Q3 2024 Dream Industrial Real Estate Investment Trust Earnings Call
Welcome to the Dream Industrial Reet 3rd Quarter, 2024 Results Conference Call on Wednesday, November 6, 2024.
Speaker Change: Please view advice that all participants are currently in listen only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.
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During this call, management of Dream Industrial REIT may make statements containing forward-looking information within the meaning of applicable securities legislation.
Speaker Change: 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 reads 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 uncertainties is contained in Dream Industrial REIT's filings with securities regulators, including its latest annual information form and MDNA.
Speaker Change: These filings are also available on Dream Industrial REIT's website at www.dreamindustrialreit.ca Your host for today will be Mr. Alexander Sannikov, CEO of Dream Industrial REIT. Mr. Sannikov, please proceed.
Alexander Sannikov: Thank you. Good morning, everyone. Thank you for joining us today for Dream Industrial REIT's third quarter 2024 conference call. Speaking with me today is Lennis Quan, our Chief Financial Officer.
Alexander Sannikov: In the third quarter, we continue to focus on executing on our key growth drivers.
Alexander Sannikov: We reported FFO per unit of $0.26, 4% higher year-over-year. Our year-over-year comparative properties NOI growth was 3.3% for the quarter and 5.1% on a year-to-date basis.
which was in line with our expectations.
Speaker Change: We remain on track to achieve our 2024 Organic Growth Guidance.
Speaker Change: We ended the third quarter with 95.5% committed and in-place occupancy.
We have continued executing on our capital recycling program. We plan to resurface additional value through reinvesting the proceeds towards our development and acquisition pipeline, which are creative on a total return basis.
Speaker Change: We're currently in active discussions on several build-to-suit opportunities across our excess land portfolio and are also looking to add further scale to our solar program at Accredo Returns.
Speaker Change: In the quarter we achieved substantial completion on a solar project located in The Hague in the Netherlands with a system capacity of 3.4 megawatts and a forecasted yield on cost of over 8 percent.
Speaker Change: Market fundamentals remain healthy across our key geographies.
Speaker Change: We have seen an uptick in demand levels in Canada recently and are encouraged to see growing activity levels for larger units.
Speaker Change: Over the past few weeks alone, in our Canadian platform, we have responded to over 1 million square feet of RFPs.
Speaker Change: We're also seeing an increase in leasing activity in Europe, primarily in Spain and France where we have several pockets of availability.
Speaker Change: Supply remains predictable and we are not seeing new material construction starts across our key markets.
Speaker Change: As a result, we expect the structural drivers for our core operating markets in Canada and Europe to remain positive as we head into 2025.
Speaker Change: This translates into leasing activity in our portfolio.
Speaker Change: During the quarter, we signed a 10-year lease at our Abbotside development for the remaining 70,000 square feet with space rents starting at $18.50 per square foot with 4% annual steps. The project is now fully leased, achieving a yield on cost of 7.1%.
Speaker Change: We also signed a $300,000 per foot lease for 10 years at our Balzac development at starting rents of $9.75 per foot with 2.5% annual steps.
Speaker Change: This lease represents nearly half of the development and is one of the largest leases completed in Calgary Industrial Market in 2024. To date, in 2024, we have completed over 800,000 square feet of development leasing at rental rates in line with our initial underwriting.
Speaker Change: Since the end of Q2, we signed 1.9 million square feet of leases and new leases and renewals at an average rental spread of 25%.
Speaker Change: In Canada, we signed 1.1 million square feet of leases at an average spread of 39%, with rental steps of 3%. In Europe, we signed 745,000 square feet of leases at an average spread of 10%.
Speaker Change: Year to date, we have signed 5.2 million square feet of leases at 40% average spread. This leasing volume is greater and the spreads are also greater compared to the same period in the prior year.
Speaker Change: As we communicated previously, we are increasingly pursuing opportunities to recycle capital out of non-strategic assets.
Speaker Change: into our core business and markets at accretive returns.
Speaker Change: Our Capital Recycling Program continues to progress.
Speaker Change: Since the end of Q2, we sold three assets across our Holyoke and Dream Summit portfolio for gross proceeds to DIR of $29 million. Among these recent dispositions is a sale of 89,000 sq. ft. flex industrial asset located in Montreal, which was sold to the existing tenant.
