Q1 2021 Dream Industrial Real Estate Investment Trust Earnings Call
Good morning, ladies and gentlemen, welcome to the Dream Industrial REIT first quarter conference for Wednesday may 5th 2021 during this call management of junior industrial REIT.
It must contain forward looking information within the meaning of applicable securities legislation forward looking information is based on a number of assumptions and are subject to a number of risks and uncertainties. Many of which are beyond dream industrial base control that could cause actual results to differ materially from those that are disclosed in or implied by such forward looking.
Information.
Information about these assumptions and risks and uncertainties is contained in dream industrial REIT filings with securities regulators.
These latest annual information for them and DNA <unk>.
These filings are also available on dream, a doctor the website at Www Dot Dream industrial REIT. That's C. A later in the presentation. We will have a question and answer session.
You're up for a question. Please press star one on your telephone keypad.
Our host for today will be Mr. Brian Paul CEO of Dream Industrial REIT. Mr. Pulse. Please go ahead.
Thank you good morning, everyone. Thank you for joining us today for Dream Industrial reached 2021 first quarter Conference call speaking with me today is let us Kwon, our chief Financial Officer, and Alex <unk>, Our Chief operating officer.
Dream industrial carried strong momentum into 2021 was an extremely active first quarter and just over 90 days, we've completed significant strategic initiatives to grow it upgrade portfolio quality strengthen our balance sheet, all while achieving solid rental rate increases in <unk> per unit growth.
We reported a 10% increase in <unk> per unit in Q1, driven by CP NOI growth rapid pace of capital deployment and a lower cost of debt.
Our pace of CPA NOI growth continues to improve and was three 1% in Q1 as leases signed over the past six months took effects.
Our pace of acquisitions has been robust.
We have closed on over $350 million of assets already this year and have $155 million of additional acquisitions under contract or in exclusive negotiations.
We have advanced our development pipeline with nearly 700000 square feet of projects currently underway in Canada and the U S. Since the beginning of 2020, we have closed or have contracted over $1 1 billion of acquisitions across Canada, The U S and Europe.
Significant achievement given the challenges presented by the ongoing pandemic.
Our local on the ground acquisition teams across our three operating regions provide us with a wide range of opportunities while our geographic diversity allows us to access capital at the most optimal costs.
Our acquisitions activity continues to enhance our portfolio quality in the past 40 months, we have more than doubled our asset value, while focusing on acquiring larger properties leased to high quality.
<unk> tenants.
Thus far in 2021, we have closed or have under contract or in exclusive negotiations over $500 million of assets across Canada, The U S and Europe.
Acquisitions added over 3 million square feet of high quality logistics GLA to the portfolio.
In the two thousands and with an average clear height of approximately 30 feet. These assets are above the average quality of our portfolio in place rents for these assets are 10% below market and we have the opportunity to opportunity to drive cash flows higher as leases roll.
We have closed on $350 million of these assets with the remainder expected to close in the next 45 to 60 days.
Our recently completed $201 million equity offering in April of 2021 provides us capacity to execute on our sizeable pipeline and we expect to have our remaining acquisition capacity committed by the end of Q2.
We are also incorporating sustainability metrics within our investment criteria, which allows us to operate contracts sustainability goals and impact results.
We continue to make significant progress on ESG goals across our business.
This quarter, we are providing an update on our ESG initiatives in our MD&A. In addition to our annual sustainability reporting.
We continue to make significant progress in all aspects of our business and I'll now turn it over to Alex to talk about our operations and development pipeline.
Thank you Brian good morning, everyone.
Industrial market fundamentals remain robust across all our markets supported by accelerated penetration of ecommerce.
Availability rates have continued to trend down in most of our markets.
Our predominantly urban portfolio is quite attractive for like just.
The focus for them.
Continuing to achieve strong rental rate growth.
Since the end of Q4, we have signed about 2 million square feet of renewals and new leases at an average rental spread of 20% on these leases. We also achieved annual contractual rental growth of two four per cent.
Our leasing activity resulted in it in our Q1 places in place occupancy.
100 basis points compared to Q4, 2000, twenty's from $95 seven per cent.
We also have lease commitments for about 450000 square feet of vacancy most of which are expected to commence in the first half of 'twenty when you want to keep.
Occupancy for about 97 per cent.
