Q2 2022 Dream Industrial Real Estate Investment Trust Earnings Call
Good morning, ladies and gentlemen, welcome to the Dream Industrial REIT second quarter Conference call for Wednesday August three 2022. During this call management of 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 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 additional information about these assumptions and risks and uncertainty.
<unk> is contained and dream industrial Reits filings with securities regulators, including its latest annual information form and MD&A. These filings are also available on dream industrial Reits website at Www Dot Dream industrial REIT dossier.
Later in the presentation, we will have a question and answer session to queue up for a question. Prestero then one on your telephone keypad. Your host for today will be Mr. Brian Pauls CEO of Dream Industrial REIT, Sir you may begin.
Good morning, everyone and thank you for joining us today for Dream Industrial reach 2022 second quarter Conference call speaking with me today is last Kwon, our Chief Financial Officer, and Alexander <unk>, Our Chief operating officer.
Dream Industrials operating results continue to highlight the quality of the business and the growth opportunities embedded in our portfolio. We reported a 12, 6% increase in <unk> per unit for the quarter led by strong CP NOI growth and lower cost of debt or pace of CPI growth rose to another record high of 10, 1% in Q2.
Two with Quebec, leading the year over year growth of nearly 16% followed by Ontario, with a 12% year over year growth, both driven by solid rental rate and occupancy increases.
Despite higher interest rates due to inflationary pressures and a more hawkish tone from the central bank's industrial fundamentals continue to be strong across our operating markets. This has resulted in low availability tight supply and strong capital values. There is now a significant disconnect between the public market pricing of industrial.
We are seeing in the private markets in Canada, we continue to build on our attractive market positioning in our core markets of the GTA Gigi.
And greater Montreal area through high quality acquisitions, as well as executing on our development and intensification pipeline.
With the national vacancy rate at just one 6% in several markets with sub 1% vacancy industrial fundamentals continue to remain exceptionally strong on.
Nearly $2 5 million square feet of leases transacted to date. This year in Canada, we have achieved rental spreads of 31% led by spreads of 71% in Ontario at 42% in Quebec.
In Europe , notwithstanding geopolitical events, we have continued to see strong demand for industrial space.
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 nearly 14%.
Our development pipeline continues to be an accretive driver of cash flow and NAV growth, while upgrading portfolio quality display despite inflationary pressures on the cost side market rent growth has continued to outpace cost increases.
Our forecast Unlevered yield on cost for our near term development pipeline of increase from our initial underwriting and now average is six 3% over 50 basis points higher than our initial forecast.
Our strategic initiatives over the past several years have positioned us well to navigate the current market volatility with our portfolio of essentially full in in place rents well below market rents our organic growth profile remains robust and should allow us to drive strong per unit cash flow.
Given the market volatility, we expect our near term acquisition activity to moderate compared to the first half of 2022, we have increased our focus on maintaining an ample liquidity cushion and low leverage we are actively monitoring our target markets and our flexible balance sheet provides us sufficient capacity to capitalize on compelling investment opportunities.
That are of strategic importance for the REIT.
Since the end of the first quarter, we completed approximately $368 million or previously announced acquisitions during the quarter that added over one 9 million square feet of high quality assets to the portfolio.
In Canada, we acquired seven income producing assets totaling 500000 square feet for $136 million as well as $19 five acres of development land in the <unk> Submarket of Calgary.
These assets are primarily located in the GTA were acquired well below replacement cost and offer the opportunity to drive significant rental rate growth over time the.
The average in place rents are over 25% below current market rent.
In Europe , we acquired eight income producing assets totaling $1 4 million square feet for $220 million. These assets are well located close to major transportation corridors and leased to high quality tenants.
In the U S. We continue to benefit from providing property management and leasing services to the U S Fund.
In 12 months since the inception of the U S Fund, we have recognized over $2 million and net property management and leasing income, which is ahead of our initial expectations and we expect the run rate to increase further as the U S Fund continues to grow.
We continue to see a long runway for industrial fundamentals in our business is well positioned to outperform.
I'll now turn it over to Alex to talk about our organic growth and outlook of our operations.
Thanks, Brian during.
