Q2 2021 Dream Industrial Real Estate Investment Trust Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the train of industrial REIT second quarter Conference call for Wednesday August 4th 2021. During this call management of cream of Doctor of each may make statements containing forward looking information within the meaning of applicable securities legislation.
Forward looking information is based on the number of assumptions and subject to a number of risks and uncertainties many of which are beyond the gesture control.
Cause actual result to differ materially from those that are disclosed in or implied by such forward looking information additional information about these the substance and risks and uncertainties is contained and dream of industrial REIT filings with securities regulators, including its latest annual information form and the M. D. N. A S filings are also available and dream of Ducks.
The REIT swept site at Www Dot dream of.
Industrial reached that see a later in the presentation well of a question and answer session.
A question and answer.
Please press star 1 on your telephone keypad youre off of.
Each day it'll be Mr. Brian policies of Dream of industrial REIT. That's your policy. Please go ahead.
Thank you and good morning, everyone. Thank you for joining us today for Dream of Industrial reached 2021 second quarter Conference call.
With me today is 1 of Kwon, our Chief Financial Officer, and Alex <unk>, Our Chief operating officer.
Q2 marked an incredible quarter with significant strategic initiatives completed by the REIT as well as solid operational results, we reported a 10% plus increase in <unk> per unit for the second consecutive quarter. This year, driven by CP NOI growth and the lower cost of debt are.
Our pace of CPE NOI growth remains robust and was 3.8% in Q2 as leases signed over the past 6 to 9 months continued to take effect.
We completed the transformation of $1.3 billion Pan European portfolio transaction.
Our total acquisition volume in the last 7 months to an incredible $1.8 billion.
Including 2 million square feet of development opportunities we.
We've advanced our development pipeline with approximately 700000 square feet of the projects currently underway in Canada and the U S.
Q2 also saw the release of our Green financing framework and our launch of $400 million of green bonds with over $300 million of the eligible investments completed or identified to date.
We continue to lower our cost of debt was $800 million of unsecured debentures issued during the quarter in connection with the Pan European portfolio of transaction at an average interest rate of just 3.5% over a 5 year term after swapping the euros.
Subsequent to the quarter, we seeded of $480 million U S. Industrial fund that will allow us to grow effectively in the U S alongside reputable institutions, while increasing the quality and diversification of our U S assets.
We expect to deploy the near term proceeds from this transaction towards high quality acquisitions in Europe, and Canada as well as towards repaying secured debt.
Over the past 18 months, we have significantly outperformed our initial targets as we executed on our European expansion and debt strategy.
We have now acquired over $1.8 billion of high quality logistics assets in Europe that of improved our portfolio quality scale and diversification the.
Execution has allowed us to become a $5 billion global REIT with significant scale in markets that have strong barriers to entry and provide solid organic growth potential.
We are optimistic about the outlook of industrial fundamentals in Europe due to the long runway for growth in e-commerce barriers to significant new supply and attractive going in capital values and yields on high quality industrial product.
Our European expansion strategy has also transformed our debt financing model over the past 18 months since launching our European expansion, we have lowered our average cost of total debt outstanding by over 200 basis points significantly outperforming our prior expectations.
In the U S. The fund the allows us to continue to grow in attractive markets, improving the overall portfolio quality and diversification, while maintaining an attractive geographic mix.
We'll grow our property management business, and we will provide property management construction management and leasing services to the fund at market rates, which will improve our returns on equity invested in the region.
Canada, we continue to add scale in our target markets of the greater Toronto area, and the greater Montreal area with over $300 million of assets closed or under contract thus far in 2021.
Private market pricing for good quality assets in these markets continues to set new records with every transaction this bodes well for our existing portfolio as reflected in the 17% year over year increase in NAV per unit from $11.75 to $13.69.
Looking forward, we will remain opportunistic in sourcing properties in these markets.
Net debt are attractive against our target of hurdles of screen well against economic rents and replacement cost.
Asset pricing continues to surpass record levels in many of our target markets. We also intend to add scale through a structured development program.
