Q4 2021 Dream Industrial Real Estate Investment Trust Earnings Call
Good morning, ladies and gentlemen, welcome to the Dream Industrial REIT fourth quarter Conference call for Wednesday February 16th 2022.
During this call management of Dream REIT industrial May make statements containing forward looking information within the meaning of Applecross securities legislation.
Looking information is based on a number of assumptions and is subject to a number of risks and uncertainties. Many of which are beyond dream industrial Reits 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 the dream industrial Reits filings with securities regulators.
Its latest annual information form and MTN. A these filings are also available on dream industrial Reits website at Www Dream Industrial REIT Gutsy eight later in the presentation. We will have a question and answer session to queue up for a question. Please press star one on your telephone keypad.
Your host for today will be Mr. Brian Pauls C E O of Dream Industrial REIT Mr. Paul. Please go ahead.
Good morning, everyone. Thank you for joining us today for Dream industrial reach 2021 fourth quarter and year end conference call.
Speaking with me today is last Kwon, our Chief Financial Officer, and Alex <unk>, Our Chief operating officer.
The DIR team continues to successfully execute on its long term strategy and our operating results for the fourth quarter and the year were strong and ahead of our guidance, we reported a 13% increase in <unk> per unit for the quarter led by strong CPE NOI growth lower cost of debt at a robust pace of <unk>.
<unk> deployment for the full year, we reported over 15% <unk> per unit growth our pace of CPE NOI growth rose to a new record high of seven 6% in Q4, with Ontario, leading the year over year growth of 17% for the full year, we reported CP NOI growth of five 4%.
Driven by solid rental rate and occupancy growth.
This was at the upper end of our guidance issued at the beginning of the year, we expect the pace of CPE NOI growth to accelerate further in 2022.
Our pace of capital deployment remained robust with $499 million of acquisitions closed during the quarter and over $2 $4 billion of acquisition closed during the year in.
In addition, we are under contract or in advanced negotiations on approximately $400 million of additional acquisitions located in Canada and Europe .
We have advanced our development pipeline with approximately 850000 square feet of projects currently underway with an additional $1 6 million square feet of projects that are in advanced planning stages.
Looking forward to 2022, we are well positioned to continue to execute on our strategic pillars, which are continued organic growth expanding our development program focused capital deployment, optimizing our cost of capital and executing our ESG strategy.
We have made significant progress on each of these pillars and our business is firing on all cylinders with a long runway for growth ahead.
Our acquisition pipeline has been an important driver for us to add high quality assets to our core markets in North America and Europe are local on the ground teams have been very successful in sourcing industrial assets that are above the average quality of our portfolio and have an attractive return profile 2021 was a milestone.
Year for the REIT with over $2 $4 billion of acquisitions completed during the year at an average cap rate of four 2%, which added 15 million square feet of GLA across our operating markets.
In Europe alone, we added over $1 7 billion of assets during the year we.
We expect the yields on these acquisitions to continue to grow at nearly all of the current leases are indexed to CPI, which is accelerating for example in the Netherlands. The CPI increased five 7% year over year in December 2021, and six 4% in January 2022.
In addition, the market rent for our European portfolio was 7% higher than in place rents at year end 2021, and we expect market rents to continue to grow in Europe .
Since Q3 2021, we have renewed over one 3 million square feet of leases in Europe at 12 for.
12% spread.
Over expiring risks in addition to new leases are indexed to CPI or.
Our European portfolio now totals over $2 billion and we have achieved significant scale in the region to execute on development and asset management strategies, which will provide a strong platform for us to continue to build long term value. We added over one 3 million square feet of development potential through our acquisitions in Europe in 2021.
<unk>, which we intend to access over time.
In Canada, we continued to build on our attractive market positioning in our core markets of the greater Toronto area, and greater Montreal area through high quality acquisitions, as well as executing on our development and intensification pipeline.
Our acquisition criteria are focuses on acquiring assets with the potential to generate strong total returns over time.
We acquired over 650 or $560 million of income producing assets in these two markets during the year.
Average cap rate of four 4%.
Current market rents on these assets exceed in place rents by over 15%, which should support robust rental rate growth as leases roll and market rents continue to trend higher.
In addition, we acquired over 175000 square feet of vacancy, which has already been leased at rental rates significantly higher than underwriting.
Moreover, these assets offer the potential to develop over 570000 square feet of access density over time, and we're already underway on some of these projects.