Property that was recently vacated by spectra, we already signed a new lease for the National Logistics company for five years at higher rent along with two 5% annual contractual rent growth, which was absent in the prior lease.
With the leasing activity over the past few months our C. P. NOI growth profile had them from significantly for 2020, one compared to 2020.
And we reported $3 one per cent year over year growth this quarter.
We reiterate our previous forecast mid single digit organic growth from 2021.
Quarterly guidance, we expect the same property NOI growth will accelerate through the year as new leases take effect.
We are also increasing our focus on development as a key aspect of our strategy to add high quality space for our portfolio, which will allow us to drive strong organic growth over the long term.
We have three pillars to our development strategy Greenfield development expansion opportunities within our current portfolio and redevelopment of existing properties.
Greenfield development is underway with construction commencing on previously announced 460000 square foot distribution facility in Las Vegas.
We also recently acquired a 30 acre land parcel in Brampton, where we can build approximately 550000 square feet of Prime legit.
The site is extremely well located in one of the most sought after industrial Submarkets in Canada with excellent access multiple highway.
We acquired the site for $35 million at $1.2 million, an acre, which is quite attractive compared to recently traded for land parcels in the GTA.
We expect to commence construction in the next 18 to 30 months and we are forecasting a yield of 6% well above cap rates on comparable brand new stabilized product.
In addition to our Greenfield development, we are commencing construction on two expansion projects in the GTA and Montreal that will add 260000 square feet of additional density in these markets.
We expect these projects completed in 2022.
We also have several existing opportunities for near term redevelopment in our portfolio.
Some of the larger opportunities in the near term pipeline includes redevelopment of 200000 square foot small big complex in Mississauga and redevelopment of the property and wouldn't be for approximately double the density.
And Mississauga, we expect to build a brand new 40 foot clear logistics that.
We expect that our density will not increase however, we will achieve a significant premium on rent given the location for the property.
Turning to valuation.
During the quarter the value of our assets increased by $75 million, reflecting the robust demand for industrial assets in that market.
Leasing activity and rental rate growth.
The outlook for rental rate growth remains strong and we look forward to engaging value add initiatives.
Surface additional value from our portfolio.
I will now turn it over to Atlanta School will provide a financial update.
Thank you Alex our financial results for the first quarter were strong and in line with our expectations.
Funds from operations was 19 per unit for the quarter, 10% higher than the prior year comparative quarter due to higher NOI from a comparative properties at recent acquisitions and lower borrowing costs as we executed on our European debt strategy.
The pace of our capital deployment remains strong and we have closed contracted or achieved exclusivity on over $500 million of acquisitions, thus far in 2021.
Typically we've acquired just over $350 million of assets to date in 2021 $274 million in Q1 with another $76 million since March 31st and have another $155 million expected to close in the next 45 to 60 day subject to satisfactory due diligence.
With access to euro denominated debt at rates below 1%. We expect these acquisitions to be accretive to S. S low per unit at <unk>.
Targeted leverage in the mid to high 30% range.
In April we completed a $201 million equity offering which will allow us to execute on our near term acquisition pipeline and fund approximately $90 million of identified development costs.
Pro forma the previously mentioned $155 million in acquisition, our leverage is expected to be approximately 28% and we will retain sufficient capacity for our sizable acquisition pipeline and client development projects.
Our debt strategy continues to provide opportunities to lower our cost of debt.
Interest rate on our in place debt has decreased by over 100 basis points over the past year.
The end of Q1, 2021 with two 4%.
Opportunity to reduce debt further.
We expect our SSO per unit to growth as we deploy our current capacity and is the pace.
Organic growth increases.
We continue to expect 10% year over year SSO per unit growth in 2021, assuming Kermit current FX rates prevail and assuming average leverage for the year in the low to mid 30% range.
I'll turn it back to Brian to wrap up.
Thank you Louis.
Just to clarify I think Alex Mic went out for a part of his presentation. He was making the point that the Labelle property recently vacated by Spectra's net leased to a national logistics tenants.
So all part of our progress during the quarter, but following a strong 2020, we've hit the ground running this year with a focus on making the business even stronger and more valuable we continued to take significant steps and positioning <unk> as the premier industrial REIT and Kid and delivering attractive overall returns to our unit holders.
I'll be happy to open it up for questions.