Our development pipeline currently consists of over of over 3 million square feet across each of our operating markets. We expect to have up to 5% of our total assets under active development at any point in time with targeted yields on construction costs over 6%, we had 3 pillars of our development strategy Greenfield.
Element redevelopment and expansion opportunities at our current sites during the quarter, we expanded our Greenfield development program in the GTA with the acquisition of 2 land parcels totaling 38 acres.
The first side is the 30 acre parcel located in Brampton that can support of 550000 square foot logistics facility with the targeted construction commencement date in the next 18 to 30 months.
The second side is an 8 acre parcel located in Canada that can support the construction of the 150000 square foot logistics facility in the next 12 months.
Combined these 2 sites were acquired for less than $50 million, representing an attractive valuation of approximately $1.3 million per acre.
We are targeting unlevered yield on cost of approximately 6% on these projects, which represents a spread of 250 basis points compared to cap rates for comparable stabilized properties and should result in meaningful NAV per unit growth.
In addition to our Greenfield development, we have commenced construction on 2 expansion projects in the GTA and Montreal that will add 260000 square feet of additional density in these markets.
We expect these projects to be completed in 2022.
Moreover, we have several existing properties and our near term redevelopment bucket the.
These sites are located primarily in the GTA and Montreal, where we can redevelop the existing properties to accommodate modern logistics use as well as increase the footprint by 300000 square feet.
During the quarter, we expanded our medium term development pipeline by over 1 million square feet of intensification opportunities in France, and the Netherlands as part of the properties added through the Pan European portfolio transaction.
We expect to access these opportunities over time in our forecasting of yield on incremental cost of over 7%.
We continued to make significant progress in all aspects of our business I will now turn it over to Alex to talk about our operations.
Thank you, Brian and good morning, everyone.
Industrial market fundamentals remain robust across all of our markets.
<unk> ability rates continuing to trend down in the most of our markets dropping to the low 2% range across Canada.
With the availability in the GTA and G&A just over 1%.
At the end of Q1, we signed 1.6 million square feet of leases at an average rental spread of over 20% of of <unk>.
Prior range.
On the leases, we also achieved an annual contractual rental growth of 2%.
Our in place of occupancy increase of 170 basis points compared to Q1.2021 to 97, 4%.
The lease commitments for about 238000 square feet of vacancies most of which are expected to commence over the balance of 2021 taken committed occupancy to 98%.
Notably with strengthening logistics fundamentals in Western Canada, and our active asset management program, we were able to at least 14 vacancies totaling 156000 square feet during the quarter, which resulted in the 170 basis points increase in committed occupancy and on Western Canada portfolio to 95, 9%.
As of June 32021.
As a result of our strong leasing activity of our same property NOI growth continued to be strong with reported 3.8% year over year growth this quarter.
We reiterate our previous forecast of mid single digit CP NOI growth of 2021.
The quarterly guidance, we expect that you can align growth will accelerate further over the balance of 2021 of sign leases take effect.
On the operations front, the rent collection levels in our portfolio have returned to pre pandemic levels as our tenant base has proven resilient through the pandemic.
We have collected over 99% of recurring contractual growth trends. During 2021, we have collected substantially all of the contractual rents of 2020.
Of the $2.3 million.
Rent deferred during Q2.2020, we have collected about 95% already.
During the quarter of the value of our assets increased by 207 million.
Reflecting lower capitalization rates.
As well as higher market rents in Ontario, and Quebec, primarily and demand for industrial assets continues to be robust across all of our markets.
As of June 32021, our investment properties were valued at $150 per square foot, including the Ontario in Montreal portfolios that are being carried at $192 and $144 per square foot respectively.
With asset pricing setting new records in most of our markets. We expect our asset values to continue to increase overtime as private market transactions provide additional data points.
We're continuing to advance of 'twenty, 1 'twenty 2 'twenty, 1 ESG plan and our increasing increasingly prioritizing investments in our capital allocation decisions.
We are in advanced stages of planning renewable power projects in Canada, and the Netherlands, and collaborating with the local authorities on these projects we are targeting to install over 40000 solar panels across 3 million square feet, which would result in over 10% of the trust portfolio of being powered by renewable energy.