In addition to income producing assets. We also expanded our Greenfield development program with the acquisition of over 65 acres of land in the GTA in Cambridge, which should add over 1 million square feet. In the next 24 to 36 months, our investment pipeline continues to be strong across all our operating regions and we have approximately $400 million in <unk>.
Acquisitions that are under contract or in various stages of due diligence.
We believe that our development program is a key driver for <unk> next chapter of growth over the course of the next.
Sorry over the course of the past 12 months, we have acquired or under contract on nearly 150 acres of land in our Greenfield development segment that would yield over $2 2 million square feet of modern logistics product <unk>.
These sites are located in the GTA, Cambridge and Calgary.
In the GTA with high quality assets trading at record high valuations and often above replacement cost. We believe that building is an important driver of generating enhanced returns, while adding scale and high quality space and one of the most attractive industrial markets globally.
The kitchen, our Cambridge, Waterloo, Submarket is becoming an increasingly attractive location for logistics companies, especially in locations that are close proximity to highway 401 attractively located between the manufacturing hubs in southwestern Ontario in the GTA with easy access to labor. This region is poised for significant railroad.
Growth in the near to medium term in 2021, we have already seen market rent growth of over 20% in this region.
The site totaled 28 acres and should support a 420000 square foot buildings with a total cost basis in the low two hundreds per square foot were forecasting an unlevered yield on cost in the mid 5% range.
With respect to Calgary, we've been long term investors in the market. We believe the region has become a key distribution hub in western Canada, given us attractive location close to a large population base and the outlook for industrial fundamentals as attractive market availability has declined by over 350 basis points in 2021 with rental rates increase.
Throughout the year, there is limited new supply with nearly 70% of new new projects under construction already pre leased we recently acquired a 50 acre site in the <unk> submarket for $14 million and are under contract on a 20 acre site in close proximity to the first site for $12 million.
<unk> is one of the most sought after submarkets in the region with new development from Amazon Walmart and several other high quality occupiers.
The sites are well located with excellent connectivity to the airport as well as downtown Calgary.
They should support the development of nearly 800000 square feet of modern logistics space with a cost basis in the high one hundreds per square foot, we expect an approximately 6% unlevered yield on cost we are underwriting high single digit rents, which we believe provides further upside in yields.
Overall, we see significant long term value and acquiring land that we can entitle and build on in the future.
In addition to our Greenfield development program, we have made considerable progress on our redevelopment and Densification pipeline.
Our predominantly urban portfolio with significant access excess density provides us a unique opportunity to add GLA or redevelop certain buildings to accommodate more modern distribution uses.
These sites are mostly located in the GTA GMA and strong urban markets in Germany, France, and the Netherlands.
Including our Greenfield developed Greenfield program or.
Our immediate development pipeline will allow us to add approximately $2 4 million square feet of incremental GLA in the next 24 to 36 months.
With an overall development cost, including land of approximately $500 million. We are currently forecasting an unlevered yield on cost of approximately 6%, which is significantly higher compared to cap rates on comparable quality stabilized properties.
These projects are poised to significantly improve the overall quality of our portfolio and provide an attractive source of cash flow and NAV growth over the long term.
Overall, our capital allocation strategy has enabled us to amass a high quality portfolio with significant embedded growth opportunities for the long term I will turn it over to Alex to talk about our organic growth outlook and operations.
Thank you Brian good morning, everyone.
As Brian mentioned, our global predominantly urban portfolio continues to be attractive to logistics occupiers and private market investors.
During the quarter the value of our assets increased by $167 million, reflecting lower capitalization rate as well as higher market fence in Ontario, and Quebec.
Largely driven by the increase in asset values Dir's NAV per unit increased to $15 13.
21% increase year over year, and 5% compared to Q3 2021.
Leasing momentum in our portfolio accelerated during Q4, and we reported seven 6% year over year same property NOI growth this quarter driven by a four 8% increase in in place rents from strong rental uplift as well as contractual rent growth and 190 basis points increase.
And average occupancy.
For the full year, we reported five 4% CP NOI growth.
Record pace of growth for DIR and at the upper end of our guidance.
Looking ahead, the industrial markets across our operating regions continues to strengthen and our asset management strategies have enhanced our long term organic growth outlook for DIR.
Occupancy across our portfolio remains strong at over 98% nearly 300 basis points higher than the prior year and our leasing momentum has accelerated over the past quarter, especially in Europe .
Since the end of Q3 2021, we have already addressed approximately one 9 million square feet of 2022 expiries across two markets.
In Europe , we signed one 3 million square feet of leases expected to commence in 2022 at an average spread of 12%.
