Q1 2023 Dream Industrial Real Estate Investment Trust Earnings Call
Speaker 1: Good afternoon ladies and gentlemen. Welcome to the Dream Industrial REIT first quarter conference call for Wednesday, May 3rd, 2023. This is the first of the three webinars on this call, Management of Dream Industrial REIT.
Speaker 1: 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 ORM.
Speaker 1: are also available on Dream Industrial REIT's website at www.dreamindustrialreit.ca. Later in the presentation, we will have a question and answer session. To queue up for a question, please press star 1 1 on your telephone keypad.
Speaker 1: Your host for today will be Mr. Brian Pauls, CEO of Dream Industrial Reit. Mr. Pauls, please go ahead.
Speaker 2: Good afternoon everyone. Thank you for joining us today for Dream Industrial Reed's first quarter 2023 conference call.
Speaker 2: Speaking with me today is Lenz Kwan, our Chief Financial Officer, and Alex Sanikoff, our President and Chief Operating Officer.
Speaker 2: DIR had an active start to the year. We completed significant strategic initiatives during the quarter that enhanced our growth trajectory going forward. In February , we acquired a 10% interest in the $6 billion acquisition of Summit in partnership with GIC, who acquired the remaining share.
Speaker 2: At the same time, we established a programmatic JV with GIC to pursue additional investment opportunities in the Canadian industrial market. This transaction was a significant milestone for DIR and positioned us as one of the largest industrial platforms in the country with over 43 million square feet.
Speaker 2: co-owned or managed in Canada and over 70 million square feet across North America and Europe .
Speaker 2: We now provide property management and leasing services for 33 million square feet of industrial assets across Canada and the U.S. held in private capital partnerships with institutional clients.
Speaker 2: These partnerships provide significant opportunities to grow creatively while requiring limited equity capital from DIR.
Speaker 2: Turning to the results for the quarter. We had a great start to the year and our operating and financial results have never been better. We reported 13% comparative properties NOI growth during the quarter. FFO per unit was 25 cents in Q1 of 13% year over year largely driven by CPNOI growth.
Speaker 2: We completed at least a 120,000 square foot expansion in Montreal, which resulted in an unlevered yield on cost of 8.4%. In the last 12 months, we've completed 700,000 square feet of developments and achieved an unlevered yield on cost of 7.8%.
Speaker 2: Looking forward, all our growth drivers remain intact. Demand for industrial space has stayed strong through the volatile economic environment. With availability in the low single digit range across all our markets, we continue to see strong organic growth for DIR's portfolio.
Speaker 2: The overall macroeconomic sentiment in Europe has improved considerably over the last few months. Occupier fundamentals continue to be strong with rising rents and low supply. Our European spread expiry this quarter averaged 13%. All our outlook for 2023 and beyond remains the same.
Speaker 2: on our accretion targets as well as maintaining a strong and flexible balance sheet.
Speaker 2: I will now turn it over to Alex to provide additional color on our business.
Speaker 3: Thank you Brian , good afternoon everyone. Industrial fundamentals in our core markets remain strong with rents increasing quarter over quarter and vacancy in the low single digit range.
Speaker 3: In Canada, we are seeing limited new supply delivered to the market with a lower proportion of pre-leasing compared to a year ago.
Speaker 3: While this increases availability temporarily, we continue to see tenant demand remain strong and rents continue growing.
Speaker 3: Within our portfolio, a strong leasing momentum from last year has carried forward to 2023.
Speaker 3: During Q1, we transacted 945,000 square feet of leases across our portfolio, achieving a rental spread of over 40%.
Speaker 3: We signed approximately 440,000 square feet of leases in Ontario and Quebec with rental spreads in the 75-80% range.
Speaker 3: In Europe we signed 250,000 square feet of leases at 813% spread over prior rents.
Speaker 3: Within the Dream Summit JV, we completed over half a million square feet of leases during the quarter. On these leases we achieved an average spread of 150% over prior rents.
Speaker 3: These spreads are in line with our underwriting and validate our thesis on significant mark-to-market opportunity embedded in the Dream Summit portfolio.
Speaker 3: For the quarter, we reported 13% comparative properties in the wide growth.
Speaker 3: In Canada, we achieved CP&I growth of 14.3%, lead-binds area at over 22%, and high single-digit growth in Quebec and Western Canada.
