Q1 2022 Dream Industrial Real Estate Investment Trust Earnings Call
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Okay.
Good morning, ladies and gentlemen.
Welcome to the <unk> industrial came industrial REIT first quarter conference call for Wednesday May four 2022. During this call management, a dream industrial REIT may make statements containing forward looking information within the meaning of applicable securities legislation forward looking information is based on a number of assumptions and is subject.
For 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 are disclosed in our high.
Such forward looking information additional information about these assumptions and risks and uncertainties is contained in dream industrial REIT filings with securities regulators, including its latest annual information form and MD&A. These filings are also available on dream industrial reached web site at Www Dot Dream industrial REIT That's C. A.
Later in the presentation, we will have a question and answer session to kill for a question. Please press zero, one and you touched on phone your host for today, Mr. Pulse C. L of Dream Industrial REIT Mr. Paul. Please go ahead.
Good morning, everyone and thank you for joining us today for Dream Industrial reach 2022 first quarter conference call.
Here with me today is Ron Kwon, our Chief Financial Officer, and Alex <unk>, Our Chief operating officer.
Dream Industrial had a solid start to 2022 and our strategic initiatives have allowed us to continue to post record operating and financial results. We reported a 16% increase in <unk> per unit for the quarter led by strong CPE NOI growth lower cost of debt and our robust pace of capital deployment.
Our pace of CPE NOI growth rose to a new record high of 10% in Q1, with Ontario, leading the year over year growth at 18%, followed by Quebec, with a 14% year over year growth.
Both driven by solid rental rate and occupancy growth, we have completed approximately $227 million of acquisitions since the beginning of 2022 with an additional $500 million of assets under contract or in advanced negotiations.
We have advanced our development pipeline with over 700000 square feet of projects currently underway and an additional $1 9 million square feet of projects at our share that our advanced planning stages subsequent to the quarter, we formed a $1 5 billion joint venture with a leading sovereign wealth fund to further scale, our Greenfield development program and the.
Greater Toronto area, and greater Golden Horseshoe area.
We are very excited about this opportunity as it will allow us to further.
Upgrade our portfolio quality and significantly increase our presence in these markets industrial fundamentals across all of our operating markets.
Remains strong and we are in position to outperform in each of our markets and Canada. We continued to build on our attractive market positioning in our core markets of the GTA gha and greater Montreal area.
Through high quality acquisitions, as well as executing on our development in anticipation pipeline. This.
This year, we have acquired for well located assets in the GTA totaling just over 400000 square feet for a total purchase price of approximately $102 million.
We have an additional nine assets totaling 700000 square feet that are under contract or in exclusive negotiations in these markets for a total purchase price of $210 million.
In addition, we acquired two sites totaling 70 acres located in the <unk> Submarket in Calgary, We plan to construct roughly 815000 square feet of GLA at roughly 6% yield on cost we continue to target acquisitions of functional well located product in our core markets that allow us to generate significant.
Rental uplift in a short timeframe our acquisition criteria focuses on acquiring quality assets that meet the widest possible range of tenant demand and strong locations, which will generate strong total returns over time.
With older vintage product often trading above replacement costs, we continue to see opportunity in developments and intensification, which will be a significant driver of value for DIR overtime.
The newly formed joint venture will target acquiring $500 million of land in the GTA to develop modern best in class assets. We expect this vehicle to provide DIR a pipeline of attractive projects over time, as we target 5% of our balance sheet to represent projects under development. This partnership allows us to scale our development program.
Across multiple projects as well as secure a pipeline of land for future development, resulting in a balanced lower risk approach to enhancing returns and adding scale in GTA and GVA Jay.
Participation with the leading sovereign wealth fund validates the value of our platform and the strength of our management expertise as part of the venture both DIR and his partner have discretion over new investments and we will have the opportunity to acquire 100% ownership of the assets if the partner chooses to sell its interest we contributed.
Two sites previously owned by DIR into the venture for a total total price of $98 million. The 30 acre branded east lands for a purchase price of $75 million represents $35 million or 100% gain compared to what we paid back in April of 2021, as well as 28 acres.
Site in Cambridge for a price of $27 5 million, which was acquired in late December 2021 the.
The joint venture acquired a third 10 acre site immediately adjacent to the brands and site at the end of April 2022.
Moving on to Europe , we have gained significant scale in our target markets over the past two years and we have already seen strong evidence of rental rate growth in these markets. Despite the ongoing geopolitical tensions we believe the fundamentals in our core Western European markets remained healthy and demand continues to outstrip supply.
