Earnings Call: Q4 2020

Feb 17, 2021

Earnings release

Good morning, ladies and gentlemen. Welcome to the Dream Industrial REIT Year End Conference Call for Wednesday, February 17, 2021. During this call, management of Dream Industrial REIT may make statements containing forward looking information within the meaning of applicable securities legislation. Forward looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Dream Industrial REIT's 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 MD and A. These filings 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. And your host for today will be Mr. Brian Pauls, CEO of Dream Industrial REIT. Mr. Pauls, Please go ahead. Good morning, everyone. Thank you for joining us today for Dream Industrial REIT's 20 24th quarter conference call. Speaking with me today is Lenis Kwan, our Chief Financial Officer and Alex Sandikoff, our Chief Operating Officer. 2020 was one of the most unpredictable and challenging years in recent history. However, our team has done an excellent job navigating through these challenges and our business has been firing on all cylinders. We have continued to achieve significant strategic milestones in Q4 and carried that momentum into 2021. We reported a 3% increase in FFO per unit in Q4, driven by CPNOI growth and the lower cost of debt. Our pace of CPNOI growth improved significantly in Q4 as our leasing momentum was realized. We expect the pace to accelerate in 2021. We continue to deploy our excess liquidity into high quality assets After completing over $620,000,000 of acquisitions in 2020, we look to continue that trajectory in 2021 and have already completed $138,000,000 of acquisitions with an additional $215,000,000 under contract or in exclusive negotiations. We raised nearly $450,000,000 of unsecured debt in Q4 at an average fixed interest rate of only 65 basis points after swapping the euros, resulting in a 100 basis points reduction in the cost of debt for the entire REIT. In terms of our operations, we believe the pandemic has permanently increased demand for industrial real estate. Our high quality urban portfolio continues to attract national and global e commerce occupiers. Leasing momentum continues to be strong and we signed nearly 2,000,000 square feet of leases across our portfolio since the end of the third quarter. These leases address a significant portion of our vacancies and will boost CPNOI growth in 2021. We continue to demonstrate strength in our acquisition platform by closing on over $620,000,000 of assets despite the market disruption in 2020. In just over a year, our European asset base totals nearly $475,000,000 representing 15% of our total portfolio. We have $355,000,000 of acquisitions in our near term pipeline, of which $138,000,000 have closed already with the remainder expected to close in the next 30 to 60 days. All of these assets fit nicely within our focused investment strategy of acquiring high quality mid to large bay distribution and urban logistics facilities in strong industrial markets. In addition to improving our portfolio quality, these acquisitions allow us to create significant value through active asset management, enhancing our total return on investment. For example, at our 116,000 square foot property in Mississauga acquired in August of 2020, We had underwritten a 90,000 square foot vacancy effective December 2020 as we expected to vacate the property. Within a month of the tenant leaving, we have signed a 7 year lease with a national logistics tenant at a 100% rental spread compared to the prior rental rate and 3.5 percent annual contractual rent growth over the lease term, exceeding our underwriting expectations. Our recently acquired 527,000 Square Foot Class A Distribution Facility in Montreal allows us to add over 220,000 Square program. We have the capability and resources for development and anticipate commencing on 1,000,000 square feet of development projects in 2021 across Canada, the U. S. And Europe. In Las Vegas, we expect to commence construction on a 36 foot clear Class A 460,000 foot distribution facility in mid-twenty 21. We are forecasting a developed yield of 6%, which is 100 to 150 basis Higher than comparable stabilized product in the market. We intend to expand an existing 110,000 square foot property in the GTA by 40,000 square feet with an estimated yield on construction cost of 8%. In Germany, we are planning a 200,000 plus square foot Expansion at our property in Dresden, which will nearly double the current footprint. We are also evaluating redevelopments in our existing portfolio, primarily in the GTA in Montreal. The strong growth in land values and market rents over the past 12 months supports the business case for redeveloping these assets. In Whitby, we are in the design and planning stage of a potential redevelopment of a 211,000 square foot building that we acquired last year with the goal of redeveloping the asset for approximately twice the current density. We expect to be in a position to commence the project once the current lease expires in early 2023. In Mississauga, we are advancing planning of a potential redevelopment of a 200,000 square foot complex that currently sits on a 10 acre land We're evaluating the prospects of building a 40 foot clear modern logistics facility, which is expected to meet the strong demand for last mile logistics assets in the submarket and command premium rents and valuation. Lastly, given the urban nature of our portfolio, we have a number of sites, primarily in the GTA, where we believe there is opportunity to convert existing assets into mid- and high rise residential uses, resulting in significant value creation. We are in early stages of activating this potential for a few sites within our GTA portfolio and we'll report additional details as we make progress on these projects. During 2020, we also made significant progress on ESG initiatives. We have summarized our progress and initiatives in our recent sustainability