Earnings Call: Q2 2021

Aug 4, 2021

Earnings release

Good morning, ladies and gentlemen, and welcome to the Dream Industrial REIT Second Quarter Conference Call for Wednesday, August 4, 2021. During this call, management of Green Industrial REACH 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 REIT's control. This 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 MD and A. These filings are also available on the MIM Industrial REIT's website at www. Dreamindustrialreach. Ca. Later in the presentation, we'll have a question and answer session. Your host for today will be Mr. Brian Pauls, CEO of Dream Industrial REIT. Mr. Pauls, please go ahead. Thank you. Good morning, everyone. Thank you for joining us today for Dream Industrial REIT's 2021 Q2 conference call. Speaking with me today is Lenis Quan, our Chief Financial Officer and Alex Sannikoff, our Chief Operating Officer. Q2 marked an incredible quarter with significant strategic initiatives completed by the REIT as well as solid operational results. We reported a 10% plus increase in FFO per unit for the 2nd consecutive quarter this year, driven by CP NOI growth and a lower cost of debt. Our pace of CP NOI growth remains robust and was 3.8% in Q2 as leases signed over the past 6 to 9 months continued to take effect. We completed the transformation of $1,300,000,000 pan European portfolio transaction, bringing our total acquisition volume in the last 7 months to an incredible $1,800,000,000 including 2,000,000 square feet of development opportunities. We've advanced our development pipeline with approximately 700,000 square feet of projects Currently underway in Canada and the U. S. Q2 also saw the release of our green financing framework and our launch of $400,000,000 of green bonds with over $300,000,000 of eligible investments completed or identified to date. We continue to lower our cost of debt with $800,000,000 of just 0.35 percent over a 5 year term after swapping to euros. Subsequent to the quarter, we ceded a $480,000,000 Industrial fund that will allow us to grow effectively in the U. S. Alongside reputable institutions while increasing the quality and diversification of our U. S. We expect to deploy the near term proceeds from this transaction towards high quality acquisitions in Europe and Canada as well as We have now acquired over $1,800,000,000 of high quality logistics assets in Europe that have improved our portfolio quality, Scale and diversification. This execution has allowed us to become a $5,000,000,000 global REIT with significant scale in markets fundamentals in Europe due to the long runway for growth in e commerce, barriers to significant new supply and attractive going in capital values and yields on high Quality Industrial Product. Our European expansion strategy has also transformed our debt financing model over the past 18 months. Since launching our European expansion, we have lowered our average cost on total debt outstanding by over 200 basis points, significantly outperforming our prior expectations. In the U. S, the Fund allows us to continue to grow in attractive markets, improving overall portfolio quality and diversification, while maintaining an attractive geographic mix. We will grow our property management business and will provide property management, construction management and leasing services to the fund at market rates, which will improve our returns on equity invested in the region. In Canada, we continue to add scale in our target markets of the Greater Toronto area and the Greater Montreal area with over $300,000,000 of assets closed or under contract thus far in 2021. Private market pricing for good quality assets in these markets continues to set new records with every transaction. This bodes well for our existing portfolio as reflected in the 17% year over year increase in NAV per unit from $11.75 to $13.69 Looking forward, we will remain opportunistic in sourcing properties in these markets that are attractive against our target hurdles and screen well against Economic rent and replacement cost. As asset pricing continues to surpass record levels in many of our target markets, We also intend to add scale through a structured development program. Our development pipeline currently consists of over 3,000,000 square feet across each of our operating markets. We expect to have up to 5% of our total assets under Active development at any point in time with targeted yields on construction costs over 6%. We have 3 pillars of our development strategy: Greenfield development, redevelopment and expansion opportunities at our current sites. During the quarter, we expanded our greenfield development program in the GTA with the acquisition Two land parcels totaling 38 acres. The first site is a 30 acre parcel located in Brampton that can support a 550,000 square foot logistics facility with a targeted construction commencement date in the next 18 to 30 months. The second site is an 8 acre parcel located in Caledon that can support the construction of a 150,000 square foot logistics facility in the next 12 months. Combined, these two sites were acquired for less than $50,000,000 representing an attractive valuation of approximately 1,300,000 We are targeting unlevered yield on cost of approximately 6% on these projects, which represents a spread of 2 50 basis points compared to cap rates for comparable stabilized properties and should result in meaningful NAV per unit growth. In addition to our We have commenced construction on 2 expansion projects