In Canada, the trust side, approximately 600000 square feet of leases expected to commence in 2022 at an average spread of 30% in.
In addition, we leased nearly 150000 square feet of vacancies with the leases commencing in Q4, 'twenty, one 2021 and 2022.
For the full year 2021, we have signed $3 6 million square feet of leases across our Canadian portfolio at an average spread of 21% and $1 2 million square feet in Europe at an average spread of 10, 5%.
In addition to the strong.
Rental uplifts contractual rent steps as well it is an important driver of state ACP NOI growth.
Currently embedded rent steps equate to two 4% annual contractual rent growth in our Canadian leases and in our recent leases, we have been able to negotiate significantly significantly higher growth, 4% in the GTA and approximately 3% in the GMA.
In Europe , 90% of our leases are indexed to CPI and recent CPI numbers suggest a strong increase in rins on our European leases in 2022.
In addition.
8% of the leases in Europe have fixed rental rate escalators of 2%.
Furthermore, the market rent for our properties have risen significantly and we are well positioned to achieve an even and even outperform market rents as leases roll.
Currently the spread between in place and estimated market rents equates to 19% considerably higher than 9% a year ago.
As a result of the outlook for CP NOI growth remained strong in 2022 and beyond.
Our comparative properties portfolio for the full year 2022 will include all acquisitions completed prior to 2021.
And we expect that the pace of same property NOI growth will accelerate for full year 2022, we are currently expecting the pace of growth to be over 7%.
In addition to CP NOI growth, we continue to see several drivers of NOI growth across our portfolio.
We have made significant progress in our development pipeline.
Already seeing strong results from our initial slate of projects.
At our 401 and Eric <unk> property in Montreal, we have substantially completed the 130000 square foot phase phase one expansion.
And we have already leased the entire space with starting rents in the low double digit range at record a record for the sub market, resulting in an unlevered yield on cost of approximately 9% the lease commences in April 2022.
During 2022, we will commence construction on over 1 million square feet of projects, primarily in the GTA and GMA.
And on these projects, we expect to achieve an unlevered yield on cost of over 6%.
With most projects expected to reach stabilization in the next 24 months.
In addition to our development pipeline. We are also advancing value added refurbishments and the existing properties, where we can generate strong yields and.
In kitchen, or we acquired a 100000 square foot property in Q2 2021 at a total purchase price of $12 million.
The property was vacant at the time of acquisitions.
During the underwriting we saw the opportunity to invest capital in the building to adapt it to more modern logistics users. We're forecasting a total spend of approximately $2 million. This month, we signed a lease for 100% of the building at a starting rent of $10 75.
The lease up will result in an expected unlevered yield on cost of approximately 7 million, 5% on the overall investment of $14 million.
We're also actively looking to add solar panels on existing properties across Canada, and Europe , which should add significant long term revenue overtime.
Currently in advanced stages of finalizing 10 projects that will add 16000 solar panels, we have an additional 14000 solar panels that are in planning stages.
We expect overall capital outlay to be approximately $15 million with Unlevered and levered yields on cost above 8%.
We expect this income to come online in phases, starting starting in the second half of 2022.
Finally, our U S property management and leasing platform is expected to be a more meaningful driver of our operating results.
We expect more substantial contribution to income.
The quarters when significant leasing is completed and as a result, the income is expected to be lumpy.
Overall, we expected an operating profit of approximately $1 5 million in 2022.
Overall, we believe the DIR has significant opportunities to drive CP NOI and NAV growth. This year, both of which should further enhance the quality of our business I will now turn it over to <unk>, who will provide a financial update.
Thank you Alex our financial results for the fourth quarter were strong.
Funds from operation was <unk> 21 per unit for the quarter, 13% higher than the prior year comparative quarter due to higher NOI from our comparative properties.
Vessel deployment of our balance sheet capacity towards over $2 $4 billion of acquisitions over the past 12 months and lower borrowing costs as we executed on our European debt strategy.
For the full year, we reported 81 peso per unit up over 15% year over year and ahead of our initial exiting initial guidance at the beginning of the year.
2021, with a significant year for advancing our capital strategy, we were able to issue a total of $1 1 billion of unsecured debt at an average rate of 40 basis points. After swapping to euros to partially fund our $2 $4 billion to $2 $4 billion of acquisitions, while keeping <unk>.
<unk> within our targeted levels.
<unk> operates primarily an unsecured financing model and this has significantly improved the overall financial flexibility of DIR as balance sheet and allowed us to significantly reduce our average cost of debt.