Speaker 3: In Europe , our leasing momentum remains robust and is also supported by CPI indexation across the portfolio.
Speaker 3: For the quarter, we reported a 12% increase in European CPNOI. We expect 2023 CPNOI growth in Europe to remain strong in the mid-to-high single digit range, assuming mid-single digit inflation in 2023.
Speaker 3: Overall, we expect our 2023 comparative properties and OI growth to be at the high end of our initial guidance range of 8-10%.
Speaker 3: Turning to our development program.
Speaker 3: We're close to completing our 154,000 square foot ground-up development in Caledon.
Speaker 3: We are seeing strong interest from occupiers.
Speaker 3: We are in very advanced negotiations with the prospect of tenant for a portion of the building at terms that are in line with our underwriting.
Speaker 3: In addition to Abbotside, we have four projects totaling 690,000 square feet at our share currently underway.
Speaker 3: Construction is progressing well and we continue to receive interest from occupiers. In addition to these projects, we are about to commence construction on two new projects totally approximately 1,000 square feet. We are in fine-tuning stages for our redevelopment project in Whittier. The 24-acre site is like a private property in 2020.
Speaker 3: informed tarik to cadence curl, how long shall we do it like this?
Speaker 3: We intend to rebuild the site with two modern and zero-hybrid living buildings, all over 380,000 square feet, where plaques, construction, and use reach 2023s with a targeted, unlivable approximately 70% including black.
Speaker 3: with a $4.9 million construction cost of approximately $75 million.
Speaker 3: We are also finalizing plans to commence construction at our 50-acre site in the Bull's Act of Marketing, Calgary, which was acquired last year. We have been able to increase our density forecast to 650,000 square feet from 475,000 square feet in our underwriting.
Speaker 3: We expect construction costs of around $90 million with a targeted unlevered yield-on cost in the mid 6% range, including the land cost.
Speaker 3: We are starting to leverage our sizeable industrial platform in Canada and globally as we proactively engage with our occupiers across multiple properties to drive synergies for our customers' business and our entire industrial platform.
Speaker 3: Our property management and leasing platform allows us to generate strong and growing net margins.
Speaker 3: For the quarter, we reported $1.6 million of net margin from this business.
Speaker 3: which included six weeks contribution from the DreamSummit JV.
Speaker 3: I will now turn it over to Lemus to talk about our financial highlights.
Speaker 4: Thank you, Alex. Our financial results for the first quarter were strong and reflect the success of our recent strategic initiative.
Speaker 4: Diluted FFO per unit was 25 cents for the quarter, 13% higher than the prior year quarter, and includes 0.4 cents for lease termination income related to an anticipated vacancy in Europe .
Speaker 4: Our net asset value per unit at quarter-end was $17.03, increasing slightly from the $16.97 at year-end 2022. This was largely due to the completion of an expansion in Montreal.
Speaker 4: The solid year-over-year growth was primarily due to strong comparative properties NOI growth and property management income from the U.S. Industrial Fund and the DreamSummit Industrial Joint Venture.
Speaker 4: The summit transaction was accretive to our first quarter FFO and we are on track to achieve our target FFO accretion in the 1-2 cent range for 2023.
Speaker 4: We expect the accretion to increase over time as we mark rents to market on rollover and achieve stabilization on development and expansion projects. We continue to focus on maintaining the strength and flexibility of our balance sheet.
Speaker 4: During the quarter, we closed the $200 million unsecured term loan in connection with the closing of the DreamSummit JV at a fixed rate of 4.85%.
Speaker 4: In March, we issued $200 million of unsecured debentures at a rate of 5.38%, which was used to partially repay our credit facility, allowing us to reduce the proportion of variable debt, increase term, and lower our average interest rate. We ended the quarter with leverage of 36% and
Speaker 4: within our targeted mid 30% range and debt to EBITDA of 9.3 times and with over $430 million of total liquidity plus an additional $250 million accordion.
Speaker 4: We expect to maintain our leverage around this level as we deploy capital into our development and solar projects and look for opportunities to grow our DREAM Summit and the GTA Development DunAlright Adventures.
Speaker 4: Looking forward to the remainder of the year and consistent with our business plan, we expect that investment opportunities can be fully funded with our current balance sheet capacity.
