Dream Industrial REIT reports FFO per unit of $0.25 By Investing.com

Dream Industrial REIT (DIR.UN) has reported a 5% year-over-year growth in comparative properties net operating income (NOI) for the second quarter of 2024, with funds from operations (FFO) per unit reaching $0.25.

The company has made significant progress in its development leasing, particularly in Ontario and Alberta, and has successfully completed $50 million in property dispositions across Canada and Europe. Dream Industrial REIT’s outlook remains positive, expecting the industrial market to stay undersupplied, leading to low vacancy rates and a rise in rents.

Key Takeaways

• Dream Industrial REIT’s comparative properties NOI grew by 5% year-over-year in the second quarter of 2024.
• FFO per unit was reported at $0.25.
• Over 0.5 million square feet of development projects were leased or conditionally leased in Ontario and Alberta.
• The company completed dispositions worth $50 million at values above pre-sale IFRS estimates.
• A strong industrial market is anticipated with low vacancy rates and increasing rents in Canada and Europe.
• Dream Industrial REIT is focusing on user sales and the sale of non-core assets.
• Financing initiatives have been completed to optimize debt costs and maintain a robust balance sheet.
• Consistent results for 2024 are expected, with growth in same-property NOI and FFO per unit forecasted for 2025.

Company Outlook

• The industrial market is expected to remain undersupplied in Canada and Europe.
• Dream Industrial REIT aims to reaccelerate same-property NOI and FFO per unit growth in 2025.
• The company is exploring opportunities to add urban, well-located assets to its European portfolio.

Bearish Highlights

• A slight decline in occupancy is anticipated for Q3 2024, with stabilization expected in Q4.
• There is a possibility of increased subleasing activity, which may affect net absorption rates and availability trends.

Bullish Highlights

• High leasing activity is observed in the company’s development pipeline.
• Strong rental spreads on contracted leases have been achieved.
• Market rents are expected to face upward pressure in the near to medium term.
• Dream Industrial REIT is considering a unit buyback program in the future.

Misses

• Occupancy levels have declined, especially in larger assets.
• Lease incentives have increased due to commissions on early renewals and larger deals.

Q&A Highlights

• CEO Alexander Sannikov discussed strategies to address occupancy declines and leasing demand.
• The company has addressed debt maturities for 2024 and included 2025 maturities in its disclosures.
• Interest rates for euro-denominated debt are expected to be around 4% for five-year terms.
• Potential acquisitions in Vancouver are being considered due to high barriers to entry and attractive returns.

Dream Industrial REIT continues to navigate a robust industrial market, leveraging its development projects and strategic dispositions to strengthen its financial position. The company’s proactive approach to managing occupancy levels, engaging in leasing activity, and optimizing its portfolio through user sales and non-core asset disposals underscores its commitment to growth and shareholder value. With a positive outlook for the industrial real estate market and a strategic focus on development and leasing, Dream Industrial REIT is positioned to capitalize on market opportunities in the coming years.

Full transcript – None (DREUF) Q2 2024:

Operator: Welcome to the Dream Industrial REIT Second Quarter 2024 Results Conference Call on Wednesday, August 7, 2024. Please be advised that all participants are currently in a listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. [Operator Instructions] 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 available on Dream Industrial REIT’s website at www.dreamindustrialreit.ca. Your host for today will be Mr. Alexander Sannikov, CEO of Dream Industrial REIT. Mr. Sannikov, please proceed.

