Good afternoon, ladies and gentlemen. Welcome to the Dream Industrial REIT first quarter conference call for Wednesday, 3 May 2023. 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&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. To queue up for a question, please press star one, one on your telephone keypad. Your host for today will be Mr. Brian Pauls, CEO of Dream Industrial REIT. Mr. Pauls, please go ahead.
Good afternoon, everyone. Thank you for joining us today for Dream Industrial REIT's first quarter 2023 conference call. Speaking with me today is Lenis Quan, our Chief Financial Officer, and Alexander Sannikov, our President and Chief Operating Officer. DIR had an active start to the year. We completed significant strategic initiatives during the quarter that enhanced our growth trajectory going forward.
In February, we acquired a 10% interest in the CAD 6 billion acquisition of Summit in partnership with GIC, who acquired the remaining share. At the same time, we established a programmatic JV with GIC to pursue additional investment opportunities in the Canadian industrial market.
This transaction was a significant milestone for DIR and positioned us as one of the largest industrial platforms in the country, with over 43 million sq ft co-owned or managed in Canada and over 70 million sq ft across North America and Europe. We now provide property management and leasing services for 33 million sq ft of industrial assets across Canada and the US, held in private capital partnerships with institutional clients. These partnerships provide significant opportunities to grow creatively while requiring limited equity capital from DIR.
Turning to the results for the quarter. Our operating and financial results have never been better. We reported 13% comparative properties NOI growth during the quarter. FFO per unit was CAD 0.25 in first quarter, up 13% year-over-year, largely driven by CPNOI growth.
We completed and leased a 120,000 sq ft expansion in Montreal, which resulted in an unlevered yield on cost of 8.4%. In the last 12 months, we've completed 700,000 sq ft of developments and achieved an unlevered yield on cost of 7.8%. Looking forward, all our growth drivers remain intact. Demand for industrial space has stayed strong through the volatile economic environment. With availability in the low single-digit range across all our markets, we continue to see strong organic growth for DIR's portfolio.
The overall macroeconomic sentiment in Europe has improved considerably over the last few months. Occupier fundamentals continue to be strong with rising rents and low supply. Our European spread expiry this quarter averaged 13%. Overall, our outlook for 2023 and beyond remains positive.
Our near-term focus is on execution across various initiatives, which include delivering on our organic growth targets, advancing our development pipeline, and achieving accretive yields, integrating the Dream Summit operations, and delivering on our accretion targets, as well as maintaining a strong and flexible balance sheet. I will now turn it over to Alex to provide additional color on our business.
Thank you, Brian. Good afternoon, everyone. Industrial fundamentals in our core markets remain strong, with rents increasing quarter-over-quarter and vacancy in the low single-digit range. In Canada, we are seeing limited new supply delivered to the market with a lower proportion of pre-leasing compared to a year ago. While this increases availability temporarily, we continue to see tenant demand remain strong and rents continue growing. Within our portfolio, a strong leasing momentum from last year has carried forward to 2023.
During first quarter, we transacted 945,000 sq ft of leases across our portfolio, achieving a rental spread of over 40%. We signed approximately 440,000 sq ft of leases in Ontario and Quebec, with rental spreads in the 75% to 80% range.
In Europe, we signed 250,000 sq ft of leases at a 13% spread over prior rents. Within the Dream Summit JV, we completed over half a million sq ft of leases during the quarter. On these leases, we achieved an average spread of 150% over prior rents. These spreads are in line with our underwriting and validate our thesis on significant mark-to-market opportunity embedded in the Dream Summit portfolio. For the quarter, we reported 13% comparative properties NOI growth.
In Canada, we achieved CPNOI growth of 14.3%, led by Ontario at over 22% and high single-digit growth in Quebec and Western Canada. In Europe, our leasing momentum remains robust and is also supported by CPI indexation across the portfolio. For the quarter, we reported a 12% increase in European CPNOI.
We expect 2023 CPNOI growth in Europe to remain strong in the mid-to-high single-digit range, assuming mid-single-digit inflation in 2023. Overall, we expect our 2023 comparative properties NOI growth to be at the high end of our initial guidance range of 8% to 10%. Turning to our development program. We're close to completing our 154,000 sq ft ground up development in Caledon. We are seeing strong interest from occupiers.