Speaker Change: Total proceeds were $20.3 million, representing a 17% premium to the carrying value.
Speaker Change: As we recycle capital from these assets, our capital allocation priorities remain intact.
Speaker Change: We remain to reinvest, we plan to reinvest the proceeds towards completing our existing development pipeline, executing on our solar program, and contributing towards our private capital partnerships.
Speaker Change: which are all accretive from a total return standpoint. We're also starting to see attractive acquisition opportunities in Europe for well-located urban industrial assets.
Speaker Change: We continue to focus on growing our industrial platform in strategic Canadian markets.
Speaker Change: We're currently under contract on $226 million of acquisitions, or $35 million at DIR's share across Canada, including a 32-acre zoned infill site in Brampton within our development joint venture.
Speaker Change: With a flexible balance sheet, our business is well-funded to pursue these initiatives through existing liquidity, disposition proceeds, and retained cash flow.
Speaker Change: To conclude, all of our growth drivers remain intact and we expect that our 2024 results will be consistent with previously communicated outlook, and we continue to expect re-acceleration of comparative properties NOI and a 4 per unit growth heading into 2025.
Speaker Change: I will now turn it over to Lennis to discuss our financial highlights.
Lennis Quan: Thank you, Alex.
Lennis Quan: We're pleased with our solid financial results for the third quarter.
Lennis Quan: We reported diluted FFO per unit of $0.26 for the quarter, 4% higher than the prior year quarter, primarily due to comparative properties NOI growth, early renewals of existing tenants, and development leasing coming online.
Lennis Quan: Our net asset value per unit at quarter end was $16.73, which is in line with last quarter.
Lennis Quan: We continue to actively pursue financing initiatives to optimize our cost of debt and maintain a strong and flexible balance sheet with ample liquidity.
Speaker Change: During the quarter, we increased the limit on our unsecured revolving credit facility from $500 million to $750 million and extended the maturity to August 2029.
Speaker Change: In addition, we extended the maturity date of our $200 million term facility out to March 2028 in order to be coterminous with the corresponding cross-currency swath, enhancing both our liquidity and debt maturity profile.
Speaker Change: We ended Q3 with leverage in our targeted mid-30% range and net debt-to-EBITDA ratio of 8 times.
Speaker Change: With total available liquidity of approximately $820 million, we retained sufficient capital to execute on our strategic initiatives.
Speaker Change: including funding our development pipeline and contributing to our private capital partnerships.
Speaker Change: Having completed the repayment of a European mortgage at maturity in August, we have addressed all of our debt maturities for 2024.
Speaker Change: Comparative property's NOI growth for the year was partially impacted by 534,000 square feet of expected vacancies across Quebec and Spain. We are in discussions to lease up approximately 75% of these spaces.
Speaker Change: Our committed occupancy was 95.5% at the end of September, up slightly from last quarter. We expect our committed occupancy to remain largely flat in the fourth quarter.
Speaker Change: Our outlook for the remainder of the year remains intact and we expect our FFO per unit for the fourth quarter to be in line with Q3. As such, our full year results are expected to be in line with our previously issued guidance on comparative properties NOI and FFO per unit.
Speaker Change: Looking beyond 2024, we continue to expect that the pace of organic growth within our portfolio will accelerate and will continue to exceed the pressure from higher interest rates, translating into sustained FFO per unit growth. I will turn it back to Alex to wrap up.
Alexander Sannikov: Thank you, Lennis. On October 1st, we had the opportunity to host many of you at our Investor Day. A recording is available on our website.
Alex: We discussed the outlook for the business over the next few years and outlined our strategic priorities, including continuing driving organic growth from the portfolio.
Alex: surfacing value and additional NOI from our extensive excess land holdings, growing our ancillary revenue, and driving value growth through alternative uses for urban industrial assets such as data centers.
Alex: These pillars will continue to inform our strategy as we head into 2025 and focus on delivering sector-leading total returns for our unit holders. We will now open it up for questions.
Alex: We will now begin the question and answer session.
Speaker Change: To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. And if you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2.
Speaker Change: We will pause for a moment as callers join the queue.
Speaker Change: And our first question comes from Kyle Stanley.
Speaker Change: Please go ahead.
Kyle Stanley: Thanks. Good morning, everyone.