Our European portfolio is essentially fully occupied with committed occupancy at 99% with in place rents below market and the high occupancy level. We are confident of driving healthy rental rate growth on over $1 1 million square feet of leases transacted. This year in Europe , we have achieved rental rate spreads of 16% we continue to add.
Scale in our core European markets.
This year, we have already closed on four assets totaling 472000 square feet for approximately $100 million and we have an additional 11 assets totaling $2 5 million square feet that are firm under contract or in.
Exclusive negotiations for a total purchase price of 220 million euros or approximately $300 million based on the current FX rate.
Our scale in the region has allowed us to increase exposure to development. The acquisition of the $8 9 million square foot Pan European portfolio last year added over 1 million square feet of expansion opportunities in the region, which we intend to access over time. Currently we are underway on two projects in Germany, and the Netherlands that will add over 300000.
Square feet in the next 12 months.
Industrial fundamentals in the U S have continued to strengthen the outlook remains quite favorable year to date DIR has funded 70 million U S of its $80 million undrawn commitment to the U S Fund and has maintained its share around the 25% level.
We continue to benefit from providing property management and leasing services to the U S Fund.
And three quarters since the inception of the U S Fund, we have recognized $1 7 million in net property management and leasing income and we expect a run rate to increase further as the U S Fund continues to grow.
Overall, we are well positioned to continue to execute on our strategic pillars, which are continued organic growth expanding our development program focused capital deployment, improving our cost of capital and executing on our ESG strategy.
We have made significant significant progress on each of these pillars in our business as far in all cylinders with a long runway for growth ahead.
I'll now turn it over to Alex to talk about our organic growth outlook and operations.
Thank you Brian .
During the quarter the value of our assets increased by $361 million, reflecting low availability tight supply and higher cap capital values across our operating markets largely driven by the increase in asset value.
<unk> net asset value per unit increased to $16 48.
28, 5% increase year over year, and eight 9% increase compared to Q4 2021.
Leasing momentum in our portfolio remains strong and we reported a 10% year over year same property NOI growth this quarter driven by a five 6% increase in in place rents and a two 7% increase in average occupancy the rent increase was achieved through marking rents to market on rollover contractual rent steps.
And indexation.
Occupancy across our portfolio remains strong at nearly 99% about 150 basis points higher than the prior year and our leasing momentum continues to be robust.
Since the beginning of the year, we have signed approximately $2 8 million square feet of leases across our portfolio.
In Europe , we signed $1 2 million square feet of leases at an average leasing spread of 16% and.
In Canada, we have signed one 6 million square feet of leases at an average spread of nearly 25% <unk>.
Contractual rent steps is an important driver of steady same property NOI growth.
Currently embedded rent steps equate to over two 5% and our Canadian leases.
Recent leases, we haven't been able to negotiate significantly higher growth at 4% per year in the GTA and 3% per year and the GMA.
In Europe , 90% of our leases are indexed to CPI and recent CPI numbers suggest a strong increase in rents on our European assets.
In Q1, 2022, we estimate that CPI days indexation resulted in a 3% increase in contractual rents for leases, representing 21 million euros and contractual rent that had their anniversary date during the period.
Over the balance of the year, we have nearly 33 million euros of annualized contractual rent subject to indexation.
Assuming the pace of CPI increases remains at current levels over the balance of the year, we expect to CPI indexation related contractual rent growth to be in the 6% to 8% range on annualized basis.
Furthermore, market rents for our properties have risen significantly and we are well positioned to achieve an even outperform market trends as leases roll.
Market rents for our properties have increased by 20% year over year and the spread between in place and estimated market rents equates to over 20%.
As a result, the outlook for same property NOI growth remains strong and we expect to outperform our initial guidance provided at the beginning of the year.
We're now expecting CPE NOI growth of 8% to 10% for the full year of 2022.
In addition to CP NOI grows we continue to see several drivers of NOI and net asset value growth across our portfolio.
We have made significant progress on our development pipeline and we are already seeing strong results from our projects with market rents continuing to growth and outpacing construction cost inflation across our markets. We expect our development margins to remain strong.
We currently have underway. We are currently are underway over 700000 square feet of projects that are expected to be completed in the next 12 months.
With a total expected cost of $122 million, we are expecting an unlevered yield on cost of six 3%.
We have an additional $1 9 million square feet in planning stages.
These projects will commence over the next 12 months with most of these projects expected to be substantially complete over the next 18 months.
At our 401, Mary <unk> property in Montreal, we have substantially completed the 132000 square foot phase one expansion.