in the GTA and Montreal that will add 260,000 square feet of additional density in these markets. We expect these projects to be completed in 2022. Moreover, we have several existing properties in our near term redevelopment bucket. These sites are located primarily in the GTA in Montreal where we can redevelop the existing properties to accommodate modern logistics use as well as increase the footprint by 300,000 square feet. During the quarter, we expanded our medium term development pipeline by over 1,000,000 square feet of intensification opportunities in France and the Netherlands as part of the properties added through the Pan European Portfolio transaction. We expect to access these opportunities over time and are forecasting a yield on incremental cost of over 7%. We continue to make significant progress in all aspects of our business. I will now turn it over to Alex to talk about our operations. Thank you, Brian. Good morning, everyone. Industrial market fundamentals remain robust across all our markets. Availability rates continue to trend down in most of our markets, dropping to the low 2% range across Canada, with availability in the GTA and GMA just over 1%. Since the end of Q1, we signed 1,600,000 square feet of leases at an average rental spread of over 20% over prior rents. On these leases, we also an annual contractual rental growth of 2%. Our in place occupancy increased 170 basis points compared to 2021 to 97.4 percent. We have lease commitments for about 238,000 square Vacancies, most of which are expected to commence over the balance of 2021, taking committed occupancy to 98%. Notably, with strengthening logistics fundamentals in Western Canada and our active asset management program, we were able to lease 14 vacancies totaling 156,000 square feet during the quarter, which resulted in 170 basis points increase in committed occupancy our Western Canada portfolio to 95.9 percent as of June 30, 2021. As a result of our strong leasing activity, our same property NOI growth continued to be strong with reported 3.8% year over year growth this quarter. We reiterate our previous forecast of mid single digit CPNOI growth for 2021. In terms of quarterly guidance, we On the operations front, the rent collection levels in our portfolio have returned to pre pandemic levels as our tenant base has proven resilient through the pandemic. We have collected over 99% of recurring contractual gross rents during 2021. We have collected substantially all of the contractual rents for 2020. Of the $2,300,000 of rent deferred during Q2, 2020, we have collected about 95% already. During the quarter, the value of our assets increased by $207,000,000 reflecting lower capitalization rates as well as higher market rents in Ontario and Quebec primarily. And demand for industrial assets continues to be robust across all of our markets. As of June 30, 2021, our investment properties were valued at $150 per square foot including the Ontario and Montreal portfolios They're being carried at $192 $1.44 per square foot respectively. With asset pricing setting new records in most of our markets, We expect our asset values to continue to increase over time as private market transactions provide additional data points. We continue to advance our 2021 ESG plan and are increasingly prioritizing green investments in our capital allocation decisions. We are in advanced stages of planning renewable power projects in Canada and the Netherlands and collaborating with the local authorities on these projects. We are targeting to install over 40,000 Solar panels across 3,000,000 square feet, which would result in over 10% of the Trust portfolio being powered by renewable energy. We continue to make solid progress in our increasing energy efficiency across our buildings. We have established a target of upgrading approximately 1,000,000 square feet of GLA each year to LED lighting. On a year to date basis, our lighting retrofits totaled nearly 500,000 square feet and we are on track to achieve our annual target. I will now turn it over to Lenis who will provide our financial update. Thank you, Alex. Our financial results for the Q2 were strong and in line with our expectations. Diluted funds from operations was $0.19 per unit for the quarter, 11% higher than the prior year comparative quarter due to higher NOI from our comparative properties and recent acquisitions and lower borrowing costs as we executed on our European debt strategy. The pace of our capital deployment remains strong, and we have closed or waived on over $1,800,000,000 of acquisitions thus far in 2021 and have closed or waived all conditions on $118,000,000 of assets subsequent to quarter end. To date in 2021, we have also repaid over $300,000,000 of secured mortgages, including approximately $170,000,000 of Canadian These mortgages bear interest at an average interest rate of 3.65 percent and have an average remaining term to maturity of 2.4 years. Our debt strategy has allowed us to transform DIR to operate primarily with an unsecured financing model and has continued to result in a lower cost of debt. Over the past year, we have raised $1,200,000,000 of unsecured debt at a weighted average interest rate of under 0.5% after swapping to euros, including $800,000,000 of unsecured debentures issued during the quarter at an average interest rate of only 35 basis points after swapping to euros. The average interest rate on our in place debt has decreased by over 200 basis points over the past year and at the end of