Kyle Stanley: One question, and I'm not sure if you'll have access to this, but I'm just curious, do you have a sense of where the space utilization across your portfolio would be today, and how that might compare to level C in the post-COVID demand boom? I'm just trying to figure out...
Alex: you know, as maybe demand picks back up later next year, how that necessarily translates to net absorption.
Alex: Thank you. Bye.
Speaker Change: What we see currently is that space utilization is going up, occupiers are very mindful of being efficient in their footprints. During COVID we've seen, or just immediately after the pandemic, we've seen occupiers take some excess space in anticipation of...
Speaker Change: Space requirements, demand
Speaker Change: That has led to some subleasing activity where maybe some of these requirements didn't materialize And what we see currently, at least the trend that we see currently, is that space Utilization is going up as occupiers want to be very efficient with their footprints
Speaker Change: Okay, no, I think that that makes sense. You hit on the sublease availability there and you know we've seen it kind of tick higher and in the last several quarters. Curious, within your portfolio has sublease availability changed at all? Have you begun to see it pull back?
Speaker Change: Thank you.
Speaker Change: We have started seeing some pullback. We're not seeing significant sublease availabilities in our portfolio when our occupiers, generally when our occupiers look to engage in subleasing.
Speaker Change: We tried to work with them to pursue direct opportunities Which work better for us and and our occupiers as well. So we haven't seen significant volume of subleasing in our portfolio
Speaker Change: And then just the last one, you made this comment in your prepared remarks, but talking about maybe a noticeable shift in leasing demand or at least inquiries in the last several weeks or maybe since the end of the summer, can you speak to maybe what you think is driving that at this point?
Speaker Change: I'm
Speaker Change: We see a combination of drivers for that, it's in some cases space efficiency, in some cases it's just general outlook and ability to plan ahead.
Alex: with the interest environment normalizing and becoming more predictable. So we're seeing a combination of drivers for that.
Speaker Change: Okay, thank you for that. I will turn it back.
Speaker Change: Thank you.
Speaker Change: Thank you so much, Kyle. That was Kyle with Desjardins. And now we have Himanshu Gupta with Scotiabank. Please go ahead.
Himanshu Gupta: Thank you and good morning.
Himanshu Gupta: On the occupancy, you know, Dream Summit, JV occupancy was down a fair bit, you know, 300 basis point, quarter over quarter. It has been resilient for some time now, so what happened this quarter?
Himanshu Gupta: The fault of a larger, on a larger footprint, we are in
Himanshu Gupta: Very active discussions to backfill that. That has been the more material impact in the quarter.
Himanshu Gupta: I don't think that we are particularly worried about
Speaker Change: Was there like a theme, you know, like the larger properties came back or certain markets came back?
Speaker Change: Any more color, please come back.
Speaker Change: It was very unique to that particular occupier, in that particular...
Speaker Change: location it's nothing that we would extrapolate onto markets or sub markets or anything like that it's really one one asset where we had a an occupier who
Himanshu Gupta: You know ran into financial difficulties and didn't need the space and so
Himanshu Gupta: We're working through that. As I said, we have a very advanced prospect to backfill most of that space already.
Speaker Change: Okay, got it. So larger occupier leaving and are looking to backfill. Okay. And when you say that, you know, flat occupancy in Q4, very similar to Q3, that applies to Green Summit JV as well. So it's like one-off kind of thing.
Speaker Change: It's mostly applying to the DIR wholly owned portfolio you know Dream Summit pursues a Well, both DIR and Dream Summit pursue a total return strategy, I think Within the Dream Summit venture we are much more mindful of
Speaker Change: rates and and and less driven by occupancy and in some cases we would be okay to
Himanshu Gupta: hold an asset vacant if we think we can get much better rents or we can sell an asset to a user and so we're a bit less driven by occupancy within the Dream Summit Venture much more driven by total return
Speaker Change: Thank you. My next question is on the Balzac leasing. I think it was Phase 2 which was done. Is there a reason that you like Phase 2 rents on a dollar per foot basis was slightly lower than the one which you did last time on Phase 1?
Himanshu Gupta: Thank you.
Speaker Change: Yeah, they're very different assets and they were targeting a very different audience. So, the 50-acre development site was...
Speaker Change: targeting large-bay logistics demand, large-bay logistics users, whereas the 20-acre development was always targeting
Speaker Change: Brian Pauls, Alexander Sannikov
Speaker Change: 15-20% difference in rents. What we've achieved on this $300,000 per foot lease was exactly in line with our underwriting.