In 2021, we repaid approximately $434 million of secured mortgages at an average interest rate of three 6%.
This has lowered the proportion of secured debt to less than 30% of total debt from 100% 18 months ago.
Our unencumbered asset pool has increased by over $2 $7 billion year over year and was approximately $4 $2 billion as of December 31, 2021, representing approximately 73% of total investment properties value.
We continue to allocate substantial capital towards sustainable initiatives across our existing portfolio and towards acquisitions of green buildings.
During the year, we issued $650 million of green bonds, including the $250 million series D. Unsecured debentures issued during the fourth quarter at an average interest rate of 54 basis points after swapping to your house.
We have already deployed or committed approximately $500 million of green bond proceeds towards eligible green projects.
We also established an aftermarket equity program in 2021.
As an additional tool in a cost effective source of equity capital to fund individual acquisitions developments and other value add initiatives. In Q4 2021, we use utilize the ATM program to raise approximately $56 million at an average unit price of $16 64.
Subsequent to the quarter end, we have raised a further $43 million through the ATM program at an average unit price of $16 27.
During the fourth quarter, we also completed a $288 million equity offering at an issue price of $69 50.
The net proceeds from the offering were utilized to fund our acquisition pipeline as well as development costs.
We ended the year with leverage at 31% and approximately $511 million of liquidity.
Our pipeline of opportunities is strong and we are under contract or in various stages of due diligence on approximately $400 million of assets in Canada and Europe .
We currently have acquisition capacity of approximately $500 million before we reach our target leverage we have sufficient capacity to execute on our acquisitions and development program, while maintaining a healthy and flexible balance sheet.
As we deploy our balance sheet, we expect our leverage to go up to the mid to high 30% range as we close on acquisitions in our pipeline and fund our development projects.
We currently have approximately $300 million Canadian and euro debt capacity and we expect it to grow.
Grow as we complete more acquisitions in Europe .
While interest rates have increased since the beginning of the year, we have only $33 million of debt maturing. This year and we continue to see interest rates on Europe equivalent debt about 160 to 180 basis points cheaper than North American that.
We are currently seeing five year euro equivalent debt in the mid 1% range, which along with our left with leverage below our targeted levels should continue to support our capital deployment strategy.
For 2022, or <unk> <unk> per unit growth will be primarily driven by strong comparative properties NOI growth, which is expected to be over 7%.
Interest expense savings from our European debt strategy completed acquisitions, and the timing of getting our balance sheet to the target leverage range. We are currently expecting <unk> per unit to be in the high 80% to 90% range, depending on average leverage for the year.
Over the past several years, we have transformed <unk> into a high quality business that can produce that can produce strong <unk> and NAV growth over the long term and we believe that our trajectory of growing and improving portfolio quality remained strong.
Turn it back to Brian to wrap up.
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'll now open it up for questions. Thank you.
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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Our first question comes from Sam Damiani from TD Securities. Your line is now open.
Thanks, and good morning, everyone.
Just wanted to start off on <unk> fair values, and maybe we'll look at Ontario, just to start I saw the low end of the cap rate range was down 25 basis points on the quarter to 4%. Even just wondering if there is a reason youre not going lower given the recent transactions that we've seen in the marketplace.
Yeah.
Hi, Tim.
Alex Thanks for the question.
What we see with <unk>.
Iff's values is.
They are largely needs, they're largely going to be supported by external appraisals.
Valuation metrics provided by external appraisals appraisers.
Sometimes it takes.
Our external appraisers time to reflect the market.
Apparel rules.
And there and Theyre suggested ranges.
That's the primary factor.
Four.
For the metrics that youre observing.
What we're trying to do with our disclosure.
For the GTA in other regions as to provide certain metrics such as prices per square foot or implied values per square foot implied cap rate for the current quarter.
So that you can then compare that with more live transactional evidence you see in the market.
Okay, and I guess, a similar thing over in Europe , where there's been some some.
Large portfolio M&A of late.
Just wondering what your thoughts were on on those assets certainly being priced on a per square meter basis, well above where DIR is carrying.
It's European portfolio as you see.
Those portfolios as being comparable overall or.
How you view the marketplace. So the trend in investment activity in Europe . These days.
It is hard to compare but the large portfolios.
In terms of the assets that said, what we implied.
Implied from the recent activity.
In Europe .
Is that there is significant investor confidence in the region.
These are the rental growth potential.
Capital value growth potential and the general outlook for European logistics, whether it's last mile logistics or general logistics for for the region.
Okay last question from me is on would be on the same property I guess the guidance for 7% plus is a nice pick up from 2021.