During the quarter the value of our assets increased by $45 million, primarily driven by higher market rents and increased values properties appraised externally.
Largely driven by the increase in asset values Dir's NAV per unit increased to $16 64.
At 21, 5% increase year over year.
As Brian mentioned, we continue to see a significant disconnect between public and private market valuations.
For example, our current unit price implies a capital value of about $140 per square foot on our income producing properties, which is significantly below private market values, especially as our operating performance remains robust.
Leasing momentum in our portfolio remains strong and we reported 10, 1% year over year CP NOI growth this quarter, a new record for the REIT. This was driven by a six 8% increase in in place rents and a one 4% increase in average occupancy.
Since the beginning of the second quarter, we signed one 4 million square feet of leases across our portfolio.
In Canada, we have signed over 1 million square feet of leases at an average spread of 39%.
I will go over a few key highlights.
A finalized a 275000 square foot renewal with a major global corporate tenants and Regina for a 10 year term with 2% annual steps starting rents in line with expiring.
Recently, we signed our 43000, we leased our 43000 square foot expansion project in Richmond Hill to a national tenant, resulting in a yield on cost of 11%.
Earlier this week, we finalized the commitment with an existing tenant in Montreal for us.
120000 square foot expansion at $14 per square foot was 4% annual steps, we expect to realize a yield on cost of over 8% on this project.
And terrible in Quebec were finalized a renewal for 57000 square feet at a rent of approximately 100% higher than expiring.
Part of the renewal, we agreed with the tenant to expand the building by 29000 square feet.
In Europe , we signed 300000 square feet of leases at an average spread of 11%.
The level of leasing activity in Europe remained strong.
We're in advanced negotiations to lease the entire 241000 square foot expansion in Dresden. We're also in advanced negotiations on a new lease for 400000 square feet in France.
Contractual rent steps are an important driver of Saudi CP NOI growth.
Currently embedded steps equate to over two 5% per year on our Canadian leases.
In our recent leases, we have been able to negotiate significantly higher growth.
4% per year in the GTA and 3% per year in the GMA.
In Europe , 90% of our leases are indexed to CPI.
As a result, the outlook for CP NOI growth remained strong and we continue to expect <unk>.
<unk> growth of 8% to 10% for the full year of 2022.
In addition to same property NOI growth, we continue to see several drivers of NOI and <unk>.
Growth across our portfolio we have.
We've made significant progress on our development pipeline and achieved strong yield on cost on our recently completed projects.
We completed a 65000 square foot expansion in the Netherlands, which was pre let at construction start.
Over the next 12 months, we expect to complete construction on six projects totaling 683000 square feet.
To date, we have leased approximately 200000 square feet of space in these developments and are currently in various stages of negotiations and marketing for the balance of this space.
We expect that these projects will be substantially leased before completion.
We intend to commence the redevelopment of a cluster of three buildings on a 10 acre site located in Mississauga.
We are working towards the construction of a 290000 square foot best in class net zero carbon facility with an unlevered yield on cost of over six 5%, we expect to start construction. This fall.
We have approximately $1 9 million square feet in advanced planning stages. Most of these projects are expected to be substantially completed over the next 18 to 24 months with an average yield on cost of 6%.
Overall, our assessment is that the market brands continued to outpace increases in construction costs, resulting in improvements in the yield on cost metrics for our development program.
We're also progressing well in our value add capex initiatives within our portfolio. For example, we're executing on 15th solar projects across Canada, and Europe that will add over 22000 solar panels, we expect an overall capital investment of roughly $12 million with an unlevered yields of over.
10%.
We expect this income to come online in say in phases, starting in the second half of 2022.
Overall, we are encouraged by the operating fundamentals in our markets and the opportunities within our business to drive organic NOI and NAV growth as we execute on our active asset management strategy I will now turn it over to <unk>, who will provide a financial update.
Thank you Alex.
Our financial results are strong and demonstrate the success of our strategic initiatives over the past several years diluted funds from operations was <unk> 23 per unit for the quarter 12, 6% higher than the prior year comparative quarter due to higher NOI from our competitive properties.
Vessel deployment of our balance sheet capacity and lower borrowing costs as we executed on our European debt strategy.