Speaker Change: on a trended basis. So when we started that development, we assumed certain rates, and we assumed certain rental growth to completion. And so what we've achieved is in line with the trended or grown rental rates.
Speaker Change: Okay, fair enough. This last question for me is on Europe. I mean between Germany, Netherlands and France, how would you rank them, you know, based on fundamentally? What do you like the most or which is the strongest to the weakest?
Speaker Change: I think the Netherlands offers probably amongst the strongest fundamentals, highly concentrated industrial stock, you know, very robust demand drivers, diverse demand drivers, so we continue to like the Netherlands a lot.
Speaker Change: close second. I think Germany, despite some economic headwinds that are well documented in the financial press, offers long-term value for well-located industrial assets and we continue to
Speaker Change: to like that when we look for acquisition opportunities.
Speaker Change: Okay, thank you guys. I'll turn back.
Speaker Change: And the next question comes from Matt Kornack with National Bank. Please go ahead.
Matt Kornack: Yeah, I got it.
Matt Kornack: It's interesting to hear that demand's picking up. In your discussions with prospective or existing tenants, has the kind of change in immigration policy from the federal level had any implication there, or have these guys kind of put expansion on hold for long enough and they kind of need to do it at this point?
Speaker Change: Thank you, Matt. It hasn't come up in our conversation with tenants. It's not a direct driver. Obviously, it drives the broader demand for goods and services in the economy.
Speaker Change: When it comes to the occupiers that we engage in with, to your point,
Speaker Change: Many of these groups have been on sidelines when it comes to expansion industrial premises for well over a year now and so it's mostly driven by that as opposed to near-term outlook for population growth.
Speaker Change: Okay, fair enough. And then it seems like you have settled on converting the property in Montreal to...
Speaker Change: a multi-tenant use. Can you give a sense of the cost to convert the existing building to that? Is it going to be a complete rebuild or are you using the existing footprint and the rent and return expectations and lease-up thoughts time-wise?
Speaker Change: Brian Pauls, Alexander Sannikov
Speaker Change: which is where we see most of the demand in Montreal right now is in that.
Speaker Change: for that answer.
Speaker Change: And then two quick last ones. One on straight-line rent. It was up this quarter, but I think that's on development deliveries and maybe associated
Alexander Sannikov: Alexander Sannikov
Speaker Change: There's going to be a base effect that's somewhat established at this point, given that your occupancy is stabilizing but you're still getting rent spread, so would you expect that kind of we're at a troughing level on same-property NOI growth at this point?
Speaker Change: So Matt, I'll start on the straight-line rent comment. So correct that some of that development leasing is contributing to there but more significantly so it's some of the early renewals that we have done of leases that are maturing beyond 2024 and we're able to lock in higher rents and extend the term on that so that's what's contributing to the straight-line rent this quarter.
Speaker Change: And on the same property, I would look as we found it before. Yeah, we do expect acceleration, and whether it's this quarter or next quarter, we expect that on a quarterly runway basis, it's going to start picking up from here.
Speaker Change: Thank you.
Speaker Change: And the next question comes from Gaurav Mathur with Green Street. Please go ahead.
Gaurav Mathur: Thank you and good morning everyone. You know when you're looking at the Canadian market and the performance from a CBNOF perspective, how would you rank
Speaker Change: Thank you, Gaurav. We didn't quite fully catch the question. In terms of the geographies, we caught that part, but maybe I didn't quite follow the ranking. You're looking at...
Gaurav Mathur: Elaborate? Sure, sure.
Speaker Change: Just trying to get a sense of how tenants are responding.
Speaker Change: Is there anything that's surprising you at this stage among the three markets or is Western Canada going to lag the rest of the country?
Speaker Change: Okay, understood. Thank you. Thank you for the clarification.
Speaker Change: We expect that from an absolute take up, Western Canada is going to lead as opposed to lag.
Speaker Change: 12 months or so.
Speaker Change: We are also expecting supply pipeline to level off in a market like Calgary.
Speaker Change: and then we'll continue.
Speaker Change: supporting the fundamentals. We haven't seen significant rental growth in Western Canada. It's been steady, but not as significant as
Speaker Change: low to mid single digits range over the next 12, 24, 36 months. So we continue to be bullish on Western Canada and specifically Calgary.