We are in very advanced negotiations with a prospective tenant for a portion of the building at terms that are in line with our underwriting. In addition to Abbotside, we have four projects totaling 690,000 sq ft at our share currently underway. Construction is progressing well, we continue to receive interest from occupiers.
In addition to these projects, we are about to commence construction on two new projects totaling approximately 1 million sq ft. We're in final planning stages for our redevelopment project in Murphy. The 24-acre site was acquired in 2020 with intent to redevelop once the existing tenant vacates. We intend to redevelop the site with two modern net-zero hybrid logistic buildings totaling over 380,000 sq ft. We're planning to start construction in third quarter 2023 with a target of unlevered yield on cost of approximately 7%, including the land.
We're forecasting construction costs of approximately CAD 75 million. We're also finalizing plans to commence construction at our 50-acre site in Balzac Submarket in Calgary, which was acquired last year.
We have been able to increase our density forecast to 650,000 sq ft from 475,000 sq ft in our underwriting. We expect construction costs of around CAD 90 million with a targeted unlevered yield on cost in the mid-6% range, including the land cost. We're starting to leverage our sizable industrial platform in Canada and globally as we proactively engage with our occupiers across multiple properties to drive synergies for our customers' business and our entire industrial platform. Our property management and leasing platform allows us to generate strong and growing net margins.
For the quarter, we reported CAD 1.6 million of net margin from this business, which included six weeks contribution from the Dream Summit JV. I will now turn it over to Lenis to talk about our financial highlights.
Thank you, Alex. Our financial results for the first quarter were strong and reflect the success of our recent strategic initiatives. Diluted FFO per unit was CAD 0.25 for the quarter, 13% higher than the prior year quarter, and includes CAD 0.004 of lease termination income related to an anticipated vacancy in Europe. Our net asset value per unit at quarter end was CAD 17.03, increasing slightly from the CAD 16.97 at year-end 2022. This was largely due to the completion of an expansion in Montreal.
The solid year-over-year growth was primarily due to strong comparative properties NOI growth and property management income from the US Industrial Fund and the Dream Summit Industrial Joint Venture.
The Summit transaction was accretive to our first quarter FFO, and we are on track to achieve our target FFO accretion in the CAD 0.01 to 0.02 range for 2023. We expect the accretion to increase over time as we mark rents to market on rollover and achieve stabilization on development and expansion projects. We continue to focus on maintaining the strength and flexibility of our balance sheet. During the quarter, we closed a CAD 200 million unsecured term loan in connection with the closing of the Dream Summit JV at a fixed rate of 4.85%.
In March, we issued CAD 200 million of unsecured debentures at a rate of 5.38%, which was used to partially repay our credit facility, allowing us to reduce the proportion of variable debt, increase term, and lower our average interest rate.
We ended the quarter with leverage of 36% within our targeted mid-30% range and debt to EBITDA of 9.3x and with over CAD 430 million of total liquidity, plus an additional CAD 250 million accordion. We expect to maintain our leverage around this level as we deploy capital into our development and solar projects and look for opportunities to grow our Dream Summit and the G-GTA development ventures.
Looking forward to the remainder of the year and consistent with our business plan, we expect that investment opportunities can be fully funded with our current balance sheet capacity. Our near-term debt maturities are limited with approximately CAD 265 million of European mortgages maturing this year.
We are in advanced discussions with our European lenders and expect to refinance these mortgages with all-in rates in the mid to high 4% range. We remain optimistic with respect to the performance of our business in 2023 and for the long run. As Alex mentioned, we expect our comparative properties NOI growth for 2023 to be at the upper end of our previous guidance.
Combined with the leverage level and accretion from Dream Summit Venture, we reiterate our previous guidance of FFO per unit for 2023 to be in the mid CAD 0.90 range. Our FFO guidance continues to be predicated on current FX levels and interest rate expectations. I will turn it back to Brian to wrap up.
Thank you, Alex. It has been an exciting start to 2023. We continue to outperform our interim goals. I would also like to take this opportunity to congratulate Alex on his appointment as the President and COO. Recognizing that Alex has been fulfilling this role already, we are pleased to provide him with the appropriate title. Alex and I will continue working closely together on all aspects of Dream Industrial's business. With Alex taking on additional responsibilities within DIR, I will also be able to focus on additional time on Dream's growing US platform. We'll now open it up for questions.
