Nexus Industrial REIT's Strategic Transition and Development-Driven Growth: A Pathway to Enhanced FFO and AFFO Per Unit

The industrial real estate sector has emerged as a cornerstone of economic resilience in the post-pandemic era, driven by e-commerce expansion, supply chain reconfiguration, and the demand for high-quality logistics infrastructure. At the forefront of this transformation is Nexus Industrial REIT (TSX: NXU.UN), a Canadian-focused real estate investment trust that has executed a bold strategic pivot to a pure-play industrial model. As of Q1 2025, the REIT's portfolio is 99% industrial by pro forma NOI, a testament to its disciplined capital allocation and alignment with macroeconomic tailwinds. This article evaluates the REIT's strategic shift, its development pipeline, and the implications for future Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO) per unit growth.

Strategic Transition: From Mixed-Use to Pure-Play Industrial

Nexus Industrial REIT's transformation began with the systematic divestment of non-core assets. In Q1 2025, the REIT completed the sale of 15 legacy retail properties and one office building, generating $50.9 million in proceeds. These transactions were part of a broader strategy to eliminate drag from underperforming assets and concentrate on industrial properties, which now account for nearly all of its NOI. The REIT also retained a 50% interest in two office properties in Quebec, both of which remain on the market, signaling a commitment to full industrial focus.

The proceeds from these divestments were strategically reinvested into high-yield development opportunities. For instance, the REIT acquired a land parcel in Kelowna, British Columbia, for $18.8 million, partially funded by the transfer of a non-core industrial property in Fort St. John. This acquisition is earmarked for the construction of Class A industrial buildings, a move that aligns with the growing demand for modern, energy-efficient logistics facilities.

Development Pipeline: Catalyst for Future Growth

Nexus's development pipeline is a critical driver of its long-term value creation. Two flagship projects—St. Thomas, Ontario (325,000 sq. ft.) and Calgary, Alberta (115,000 sq. ft.)—are slated for completion in Q3 2025. These projects, with combined development costs of $70.3 million, are projected to add $6.6 million in annual stabilized NOI. The St. Thomas expansion, constructed for an existing tenant, offers a 9.0% return on $54.9 million of costs, while the Calgary project is expected to yield an 11% return on $15.4 million. These returns are above the REIT's historical benchmarks, underscoring the quality of its capital allocation.

Additionally, the REIT has a newly constructed, 115,000 sq. ft. property in Hamilton, Ontario, featuring a 40-foot clear height and LEED certification. Despite a challenging local market, the REIT's confidence in this asset reflects its belief in the long-term demand for sustainable, high-capacity logistics space.

Financial Metrics: Strong Leasing Performance and Guidance

Nexus's Q2 2025 results highlight the REIT's operational strength. Normalized FFO per unit rose 5.6% to $0.188, while normalized AFFO per unit increased 10.6% to $0.313 year-to-date. These gains were fueled by disciplined cost management, a 94% portfolio occupancy rate, and a weighted average lease term of 7.1 years. The REIT's leasing performance has been particularly robust, with 1.19 million sq. ft. of new leases secured at an 82% rent spread year-to-date.

The development pipeline is expected to amplify these metrics. The completion of the St. Thomas and Calgary projects in Q3 2025 will directly boost NOI, which will flow through to FFO and AFFO per unit. Management anticipates mid-single-digit same-property NOI growth for 2025, driven by re-leasing at premium rates and the absorption of vacant space.

Risks and Considerations

While Nexus's strategy is compelling, investors should remain mindful of risks. The REIT's normalized AFFO payout ratio for Q2 2025 was 100.3%, and the first-half ratio stood at 102.2%, indicating a tight balance between distributions and cash flow. However, management has emphasized that the development pipeline and leasing momentum will sustain the dividend. Additionally, the Hamilton property's vacancy rate in a competitive market could pose short-term challenges.

Investment Thesis

Nexus Industrial REIT's strategic shift to a pure-play industrial model positions it to capitalize on the secular growth of the logistics sector. The REIT's development-driven approach, combined with its focus on high-quality, value-add assets, offers a clear pathway to enhanced FFO and AFFO per unit growth. For investors seeking exposure to the industrial real estate boom, Nexus presents an attractive opportunity, particularly given its disciplined execution and alignment with long-term trends.

In conclusion, Nexus Industrial REIT's transformation underscores the importance of strategic agility in a rapidly evolving market. With its development pipeline nearing fruition and a portfolio primed for growth, the REIT is well-positioned to deliver sustainable unitholder returns in the years ahead. Investors who recognize the REIT's disciplined capital allocation and macroeconomic tailwinds may find this to be a compelling addition to their portfolios.