report that was published in December and can be accessed on our website. For 2021, we intend to advance this agenda further as we continue to collect more data, establish meaningful and realistic benchmarks and measure our progress in order to integrate our environmental and social obligations into the ways we manage our business and create value. We are also exploring the possibility of investing in renewable power in our buildings, which will further our sustainability initiatives. We continue to make significant progress on all aspects of our business. And I will now turn over to Alex to talk about our operations. Thank you, Brian. Good morning, everyone. Starting with leasing. Industrial market fundamentals remain robust across all our markets supported by accelerated penetration of e commerce. Availability of rates have remained close to historic lows during the pandemic with healthy rental rate growth across our portfolio. Leasing volume has increased significantly in all our markets, taking our overall leasing volume since the beginning of 2020 to 4,600,000 square feet. Since the end of Q3, We signed 1,100,000 square feet of new leases at an average rental spread of 20% over prior rents, including leasing up 600,000 square feet of vacancy, which are expected to commence in the first half of twenty twenty one. We also signed nearly 900,000 square feet of renewals at an average rental spread of 10%. We also achieved annual contractual rental growth of 3% in our recent renewals and new leases. Earlier this year, we leased our largest vacancy Amazon with rent payment commencing in Q2, 2021. Pro form a the lease with Amazon, committed in the U. S. Portfolio as well as our total portfolio will be approximately 97%. As we anticipated, Spectra has vacated The smaller of the 2 main properties we have with them in Montreal from January 1, 2021. The asset is a 180,000 square foot distribution and logistics property well located in Laval. We have received strong interest in the asset and are already in negotiations with a major national for the entire building. In addition, we received strong unsolicited interest from multiple parties in acquiring the asset as is at a significant premium to our current book value. Spector has expressed intention to remain at their other major space with us in Boucherville. Turning to our organic growth outlook. With the leasing activity over the past 6 months, our CP NOI growth profile has improved significantly for 2021 compared to 2020. We reiterate our previous forecast of mid single digit CPNOI growth for 2021. In terms of quarterly guidance, we expect CP NOI growth to accelerate through the year as new leases take effect. On the operations front, rent collection levels in our portfolio have returned to pre pandemic levels and our tenant base has proven highly resilient. We collected 98% of contractual gross rents due for January 99% of contractual gross rents due for Q4 2020. We have collected substantially all rents due for Q2 and Q3 2020 after adjusting for Seacraft. Of the $2,300,000 of rent deferred during Q2 2020, we have collected over 90% already and we anticipate collecting the remaining amount in the near term. Lastly, touching on our valuations. During the quarter, the value of our portfolio increased by $92,000,000 reflecting the robust demand for industrial assets in our markets, Strong leasing activity and rental growth. The outlook for rental growth remains strong and we look forward to engaging in value add initiatives to increase the returns and surface additional value from our portfolio. I will now turn it over to Lenis, who will provide our financial update. Thank you, Alex. The 4th quarter was eventful and a successful end of another transformative year for DIR. Our financial results for the Q4 were strong and in line with our expectations. Diluted funds from operations was $0.19 per unit for the quarter, 3% 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. During 2020, we made significant progress on our financing strategy. Our strong and flexible balance sheet along with our superior tenant and geographic diversification enabled us to obtain BBB mid investment grade credit rating from DBRS in October. We shifted the REIT to operate on a primarily unsecured financing model And with our European expansion, we're able to access low cost euro interest rates. We raised nearly $450,000,000 of unsecured debt during the 4th quarter at an average rate of only 65 basis points after swapping to Europe. The average interest rate on our in place debt has decreased by over 100 basis points over the past year and at the end of 2020 was 2.57% with opportunity to reduce this further. We reduced our secured debt to 23% of total assets with overall net debt to assets of 31% and net debt to EBITDA at 6.2x. Over the course of 2020, our unencumbered asset pool increased by over 10 times to $1,400,000,000 at the end of 2020, which represents 45% of our total investment property value. In conjunction with our unsecured credit facility, this provides a significant amount of financial flexibility as we continue to focus on improving portfolio quality. Last month, we completed a $259,000,000 equity offering and used the proceeds to continue to pay off Canadian mortgages And to fund our near term acquisition pipeline. With these mortgage repayments, our average cost of debt has come down further since the end of Q4. Our acquisition pipeline comprises previously announced $355,000,000 of high quality acquisitions in Canada, the U. S. And Europe. We have closed on $138,000,000 of these acquisitions to date in 2021 with the remainder expected to close in the next 30 to 60 days. Pro form a these transactions, our leverage is expected to be in the low 30% range with an unencumbered asset pool close to 60% of our total assets. We currently retain over $250,000,000 of acquisition capacity. Assuming average leverage for the year in the low to mid-thirty percent range and that current foreign exchange rates prevail, we expect 2021 FFO per unit to be approximately $0.80 or over 10% higher than 2020. For the Q1 of 2021, We expect our FFO per unit run rate to be in line with that of Q4 2020. Comparative property NOI growth, acquisitions and lower cost debt are expected to be offset by slightly lower average leverage in the Q1. Then we expect our FFO run rate to increase in subsequent quarters as our comparative property NOI growth accelerates and we deploy our acquisition capacity. I will turn it back to Brian To wrap up. Thank you, Lenis. We continue to take significant steps in positioning DIR as the premier industrial REIT in Canada and delivering attractive overall returns to our unitholders. We'll now open it up for questions. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Our first question is from Brendan Abraham from Canaccord. Hi, good morning, everyone. Maybe just the first question on portfolio composition. I mean 2020 was the entry into Europe and you already have just slightly under 15% of the portfolio there. Just wondering how you're thinking about your target your pro form a target geographical mix going forward given Yes, the ramp up in Europe has been so successful. Yes, Brendan, it's a good question. We have a target allocation of 20% to 25%, potentially even to 30% in Europe depending on the opportunities that we're able to find. So we're under allocated there in terms of our eventual target. We're basically at our U. S. Target. We'd like to grow more in Europe. That gives us a lot of things. The assets there perform well on their own. It gives us access to very, very low cost debt. And then we like the geographic and tenant diversification across the three platforms of Canada, U. S. And Europe. So we're on our way to continue to grow a little bit faster in Europe So we get to our target allocation there. Okay. So I guess the idea would still be to have a Majority weighting or about half weighting in Canada? Yes. Yes. We have roughly 20% target in the U. S, 20% to 30% in Europe and the rest in Canada. Okay. And then A quick question on utilized cap rates. I noticed a pretty big drop in Ontario Quarter over quarter, just over 50 basis points. The drop in Europe, that might have been because of adding new assets. But If you could just speak to the change in Ontario. Was that a function of Kind of new appraisals over the last since last quarter or changes in the marketplace? Yes. Well, it's a number of those things. I think as their asset quality goes up, the cap rates will go down. The market continues to be More and more competitive pushing cap rates down. Alex, I'll let you comment on where you're seeing cap rates and what's happening in these markets. Thanks. So specifically for Ontario, obviously, cap rate is one metric in the evaluation process. We've seen significant Acceleration in rental rates and rental rate growth primarily in Toronto. And that It does push down the growing in cap rate as without necessarily changing the overall total return outlook. The total return gets More skewed towards future growth. Now having said the when we look at the implied cap rates for the Q4 Ontario relative to the Q3 and that is just last quarter annualized NOI, That cap rate drop is not as pronounced perhaps as you pointed out, simply because There is NOI growth as well in these numbers. So when we're looking at Q3 versus Q4, it's roughly 20 and change basis points relative drop in the implied cap rate. Our next question is from Brad Sturges of Raymond James. Hi, good morning. Maybe just to follow on that line of questioning. When you were reviewing your fair market values, how much Of the intensification or redevelopment of Central is being baked into those numbers right now? Yes. Hi, Brad. Basically, none. I mean, we're the properties get evaluated as they are Currently sitting there, so the intensification or the future value is not considered in our IFRS Numbers, this would be value add that we would do in the future. All the development we mentioned, some of it's like Las Vegas Greenfield, but a lot of it is intensification within Current portfolio, which would be additive in terms of overall value to the portfolio. Okay. So it's more really based on in place NOI? Yes. Okay. That's helpful. In terms of the acquisition activity so far today, it's been a pretty Robust start to the year for Dream Industrial. Just curious On your expectations for the rest of the year, once you close, I guess, what's still in the immediate pipeline, You had a pretty successful year of over $600,000,000 acquisitions. Is that something you think you can beat this year? And where Do you think the REIT can what would be the timeline for the REIT to more or less reach the stabilized financial leverage targets? Yes, Brett. Our team has hit the ground running in 2021. We've got a really active and robust pipeline, some of it we mentioned in the prepared remarks. But we're looking at a lot more things every day. So as I mentioned to Brendan, I think we will Likely grow in Europe faster, although we're seeing opportunities in Canada in our target markets as well as the U. S. So we anticipate doing acquisitions There as well. I would expect we would have a similar or more robust acquisition Total acquisitions for 2021 compared to 2020 will likely be higher depending on kind of what opportunities we can find. Alex, you can comment a little bit on where we're seeing opportunities, particularly in Germany and the Netherlands, where we're likely to grow faster. Yes. We continue seeing it, Ryan. You suggested a strong pipeline of off market, on market opportunities Leveraging our local network. So we're seeing more opportunities in Germany, Netherlands. And As the travel restrictions get lifted, we will start looking closer at other The potential target markets in Europe that offer compelling fundamentals and the ability to grow further On the content. Okay. In terms of asset sales, any update in terms of your planning there and The potential