Yeah.
We continued to make solid progress in our.
Increasing energy efficiency across our buildings, we have established a target of upgrading of approximately 1 million square feet of GLA of each year to OLED lighting.
On a year to date basis, our lighting retrofits totaled nearly half a million square feet and we are on track to achieve our annual target I will now turn it over to lenders, who will provide a financial update.
Thank you Alex.
Our financial results for the second quarter were strong and in line with our expectations diluted funds from operations was <unk> 19 per unit for the quarter, 11% higher than the prior year comparative quarter due to higher NOI from our competitive properties and 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 or wait on over $1.8 billion of acquisitions, thus far in 2021.
And have closed or waived all conditions on a $118 million of assets subsequent to quarter end.
To date in 2021, and we have also repaid over $300 million of secured mortgages, including approximately $170 million of Canadian mortgages repaid subsequent to the end of the second quarter.
Of these mortgages bearing interest at an average interest rate of 365%.
And have an average remaining term to maturity of 2.4 years.
Our debt strategy has allowed us to transform the IRR to operate primarily with an unsecured financing model and has continued to result in a lower cost of debt over the past year. We have raised $1.2 billion of unsecured debt at a weighted average interest rate of under 0.5% after swapping to euro.
Including $800 million of unsecured debentures issued during the quarter at an average interest rate of only 35 basis points after swapping to euros.
The average interest rate on our in place debt has decreased by over 200 basis points over the past year and at the end of Q2, 2021 was 149% significantly outperforming our expectations at the onset of our European expansion and debt strategy.
With the repayment of additional mortgages subsequent to the end of Q2, we expect an interest rate to decrease further.
During the quarter. We also issued are in non.
Green bond of $400 million series C unsecured debentures the.
Proceeds are expected to be invested in accordance with our green financing framework the.
The deployment of the proceeds is well underway and should be in the.
<unk> already completed or have identified over $300 million of eligible projects to date, including over $200 million in Green certified assets acquired as part of the Pan European portfolio transaction.
Subsequent to quarter end, we sold the 75% interest in 18 of our U S assets for expected net proceeds of $250 million.
Brian mentioned, we expect it to reach to redeploy the proceeds towards acquisitions over the balance of the year as well as repaying secured debt.
Pro forma the acquisitions completely underway since the end of the second quarter of the repayment of mortgages in the U S Fund transaction, our leverage is expected to be in the mid 30% range and we will retain nearly $300 million of acquisition capacity before leverage reaches our target of mid to high 30% range.
Having achieved a significantly lower average cost of debt during the first half of the year and with strong comparative properties NOI growth expected for the year, we expect just over 10% year over year <unk> per unit growth in 2021, assuming average leverage for the year in the low to mid 30% range.
I will now turn it back to Brian to wrap up.
Thank you line is 2021 has been an incredibly exciting time for DIR and we've taken significant steps to position <unk> as the premier industrial REIT in each of our operating markets. We will now 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 1 on your Touchtone phone.
If you wish to be removed from the queue. Please press the pound sign or the ASP.
The Italy was the first question is announced.
Using a speakerphone you may need to pick up the handset first before pressing the numbers.
Once again, if you have a question. Please press Star then 1 on your Touchtone phone.
The first question comes from Brad Sturges of Raymond James Your line is open.
Hi, good morning.
Maybe just starting with the U S Fund strategy I'm wondering if you could just comment on the fund raising efforts to date and maybe give a little bit color on.
So you can't you can maybe the types of institutional investors participating in the fund.
Sure Brad Good question, we're excited too to me.
Maintained 25% of the fund there are significant U S institutions coming into the fund were not at Liberty to identify them, but they would all be household names. So we.
We think the opportunity to partner with them to grow into very strong markets.
We really focused on total return of have exposure to some new markets. We wouldn't have been able to enter without the fund is an exciting opportunity. So the.
There's a lot of investor interest.
It's certainly well capitalized with with interest from the institutions in seeing that grow so.
Certainly the seed portfolio is fully funded and there is commitments to grow beyond that.