We ended the quarter with leverage just under 30% and with approximately $429 million in available liquidity.
Since June 30, we have closed on one acquisition for $23 million and have another two acquisitions totaling $85 million that are firm or in exclusivity.
We retained sufficient liquidity and balance sheet capacity to execute on these acquisitions and fundamentals.
$70 million in development costs over the balance of 2022.
Our near term debt maturities and limited with only $270 million of debt maturing in the next 18 months with access to euro equivalent debt that continues to be priced about 200 basis points lower than North American debt. We expect refinancing these upcoming maturities to have limited impact on our financial results.
Our euro 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 CAD FX rate.
On the SSO side, there is some impact due to the spread between our yield NOI yields and interest rates.
The recent roughly 5% strengthening in the Canadian dollar versus the euro since the end of the quarter.
<unk> has less than one cent impact on our SSL per unit forecast for 2022.
Given the recent market volatility, we intend to run at leverage in the low to mid 30% range and retain sufficient balance sheet capacity to pursue and execute on compelling investment opportunities.
We expect <unk> per unit for the full year 2020 to be in the range of our prior guidance with the biggest variables dependent on average less leverage and foreign exchange rates.
Our strong and flexible balance sheet and significant opportunities in China, and cash flow and continue to position us well to deliver strong operating and financial results I will turn it back to Brian to wrap up.
Thank you lend us over the past several years, we've built <unk> into a high quality resilient business that is capable of producing strong returns for all of our stakeholders with the strength of our balance sheet and significant drivers of organic growth, we remain well positioned to continue to create value for our unit holders.
I will now open it up for questions.
Thank you we will now begin our question and answer session. If you have a question. Please press <unk> then one on your Touchtone phone if you wish to be removed from the queue. Please press. The Euro then too if youre using a speakerphone. Please pick up the handset first before pressing the numbers once again with your question. Please enter the queue by pressing.
Zero than one hour.
First question is from Mark Rothschild with Canaccord.
Thanks, and good morning, everyone.
Brian you guys have assembled quite a large development pipeline do you see development yields changing at all with.
Rising costs things are definitely cost more now than a year ago does this change element yields and then does it may be impacted at all whether positive or negative your outlook on growing the development pipeline stronger obviously rental rates have gone up quite a bit as well.
Yeah. Thanks, Mark I mentioned in my comments, we've spreads have actually our yields are actually going up more than the costs. So we've increased our outlook on our yield on cost.
For our developments going forward. So what we're finding as costs have certainly gone up but rents have gone up faster. So we've increased by 50 basis points our outlook of the development program, We've got a significant program and our joint venture with GIC.
We're looking for.
Land throughout throughout the GTA.
And.
Anyway, So we see our development program continuing to grow we see that as a great opportunity for us.
Okay. Thanks, I guess I was just asking more about.
With values, where they are now is if you look and see it grow and you did add to that maybe just moving on to something else as far as.
I see that the move and the fair market value of your assets can you just maybe explain a little more how you guys look at <unk> values as it based only on transactions that have occurred in the past or is this based on where you believe the market is today or where transactions what happened for the most part that's the <unk>.
Lower pace of transactions in the market. So I just want understand how you guys look at it.
Go ahead, Alex Thanks, Brian .
So.
We've looked at.
As we always do.
Any quarter, we look at the market rent outlook will look at sort of the implied total returns by these values.
And we have seen some transaction evidenced, especially in Canada, it's not firm yet announced but we've.
We know that theres been some bidding activity.
On some portfolios in the GTA in Calgary.
And the capital values that are implied by the level of bids.
Suggest that.
Our <unk> values are.
Are reasonable and there was no no no reason to kind of change that significantly. So we felt pretty confident with that with those data points supporting alright price values. In addition.
As we said in our prepared remarks.
35.
$45 million of increases in value that we saw this quarter was largely driven by external appraisals.
Okay, great. Thanks, so much guys.
Thank you. Our next question is from Sam Damiani with TD Securities.
Thanks, and good morning, everyone.
The business is obviously growing extremely well.
In spite of the macro headlines that we're all aware of.
Yes, just how how do you how are you changing the approach of the business.
Given the given the macro concerns I guess specifically over in Europe .