How much of that is coming from the acquisitions that were completed in 2020 that will be rolled into the same property pool and I'm also curious how Europe is going to play into that.
Just given the accelerating same property NOI growth with your portfolio assuming over the last three quarters.
So we expected the acquisitions completed in 2020 will be on average in line with the rest of the portfolio.
There'll be some assets that will be.
<unk> more than others like for example, we bought if you recall one asset.
Largely baked in Mississauga.
That will be contributing a little bit more than average for Ontario, but overall, we expect it to be to be in line. Our kitchen of the portfolio is going to be part of our same property pool for 2021 2022.
Brian mentioned that that region, you're seeing considerable strength that we've seen that in our operating results and we just announced the.
The value add project completion, and kitchen area as well.
With rents that are exceeding our underwriting and resulted in very strong unlevered yields.
In terms of Europe , we expect Europe .
To be in mid single digit range.
And that inflation increased inflation outlook is not fully factored in now mind you the.
The European portfolio that is included in the same property pool is the 2020 acquisitions that all the 2021 acquisitions, which is the majority of our European holdings today.
It is not part of our same property pool.
Okay. Thank you that's that's helpful I'll turn it back.
Thank you. Our next question comes from Mark Rothschild from Canaccord. Your line is now open.
Thanks, and good morning.
Brian you spoke about acquisitions and maybe.
And markets are properties that are above average quality for the portfolio.
Can you give some more information and your thoughts on where cap rates are for those types of properties and the accretion you would need to justify those acquisitions versus the strong growth in the current portfolio.
Is it accretion based off of now where you think you can get to.
Over the next year or two to same property growth or is it just the benefit of being bigger and having higher quality properties.
Yes, Hi, Mark.
So we judge quality a lot of ways location functionality rent growth I mean, we're looking at total returns when we talk about.
The financial outlook. So some of the acquisitions have opportunities to add density as I mentioned in the opening remarks, some of them have value add just by rolling to market the leases that are in place.
We're seeing a lot of.
Opportunities in Canada for example to buy at cap rates that are that are low so yes about cap rates, but cap rates are kind of one.
One leg of a three legged stool I mean, we look at we look at cap rates. When we look at replacement costs and we look at in place rents. So for example, a property in the <unk>.
Significant mark to market in a shortfall would be a great opportunity for us because the going in cap rate is not really representative of our of our total return same thing. If we can add density to that what we're seeing is.
We're continuing to invest in markets, where we see a runway of growth.
We talked earlier in the Q&A about <unk> versus currently what's in the market all of that.
<unk> is backward looking in the current market activity is pointing to significantly.
Hi, rent growth and value growth going forward and thats evidenced through the private market transactions that are happening. So we're seeing that we're looking to capitalize on that market participate in it particularly in our target markets in Europe GTA Montreal, We think the development pipeline, we have will allow us to participate in that so it has some immediate.
Accretion on the acquisitions that we do but we're very focused on.
Really the long term value in long term quality of our portfolio.
Okay, Great. That's helpful. Thanks, so much.
Thank you. Our next question comes from Brad Sturges from Raymond James Your line is now open.
Hi, there.
So I wonder if you could.
Provide a little bit more context on the <unk>.
Amendment to the external management agreement what the.
Rationale would have been or what prompted the review in the.
I guess, the valuation to the amendments and whether or not that would have included a review on potential internalization.
Okay.
Hi, Brad.
Yeah, Let me just kind of the the asset management.
Amendments are pretty innocuous, let me just run through them. They are switching from a fiscal year to a calendar year.
They are switching from <unk>, which we don't report any more to <unk>. So that's a much more transparent.
Metric.
And thirdly, it's.
It's.
Breaking out our regions, So Canada Europe will have a separate agreements with the same economics, but.
Theres nothing anticipated, but allows for flexibility in the future should we need it and then more importantly, the fourth comment is to add clearly add construction cost to our historic cost when looking at the incentive fee. So.
That was less than totally clear and as we focus on developments going forward I mentioned.
A tremendous part of our growth and a big part of our focus is development. We're at a scale now where we're doing.
Looking to do more development and complement our portfolio.
The amendment now clearly states, which is beneficial certainly forward holders that the historic costs will include the construction costs of of.
Of development not just the land. So it was meant to clear that up and so it was a little bit of.
While we're at it let's just clear all these things up like this the calendar year and those kinds of things. So does that answer your question Brad.
And sorry, maybe I missed it but.
In terms of.
You've cleared up the cleaned up some of the.