Alexander Sannikov: Thank you. Good morning everyone. Thank you for joining us today for Dream Industrial REIT second quarter 2024 conference call. Speaking with me today is Lenis Quan, our Chief Financial Officer. In the second quarter, we continued to focus on executing our key – on our key growth drivers. We reported 5% year-over-year comparative properties NOI growth for the quarter, which drove FFO per unit of $0.25 in line with our guidance. We have made good progress in our development leasing with over 0.5 million square feet of projects leased or conditionally leased at strong rents across Ontario and Alberta, including our recently completed Courtney Park redevelopment, which is now fully leased. We are executing on capital recycling to continuously upgrade our portfolio quality with the completion of $50 million of dispositions across Canada and Europe at above pre-sale IFRS values. With nearly $600 million of available liquidity and our marginal cost of debt declining by over 50 basis points since the last quarter, about our balance sheet remains strong. Starting with broader market observations. The pace of demand across our industrial market has continued to normalize compared to 24 months ago. In addition, there has been some limited new supply delivered to the market, which along with the rise in sublease options has resulted in an uptick in availability. Based on the current subleasing pipeline we see in the market, we expect availability rates to continue trending upwards for the next quarter or two. Subleasing activity usually spikes in response to any economic disruption, but drops off fairly quickly as broader demand picks up pace. As such, we do not expect this particular supply driver to impact the market for the medium term. Current supply under construction represents only a minor fraction of existing market inventory and we are seeing new construction starts dropping rapidly across our markets. With that, we expect our core operating markets in Canada and Europe will remain undersupplied in the context of structural demand drivers for industrial product over the next near to medium term, leading to low vacancy rates and upward pressure on rents. Over the last quarter we saw high leasing activity in our development pipeline. During the quarter we completed or conditional on 150,000 square feet of project in Ontario and 400,000 square feet in Alberta. Our recently completed redevelopment project at Courtney Park in Mississauga is now fully leased to two tenants. We achieved an average starting rent of $21 per square foot and annual steps of approximately 4%. We expect this asset to contribute over $4.5 million to our annual NOI on a run rate basis with rent commencement in September 2024. During the quarter we substantially completed our 20-acre project in Balzac. The project is comprised of two buildings and approximately 70% of the project is leased or conditionally leased and we achieved an average starting rent of $12 a foot and annual steps of approximately 3%. We expect this stabilized project to contribute over $4 million of annual NOI on a run rate basis. Spread on contracted leases remains strong. Since the end of Q1, we have signed 2.4 million square feet of new leases and renewals at an average spread of 57%. In Canada, we signed 1.7 million square feet of leases at an average spread of 80%, including a 180,000 square foot tenant in the GTA who we renewed at a spread of over 200%. In Europe, we signed 800,000 square feet of leases at an average spread of 11% and we have been able to realize solid rental steps on all of these deals. Our approach to prioritizing rental growth in our leasing strategy has proven to be rewarding despite the temporary drag on occupancy. Our 100,000 square foot property in the GTA is a good example of this strategy. The previous tenant was paying mid $14 rents and was terminated in Q3 2023. A few months ago, we received an offer in the $15 range, which we passed on and recently signed an offer for a five-year lease for 100% of the building at a rent of $18 a foot with 3.5% step. This new lease is expected to commence in Q3. While patient approach to leasing is appropriate for some assets, we are evaluating all scenarios on an asset by asset basis. For our 200,000 square foot property in the Port of Montréal, we were looking to achieve premium rents for significant outside storage component. Based on the response from the market so far, we currently expect that intensification and reconfiguration of the asset to accommodate multiple tenants will result in stronger returns. As such, we are likely going to pivot towards intensifying and refurbishing the asset in the near term as opposed to leasing as is. Another approach that we are increasingly exploring is user sales. We have seen significant demand from owner occupiers in many of our vacant buildings, both in DIR’s wholly owned portfolio and in our private ventures. We are in discussions or have closed on over $100 million of user sales at prices representing a cap rate of approximately 5% on market rents for these buildings, which is accretive to our total returns. As we communicated previously, we are increasingly focusing on opportunities to recycle capital out of non-strategic assets into our core business and markets at accretive returns. During the quarter, we disposed of six non-strategic assets located in Regina at total proceeds of $42 million, representing a 12% premium over carrying value. The consideration included a two-year vendor take back mortgage totaling $29 million and bearing an interest rate of 6.5%. This effectively allows us to continue generating cash flow from these assets for the next two years in addition to $12 million of proceeds upfront. We are open to opportunities to sell our remaining Regina assets over time at compelling pricing metrics. As we recycle capital from these assets, our capital allocation priorities remain intact. We plan to reinvest the proceeds towards completing our existing development pipeline, executing on our solar program and contributing towards our private capital partnerships, which are all accretive from a total return standpoint. To date, in 2024, we have completed over $100 million of acquisitions in the Dream Summit Venture. We continue to focus on growing our industrial portfolio in strategic Canadian markets such as Toronto, Montréal, Calgary, and we are starting to explore opportunities in Vancouver. Our business is well funded to pursue these initiatives on a leverage neutral basis through existing liquidity and retained cash flow. While the current environment is less certain compared to 24 months ago, all of our growth drivers remain intact. The demand for high quality urban industrial space remains solid and structural supply demand drivers are intact. We expect that our results for 2024 will be consistent with previously communicated outlook and we continue to expect reacceleration of same-property NOI and FFO per unit growth into 2025. I will now turn it over to Lenis to discuss our financial highlights.