Speaker 4: Our near-term debt maturities are limited, with approximately $265 million Canadian equivalent of European mortgages maturing this year. We are in advanced discussions with our European lenders and expect to refinance these mortgages with all-in rates in the mid-to-high 4% range.
Speaker 4: We remain optimistic with respect to the performance of our business in 2023 and for the long run.
Speaker 4: As Alex mentioned, we expect our comparative properties NOI growth for 2023 to be at the upper end of our previous guidance.
Speaker 4: Combined with the leverage level and accretion from Dream Summit Venture, we reiterate our previous guidance of FFO per unit for 2023 to be in the mid-90 cent range.
Speaker 4: Our SFO guidance continues to be pre-prepared on current XS levels and interest rate expectations.
Speaker 4: Our SFO guidance continues to be pre-prepared on current FX levels and interest rate expectations. The SFO guidance continues to be pre-prepared on current FX levels and interest rate expectations.
Speaker 5: Thank you, Les. Next is Production position Prop Hitman,
Speaker 2: I would also like to take this opportunity to congratulate Alex on his appointment as the President and COO recognizing that Alex has been fulfilling his role already. Here please provide him with the appropriate title.
Speaker 2: Alex and I will continue working closely together on all aspects of Dream Industrial's business. With Alex taking on additional responsibilities within DIR, I will also be able to focus on additional time on Dream's growing US platform. We will now open it up for questions.
Speaker 1: Thank you. We will now begin our question and answer session. If you have a question, please press star 1 1 on your telephone keypad. If you wish to be removed from the queue, please press star 1 1.
Speaker 1: If you're using a speakerphone, you may need to pick the handset first before the question is announced. Once again, if you have a question, please press star one one on your telephone keypad. We have our first question from Sam Diamani with TD Securities. Please stand by while I open your line.
Speaker 1: And your line is now open.
Speaker 6: Thanks and good afternoon everyone and congratulations Alex on your expanded title. Well done. Maybe just a first question, just on Europe , very strong same property in the quarter. I gather some of that was from the CPI linked nature of the leases.
Speaker 6: with the average rent moving up nicely on the quarter. What's your view on that market, a bit markets ability to see market rents sort of move in step with inflation or over this inflationary environment just simply bring rents closer to market?
Speaker 2: as we go through this period. Thank you Sam.
Speaker 3: We continue to see rental growth in Europe , what we've seen in 2022, in many markets in Europe , including Germany, certain submarkets in the Netherlands.
Speaker 3: certain some markets in France such as Paris. We've seen real rental growth, so rental growth and excessive inflation. And we continue to see...
Speaker 3: upwards pressure on rents in Europe as supply remains limited and there's increasing pressures on supply resulting from capital markets. There's strong occupier demand across the board so we expect that there's going to be continued upward pressure on rents.
Speaker 6: Next question is just on the spreads that were achieved in Canada, particularly Ontario and Quebec. You know, after really spiking over the course of 2022, it looked like the spreads moderated a bit this quarter. Was there any particular reason in Ontario to go back to those spreads?
Speaker 3: place.
Speaker 3: So we haven't seen any downwards pressure on rent. If anything we see continued upwards pressure. We are routinely doing deals in $20 range with 5% steps especially for...
Speaker 3: mid-bay units in the 20,000 to 50,000 square foot range. We've recently signed a few deals with Well Into the 20s, NER, so we continue to see strong rental development.
Speaker 6: That's great. Last question from me, just a quick one. What sort of acquisitions is the Dream Summit JV looking at currently? Any preferences by region or building age or class?
Speaker 3: We are looking at a few opportunities primarily in the GTA at the moment.
Speaker 3: They would be comparable to what DreamSummit's typical assets are on average. Good quality locations, strong sub-markets, relatively short leases with strong market potential. We're also looking at a few covered land opportunities.
Speaker 3: these would be sites that could be leased for outside storage, capitalizing on the scarcity of this product in the market.
Speaker 6: That's great. Thank you. I'll turn it back.
Speaker 6: That's great. Thank you. I'll turn it back. And thank you.
Speaker 1: We have our next question from Mark Rothschild. Will the person with canicord please stand by while I open your line?
Speaker 7: Your line is now open.
Speaker 8: Thanks. Good afternoon and congrats, Alex.