Speaker Change: We commented before that we're looking for more opportunities in Vancouver.
Speaker Change: but certainly a market that we like.
Speaker Change: none really to speak of going forward and as
Speaker Change: See more levels of leasing activity, but for the past 12 months. It's been slower
Speaker Change: Thank you for the time on that, it was helpful.
Speaker Change: Thank you for the call on that. I appreciate it.
Speaker Change: And last question, you know, we've also noticed that although
Speaker Change: for this session.
Speaker Change: We are obviously focusing on the NER, focusing on the face trends we're achieving. We commented before that, you know, we have not seen in our portfolio a significant pressure in...
Speaker Change: On face rents, again, some of the commentary that we provided earlier hopefully speaks to that. But, you know, there's a higher degree of or higher quality of fit out that goes with
Speaker Change: leasing some of these spaces and
Speaker Change: That's what's reflected in the leasing costs. We don't expect it to...
Speaker Change: go up materially from here.
Speaker Change: Your comment about significant, you know, it's significant relative to 2020.
Speaker Change: two, for example, but in historic context, more broadly, the level of leasing cost is very much in line and NERS are obviously above what we were achieving pre-COVID on this industrial leasing.
Speaker Change: Okay, well thank you so much for the call Alex. I'll turn it back to the operator.
Speaker Change: Thank you. Next question comes from Sumaya Syed with CIBC. Please go ahead.
Sumaya Syed: Any more color? Was there anything lease or tenant specific there? And are these trends holding into 204 leasing that you've done to date?
Speaker Change: Thank you for the follow-up. Spreads will move around from one quarter to another, as we commented earlier, overall on the leasing that we've done this year.
Speaker Change: Our spreads are higher than the spreads we've achieved last year and spreads are mostly a function of what's expiring as opposed to...
Speaker Change: necessarily the indicator of where the market rents and or the market generally is trending.
Speaker Change: So, there's obviously some idiosyncratic leases that drive any given quarter. This particular quarter we didn't have significant volume in Quebec. We only had 194,000 square feet of leases in Quebec this quarter compared to...
Speaker Change: Almost 800,000 square feet of leases the quarter before, so it's not a significant sample, if you will, to draw any material conclusions from it.
Speaker Change: Great, okay. And then I also wanted to follow up on your comments around occupancy generally. I think previously you had indicated that
Speaker Change: it would trend upwards by the end of 2024. And now, with it being flat, is that just tied to the larger default you mentioned, or if there's anything changed there, and how much you think that occupancy uptick has been pushed out by?
Speaker Change: Well, as we commented before, we expected on the same property in a wide basis, a full basis, the guidance stays intact. When it comes to occupancy, it's a function of
Speaker Change: Timing of completing some leases and as we mentioned we are in discussions on a number of leases in Spain and in France that will materially move the occupancy number They're not going to contribute significant amount to the NOI because rental rates are lower so
Speaker Change: I think what Linus was aiming at with that comment is we expect occupancy kind of to more or less stay at this level when we think about our
Speaker Change: guidance, the strategy that we have remains intact where we prioritize achieving the right rents versus necessarily filling up every space.
Speaker Change: So, to give you an example, the 100,000 square foot lease that we just announced in...
Speaker Change: in Oakville at $18.
Speaker Change: So he got signed at the end of summer.
Speaker Change: In March, we had the ability to lease that space at $15, and we passed on that opportunity. And so that goes to illustrate the strategy that we have with leasing, is prioritizing rates versus occupancy. And so we're staying the course there.
Speaker Change: And Samaya, just to clarify, I think when we were guiding towards flat to slightly up last order, we were also referring to committed occupancy.
Speaker Change: not just in place because to Alex's point there's some timing of leases that we're targeting to sign by end of year.
Speaker Change: Okay, so just a timing issue there. Great. And then just lastly, in terms of capital deployment, how much of an area of focus are land deals for you? And I know noting you have one in Brampton under discussion. And just what are you seeing for pricing for industrial land these days?
Speaker Change: We continue to look for well-located infill sites that can accommodate
Speaker Change: functional multi-tenant layouts for midday industrial.
Speaker Change: These sites are difficult to find, but when we do find them, we continue to be active, especially in the context of our
Speaker Change: Development JV.