Yes.
I guess the metrics in the contract, but what would a internalization and been part of the review process as well or how should we think about that.
The board has discussed it over the years certainly is.
It would be up to them, but it was not part of this this.
This amendment discussion.
And just to clarify the the transition from <unk> to <unk> is neutral it's just.
Just using a different metric, but having the same economics.
Yes, Thanks, Sean.
Yes in terms of the the near term acquisition pipeline I think you talked about $400 million.
Our review and capacity for 500, how should we think about the pipeline right now and sort of the timing and then maybe break it down a little bit more by.
Geography, or I guess stabilized versus development opportunity.
Sure unless you want to talk a little bit about we haven't contracted sure. Yes. So at the end of the year, we had just over $510 million of liquidity I had mentioned we had issued.
$43 million on the ATM since the beginning of the year.
Currently working on about $400 million of acquisitions in various stages within the pipeline.
So I think we've got sufficient capacity to add to close on those acquisitions as well as funding our development costs.
And the timing of those acquisitions will hard to pin down I think it's going to be weighted a little bit towards end of Q1.
Bit more of a chunky into Q2, there is a significant proportion of those acquisitions that are in Europe .
Our German acquisitions, particularly if you take a little bit longer to choose.
To close I'm just.
Kind of given the the process in Germany.
Was that in a moment.
Your question please.
<unk> would be stabilized our fees are.
Do you think about adding more to the development pipeline and then how much activity in terms of.
On the per.
Come up from that perspective.
So in terms of land, Brad Thats out there.
So the one site that we talked about that isn't closed as part of that pipeline and in addition to that we're looking at.
Adding a site right next to another site that we own immediately adjacent to that so that's part of that.
Very large acquisition, but theres. These two parcels in the pipeline.
Okay, great. Thanks, I'll turn it back.
Thank you. Our next question comes from <unk> Gupta from Scotiabank. Your line is now open.
Yes.
Thank you and good morning.
So just under 2022 lease expiring I think around one 5 million square feet is coming due this.
So what are your thoughts.
Do you expect.
Please come back.
Hi, I'm not sure.
So as you've seen we've addressed a significant amount of lease.
Expiring in 2022 since we spoke.
Last time, there's still a couple of leases that is still expiring we expect that the vast majority of them will be renewables there will be.
One or two spaces coming back to us.
Which is which is normal course of business and where we have strong prospects and good pipeline to replace those tenants.
Got it and then in terms of the activity.
During the year.
Those have been split up almost 1% in Europe .
Was it mostly driven by new leases, all youre getting uptick on that as well.
So.
I'm not sure I think your question was in terms of the spreads in Europe with new leases and renewals. The line was breaking up a bit.
That's my idea between new leases and renewals holds us publicly.
I think you've given us.
A whole number of phone.
One for one so just wondering is there a big gap between.
And what state.
The vast majority here were renewals.
So did it.
Not seeing a.
Huge gap.
On those negotiated renewals so we are.
It's pretty consistent.
In some cases, we are working on opportunities for example, we have one one lease in Europe for about 200000 square feet.
Where we have an opportunity to work with the existing tenants too.
To get the space back earlier, we have another 10, who is interested in that space and they are willing to pay rents close to double of what the existing kind of in terms of Spain. So.
Part of our <unk> range of expires is that going to be an additional opportunity. So there is there are some opportunities like that that we're working on.
Alright.
Just to clarify.
On the Douglas Elliman had the option to the new fixed price, although a lot of those leases.
It comes to market developments.
The vast majority of what we have left will be markets market discussions.
Okay.
Okay.
And then if I look at the in place rents.
Square footage.
European portfolio again.
Five youll collagen seven Canadian dollar per foot.
Is there a reason why you opened is going global.
Range closer to quantum opened up at store.
Well, we believe that there is strong upside in European rents overtime.
And we are starting to see.
Pockets of rental growth in March in Europe .
Specifically southern Germany, we've seen certain markets.
Grow at.
Mid to high double digit pace.
Over the course of 2021.
Are we seeing that in our in our own leases.
We're seeing that kind of in many pockets across Europe , Spain buckets in the Netherlands.
So.
We think that it's a great.
Advantaged to have low starting rents and because theres much more upside than downside overtime.
Got it.
Our next door.
And then.
CPI rising in Netherlands, and Germany has that impacted the cost of borrowing.
I think we have done.
They just said no.
Half of the Sunday last year.
Now, although the cost of borrowing.
Alright, So you mentioned that it's a little hard to hear you, but I think you were asking about our cost of debt.