Thank you. We will now begin our question-and-answer session. If you have a question, please press star one, one on your telephone keypad. If you wish to be removed from the queue, please press star one, one. If you're using a speakerphone, you may need to pick up the handset first before the question is announced. Once again, if you have a question, please press star one, one on your telephone keypad. We have our first question from Sam Damiani with TD Securities. Please stand by while I open your line. Your line is now open.
Thanks and good afternoon, everyone, and congratulations, Alex, on your expanded title. Well done. Maybe just first question, just on Europe. Very strong same property in the quarter. I gather some of that was from the CPI-linked nature of the leases, with the average rent moving up nicely on the quarter. What's your view on that market's ability to see market rents sort of move in step with inflation? Will this inflationary environment just simply bring rents closer to market as we go through this period?
Thank you, Sam. We continue to see rental growth in Europe, what we've seen in 2022 in many markets in Europe, including Germany, certain submarkets in the Netherlands, certain submarkets in France such as Paris. We've seen real rental growth, rental growth in excess of inflation. We continue to see upwards pressure on rents in Europe as supply remains limited. There's increasing pressures on supply resulting from capital markets. There's strong occupier demand across the board. We expect that there's gonna be continued upward pressure on rents.
Okay, great. That's helpful. Next question is just on the spreads that were achieved in Canada, particularly Ontario and Quebec. You know, after really spiking over the course of 2022, it looked like the spreads moderated a bit this quarter. Was there any particular reason in Ontario and Quebec for those spreads to moderate?
Thanks, Sam. No particular reason. As you can imagine, the spreads are idiosyncratic to a large degree. It's a function of the space that is rolling and the leases that are in place. We haven't seen any downwards pressure on rent. If anything, we're seeing continued upwards pressure. We are routinely doing deals in CAD 20 million range with 5% steps, especially for mid-bay units in the 20,000 to 50,000 sq ft range. We've recently signed a few deals with well into the 20s NER. We continue to see strong rental development.
That's great. Last question from me, just a quick one. What sort of acquisitions is the Dream Summit JV looking at currently? Are any preferences by region or building age or class?
We're looking at a few opportunities, primarily in the GTA at the moment. They would be comparable to what Dream Summit's typical assets are, on average, good quality locations, strong submarkets, relatively short leases with strong mark-to-market potential. We're also looking at a few covered land opportunities. These would be sites that could be leased for outside storage, capitalizing on the scarcity of this product in the market.
That's great. Thank you. I'll turn it back.
Thank you. We have our next question from Mark Rothschild with Canaccord. Please stand by while I open your line. Your line is now open.
Thanks. Good afternoon and congrats, Alex. Maybe just following up on to this last point talking about acquisitions, with the balance sheet the way it is right now and cost of capital having gone up, how do you view your acquisition capacity and how much you'd be willing to do with the current balance sheet? Should we interpret from your remarks that you view Canada as a more interesting opportunity than other markets, or maybe I just shouldn't read into that at all?
Thank you, Mark. Our Dream Summit JV allows us to continue to be active in the market and find good opportunities while requiring very limited capital from DIR. As you may have seen in our AIF, we've provided additional disclosure on the structure of the venture. We continue to look for opportunities in Canada. We're monitoring the markets in Europe.
We think that the risk-adjusted returns at the very moment are a bit stronger in Canada, although we're starting to see interesting opportunities in Europe emerge as well. The additional benefit of pursuing acquisitions within the Dream Summit venture is the property management and leasing fee revenue that enhances DIR's return on capital.
Okay, great. Thanks. That's it for me.
Thank you so much. We have our next question. Our next question is coming from Himanshu Gupta with Scotiabank. Please stand by while I open your line for you. Your line is open.
Thank you, good afternoon. In your CPNOI growth guidance, now you're obviously expecting on the higher end, are you assuming any occupancy slippage in any of your portfolio?
Thank you, Himanshu. We do not generally expect significant occupancy slippage. As you would have seen from the disclosure this quarter, occupancy did decline in Montreal, compared to December. That was driven by one property that was slated for redevelopment. As we look at the market today, we think that there's also merits to explore, lease up as is. We think that property could contribute to CP NOI growth later in the year, if we do indeed pursue that alternative. Generally, we expect the occupancy to remain at these levels on average.
Got it. Then Alex, you know, based on the brokerage reports like CBRE and others, you're seeing some slowdown in leasing volumes, in first quarter. Are you seeing any softness, in leasing volumes in your markets as well?