We leased the entire space at record rents for the sub market, resulting in an unlevered yield on cost of 9%.
The lease commenced in April 2022.
Phase II of the project is well underway with construction expected to be completed by the end of 2022.
We have strong interest from tenants and the second phase as well.
Construction is underway on our 241000 square foot freestanding building on excess land at our property in Dresden.
The expansion will roughly double the GLA on site and we are forecasting an unlevered yield on cost of six 5% on the project. We are already in advanced negotiations with a tenant to lease the entire facility.
At the end of April construction commenced on our 80 acre site located in Canada.
We are building a 154000 square feet of high quality industrial space and expect completion in the first half of 2023.
With a total cost of approximately $38 million, including the cost of land, we're forecasting an unlevered yield of five 6%.
In the second half of 2022, we intend to commence the redevelopment of a cluster of three buildings on a 10 acre site in Mississauga.
We are working towards the construction of a 290.
Square foot best in class facility with an unlevered yield on cost of over 5%.
We will continue to make strong progress on our sustainability initiatives across the portfolio.
Scope and the scale of our renewable energy program continues to gain momentum our first solar installation project in Sandridge Calgary achieved substantial completion in the quarter and the tenant is now using solar generated power to operate the building.
We are also executing on 12 projects across Canada, and Europe that will add 19000 solar panels, we expect the capital investment to be roughly $10 million with an unlevered yield on cost of about eight 5%.
We expect this income to come online in phases, starting in the second half of 2022.
Our U S property management and leasing platform continues to generate strong income.
We expect an operating profit of over $1 5 million in 2022.
Overall, we believe the DIR has significant opportunities to drive CPE, NOI and NAV growth both of which should further enhance the quality of our business.
I will now turn it over to <unk>, who will provide our financial update.
Thank you Alex.
Our financial results for the first quarter was strong diluted funds from operations was 22 cents per unit for the quarter, 16% higher than the prior year comparative quarter due to higher NOI from our competitor properties.
Vessel deployment of our balance sheet capacity towards more than $2 billion of acquisitions over the past 12 months and lower borrowing costs as we executed on our European debt strategy.
We have been able to achieve strong year over year growth, while strengthening our balance sheet.
During the first quarter, we also completed a $230 million equity offering at an issue price of $16 30.
The proceeds from the offering were utilized to fund our acquisition pipeline as well as development costs.
In Q1, 2022, we raised about $90 million through our ATM program at an average unit price of $16 46.
We continue to allocate substantial capital capital towards sustainable initiatives across our existing portfolio and towards acquisitions of green buildings last month.
We issued $200 million series E Green buys which took our total outstanding green bonds to $860 million.
We have already deployed $295 million towards elvish eligible green projects and identified $200 million in additional eligible green projects with a further $300 million of projects and feasibility or preliminary stages.
We ended the quarter with the leverage just below 26% and with approximately $638 million of liquidity.
After the quarter, we closed on our $200 million series, the green bonds and foreign to GTA joint venture, bringing our total liquidity to over $900 million.
Since March 31, we have closed on $110 million of acquisitions across Canada, and Europe , and funded approximately Katy and $60 million of our commitments to the U S Fund.
We have just over $500 million of acquisitions that are currently under contract or in exclusive negotiations as well as $90 million of developing development costs for our near term development pipeline.
Pro forma these capital deployment initiatives, our leverage will be in the low to mid 30% range and we will continue to have significant room in our balance sheet to execute on our growth strategy.
We will be able to acquire approximately $500 million of additional assets before our leverage increases to our targeted range in the mid to high 30% range.
Given the recent market volatility we believe that it is prudent to run the company in the near term at a lower leverage level level in the mid 30% range.
Our geographic diversity allows us to access debt at the most optimal costs. We continue to see euro debt rates that are 200 basis points lower compared to North America and that provides us a significant advantage as we continue to execute on our growth strategy.
We ended the quarter with approximately $400 million Canadian of Euro debt capacity.
Following our $200 million Green bond in April and pro forma the closing of the European assets in our acquisition pipeline, we expect our euro debt capacity to grow to over $500 million Canadian.
With less than $30 million of debt maturing for the remainder of this year, we have limited exposure to higher interest rates in the near term.
Future acquisitions, our underwriting continues to focus on assets that generate strong total returns that exceed our return hurdles.
Our Europe equivalent that provides a natural currency hedge to our assets and income from Europe as our assets are nearly fully hedged we expect minimal movement in our net asset value per unit from changes in the Euro Canadian FX rate.