Is that right yes.
Yes exactly.
CPI going up any was there any thank you.
Sure I mean, we're continuing to see.
The cost of European debt being significantly lower than North American Denton for five year Euro equivalent we're seeing about 1%.
Oh, okay. Okay. Thank you.
And the last question on the numbers.
And then you have now.
That would then.
He is well known.
Then I'll just build on spec.
Primarily it will be on speculative basis.
You might find tenants who are interested in taking space early.
It's primarily going to be on speculative basis, but what we're seeing is that as we break ground. We start negotiating leases with tenants. So for example, with Mary Carey, we signed the lease they are well advance of the completion.
On another expansion in the GTA, where radio we're talking to a prospect tenant for a completion in September October .
On another Greenfield project.
In the GTA, we already started talking to tenants with delivery expected end of 2022 early 2023.
Same in Germany, where we will be building a freestanding expansion. So we are seeing that.
We will be entering into lease discussions with tenants before completion. So it's highly likely that many of our projects will be at least.
Leading to completion and the reason, we like that strategies.
We generally seeing much higher rins as a result.
Compared to pre leasing that.
Got it and then in terms of getting development permits or get into one or is it any different with <unk>.
The pace of construction of that includes them.
From GBM.
<unk>.
Much easier to get your Diamond <unk>, let's move on to do quantum for example.
Its very site specific depends on weather.
You need to go through the rezoning process or not and whether your site is.
As it has.
The zoning in place.
As far as site approval process.
It's a bit shorter in Calgary that is in the GTA.
Rezoning might move might be different for different different properties.
Fair enough.
And my last question is.
Jonathan exposure is almost 40% of the portfolio.
Amy.
Is that assuming.
Sales exposure.
Why are you so our European exposure is in that 40% range.
We expect it's going to be in that in that in that range.
With Canada being targeted as the majority of our company.
But it will it will move around over time.
As we say often opportunities don't always come in perfect timing perfect sizes. So it will move around but generally the long term target is that Canada and.
In GTA GMA, primarily are the majority of the portfolio.
Got it fair enough.
Thank you ladies and gentlemen.
Yes.
Thank you. Our next question comes from Sam <unk> from CIBC. Your line is now open.
Thanks. Good morning, just first your question on renewal of the Diamond and the Western Canada in the quarter there.
Coming and all that.
Lot basis against an improvement over the prior quarters. Just wondering if that was specific to the leases that rolled or are you seeing more of a broader improvement in that market.
Thanks, Mike This is that as the spreads in the quarter were primarily.
Relating to specifics of the leases.
We are generally seeing is that there is improvement in the market.
<unk> are starting to trend upwards.
<unk>.
We are starting to.
Put higher rent escalators in our leases.
As we didn't do renewals and new leases were seeing strong leasing momentum in the region.
Terms of absorption of vacancy so we're very encouraged by the fundamentals.
Overall.
Okay.
And then just more broadly in terms of market presence and mix are you.
Sort of happy with your current European footprint or could you see potentially exiting the markets, where you don't necessarily have scale there.
Yes.
We're very happy with the markets that we're in.
Many of the markets that we'd like to add scale. We do look at all of our assets regularly. So every quarter. We go through asset plans and look at recycling.
Assets that we think have lower growth profile our growth outlook then.
Then other opportunities so.
I would say it's a constant.
Work in progress, where we are looking to recycle small portions of the portfolio within all of the regions.
And add more in areas, where we see more growth for example, we're doing certainly more development in the markets that I mentioned earlier and we are continuing to look at recycling some.
Assets that have a lower growth profile or maybe where we've created all the value that we plan to we will recycle out of some of those and invest more in the more opportunistic areas. So we're happy with the allocation we have right now, but we'll continue to look to.
Reinvest and grow in our target markets.
Alright makes sense.
And then just last question from me is just on the NOI margins, which have come up quite a bit I'll be helped by occupancy.
Wondering if the full year level.
<unk> is a good run rate to go with.
Yes, I think thats definitely a good a good run rate to continue using I mean, obviously as we increase the.
The scale of our portfolios as well as the <unk>.
The quality in the portfolio, it's definitely showing through in our margins and obviously the year our European portfolio.
That's slightly higher margin than in North America, just with the cost base structure and the operating cost structure in Europe is a little bit lower than what it is in North America.
Alright, Okay. Thank you I'll turn it back.
Thank you. Our next question comes from Matt <unk> from National Bank. Your line is now open.
Yes.
Just wanted to quickly ask a few questions on the guidance.