Sure.
Strategy in any way in the short term as a result of those macro concerns.
Yeah. Thanks, Sam.
Generally we're running the business with very low debt.
We're basically trading liquidity is very precious we are re underwriting all of our acquisitions not just in Europe , but in North America as well.
I would say, we're seeing rent growth, we're seeing opportunities. We're looking at our acquisitions very carefully to make sure. They are one accretive to our business, but to also strategic from a location and quality standpoint, Alex you can talk a little bit about specifically in Europe , what we're looking at and how we.
We're underwriting given the current environment.
Thanks, Brett.
We continue to see strong levels of leasing activity.
In Europe , we don't have a lot of vacancy, but we have some.
Developments coming up in.
Are we engaging with tenants and what we're generally seeing is that the level of leasing activity is robust and in fact.
We would suggest that on our <unk>.
Availability is the level of leasing activity now exceeds the levels that we've seen call it six months ago.
It could be a function of our projects being more advanced or it could be a function of just generally.
Broad.
Demand in the market and it's not.
One or two tests that we've seen for example on our.
Development in Dresden were engaging with five tenants, we won't be able to accommodate all five but thats kind of the level of leasing activity, we see on that particular asset.
That's helpful. Excuse me in just on the <unk> for us for values I noticed there was cap rate changes in most markets very modest, but what market that didn't see any cap rate changes was Europe .
I Wonder if you could just.
To address that.
Yes.
That's a fair observation.
That said on the cap rate side.
What we see is fewer.
You will withheld values largely flat on a capital value basis.
The market rents have gone up NOI has gone up and that really resulted in.
Expanding cap rates.
And this is consistent with what we see.
We see across the board.
Okay, great. Thank you.
We have our next question from Kyle Stanley with Desjardin.
Thanks, Good morning.
As you work through the planning phase for your future developments are you starting to see cost inflation moderated or has access to materials improved at all at this point.
Yes, I will just start by saying I think we are seeing it moderate Kyle it is certainly going up at a slower rate than it was.
The developments that we do are concrete steel glazing those are the the main components and so we're seeing certainly moderation in those.
But as I mentioned as costs have increased we're certainly seeing a stronger benefit in rent. So the yields are strong, but I think the development outlook for US is is positive because of the yields that we can achieve and because of the outlook to supply chain getting more positive.
Access to labor access to materials, I think is going to be better for us as we go and certainly we intend to continue to develop in the markets that I mentioned.
In the prepared remarks.
It's one we're adding do to add to that.
We just recently received.
We went out to the market for an RFP on a.
New project in the GTA.
And we received construction bids.
A number of players in.
The range that we've seen in those bids about 7% from high to low.
In that range, but a bit much wider call 12 months ago, so that.
It seems to be a sign that the market is.
Moderating as Brian suggested.
Okay, Great and then you kind of discussed it a little bit, but I'm just thinking more on the tenant side here. So have you seen any changes whether they be positive or negative.
Demand for space desired floor plates types of tenants that are looking for space or maybe just another way is there anything youre seeing in the market. Currently that indicates there may be a change in demand or activity in the second half just given some of the macro concerns that you've mentioned.
No.
I wouldn't say that we haven't seen any significant changes in demand patterns, we continue to engage with <unk>.
Have tenants, who are looking to expand we've done some renewals.
With larger corporate attendance.
Got it.
It seems to be quite quite range and.
Which we would've how we would kind of characterize the demand market in.
Six months ago, So we can really.
Point to any significant changes to al the only thing I'd add to Alex's comments.
We underwrite very closely the quality of the buildings clear height.
Base spacing truck maneuvering area access to main highways and arteries. So I would say the use of space is pretty utilitarian. So if one particular tenant.
Doesn't want it I mean, it's very generic space. So it works well for three deals for specific users.
That's how we underwrite space, that's kind of the portfolio, we want to build.
Okay. Thanks, just a quick last one for me.
I don't know if you can but would you be able to provide the average cap rate for the acquisition activity completed during the second quarter.
We don't have the second quarter rate right here in front of us. So we can maybe follow up with you separately.
That's okay.
Yes, no problem at all I'll turn it back thanks, guys.