On the <unk> side that there is some impact in the spread between our NOI yields and interest rates.
Year to date strengthening of the CAD versus the euro of approximately 6% when compared to year end 2021.
We have an approximate one five to <unk> <unk> impact on our full year 2022 <unk> per unit.
Looking at the remainder of the year, we expect to run at slightly lower leverage and assume the Canadian dollar stays close to current levels.
We are on track to exceed our competitive properties NOI target as Alex had mentioned earlier, we are expecting 8% to 10% comparative properties NOI growth this year.
Putting that all together, we expect <unk> per unit for the full year 2022 to be in the range of our prior guidance, which is in the high 80% to 90% range and will depend on our average leverage and FX rates.
Over the past several years, our strategic initiatives have transformed <unk> into a high quality business that can produce strong SSO and net asset value growth over the long term and we believe that our trajectory of growing and improving portfolio quality remained strong.
I will turn it back to Brian to wrap up. Thank you Ed our team continues to work hard and achieved significant milestones along the way.
We have taken significant steps to position <unk> as the premier industrial REIT in each of our operating markets.
I'd be happy now to open it up for questions.
Thank you we will now begin the question and answer session.
Please go ahead.
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And our first question comes from Sam Damiani. Please go ahead.
Good morning, everyone. Congrats.
Congrats on a good quarter.
I guess, maybe just to start off is I guess, the big question, probably in everyone's mind is Amazon and their announcement last week about the capacity issues in their fulfillment operations.
As have any sense as to what they may or may not do and how pervasive that issue might be for other other space users in the marketplace like how big of an issue do you think this is.
Yeah. Thanks, Sam.
We've heard their guidance.
We don't have a tremendous exposure directly to Amazon and the exposure. We do have notes are in very.
What I would call generic but highly functional buildings. So it's in generic space that would be very reliable in fact in most cases, it's under market.
That they pay so we don't have specialty buildings, we don't have super high rents that were receiving from Amazon in the small exposure, we do have I'll, let Alex talk a little bit about it as well but.
We don't see this having a great impact on us in fact, most of the markets that we're in and certainly where we have exposure to Amazon we would welcome some vacancy and the opportunity to mark those those leases to market.
It's I think a big thing in the market because there is such a large occupier of space around the world, but for the most part the markets. We're in are not significantly impacted by them for example in the Netherlands. They don't have a big presence at all.
In the U S, where we do have some exposure to them it's in buildings that.
Our very reliable so we don't know the extent of.
Can't necessarily quantify there changes but.
But we know it will create some market noise, Alex do you want to elaborate on that.
Thank you Brian .
Well, Sam when we look at the markets, we're in and the asset types we are in.
So starting maybe with asset types as you know we are focusing on.
Urban logistics assets primarily.
We don't focus on sort of fulfillment centers and very large boxes, we have warehouse distribution assets. They would be in 200 300000 square foot range on average.
When we analyze amazon's guidance when they talk about there.
Excess capacity, primarily in fulfillment centers not in the last mile.
Product and then if we zoom in into the markets that we are.
And so in the GTA.
Markets are exceptionally strong we.
Our hearing that there are.
Plenty of other occupiers, who may have been behind on in terms of.
Their distribution networks compared to Amazon, who are continuing to ramp up their ecommerce operations, we're seeing strong demand from tenants who are.
Adjusting their businesses for the changes to supply chain inventory levels and we are seeing.
Seen that demand.
When it comes to Europe .
And Theres a lot of demand that we see not from Amazon in our portfolio, it's really or E. Commerce, it's really from various industries as well.
<unk>.
We continue to see on the ground is that the markets remained strong and theres lots of demand coming from a variety of sources not just ecommerce ecommerce has definitely been a significant driver for industrial and logistics, but they have been significant other drivers added over the last.
24 months that are still there.
In our markets.
That's great color I appreciate that.
And just moving on to the development pipeline have you recast.
The budgets on the active projects.
Sort of reflect current market costing have you done that.
What impact have you seen and has it been more than offset are sufficiently offset by higher rents.
Yes.
Sam we've much of our cost for our.
A lot of our construction right now is locked in so some of the current projects were re recasting to reflect the market rents a lot of our costs are locked in as we look to future pipeline.
Future development, we're certainly looking at cost changes as we go both both on the material Labor land and then we're also looking at rents as well so our yields and spreads. We think are certainly intact market rents have been growing faster than costs at this point, even though costs are.
Are going up but we look at it.
Certainly weekly if not sometimes daily Alex.