Speaker Change: this
Speaker Change: Acquired for that venture As far as pricing metrics, we are looking to achieve high six Untrended yield on cost and
Speaker Change: with some moderate rental growth. It's going to be at around seven, maybe slightly north of seven yield on cost by the time we complete that particular development.
Speaker Change: We will provide more color on that project as we close on the site.
Speaker Change: The building can also accommodate larger users if that large pay demand continues to rise.
Speaker Change: Our next question comes from Sam Damiani with TD Securities. Please go ahead.
Sam Damiani: Thank you. Good morning.
Sam Damiani: So, maybe just Lenis, just to clarify your comment on Q4 for flat occupancy on a committed basis. Would you say the same on an in-place occupancy level too?
Speaker Change: To clarify, the flat is referring to...
Speaker Change: on an in-place basis and the committed is, you know, that's the timing of signing future leases as well.
Speaker Change: Okay, great. And for same-property NOI growth, you're still targeting mid-single digits for this year.
Speaker Change: So we can assume probably in and around that level in Q4, so suggesting Q3 hopefully was the trough.
Speaker Change: I'm just wondering if you would agree with that. And when we look out to 2025, maintained, you know, an accelerated outlook, I wonder if you could be a little bit more specific in terms of, you know, the quantity and by how much it could accelerate.
Speaker Change: Sure, Sam. So I did indicate that our FFO per unit for fourth quarter would be expected to be flat.
Speaker Change: to Q3 and correct our Comparative Properties NOI guidance is still intact. So full year, or year-to-date, the nine months, we're at about 5.1%. So that would sort of imply, you know, based on the guidance of the mid-single digits that...
Speaker Change: You can come back into what Q4 range-wise would be approximately, but yes FFO per unit would be flat as well.
Speaker Change: and Brian Pauls.
Speaker Change: and that OTA of 2025.
Speaker Change: We're not talking 50 basis points, so it's more material than that. But beyond that...
Speaker Change: We would rather provide more specific guidance in February.
Speaker Change: Okay, sounds good. And then just on the acquisitions that you're under contract on, in terms of the income property producing component of that, what sort of yields or IRRs are you targeting there?
Speaker Change: On the capital deployment?
Speaker Change: Yeah, on the $226 million.
Speaker Change: Thank you.
Speaker Change: Yeah, so the acquisitions remain to be in that mid to high six mark-to-market yield range with high single-digit, low double-digit unlevered returns. We remain to target that and remain to see opportunities that pencil to these returns.
Speaker Change: Thank you.
Speaker Change: And I guess just, you know, when you buy on a market-to-market sort of high six, is it going in?
Speaker Change: Are you playing the strategy of buying really low and then capturing the upside or are you playing a little bit less aggressive tactic on acquisitions today? Just wondering what the upfront NOI could look like.
Speaker Change: Some of the acquisitions we've pursued prior to this. Again, it's an asset that we're very excited about and as soon as it's firm, we'll provide more color on that particular investment.
Speaker Change: Okay, great. And would this group of assets include an entry into the Vancouver market?
Speaker Change: Adios.
Speaker Change: and Brian Pauls, Alexander Sannikov
Speaker Change: it could. As I said, we'll provide more color on the assets, geographies, and why we like them as these deals firm up.
Speaker Change: Great. And, you know, last question for me, just on the...
Speaker Change: The rent growth touched on a little bit in the call already, but I guess just a bigger picture.
Speaker Change: You know, you know, are you?
Speaker Change: When would you say the rent growth could really re-accelerate in Toronto and Montreal? How comfortable are you saying that could happen in six months, two years? What would be your best guess at this point?
Speaker Change: Um...
Speaker Change: So we generally share the view that was expressed by Colliers as part of their presentation during our investor day that we'll see.
Speaker Change: Rental growth coming through in 2025.
Speaker Change: When exactly in 2025? It's more difficult to predict, but we think that the market is shaping up well for rental growth to resume in 2025.
Speaker Change: Thank you. Bye.
Speaker Change: Thank you.
Speaker Change: Okay, great. Thank you very much, and I'll turn it back.
Speaker Change: Thank you.
Speaker Change: Next question comes from Pam Eber with RBC Capital Markets. Please go ahead.
