Good morning, ladies and gentlemen. Welcome to the Dream Industrial REIT Fourth Quarter 2017 conference call for Wednesday, February 21st, 2018. 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 the latest annual information form and MD&A. These filings are also available in Dream Industrial REIT's website at www.dreamindustrialreit.ca. Later in the presentation, we will have a question and answer session.
To queue up for a question, please press *1 on your telephone keypad. Your host for today will be Mr. Brian Pauls, CEO of Dream Industrial REIT. Mr. Pauls, you may begin.
Good morning, everyone. Thank you for joining us today for the Dream Industrial REIT conference call, which is for the three months and year ended December 31, 2017. Speaking with me today is Lenis Quan, Chief Financial Officer of the REIT. On today's conference call, I will start off with a brief overview of our results, an update on our markets, and our strategic growth initiatives. Lenis will then provide our financial highlights. We'll then be happy to field your questions. I'm delighted to join Dream Industrial REIT. In the past couple of months, I've spent my time getting up to speed on the properties, people, and the day-to-day operations of the trust. Overall, the business is running well and is positioned well to capitalize on growth through increased rents, acquisitions, and aggressive asset management throughout the four Canadian markets we invest in, as well as the U.S.
For 2017, I am happy to report that DIR outperformed our FFO, AFFO, tenant retention, and occupancy targets. We grew our AFFO by 3%, reduced our leverage to below 50%, and raised CAD 113 million. This was our first equity offering since 2013, and it was well-subscribed. The Canadian economy remains very strong, with overall industrial availability of 4.1%, a 16-year low. New supply under construction remains limited at 14 million sq ft, or only 0.8% of the market inventory. It is unlikely that the new supply will meet the continuing demand resulting from e-commerce and other economic drivers, fueling increasing demand for industrial space. Our leasing and management teams have done a tremendous job leasing 3.2 million sq ft throughout the year, including commitments, and retaining 80% of our expiring tenants to bring overall occupancy to almost 97%, compared to 95% one year ago.
Our Western Canada assets have retained a very healthy occupancy rate, closing 2017 at 95% occupied as those economies continue to recover from the significant recent commodity correction. Our properties are well-positioned to benefit as Western Canada continues to recover. Eastern Canada experienced positive absorption, and 2017 year-end occupancy is over 93%. Both Ontario and Quebec remain extremely healthy, with occupancy at 99.7% and 96.3%, respectively. In both of these markets, the trust has the opportunity to increase rents as tenant lease commitments renew. In the last four months, we have actively grown our portfolio in the U.S.
The trust acquired 2.8 million square feet of distribution and light manufacturing facilities in strong industrial markets in Memphis, Nashville, Orlando, and Charlotte for a total purchase price of $151 million USD, representing a weighted average cap rate of 6.4% and a purchase price of approximately $54 USD per square foot, which we believe represents a 10% discount to replacement costs of comparable properties in these markets. The assets are 100% occupied by a mix of large blue-chip companies and medium-sized enterprises, including Nissan North America and Coca-Cola Refreshments USA Inc. The acquired properties are all under triple net lease structures with contractual rent increases and have a weighted average lease term of 6.7 years. The Dream and Pauls Corp acquisition teams continue their work to source new acquisitions in both Canada and the U.S. to identify opportunities that meet our investment criteria. Lenis?
Thank you, Brian. Dream Industrial reported another quarter of strong portfolio performance and solid financial results. Our current portfolio continues to perform well, and our operational and financial performance in 2017 has improved significantly. Diluted adjusted funds from operations, or AFFO, per unit for the quarter was CAD 0.204, up 9.7%, compared to CAD 0.186 in the same quarter prior year. Our AFFO has increased due to higher comparative property NOI, G&A savings, and a one-time cost that was incurred in the prior year, offset slightly by the timing difference between the November equity offering and when the capital was deployed. Diluted FFO per unit for the quarter was CAD 0.225, up 6.1%, compared to CAD 0.212 for the prior year same quarter. Diluted AFFO per unit for the year increased 2.9% to CAD 0.813 compared to CAD 0.79 for the prior year.