Q2, 2021 was 1.49%, significantly outperforming our expectations at the onset of our European With the repayment of additional mortgages subsequent to the end of Q2, we expect bad interest rate to During the quarter, we also issued our inaugural Green Bond, a $400,000,000 Series C unsecured debentures. The proceeds are expected to be invested in accordance with our Green Financing Framework. The deployment of the proceeds is well under And we have already completed or have identified over $300,000,000 of eligible projects to date, including over $200,000,000 of green certified assets acquired as part of the Pan European Portfolio transaction. Subsequent to quarter end, we sold a 75% interest in 18 of our U. S. Assets for expected net proceeds of $250,000,000 As Brian mentioned, we expected to redeploy these proceeds towards acquisitions over the balance of the year as well as repaying secured debt. Pro form a the acquisitions completed or waived since the end of the second quarter to repayment of mortgages and the U. S. Fund transaction, Our leverage is expected to be in the mid-thirty percent range, and we will retain nearly $300,000,000 of acquisition before our leverage reaches our targeted mid to high 30% range. Having achieved a significantly lower average cost Debt during the first half of the year and with strong comparative properties NOI growth expected for the year, we expect just over 10% year over year FFO per unit growth in 2021, assuming average leverage for the year in the low to mid-thirty percent range. I will now turn it back to Brian to wrap up. Thank you, Lenis. 2021 has been an incredibly exciting time for DIR and we've taken significant steps to position DIR as There will be a delay before the first question is announced. And the first question comes from Brad Sturges from Raymond James. Your line is open. Hi, good morning. Maybe just starting with the U. S. Fund strategy, I'm wondering if you could just comment on The fundraising efforts to date and maybe give a little bit color on, to the extent you can, maybe the types of institutional investors participating in the fund. Sure, Brad. It's a good question. We're excited to maintain 25% of the fund, there are significant U. S. Institutions coming into the fund. We're not at liberty to identify them, but they'd all be household names. So we think the opportunity to partner with them to grow into very Strong markets, be really focused on total return and have exposure to some new markets we wouldn't have been able to enter Without the fund is an exciting opportunity. So there's a lot of investor interest. It's certainly well capitalized With interest from these institutions in seeing that grow. So certainly the seed portfolio is fully funded and There's commitments to grow beyond that, and we're looking to grow not only in 2021, but beyond that. We expect scale to grow pretty significantly over the next few years. Okay. Beyond the seed portfolio, do you have any initial targets or thoughts Thoughts in terms of what the fund could grow to in the next call 12 to 24 months? Yes, I think It could certainly double or triple over the next couple of years. That would be the target from the investor clients And the expectation for the fund. And just in terms of the investment strategy, I guess there's a 4 pronged Approach like is there a specific target in terms of the exposure to those various buckets of investment exposure or is it going to be more of an opportunistic investment strategy? The investment manager will manage that. I think it will include Four prongs as you mentioned, development, value add, core plus and then core development core properties. So that will be a mixture. It will have a mixture Current return as well as kind of total return as a result from development and value add opportunities. And with a total return approach, is there specific target you have in mind to achieve on an annual basis, let's say? I think the target return To investors and to us, I'd say the expectation would be the overall return would be in the It will be certainly the market return for these types of funds, but we see this as an opportunity to really Grow into new markets and basically participate in really, really high quality assets, ones that we couldn't necessarily afford to buy ourselves and to get to the Scale that we would have the diversification that we without the fund. Okay, great. I'll turn it back. Thank you. Thank you. And our next question comes from Debashree Gupta from Sysco Bank. Thank you and good morning. Just to follow-up on the U. S. Industrial Fund. Brian, you mentioned the portfolio could double or triple over the coming years. So does Dream Industrial look to maintain that 25% interest in that fund over time? I mean, are you committed to maintaining certain exposure to U. S? Yes, Himanshu, we'll have the option to do that, not the commitment. I think we'll see the results of the fund and make an allocation At the time, we do see it as a good opportunity to grow and would expect to continue to invest in the U. S. Fund as it grows. Lenis mentioned we're going to deploy proceeds in Europe. We're going to pay down some secured debt. We've got a pipeline of opportunities in Canada as well as Europe. And we would also Back to participate in the fund as it grows. Okay. That's helpful. And maybe on the same lines, any thoughts on your overall target portfolio mix? I mean, if I look at Europe post this U. S. Transaction, that will be almost 40% of your portfolio and how