And we're looking to.
Grow not only in 2021, but beyond that.
We expect the scale to grow pretty significantly over the next few years.
Okay beyond the seed portfolio do you have any initial targets or thoughts in terms of what the the fund could grow to in the next call. It 12 to 24 months.
Yes, I think it could.
It could certainly.
Certainly double or triple over the next couple of years.
That would be the target from the from the Investor clients and.
And the expectation for the fund.
In just terms of the the investment strategy of I guess Theres a 4 pronged approach like is there a specific target in terms of the exposure to those various buckets. So the.
The investment exposure or is it going to be more of an opportunistic investment strategy.
The investment manager will manage that I think it'll include.
Full of problems as you mentioned development value add core plus and then core development of core properties. So that'll be a mixture. It will have a mixture of current return as well as as.
The total return as a result from from development in.
And value add opportunities.
With a total of turn return approach as the spill.
Sort of a target you have in mind to achieve.
On an annual basis, let's say.
I think the target return.
The 2 to investors and to us.
The I'd say the expectation would be the overall return would be in the double digits it'll be.
Certainly the market return for these types of funds, but we see this as an opportunity to really grow into new markets and basically participated really really high quality assets ones that we couldnt necessarily afford to buy ourselves and to get to the scale that we wouldn't have the diversification that we.
Without the fund.
Okay, Great I'll turn it back thank you.
Thank you and our next question comes Darren <unk> Deutsche.
Most of the bank.
Thank you and good morning.
Just to follow up on the U S. Industrial fund, Brian you mentioned the portfolio could double or triple over the coming years. So does the dream of industrial look to maintain that 25% of interest that's funded over time.
Are you committed to maintaining sort of an exposure to the U S.
But yes as I mentioned, we will have the option to do that not the commitment.
We will see the results of the fund and make an allocation of the <unk>.
At the time, we do see it as a good opportunity to grow and would expect to continue to invest in the U S Fund as it grows Lennon's mentioned, we're going to deploy proceeds in Europe, we're going to pay down some secured debt. We've got a pipeline of opportunities in Canada as well as Europe, and we would also expect to.
Participating in the fund as it grows.
Okay. That's helpful and maybe on the same line.
Any thoughts on the overall target portfolio mix.
If I look at Europe or is this the restaurant reaction that does the almost 40% of your portfolio.
How much maximum exposure do you want to have for Europe.
Europe and.
Any thoughts on the overall you saw the portfolio mix.
We'd like to keep the majority of our assets in Canada Europe has grown significantly although we've got some opportunities I think to continue to grow that.
Referencing your previous question wed like to grow our allocation of the U S. So the rebalance a little bit as we go.
But we keep over 50% in Canada somewhere between.
30, and 40% I would say in in Europe, and then the balance of be call it 20% up to 20% in.
In the U S. So that's really just an off the cuff kind of allocation, but that's generally where AMC things shaking out as the dust starts to settle Alex do you want to comment on where we're seeing opportunities and where we will where we'll be yes, we continue seeing.
A pretty strong pipeline of opportunities in Europe. So we expected in the near term.
Europe will will be at the.
Of the upper end of the allocation of as Brian mentioned, and then that in Canada. We are continuing to see acquisition opportunities. But also we are ramping up of our development program and so as these developments.
And get completed then obviously the Canadian portfolio will grow disproportionately so it will not be.
Consistent with those numbers every quarter from quarter to quarter of as kind of move around but in the long run that's where we expect it to kind of.
Shakeout.
Okay. Thank you it makes sense.
And maybe just channel obviously Europe is the focus right now on the Pan European portfolio acquisition.
Can you talk about the quality of the tenants and then it seems like it's largely sort of Benson and portfolio. So maybe anything on the credit quality type of index.
Thanks.
Yeah.
Yes, thanks for the question.
Is an institutional grade portfolio. It is the logistics portfolio and as it typically is with logistics assets.
Especially the logistics assets in Europe, they are tangled tenants so.
That's why the most of the building share of single tenant. These are sort of household logistics names.
Europe, we're globally.