Pam Eber: Thanks. Good morning. I just wanted to go back to your comments. I think at the outset, Alex, you'd mentioned that maybe you're looking at or you're seeing some more acquisition opportunities in Europe. I think later you've said perhaps in Germany. So can you maybe just expand on that? You know, again, maybe just some color on which markets, what sort of volume you're talking about and how you would expect to fund it, just given your current cost of capital.
Speaker Change: mid-bay assets. And we're seeing stronger going in yields right around that 6% mark with mark-to-market potential that ranges from...
Speaker Change: 7 plus to, in some cases, double digits.
Speaker Change: on a yield basis. Now, in Europe, you need to underwrite longer mark-to-market because, in some cases, tenants have options, but with these pricing metrics, we're seeing very attractive total returns. As far as funding goes,
Speaker Change: With that, the balance sheet is well funded to pursue some of these
Speaker Change: smaller acquisition opportunities that are additive to our portfolio and screen very attractive on an individual investment basis.
Speaker Change: Okay, so maybe not something big enough to pursue through some new private capital JVs.
Speaker Change: These assets will very much fit any potential JV, but we can pursue them without having one formed. And if we do have a JV formed, then these assets will be well positioned for a larger venture that would allow us to then scale up that acquisition program beyond what we can do on balance sheet and obviously get additional return for the REIT through our cropping management and leasing platform.
Speaker Change: We will answer a couple questions as we rise through generations of American import companies Companies such as Swiss Airfreight Swiss Aircraft SwissFlight Amc We'll answer a couple questions as we rise through generations of American imports
Speaker Change: $400,000 per feet. When we bought it, it was bought on a very attractive basis.
Speaker Change: in the mid-100s.
Speaker Change: to the vacancy. It was more of a refurbishment redevelopment acquisition, so we obviously knew that they would have a vacancy component going in.
Speaker Change: with respect to like rent steps in terms of new leasing or even on renewals, any change at all in terms of or any pushback from tenants in terms of being able to put through or incorporate these steps into leases?
Speaker Change: We continue to achieve BRENDT steps that we
Speaker Change: We have been achieving, so this quarter on our Ontario leasing, which is about 400,000 square feet, we signed 3.9% escalators.
Speaker Change: In Quebec, escalators were around 3.3%.
Speaker Change: in Western Canada, 2.5%.
Speaker Change: and last quarter, for example, we had 4%, 2.7% and 2.8%, so very consistent levels.
Speaker Change: in terms of rental steps that we're achieving.
Speaker Change: and just pulling up on that.
Speaker Change: I have a question that Sumaya had about rental spreads this quarter. The rental rates that we've achieved this quarter on 1,000,001 square feet of leasing on average are $13.50 and they are very consistent with the rental rates that we've achieved last quarter.
Speaker Change: But the expiring rents or the prior rents are almost $2 higher
Speaker Change: this quarter on that millions per feet of leasing compared to last quarter, hence the spreads are
Speaker Change: slightly different. So the absolute rents that we're achieving are in line or higher.
Speaker Change: both in Ontario and Quebec, but the expiring rents are different.
Speaker Change: Thank you. Bye-bye.
Speaker Change: Question comes from Mike Markidis with BMO Capital. Please go ahead.
Mike Markidis: Thank you, Albert. Alex, earlier in the call you just mentioned that, you know, the read is both prioritizing rents, but that desire is maybe stronger in the Dream Summit JV, and I guess maybe I'd...
Mike Markidis: I hope that you could expand on that a bit more, just given the size of your Holy On platform, balance sheet being at eight times that of Tibidab and material payout improvements that you've seen on an FFO basis.
Speaker Change: Thank you.
Alexander Sannikov: Thank you for that follow-up, Mike. So, obviously, Dream Industrial REIT is a REIT, and so we do pursue a total return strategy, but we want to have a balance, especially given the...
Alexander Sannikov: If you kind of keep score just on this call alone, more than 60% of questions were around occupancy.
Speaker Change: when it comes to Dream Summit.
Speaker Change: It's a private venture. It pursues a total return strategy. And if we can buy a vacant asset that will move our overall occupancy by 50 basis point in any given quarter.
Speaker Change: and given that we're buying it at...
Speaker Change: made $100 a foot.
Speaker Change: and we already have offers from users on it at mid $200 a foot.
Speaker Change: It's a great investment, and we very much like that.
Speaker Change: within the context of a private venture.
Speaker Change: you know, in the context of...