Would you add to that.
Yes, Thanks, Brian as Brian said, so we're locked in on everything there is underway.
We are seeing improvements in yields because.
On the revenue side, we're still seeing upside as as market rents continue to grow.
Some projects that are still in planning.
Yes, we will likely see continue to see exposure to fluctuations in construction costs, but Brian .
Brian said, we have seen that our margins are.
Staying in tax are improving as as market rents grow.
That's great. Thanks for the color and I'll turn it back.
Thank you. Our next question comes from Mark Rothschild. Please go ahead.
Thanks, Good morning, guys.
But with the move in interest rates and obviously the equity markets being a little softer have you changed at all your underwriting for acquisitions or maybe just.
How aggressive youll be biopsy by quite a bit.
Over the past year have been moving quickly this year so far.
Yes, Mark it's a good question, we're watching it very very closely the things that.
We've waived on we're closing on things we've not waived on we were basically re underwriting re making sure that our our pricing is good. The geography is good this is exactly what we want.
We're watching it closely I think.
Theres still been a little bit of a decoupling between interest rates and cap rates, but that could change over time and so we're quite careful I would say we are more and more cautious now as we look at noise in the market and as interest rate risks are out there and things that are affecting potentially affecting pricing.
We're looking at that very closely so across all the markets I think it's affecting Canada, Europe and the U S potentially different depending on how tight the markets are and what the rent growth outlook is for that particular market. So it's.
It's not a broad brush, we paint with but its very very specific when we look at each individual market and the underwriting. So we're we're really looking at it as we go and I would say, we're certainly taking a.
More and more cautious as we look at underwriting in light of the cost of debt.
Okay, Great maybe just one more question.
Can you just give us an updated comment specifically on western Canada, how fundamentals have changed of late.
Do you have a more optimistic view on that market now as opposed to maybe six months ago or a year ago.
Yes, I'll, let Alex reflect on that but it is certainly changing.
Absolutely.
I would say six months ago Mark.
We started to be much more bullish on western Canada already.
And when comparing to 12 months ago, absolutely be the fundamentals have changed considerably.
We have seen.
Significant absorption.
The outlook for.
For rental growth has improved considerably.
We are seeing.
Rental rate growth and our own leasing as as we go.
Every every week, we're seeing kind of improving.
In terms of higher contractual steps higher rents.
So I would say that we are much more constructive on the market compared to 12 months ago.
Okay, great. Thanks, so much.
Our next question comes from.
Doug. Please go ahead.
Thank you and good morning.
So seabee NOI growth guidance was increased to 8% to 10% from 7%.
Can you elaborate like water, which regions are driving that increase.
Hi, I'm Andrew Thanks.
Thanks for the question so.
We're seeing improving.
Fundamentals across the board.
In Ontario, and Quebec, we are signing deals at higher rents.
In Europe , we have had a few successes as well in terms of marking rents to market, we certainly seeing higher CPI contra.
Contribution in Europe .
We've talked about Western Canada, just recently, so we are seeing improving fundamentals across.
Across the regions.
Contributing to this improved outlook.
And are you baking I think you mentioned the CPI index in Europe , but it will be 6% to 8% range. So are you expecting that.
As well it does.
Guidance of 8% to 10%.
Is that another reason why the guidance.
Gone up because of the DRP capital.
Yes, a lot.
The CPI tick.
Pick up for 'twenty train two has already happened.
We have a little bit more leases that will be subject to indexation.
<unk>.
In Europe , a lot of those leases are non safety and non non same property and theyre not in the same property pool.
So we expect that yes, CPI will contribute but a lot of batteries.
Yeah.
Got it okay.
Then on also for per unit guidance was unchanged.
Excluding the negative impact from euro.
19 of the Canadian dollar versus Euro.
We offset by higher NOI guidance I mean is that how we should look at.
Yes, that's correct.
The other the other moving part was the average leverage that we have assumed I think we're expecting that we would run at slightly lower leverage.
But that again is also offset by the stronger organic growth.
Got it okay. Thank you.
And then.
Back to the leasing question here in Europe over 1 million square feet of leases signed at 16% plus spread.
No.
Is that a function of it's funny when being blow or are you seeing buckets like Stanton.
Lucky brand sales growth.
We are seeing market rent growth.
And.
Yes, we had built in mark to market potential, but we have.
Seeing market rent growth.
And then the bulk of the market opportunity under the European portfolio.
The school just mentioned around 6%.
Do you think there is that's a conservative number given what do you think about market sounded like it could look like double digits here in terms of mark to market.