much maximum exposure do you want to have for Europe and any thoughts on overall target portfolio mix? Yes. We'd like to keep the majority of our assets in Canada. Europe has grown significantly, although we've got some opportunities, I think, to continue to grow that. Referencing your previous question, we'd like to grow our allocation in the U. S, so to rebalance a little bit as we go. But we keep Over 50% in Canada, somewhere between 30% 40%, I would say In Europe, and then the balance would be, call it, 20% up to 20% in the U. S. So that's really just an off the Allocation, but that's generally where I see things shaking out as the dust starts to settle. Alex, you want to comment on where we're seeing opportunities and where we'll be? Yes. We continue seeing a pretty strong pipeline of opportunities in Europe. So we expect that in the near term, Europe will be at the upper end of the allocations Brian mentioned. And then in Canada, we are continuing to see But also we are ramping up our development program. And so as these developments It gets completed, then obviously the Canadian portfolio will grow disproportionately. So it will not be Consistent with those numbers every quarter, from quarter to quarter, it's going to move around, but in the long run, that's what we expect it's going to shake out. Okay. Thank you. That makes sense. And maybe just obviously Europe is the focus point right now on the Pan European portfolio Maybe can you talk about the quality of the tenants? I mean, it seems like it's largely a single tenant So maybe anything on the credit quality and type of investment exposure you have? Yes. Thanks for the question. It is an institutional grade portfolio. It is a logistics portfolio and as it Typically is with logistics assets, especially logistics assets in Europe, they are single tenant. So that's why Most of the buildings here are single tenant. These are sort of household logistics names in Europe or globally. When we look at rent collections, for example, in that portfolio throughout the pandemic, it has been 100%. As we talked when the portfolio was announced, significant components of the portfolio is in All tenants in the portfolio are in food and grocery and other logistics services. So it's a diversified mix, but at the same time, these tenants are in the path of progress, As we say, with respect to how logistics markets are developing. Okay. Thank you. That's helpful. And maybe last question for Lennox. Any update on the FFO per unit guidance? I think previously you have mentioned around 10% increase year over year. Any update there? Hi, Himanshu. Yes, I think we had mentioned just over 10% year over year FFO Per growth unit, so that's our current guidance for FFO per unit. I think with the significantly Large reduction in our average interest costs and reiteration of our same property growth. We're landing on just over 10% growth this year per FFO. Awesome. Thank you everyone and I'll turn it back. And your next question comes from Sam Demings from TD Securities. Thanks. Good morning, everyone. I think the only question I have left is just the Capacity on the balance sheet for additional euro swap debt and also what would be your incremental debt cost To do it domestically without the swap. Hi, Sam. So at the end of the quarter, we had about €150,000,000 capacity and as we continue to acquire additional European assets that grow. So subsequent to quarter, we've probably grown that capacity by close So approximately €200,000,000 as of today. And as we continue to grow in Europe, that increases the capacity as well. I think in terms of sorry, your second question was just in terms of the rates, I believe, that we're seeing Yes. Rates are both with and without the swap. Okay. Yes. So we're seeing versus the Canadian market, we're probably seeing close 100 basis points differential between CAD and the euro. And interest rates for 5 To the 5, 7, 10 years on the euro swap, it's probably in and around 45 to Okay. And just on the U. S. Funds, sorry, one more question. When do you think The next factor, like when will the fund sort of resume acquisition activity going forward? Yes. Hi, Sam. I'd expect that to be in Q4. Okay, great. Thank you very much. And our next question comes from Matt Kornack from National Bank. Your line is open. Hi, guys. A follow-up on the balance sheet front. You have a fairly sizable amount of cash On the balance sheet, you're getting some more from the U. S. Sale, obviously, repaying some mortgages as well. On the debt repayment Front, should we anticipate in the near term more sort of mortgage repayments and potentially the seasons of some of the debt that came from the European Portfolio? Or is that something that will take place later? Hi, Matt. So yes, with the As I mentioned before, we've repaid about CAD 170,000,000 of Canadian mortgages since the end of the quarter, using some of that cash on the balance sheet with the closing of the U. S. Fund transaction. We'll use a little bit of that to repay some additional mortgages, but also to fund some of the acquisitions that we've identified. We'll look at the European mortgages that were acquired with the portfolio. There isn't a long Term left on them and the average interest rate was about 1.5% or 1.8%. So I think we see some good opportunity To tackle some of the Canadian mortgages first, but definitely keeping the European mortgages on the radar as well as it provides additional euro deck capacity for us. Okay. Fair enough. On the European