Lenis Quan: Thank you, Alex. We’re pleased with our solid financial results for the second quarter. We reported diluted FFO per unit of $0.25 for the quarter, driven by solid comparative properties NOI growth of 5% and over $2.5 million of net fees generated from our property management and leasing platform. Our NAV per unit at quarter end was $16.73, a slight increase compared to the prior quarter, primarily due to leasing activity driving higher market values in Canada, partially offset by higher cap rates in Europe. We continue to actively pursue financing initiatives to optimize our cost of debt and maintain a strong and flexible balance sheet with ample liquidity. During the quarter we completed the refinancing of our $200 million Series B floating rate debentures with a new €153 million unsecured term loan. The new term loan bears interest at a rate of 4.01%, approximately 50 basis points lower than the maturing rate. The Canadian equivalent is approximately $225 million and the incremental $25 million of financing proceeds will be earmarked to repay our European mortgage maturing at the end of August, our last debt maturity for the year. We ended Q2 with leverage in our targeted mid-30% range and net debt-to-EBITDA ratio of 8.1 times. With total available liquidity of approximately $600 million, we retained sufficient capital to execute our strategic initiatives, including funding our development pipeline and contributing to our private capital partnerships. In July, we extended the maturity date of our $200 million unsecured term loan by two years to match the associated interest rate swap from February 2026 to March 2028, further enhancing our debt maturity profile. No changes were made to the rate or any other substantive terms. Having completed these financing initiatives, we have effectively addressed all of our debt maturities for 2024. The debt markets have become more constructive and recent changes in the underlying rates have resulted in our marginal cost of debt declining by over 50 basis points since the last quarter. Our outlook for the remainder of the year remains intact and in line with our previously issued guidance on comparative properties, NOI and FFO per unit. We continue to expect that our occupancy will trend upwards by the end of 2024 based on the new leasing pipeline and timing of lease commencement for the third quarter, we expect in place occupancy to decline slightly while committed occupancy to remain largely flat to slightly up compared to Q2 2024. Looking beyond 2024, we expect that the pace of organic growth within our portfolio will accelerate and will continue to exceed the pressure from higher interest rates, translating into sustained FFO per unit growth. I will turn it back to Alex to wrap up.

Alexander Sannikov: Thank you, Lenis. We look forward to continuing executing on our targets and focus on creating value for unitholders. We will now open it up for questions.

Operator: [Operator Instructions] Our first question is from Kyle Stanley with Desjardins. Please go ahead.

Kyle Stanley: Thanks. Morning, guys. Lenis, I think I just missed kind of what you were saying on the occupancy side right at the end. So I just want to kind of clarify what your confidence level is on kind of regaining occupancy into year-end in order to set up for 2025, or if you can provide, I guess, the expected kind of exit occupancy for the year?

Alexander Sannikov: Thanks. Thanks, Kyle, and good morning. As we previously commented in May, we were expecting at the time that occupancy would decline into the mid-year and recover back up to the – or the starting point for the year towards the end of 2024, and our expectations remains intact. So we expect to see in place occupancy slightly down for Q3, committed occupancy to be flat, maybe slightly up in as of September, and trend back up into Q4 towards the end of the year. I think one thing to point out on occupancy is that our portfolio is fairly diverse when it comes to rents that we generate for every square foot. So, for example, 400,000 square foot of vacancy currently is in Spain. Roughly 1% of the total portfolio. Rents in Spain, both on a net basis and a gross basis, are about a quarter to a third of what they are in the GTA. So if you translate that vacancy into dollars, that’s equivalent to about 100,000 square feet or 150,000 square feet in the GTA. So while we want to lease all of that space, some space contributes far greater than others.

Kyle Stanley: Okay, I appreciate that context. It’s very helpful. I think you kind of gave your outlook on the current state of the market and maybe not seeing availability peak for a few quarters. I mean, this past quarter, as kind of for the broker reports, we did see absorption in Canada was quite soft. Would you say, in your view, we’ve kind of -on a market basis, peaked on the negative absorption front? Or would you expect maybe some more significant negative absorption into year-end before the inflection point?

Alexander Sannikov: Yes, in Canada. We measure availability rate, which includes subleasing activity. As we commented earlier, we expect that there’s going to be more subleasing activity in the third quarter, potentially the fourth quarter, based on at least a pipeline that we see in our portfolio and conversations with occupiers. And so as that subleasing activity hits the market, it will impact the reported net absorption and so we expect availability to trend slightly upwards. We’re not really seeing significant pressures on vacancy, so vacancy will likely remain consistent. It might trend downwards as some of the new stock gets leased, but the overall availability will likely trend upwards just based on the subleasing activity.

Kyle Stanley: Okay, that makes sense.

Alexander Sannikov: As we said, we expect that for the next quarter or two. We don’t expect that this is going to be a long lived trend.

Kyle Stanley: Okay, thank you for that. Maybe just switching to Europe quickly for a second. How are you thinking about the European portfolio today? Would you say you’re looking to expand it? Or would you consider monetizing some assets? Maybe given what seems like a bit of an improving transaction environment?