Thank you we will now begin the question and answer session.
If you have a question. Please press Star then one on your Touchtone phone.
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Once again, if you have a question. Please press Star then one on your Touchtone phone.
And our first question comes from standard Dayni from TD Securities. Your line is open.
Thanks, Good morning.
Congratulations on a really good quarter.
Just wanted to touch on I.
I guess, Brian if you could give us your thoughts on the portfolio. As you mentioned has grown significantly over the last I guess 15 months.
And with the sort of evolving profile of the portfolio. How are you looking at dispositions from their strategic sense at this point going forward.
Yes, Sam Thanks.
We have we analyze all of our assets, we've got an IRR model for every property in our in our portfolio and we're looking to kind of recycle ones that are at the bottom of that where maybe we've either realize the the.
The greater side of the IRR or its best days are behind it or it's not as accretive as.
Opportunities that we're seeing going forward. So we do look at geographic regions certainly the west we're not buying as much as we are selling.
<unk>.
And we keep kind of top grading, we call it or upgrading the quality of the portfolio anything we sell would be on the bottom half anything we buy would be on the on the top half. So we're really not necessarily looking at liquidating regions or recycling regions. What we're doing is upgrading individual assets as we go.
So it's something we're constantly thinking about Sam constantly trying to upgrade the quality I mentioned in my remarks as did as did Alex.
Debt debt.
We're always looking to get better high quality buildings that will.
Basically empty out last in lease up first in the various cycles that were likely to hold them through so we are we are continuing to recycle as we go we've been active on the acquisitions front, but I expect we will be.
Active on the disposition front, we do have offers in place for some of our assets right now and we're analyzing those.
Just given the strength of the market.
Okay. Thank you just to add to that as well just some color we are seeing specifically in the west.
Where most of our non strategic assets are we.
Are we seeing debt over the last.
Three four months Theres been a significant improvement.
An increase in demand.
We see it starting to see that translate into offers and pricing so.
As we communicated in prior calls these non strategic assets to us, but not non core assets. So we don't we're not in a rush to sell anything.
And obviously, we are price sensitive and with the pricing momentum, we're starting to see in the west we want to make sure that where we.
We are capturing as much of that amendment, we can in terms of our time.
Thanks, Alex that's much appreciate it that was actually my my second question. So thank you for for.
For for answering that so I'll flip to my third which is just on the development pipeline I guess, a couple of questions I noticed.
Table in the MD&A didn't include the for.
Frankfurt area project, unless I missed it just wondering what happened there and secondly, if you could provide any details on the address or specific location of the Brampton parcel that was acquired.
You bet, Alex you want to.
You want to speak to that.
So the the Frankfurt.
Pretty I think Sam you are referring to emphasizing we were working through that there is a alone much much longer list compared to what's included in the in the MD&A with.
Including in the MD&A something that is well underway.
The expansion in the Frankfurt area would be.
It would be relatively small expansion as we as we pointed out when we acquired the assets the rottenberg expansion.
Or addition is given the table when that's much larger project, that's well over 200000 feet and we are working to get construction started on that this year.
Ed.
But as we continue working.
Working through the pipeline and our NRI intensification opportunities, we'll be adding much more a much more projects to.
To the list.
Yeah.
Yeah.
Does that answer your question Sam.
Thank you I was just wondering on the Brampton. If you have any details you can share of let's say.
Yeah, we will be disclosing the address and obviously the debt.
Kind of the drawings as we will continue working through it then rendering them yeah.
Absolutely yeah, it's not in the press release, yet, but we will be providing that.
Bruce do you want to comment a little bit more about the location of the site.
Sure Yeah, Hi, Tim location is in.
On the country side drive and Grafton.
So it's been an area, where a lot of the big players are developing.
And it's within the official plan.
Industrial.
Already industrial designated so it's very near term near term land.
And in an area has seen a lot of demand youre close to a lot of tenants that are from Amazon maybe tire.
Other tenants are really seeking out that area because as you I'm sure you know Brandon is.
Is the hardest part of the GTA in terms of logistics.
Close to the CN CP intermodal terminal.
Absolutely. Thank you that's very helpful I'll turn it back.
Yeah.
And just as a reminder to enter the queue. Please press Star then one on your Touchtone phone and your next question is from Brendon Abrams for mechanical Heart. Your line is open.