Diluted FFO per unit for the year was CAD 0.905 compared to CAD 0.901 for the prior year. The increases in annual diluted FFO and AFFO were due to the same factors as the quarterly numbers. Comparative property NOI was strong, improving 2.3% from the same quarter last year, and is up 1.9% full year, mainly reflecting higher average occupancy in Ontario. We maintained a healthy retention ratio for 2017 of 80.3%, and have secured leases for 65% of our upcoming 2018 expiries, compared to 53% this time last year. The value of our investment properties increased to CAD 1.7 billion, compared to CAD 1.6 billion at the beginning of the year. The increase was largely as a result of the CAD 95 million in acquisitions completed during 2017. The Trust's payout ratio on undiluted FFO is a healthy 77.3%, compared to 77.7% one year ago.
We have grown our free cash flow per unit and lowered our payout ratio while reducing our leverage, and have enhanced our financial flexibility to execute on our strategic initiatives. During the fourth quarter, the Trust successfully completed a public offering and private placements for total gross proceeds of CAD 113 million and issued CAD 12.9 million in units. Net proceeds were used to repay the CAD 19.4 million of 6.75% debentures that matured on November 30th, and to fund the U.S. acquisitions, which closed in December 2017 and January 2018. Our debt to total assets ended the year at 49.5%, a decrease of 310 basis points when compared to 2016, with interest coverage of 3.3 times and a weighted average term to maturity of 3.8 years. At year-end, we retained unencumbered assets of CAD 113 million with CAD 123 million of liquidity on our credit facility.
Looking forward, we expect the strong performance to continue. Our properties are well-positioned to benefit as Western Canada continues to recover and occupancy is up significantly in Eastern Canada. In terms of our growth strategy, we have the balance sheet flexibility to be net acquirers during 2018. Our investment criteria demand assets that would be above the average quality of our portfolio, offer a good growth profile, and be accretive to DIR. In terms of geography, we are open to opportunities in both the U.S. and Canada, as long as the asset in question fits these investment criteria. Overall, on a comparative property basis, we expect NOI to be up about 2% this year, which should lead to FFO per unit growth in the low single-digit range.
Currently, approximately 50% of the forecast comparative property NOI growth for 2018 is through contractual rent steps, and more than half of the remainder is through the full year impact of the increased occupancy in Eastern Canada. We feel confident about that growth and will strive to do better. Within our portfolio, we are continuing to drive organic growth through continued contractual and rental increases and increasing rental spreads, primarily in Ontario and Quebec. We believe this will result in 2%-3% comparative property NOI growth beyond 2018. In addition, our well-capitalized balance sheet is at its strongest since inception, and we are well-positioned to focus on strategies to improve the value of our business, which include growing organically and identifying asset recycling opportunities that can improve overall portfolio quality and generate higher net asset value growth. I will turn it back to Brian now to wrap up.
Thank you, Lenis. Recent M&A activity in the Canadian REIT space has highlighted the significant value in owning sizable quality portfolios of commercial real estate, including industrial assets. We believe this has positive implications for our net asset values going forward. Dream Industrial is well-positioned to improve the value of the business by organic income growth, identifying asset recycling opportunities to improve overall portfolio quality, as well as using the strength of its balance sheet for new investment opportunities that meet our investment criteria. It has been an exciting first six weeks, and I look forward to discussing the company and our progress with the analyst community and our investor base. We would be happy now to take any questions.
Thank you. If you have a question, please press star then one on your touchtone phone. If you wish to remove yourself from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touchtone phone. Our first question comes from Fred Blondeau from Echelon Wealth Partners.
Thanks, good morning.
Good morning.
I just wanted to further discuss the U.S. strategy at this point. How big is your acquisition pipeline at the moment, would you be open to buy more land, at this stage?
