Nexus Industrial's Dividend Pledge: A Delicate Balance Between Growth and Financial Risk

In the world of real estate investment trusts (REITs), the sustainability of dividends is a tightrope walk between aggressive growth and prudent fiscal discipline. For Nexus Industrial REIT (TSX:NXR.UN), the stakes are particularly high. The company's recent financial disclosures reveal a troubling disconnect between its dividend commitments and its operational cash flow, raising questions about its ability to maintain its payout amid rising leverage and a volatile economic environment.

The AFFO Payout Ratio: A Ticking Time Bomb

Nexus Industrial's 2023 normalized AFFO payout ratio of 100.1%, according to the Nexus Industrial 2024 results-a metric that measures the proportion of funds distributed to unitholders relative to available cash flow-signals a precarious position. This figure, which rose from 91.7% in 2022 (per the Nexus Industrial 2024 results), far exceeds the industry benchmark of 86.3% for Q1 2025 shown in the Commercial REIT results. While industrial REITs as a sector have historically maintained higher payout ratios due to robust demand for logistics infrastructure, as explained in a decoding REIT payout ratios guide, Nexus's trajectory is alarming. By Q2 2025, the REIT's normalized AFFO payout ratio had climbed to 100.3% for the quarter and 102.2% for the six months ended June 30, as reported in the Q2 2025 results, effectively distributing more in dividends than it generated in cash flow.

Such a strategy is not sustainable in the long term. A payout ratio above 100% implies that the REIT is relying on external financing or asset sales to fund its dividend, a practice that becomes increasingly risky during economic downturns or interest rate hikes. For context, a "safe" payout ratio for well-managed REITs typically falls between 70–80%, as discussed in Understanding REIT payout ratios. Nexus's current trajectory suggests it is operating on the edge of a cliff.

Operational Leverage: A Double-Edged Sword

Nexus's leverage metrics compound these concerns. As of Q2 2025, the REIT reported a Net Debt to Adjusted EBITDA ratio of 10.3 (reported in the Q2 2025 results), a marginal improvement from 10.9 in Q2 2024 but still significantly higher than the average net debt to EBITDA of 4.75. This level of debt amplifies the REIT's vulnerability to interest rate fluctuations and economic shocks. While industrial REITs generally maintain lower leverage than office or residential peers, according to an office vs. industrial comparison, Nexus's debt load is exceptional even within its sector.

The Debt Service Coverage Ratio (DSCR), a measure of a company's ability to meet its debt obligations, stands at 1.68 times (reported in the Q2 2025 results). While this exceeds the critical threshold of 1.0, it lags behind the REIT industry snapshot average DSCR of 4.1x, which reflects stronger debt servicing capacity across the broader REIT sector. For Nexus, this suggests a narrow margin of safety, particularly as interest rates remain elevated and refinancing risks loom.

Industry Context: Strengths and Vulnerabilities

Industrial REITs as a whole are enjoying a golden era. With 92% occupancy rates and 6.6% year-over-year rent growth (per the office vs. industrial comparison), the sector is buoyed by e-commerce demand and supply chain modernization. However, Nexus's financial structure diverges sharply from the industry norm. While peers benefit from low debt-to-asset ratios (33.5% industry-wide according to REIT statistics) and high unsecured debt proportions (80.6% as outlined in a measure REIT leverage guide), Nexus's reliance on secured financing and its elevated leverage ratios expose it to unique risks.

The REIT's strategic pivot to a "pure-play" industrial portfolio-achieved through the sale of 33 non-core properties and a $160 million credit facility expansion (described in the Q2 2025 results)-is a step in the right direction. Yet, these measures have not been sufficient to bring its leverage in line with industry standards. The recent $46 million net loss in Q3 2024, detailed in the earnings call transcript and driven by non-cash fair value adjustments, further underscores operational fragility.

The Path Forward: Mitigating Risk or Setting Up for Failure?

Nexus Industrial's management has signaled intent to reduce its payout ratio to the "low to mid 90% range" in 2024 (as noted in the Nexus Industrial 2024 results), a goal that appears unmet given the Q2 2025 figures. The REIT's focus on debt reduction through asset sales and portfolio optimization is commendable, but the pace of deleveraging must accelerate. Investors should scrutinize the Q3 2025 results, scheduled for November 13, via the Q3 2025 release to assess progress on this front.

For now, Nexus Industrial's dividend remains a high-stakes gamble. While its industrial portfolio benefits from favorable sector trends, the company's financial structure-marked by excessive payout ratios and leverage-poses a significant threat to long-term sustainability. In a market where liquidity and flexibility are paramount, Nexus's current trajectory suggests it is playing with fire.