Speaker 8: Maybe just following up on this last point, talking about acquisitions, with the balance sheet the way it is right now and cost of capital having gone up, how do you view your acquisition capacity and how much you'd be willing to do with the current balance sheets? And should we interpret from your remarks that you view Canada as a more interesting opportunity than other markets? Or maybe I just shouldn't read into that at all.
Speaker 3: Thank you, Mark. Our Dream Summit JV allows us to continue to be active in the market and find good opportunities while requiring very limited capital from DIR. As you may have seen in our AIF...
Speaker 3: We've provided additional disclosure on the structure of the venture. We continue to look for opportunities in Canada. We're monitoring the markets in Europe . We think that the risk adjusted returns at the very moment are...
Speaker 3: a bit stronger in Canada, although we're starting to see interesting opportunities in Europe emerge as well. And the additional benefit of pursuing acquisitions within the Dream Summit venture is the property management and leasing fee revenue.
that enhances DIR's return on capital. Okay, great, thanks. That's it for me.
And thank you so much. We have our next question. Our next question is coming from Himanshu Gupta with Scotiabank. Please stand by while I open your line for you.
And thank you so much. We have our next question. Our next question is coming from Himanshu Gupta with Scotiabank. Please stand by while I open your line for you. Your line is open.
Thank you and good afternoon. In your CP-NOI growth guidance, now you're obviously expecting on the higher end. Are you assuming any occupancy slippage in any of your portfolio?
Thank you, we do not generally expect significant occupancy slippage as you would have seen from disclosure this quarter. We did decline in Montreal.
compared to December , and that was driven by one property that was slated for redevelopment. However, as we look at the market today, we think that there's also merit to explore lease-up as-is. So we think that that property could contribute to...
Cp&OI growth later in the year if we do indeed pursue that alternative. But generally we expect the occupancy to remain at these levels on average.
And then Alex, based on the brokerage reports like CBRE and others, we're seeing some slow down in leasing volumes in Q1. Are you seeing any softness in leasing volumes in your markets as well?
We're not seeing softness in volumes also. I think we need to take into account that the leasing volume is a function of availability to some extent. And availability is very low. Available space is very low. We're seeing very strong renewal activity and generally tenants want to stay where they are.
new leasing volume, what we see, especially when it comes to developments, is that occupiers now don't tend to pre-lease these developments, they tend to wait until these projects are substantially complete to then engage in leasing discussions. And so we're seeing that in our…
in our Abbott site project, for example. Got it. Thanks for the color. And then just sticking to that development comment, you have this Mississauga redevelopment, I think, at the Koteen Park. What kind of cost of construction are you projecting there on a dollar-to-foot basis? Thank you. I will refer you to the next slide.
Yes, yes, thank you for that question. As a general...
The general principle in our disclosure intensifications tend not to include the cost of land because the land is already included in the IFRS value of the income producing asset. For redevelopment projects and new development projects, the total cost that is estimated in this table includes the cost of...
probably one or two questions more. In your FFO guidance, Lenneth, what is the EuroCAD you're assuming?
the current rates are around 145, so very close to our current rates right now.
So 145, okay fantastic. And I think the last question was just on CPNY in Europe , it was very strong in Q1 at 12%. Was it better than your expectations in Q1 and what's the outlook for the full year?
It's generally in line with our expectations for the first quarter and then we provided some color in our prepared remarks as well on the expectation for the balance of the year. We wanted to be in the mid to high cycle digit range.
Thank you guys.
Thanks Alex again and I'll turn it back.
Thank you. Thank you. We have our next question. Our next question is coming from Brad Sturges with Raymond James. Please stand by while I open your line for you.
Your line is open. Hey there. Just to maybe touch on...
potential for asset sales. I think he alluded to
to it last quarter in terms of reviewing the portfolio for potential opportunities. Where would that stand and do you have a quantum of potential asset sales in the pipeline for this year? Good afternoon.
Well, as you would have seen, this quarter there was one smaller sale in Europe as we continue opportunistically dispose of non-strategic buildings. In Canada there is interest...
in a few of our properties including from occupiers. So we don't have specific guidance as we always communicated. There's no target to sell certain amount of buildings. We have a pool of non-strategic buildings that we would dispose of at the right time for the right price.
and we continue working at it. In terms of volume for modeling purposes, as we indicated in February , $50 million could be a reasonable modeling assumption to use. It may be lower, maybe higher.
depending on the timing and some of the other factors I mentioned. Depending on your growth capital needs, whether it's the development program or contribution in your JV investment funds, would that accelerate or decelerate your appetite for asset sales or is it just really...
based on the opportunity presented at each asset that you're reviewing right now? It certainly is a factor and when we look at disposing assets, we would be looking at the go forward return we expect from these properties of adjustment for risk.