When we look at rent collections for example in that portfolio throughout the pandemic and of 100%.
The as we talked when the portfolio was announced and of <unk>.
<unk> component of the portfolio is in.
Of tenants in the portfolio are in food and grocery and the other logistics services.
Sure.
Is it the diversified mix of at the same time.
And of these tenants are in and of the path of progress as we say.
With respect of how logistics markets of developing.
Okay. Thank you that's helpful.
Maybe last question for Linda.
Any update on the also for your new guidance.
With me of mentioned around 10% increase year over year.
The updated.
I mentioned, yes, I think we mentioned just over 10% year over year of hassle.
The prepared growth unit so.
That's the that's our current guidance for <unk> per unit I think with the.
The significantly.
The reduction in our average interest costs and the reiteration of our same property growth.
We're landing on the just over 10% growth per aircraft.
Awesome. Thank you and well then all of them back.
And our next question comes from Sam <unk> from TD Securities.
Hey, good morning, everyone.
Yes.
The only question I have left is just.
The capacity on the balance sheet for additional year.
Euro swaps.
And also what would be your incremental debt costs to do with the.
Domestically without the swap.
Hi, Sam so at the end of the quarter, we had about 150 million euros of capacity and as we continue to acquire additional European at the.
The European assets that growth the subsequent to quarter, it's probably gone that capacity by close to 50, So approximately 200 million euros as of today and <unk>.
We continue to grow in Europe that increases the capacity as well.
I think in terms of 3 of your second question was just in terms of the rate I believe.
Yes, yes.
Yes, so both with and without the swap.
Okay, Yes, the we're seeing versus the Canadian market, we're probably seeing close to 200 basis points differential between CAD and euro.
Net interest rates.
4.5 to 5.7 and 10 years on the ear of swap it's probably.
In and around.
45 to 125 basis points.
Both of the terms on the over the various terms.
Okay.
On the U S..1 sorry, 1 more question when do you think of the next act like 1 of the funds sort of resume acquisition activity.
Going forward.
Yeah, Sam I would expect that to be in Q4.
Yeah.
Yes.
Okay, great. Thank you very much.
And just as a reminder, if you'd like to enter the queue. Please press Star then 1 on your Touchtone phone again the star 1 entered the queue and our next question comes the Matt <unk> from National Bank. Your line is open.
Hi, guys.
Follow up on the balance sheet front.
Fairly sizable amount of cash.
On the balance sheet.
Youre getting some more from the U S sale, obviously repaying some mortgages as well.
On the debt repayment front should we anticipate in the near term.
More of sort of mortgage repayments and potentially the seasons of some of the debt that came from the European portfolio or is that something that will take place later.
Hi, Matt So yes with the.
As I've mentioned before we've repaid about $170 million of Canadian mortgages since the end of the quarter and using some of that debt cash on the balance sheet with the closing of the U S.
Fund transaction, we will use a little bit of that 2 of the prepay. Some additional mortgages spinoff of to fund some of the acquisitions that we've identified.
Well, we'll look at the end of the European mortgages that were acquired with the portfolio. There isn't a long term left on them and they are out of the average interest rate was about 1 half of 1.8%.
So I think we see some good opportunity to tackle some of the Canadian mortgages first but definitely keeping.
The European mortgages on the radar as well as it provides the additionally, URL debt capacity for us.
Okay fair enough.
On the European portfolio.
With regards to the lease maturities. It seems like there is a fairly chunky amount of space in 2022.
Can you maybe speak to the prospects for that I assume it's the.
Several tenants.
Just in terms of what Youre seeing with regards to the prospects of <unk>.
Some frictional vacancy if there would be any of the renewal spreads.
Yes, we are.
Some of the tenants who have near term maturities of some sort of underwritten and we're working with some of them to renew.
And a few.
Have indicated they might non renew but we have a pipeline of tenants who will be replacing them.
So thats so far is all in line with our underwriting and.
As far as rental spreads the gen.
Consistent with what we've communicated on average for the portfolio, but obviously some of it some spaces will be lower some space will be higher.
But generally the spreads are positive.