We're not seeing softness in volumes. I think we need to take into account that the leasing volume is a function of availability to some extent, and availability is very low. The available space is very low. We're seeing very strong renewal activity, and generally, tenants want to stay where they are, and we obviously wanna work with them to keep them in the locations they are occupying with us, facilitate their business needs. We're engaging with tenants on expansion possibilities within the portfolio.
When it comes to new leasing volume, what we see, especially when it comes to developments, is that occupiers now don't tend to pre-lease these developments. They tend to wait until these projects are substantially complete to then engage in leasing discussions. We're seeing that in our, in our Abbotside project, for example.
Got it. Thanks for the color. You know, just sticking to that development comment, you have this Mississauga redevelopment, I think at the Courtney Park. What kind of cost of construction are you projecting there on a CAD 1 per ft basis?
Thank you. I will refer you to the development table in the MD&A.
Yes, I looked at it.
If you have that in front of you.
No, no, I have it. The reason I brought it up is, I mean, I calculate around CAD 300 per ft. My question was, does that include the cost of land as well?
Yes.
It looks like it's more of a demolition project, right? Redevelopment there.
Yes, yes. Thank you for that question. As a general principle, in our disclosure, intensifications tend not to include the cost of land because the land is already included in the IFRS value of the income-producing asset. For redevelopment projects and new development projects, the total cost that is estimated in this table includes the cost of land or the value of the building in case of redevelopments. So. This would be also the case for Courtney Park.
Okay. I just wanted to confirm that, you know, if just the cost is like CAD 300 per ft, which I thought probably is probably on the higher side there. Thanks for that. A couple of, probably one or two questions more. In your FFO guidance, Lenis, what is the Euro CAD you are assuming?
The current rates are around CAD 145, so it's very close to our current rates right now.
CAD 145. Yes, okay, fantastic. I think the last question was just on CP NOI in Europe. It was very strong in first quarter at 12%. Was it better than your expectations in first quarter? What's the outlook for the full year?
It's generally in line with our expectations, for the first quarter. We provided some color in our prepared remarks as well on the expectation for the balance of the year. We expect it to be in the mid to high single digit range.
Awesome. Thank you guys.
Assuming inflation stays at the mid-single digit range for 2023.
Fair enough. Thanks Alex again, and I'll turn it back.
Thank you.
Thank you. We have our next question. Our next question is coming from Brad Sturges with Raymond James. Please stand by while I open your line for you. Your line is open.
Hey there. Just to maybe touch on potential for asset sales. I think you alluded to it last quarter in terms of reviewing the portfolio for potential opportunities. Where would that stand? Do you have a quantum of potential asset sales in the pipeline for this year?
Thank you, Brad. Well, as you would have seen, this quarter, there was one smaller sale in Europe as we continue opportunistically dispose of non-strategic buildings. In Canada, there is interest in a few of our properties, including from occupiers. We don't have specific guidance as we always communicated. There's no target to sell certain amount of buildings.
We have a pool of non-strategic buildings that we would dispose of at the right time for the right price. We continue working at it. In terms of volume for modeling purposes, as we indicated in February, CAD 50 million could be a reasonable modeling assumption to use. It may be lower, it may be higher, depending on the timing and some of the other factors I mentioned.
Would, you know, depending on your, on your growth capital needs, whether it's, the development program or, contribution into your JV investment, funds, would that accelerate or decelerate your appetite for asset sales? Or is it just really based on the opportunity presented at each asset that you're reviewing right now?
It certainly is a factor. When we look at, disposing assets, we would be looking at the go-forward return we expect from these, properties, adjusted for risk, and then where can we use this capital in the business. We certainly want to make it accretive, to the business overall.
Then I guess you're reviewing opportunities for capital recycling in all regions, but would there be a weight towards any particular region?
Nothing specific, no. The either thing that Sort of assets within Well, each of our regions, we have some non-strategic assets.
Okay. last question, just on the lease termination fee income. Just looking for a little bit more color, maybe I missed it, but just looking for a little bit more color in terms of electrical debt vacancy and your expected your expectations for transitional vacancy at the facility.
This was an expected vacancy in France. We expect positive leasing spread when we retenant this asset. This is, sort of pre-specific, clause that is, for this lease, that resulted in the termination penalty. We have quite a bit of notice, so we are not going to get the space back until very end of 2023. In terms of the average occupancy impact for 2023, it's going to be minimal.