Thank you. Our next question is from Rob Mathur with IAA capital market.
Thank you and good morning, everyone.
Two quick questions on my end than the beginning with the first so given the macroeconomic volatility and the fact that Europe is heading into a more customer discussion.
How are you viewing the European industrial market from an acquisition on the capital deployment viewpoint. I mean is there is there a price discovery phenomenon currently in place or is that still too soon to be said for Europe .
Thanks for the question we haven't seen.
A whole lot of transaction evidence in Europe on the investment on the investment side.
Win win.
Comments being made about Europe going into a recession.
Thats kind of characterizing the broad macro economic.
Environment, perhaps when we think about just purely industrial market and the fundamentals in the industrial market.
We are seeing is very low availability.
Steady demand.
We are seeing that rates are rising rental rates are rising and rising faster now than they were call. It six months ago, because the development pipeline is slowing and also with the cap rates, perhaps being an uncertain metric.
The development community is looking to get higher rents on their projects to get.
Get them through the same return.
So overall, we expected.
If the demand stays as it is now supply stays moderate moderate further.
The operating fundamentals in the industrial will remain strong and we will outperform the broader real estate market in Europe .
And with that it will inevitably drive the capital market activity.
Because of the underwriting confidentiality there we've seen that for example, with Western Canada 12 months ago, we've seen the operating fundamentals.
Kind of a pretty robust capital market activity wasn't there.
Or there wasn't a lot of transactions and then S.
We've seen a couple of quarters of that strong operating.
The strong operating fundamentals that followed by a wave of capital market activity that we've seen recently so.
We remain pretty constructive on industrial in Europe .
Okay great.
And given the dislocation in public and private markets.
That's about as well.
Are there any considerations towards buying back the stock comp.
<unk> platform.
Yes, I mentioned the disconnect between private and public.
Right now we have not engaged in that.
Basically kept our balance sheet available for opportunities. We do think we will see opportunities that are accretive and very strategic for us. So that's an important priority for us.
Okay. Thank you and thank you for the color I'll turn it back to the operator.
Thank you. Our next question is from Matt <unk> with National Bank financial.
Hi, guys.
On your Canadian portfolio, you had some of the best read spreads we've seen.
In many asset classes, but for you historically and also your outlook in terms of the mark to market potential increased pretty substantially quarter over quarter.
<unk> year over year.
Are we seeing any stabilization in market rents at this point in Canada, and maybe if you could extrapolate what youre seeing in the U S. As maybe a more mature market.
In terms of how we should think of market rate.
In the industrial space in Canada.
Sure, maybe I'll start, Matt and let Alex elaborate as well I think we're seeing continued growth.
In rents.
To forecast when they will flatten out I don't know, but I think we need to reach a basically an economic rent equilibrium, where rents justify new construction. So thats continuing to go up rent land prices have maybe moderated so maybe that's a sign that rents in the mid to high teens.
No.
Settle in there it's hard to predict that the question regarding the U S. U S Fund continues to grow what we've seen is in tight land constrained markets rents again or are continuing to grow to justify new new construction. So there's there's more space demanded the only relief.
<unk> is new construction and in order to.
To justify new construction rents are continuing to grow so I think in the tight markets. That's the case in less land constrained markets.
We're seeing rents not.
Not grow as fast so theres some U S markets that don't have.
Many constraints on land or constraints on development in those markets are finding rents stabilizing much much quicker, but in the GTA certainly and in Montreal, What we're seeing is rents continuing to grow Alex you can comment a little bit on on what we're seeing on the ground, but even for example in Calgary.
We're seeing significant rent growth there that's why we're building there.
Yes, Thanks, Brian Yes.
Starting with Western Canada.
It's a market that hasnt seen significant rental growth for the last couple of years, we're starting to see that.
Availability is low.
Our portfolio is essentially full.
In Calgary and so are we starting to see rental growth there. So we're pretty constructive on Calgary.
And when it comes to the GTH GMA. In addition to Brian's comments, we started to see some development projects that are being put on hold when we will look at let's say our development pipeline.
Look at competition next to us.
We haven't done a full serving of the market, but we know anecdotally that there is a couple of projects that are being delayed because.