to see some asset sales in Western Canada this year? So we're looking at kind of targeted asset Sales targeted recycling, we're looking at this every day of which assets kind of would be good to recycle out of, how can we continue to improve quality. Alex, maybe you can give an update on what we're seeing specifically in Western Canada that Brad is asking about. Yes. So we've seen interest in some of our assets. We've identified as we've communicated at the end of 2020, We've identified a list of non strategic assets, that's for the assets that we would sell at the right time for the right price. And we have been engaging with potential users and some investors on these assets Over the past 6 months and we've received some interest in some of our non strategic assets. We're currently in discussions with Some users, some investors on select opportunities in Western Canada and various markets. Obviously, we want to make sure that we hit The right price and the right terms, so we're happy to hold these assets or at the right price, We'll look at parting with them. And I'd say you can't comment on what that program may look like right now for this year? It's a bit hard to predict that because the liquidity in Western Canada is not as robust as it is in Toronto, And the transaction volume has not been as robust as you know. So it's hard to predict that. There is we are in discussions with So potential buyers, but it's a bit difficult to forecast. Okay. Maybe my last question just to discuss the Laval property with Spectra vacating. What's your expected downtime at the property at this stage? And any general comment on what you believe the mark to market rent growth opportunity would be? So we are in discussions with 1 prospective user who would like the space more or less immediately. There will be some fixturing period required, so it will be at least a few months if that deal advances. If not, we expect that we'll be in occupancy kind of in the summer. And as far as the mark to market goes, we expect that there's going to be better growth profile from the assets going forward. The immediate mark to market is likely going to be roughly flat, maybe slight increase compared to the previous rent, But there's going to be a better growth profile from the asset over the lease term. And we were already seeing From the unsolicited interest that we've received on as is basis that the asset is going to be significantly more valuable as a result of this event compared to 2020. And whether it's leased or vacant, we've seen pretty strong valuation So overall story overall total return is going to be quite positive for the company. Okay, great. I'll turn it back. Thank you. Next question from Tami Bihir of RBC Capital Markets. Thanks and good morning. Just maybe on the Amazon lease in Louisville, Can you maybe provide just some background on maybe the terms, like the duration, any rent steps in that lease And how did the rents compare to market rates? Yes. Hi, Pammi. We can provide Basically that the rent is going to commence in Q2. We're not allowed to disclose the specifics of it yet. It's right On market, it's slightly better than what we were forecasting. The tenant's certainly investing a lot in the space. And that's about all we are able to disclose at this point. We're certainly really delighted to have it Entirely leased that Louisville building entirely leased to Amazon. They're a great tenant. We'll add a lot of value. The rental rate is right in line with market and we'll disclose that when we're able. Got it. And I guess then is there any capital Put in by the REIT at all or? For the most part, the tenant, Alex, you can comment on any landlord work, but it's quite minimal. Yes. The market standard contribution from the landlord, but the tenant is going to be putting in significant amount Capital to get the property suitable for their last mile operations. So the capital The tenant intends to invest in multiples of what we contributed. Got it. Thank you. Just with respect to the same property NOI guidance, The mid single digit level for 2021. Do you see that sort of being fairly consistent or even across So your 3 regions for just sort of continued leadership out of Canada relative to the U. S. And Europe. Just Curious if you could break that down. Yes. Thanks, Alex. Yes. So with respect to the regional breakdown, when we are Guiding mid single digits for the year, that excludes Europe. Now Europe will be in our same property numbers Later in the year, but when we're guiding, we're guiding without it because it's a full year guidance. So with respect to how that breaks down, we expect that Canada is going to be sort of in that in the midpoint of that guidance. And U. S. Is going to be higher on the back of the Louisville lease up. So U. S. Is going to be in that High single digits and Canada is going to be sort of right in the middle of the mid single digits number for the year. Okay. Thanks for that, Alex. Just one last one. I'm just curious with respect to the ATM, curious on your rationale to maybe put that program in place. And what do you see the potential size of that program, what it might look like? You bet, Pammi. I think it's an additional tool as we go. If you look at the kind of the 3 tools of DRIP, ATM and then bought deals, those kind of go in order of size and we expect to Be able to issue equity through those three tools. As you know, the DRIP is back turned on. The A-ten will be used in the Future as needed. However, we've got quite a bit of capacity right now on our balance sheet to do acquisitions, which we will use first. I'll let Lenis comment more just in terms of How we will manage that and how we will potentially use that in the future? Go ahead, Linus. Sure. Like Brian said, we view the ATM as a good tool to have just in addition to the other tools such as the larger bought deal equity offering. It could turn out to be a cost effective means to finance smaller tuck in acquisitions, redevelopment projects