Sure, Fred, it's Brian Pauls here.
Yep.
We've got an acquisition pipeline in many states in the U.S. We're looking at opportunities in the markets we're in, the ones I mentioned earlier in Nashville, Memphis, Charlotte, and Orlando. We're looking to expand in those markets. An example, we recently underwrote a portfolio in Jacksonville, Florida. It was an attractive portfolio, but as it got bid up in price, down in cap rate, we decided it was getting too pricey. That was likely to go at a 6% or below a 6% cap rate, so we decided to opt out of that. Now, we are continuing to look for opportunities, leverage the relationships that we have in the U.S., like the one that produced the previous acquisition. We're looking in all those markets.
Mm-hmm. You wouldn't buy more land at this point, right?
We don't have vacant land in the U.S. We would look to expand some of the existing tenants we have So we would develop within the properties that we already have. If there was a new development opportunity that made sense, that was a pylon opportunity that would be a complement to what we already have, we'd look at that as well. We're really focused on accretion for the REIT when we look at new acquisitions in the U.S., so that's part of our investment criteria we're looking at.
Mm-hmm. Okay. I was just looking at the price increase of industrial land in the U.S., which more than doubled last year. I guess at the moment, you are benefiting from these conditions from a value standpoint, but do you think it could become an impediment to future accretive growth?
I think it's rising replacement costs, certainly.
Yeah.
That's helping probably the overall value of industrial real estate, the stuff that we already bought. It's pretty competitive, so it's tough to buy new stuff. We do have dry powder, there are acquisitions we can do out there that are accretive, they're hard work to find.
Sure. Lastly, how would you characterize construction activity in your U.S. target markets at the moment now that industrial development activity is at an all-time high in the U.S.?
Fred, I think it's a market-by-market answer.
Yep. Mm-hmm.
All of the markets we're in are quite healthy. All of them would have mid-single-digit vacancy rates. They do have development going on, but they've also got more absorption than they have supply coming on. They're all healthy and continuing to get more healthy. The U.S., as you know, is quite a large market compared to the Canadian market.
Yep. Oh, yeah.
There are many markets. It's a big pool to swim in, where we think we'll continue to find opportunities that make sense for us. We're looking both in Canada and the U.S., and we think we'll find accretive opportunities that will be a complement to what we have. But it's hard work. It's a competitive space out there.
Yep. Perfect. Thank you. I'll leave it there.
Thank you. Next, we have Mark Rothschild from Canaccord Genuity.
Thanks. Good morning. Brian, you mentioned that you've been going through the portfolio in Canada as you progress as CEO. Can you maybe talk about, are there any markets in Canada or any asset-based things that you want to sell? Obviously, the REIT sold a number of assets in the year before you joined. As you go through the portfolio, how much of the portfolio is property that you want to own for the long term?
It's a good question, Mark. We're looking at it asset by asset. We're looking at which assets are probably worth more in the hands of others than they are in our hands. For example, we had an offer from a tenant within our portfolio who wanted to own their own building. Those are opportunities that we probably would cycle out of. At the same time, we're looking to replace those assets with either higher quality assets or better located assets or more accretive assets. We're looking to recycle where we can, where we can make positive trades.
Are there any markets in Canada where the REIT is currently operating that you would prefer not to be in?
No. I think all the markets we're in are performing well. Some are performing better than others. Certainly, Ontario's got record lows of vacancy, record highs of occupancy. Rents are poised to grow fast there. We think that's where we'd like more space. Western Canada's been relatively flat through the commodity crisis it's experienced, but we know from history that that will rebound, its current performance is less, although we like being there.
My only other question, just maybe just adding on to what Fred was asking, there was definitely talk before you joined about doing more developments in Canada. I don't know if there's any progress on that, if there's any sites that maybe through Dream Unlimited, maybe, that you guys are partnering on or any other sites that you see that you would want to get involved in on development.