It could over time.
As more leases roll.
We could see more upside than downside to that number.
Okay. Thank you.
Gentlemen.
Our next question comes from.
Please go ahead.
Thanks, Good morning.
Alex in your remarks, you spoke to.
Getting success getting those 304% contractual steps in your renewals are you seeing any signs of resistance from certain groups of tenants or do you have any concerns about tenant affordability at this.
At this point in time.
Thank you for the question, Yes, we are seeing.
Those dose.
Those levels and are in lease negotiations.
It became sort of the market norm too.
To have the built in escalators, what we see from our occupiers and when we have discussions with our occupiers are but the.
Our market wind levels.
Rent is important.
But it's still a small component of the overall P&L and.
And so it's not necessarily an affordability issue.
For many of the occupiers.
For a lot of the upside as it comes due.
Being in the right location with close proximity to major arteries.
Pools.
That is much more.
Important competitors, let's say.
Negotiating the last $2 on the rent or moving to a location that is.
Cheaper in terms of the overall occupancy costs, but will result in additional audit costs.
Okay.
You also spoke about sort of the non e-commerce demand for aerospace, especially the European portfolio.
Could you give us some examples of sort of the biggest user of type of types that are leading demand or is it sort of well around a demand from a variety of industries.
Yes in our portfolio, we see a lot of food and beverage tenants.
These trends have been very active and.
We've seen them grow.
We are seeing.
Tenants, taking more space to carrying more inventories.
As they are.
Adjusting their operations for changes to supply chain. So we see that in North America, we see that in Europe .
So there's lots of examples of non e-commerce.
Demand.
Our business.
Okay. Thank you I'll turn it back.
Our next question comes from Matt Cornett. Please go ahead.
Yes.
Just a quick follow up to marks earlier questioning with regards to the acquisition pipeline and what you are looking at.
Has this bond yield environment changed which markets look more attractive at this point or I guess said differently would.
Or would you rather have leases that are trading at lower cap rates with more upside on the rent side or.
In markets like Europe , where interest rates. So you still have a positive spread I guess between interest rates and cap rates just interested in your general thoughts as to where Youre targeting capital These days or where you think putting incremental money makes sense.
Yes, Thanks, Matt.
We're still very very focused on the same strategy. We're focused on liquid markets were very very focused on quality assets none of that has changed.
I mentioned to an answer to Mark's question that.
We are looking at the.
Mark to market, we look at walls for example longer wells are are getting repriced, probably more substantially just because of the dead or bond yields shorter wallets and marking to market with significant growth is very very competitive. So we're looking at all of those attributes to acquisitions that we are chasing.
But really the core fundamental of great markets, great locations, Alex mentioned proximity to main arteries proximity to population centers long term values. What we're focused on so that has not changed in the markets that we're in are still our core markets.
<unk>.
Those markets will continue to be the the stronger markets are the ones that performed best for us over the long term. So none of that has changed some of the specific pricing. We are looking very closely at and taking a pretty conservative eye toward.
The cost and the incremental accretion to those acquisitions so.
None of our overall strategy has changed its just.
We're focused on the on the unique pricing to each individual asset or the unique attribute to each market that we're in.
Okay fair enough. So it sounds like pricing at this point is fairly efficient across markets based on those different characteristics.
And then I guess the flip side is the euro has depreciated depreciated against the Canadian dollar does that make a difference in terms of that market being a little bit more attractive at this point to put capital into it and then maybe a follow up question for lettuce.
In terms of the way you issue European debt.
Can you speak to the difference in cost between maybe issuing in Europe directly on an unsecured basis.
That's even possible as well as kind of the cost differential to the swaps that youre doing.
The existing financing.
So theres a series of questions there, Matt I'll just start with the first one to say our allocation towards the different markets Hasnt changed so the attraction to the.
The FX side of the business Hasnt changed where we want to allocate capital and kind of our overall.
Geographic allocation or mix. So then I'll.
I'll, let <unk> comment on the kind of the balance of your questions as it relates to our balance sheet, but.
Sure David the question I do recall is the line of both the euro.
The issuance of this European debt. So we are looking into opportunities to whether or not we can issue debt directly in Europe .
From a cost perspective is it fair.
Barely equivalent it may be a few basis points.
For the method that we are doing currently.
There is some I guess some pricing that's to be gained through the swap mechanism.
But it's a few basis points.
We're looking into whether or not lead to issue directly in Europe . There is some additional steps required.
An additional rating.
Our ratings.
Another rating agency would be required.