Alexander Sannikov: We are generally encouraged by what we see in Europe from supply demand perspective. We are seeing solid demand for urban, well located assets and so we continue to look for opportunities to add to that segment of the portfolio. We wouldn’t be opposed to maybe recycling capital out of some of our larger bay products. We wouldn’t be opposed to recycling capital out of markets such as Spain over time. There’s nothing imminent in the pipeline, but we’re definitely exploring opportunities like that.

Kyle Stanley: Okay. Okay, thank you. And just a quick last one. What are your views on a unit buyback program today? Just given the stock is trading at a pretty significant discount to book. So curious on how you’re thinking about that amongst all of your other capital initiatives? Thanks.

Alexander Sannikov: Thank you for that Kyle. So we commented on that earlier this year, and the commentary generally stands that we have other immediate priorities for capital, primarily our development program. As we finish that, and as we look at availability of capital from either retained cash flow or sales proceeds, then we will look at all opportunities to deploy capital, including share buybacks. But for the foreseeable future i.e., next quarter or two, we’re going to focus on finishing a development program with the capital that we have.

Kyle Stanley: Okay, thank you very much. I’ll turn it back.

Operator: The next question is from Mike Markidis with BMO Capital Market. Please go ahead.

Mike Markidis: Thank you. Good morning everybody. Just starting off here. Alex, you mentioned that sublet activity in the market was picking up, but you also said that you’re seeing it in your own portfolio. I was just wondering if you could give us a little bit more context there in terms of where you might be seeing it and how material that may be, because it’s not in your reporting occupancy figures.

Alexander Sannikov: I would say picking up. I just want to clarify that. I think we just see a little bit more on the horizon. Obviously, we’ve seen probably most of it already in the market stats, but we’re seeing probably a little bit more in the pipeline. So that’s kind of informs our outlook for the broader market. As far as what we see in our portfolio, we have a couple of pockets where we have third party logistics users who have maybe taken up more space than they currently need, who are looking to optimize their footprints. And it’s consistent with what has been driving availability rates going up in the market, or negative absorption, as Kyle referred to.

Mike Markidis: Got it. Thanks. Okay. And then just on the in-place occupancy, I guess you guys started the year at 95.9%. We’re at 95% now. You think it maybe comes in a little bit, but you end the year, if I hear you correctly, sort of back where you started. So I guess rough math that would put you at an average of 95.50% or maybe slightly lower for this year, based on your comments on reacceleration in 2025, sort of what kind of average occupancy increase are you expecting? Is it flattish to this year? Is it higher? Because I know you’re getting high single digit on in-place rents. So just curious on your thoughts there.

Alexander Sannikov: Look, we’re not obviously issuing guidance right now for 2025. Our portfolio generally operates in the kind of mid-to-high 90s occupancy and has operated over multiple cycles. And so we don’t expect the average run rate occupancy to change dramatically over time. And so our outlook for near medium term for occupancy is in that range. In addition to that, our development assets will contribute to the occupancy and these assets are let on long term basis. So that will contribute to the overall occupancy primarily into 2025.

Mike Markidis: Right. Okay. And then on a same-property basis, I guess just given your comments, you don’t actually need to see you’ve got a down year this year in terms of average occupancy, but next year, even if you’re consistent with this year, we should see same-property NOI growth pickup.

Alexander Sannikov: Absolutely. And thank you for pointing this out. And this has been the theme for 2024 that we’ve also tried to communicate to the market that our business is able to produce mid single-digit, like-for-like NOI growth despite occupancy, downward occupancy pressure, and as occupancy stabilizes or kind of reverts back to me combined with spreads that we’re achieving on releasing and embedded contractual rent steps, we should see reacceleration in these metrics.

Mike Markidis: Okay, thanks. Last one for me before I turn it back. Just on the increased demand you’re seeing from occupiers and users and the disposition success that you’ve had year-to-date. Could you say that VTBs [ph] are required to get these over the finish line, or is that sort of something that you’re looking to extend just in order to minimize some of the dilution as you reinvest the proceeds?

Alexander Sannikov: When it comes to user sales, not at all. We are actually seeing no interest from these groups in vendor financing. They frequently have access to very efficient financing, either for the real estate itself or at the business level. So these are typically all cash transactions. And as we commented before, we’re seeing strong pricing metrics there.

Mike Markidis: Okay, so would this be a one off? Or was it a DIR? Was it your choice to do the VTB? I mean, ultimately is your choice, but was it driven by you or by the buyer in this instance?

Alexander Sannikov: So there are two types of dispositions. So there’s the Regina sale where we did the VTB, and that was a combination of us being able to invest the cash flow and the vendor – the buyer looking for shorter term financing. So it was, if you will a win-win. But that’s specific to this Regina portfolio. The user sales that we commented on as well in our prepared remarks are in addition to that. So there’s about $100 million of user sales that we are pursuing or have closed on, both on DIR’s balance sheet and in our private ventures. And there’s no vendor financing in any of these deals.

