Assessing the Investment Safety of Nexus Industrial REIT’s 8.9% Yield in a Shifting Market

For income-focused investors, Nexus Industrial REIT’s (NXR-UN.TO) 8.9% yield is a siren call in a market where traditional fixed-income assets struggle to compete. However, the safety of this high yield hinges on two critical factors: dividend sustainability and technical performance in a shifting economic landscape.

Dividend Sustainability: A Tale of Two Metrics

Nexus Industrial REIT’s dividend coverage appears mixed at first glance. According to a report by SimplyWall St [2], the REIT’s payout ratio based on earnings stands at 65%, suggesting dividends are reasonably supported by profits. This aligns with the Q2 2025 earnings call, where normalized FFO per unit rose 6% to $0.188/unit [5], a metric the REIT uses to calculate its Normalized AFFO payout ratio of 100.3% [4]. This indicates distributions are fully covered by normalized earnings—a positive sign for stability.

Yet, the picture darkens when examining cash flow metrics. Data from GuruFocus [3] reveals a cash payout ratio of 225.5%, meaning the REIT’s dividend exceeds its operating cash flow by over 200%. This discrepancy highlights a critical risk: while earnings (adjusted for non-cash items) support the payout, actual cash flow struggles to cover the dividend. This divergence is not uncommon in REITs, but it raises questions about the REIT’s reliance on accounting adjustments to justify its yield.

The Q2 2025 results further complicate the narrative. Despite a 2.8% growth in industrial same-property NOI and a 5.6% increase in normalized FFO per unit [4], the REIT reported a net loss of $7.6 million due to fair value losses [1]. This underscores the fragility of earnings-based metrics in the face of market volatility.

Technical Performance: Strategic Shifts and Market Headwinds

Nexus Industrial REIT’s transition to a pure-play industrial REIT has yielded mixed results. The company’s strategic sale of 33 non-core properties [3] has streamlined its portfolio, but this also signals a shift away from diversification—a double-edged sword in a sector sensitive to supply chain dynamics. While industrial demand remains robust (driven by e-commerce growth), rising interest rates and inflationary pressures could strain financing costs for development projects.

The REIT’s free cash flow of C$0.77 per share in Q2 2025 [4] is modest but positive, yet it barely outpaces the $0.05333 monthly dividend [1]. This tight margin leaves little room for error if cash flow dips due to rising interest rates or leasing challenges. Management’s guidance for mid-single-digit same-property NOI growth [4] is optimistic but may prove difficult to sustain in a tightening credit environment.

Balancing Risk and Reward

The 8.9% yield is undeniably attractive, but investors must weigh it against the REIT’s cash flow limitations and reliance on normalized metrics. For context, a payout ratio exceeding 100% on cash flow is generally a red flag for REITs, as it signals a higher risk of dividend cuts [3]. Nexus Industrial REIT’s 225.5% ratio is far beyond this threshold, suggesting the dividend is more of a bet on future earnings growth than a sustainable payout.

However, the REIT’s aggressive capital recycling and development pipeline [4] offer a counterpoint. By converting non-core assets into high-yield industrial properties, management aims to boost long-term value. This strategy could pay off if industrial demand outpaces supply, but it also exposes the REIT to construction delays and cost overruns.

Conclusion: A High-Yield Gamble?

Nexus Industrial REIT’s 8.9% yield is a compelling proposition for risk-tolerant investors seeking income in a low-rate environment. The REIT’s earnings-based payout ratio and normalized AFFO coverage provide a veneer of stability, but the cash flow shortfall and recent net loss [1] cannot be ignored.

For now, the REIT’s dividend appears supported by accounting adjustments rather than robust cash flow, a distinction that could widen in a downturn. Investors should monitor upcoming quarterly reports for signs of cash flow improvement and assess whether management’s capital recycling strategy can offset industrial sector risks. In a shifting market, Nexus Industrial REIT’s yield is a high-stakes bet—one that demands close scrutiny of both the numbers and the broader economic backdrop.

Source:
[1] Nexus Industrial REIT Announces Second Quarter 2025 Financial Results [https://www.globenewswire.com/news-release/2025/08/11/3131354/0/en/Nexus-Industrial-REIT-Announces-Second-Quarter-2025-Financial-Results.html]
[2] Nexus Industrial REIT (TSX:NXR.UN) Dividend Yield, ... [https://simplywall.st/stocks/ca/real-estate/tsx-nxr.un/nexus-industrial-reit-shares/dividend]
[3] Nexus Industrial REIT (TSX:NXR.UN) Dividend Payout Ratio [https://www.gurufocus.com/term/payout/TSX:NXR.UN]
[4] Nexus Industrial REIT Announces Second Quarter 2025 Financial Results [https://www.barchart.com/story/news/34059078/nexus-industrial-reit-announces-second-quarter-2025-financial-results]
[5] NEXUS INDUSTRIAL REIT (NXR-UN.TO) Q2 FY2025 Earnings Call [https://finance.yahoo.com/quote/NXR-UN.TO/earnings/NXR-UN.TO-Q2-2025-earnings_call-333125.html]