Hi, good morning, everyone.
Maybe just following up on the line of questioning on the Brampton.
Acquisition.
Can you provide any color or details.
Around cost per square foot or.
Alright expected net rents so in terms of your underwriting assumptions to get to the 6% Unlevered yield.
Sure Brendan.
Let me start and I'll turn it over to Alex for a little more detail what we're seeing is.
<unk>.
Prices for existing properties are approaching and in some cases going higher than replacement cost for new.
<unk> development, we see as a really good opportunity for US certainly we're in the.
Low low to mid two hundreds on a price per square foot all in and.
But at yields that are higher than what you would pay and a going in cap rate. So Alex you want to elaborate a little bit about <unk>.
Just the development.
Pro forma metrics.
Yeah. Thanks, Bryan So we're forecasting all in cost of just looked in the low $200 per square foot range, including the land.
As far as the rent goes.
We are already hitting in our portfolio.
12, 50 and in some cases.
That's that's something that we're targeting for core locations in Mississauga, Brampton in not only targeting with hitting that in our leasing.
So we expect that something like this.
Command rents flat rents certainly greater than that.
We are expecting that the rent will continue.
Growing over the next 18 to 30 months.
Okay.
Yeah, that's very helpful and maybe just turning to leasing spreads currently very strong.
During the quarter, especially in the Ontario portfolio just wondering.
Was there was there any one or two leases.
That drove.
The Ontario leasing spreads to be so much higher than I guess, what you're showing as kind of the estimated mark to market for the broader Ontario portfolio. It seems every quarter.
Leasing spreads in Ontario are well above kind of.
What you've indicated as the mark to market. So I'm just wondering if there is.
If there is one or two leases that were anomalies or debt.
Drove that.
<unk> 50 per cent leasing spread and in Ontario.
That's a fair observation in the market rents continue evolving every quarter.
And the Q1 has seen a pretty significant debt peso.
Growth in the in market rents generally.
So.
Something that we continue catching up on if you will in there.
Keep in mind.
Our disclosure generally covering discovering them when we say, Ontario. We include our Ottawa. We include a Toronto include you know keep generic.
<unk> portfolio of ours.
Much larger.
Much larger portfolios in the GTA.
In the GTA.
There was a few anomalies that drove the spreads higher financial drive assets is one of them, where we acquired the assets in the third quarter of 2020.
With really low in place rents and we and the tenant vacates and so are we more or less debt.
Good day rents compared to the expiring.
So there was a few deals like that including in Oakville and Mississauga. So there was a few fewer flyers that kind of one contributing factor and the other one is the market continues to continues to evolve there quickly.
Okay.
Great I'll turn it over thank you.
And our next question comes from Mr. Gupta from Scotiabank. Your line is open.
Thank you and good morning.
So just a follow up on the volume from Walmart acquisition is demand already zoned for industrial use.
And then you mentioned in Q2 to 18 months for us.
<unk> construction, while for too long.
Yeah.
Yes.
Yes, you bet <unk>.
I'll, let other.
Bruce travelers, who runs our <unk> acquisition is talk a little bit about the process and what we expect for timing.
Sure Yes.
So the lands right now are within the investment plan for industrial with these industrial use.
Our rezoning therefore can follow fairly quickly obviously municipalities arent able to move maybe quickly today. There is certainly a lot of activity there so to move through the process of site plan approval and getting the rezoning.
<unk> formally signed off on.
I can take that.
Take 12 months easily even if even if you were to buy a site that it was ready zone. It would take 12 months.
Moving to the process.
All that goes with that so that gives us also a time to prepare our marketing and get ready to launch the project.
But we think that that.
2018 to 30 months.
Shovels in the ground is very realistic.
Okay.
So that's all.
Let me sort of cautious for the one and done.
On the cost escalation and then are you seeing cost escalation compared to last year.
With respect to legal costs.
Cost for us.
For those.
Yes.
We are seeing we are seeing that costs are rising steel for example is one of the factors that is.
He is increasing generally.
We are you know.
Trying to hedge that risk as much as we can when it comes to buildings that we are starting to construct and we generally are not exposed to significant risks on that.
With Vegas or the expansions that we are currently.
Pursuing.
In Montreal in the GTA, but generally for development projects that are further out there is debt.