Mike Markidis: Got it. Okay, so the $100 millions on top of the Regina portfolio. Got it. Okay. All right, thanks.

Alexander Sannikov: It’s not all on DIR’s balance sheet, though some, that is not private ventures.

Mike Markidis: Understood. Thank you.

Operator: The next question is from Gaurav Mathur with Green Street. Please go ahead.

Gaurav Mathur: Thank you, and good morning, everyone. Just on the current in-place occupancy pressure, can you provide some more color on what kind of tenant is driving this in Canada versus Europe? And then, as you expect the occupancy to move up in the fourth quarter again, what tenant type is driving that on both sides of the pond?

Alexander Sannikov: We are continuing to see pretty broad-based trends when it comes to demand. We’re seeing some manufacturing users active. Traditional distribution needs, continuing to see strong activity from food and beverage sector, which is significant for us. As you know, third-party logistics users are on balance giving back space, although we continue to see these groups active both on new leasing front and on called subleasing front or in discussions to give back space. So that’s generally what we see. As far as the occupancy outlook, it is informed by active discussions that are taking place, LOIs, that are being exchanged, et cetera, et cetera.

Gaurav Mathur: Okay, thanks. And just lastly, you have about 870 [ph] million of euro-denominated debt that’s coming due through 2024 and 2025. Now that’s at a quite a low weighted average interest rate. How are you thinking about the refinancing mix ahead and what sort of spreads are you currently seeing in the market?

Lenis Quan: Thanks. So the debt maturities for 2024 have been addressed and for 2025 we’ve included in our disclosures those are maturing towards the end of the year. Obviously our beyond 2024 outlook for FFO growth is informed by this as well, because as I mentioned, they don’t mature till the very end of 2025 being November and December. The current – our current outlook is, and we’ll provide more information. We have an Investor Day coming up in October where we will provide some more color regarding our outlook beyond 2024. But current interest rates, as we’ve mentioned in our prepared remarks, have come down about 50 basis points or so in the last quarter. We’re currently looking at euro equivalent debt in and around 4% for five-year terms, which is typically what we would refinance at. So that’s what the typical rates that we’re seeing today are. But again, these ones don’t roll till the end of 2025. And we’re just focused on our organic growth drivers. We’re continuing to grow NOI because we do believe that the growth from our organic on our operations will outpace the pressures from higher interest rates.

Gaurav Mathur: Okay, thank you for the color. I’ll turn it back to the operator.

Operator: The next question is from Matt Kornack with National Bank Financial. Please go ahead.

Matt Kornack: Hey guys, just with regards to the end users that are buying assets, can you give us a sense as to the depth of that market and what type of assets are they? Are these tenants typically looking to occupy and in what geographic locations?

Alexander Sannikov: We — thank you for this question, Matt. We were generally encouraged by the depth that we’re seeing. The $100 million that we commented on are active discussions or advanced discussions. Rather, there are many other discussions taking place. We generally see these groups active in Toronto, Montréal with more activity, perhaps in Toronto. And these buyers are focusing on mid-sized freestanding assets. They don’t have to be newer, can be older, vintage, functional, well located, but freestanding assets are obviously preferred without other tenants.

Matt Kornack: Okay. Makes sense. And then on your kind of outlook for occupancy, I understand you’re not providing guidance, but you noted mid to kind of high 90% occupancy historically. Should we infer that kind of 97% or so is where you think this portfolio should be on a stabilized basis? Or will it just fluctuate between those two guidelines with rent growth being kind of the ultimate goal?

Alexander Sannikov: Yes. So if you look at our disclosure, over the last 10 years, 12 years, the portfolio has averaged 96%, 97% consistently. And we don’t expect that this environment should fundamentally change that trend. If you look at Summit’s historic disclosure, which is also a significant component of what we operate, this is consistently in that range, maybe a little bit higher in the kind of 98% range over the long-term for Summit, but we expect it to settle in that 96%, 97% again, as we are prioritizing rents across the business.

Matt Kornack: And then on the Montréal property near the port, appreciate the update there. Can you give us a sense? I don’t know if you have these numbers or if you’ve thought about it, but the capital deployment that would need to go into that repositioning and a potential return that you’d be getting on that capital.