And maybe that exit cap rate is a little bit of a certain metric or some other factors and so if that indeed translate into a broader phenomenon for the market. It might mean that there's going to be more rental growth and less.
So this is something we are closely watching.
No fair enough.
No availability for anybody to take up space, So hopefully someone build somewhere.
Just two.
Just with regards to the U S portfolio, there was a pretty substantial uptick in occupancy there.
I don't think theres been any real change in the nature of the assets did you did you lease up space and can you kind of speak to what that was.
That was just leasing of vacancy within that fund.
The produce that I don't think there was anything out of the ordinary Matt.
Okay, but youre still youre still seeing occupancy gains in the states.
At this point in the market, yes, youre operating in okay.
Last one for me in terms of the financing costs led us.
How should we think of your current debt financing costs. If you were to do something in Canada I don't know if you do at this point unsecured versus secured as well as <unk>.
European kind of swap to us at this point.
Okay.
So our euro debt capacity at the end of the quarter. It was about 400 million Canadian roughly about 303 million euros.
So there is still some capacity to do additional euro equivalent debt financing and we're monitoring all the various options.
To do unsecured in Canada right now.
It's sort of in the mid to high fours to low fives, if youre looking at five to 10 years. So we're still seeing about 200 basis points.
Pickup in terms of doing euro equivalent debt.
So that's first.
We're seeing euro equivalent debt sort of in the high teens to low threes to mid threes for five to 10 years.
So thats kind of the range if the rates that we're seeing right now.
Is there any difference between unsecured.
Unsecured debt in the market and maybe an unsecured term loan type.
Offering and could you swap that into euros as well or is that.
Not a possibility.
Yes, certainly we could do unsecured term loans with them and with any financial institution. We do have one with the Canadian Bank. Currently that is swapped euro. So thats also an alternative in terms of our debt portfolio.
Okay.
Pricings pellets is quite similar as well, okay fair enough. Thanks.
Thanks.
Very helpful and congrats on a very strong quarter.
Thank you Matthew.
We have our next question from <unk> <unk> with RBC capital markets.
Thanks, Good morning, I might have missed this but just with respect to the IRS valuations was there anything notable about the larger increase in cap rates in Quebec versus some of the other Canadian markets.
Hi, Alan.
Alastair no nothing notable.
It's a function of a.
Is keeping the capital values flat primarily in.
The rents have increased that's really what.
What drove that so it's not not.
Notable there.
Got it sorry, yes, so I'll just highlight that these numbers are.
Agree with conservatism too.
Some of these estimates.
Right. So sorry, it was just driven off the the higher NOI, but holding that capital values flat got it. Thank you.
Great.
Can you maybe just talk a bit about how the capital pool has changed in terms of buyers at the table on transactions that you might be looking at and I'm. Just curious if you're curious if youre seeing any evidence of transactions that might have been in the works getting repriced at all.
We haven't seen any evidence of repricing.
It's hard to say just yet who the buyers are we know we know anecdotally with the bit depth is on some of the recent portfolio as it seems it seems it seems good.
With.
A handful to maybe half a dozen bids on larger portfolios.
Being kind of consistency consistently across the board.
No. These are all recent bids. So we just don't know who the buyers are or who the bidders were so this so we'll we'll continue watching that.
Got it just yet, but I think we didn't see longer well deals.
It may be more impacted by price certainly less less strategic locations.
Having more impact on price or cap rate, but close in short while mark to market kind of deal.
We're seeing tons of demand from all different kinds of buyers.
Got it.
Maybe just on the $85 million of acquisitions that you flagged that were under contract or in progress.
Can you talk about where the pricing is on those relative to maybe from a cap rate standpoint relative to maybe transactions done earlier this year.
So the deals that we have under contract.
Yes.
One of the only makes up the bulk of it is a pretty strategic asset.
Is immediately adjacent to something that we already own in the GTA.
And you will.
He will help us complete sort of a pretty large.
Land Assembly.
When we think about it on a total return basis, where we're looking at is are high.
Single digits for Unlevered returns.
Pre land assembly value and if you layer on the land assembly value, it's probably moved it by another 150 basis points.
On a levered basis. So we are.
