Dream Industrial Real Estate Investment Trust (DIRUN) Earnings Call Transcript & Summary

Good morning, and welcome to the annual meeting of unitholders for Dream Industrial REIT. Your host for today's call is Ms. Vincenza Sera, Chair of the Board of Dream Industrial REIT. Ms. Sera, please begin.

Thank you, and good morning, everyone. As this meeting is held virtually via live audio webcast, for the purposes of the meeting today, voting on all matters will be conducted by electronic ballot. Registered unitholders and duly appointed proxy holders will be asked to vote on each business item. At any time during the meeting, registered unitholders who have not already provided voting instructions or appointed a proxy holder that are logged on and wish to vote their units may do so by clicking on the Vote Here button on your screen and following the instructions provided. Proxy holders may also vote now using the same method. The polls will remain open until just before the conclusion of the formal business of the meeting. If you voted units prior to the start of the meeting, your votes have been received by the scrutineers, and there is no need to vote those units during the meeting unless you wish to revoke or change your vote. We have been advised by Broadridge Financial Solutions, Inc. that based on the proxies already deposited with them, enough votes have been cast to carry each of the motions. [Operator Instructions] We will respond to the questions received on the matters of formal business just before closing the polls for voting. Questions that are not received by that time or which do not relate to the formal business of the meeting will be addressed in the question-and-answer session following the conclusion of the meeting. If unitholders or proxy holders wish to ask questions about the REIT's business, you may do so at any time during the meeting or during the question-and-answer session following the conclusion of the formal business of the meeting. We will now proceed with the formal portion of today's meeting. To expedite the formal part of the meeting, I will move, and Shannon Macri will second all motions. I will act as chair of the meeting. Robert Hughes will act as secretary of the meeting. For purposes of this meeting, I appoint Leanne Branston and Rosemary Colakic of Broadridge Financial Solutions, Inc. to act as scrutineers to compute the votes of any polls taken at this meeting and to report thereon. The Board of Trustees fixed May 21, 2020, as the record date for determining unitholders entitled to vote at this meeting. An affidavit has been delivered attesting to the mailing of the notice of availability of proxy materials and the voting instructions form or form of proxy. Our circular and other meeting materials were made available through the notice and access system. I would ask the secretary to place the affidavit before the meeting and to keep the affidavit with the corporate records. I am pleased to announce that there are present, by proxy, a sufficient number of the voting units of the REIT to constitute a quorum. Accordingly, this meeting is duly called to order and properly constituted for the transaction of business. After our formal business is concluded, our CEO will provide a few brief remarks, and then there will be an opportunity to ask questions. Please hold questions that do not relate to the formal business of the meeting until that time. The first item of business is the presentation of the REIT's 2019 annual report, which contains the REIT's audited financial statements for 2019. I note that the secretary has placed before the meeting a copy of the 2019 annual report. The next item of business is the election of trustees. The 8 trustees to be elected by the unitholders of the REIT shall hold office until the close of business of the first Annual Meeting of unitholders of the REIT following election or until their successors are elected or appointed. The 8 nominees are: R. Sacha Bhatia, Michael J. Cooper, J. Michael Knowlton, Ben Mulroney, Brian Pauls, Vicky Schiff, Sheldon Wiseman and myself. Each of the persons nominated has confirmed that he or she is prepared to serve as a trustee. Mr. Hughes, have we received any other nominations?

No, we have not.

Since there are no other nominations, I declare the nominations closed, and I move a motion to elect the trustees. The next item of business is the appointment of auditors. The Audit Committee and the Board of Trustees have recommended the reappointment of PricewaterhouseCoopers LLP Chartered Professional Accountants as auditors. I move that PricewaterhouseCoopers LLP be appointed auditors of the REIT until the next Annual Meeting of unitholders and that the Board of Trustees be authorized to fix their remuneration. May I have a seconder?

I second the motion.

Thank you. We will be closing the polls for voting momentarily. Before we do so, I will ask Mr. Hughes whether we have received any questions relating to the formal business on our agenda today.

No, we have not.

Now that everyone has had an opportunity to vote, I now declare the polls for the 2020 Annual Meeting of unitholders of Dream Industrial REIT closed. I have been advised by the scrutineers that a significant majority of the proxies received by management prior to the meeting have been voted for the election of trustees and the appointment of auditors. I therefore confirm that the 8 nominees for election as trustees have been elected as trustees and that the motion to appoint the auditors has carried. I would ask that the scrutineers compile the report regarding the results of voting on all business matters and results will be published on SEDAR and by press release later today. The formal items of business, as set out in the notice of the meeting, have now been dealt with. As there is no further business to come before the meeting, I declare the formal part of the meeting to be concluded. I now invite Mr. Brian Pauls, CEO of the REIT, to provide a few brief remarks. After Mr. Paul's remarks, we will have a question period. [Operator Instructions] We will answer as many questions as time permits. Mr. Pauls, please go ahead.