Just looking at how that would be structured et cetera, but it is something that we are exploring as well.
Okay fair enough.
Another really solid quarter guys.
Thank you.
Our next question comes from.
Bob Bob Mukhtar. Please go ahead.
Thank you and good morning, everyone.
Great quarter I have two quick questions and I'll talk to the first.
We've seen fair value gains across the portfolio and im trying not to paint everything with the same paintbrush.
I'm wondering if you're witnessing greater cap rate compression across the European portfolio as compared to Canada, given where demand for private assets.
Capital flows Blake too.
And thank you for that question overall, when we think with capital values.
So the cap rates.
Cap rates can be very challenging to compare across assets.
Brian said short of world with Mark to market versus longer world with no ability to mark to market.
When we think about capital values capital values remain lower in <unk>.
Europe compared to North America compared to Toronto in particular.
Ontario.
We are continuing to see upward movement in capital values, especially as rental growth takes place.
In the GTA GMA capital values remained strong and we have seen.
Upside in our own portfolio from a capital value perspective.
In the greater Toronto area critical Horseshoe area generally.
To reflect kind of the the.
The comparable transactions that we've seen in the market over the last Oh.
The last few months.
Okay. Thank you for that.
Alex and then my last question now we've also seen impressive quarter on quarter growth with respect to we are not per unit. How should we think about naphtha unit growth for the rest of the year and I'm. Just wondering if there's any guidance that you would like to provide a bump.
Well, we can't really guidance, our future value changes because obviously.
<unk> is at a time.
However, we continue to see drivers for organic net asset value growth as we've talked about our same property outlook is robust.
We are completing value add initiatives across the portfolio, we are completing development projects across the portfolio.
And we expect that all of these initiatives will contribute to our net asset value growth over time.
Okay. Thank you for that back to the operator.
Once again, thank you for that.
Question. Please zero one on your Touchtone phone.
And our next question comes from Penny Berger. Please go ahead.
Thanks.
Good morning.
Just with respect to the $500 million of acquisitions that are in the works can you just comment on where.
<unk> is coming in in terms of cap rate ranges.
What sort of debt costs.
On an overall average basis are you underwriting them.
Sure.
So we expect that the cap rates are going to be consistent in the growth profile is going to have a consistent with what you've seen from us.
We are doing some deals.
In greater Toronto area that are immediately adjacent to some of our holdings in core GTA that.
We'll we'll allow us to pursue a land assembly strategy.
Cap rates on those assets would be lower let's say in the 3% range, but with significant upside as we mark to market and then further upside as we pursue the redevelopment of dose those assets for example in Europe , we're seeing deals in the in the 4% range.
In the mid 4% range was ups.
Upside from CPI, marking rents to market.
Et cetera, as far as the cost of debt.
We have issued the cost we have issued bonds recently, so we are we still have to deploy that money.
But generally we are underwriting two to two 5% range when we look at new.
New capital.
Got it.
And maybe just sticking to the I guess the acquisition market.
Just curious if youre seeing any changes in terms of the types of buyers at the table.
Again with the move up that we've seen.
In the back of the bond yields.
We have seen that some of the buyers that rely heavily on financing are more cautious.
Private buyers.
Or.
I would say smaller private equity players.
Who need financing and need a lot of it.
But at the same time, we continue to see that large institutions.
In Canada and in Europe .
<unk>.
Operator was.
Very little leverage and no leverage and they continue to be active.
Got it.
Maybe just it was interesting actually just hearing a broker presentation last week in Europe , and I guess their expectation for for cap rate expansion in industrial, but good offset by by rent growth.
I'm just curious do you share that view and do you think that the rent growth is more than sufficient.
To offset the impact.
Rising cap rates.
Your portfolio and maybe just.
As an add on.
Any conversations about whether it's with appraisers potentially adjusting cap rates.
Going forward.
Pardon me I'll start on that if you look at our our spreads our renewal spreads they are significant.
Rent growth right. Now is has been very significant so we haven't seen an impact on cap rates appraisers will wait for data points before they can kind of recognize the change in that.
We would expect that may come over over time, but right now we're seeing rents that are.
Trying to meet replacement costs, so economic rent will justify new construction and that is somewhere in the mid to high teens in the GTA. For example, so we've still got some rent growth to go and we are seeing that outpaced cap rate.
Expansion so.
That's the current state of the market and we expect that to continue until rents could justify significant new construction.
And then finally just to add to that is specifically for Europe .
Okay.
When it comes to cap rate expansion argument.
We have that there hasnt been a lot of evidence of it however.