and we would utilize it in a manner that results in most value to unitholders. But as Brian also mentioned, like we don't currently anticipate using it in the near term as we have ample acquisition capacity. Our next questioner, Himanshu Gupta of Scotiabank. Thank you and good morning. So just on the FFO guidance for 2021, I think you mentioned 10% higher in 2020, almost $0.80 So just wondering what leverage or range of leverage are you assuming in that guidance? And also what level of acquisitions or dispositions are baked in Your guidance. You bet Himanshu. We are basically low to mid-30s as we start 2021, that's anticipated to grow over the year. However, it doesn't take effect till mostly later in the year. So we're basically average leverage In the low to mid-30s for 2021 producing that FFO that you mentioned. Lenis, you can elaborate on that and How we are forecasting leverage and guidance for FFO? Sure. Yes. No, as you mentioned, Leverage, we're seeing low to mid-thirty percent low to mid-thirty percent. So I think pro form a, the previously announced Acquisitions that kind of gets us in that low 30% range. The guidance is assuming average leverage in that low to mid 30% range and also that Our current FX rates, the U. S. And euro rates remain the same throughout the year and that those are sort of the big levers there in the guidance. Got it. So maybe on the acquisition side, if you do, let's say, another $500,000,000 of acquisition Over and above what you have announced so far, I mean, that could lead to an upside to the guidance. Is that a fair statement? I mean, More acquisitions versus what has been already announced, could probably lead to some kind of upside there. Yes. I'm answering that's a very fair statement. It would push leverage up into, call it, the upper 30s and would be upside of the FFO. Sure. Thank you. And then just on the mid single digit organic growth 2020, I know you provided some color. But specifically for Western Canada, I mean you have, I think, almost 800,000 credit releases coming up for renewal in 2021. Do you expect any softness in rents there? And And then how is the market performing? I know your occupancy was actually up year over year in Western Canada Sequentially as well. I mean, any update on the market there? Yes, you bet. Himanshu, the Western Canada market has proven If you look at our occupancy and look at the transactions we've been able to do, it's been quite a stable market there and it's performed okay. Alex, You can elaborate on how you're feeling about leasing for 2021? So we have been making good progress on leasing in Western Canada. We are working on Just over 100,000 square feet of new leases right now across various markets. So what that translates into for the year is that we expect slightly higher Occupancy over the course of 2021, we're still seeing that there's going to be and as outlined in RM B and A that there's Bit of an over rent there where we're going to see some leases roll to market down. So that will offset that a little bit. And for the year, we expect that the same property NOI in the West is going to be modestly up, so kind of that low single digits number, so Glass is likely up for the PR on same property basis. Got it. And then on the same subject like collections in January, I know Q4 has remained strong. For January, I think around 2.3% is yet to be collected. Is there any particular region where you still need to collect? I mean, are the collection in Western Canada very similar to other regions in January as well? Yes. We're seeing consistent levels across the regions. And what we're seeing in our collection numbers And that's also evident from our reporting over the last few quarters is that our collection rates for The quarter rises as time passes. So if you recall, when we published our Q2 2020 collection numbers, they were in that 98% range, so with just over 2% remaining uncollected. And now we are virtually at 100% for the 2nd quarter. We've seen that for the Q3 and for the Q4. So we expect that tenants are going to catch up on this outstanding balance And that our collection rates are going to be in that north of 99% range for January and for the remainder of the Q1 of 2021. Got it. And then maybe just switching gears to acquisitions, and I know you provided some commentary on the European Acquisitions. So just one observation, most of them, the acquisitions you have done so far, at least announced so far, have been in the range of $20,000,000 to $40,000,000 acquisition price per property. Is this where the opportunity lies in those countries compared to say portfolio acquisitions? And then what CapEx are you buying these Dutch and German properties recently? I mean, so we're seeing I think that's where the recent acquisitions have come down. The larger portfolios or the bigger portfolios, they're very, very competitive. So we have looked at those. I think it's Somewhat coincidence that's where our recent acquisitions have fallen down. We're not necessarily targeting a certain purchase price size. We're more looking at asset quality and location, but we do find a niche in that Price range often, but I would say we will look at larger deals certainly, smaller tuck in deals in markets that we've already got scale Would fit as well. Alex, you can talk about kind of our pipeline and why it's somewhat coincidental that we're seeing all these Acquisitions in the similar price range? Yes. So when we look at our European deals, and this Consistent with what we've been communicating over the course of 2020 is that we're seeing that there is that niche in terms of the competition in In the market from, call it, €10,000,000 to €40,000,000 it becomes a bit less competitive than for Much larger assets and larger portfolios and we are able to get better prices, get deals faster, get some deals off market. But having said that, as Brian suggested, we are looking at larger deals because they offer other advantages. Maybe there is less of a Pricing