Thank you, Ms. Sera, and good morning, everyone, and thanks for joining us today. I would like to start off by expressing my gratitude to our Dream Industrial team for keeping our tenants and building safe and navigating our business through the challenging environment brought on by the COVID-19 pandemic over the past few months. It has been an unprecedented and challenging time. However, there are many positive signs for industrial real estate as supply chains and economies begin to reopen in our markets. Industrial real estate will continue to benefit from several permanent demand drivers, including an acceleration in e-commerce penetration and the trend toward carrying higher inventory levels. It has been reported that the health crisis, in just 4 months, has led to levels of e-commerce penetration that would have taken 4 to 6 years under normal circumstances. Moreover, in response to the shortage of goods, from food to toilet paper, witnessed during the early days of the crisis, retailers are moving towards carrying higher inventory levels and manufacturers are taking a closer look at reshoring their production back to developed economies. This will also create significant demand for industrial space. According to Colliers International, the push towards supply chain resilience would lead to an additional 750 million to 1 billion square feet of industrial demand in the U.S. alone. Our portfolio is very well positioned to take advantage of these trends. We have significant scale in the strong industrial markets across Canada, the U.S. and Europe. All our properties are strategically located close to major population centers and are well suited to meet regional and last-mile distribution needs. The construction pipeline of urban logistics assets remains very limited due to land and development constraints, and we are very confident in the outlook for rental rate growth and asset values in our portfolio over the long term. Currently, 45% of our annual rent is from tenants that support e-commerce activities, and with the bulk of our leasing activity driven by e-commerce users, this number will increase even further. Our portfolio diversity is one of our key strengths with an attractive mix of small and large tenants that support over 15 distinct sectors of the economy. As of the first quarter of 2020, our asset value is nearly double that of a few years ago at just under $3 billion, and our portfolio spans 26 million square feet across North America and Europe. We are very proud of the portfolio that we have built and have been allocating capital towards high-quality, well-located and functional real estate that will continue to deliver cash flow and NAV per unit growth over the long term. At the same time, we have been selling lower quality assets in noncore markets that do not meet our return threshold. Last year, we sold our entire Atlantic Canada portfolio for just over $270 million with proceeds being deployed towards acquisitions in the Greater Toronto area, Montreal and Europe. This transaction allowed us to recycle capital from a more capital- and management-intensive smaller bay portfolio into larger-bay, newer generation assets in the tightest industrial markets in North America and Europe and will lead to stronger cash flow and NAV growth. The focus on quality has resulted in a 13% increase in average clear height in our portfolio, 400 basis point improvement in NOI margins and an 80 basis point decline in our average cap rate. Looking forward, we will continue to focus on upgrading quality by selective selling underperforming noncore assets and redeploying proceeds in the mid- to large-bay assets that are less capital and management intensive. Earlier this year, we announced our European expansion strategy, which is an unprecedented opportunity for the REIT to add scale and upgrade portfolio quality with significant economic benefits. E-commerce penetration in most European countries are lower than North America currently, and we expect this gap to narrow, supported by dense population centers and strong transport infrastructure in our target European markets. This will boost industrial fundamentals even further and make our portfolio more valuable. We have immediate access to Dream's European platform, adding local expertise, deep local relationships with tenants, lenders and brokers. Through these relationships, we have underwritten more than $1 billion of assets this year in Europe alone. We closed nearly $270 million of acquisitions in Q1 and currently have an additional $100 million of assets in advanced or exclusive negotiations. Our European asset base allows us to access debt at rates that are currently 150 basis points lower than North American financing rates. Over the next few years, we are aiming to optimize our capital structure such that most of our debt would be euro denominated, which allows us to hedge our euro currency exposure while reducing our overall cost of debt by over 40% and boosting our return on equity by over 15%. In conjunction with improving the overall quality of our portfolio, we have focused on increasing the safety and flexibility of our balance sheet, which this year is the strongest that it's ever been. Our current leverage is below 30%, which is down 20% since year-end 2017. With the closing of a new USD 250 million unsecured facility, we retained $400 million of liquidity between cash on hand and borrowing capacity on our revolver. Our unencumbered asset pool totals $1.1 billion and provides added liquidity, positioning us well to pursue an investment-grade credit rating in the near term. In closing, DIR is well positioned to take advantage of future opportunities in the industrial real estate market, which, along with our strong balance sheet, high-quality portfolio and disciplined investment strategy, will allow us to continue to create long-term value for DIR unitholders. We'd now be happy to take any questions.

Mr. Pauls, we have received no questions. You may conclude the meeting.

Thank you, everyone, for joining us. That concludes today's meeting.