Mark, the short answer is yes. We're looking at opportunities all the time. The long answer is it's slow. It's hard to find good sites. It's hard to find good opportunities. We're working with Dream Unlimited on some potential development opportunities. At the same time, we're looking at just market-based opportunities, maybe an off-market piece of land or something that we can go buy that would be a complement to our portfolio, because if prices go beyond replacement costs, we'd rather be building, and we know that. It's not easy to find land. It's not easy to find well-located, appropriate land to build on, but we think it would be a great complement to our portfolio to have that. We're looking for opportunities for that in Canada as well as in the United States.
Okay, great. Thanks a lot.
Thank you. Next, we have Mike Markidis from Desjardins.
Thank you, and good morning. Lenis, quick clarification. I think you said on your comments that same property NOI growth was expected to grow at 2% to 3% beyond 2018. Is that an expectation for 2018, or is it just a sort of general trajectory towards a figure of that magnitude in later years?
For 2018, in my prepared remarks, I had commented about 2% comparative property growth and broke down the components. We've got contractual rent steps as well as some increases in average occupancy driving that for 2018. Our expectations in the future are we'll continue to be growing organically through our contractual rent steps and opportunities where we can increase occupancy. I think what we're focused on driving the organic growth through our increasing renewal spreads, rental spreads, particularly in Ontario and Quebec, so that we can drive further growth. We're going to see better organic growth from within our portfolio beyond 2018.
Okay. That's great. Thanks. Obviously, you're seeing opportunities to maybe drive rents in the coming quarters, specifically Ontario and Quebec, and saw that your average in place estimate or your average estimate of market rents for the portfolio did increase a little bit versus the last quarter, 3Q specifically. Also noticed that your CapEx TIs, total CapEx, including your TIs and leasing costs, came down notably in 4Q and were down a decent clip from the prior year as well on a full year basis. Do you expect that trend will continue as well, just given what you're seeing in the market?
You are correct. Our CapEx and leasing costs came in 20% lower in 2017 compared to 2016. I think for 2018, the leasing costs are actually subject to the nature of our units rolling over. I can say that our planned capital spending for 2018 is going to be flat compared to 2017. I think that as the West and East markets are continuing to stabilize and the Ontario and Quebec markets are continuing to tighten, part of our asset recycling strategies is to continue to upgrade our portfolio with higher quality, less capital-intensive units. We think that our overall costs will trend downwards.
Okay. Last one for me before I turn it back. Brian, just wondering on a general comment, just given your experience in the U.S., if you could comment if you've seen any step change in the competition for assets or acquisition environment in the U.S. today versus, say, six to 12 months ago, given the change in the yield curve.
Mike, I think it's been competitive. It continues to be competitive. It's hard to gauge whether it's gotten more competitive or less competitive. The yield curve has certainly flattened, meaning that short-term rates have come up. You're not paying that much of a premium for longer-term rates. We find that capital right now is still seeking yield. We find the most desired real estate asset class is industrial right now. It's producing heavy competition throughout Canada and the U.S. I think there's still good buys to have. We still think there's a lot of runway here. There's a lot of room for rents to continue to grow. When you look at where replacement costs are going with land and with construction, rents are likely to continue to grow. That's evidenced by the big capital transactions that are happening in the market with PIRET.
You can see where the big investors are expecting rents to go. We believe they're right. We believe we'll capitalize on the same kind of rising tide.
Okay. That's it for me. Thanks very much.
Thank you. Next we have Sam Damiani from TD Securities.
Thanks. Good morning, everyone. To continue on the sort of market cap rate discussion, wondering if you could specifically say, Brian, you did the acquisition in the U.S. at a 6.4 cap rate. Could you replicate that acquisition on a same quality growth profile risk-adjusted basis at the same cap rate today or in the next three months? Do you think cap rates have moved one way or the other?