It varies by by type of their positive mid single digit spreads.
Okay, perfect and then the Canadian rent spreads continue to.
Exceed expectations in the acceleration has been pretty steep there.
Was there anything specific to the tenant or the lease that was renewing.
For the Quebec tenant, where you get to 92%.
Fred to the expiring rent.
It seems like a pretty hefty increase there.
No nothing nothing specific that's sort of the market for this type of building high quality of building.
<unk> has a bit of excess land.
So in the long run we see it as of <unk>.
Intensification of opportunity obviously not during the during the renewal term.
But other than that it's a good quality of building in a pretty pretty strong market.
That's the.
What's reflected in the new term.
New lease rates.
Okay, great. Thanks, guys.
And.
Our next question comes from Brad Sturges Raymond James.
Just 1 quick follow up on.
The the potential for asset sales of our capital recycling in Western Canada, any updated thoughts there you've been seeing a little bit, but our occupancy rates of is there any change in your strategic plan their curve for capital rotation of capital recycling of rotation out of those.
Great.
Yeah, Brad we we constantly look at this we look at it every month.
As you know we've got an IRR model for all of our assets and we're looking to recycle ones that we think are not going to perform as well as others as we replace them with.
The higher quality and better long term outlook assets of we're constantly looking at our whole portfolio.
We do see some opportunity in western Canada to recycle some assets certainly asset values. The rising tide has risen those boats as well so.
<unk>.
We are looking at a few assets in Western Canada now maybe a good time to do that Alex you can comment a little bit more on kind of the status of the market and specifically Western Canada and thanks, Brian.
We are seeing improving fundamentals in pretty much all the markets in the west where we are present in.
Those improving fundamentals improving confidence in leasing outlook.
Does bring more liquidity and more investor interest and demand and so that's that's the trend that we're starting to see and that's the trend Brian is referring to is to us looking at our portfolio and opportunities to capitalize on this trend.
For the properties that are good quality properties, they're performing.
However, with the.
The trust, reaching the scale we're at some of these assets are smaller.
We don't don't fit the long term portfolio of strategies that we would look at the best opportunistic about recycling.
Capital depending on.
Rising and a few other asset management initiatives that we are pursuing on those assets. So timing is hard to predict but we continue monitoring that and looking for opportunities.
Okay.
No real change the strategic plan, but.
Given the market fundamentals of improvement you'd be a little bit more opportunistic I guess.
That's right.
Okay, great. Thank you.
And just as a reminder of entered the queue. Please press Star then 1 on your Touchtone phone.
And our next question comes from.
Tammy <unk> from RBC.
Thanks, Ed.
Good morning, everyone.
Just a quick question, maybe a fall of 2 other questions earlier on.
On the securities So the 2022.
Pick up and.
Europe and you mentioned, maybe there are some I guess some vacancy that the anticipated there.
Maybe when you layer that together with the strong spreads that you have been getting on renewals and new leasing what is the sort of 1 of your initial thoughts I guess for next year in terms of the utility to carrying the momentum same property NOI growth in 2022.
We're not in a position to provide guidance on the same property NOI.
Are we expecting that the strength of the markets will continue.
We're looking at.
Not only capitalizing on the on the rental spreads and built in escalators, but.
So at generating additional sources of revenue.
Through our solar initiative and a few other opportunities to invest in the buildings.
It will translate into the same property NOI growth. So we expect the outlooks.
The positive however will be providing more precise guidance at the later stage.
Got it and just maybe 1 more quick 1.
Turning to your comments on the the 10% of <unk> growth or just over 10% for this year just wanted to clarify whether that.
That excludes any of the the early debt repayment charges.
Yes, that's correct Tommy and those that the payment charges or just as a result of the capital allocation.
They would be excluded from our guidance.
Great. Thanks, very much I'll turn it back.
And we have no further questions.
I will now turn the Colo.
Hey, Brian for final remarks.
Thank you. Thank you everyone for your time today, we look forward to speaking again soon and in the meantime, stay healthy and stay safe take care.
Thank you ladies and gentlemen.
The conference call. Thank you for participating and you may now disconnect.