Alexander Sannikov: We will provide an update on that perhaps next quarter or kind of towards the end of the year. Perhaps premature to comment on that specifically, but the idea for this site is to activate the land holdings that we have and position the assets to benefit from mid-day demand that we continue to see across the board. As we have previously commented, Montréal is a small market compared to Toronto, and therefore, what we see is that in Toronto, most of the demand that we currently see is in that 50,000 [ph] square foot to 150,000 square foot range. It is smaller in Montréal, so call it 25,000 square foot to 75,000 square foot. And so we want to make sure that the assets is well positioned, vis-à-vis the demand patterns that we see. So we would want to make sure. Just we want to make sure it’s multi-tenant, multi tenantable as we pursue this intensification and refurbishment.

Matt Kornack: That makes sense. And then just the last one, quickly for me, and I don’t know, Lenis or Alex, you can answer it. After you get through this year of development spend, I think next year you probably generate in the order of $90 million according to our model of free cash flow. Is there a preferred destination for that? Or are you looking at Dream Summit additional development and buybacks kind of equally…

Lenis Quan: Yes. We’re looking at all of the opportunities available to us in terms of deploying capital. And market environment is highly dynamic. And so it’s hard to comment on the capital allocation priorities six months to 12 months out. But we will keep updating investors on how we’re thinking about that every quarter.

Matt Kornack: Fair enough. Thanks guys.

Operator: The next question is from Brad Sturges with Raymond James. Please go ahead.

Brad Sturges: Hey, good morning. I guess a lot of discussion around the occupancy, and I apologize if I missed it. But based on what you’re seeing today, what’s your expectations around market rents and Toronto, Montréal deal. I guess there has been a little bit of a pullback in that. But how are you thinking about where market rents go? And would that narrow the rent mark-to-market opportunity a bit from, albeit pretty healthy levels till today.

Alexander Sannikov: Thank you, Brad. We expect that market trends that we are achieving on our leases will remain consistent with our disclosure. As you know, we measure market rents for our assets differently compared to what you see from market reports. So when you look at market reports, what’s measured at market rent is the asking rent for available space. When we report market rents in our MD&A, these metrics reflect weighted average market rents for every building in our portfolio. And as you would have seen from our disclosure, market rents remained largely consistent from Q2 — from Q1 to Q2 and throughout the year, which is perhaps different compared to what you see from market reports from the brokerage community. And this is a reflection of how these market rents are measured. And so we expect for the next quarter or two that market rents will remain consistent as we measure it. So within our MD&A reporting, and in the near medium term, we continue to expect upward pressure on rents as kind of demand patterns stabilize, as subleasing activity normalizes. And as we continue to see supply vacuum sort of building in the market into 2025 and 2026.

Brad Sturges: And building on that, based on what you’ve achieved to date on the development, leasing, that, plus, I guess, your expectations for demand to recover next year or in the coming quarters, I guess you’re still pretty comfortable in achieving your targeted or your estimated development yields that you disclosed again this quarter.

Lenis Quan: Yes, that’s exactly right. And the leasing that we’ve done with about 0.5 million square feet that we’ve announced that are either done or very closely done, these rents and yields are consistent with our disclosure.

Brad Sturges: Okay, just maybe switching gears, I want to touch on. It sounds like on the acquisition side you’d be open to looking at opportunities in Vancouver. I just wanted to get some thoughts on, I guess, your return expectations there, or the opportunity set versus some of the existing markets like Toronto, Montréal, that you’re already in today.

Alexander Sannikov: We think Vancouver is a great market for industrial. It has significant barriers to entry from a new supply perspective and it’s certainly a key market in Canada. From a total return perspective, we expect to see comparable total returns to other markets where we are already active. The composition of total return may be slightly different in Vancouver compared to a market like Calgary or the GTA, but overall, on a total return basis, we expect it will be consistent with other markets.

Brad Sturges: I assume you’d be open to doing it, I guess, through individual asset purchases. But is there a medium term, long term target in terms of if you do enter the market, what’s the appropriate scale to operate there in Vancouver efficiently?

Alexander Sannikov: The assets that we have on our radar are less management incentive in the traditional sense. So these are not, let’s say, small bay, multi-tenant assets that require constant presence in the market. So as we think about entering the market, we are definitely aware of operations that we’ll need to maintain there and how we would run the assets. So the assets that we are looking at are well positioned in that regard and will create a good starting point for us to build operating presence in the market.

Brad Sturges: Okay, thanks a lot. I’ll turn it back.

Operator: The next question is from Himanshu Gupta with Scotiabank. Please go ahead.

Himanshu Gupta: Thank you and good morning. So can you comment on the leasing done in Ontario in Q2? I mean, was there anything related to 2025 expiries?

Alexander Sannikov: There’s been a — thank you, Himanshu. There’s been a couple of deals done for late 2024 or 2025 in Ontario. We’ve done a large deal in Quebec relating to 2025 for about 400,000 square feet. Generally speaking, six months to nine months out, with exception of that Quebec lease.

