow this winter, they’re completing in July. So as it comes closer and closer to the final product, I hope to see some pickup on the leasing there. We’ve kind of targeted and budgeted in our model a November 1 start date to give us time. So if we can beat that, it’s even better. So that’s kind of how we’re looking at it right now.
Himanshu Gupta
That’s good to hear. And then on dispositions and I know a lot of questions have been asked regarding that, just to clarify, that includes Montreal office, Sandalwood and non-core industrial but does not include Richmond, right? I mean, that’s still not on sale?
Kelly Hanczyk
That’s right.
Himanshu Gupta
Got it. And then what is the — sorry, go ahead, Kelly.
Kelly Hanczyk
No, I just said there could be little spatterings as we do get interest coming up on other ones that we would look at. I’ll give you an example. And so in Montreal, we linked a deal with someone where I think our ex, we moved a tenant from one of our properties to another one. And it left about a 25,000-square foot vacancy effective March. And then I think it’s May 15, we’ve signed a new deal at $16. And that tenant, in about a year’s time, we’ve agreed on a purchase price to take half of the building from us at our carrying value, which has carried a pretty low cap rates. So — and then I believe that tenant wants to expand into the balance of the building at the same rental rate, where I think we probably are sitting an $8 rent. So that one will pop up as we go. And as we look through the portfolio, we get a lot of interest on kind of smaller properties at Westcan, and we may pick them off one-by-one as we go throughout the year as well.
Himanshu Gupta
Right, okay. And my question — follow-up question was on the non-core industrial properties for sale. Can you quantify how much is non-core industrial out of this $200 million? And how do you define that? I mean, is it like Edmonton? Is it Regina? Or is it anything in Ontario as well?
Kelly Hanczyk
No, no. That non-core industrial that we’re talking about right now is about $81 million of that $200 million and ultimately, it’s the Westcan portfolio. So we are working with someone. It’s a good portfolio from us from a cash flow. But we like the purchase price. And if they can get the equity required, I believe that will close, and that will free up that cash to do more of the properties that we’re currently doing, whether it’s for development and develop newer — new-generation, LEED-certified warehouse — modern warehouse versus the old truck terminals that we have in that portfolio. So it’s just an evolution of the portfolio.
Himanshu Gupta
Got it. Okay. Thanks for clarifying that. And the proceeds which come from disposition will be used first towards the development and then some for debt paydown as well?
Kelly Hanczyk
Yes, both, yes.
Himanshu Gupta
Okay, okay, okay. Fair enough. And just last question, the variable debt exposure, it looks like you did $100 million of swaps in the first quarter. So your variable rate exposure is pretty much taken care of. Is it fair to say that?
Michael Rawle
Yes. Well, we still have some variable debt outstanding. But that’s — I think we had about $130 million outstanding at the end of the year and at the end of the quarter, and we swapped $100 million of that.
Himanshu Gupta
Got it. Okay. Thank you guys. I’ll turn it back.
Operator
Thank you. The next question is from the line of Anthony Bogdan from National Bank Financial. Please go ahead.
Anthony Bogdan
Thanks, operator. Good morning. Just quickly, you mentioned that development costs were coming in 10% below budget in St. Thomas. Is this a broader trend in construction or more property-specific?
Kelly Hanczyk
I would say it is a broader trend in construction. Lumber has gone down. I think overall, prices have stabilized and dropping a little bit.
Anthony Bogdan
Okay. And are you considering starting any new developments in the near term?
Kelly Hanczyk
No, not right now. So I would say the only way I would do one right now is if we had a tenant in our pocket that came to us with an expansion. At the end of the day, we have Wilton Grove Road, where Drexel is. And that just had a 155,000, 160,000-square foot expansion when we purchased it put on. And we have the one that they just took. We could add 100,000 more to the one at Hubrey that they just took. So that’s available to us if they came to us. And the one in Wilton Grove, we could easily add another 150,000, maybe 200,000, possibly 250,000 that if they came to us with a deal. So unless we had a tenant in hand, we wouldn’t go forward. So other than the Canada Cartage former site, where we have that 6 acres of land now attached there, we’re not looking to do anything right now.
Anthony Bogdan
Great. So nothing on spec.
Kelly Hanczyk
No.