That's how we kind of look at it and we.
Continuing working on it.
So it was speed.
Okay.
Last one from me in terms of the coming back to the question previous question on possibly looking at.
The NTSB, but.
If I look at your implied cap rate kind of in the mid fives. I mean is there is there stuff out there that you can really buy.
At that type of pricing and maybe what might prompt you to consider it and CIB perhaps.
Down the road.
Well, Alex you could talk about whether we'd find deals in that cap rate range. I think there is a potential we would certainly with rental rate growth and mark to market opportunities.
We see things that are accretive at our current cost of capital.
Development opportunities and and Mark to market opportunities I think present really really.
<unk> investment opportunities for us.
We'd have to look at NCI.
What that is compared to market opportunities as I mentioned before I think.
Our balance sheet is precious right now we're treating it that way and looking at the opportunities we see it in front of us as being pretty strategic for the growth of our company.
Yes, as we call it.
And finally, we're seeing six 3% yield on cost on our development program that includes land on our Redevelopments and Greenfields, which is already.
So the yield on incremental capital investment invested is much much higher.
So.
We are certainly seeing well north of five and a half on that.
<unk>.
We intend to kind of complete the development program that we have ahead of us and potentially find new opportunities. So that's one one area of focus for US. In addition to our value add program, we talked about our solar program. There is other smaller value add initiatives that are producing 10 plus yield on costs. So they require.
Capital.
We intend to complete those so there is we see lots of use for capital within the within the business that produce strong strong returns.
Thanks, very much I'll turn it back.
We have our next question from from ISI.
Thanks, Good morning, just a question on the <unk>.
Development pipeline with yields going up this quarter. So when you review the cost of expected Brian .
How frequently is that review and then I guess my question being should we expect more upward pressure on yields for the pipeline of <unk>.
Keep outpacing cost inflation.
Sure.
And that is a great question. Thank you for that.
We do review quarterly when we.
When we published the table in our MD&A.
And.
So we continue to kind of looking at market rents and.
We have live models for every project that are being in data regularly.
And so we continue monitoring that.
As we get better information on construction costs on some of the projects in the planning phase and as rents we update we update our outlook.
Okay. So it's fairly dynamic thanks.
And then I wanted to I guess touch on tenant.
And then I guess that cluster thats driven by wanting to hold high inventory can you give us an update on that front of that.
Full driving ancillary portfolio things sort of slowed our stabilized.
I want to add.
I can't say that we have.
Concrete data, we can point to anecdotally, we still have tenants who are looking to expand.
And take more space.
We engage with tenants within our portfolio, if we're looking to expand and we're trying to find them space or build them additional space, which.
Which is completed that.
Deal in inter bond in Quebec, where we renewed the tenant and expanded them by just about 50%.
We talked about another deal in.
In Montreal, whether we have.
<unk> existing tenant lease.
An expansion, which again growth in by about 50%. So we continue to see.
That activity from our tenants who are looking to expand we have a one time engaging with in Europe .
Who is looking to expand their building also by about 50% so.
Unfortunately on that one.
On the development there.
Theres a few few of those anecdotes, but we don't really have good data to point to on that front in our portfolio.
Okay that helps.
And then just lastly, more of a modeling question looking at I guess the tenant.
Incentives and there was a comment that they were up this quarter, just gone higher construction costs and commissions.
Just wondering how to think about I guess, an annualized spend number for you guys.
Yes.
Alex had mentioned, we do engage with our tenants and oftentimes.
They do walnuts.
US to partner with them in terms of inquiry, improving sustainability, we've been ramping up our OLED lighting program and upgrading units, sometimes tenants will come to us within term to do early renewals.
So I think some of the.
And we are able to.
Recapture some of that to increase trends as well.
So I think.
The pricing of that will fluctuate.
Depending on leasing volume.
And that is a bit of needs to variability from quarter to quarter. It's just really dependent on the leasing volume.
Whether or not we're investing additional amounts in the building just to print of sustainability energy efficiency of the space.
Okay. That's all for me thank you.
As a reminder, if you have a question. Please press zero than one our next question comes from Todd point.
Yes, Hello, Brian let us Alex.
It's great to see continued positive rent growth solid supply demand dynamics.