Himanshu Gupta: Okay. And Alex, I think you mentioned also 180,000 square feet done at 200% spread. I mean, is there anything specific to this property to get that kind of rental spread?

Alexander Sannikov: Nothing specific other than the expiring rent was relatively low. And we were able to capture the market rent that we expected to achieve, which is in the high teens range, and that resulted in the spread. And as we commented before, spreads will fluctuate from one quarter to another based on expiring rents.

Himanshu Gupta: Okay, fair enough. And then you know, the broader market and thanks for the discussion so far. So should, do you expect leasing demand to recover by the end of the year or more like next year? And what could drive that, if the confidence is, demand coming back in Q4?

Alexander Sannikov: There’s a number of ways to measure demand. And so one way to measure demand is just the level of activity. And so we generally see levels of activity are pretty healthy. We continue to see RFPs, we continue to see tours. And so there’s lots of activity in the market. What’s creating pressure and availability is primarily the subleasing activity. So we don’t expect that that will last for very long. As we commented before, we are aware of some pending subleases that are not captured in the market stats. And so, extrapolating from that, we expect availability to trend upwards into Q3, perhaps slightly into Q4. And some of the demand that we’re talking about, the activity when it comes to tours or RFPs, is taking a bit longer to materialize. Decisions are taking longer. And so we expect that it will kind of reach an equilibrium into Q4 where groups will start making decisions and again, subleasing activity will normalize or come down to effectively zero. And then we expect kind of availability rates to trend downwards from there. Again, we’re not seeing new supply on the horizon, so we don’t expect new supply will be a big driver of availability into 2025. So it really will come down to existing availability and pressures from subleases and versus pressure from new groups looking for space.

Himanshu Gupta: Got it. Okay. And then, subleasing, is it mostly a GTA problem? Or you’re seeing in like Montréal as well?

Alexander Sannikov: We’re seeing that across the board. And I would say that we see that in the GTA seed Montréal a little bit in Calgary. So it’s not a GTA phenomena per se.

Himanshu Gupta: Okay, thank you. So just turning to FFO guidance, mid single-digit growth. Lenis, like what effects do you assume for and do you already assume like occupancy recap in Q4 in your FFO?

Lenis Quan: Yes. So as we commented, I think all those factors would be baked into our expectations. So in terms of the FFO, I mean, if you want to be more precise, I think we would say consensus is probably a good base case estimate.

Himanshu Gupta: Okay. And so FX, what about the EUR/CAD assumption in your model?

Lenis Quan: We’re assuming it’s close to current levels, maybe a little bit stronger CAD.

Himanshu Gupta: Okay. And it includes rent from the, from Courtney Park and Balzac as well. Whatever the leasing done so far.

Lenis Quan: That’s right. When they come online during Q3. As they start coming online during Q3.

Himanshu Gupta: Okay. Thank you so much. I’ll turn it back.

Alexander Sannikov: Thank you.

Operator: The next question is from Sam Damiani with TD Cowen. Please go ahead.

Sam Damiani: Thanks. Good morning, everyone. I guess Alex or Lenis, the comment about NOI growth picking up and overcoming interest expense to produce FFO growth in 2025. I don’t know how much more specific you can get, but would you extend that comment into 2026 as well in terms of FFO growth being positive?

Alexander Sannikov: Thank you, Sam. Generally we would. And that’s when we say that what we’re working on is ensuring that NOI growth outpaces pressure from interest expense line. We’re not just focusing on 2025 as you know, we’re not going to see significant pressure or significant additional pressure into 2025 from interest expenses going up because our maturities are in November and December. But that comment is primarily aiming at 2026.

Sam Damiani: Okay. And again, thank you for the sort of detail on the plans on the Montréal Port. Beyond that, do you anticipate adding more to the active development pipeline from a greenfield perspective in the near term?

Alexander Sannikov: Thank you for that follow up. We are looking at development opportunities more infill mid-Bay assets in the GTA for the account of some of our private ventures. We also have our site in Brampton that is in pre-construction phase right now and we are advancing pre development work there. So we will evaluate towards the end of the year whether we will start going vertical on that site in 2025. Again, that site sits in one of our private ventures.

Sam Damiani: Perfect. Thank you and I’ll turn it back.

Operator: The next question is from Pammi Bir with RBC Capital Markets. Please go ahead.

Pammi Bir: Thanks. I just wanted to come back to the market rent commentary and I guess the earlier commentary on the same property NOI growth accelerating next year. Does that comment about next year’s acceleration of organic growth? Does that assume stable market rents or possibly moving up?

Alexander Sannikov: I’d assume stable market rents Pammi.

Pammi Bir: Okay. And then I’m not sure if you provided this, but roughly how much of your portfolio is, is being subleased or on the sublease market at the moment?