And then where can we use this capital in the business? We certainly want to make it accretive to the business overall.
And then I guess you were viewing opportunities for CalPERS, I mean all regions, but would there be a way towards any particular region?
Nothing specific. No, these are idiosyncratic assets within each of our regions. We have some non-strategic assets.
Just looking for a little bit more color. I think I missed it.
Just looking for a little bit more color in terms of what you hold that vacancy and your expectations for transitional vacancy at the facility.
So this was an expected vacancy in France. We expect positive leasing spread when we retentent this.
So this was an expected vacancy in France. We expect positive leasing spread when we retentent this asset.
This is...
pre-specific clause for this lease that resulted in the termination penalty. We have quite a bit of notice so we are not going to get the space back.
specific clause that is for this lease that resulted in the termination penalty. We have quite a bit of notice so we're not going to get the space back until...
very end of 2023. So in terms of the average occupancy impact for 2023 is gonna be minimal. Okay, that's helpful. I'll turn it back, thanks. And thank you. We have our next question.
From Kyle Stanley with Desjardins, please stand by. I will open up your line.
And your line is open. Thanks, good afternoon everyone and congrats Alex on the expanded role. I'm just wondering, so is it safe to assume based on your commentary that the majority of the REITs external growth, at least in the near term, is likely to come within the Summit JV? Thank you Carl.
So the economics to the REIT from investing through this JV are significantly enhanced by the property management and leasing fee revenue. And the margin on that incremental revenue as well is higher because obviously the platform is already in place and doesn't require significant incremental staffing.
Just on the leasing side, I guess it comes down to affordability a little bit. Are you seeing any differences in your leasing negotiations with maybe some of the smaller tenants in your portfolio versus maybe some of the larger tenants? That is a great question. We do see, as we commented earlier, for smaller units we are achieving pretty strong rents in terms of starting rents but we are also achieving stronger growth on average. We would be pushing 5% per year with $20 starting rents in many of our 20,000 square foot pockets.
seasonal basis or are we just starting to see, you know, just overall market rank growth maybe slow a little bit.
I think the rate of growth, not only in our portfolio, but also if you look at various market reports and statistics, the rate of growth in the first quarter of 2023 is lower than in 2022 as expected, widely expected.
Whether that should be extrapolated into the future or not, that's early to say. We think that the underlying ingredients for rental growth remain there across all of our markets. In some markets such as Calgary, rental growth is accelerating, but in some other markets it is decelerating, partly because of the strong rate of growth.
experienced in 2022 and 2021 in markets such as GTA and Montreal.
Okay, understood. And just the last one, and you may not have this at the tip of your fingers, so no problem. But just wondering, do you know what percentage of your European portfolio would have had the rental rate reset based on CPI so far this year?
I don't have the exact statistic, but our leases are organized such as the majority of leases are in Key 1, but not the vast majority. So it's a bit skewed toward the first quarter.
in terms of the CPI adjustment timing, but there's going to be a fair bit in Q2 to Q4.
Perfect. Thanks very much. I will turn it back. We have our next question from Gaurav Mathur with IA Capital Markets. Please stand by while I open up your line.
Your line is open.
Thank you and good afternoon everyone. Just from an acquisition's viewpoint, I think we have time for one more question.
Are you seeing any distressed asset opportunities in Canada or Europe that you could potentially execute on? Thank you for that question. No, we're not seeing distress. We actually are seeing generally that landlords are well capitalized and we're seeing that there's
underlying investor interest. What we see is that smaller tickets generally attract more demand and there's not a lot of large tickets out there whether in Canada or in Europe but the demand for those 20 to 60 to 70 million dollar tickets is...
still very strong and these processes attract multiple bids still. Okay, great. And then just lastly, given the dislocation in public and private market asset values.
Do you perhaps see valuations converging in the near term or is that still going to be played out over a longer time period? That is a challenging question to comment on. We are focusing on the underlying fundamentals in our business.
whether it's organic growth, the returns that we are achieving on our development program, as well as the returns that we can achieve in the...
in the private markets through our private capital partnerships.