Sam, it's a hard question to answer. They move up and down. It depends on the day. The portfolio we bought in the Southeast, Blackstone did not bid on. When they're in there bidding and some others are bidding, it can drive the price up and the cap rate down. If we can find portfolios like that off-market with relationships that we currently have in the U.S., I think we can definitely replicate it. You don't find those on every corner, but they're out there. We continue to leverage those relationships and leverage kind of market experience that both DREAM has and Pauls Corp has to find opportunities that are unique that maybe others haven't found. Could we do that again? I think we could probably come pretty close.
We thought we may have an opportunity in Jacksonville. We're trying to stay quite disciplined to our criteria and our buy approach. We're going to keep looking. It's very competitive. With the change in the yield curve, with the change in interest rates, sometimes it just depends on the day or the month of what opportunities are out there. We have dry powder, and we're looking for opportunities and ready to grab them when they're there.
Fantastic. Just sort of same question in Canada. You mentioned Blackstone and the PIRET transaction, obviously. What's your expectation in terms of Blackstone's continuing appetite within Canada? How does that impact the competitiveness for acquisitions today?
I'm just speculating, but I think they've got further appetite within Canada. The Canadian market is quite tight. Just because it's a smaller market, there's fewer markets and fewer assets to choose from. I think they and other institutions still have an appetite to grow within Canada. It's likely to push prices up, but it's also likely to push rents up. I don't know if that answers your question, but I think they'll continue to buy. I think the kind of the same old players that are left in the market will continue to buy. We'd like to grow in Canada. We'd like to grow in the U.S., and we'll be looking to do so.
Right. It kind of feels like markets has been at a bit of an inflection point, causing rents maybe to grow faster than they have in a long time. Is there a portion of the portfolio you see better positioned to benefit from that versus not? Does it maybe impact your view on what types of properties or markets to accelerate capital recycling?
You bet. The first part of your question, what markets are poised best to push rents. Ontario and Quebec, no doubt, are in the best position. They have big demand generators, they have big catalysts for rent growth. They've got a lot of capital wanting to invest. Those two markets are probably poised the best of our portfolio to grow. The West and the East are likely to not grow as fast. Recycling will likely occur all over the portfolio. We've honestly looked at assets. I'm just getting up to speed, but I've seen almost every asset. Some of them we've identified as potentially good recycling assets, but at the same time, we want to do the best we can and marry those up with acquisitions that are accretive.
Yeah. Okay, just two quick questions before I wrap up. On the debt side, what are mortgage spreads today in Canada for five or seven-year debt? Then I have one follow-up as well.
Sure, Sam. Right now, for five, seven, and 10 years in Canada, we're seeing about 3.9%, 4%, and 4.2% in Canada. The rates, as you know, have ticked up a little bit over the last few months.
Okay. Lenis, your FFO guidance for low single-digit growth, does that include any benefit for redemption of the last convert?
As Brian had mentioned, we've got some dry powder following the equity offering. We are contemplating some redemptions of our convertible debentures. As you all may recall, they are due at the end of 2019 but are open for prepayment without penalty at par at any point between now and the maturity date. We are contemplating a small partial repayment with some of our excess, some of the liquidity following the equity offering.
Great. Thank you.
They carry a coupon of 5.25%.
Exactly. Thank you very much.
Thank you. Next, we have Heather Kirk from BMO Capital Markets.
Just moving to the Western Canadian portfolio, it looked like the occupancy kind of ticked down just sequentially this quarter, and I'm just wondering if that's a sign of any kind of shift in the market, and if you could just give us a sense of, A, what that was related to and what your outlook is for rents and occupancy in the West.
Just answering your question specifically on the West occupancy. We had a couple of departures of tenants in the fourth quarter in a couple of our smaller mid-bay industrial units. That's the part of the market in Calgary that has held up quite strong. It's just a matter of timing of releasing, nothing of a significant concern perspective. Those were not driven by flex office units. I think what we're seeing in Alberta is the industrial portion of the market is stabilizing, and we believe that rents are bottoming out. There's still some rental rate pressure, but we do feel that they're bottoming out. As we do those renewals, we are also building in rental growth through the contractual rent steps.