Following up on that last question is also something I was focusing on.
Can you can you explain as well because I know one above you talk about non recoverable capital expenditures and let US just what you are describing it sounded to me more like a non recoverable capital expenditure, which is a different bucket.
Can you help me understand the difference between the two and then do you all.
Publish a net effective rent growth.
Clearly work with a strong supply demand is great.
I'm, just trying to get down to our bottom line and what the net effective rent growth is after all of these lease incentives non incremental capex et cetera.
Thanks, Todd so nonrecurring capex.
Sure.
It's primarily Europe .
There's some minor non recoverable capex in Canada.
Very very rare for example structural capital.
Generally not recoverable in Canada.
We don't really see that that too much of that in our buildings. So the majority of capital is.
Is recoverable so.
We've seen the non recoverable line is largely Europe when it comes to the value add expenditures. The way we think about value added expenditures. These are old return generating capital. So solar for example would be in this.
In this value add development bucket.
And as we said we've seen yield on cost of about 10%.
With respect to the OLED upgrades.
We have a program some of our large public peers as well have a program like this where we work with tenants during the term. So for example, we have a tenant with a 10 year lease.
Lighting is on a grand scale, it either paying well below market rent, we would approach them during the term and say.
Why don't we partner on LNG upgrade in your space.
And we will.
Put the capital.
Invested capital, we will amortize the capital of the term of the lease and we will have some sort of an interest rate on that and our interest rate usually is around 6% to 8% range.
So we've seen pretty strong unlevered return on that.
Tenancies payback.
During their lease we see a strong return on capital and we ended up with having.
A better building at the end of the week so.
So it's almost like a win win win type of type of program.
That's kind of what goes into the value add bucket.
There's multiple examples of that we bought a building they can building in kitchen or last last year.
And we invested some capital.
<unk> capex to refurbish the building and when we think about the purchase price plus the Capex investment we realized that yield on cost when we leased it well north of 7%. So that would that kind of work would go into this bucket.
All kind of return generating activity.
Going back to your question about net effective rents, we don't publish that I don't believe but.
We're seeing net effective rents.
Increasing considerably even faster than face rents because.
We're not really seeing.
Inc. A whole lot of incentives, especially in markets like GTA.
And greater Golden Horseshoe in Montreal.
We're not seeing a lot of.
Incentives.
Free rent and things like that there is some ti once in a while where we need to upgrade the space, especially on the new lease.
But that usually gets priced into the rent. So we are.
We're well covered there. So we are seeing considerable increases in net effective rents where we can.
We'll look at.
Putting more and more of that data together and show that at a later stage.
Don't have that.
Makes sense based on what you are saying in terms of how strong. The market is you would have that net effective rent growth just when I look at the disclosure, though the leasing incentives indirect leasing costs were up 134% year on year.
$3.7 million.
Last year $2 7 million.
And so that suggests to me at least and that's only a three month period. So I know that can be it can be lumpy suggests at least whether there was something very specific at least for this period, where our leasing incentives and direct leasing costs were higher and that suggests at least for this quarter net effective rents were lower.
And then what is reported on a gross basis. So.
In the future that would be helpful to better understand the net effective rent growth that we see.
Maybe.
Help me understand that.
No no.
Im looking at the table you are looking at.
I think it could be a function of volume.
We didn't see any kind of significant increases on a per square foot basis this quarter.
Let us look into that and we'll come back to you, but it probably is a function of volume.
Yes, no doubt you're all growing very fast so I assume that was the major.
Describe it just was it was much bigger than the growth you've had.
So it seems.
Hey, good morning volume leasing volume yes.
Great well very good. Thank you so much and that also echo the encouragement to pursue pursue a stock repurchase program.
So I. Thank you all for you.
Todd. Thank you appreciate your input.
Thank you Todd.
Thank you.
Thank you.
That was our last question I will now turn the call back over to Mr. Brian Pauls for closing remarks.
Thank you I'd like to thank everyone for your time today, we look forward to speaking again soon in the meantime, please stay healthy and safe and enjoy the balance of summer take care.
Ladies and gentlemen, this concludes our conference. Thank you for participating you may now disconnect.