Okay. That's helpful. I'll turn it back. Thanks.
Thank you. We have our next question from Kyle Stanley with Desjardins. Please stand by. I will open up your line. Your line is open.
Thanks. Good afternoon, everyone. Congrats, Alex, on the expanded role. I'm just wondering, is it safe to assume, based on your commentary, that the majority of the REIT's external growth, at least in the near term, is likely to come within the Summit JV?
Thank you, Kyle. We think that this is one of the best opportunities for us to allocate capital when it comes to acquisitions is through that venture at the moment. We commented earlier, not only is that allowing us to scale an otherwise strategic relationship, but also the economics to the REIT from investing through this JV are significantly enhanced by the property management and leasing fee revenue.
The margin on that incremental revenue as well is higher because obviously the platform is already in place and doesn't require significant incremental staffing. We think that that's pretty compelling overall, and we're excited to continue scaling that partnership.
Great. Just on the, on the leasing side, I mean, I guess it comes down to affordability a little bit. Are you seeing any differences in your leasing negotiations with maybe some of the smaller tenants in your portfolio versus maybe some of the larger tenants?
That is a great question. We do see as we commented earlier, for smaller units, we're achieving pretty strong rents in terms of starting rents, but we're also achieving stronger growth on average. We would be pushing 5% per year with CAD 20 million starting rents in many of our 20,000 sq ft pockets. With larger occupiers, we're certainly seeing more of a negotiation. However, our larger occupiers customers come very well prepared to negotiations and very educated about the market and the, and the options.
Okay. Fair enough. You know, just looking at your, you know, management's expectation of market rent and, you know, it ticked up about 2.5% quarter-over-quarter. You know, that is a bit lower than what we saw last quarter. You know, is that reflecting anything on a seasonal basis or are we just starting to see, you know, just overall market rent growth maybe slow a little bit?
I think the rate of growth is, you know, not only in our portfolio, but also if you look at various market reports and statistics, the rate of growth in the first quarter of 2023 is lower than in 2022, as expected, widely expected. Whether that should be extrapolated into the future or not, that's early to say. We think that the underlying ingredients for rental growth remain there across all of our markets.
In some markets, such as Calgary, rental growth is accelerating, but in some other markets, it is decelerating partly because of the strong rate of growth experienced in 2022 and 2021 in markets such as GTA and Montreal.
Okay, understood. Just the last one, and you may not have this at the tip of your fingers, so no problem. Just wondering, do you know what percentage of your European portfolio would have had the rental rate reset based on CPI so far this year?
I don't have this as the exact statistic, but our leases are organized such as the majority of leases are in first quarter, but not the vast majority. It's a bit skewed towards the first quarter in terms of the CPI adjustment timing. There's gonna be a fair bit in the in second quarter to fourth quarter.
Perfect. Thanks very much. I will turn it back.
We have our next question from Gaurav Mathur with iA Capital Markets. Please stand by while I open up your line. Your line is open.
Thank you. Good afternoon, everyone. Just from an acquisitions viewpoint, are you seeing any distressed asset opportunities in Canada or Europe that you could potentially execute on?
Thank you for that question. No, we're not seeing distress. We actually are seeing generally that landlords are well capitalized, and we're also seeing that there's underlying investor interest. What we see is that smaller tickets generally attract more demand, and there's not a lot of large tickets out there, whether in Canada or in Europe. The demand for those CAD 20 to 60 to 70 million tickets is still very strong and these processes attract multiple bids still.
Okay, great. Then just lastly, you know, given the dislocation in public and private market asset values, do you perhaps see valuations converging in the near term, or is that still going to be played out over a longer time period?
That is a challenging sort of question to comment on. We are focusing on the underlying fundamentals in our business, whether it's organic growth, the returns that we're achieving on our development program as well as the returns that we can achieve in the private markets, through our private capital partnerships. We think that these returns are accretive to our overall cost of capital and whether in the short run or the long run, and we continue focusing on that. As to whether the valuation gap between public and private markets will close, it's hard to comment on that.
Great. Thank you for the color. I'll turn it back to the operator.
Thank you so much. We have our next question from Matt Kornack with NBF. Please stand by while I open your line. Your line is now open.
Hi all. Just quickly with regards to the Montreal asset, can you kind of describe what the thought process is around kind of an as is, replacement of the tenant versus it sounded like there's a low site coverage there and you can potentially expand, but, why would you go with one over the other at this point?