Just in terms of the commentary around better rent growth, I'm just wondering, in the MD&A, looks like the market rents are only CAD 0.10 higher in Ontario. Is that just conservatism, and can you just give us a sense of what your outlook is for rent growth there? It just seemed like a very modest spread given your positive commentary on the call.
Yeah. When we derive our market rents, we do a combination of consulting with our leasing teams as well as getting information from our external appraisers. I think, again, given that this was done in the fourth quarter and there's been some recent M&A activity in the first quarter, I think we would expect, especially in Ontario, that we would be a lot more bullish and a little bit more aggressive on pushing on those market rents.
Okay, just in terms of your growth expectations, it sounds clearly like you want to expand, particularly in the U.S. What kind of scale of acquisitions are you looking at? Can you just give us a sense of how you expect to fund that, and what your thoughts are on capital recycling versus potentially issuing equity at a discount to NAV?
In terms of our acquisition capacity on a leveraged neutral basis compared to prior to our equity offering, we've probably got acquisition capacity of about CAD 100 million. That's also, as I alluded to and Brian's mentioned as well, we're being very disciplined, and we want to find assets that improve the quality of the portfolio and are financially beneficial to the REIT. I'm sorry, I think, was there a second part to your question, Heather? Sorry.
Just whether this is going to be funded through what you have existing, and is that all you're planning on doing? There's no intention to come back for equity, or what's your thoughts on I guess I'm just trying to figure out if you're doing acquisitions beyond the CAD 100 million. Is this going to be funded through capital recycling or through coming back to the equity market?
Correct. I think we want to be focusing on capital recycling and improving the quality of our assets, and hopefully result in some benefits to the REIT and net asset value, such that we can reduce our cost of equity.
Thank you.
that's really where we're going to be funding a lot of the acquisitions.
Great. Thanks very much.
Thank you. Next we have Carl Burton from Industrial Alliance.
Hi, good morning. Most of my questions have been answered, I was wondering if I could get some more guidance on same property growth going forward.
For 2018, the 2%, I think half of that's coming from contractual rental increases, so stuff that's already been contracted. The other half of that for 2018 is really being driven by higher average occupancy, particularly in our Eastern Canada region. That comes to the 2%. I think going forward, we're going to strive to do better. We're targeting up to 3% beyond 2018. We would consider that sort of our stabilized run rate going forward. Part of that is adding to the mix is just driving organic growth through whether it's higher contractual rent steps, increasing the renewals spread, particularly in Ontario and Quebec.
Do you have the guidance broken down by geographic region, though?
For 2018 or?
That's correct. 2018.
I would say, contractual rental steps are across the portfolio, the average increase, I think it's largely driven by the East.
Thank you.
Thank you. Next, we have Pammi Bir from Scotia Capital.
Thanks. Just maybe expanding on one of the earlier questions with respect to guidance. Can you maybe just provide a bit more color in terms of what you've underwritten or some of the underlying assumptions for acquisitions and asset sales in 2018?
Do you want to go for this?
For 2018, when we underwrite, we're looking for about 2% annualized growth. It's somewhat similar to the organic growth within the core portfolio. In terms of cap rates, I think it's something similar to what our U.S. portfolio acquisition would've been.
Sorry, Lenis, can you just repeat the first part of your comment? The 2%?
Well, you were asking so what kind of growth assumptions were in our underwriting models?
just looking at the guidance for the year, the low single-digit FFO guidance. My question was really just some of the underlying assumptions with respect to acquisitions, like what have you built into that number?
Right
relative to the CAD 100 million of acquisition capacity that you referenced. Secondly, from a disposition standpoint, do you expect to be or are any dispositions in that guidance?
The assumptions in the FFO, we've got this 2% comparative property NOI growth. We've modeled more on a leverage-neutral basis. We've including some of the acquisition capacity. In terms of targeting the capital recycling, I think that's going to probably impact free cash flow. It would impact free cash flow more in net asset value more than FFO initially.