arbitrage, but they offer scale, they offer perhaps maybe better growth. So we are not disregarding those opportunities and we're Looking at a few now, but as far as the pricing a little bit about pricing arbitrage, we do see that in the Small to midsize assets. Sure. And just final question from me on that Montreal distribution Facility acquisition, almost 500,000 square feet and expansion of, I think, over 200,000 square feet. Is the expansion going to be on a speculative basis or the existing tenant is asking for more space there? And how much are you looking to spend? So there are 2 expansion phases on that project. So that 200,000 per foot volume breaks roughly into Two halves. So we're proceeding this Phase 1 and shortly thereafter, we intend to proceed with Phase 2. Generally, our plan is to proceed on speculative basis, however, there is interest from existing tenants in that expansion space. And so we are engaging with them, but we're not holding the project to get a tenant lined up. As far as construction costs, we Currently, we are in that low $100 per square foot range for that expansion. Awesome. Okay. Thank you, guys. I'll turn it back. Our next question is from Matt Kornack of National Bank. Hi, guys. A bit of a different tack on an earlier question with regards to fair value. I mean, if you look at the per square foot The values that you have on your books, do you think you could acquire in Toronto at 160 a foot per Quebec at 115 these days. I'm just trying to get a sense of what I thought markets are 100 A foot higher than that at this point. Just some thoughts there. Yes, Matt, it's good observation. All of our valuations, our IFRS are They often can't keep up with the actual market. We certainly wouldn't transact for our IFRS values And they're likely to continue to try to catch up to market, but it's by its very nature definition is backward looking. So We would agree with you. It's way undervalued in terms of price per square foot. We anticipate continuing to unlock that value as we go. And let us, you can comment a little bit more on our valuation process or how it's done. Yes. I mean, I won't add too much color because I think folks are quite aware just in terms of we got to get a certain part The portfolio externally appraised, they tend to be looking backwards at previously the prior transacted As well as backwards looking metrics, and that really kind of dictates the assumptions that need to go into our internal valuation models as well. So, yes, I mean, not too much color to add in terms of just kind of constrained with that process. We do have ongoing conversations with appraisers to try to bring up to date. Just We see more recently some transactions and market rents as well as on the ground negotiations of active deals as well, but for the large part You need to fall in line with what the rules dictate. Fair enough. That was kind of a loaded question there. Just to add to that, Matt, what we've seen was external appraisers and our valuation process such that we obtained not only we obtained Appraisals for part of the portfolio will still obtain cap rates and discount rates from external appraisers. And what we've seen is that it's been a little bit more difficult for them to Keep up with the market during the pandemic as well as they do as Magnus pointed out, they do need to see a deal close So it would be reflect to reflect that in their market assessment. And so with that lag and Obviously, the complexities of the pandemic, we're seeing that impacting their inputs. Sure. It makes sense. It's A pretty crazy ride to this point. And then on that note, just with regards to your leasing, you disclosed a few leases in the GTA with Pretty substantial mark to markets. And then on top of it, you're getting 3.5% annual rent escalators. Is that unique To the GTA? Or where would those rent escalators be in other segments of the portfolio? We're certainly trying to implement contractual rent escalators across the portfolio. There would be higher in the GTA compared to other markets. So in the GTA, we're trying to get Close to 4%, average is around 3.5%. In Quebec, we are pushing 2% to 3%, in some cases 3.5%. In Alberta, we're pushing that 1%, 1.5%, 2%. In U. S, it's about 2.5% on average and in Europe, it's indexation. Matt, we're trying to be leaders in this area. So this wasn't necessarily a phenomenon for GTA in Quebec a few years ago. About years ago, we started implementing it across our portfolio. Obviously, Blackstone came in and bought Pure Industrial. They started implementing it, became much more of a market condition. It's been in the U. S. For many years. It's kind of a normal lease provision, and we're starting to implement that now and starting to see the fruit of our Labor and CP NOI and contractual rent growth. So, it's certainly something we're putting across the whole portfolio, Europe as well where we can. And so we expect to have more and more leases with that contractual rent growth in it. Okay. That makes sense. And then last one for me on the development side. Las Vegas development, 6% yield on cost. If you could provide some context as to where a new asset at market rents would trade terms of the development spread you're getting and then it sounds like you're getting sort of high single digit yield on costs for some of the expansion options. So That's clearly a good use of your capital. And I think you've defined the opportunity, but what would be sort of the upside you'd expect there? Yes. Stabilized building that like we're going to build in Las Vegas would be 4.5 Maybe upper 4s in terms of a cap rate, we're going to build to a 6, so it's 100 basis points to 150 basis points spread in terms of the lift we would get by building it and leasing it ourselves. And then it's similar, if not wider spreads On buildings that we expand, so when we're 6.5 to 8 in terms of return on construction costs, that could be even 300 to 400 basis Compared to the market, keep in mind that we've already got