Thank you, Matt. The analysis that we perform is sort of classic opportunity cost analysis. We would look at what the existing property could command in terms of rent. That rent for the existing property, especially today, is significantly impacted upwards by the outside trailer storage component. We would compare it with the rent that we can achieve on the expanded property.
It would likely be, you know, a lower rent per square foot because obviously it's gonna be a larger building, but less of that outside storage. What's the capital that will be required to achieve one versus the other? We just try to estimate the return on that capital.
If the rent for the existing property as is is lower, then obviously that incremental return is very compelling. As the rent for the existing property goes up, then lease up as is, at least for the next little while, could be more compelling. Then redevelopment is always an option that is available to us. Obviously, we take into account factors such as downtime, and the risk to develop. We've seen this before. In early 2020, we had a site in Cambridge that could accommodate. But we still own it, obviously, that could accommodate 120,000 sq ft of density. There's about 40,000 sq ft of density on site right now.
We got the building back, and we were planning to redevelop it. We had a tenant who needed the space, and they needed the yard, and they were willing to pay record rents for Cambridge at the time. With the rents that we achieved for the as-is building, we just couldn't justify the construction. We're getting the building back, or the lease is gonna roll in the next couple of years, and then we'll have another ability to reevaluate this redevelopment. That's the same sort of analysis that we're going through for the Montreal project.
Okay. No, that's very helpful. I assume at this point that you've probably listed it to at least see what that rent is, get a number there, or have you made a decision one way or the other at this point as to which way you'll go?
No decision yet, but we think that if we can achieve the rents that we think should be achievable, then we think it makes sense to just lease it as is for the time being and then reevaluate redevelopment in three to five years. We are marketing the space right now.
Okay. Makes sense. Then just two quick accounting questions. With regards to the FFO contribution from the joint venture obviously closed partway through the quarter, am I right to think there's about CAD 1 million of incremental FFO per quarter, I guess, to be added in second quarter and then carried on at that run rate for the joint venture?
Matt, we actually have included some disclosures within the MD&A on the FFO contribution. I can certainly give you a call after just to point to the specific tables.
Okay. No, that would be helpful. Similarly on the fee income, I don't know if that number in your NOI, it was pretty high. Do we prorate that for kind of the percentage that the portfolio was in, or is that provided in the MD&A as well somewhere?
Yeah. We've provided the total margin from the property management and leasing business. It obviously includes both the US Industrial Fund and the Dream...
Mm-hmm.
Dream Summit Joint Venture. But there is only half a quarter from Dream Summit Joint Venture. You could, you know, you could probably do a high-level estimation based on what was...
Sure.
In fourth quarter versus first quarter and kind of make an estimation or proration from there.
Yep. Nope. That's fair. I can do that, and I appreciate the color. Thanks, guys.
Thank you. We have our next question from Pammi Bir with RBC Capital Markets. Please stand by while I open your line. Your line is now open.
Thanks. Hi, everyone. Maybe just building on that last question. The pickup between fourth quarter and first quarter in terms of the fee income, just wanted to clarify, was that entirely from the Summit transaction? Tied to that, I guess, was there anything non-recurring-ish or any lumpy amounts in that maybe tied to leasing?
Thank you, Pammi. As we commented in February, we don't disclose specifically the fees or the margin from the Dream Summit venture for confidentiality reasons. The best disclosure we could come up with to provide transparency to investors and analysts for modeling purposes is kind of to blend the margin from the Dream Summit venture and our US fund property management and leasing business. We cannot comment specifically as to the increases for those reasons.
Naturally, the Dream Summit would have been a significant factor in the increase year-over-year. When it comes to the overall revenue from property management and leasing business, as you can imagine, the leasing fee stream is indeed lumpy. We have, it's a function of when leases get signed. Property management, fee revenue is much more predictable and steady quarter-over-quarter.
Okay. Then just really one last one for me. I mean, clearly the operating metrics, you know, portfolio performance is quite strong. Maybe, I guess, really just building on one of the questions earlier on, are there any maybe tenant segments where you're perhaps not seeing it yet, but maybe anticipating a slowdown, whether it's, you know, whether it's in, you know, some of the retailers looking to, you know, build out their warehouse distribution space or 3PL or/a nd any tenants on your watch list in any of your in your markets?
