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

Good morning, ladies and gentlemen. Welcome to the Dream Industrial REIT First Quarter Conference Call for Wednesday, May 4, 2022. 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'll have a question-and-answer session. [Operator Instructions] Your host for today, Mr. Pauls, CEO of Dream Industrial REIT. Mr. Pauls, please go ahead.

Good morning, everyone. Thank you for joining us today for Dream Industrial REIT's 2022 first quarter conference call. Speaking with me today is Lenis Quan, our Chief Financial Officer; and Alex Sannikov, our Chief Operating Officer. Dream Industrial has had a solid start to 2022, and our strategic initiatives have allowed us to continue to post record operating and financial results. We reported a 16% increase in FFO per unit for the quarter, led by strong CP NOI growth, lower cost of debt and a robust pace of capital deployment. Our pace of CP NOI growth rose to a new record high of 10% in Q1, with Ontario leading the year-over-year growth at 18%, followed by Quebec with a 14% year-over-year growth, both driven by solid rental rate and occupancy growth. We have completed approximately $227 million of acquisitions since the beginning of 2022 with an additional $500 million of assets under contract or in advanced negotiations. We have advanced our development pipeline with over 700,000 square feet of projects currently underway and an additional 1.9 million square feet of projects at our share that are in advanced planning stages. Subsequent to the quarter, we formed a $1.5 billion joint venture with a leading sovereign wealth fund to further scale our greenfield development program in the Greater Toronto Area and Greater Golden Horseshoe Area. We are very excited about this opportunity as it will allow us to further upgrade our portfolio quality and significantly increase our presence in these markets. Industrial fundamentals across all of our operating markets have remained strong, and we are in a position to outperform in each of our markets. In Canada, we continue to build on our attractive market positioning in our core markets of the GTA, GGHA and Greater Montreal Area through high-quality acquisitions, as well as executing on our development and intensification pipeline. This year, we have acquired 4 well-located assets in the GTA totaling just over 400,000 square feet for a total purchase price of approximately $102 million. We have an additional 9 assets totaling 700,000 square feet that are under contract or in exclusive negotiations in these markets for a total purchase price of $210 million. In addition, we acquired 2 sites totaling 70 acres located in the Balzac submarket in Calgary. We plan to construct roughly 815,000 square feet of GLA at roughly a 6% yield on cost. We continue to target acquisitions of functional well-located product in our core markets that allow us to generate significant rental uplift in a short time frame. Our acquisition criteria focuses on acquiring quality assets that meet the widest possible range of tenant demand in strong locations which will generate strong total returns over time. With older vintage product often trading above replacement costs, we continue to see opportunity in developments and intensifications, which will be a significant driver of value for DIR over time. The newly formed joint venture will target acquiring $500 million of land in the GTA to develop modern best-in-class assets. We expect this vehicle to provide DIR a pipeline of attractive projects over time as we target 5% of our balance sheet to represent projects under development. This partnership allows us to scale our development program across multiple projects, as well as secure a pipeline of land for future development resulting in a balanced low-risk approach to enhancing returns and adding scale in GTA and GGHA. Participation with the leading sovereign wealth fund validates the value of our platform and the strength of our management expertise. As part of the venture, both DIR and its partner have discretion over new investments, and we will have the opportunity to acquire 100% ownership of the assets if the partner chooses to sell its interest. We contributed 2 sites previously owned by DIR into the venture for a total price of $98 million. The 30-acre Brampton East Lands for a purchase price of $70.5 million represents a $35 million or 100% gain compared to what we paid back in April of 2021, as well as 28-acre site in Cambridge for a price of $27.5 million, which was acquired in late December 2021. The joint venture acquired a third 10-acre site immediately adjacent to the Brampton site at the end of April 2022. Moving on to Europe, we have gained significant scale in our target markets over the past 2 years, and we have already seen strong evidence of rental rate growth in these markets. Despite the ongoing geopolitical tensions, we believe that fundamentals in our core Western European markets remain healthy and demand continues to outstrip supply. Our European portfolio is essentially fully occupied with committed occupancy at 99%. With in-place rents below market and the high occupancy level, we are confident of driving healthy rental rate growth. On over 1.1 million square feet of leases transacted this year in Europe, we have achieved rental rate spreads of 16%. We continue to add scale in our core European markets. This year, we have already closed on 4 assets totaling 472,000 square feet for approximately $100 million, and we have an additional 11 assets totaling 2.5 million square feet that are firm under contract or in exclusive negotiations for a total purchase price of EUR 220 million or approximately $300 million based on the current FX rate. Our scale in the region has allowed us to increase exposure to development. The acquisition of the 8.9 million square foot pan-European portfolio last year added over 1 million square feet of expansion opportunities in the region, which we intend to access over time. Currently, we are underway on 2 projects in Germany and the Netherlands that will add over 300,000 square feet in the next 12 months. Industrial fundamentals in the U.S. have continued to strengthen and the outlook remains quite favorable. Year-to-date, DIR has funded USD 70 million of its USD 80 million undrawn commitment to the U.S. Fund and has maintained its share around the 25% level. We continue to benefit from providing property management and leasing services to the U.S. Fund. In 3 quarters since the inception of the U.S. Fund, we have recognized $1.7 million in net property management and leasing income, and we expect the run rate to increase further as the U.S. Fund continues to grow. Overall, we are well positioned to continue to execute on our strategic pillars, which are continued organic growth, expanding our development program, focused capital deployment, improving our cost of capital and executing on our ESG strategy. We have made significant progress on each of these pillars and our business is firing on all cylinders with a long runway for growth ahead. I'll now turn it over to Alex to talk about our organic growth and outlook and operations.