Okay. Just maybe switching gears, going back to some of the commentary around M&A and positive implications for your NAV based on some of the deals that we've seen. Can you just expand on the positive implications for your NAV? Was that a reference to perhaps your cap rate assumptions, or is it referring more to some of the commentary you've made with respect to pushing rents a little harder? The numerator versus, say, the denominator in your asset values.
It's a good question. I think it implies two things. One is our implied cap rate is obviously much, much higher than what these trades are in the market. That's true. The underlying asset value, the underlying property values, we see continuing to rise as a result of these trades. I think it's going to impact both of those things, the appraisals, which will affect IFRS values on the ground, as well as the market rents that Heather questioned about. Also, we think it'll impact our implied cap rate in the public markets.
Any preliminary commentary on the potential impact on how you see your cap rate moving over the next few quarters?
Well, I'd say this. The market moves and it's not smooth, it's lumpy. Certainly we see net asset value going up. We see our cap rate going down. Some of this, it moves lumpy as rollovers happen. We've contracted for 65% of our 2018 rollover right now, so as we can deal with the balance of what hasn't rolled yet as we continue to push rents. It takes some time for this whole effect to kind of work its way into the system.
Thanks. Just last one for me. Can you comment on the appetite from an investment standpoint? You've talked about capital recycling, but can you comment on how the market is for, say, multi-tenant, smaller bay assets versus, say, some of your single-tenant properties in Canada?
Sure. To us, it really doesn't matter whether there's one tenant in there or multiple tenants. It's a matter of the functionality of the property, how useful it is to not only the tenant that's using the space now, but future tenants. The smaller multi-bay properties are usually the most utilitarian, meaning they're the most useful to the widest array of tenants. Those have tremendous value. Those values are going up. The replacement costs of those particular assets are rising faster than the big boxes. We like that asset class. We have a lot of that, and we think those values are going up. We like that. We also like sprinkling in some balance of product. Some of the stuff that we just purchased in the U.S. is larger, big bay distribution-type space, but we think that complements our portfolio of smaller bay stuff well.
That's great. Thank you very much.
Thank you. We have a follow-up question from Sam Damiani from TD Securities.
Thanks. Just if I may, on the 2% NOI growth guidance for 2018, Lenis, do you expect that to be front or back-end weighted? I'm just looking at sort of the eastern region, sounds like being a key driver there, and the occupancy clearly picked up in the east over the course of 2017 from beginning to end quite a bit. I'm just wondering if that's going to drive the seasonality for
Yeah. It's probably more weighted to Q3 and Q4, where we're really going to see that come in.
Even though the year-over-year occupancy was actually quite strong in the last half of 2017?
Correct.
You still think you're going to do?
Yeah, there could be some rent-free periods in the last half of the year that are rolling off. We do see more of that pickup through the back half of the year. I think the first half of the year should be relatively stable. We do have the contractual rental increases occur through the year as well. I think when we kind of pile on all the pieces together, you're going to see more of the growth in the second half of the year.
Just finally, if I may, the leverage of the REIT does stand at sort of the top end of the range of the peers. I'm just wondering if there's a change in thought as to, Brian, how you see the REIT operating maybe two years out.
Sure. Right now, we're at 49.5% debt. I guess I wouldn't consider that top end of the range. We figure that's pretty healthy. Our target's been low 50s. Post-closing, we're going to put some secured financing on the U.S. assets that'll take us probably to 51%. We see our NAV increasing, our debt to NAV will obviously go down by math.
We see that over the long term coming down, in the short term being in the low 50s, which we see as reasonably healthy. It leaves us with dry powder to go capitalize on opportunities as we see them.
Right. Okay. Just by top end of the range, I may have misspoke, but I meant of the peer group range. Most of your peers are lower. Okay, that's helpful. Thank you very much.
Okay. Thank you.
Thank you. We have no further questions at this time.