Anthony Bogdan
So at the Richmond site, you’re still waiting last mile for the occupancy permits. Is the tenant ready to go, they can start up operations the next day? Or is there going to be a little bit of a lag there?
Kelly Hanczyk
It’s going fast and ready to go.
Anthony Bogdan
That’s good. And then my last question, you have mid-single-digit same-property NOI growth in the industrial portfolio. How does that blend out on an overall portfolio basis? And if you could just comment on, sorry, if you could just comment on the industrial target, does that factor in the $80 million in dispositions or like how would that change depending on the sales?
Michael Rawle
So the blended rate really depends on the timing of dispositions for the rest of the portfolio. So, yes, it’s hard to nail it down, depending on when the dispositions happen at the end of the year or earlier in the year. The overall blended rate includes — the mid-single-digit does not assume the sale of the non-core portfolio.
Anthony Bogdan
So if it were to be sold, I guess, maybe a little higher on the mid-single-digit range?
Michael Rawle
It will be slightly lower, slightly lower end of that range. I mean, it will still probably be — still be mid-single-digit, but maybe 1% or 2% lower.
Anthony Bogdan
Okay. Great. I’ll turn it back.
Operator
Thank you. The next question is from the line of Mike Markidis from BMO. Please go ahead.
Michael Markidis
Thanks, operator. Sorry to draw this out, guys. Just a couple of clarifications on my end while I have you. I guess, I missed a little bit, so Kelowna, you said in your press release, you closed during the quarter. But then it doesn’t show its closing during the quarter. So what’s the timing of the Kelowna acquisition?
Kelly Hanczyk
It’s scheduled — there was a little, I guess — it was supposed to be pulled out of the press release. But it’s scheduled to close today.
Michael Markidis
Got it. Okay. Got it. So it’s a Q2 acquisition. All right. And it just so happens to be the same dollar amount as Canada Cartage, $35 million?
Kelly Hanczyk
Yes.
Michael Markidis
Okay. And then can you remind me then, what was the yield on Canada Cartage? I said 7%, but I was referencing Kelowna. I just thought it was Kelowna and Calgary were mistakenly pointed.
Kelly Hanczyk
Yes, I believe the Cartage one was a 5.25%, I believe.
Michael Rawle
5.05% to 5.1%.
Kelly Hanczyk
5.1%, but clearly some management fee that goes in there, so it’s about a 5.2%, 5.25%.
Michael Markidis
Okay, got it. So Canada Cartage, $35 million. That’s in there, but that’s already in your quarter. But then we’ve got another one coming in now, Kelowna. Okay, perfect. All right, great. And then just going back to Savage, so good to hear that the occupancy permit is there. Just thinking about the ins and outs. So there’s a vendor rent obligation of $600,000 and some odd that gets added back to the quarter. And I know we keep talking about the ramp of the new NOI or new rent from when Belvedere Club opens. So what happens to that $600,000 and some odd?
Kelly Hanczyk
That swings from vendor obligation, I believe, to rent. So that’s all being kind of done part and parcel with this. So by next quarter, it will be much cleaner and easier to understand.
Michael Markidis
Okay. So the $100,000 a month is in addition to the vendor rental obligation?
Kelly Hanczyk
Yes.
Michael Markidis
It is? Okay, perfect. And then what — I know you’re giving them some time to ramp. So if we think about it, then when it starts, $100,000 this month plus the $600,000, we’re at about $1 million a quarter. So what’s the — once they get fully stabilized, what’s the thought process there in terms of the NOI?
Kelly Hanczyk
Yes, so I’m not yet finalized on it. But I believe I’m giving them a couple of years at the one rent and then it ramps up to, call it, in two years after that, another, I believe, like $1 million on there. So in four years — or three, four years — in two years, then it will ramp and then it will ramp again. So just let them get stabilized, no one expected a permit to take this long. And it’s actually mind-boggling to me. But I was out there in the city and that city is unbelievable, but — and as you can imagine, that’s a costly obligation. So I’m giving them the opportunity to ramp up and make the site successful.
Michael Markidis
Okay. No, that’s fair. So just — so the NOI impact will be about, once they start paying, $1 million-ish a quarter and the FFO impact will be about $300,000 a quarter as the $600,000 or some odd is already in FFO normalized?
Michael Rawle
Yes, that sounds about right. Yes, the $600,000 in there, so just giving incremental on top of that, yes.