True.
However, what affects US is the rents continue to increase at a much faster pace as compared to Pittsburgh.
Yes, I'd just add to that I mentioned.
Most of the Las Vegas project has been already already bought out and committed to lumber has been the largest increase in costs by a long shot most of our billings or our concrete steel and glazing. So those those materials have gone up not quite as bad as lumber. So we're not seeing it you can't really compare it to say residential construction cost.
However, they are going up and where we are managing that and watching it very closely.
Thank you for that and then just Tony for the leasing activity.
The quarter I'm looking at 190, supervisory still seems a little bit mega loans, almost 20 for some hybrid sporting events.
So is that a function of low spot.
Bobby.
The team.
The market loans and mobile non plausible.
Oh excuse me.
Okay.
It is a combination of both.
We are seeing market rents increasing and.
We expect that market rents will continue increasing faster than Europe, generally and that particular lease that particular asset did have low in place.
Place rents.
So it is both factors at play.
We expect the debt market rent growth is going to continue.
To drive our performance in Europe.
Yeah.
Okay.
And then maybe you know.
Maybe final question for me on the acquisition from obvious.
Do you guys have been really almost all of them, but they don't know how physicians the muscle.
Paul.
Can you talk about the acquisition strategy.
What's the focus.
Size of the property.
But the debt.
Growth opportunities all day.
So perhaps you can focus is volume.
Thank you.
Our acquisition strategy.
Yeah, Let me, let me start demand shoe and then ill, let Alex and Bruce comment comment as well.
Everything you mentioned is a factor certainly we're looking at quality, we're looking at geographic.
Geographic geographic focus something that's complementary to what we currently have in our portfolio.
Those are the things we're chasing we're not chasing.
Yield at any cost where we're looking at quality, we're looking at location and.
We're looking at kind of long term value. We do look at total return we look at IRR as you look at the opportunity to grow rents.
I think I've mentioned before that we look at really kind of three look at opportunities through three lenses. We look at we look at the cap rate, we look at the in place rents compared to the market and then we also look at our overall price per foot compared to replacement cost. So those three things.
Paying a pretty good picture of the quality of the acquisition or the opportunity. We're looking at when you layer on top of that geography, and where we want to be we want to be proximate to population centers, we want to be in the path of progress for for logistics and distribution. So all of those things factor into the the opportunities. We we look at.
Have.
I'll, let the team talk a little bit about this but we have boots on the ground in many many markets. So we have long standing relationships experience in.
In the markets that we're doing acquisitions and so we're able to basically see all the deals that happen and to chase the ones that fit.
That fit our profile or fit our strategy.
Alex you may want to add to that as well as Bruce.
Yes.
Just maybe added a little bit of example, so you know what.
What <unk> seen from Us recently.
As a reflection of what we want to continue pursuing.
It's more modern.
Larger Bay logistics space generally.
We are looking to buy assets that have current densification opportunities and not only have the opportunities, but we intend to execute on those opportunities as we did with Mary Carey. If you recall, we acquired it in January we started construction on phase one of expansion in April.
We're looking at buying vacancy and rollover risk with high quality.
Our high quality assets. So as we did with financial drive it was a low going in cap rate, but we doubled the rent and in less than four months.
And we're looking at a couple of assets right now in clusters that we already.
Where we're already present, whether it's maybe a bit of vacancy and were looking to take that vacancy risk and because of COVID-19.
Comfortable with those nodes we.
We expect that we will be achieving sort of value add returns and.
Lastly, in an awesome, but we're also importantly, as we're looking to continue pursuing our clustering strategy we have clusters.
Clusters in many markets.
And.
Including places Mississauga and ramped in kitchen in Cambridge.
Central locations in Montreal, and we gradually adding to our clusters.
That is a has been a very successful strategy for us resourcing those a lot of these deals off market and for.
Assuming a much larger footprint in one node gives us economies of scale, our operational synergies and also long term opens up long term redevelopment opportunity.
Great. Thanks, Alex. Thank you. Thank you both.
Yeah.
That's helpful.
I'll turn the box.
Okay.
And we have no further questions from the queue I will turn the call back over to Mr. Brian Paul for final remarks.
Thank you everyone for your tonnes a day, we look forward to speaking again soon in the meantime, stay healthy and stay safe take care.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
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