the land. So we're talking about yields on construction costs to expand the building. But the value add and the lift on value by doing development is pretty significant. Okay, perfect. Thanks guys and congrats on a strong quarter. Thanks, Matt. Next question from Mike Martinez at Desjardins Capital. Hi, everybody. It's my own in on the development side as well. I'm not thinking if President putting more emphasis on, on the disclosures, certainly in the presentation. And I think the number you quoted is 1,000,000 square feet that you look to start this year in terms of the total greenfield and expansions that you're doing. You have a rough sense of what the total capital required would be for that 1,000,000 square piece? Yes. Thanks, Mike. So for the year, we expect it will depend on the timing of construction Commencement, obviously. So we're roughly budgeting about $40,000,000 to $50,000,000 For the year, depending on the timing and some of these projects are going to spill over into 2020, too. Okay. So if we into 2022, so if we just thought about the total budget for all of that 1,000,000 square feet, Would you say 30x to 50x2? Or what will be the sort of total cost? It is going to be roughly in that magnitude, yes. I don't have the exact number in front of me, but we can get back to you, but it's going to be in that Okay. No problem. And then, I guess, presumably, you own all the land, so any of the capital costs there, you'd be able to get capitalization Will be asset stabilize? That'd be correct, Dennis. Mike, that was really hard to hear. Could you repeat that question? Sorry, I was just saying with any incremental capital, just given the nature of your program right now, you own the land in Las Vegas, you own the land on your Valvolcano So would the incremental spend at this juncture be all capitalized from an interest perspective and then hit the income statement when you Stabilize the assets are delivered. Yes. So we own the land on all of those. That'd be how it's Treated, Lenis, you can elaborate on the accounting treatment of the development, but it's all capital going into those assets. Yes, that's right, Brian. Look, we haven't commenced construction. So there hasn't been a significant amount of spend to date. And then to the extent that We incur the interest on funding that in modeling and development stage. We believe We are able to capitalize that against the costs there. Okay. And thank you. And then last one for me. Just with respect to The way you see your development program going, I know it sort of got kicked off with the acquisition of the Blended in Las Vegas. But In terms of where you see yourself focusing in the next 2 to 3 years, can we be thinking that most of the effort and capital will be going into The redevelopment opportunities that you see within the existing assets or do you expect to continue being active on the acquisition of land in your target markets in the U. S? Mike, I would say both. We have Greenfield, as you know, in Las Vegas. We're doing a lot of development and expansion and adding density in Canada. We're doing that in Europe as well. We've got boots on the ground and Ability to execute within our own company in all three of our target areas of Canada, the U. S. In Europe, I would expect us to continue to add value and look for opportunities to enhance yields by development in all three of those areas. So Where we have greenfield opportunities, we'll do it. Sometimes that is quite a bit of time, like it would be a couple of years before you can execute. But if we can buy properties like we're doing in Dresden that we mentioned, in Montreal, where we buy the property, we've got some interim yield And expand it, we'll certainly do that. So I would say we would look to add to all those fronts as we continue to grow the company and add more development to our portfolio. Alex, you may want to elaborate on that. Yes. We are seeing opportunities to expand assets and we are looking for Select land opportunities, as Brian suggested. And I think Mike also wanted to point out, and Brian also alluded to that in his prepared remarks, We're looking at redevelopment opportunities in the portfolio. So, our property, for example, in Whidbey is A 200,000 square foot building that and the base case for that asset and that acquisition was that we would redevelop the entire property and Yes, double the density. So we're seeing more of those opportunities also in the market, but also in our portfolio As land prices as well as the as rent levels Continue rising and that makes some of these cases more economical and we're also working on one in Mississauga right now that That will be along the same lines. Okay. That's great. Thank you for the update. Our next question is from Sam Damiani of TD Securities. Thanks. Good morning, everyone. Just wanted to start off on occupancy. You did give some pretty good guidance for same property NOI growth, but And also the occupancy, I guess, in the U. S. Portfolio. But for the overall portfolio, maybe Canada, Europe specifically, what sort of occupancy changes do you expect in the Couple of quarters. Hi, Sam. So in terms of rent paying occupancy, we expect that it will continue trending ports throughout Q1 and Q2 and Q3, sorry, for that matter. We expect it's going Level off a little bit in the Q4 relative to Q3. So we're expecting moderate uptake in the 1st quarter and then getting slightly closer to our pro form a occupancy in the second quarter And then rising slightly from there. And the last one is occupancy. Sorry, I was just going to say, so you think there you see positive absorption throughout the portfolio at least through the 1st three quarters? That's right. Yes. Okay. And I guess just on most of my questions have been asked, but just on rent collections, With the lockdowns in Ontario and Quebec, is there any impact there on tenants' behavior in terms of paying rent? We have not seen a significant impact so far as we look at our January February