portfolio, with regards to the lease maturities, it seems like there's a fairly Chunky amount of space in 2022. Can you maybe speak to the prospects for that? I assume it's several tenants, but Just in terms of what you're seeing with regards to the prospects of some frictional vacancy if there would be any and renewal spreads? Yes. We there are some tenants who have near term maturities that have been underwritten and we're working with some of them to renew. And if you have indicated that they might not renew, but we have a pipeline of tenants who will be replacing them. So that's so far is all in line with our underwriting. And as far as rental Spreads, they're generally consistent with what we've communicated at average for the portfolio, but obviously some spaces will be lower, some spaces will be higher. But generally, the spreads are positive. It varies by 10, but they're positive mid single digit spreads. Okay, perfect. And then the Canadian rent spreads continue to Exceed expectations and the acceleration has been pretty steep there. Was there anything specific to the tenant or the lease that was Renewing for the Quebec tenant where you got a 92% spread to the expiring rent. It seems like Pretty hefty increase there. Nothing specific. It's sort of the market for This type of building is a high quality building, has a bit of excess land. So in the long run, we see it as an Intensification opportunity, obviously, not during the renewed term. But other than that, it's a good quality building In a pretty strong market and that's what's reflected in the new lease rates. Okay, great. Thanks guys. And Our next question comes from Brad Sturges from Raymond James. Just one quick follow-up on The potential for asset sales or capital recycling in West Canada, any updated thoughts there? You've been seeing a little bit better You can see rates, is there any change in your strategic plan there for our capital rotation our capital recycling rotation out of those markets? Yes, Brad. We constantly look at this. We look at it every month. As you know, we've got an IRR model for all of our assets and we're looking to Recycle ones that we think are not going to perform as well as others and replace them with higher quality and better long term Outlook assets and we're constantly looking at our whole portfolio. We do see some opportunity in Western Canada to recycle some assets, certainly asset values, The rising tide has risen those boats as well. So we are looking at a few assets in Western Canada, now may be a good time to do that. Alex, you can comment a little bit more on kind of the status of the market and specifically Western Canada. Thanks, Brian. We are seeing improving fundamentals in pretty much all markets in the West where we are present. And that those improving fundamentals improving confidence in leasing outlook does Bring more liquidity and more investor interest and demand. And so that's the trend that we're starting to see and That's the trend Brian was referring to as to us looking at our portfolio and opportunities to capitalize on this trend For properties that are good quality properties, they are performing. However, With the trust reaching the scale we're at, some of these assets are smaller and we Don't fit the long term portfolio strategy, so we would look at that opportunistically recycling capital depending Pricing and a few other asset management initiatives that we're pursuing on those assets. So timing is hard to predict, but we continue monitoring that and looking for opportunities. Okay. So no real change in strategic plan, but given the market fundamentals are improving, you can be a little bit more opportunistic, I guess? That's right. Okay, great. Thank you. And our next question comes from Pammi Bir from RBC. Thanks and good morning everyone. Just a quick question, maybe a follow-up to one of the questions earlier On Mason 30, so for 2022, it has take up and again in Europe. And you mentioned maybe there's some, I guess some vacancy that's investigated there. And then maybe when you layer that together with the strong spreads that you have been getting on renewals New leasing. What is the sort of what are your initial thoughts, I guess, for next year in terms of the ability to The momentum in same property NOI growth in 2022. Well, we're not In a position to provide guidance on same property NOI. That said, we're expecting that the strength of the markets will continue. We're looking at not only capitalizing on the rental spreads and built in escalators, but also at generating additional sources of revenue through our solar initiative and a few other Opportunities to invest in the buildings that will translate into same property NOI growth. So we expect the outlook is positive. However, we'll be providing more precise guidance by the later stage. Got it. Just maybe one more, one quick one. Len, to your comments on the 10% FFO growth or just over 10% for this year, I just wanted to clarify whether that Excludes any of the early debt repayment charges? Yes, that's correct, Pammi. Those payment charges are as a result of capital allocation. So yes, they would be excluded from our guidance. Great. Thanks very much. I'll turn it back. And we have no further questions. I will now turn the call over to Brian for final remarks. Thank you. Thank you everyone for your time today. We look forward to speaking again soon. And in the meantime, stay healthy and stay safe. Take care. Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.