Thank you for that. No tenants on the watch list, we generally proactively engage with our tenants throughout the year in terms of understanding their business needs, health of the business, issues they're facing. There's nothing other than a few tenants here and there, which is natural for the portfolio of our size. Nothing that is a red flag. When it comes to incremental demand, yes, we have seen obviously that incremental demand has shifted from e-commerce led in early to mid-2021, to more 3PL activity to then more underlying user activity. Generally we're seeing strong demand across the board.
A lot of the end users in not the 3PLs, but the end users, whether they do manufacturing or the tenants who are more vertically integrated. We're seeing quite a bit of incremental demand from these occupiers, and they're frequently asking us to facilitate expansions for them, and are generally looking for additional space.
Thanks for that. I'll turn it back.
Thank you so much. We have our next question from Michael Markidis with BMO Capital Markets. Please stand by while I open your line.
Hi. Thanks everybody. Lenis, I don't know if this was intentional. Last quarter, I think you said the guidance for FFO was mid-nineties with potential upside. I don't know if I'm reading too much into this, you dropped the potential upside. Was that intentional?
No, no. That wasn't intentional. I think obviously, we still have the strong CP NOI guidance, and we've reiterated that that's, you know, that still holds. We're coming in on the upper end of that guidance. From the FFO standpoint, you know, there's still, you know, we still have the second half of the year. There is, you know, there's obviously additional leasing that we continue to work on that could trickle through. But I think we wanted to just reiterate that mid-nineties in terms of FFO, again, based on current leverage and the foreign exchange rates there.
Okay. Yeah. I mean, I don't wanna split hairs, but I mean, I guess your CPNOI growth at the high end of your initial range and the euro I think is actually a little marginally stronger. What would be the other offsets that sort of make you not wanna pump that up a little bit?
There's no offsets, Mike, as Lenis commented, this was not intentional. Thank you for pointing this out for the audience.
Okay. Thank you. Okay. Then, just last question from me. Maybe you could just help us out in management's view on the distribution. The reason I ask is that, you know, your business is much stronger than it ever was, you know, in history. Here we are on your guidance, I think you're kinda trending into a 70 if not low 70% FFO payout ratio and at your target guidance. If you aren't sort of thinking that it might be sooner rather than later, I mean, how do you Can you give us a target for leverage? I mean, how can we think about distribution going forward?
You know, I think we've indicated in the past that as our FFO continues to grow and the payout ratio comes down, you know, it's something that gets reviewed on a regular basis, internally and with our board as well. We obviously want to target, you know, the payout in the low 70% range. You know, and we're obviously on the right trajectory to that.
I think it's just, you know, right now we're really focused on, you know, the strong balance sheet and keeping leverage in this level. You know, obviously something we continue to monitor, but nothing, you know, nothing near term that, you know, we feel that there's anything, any announcement or changes required.
I appreciate that. I probably missed it, but I don't think I've ever heard you say a low 70 payout range on the distribution. Just to clarify, is that an FFO or an AFFO metric?
FFO. That's, you know, just regarding what we publish. In terms of the payout ratio, I mean, low seventies is something where a lot of the Canadian peers are. When you look to US peers, it's even lower than that. It's something that we're cognizant of, and that's, you know, obviously something we continue to benchmark as well.
That makes a lot of sense. Thanks so much.
Thank you.
As a reminder, if you have a question, please press star one, one on your telephone keypad. We have a follow-up question from Sam Damiani with TD Cowen. Please go ahead. I will open up your line in just a moment. Your line is open. Please go ahead, Sam. Your mic is open. Just to confirm, if you are muted on your end, please unmute.
I am unmuted. Apologies everyone. Lenis, just one quick follow-up accounting question. Just for interest expense in second quarter, there's a lot of moving parts in first quarter. Do you have a kind of a rough number you'd be comfortable putting out, as an interest expense run rate for the second quarter?
Sam, Can we get back to you on that? Like I said, there's quite a bit of moving parts.
Of course. Thank you.
Thank you, Sam. Nothing further from you?
That's it. Thank you.
You're so welcome. I see no further questions in queue. I will now turn the call over to Brian Pauls for closing remarks.
Thank you. I'd like to thank everybody for your time today. We look forward to speaking again soon. In the meantime, take care and stay safe. Take care.
Thank you. This concludes today's conference. Thank you for participating. You may now disconnect.