Speaker Change: Thanks for having me.
Speaker Change: laser-focused from the market on occupancy. We're being a bit more balanced, but still are pursuing that rental rate strategy as we commented on before.
Speaker Change: We would look at options as to whether we should sell that asset to a user or lease it and in many cases the user sale value informs our rental rates, which may well be 20 or 30 percent higher than what the nearest 10 comparable leasing transactions will suggest.
Speaker Change: as we commented on earlier, again.
Speaker Change: This is much more of a total return and purely a value-driven strategy and exercise.
Speaker Change: So, the sale that we just completed.
Speaker Change: and announced this quarter was done at $380 a foot, which is, you know, a very attractive price. And, you know, it was at around 5 or sub 5% yield on what we would have been able to achieve in the leasing market.
Speaker Change: Okay, thanks. I mean, actually, that's a good segue because I was going to ask you about that asset in the $3.80 per square foot. Were there any unique attributes about that property that would have contributed to that $3.80 per foot? I mean, I think that would probably be a little bit higher than most people would think about when valuing.
Speaker Change: and even Urban Info Office in the GTA.
Speaker Change: No, not at all. It was, if anything, it had some attributes that would make it a bit more difficult to lease, because it had a higher office component. But, you know, well located, GTA assets, you know, midsize footprint, and in fact we had multiple offers on that asset.
Speaker Change: from multiple users.
Speaker Change: And yeah, we continue to see.
Speaker Change: that the user market being very active. We have a mid-sized asset right now in Brampton. It has a little bit of excess land to it, a bit of a yard. The price per square foot that we've seen offered on that asset is north of $500 a foot.
Speaker Change: and you know that goes to say or goes to illustrate the value of urban industrial.
Speaker Change: Okay, and that asset you're referring to, is that a wholly owned or a tuned summit asset?
Speaker Change: The $500 a foot one? Yeah.
Speaker Change: That's within Dream Summit. But, you know, situations like this inform our leasing strategy where, you know, we can lease that asset at low 20s a foot or maybe
Speaker Change: Mid-20s afoot, but when you have an alternative to sell it north of 500 you need to the rent that you need to achieve to
Speaker Change: Alexander Sannikov, Brian Pauls, Alexander Sannikov, Brian Pauls, Alexander Sannikov,
Speaker Change: Okay, last one for me just to wrap it up here. Obviously, you're not going to guide to 2025 specifically until February, totally understand that. Just with respect to the NOI bridge that you laid out in the investor day on October 1st,
Speaker Change: Would it be safe to say that if you were to do it again today that there would be no changes to that? Or have you seen anything that would suggest that that should be increased or decreased?
Speaker Change: Assume activation of access land holdings and And and things like that. We've only modeled for that bridge a very moderate pickup and occupancy of 100 basis points give or take relative to current levels so
Speaker Change: Yeah, if we were to follow the same methodology, i.e. conservative outlook, there wouldn't be any changes. And as we commented on earlier in our prepared remarks, for our excess land holdings, for example, we are in multiple discussions at the moment on built-to-suit opportunities.
Speaker Change: in Europe and in Canada, in fact, and so these developments will enhance that outlook further.
Speaker Change: Our next question comes from again Himanshu Gupta with Scotia Bank. Please go ahead.
Himanshu Gupta: Thank you. Just a follow-up question on European Union expires next year in 2025.
Himanshu Gupta: I think the filing you mentioned, market rents are like 25% higher for European expiry next year. Is that, you know, your expectation as well? And, you know, if there's a reason the number is high, I think it's...
Himanshu Gupta: number is high relative to what you have achieved in the rental spreads in Europe so far.
Speaker Change: higher spreads. Last quarter we announced a deal in Germany, for example, with 20% spreads. You know, a deal in the Netherlands with much higher spreads. So, you know, we do have some expires that will have a higher spread.
Speaker Change: Okay. Thank you, Alex. I'll turn it back. Thank you.
Speaker Change: This concludes the question and answer session. I would like to turn the conference back over to Mr. Sannikov for any closing remarks.
Alexander Sannikov: Thank you for your interest in our company and support of Dream Industrial REIT. We look forward to reporting on our progress next quarter.
Speaker Change: Goodbye.
Speaker Change: This brings a close to today's conference call. You may disconnect and thank you for participating and have a pleasant day.
Speaker Change: [music]