Michael Markidis
Got it. Okay. And then last one for me, I promise, is just — so great news on that interest rate swap. Mike, is that going to be a pure interest P&L flow-through? Or is there an element of that, that’s being capitalized and therefore the impact is going to flow through?
Michael Rawle
To the extent that it’s still properties under development, some of it will be effectively capitalized. But that’s — as we’re finishing these properties off, most of the CapEx is being spent, so lower and lower portion being capitalized at this point.
Michael Markidis
Right. Okay. No, that makes sense. All right. Thanks. Sorry for drawing that out and I appreciate the clarification. So thanks.
Operator
Thank you. The next question is from the line of Jimmy Shan from RBC Capital Markets. Please go ahead.
Jimmy Shan
Hey, I just have one question. Having a tough time with all the various moving parts with expected Canada Cartage. So I’m hoping if you could just simplify for me between Canada Cartage and Exeter, what is the incremental NOI relative to Q1 that we should be adding once the tenants are — come online?
Kelly Hanczyk
Well, you would have, on Canada Cartage, once that tenant comes online, you have $19 times 29,000 square feet. So that would be that one. And —
Jimmy Shan
So that will be August?
Kelly Hanczyk
That begins August 1st. I think they have two months fixturing June, July to — for fixturing and then it commences August. And then the Exeter, if all goes well, I believe that’s an August start as well. And you would take — it’s $10 a foot on 68,000 square feet.
Jimmy Shan
Okay, perfect. Thank you. And sorry, I do have one more. You mentioned London being the tightest market in the country. I wondered if you could just comment generally on that market and sort of the sustainability of it remaining as tight as it is.
Kelly Hanczyk
I think it’s going to remain very tight. I don’t see anything in the fundamentals that are changing. I think the Volkswagen plant in St. Thomas that’s about to start is a very, very, very positive thing for that region. So I see that as a driver of the overall from the ancillary demand that’s going to be required just to service that plant. So at the end of the day, the net effect will be pretty big migration into that Southwestern Ontario node. And everything that we’ve seen so far, the market is still pretty good and there’s not much build going on. So fundamentally, it looks really sound.
Jimmy Shan
Thank you for that.
Operator
Thank you. The next question is from the line of David Chrystal from Echelon Capital Markets. Please go ahead.
David Chrystal
Hey, thanks. Good morning. A quick one for me, just some incremental color on the NOI outlook. The Canada Cartage space, does the land component come out of same-property NOI if that’s going to be a development site?
Michael Rawle
Yes, it does. Yes, we’ll take it out.
David Chrystal
Okay. And then the sports complex, the Savage Road, will the incremental $300,000 a quarter, that will be additional NOI for same-property NOI calculation?
Michael Rawle
It’s in — no, that would be inclusive in the mid-single-digit forecast.
David Chrystal
Okay, yes. But the incremental $300,000 would be additional NOI, so it would be factored into that mid-single-digit, okay.
Michael Rawle
Correct.
David Chrystal
Okay. Perfect. That’s it for me. Thanks.
Operator
Thank you. The next question is from the line of Sumayya Syed from CIBC. Please go ahead.
Sumayya Syed
Thanks. Good morning. Just wanted to touch on the payout ratio, given there are some moving pieces. Could you chart a path for how that payout tracks over the course of the year? And I think previously, you’re expecting normalization around the low to mid-90% range for the year. Does that comment still stand?
Kelly Hanczyk
Yes. No, I think so what you’ll see is probably next quarter, it drives back down to the — right around that 100% range. And then as the next two quarters come by, the third and fourth quarter, that continues to drop down. And it’s going to also be a little bit how the asset sales roll out here as well because that will affect it. But I would say, by the end of the year, it’s looking hopefully in and around the mid-90s and then it sets us up nicely for next year and the growth that we perceive for next year. So overall, this quarter, with the vacancies we had and where we know and what we’ve backfilled, that continues to drive down throughout the balance of the year.
Sumayya Syed
Okay, great. Thank you.
Operator
Thank you. [Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Kelly Hanczyk for closing comments.
Kelly Hanczyk
All right. I want to thank everyone for attending the call. Any questions, just please feel to reach out to Mike or myself and we’ll chat next quarter.
Operator
Thank you. This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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