Is.
Is the occupancy level assumed I guess on an average basis consistent with where it was at 98% in Q4, and then how should we think of the CPI that you have forecasted in.
And this guidance.
Does it sort of blends to about 3% in terms of rent escalators annually.
When you take into account, both the Canadian and the European portfolio.
So as far as the occupancy that we expect that occupancy is going for the comparative portfolio will remain largely constant.
Theres going to be some some movements but.
Nothing.
Significant.
Just part of normal course of lease rollover transitory vacancies.
New leases, taking effect et cetera.
But largely stable overall.
When it comes to <unk>.
Actual growth outlook, so for Canada, we have with <unk>.
Quantified that.
As we said.
But 8% of leases in Europe have contractual steps when it comes to the CPI indexed leases.
The majority of leases in St.
Netherlands have an annual indexation, so at the anniversary of the lease the rent get adjusted.
Our leases and some other markets such as Germany that half.
Thresholds.
Next needs to reach a certain level before the bearing gets adjusted so let's say the threshold can be set at 5% to 10%.
As soon as the index.
Cumulative index reaches that level, then the entire five or 10% or 80% 90% of that depending on the lease.
It gets reflected in the rent escalator, so that that would be a bit lumpy.
As a result of the structure, which is.
Similar to <unk>.
For example, when.
Jim Global had with.
With Deutsche post lease.
Fair enough yet remember those days, okay. So some lumpiness there.
On the development side just wanted to thank you guys for the incremental disclosure it's very helpful.
But also in terms of the <unk>.
Capex.
It looks like most of this capex is still taking place in the IPP portfolio because it's expansions.
Versus Greenfield development is any of that Capex.
Related to sort of other expansionary, but maybe not adding GLA.
<unk> investments in the portfolio or is the bulk of it development at this point.
A significant component of that is in development it is sort of being expansions.
There is some capex relating to.
Refurbishment. So for example.
Thats kitchen, our assets we've talked about.
We did not add GLA, but rather we took that took a building that was not really.
Ready to be occupied by modern logistics tenant and refurbished the interior to some exterior work and signed the lease. So it was a more of a value add refurbishment. So things like that would be part of that part of that number as well.
Okay, but if I'm looking at sort of ongoing portfolio Capex I should be excluding the $30 million that you spent in the last two quarters because it seems like it's onetime in nature or related developments.
Yes.
That's correct.
And.
Congrats on a good quarter and a very solid outlook.
Thank you Matthew.
Thank you. Our next question comes from Mike from days are Dan. Your line is now open.
Alright, thank you.
Just a quick confirmation that.
It doesn't but.
$100 million of.
Product that you have in the pipeline does that contemplate any additional investment through the U S Fund would be part one second.
Second question is when you're thinking about the U S funds.
To the best of your ability to just give us an update in terms of what the real quick what is there.
What the routes.
Opportunity for additional investment.
It would be in the next 12 months.
Okay.
So.
So Mike is it 400 million does not include.
The U S fund contributions.
We do have.
Some capital there is committed to the vehicle.
And then called.
But the 400 million does not include that.
Yes, and then ongoing Mike it's Brian here.
Waiting to see the fund's performance for Q4, we're expecting them to do well as logistics is doing well everywhere and we anticipate the fund to do quite a lot of development.
<unk>.
And value added some new liquid markets and we will look to participate in that as we see the results and as we as we see fit we think it'll be a good complement to everything we're doing certainly as we enhance our yields through property management and leasing that helps us quite a lot. So we anticipate growing with fund too.
Two roughly the 25% level as they continue to expand.
And just to follow up on to that.
Oh, sorry.
Sorry, Mike I, just wanted to also clarify that.
We do have sufficient debt and balance sheet capacity for this $100 million of acquisitions. The development spending that we're planning for the year as well as the commitment for the U S Fund.
Okay. Thank you and then Alex and Michael I was going to add.
To reiterate the property management and leasing platform.
Operating profit that is rising and will be.
A more meaningful as a fund scales up and we're already seeing that in.
We guided roughly but $1 $5 million of operating profit in 2022, and we expect that will scale up as the funding to fund growth.
Okay. Thanks for highlighting that the one $5 million of decided Alex is that was that all flowing down to the bottom line or is there some outsourcing that.
Sure.
That's net operating profit.
Net operating okay, great. Thanks, so much.
Thank you and at this time I show no further questions in queue and I will turn the call back to Mr. Brian Pauls for closing comments.
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. This concludes today's conference. Thank you for your participation you may now disconnect.
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