And we think that these returns are accretive to our overall cost of capital and whether in the short run or the long run and we continue focusing on that as to whether the valuation gap between public and private markets will...
close, it's hard to comment on that. Great, thank you for the caller. I'll turn it back to the operator. Thank you so much. We have our next question from Matt Kornack with...
NBS, please stand by while I open your line.
N-B-S, please stand by while I open your line. Your line is now open.
Hi all, just quickly with regards to the Montreal asset, can you kind of describe what the thought process is around kind of an as is replacement to the tenant versus it sounded like there's a low site coverage there and you can potentially expand, but why would you go with one over the other at this point?
Thank you Matt. The analysis that we perform is sort of classic opportunity cost analysis. We would look at what the existing property could command in terms of rent. And that rent for the existing property, especially today, is significantly impacted.
and then what's the capital that will be required to achieve one versus the other, and then we just try to estimate the return on that capital. And if the rent for the existing property as is is lower, then obviously that incremental return is very compelling as the rent for the existing property goes up.
then
lease up as is, at least for the next little while, could be more compelling. And then redevelopment is always an option that is available to us. Obviously we take into account factors such as downtime and the risk to...
to develop. And we've seen this before in early 2020. We had a site in Cambridge that could accommodate, and we're still on it obviously, that could accommodate 120,000 square feet of density. There's about 40,000 square feet of density.
on site right now. We got the building back and we were planning to redevelop it. But then we had a tenant who needed the space and they needed the yard and they were willing to pay record rents for Cambridge at the time. And with the rents that we achieved for the Asis building we just couldn't justify the construction.
But then we're getting the building back where the lease is going to roll in the next couple of years and then we'll have another ability to re-evaluate this redevelopment.
And so that's the same sort of analysis that we're going through for the Montreal project. Okay, no, that's very helpful. So I assume at this point that you've probably listed it to at least see what that rent is, get a number there, or have you made a decision one way or the other at this point as to which way you'll go? No decision yet, but we think that if we can achieve the rent that we can achieve, we can
we think should be achievable, then we think it makes sense to just lease it as is for the time being and then reevaluate, redevelopment in three to five years. So we are marketing the space right now. Okay, excellent. And then just two quick accounting questions.
in Q2 and then carried on at that run rate for the joint venture.
So Matt, we actually have included some disclosures within the MD&A on the FFO contribution. I can certainly give you a call after just to point to the specific tables. Okay. No, that would be helpful. And then similarly on the fee income.
I don't know if that number in your NOI, it was pretty high, but do we prorate that for the percentage that the portfolio was in or is that provided in the MDNA as well somewhere? We've provided the total margin from the property management and leasing business. It obviously includes us making different investments in our ownig plant.
from there. Yep, nope, that's fair. I can do that and I appreciate the color. Thanks, guys.
And thank you. We have our next question from Pami Burr with RBC Capital Markets. Please stand by while I open your line.
And thank you. We have our next question from Pami Burr with RBC Capital Markets. Please stand by while I open your line. Your line is now open.
Thanks, hi everyone. Maybe just building on that last question, the pickup between Q4 and Q1 in terms of the fee income, just wanted to clarify, was that entirely from the summit transaction, then tied to that, I guess, was there anything non-recurring issue or any lumpy amounts in that maybe tied to leasing?
Thank you, Pami. As we commented in February , we don't disclose specifically the fees or the margin from the DreamSum adventure for confidentiality reasons.
The best disclosure we could come up with to provide transparency to investors and analysts for modeling purposes is to blend the margin from the DreamSum adventure in our US fund property management and leasing business. We cannot comment specifically as to the increases for those reasons.
but naturally the dream summit would have been a significant factor in the increase year over year. When it comes to the overall revenue from property management and leasing business, as you can imagine, the leasing fee stream is indeed lumpy. We have a positive adjustment to our
operating metrics, portfolio performance is quite strong. And maybe, I guess really just building on one of the questions earlier on, are there any maybe tenant segments where you're perhaps not seeing yet, but maybe anticipating a slowdown, whether it's, you know, whether it's in, you know, some of the retailers looking to, you know, build out their.
their warehouse distribution space or 3PL or any tenants on your watch list in any of your markets.