There is speculation that it could happen as assets that are have very long leases with very.
Limited upside in our ability to to mark to market core assets that already have low low going in yields.
That said as we as we talked about earlier.
When we think about overall capital values.
For logistics in Europe logistics.
Our industrial in Canada.
We continue to see capital values rise and.
They're there, it's really a function of rental growth.
And we do see that for <unk>.
Does that have.
Mark to market potential in Europe .
That is more near term.
Market is generally baking in.
Starting to bake in the assumptions of the mark to market and underwriting.
Okay.
Maybe last one for me just with respect to the ATM, just given where the unit prices how would you view maybe changed with respect to using the ATM.
Go ahead, yes, hi, Yes, let me, we still think the ATM as a cost effective way of raising equity, but we are cognizant of the cost that we're issuing asset versus our net asset value net asset value.
So I think where we're going to be very cautious in terms of tapping that I think we've got sufficient amount of liquidity right now too.
To address our pipeline in development upcoming near term development cost.
So.
Kind of given some of the recent market volatility and where the interface is trading I think we will.
We'll be a little quiet on that in the near term.
Makes sense.
Thanks, very much I'll turn it back.
Once again, if you do have a question please press.
One on your Touchtone phone.
And our next question comes from Todd Blake. Please go ahead.
Yes, Hi, Brian and Alex. Thank you so much for this call just a quick question, it's more on the data that we.
We've struggled to find and can you quantify do you have data to quantify what Amazon has meant to the annual take up in Europe , and Canada as a percentage of total take up I mean, we've seen the numbers for the UK, which is very high for the U S which is high.
What is that number for Canada and Europe .
If you have that data.
We don't have the exact data at our fingertips right now, but we can we can get back to you in the GTA.
It hasnt been significant.
In terms of specifically.
Yes.
The footprint of Amazon is less than 1% of the of the market.
Although stock in the market. So we and we don't think that there.
Impact of them slowing down if they will slowdown in the GTA.
For example that would be the market.
It's on the list of <unk>.
Excess capacity.
The impact is going to be significant and Tim just to add to Alex's comments there their impact is not equal across all product types. So for example, their fulfillment centers.
Not have much of an impact on urban logistics as we discussed earlier in the call.
We don't think it will have a meaningful impact on our portfolio. It may have an impact on creating some space in the large very rural logistics fulfillment markets, maybe by providing some space there, but in terms of our portfolio in the locations where we are.
We don't see that having a meaningful impact.
Thank you and just a follow up somewhat related do you have a sense either from discussions with Amazon or from those that are.
A link to a related.
Comment about excess capacity in the kind of the logistics market was that a U S specific comment or was that a global comment.
We have not had those conversations.
Early days.
We are seeing.
Is that they remain active in some markets.
And.
Less active than others, we have a footprint.
Footprint in the U S. We have footprint.
In Canada in Europe . So we think that candidate is probably a bit different than the U S where they have the largest footprint in Europe .
I'm talking about Continental Europe .
Their footprint is growing they happened.
They havent reached probably.
See the footprint they need over.
To serve as the entire market.
As we talked earlier in the Netherlands, they've just starting in the Netherlands.
They have been servicing that out of Germany, primarily.
We see them, taking more space and plants have seen them, taking more space in France.
As recently as.
Six months ago.
Significant space.
We're talking about close to a nine square feet and Submarkets, we're continuing to see them active.
In Germany, they looked at our development site in Dresden for example.
We were engaging with them six to nine months ago.
We continue to see activity from them across various markets. It is fair to say that E. Commerce penetration is highest in the U S. Probably next in Canada, and then the lowest in Europe . So if that.
Is there capacity or the efficiency of the e-commerce market.
That's what we see or how do we interpret that data.
Thank you and do you have.
The latest snapshot in terms of just from a market perspective is square meters per capita square feet per capita for Canada U S and Europe and how they compare I know theres that rule of thumb. The rule of 10 four U S is tenex everyone else in terms of square footage per person.
<unk>.
Do you have any updated view for Canada and Europe .
In terms of industrial inventory that is required so required per capita.
Not required just existing as a percentage of population.
Just getting a sense of how much.
Yes. It is out there we do have that we don't have it right with us Todd.
Okay, We'll circle back with you after the call.
Alright, good thanks al.
Thank you and at this point, we have no further questions turning it back for any closing remarks.
Thank you so much for your time today, we will be able to say today and we look forward to circling up soon take care.
Yes.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect speakers. Please standby for your deeply.
Okay.
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