Alexander Sannikov: We have not commented on that specifically. It’s not a significant portion, but we haven’t commented on that specifically and we wouldn’t have that metric readily available. We can come back to you or come back to the market next quarter if it’s a material metric ton for investors to take into account.

Pammi Bir: I’m just curious if you think it’s maybe roughly in line with where broader market levels are more or less.

Alexander Sannikov: Yes. The subleasing is about a third to 40%, depending on the market of the overall availability and in our portfolio. In many cases, when occupiers look to get rid of the space and subleasing is important for them to just to maintain financial health of the underlying business, we would rather engage in proactive termination discussions against the termination penalty and then get the space back directly so we can then benefit from the mark-to-market and achieve better rents. As you know, in Canada, the standard lease does not allow for occupiers to profit from subleasing. So it creates sort of a bit of imbalance between in terms of the objectives that our occupiers have versus what we have. So yeah, we would prefer to work with the termination practice terminations of excess space against the termination penalty. And this is partially what’s reflected in our occupancy for the year, where we’ve worked with some of our occupiers to take back space against either a penalty or extending the lease on the remaining premises, things like that. We’ve pursued these kinds of options for some of our. Primarily in our private ventures. We haven’t done a lot within the GIRs wholly-owned portfolio. We’ve had a few cases within our private ventures.

Pammi Bir: Got it. That’s helpful. Just on the development pipeline. What’s your sense of getting the balance of the Balzac properly leased up? And then I’m curious what type of interest you’re getting on the Cambridge site as well, beyond, I think, the 15% that’s already done.

Alexander Sannikov: So, starting with Cambridge, so we are pursuing a multi-tenant strategy there. We leased one pocket already, and we are in discussions with a number of occupiers who are looking for about 100,000 square feet on average. And so it will take about four of those deals to materialize for the property to be fully leased. We are encouraged by the level of activity and we think that our properties very well positioned relative to other options that are available in that node. From location perspective and just the physical attributes of the building perspective, it offers obviously older modern specs, 40-foot clear height and excess trailer storage, and various other attractive attributes. When it comes to Balzac, there are two development projects, as you know. So for the 350,000 square foot project on the 20-acre site, we’ve seen strong activity at, call it that, $12 range rents. We are targeting users ranging from 26,000 square feet to 100,000 square feet and this is where we’ve seen most of the demand. So with the conditional deals that we commented on earlier and in our press release, the front building is fully leased and the back building has about 80,000 square feet available. And so we’re working with a number of occupiers to fill that. Again, the building was designed to be multi tenanted and demised and so that’s the demand we’re responding to. We generally are seeing very healthy levels of activity in western Canada. We’re not seeing that activity to translate into significant pressure on rents just yet because availability is a kind of touch higher in Calgary compared to let’s say Toronto. But the sheer level of demand is relatively healthy. And for our larger development we are in a very advanced discussion with one user to take one of the buildings fully and the second building is available. But we expect that to be leased before or shortly after completion.

Pammi Bir: Got it. That is a very good color. Thanks Alex. I will turn it back.

Operator: [Operator Instructions] The next question is from Sumayya Syed with CIBC. Please go ahead.

Sumayya Syed: Thanks. Good morning. Just following firstly on the occupancy discussions, obviously the drop there was as expected, and you did talk about demand from various user type, but would it be fair to say that that drop in occupancy was more of a meaningful impact to your larger assets versus the smaller and mid based stuff?

Alexander Sannikov: Thank you for that follow up, Sumayya. Yes, I think that’s a fair observation. We’ve seen some of the decline in occupancy being attributed to maybe a couple of larger spaces. In many cases these spaces are demiseable. And so we will work to reconfigure them to then respond to the demand that we see in the market.

Sumayya Syed: Okay, thanks for that. And then just secondly, notice that the lease incentives jumped sequentially in year-on-year a bit this quarter. Looks like some early renewals were the [indiscernible], but how should we think about that figure going forward?

Lenis Quan: Yes. Thanks, Sumayya. So yes, that’s correct. The increase was due to some commissions payable on earlier renewals, and some larger deals. So that’s going to be a little bit lumpy, I would say. You know, just generally speaking, overall leasing costs on deals are relatively in line. They may have ticked up slightly, but not enough to offset, healthy net — healthy growth in the starting rents and NERs as well.

Sumayya Syed: Okay, thank you. I will turn it back.

Operator: This concludes the question-and-answer session. I’d like to turn the conference back over to Mr. Sannikov for any closing remarks.

Alexander Sannikov: Thank you, Operator. Thank you everyone for your interest in Dream Industrial REIT. We look forward to reporting back next quarter.

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