Thank you for that. No tenants on the watch list and we generally proactively engage with our tenants throughout the year in terms of understanding their business needs, the health of the business, issues they're facing and there's nothing
other than a few times here and there, which is natural for the portfolio or size. Nothing that is a red flag. When it comes to incremental demand, yes, we have seen obviously that incremental demand has shifted from e-commerce-led and early to meet.
Net 2021 to more 3PL activity to then more underlying user activity. But generally we're seeing...
strong demand across the board and a lot of the end users, not the 3PLs, but the end users whether they do manufacturing or the tenants who are more vertically integrated, we're seeing quite a bit of incremental demand from these occupiers and they're frequently asking us to facilitate expansions for them.
and are generally looking for additional space. Thanks for that. I will turn it back.
And thank you so much. We have our next question from Michael Mercidius with BMO Capital Markets. Please stand by while I open your line.
Hi, thanks everybody. I don't know if this was intentional, but last quarter, I think you said the guidance repertoire was C Hunt- flourishingly moving into the truth – keeper.
mid 90s with potential upside and I don't know if I'm reading too much into this but you drop the potential upside was that intentional?
that's still holding. No, no, that wasn't intentional. I think we obviously still have the strong CP NOI guidance and we reiterated that that's still holds. We're coming in on the upper end of that guidance. So from the FFO standpoint, there's still a lot of information that's coming in on the upper end of that guidance. So from the FFO standpoint, there's still
If, you know, we still have the second half of the year, there is, you know, there's obviously additional leasing that we continue to work on that could trickle through, but I think we wanted to just reiterate that mid 90s in terms of FFO, again, based on current leverage and the foreign exchange rates there. Okay, yeah, I don't want to split hairs, but I mean, I guess you're.
But thank you for pointing this out for the audience.
Thank you. Okay, and then just last question for me.
Maybe you could just help us out in management's view on the distribution. And the reason I ask is that your business is much stronger than it ever was in history. And here we are on your guidance. I think you're kind of trending into a 70 if not low 70% FFO payout.
ratio and at your target guidance? And if you aren't sort of thinking that it might be sooner rather than later, I mean, how do you give us a target for leverage? I mean, how can we think about distribution going forward? You know, I think we've indicated in the past that as our FFO continues to grow and the payout ratio comes down.
It's something that gets reviewed on a regular basis internally and with our board as well. We're obviously, we want to target the payout in the low 70% range. We're obviously on the right trajectory to that.
I think it's just, you know, right now we're really focused on, you know, the strong balance sheet and keeping leverage in this level. So, you know, obviously something we continue to monitor, but nothing near term that, you know, we feel that there's any announcement or changes required. Okay, I appreciate that. I'm not, I probably messed it up, I don't think I ever heard you say.
a low 70 payout range on the distribution. And just to clarify, is that an FFO or an AFFO metric? FFO, FFO, that's, you know, just regarding what we publish. I mean, yeah, we've, you know, we've, and in terms of the payout ratio, I mean, low 70s is something where a lot of the Canadian peers are when you look to.
U.S. peers, it's even lower than that. So it's something that we're cognizant of and that's obviously something we continue to benchmark as well. Now that makes a lot of sense. Thanks so much. Thank you.
As a reminder, if you have a question, please press star 1 1 on your telephone keypad. We have a follow up question from Sam Diamani with TD County. Please go ahead. I will open up your line in just a moment. And your line is open.
Just for interest expense in Q2, there's a lot of moving parts in Q1. Do you have a kind of a rough
number you'd be comfortable putting out as an interest expense run rate for the second quarter? Sam, can we get back to you on that? Like I said, there's quite a bit of mewling part.
be comfortable putting out as an interest expense run rate for the second quarter? Sam, can I, yeah, let's, can we get back to you on that? Like you said, there's quite a bit of mewling parts. Of course. Thank you.
Thank you, Sam. Nothing further for you? That's it. Thank you. You're so welcome.
And I see no further questions in queue. I will now turn the call over to Brian Pauls for closing remarks.
Thank you. I'd like to thank everybody for your time today. We look forward to speaking again soon. In the meantime, take care and stay safe. Take care.
And thank you. This concludes today's conference. Thank you for participating. You may now disconnect.
And thank you, this concludes today's conference. Thank you for participating. You may now disconnect.