Nexus Industrial REIT (NXR.UN): A Shift to Industrial Strength Amid Economic Crosscurrents

The industrial real estate sector has emerged as a cornerstone of resilience in an era of economic uncertainty, fueled by e-commerce growth, supply chain reorganization, and the enduring need for warehousing and logistics space. Nexus Industrial REIT (TSX: NXR.UN) has positioned itself at the forefront of this trend through a strategic pivot to a “pure-play industrial” model, shedding non-core assets and focusing on high-quality Canadian industrial properties. This transition, paired with robust financial metrics, may make NXR.UN a compelling opportunity for income-focused investors seeking stability and growth. Let's dissect the catalysts and risks.

The Transition to Pure-Play Industrial: A Strategic Masterstroke?

Nexus' decision to sell 15 legacy retail properties and one office building—once contributing 1% of its NOI—to focus exclusively on industrial assets has been a defining move. This shift has concentrated its portfolio in 90 industrial properties (99% of NOI), leveraging the strong fundamentals of Canadian industrial real estate. The 97% occupancy rate (up from 96% in 2024) underscores the sector's demand, while the weighted-average lease term of 6.8 years provides a shield against near-term volatility.

The 8.6% year-over-year NOI growth to $32.1 million in Q1 2025 is a direct result of this strategy. Notably, industrial Same Property NOI rose 6.6%, driven by rent escalations and value-add renewals. These figures are bolstered by contractual rent growth embedded in leases, which management estimates could add 22% in potential mark-to-market rent upside over time.

Accretive Developments Fuel Growth

Nexus is not merely sitting on its portfolio—it's aggressively expanding. Two major projects under construction, a 325,000 sq. ft. expansion in St. Thomas, Ontario, and a 115,000 sq. ft. small-bay complex in Calgary, Alberta, are set to deliver $6.6 million in annual stabilized NOI by Q3 2025. These projects, with going-in yields of 9.0% and 11%, respectively, exemplify Nexus' ability to deploy capital into high-return, accretive opportunities.

The St. Thomas project, a partnership with a local developer, exemplifies Nexus' strategy of intensifying well-located sites. Similarly, the Calgary development targets the booming Alberta market, where industrial vacancy rates hover at just 3.2%. Together, these projects could boost NAV per unit by ~5% when stabilized, offering a tangible path to dividend growth.

Leverage Reduction and Dividend Health

Nexus has also made strides in de-risking its balance sheet, a critical factor for dividend sustainability. Net debt fell to $1.26 billion in Q1 2025, down from $1.28 billion in late 2024, while the Total Indebtedness Ratio improved to 48.8% from 49.1%. The Net Debt to Adjusted EBITDA ratio dipped to 10.36x, a manageable level even in a rising-rate environment.

The dividend itself—$0.05333 per month (annualized $0.64)—remains supported by a Normalized AFFO payout ratio of 104.1%, slightly elevated but within a tolerable range. Crucially, the Debt Service Coverage Ratio (DSCR) of 1.64x ensures ample capacity to cover interest expenses. With 40.2% of properties unencumbered, liquidity remains robust.

Risks on the Horizon

While the positives are compelling, risks persist:

1. Tenant Concentration: The top five tenants account for 23% of rental revenue, per Q1 disclosures. A sudden vacancy among these could strain cash flows.
2. Interest Rates: Over 80% of debt is fixed-rate, mitigating near-term refinancing risks, but prolonged high rates could pressure future borrowing costs.
3. Economic Softening: While industrial demand remains strong, a slowdown in e-commerce or a supply chain correction could erode occupancy.

Investment Thesis: A Buy for Income Seekers

Nexus Industrial REIT's strategic transition has created a high-quality, yield-driven asset with 8.67% dividend yield as of June 2025. The pure-play industrial focus, robust occupancy, and accretive development pipeline position it to navigate economic headwinds better than its mixed-asset peers.

Key Catalysts for Re-Entry:
- Completion of the St. Thomas and Calgary projects (Q3 2025), which should lift AFFO and reduce the payout ratio.
- Potential dividend hikes as NOI growth outpaces distribution demands.
- A NAV per unit of $13.21 (vs. current price of ~$7.38) suggests significant upside if markets reassess its value.

Risks to Avoid:
- Investors must monitor tenant renewals and the pace of development completions. A delay in St. Thomas could weaken near-term cash flow.

Final Take: Buy NXR.UN for Industrial Resilience

Nexus Industrial REIT's shift to a pure-play industrial model has created a defensive, high-yield asset with growth catalysts baked into its development pipeline. While risks like tenant concentration and interest rates loom, the dividend's coverage and the sector's structural tailwinds make NXR.UN a compelling buy for income investors willing to overlook near-term volatility. With a NAV discount of ~45%, this REIT may offer both income and capital appreciation potential in a challenging macro environment.

Recommendation: Buy on dips below $7.00, with a 12-month price target of $8.50–$9.00. Hold for at least 18 months to capture NOI accretion from developments.

Always conduct your own research and consult a financial advisor before making investment decisions.