collections numbers, although February collections are still coming in, so we don't have complete data. The various programs that are out there, including fares, are helping, and we are definitely hearing that from our tenants. There are some of our tenants who are not operational during the lockdowns and they do contribute to that Outstanding balance, however, we're working with them and they are on their support programs and That cover a significant component of their rent and maybe they have a few, like a small percentage of their rent that is Not covered and outstanding. Okay, that's helpful. And just finally on the acquisition pipeline, has it changed Since the January press release and do you expect incremental new sort of new acquisitions to close as early as later on in the Q2 or would anything new likely not close until the Q3? Yes. I think we're basically on track as we disclosed before, Sam. We do have New opportunities coming into our pipeline, which we expect to continue to execute on well into Q3 and beyond depending on how they develop. So I would expect we would continue To execute on acquisitions throughout the year, it's hard to predict exactly when they fall. Alex, you can comment And how you see those developing in all three of our regions? Yes. So we are always adding The pipeline in Europe well, in Germany specifically, deals take longer to close. I mean, if we add them to the pipeline today, in the Netherlands, it's a Factor timeline from origination to closing, and we continue being active in Canada. We have a few deals that we We're underwriting. So there's always deals there we're looking at. Thank you. I'll turn it back. Thank you. Our next question is from Dean Wilkinson of CIBC. Thanks. Good morning, everyone, or just morning. Questions for Brian, more of a higher level conversation, if you will. Brian, you've gone through a couple of cycles in here. We're looking at all time low interest rates, Unprecedented demand for industrial product, rental rates coming up at double digit clips. What concerns you in this? And how does this compare to prior cycles that you've kind of lived through? Yes, Dean, thanks for your question. We have been through a number of different cycles. They're affected different ways. The pandemic has certainly changed things. A lot of what we look at so when we do acquisitions, we look at 3 things that are that we look at it like a 3 legged post. If you look at cap rate as 1, that's The high level metric that everybody looks at, that's the headliner. But we also look at where in place rents are compared to market. And finally, we look at maybe most importantly replacement costs. So where are we related to replacement costs? And as you look at this cycle, Even though rents are growing, there's a tremendous amount of competition and euphoria around industrial. We don't think we're necessarily in that unhealthy of a spot in the cycle because when you look at replacement costs, where things are trading compared to replacement costs, They're continuing to go up. So we like our basis. We like continuing to buy in strategic locations. Replacement cost is going up because entitlement costs are going up, materials are going up. It's becoming more and more difficult to build Large industrial buildings because they are inefficient land uses compared to other uses like residential or other things. And so It becomes there's more and more barriers to entry in this space. We like the markets we're in. We're very focused on location. We're very focused On geographic mix and tenant mix, so we think we are we're very happy with our portfolio. We continue to Look for higher quality assets that will continue to increase the quality of our overall portfolio. We've got A metric that looks at every single one of our assets, the things that we buy are above the mean or the average quality. The things that we sell are below the average quality and the average quality has a lot to do with functionality, clear height, truck maneuvering area, Location of the assets. So we're quite analytical when we look at our portfolio and what to recycle. That's great. And I guess it's fair to say then in those Prior cycles and I've seen a few myself, is that speculative supply that comes into the market that tends to start to Put pressure always around and that's kind of like when the punch bowl gets taken away. Is it can you quantify that gap How far rents need to go before speculative supply would come into one of your key markets To have I would imagine that they might need to double from here before we get merchant builders coming in. But can you guys maybe We certainly can't quantify it and we do that. Each market is different. But if you look at that's going back to my point on replacement costs In Ontario, for example, there's been very, very little new supply. Rents would need to grow certainly into double digits, $12 $11 $12 per square foot to justify what we call economic rent or what would support new construction based on replacement costs. So we've got a long ways to go in terms of rent growth, and we expect that to continue So we're at all time lows in terms of all time lows in vacancy, all time highs in terms of occupancy. We do expect more rent growth before significant new supply hits the market. That is the snapshot of Toronto. Similar story in Montreal, most of the markets we're in, we do monitor what you're talking about in terms of new supply and the things that could Significantly impact the fundamentals of the market. So we want to be in high barriers to entry markets with good quality product. That's easier said than done because it's very, very competitive. Well, that's great. Good color. It sounds like it's just the front end of Charles Dickens' story. It was the best of times. And there are no more questions. Well, we would like to thank everyone for your time today, and we look forward to Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. 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