Thank you, Brian. During the quarter, the value of our assets increased by $361 million, reflecting low availability, tight supply and high capital values across our operating markets. Largely driven by the increase in asset value, DIR's net asset value per unit increased to $16.48, a 28.5% increase year-over-year and 8.9% increase compared to Q4 2021. Leasing momentum in our portfolio remains strong, and we reported 10% year-over-year same-property NOI growth this quarter, driven by a 5.6% increase in in-place rents and a 2.7% increase in average occupancy. The rent increase was achieved through marking rents to market on rollover, contractual rent steps and indexation. Occupancy across our portfolio remained strong at nearly 99%, about 150 basis points higher than the prior year, and our leasing momentum continues to be robust. Since the beginning of the year, we have signed approximately 2.8 million square feet of leases across our portfolio. In Europe, we signed 1.2 million square feet of leases at an average leasing spread of 16%. In Canada, we have signed 1.6 million square feet of leases at an average spread of nearly 25%. Contractual rent steps is an important driver of steady same-property NOI growth. Currently, embedded rents that equates to over 2.5% in our Canadian leases. And in our recent leases, we have been able to negotiate significantly higher growth at 4% per year in the GTA and 3% per year in the GMA. In Europe, 90% of our leases are indexed to CPI, and recent CPI numbers suggest a strong increase in rents in -- on our European assets. In Q1 2022, we estimate that CPI-based indexation resulted in a 3% increase in contractual wins for leases representing EUR 21 million in contractual rents that had their anniversary date during the period. Over the balance of the year, we had nearly EUR 33 million of annualized contractual rents subject to indexation. Assuming the pace of CPI increases remains at current levels over the balance of the year, we expect CPI indexation related contractual rent growth to be in the 6% to 8% range on an annualized basis. Furthermore, market rents for our properties have risen significantly, and we are well positioned to achieve and even outperform market trends as leases roll. Market rents for our properties have increased by 20% year-over-year and the spread between in-place and estimated market rents equates to over 20%. As a result, the outlook for same-property NOI growth remains strong, and we expect to outperform our initial guidance provided at the beginning of the year. We are now expecting CP NOI growth of 8% to 10% for the full year of 2022. In addition to CP NOI growth, we continue to see several drivers of NOI and net asset value growth across our portfolio. We have made significant progress on our development pipeline, and we are already seeing strong results from our projects. With market rents continuing to grow and outpacing construction plus inflation across our markets, we expect our development margins to remain strong. We currently have underway -- we currently are underway on over 700,000 square feet of projects that are expected to be completed in the next 12 months. With a total expected cost of $122 million, we are expecting an unlevered yield on cost of 6.3%. We have an additional 1.9 million square feet in planning stages. These projects will commence over the next 12 months with most of these projects expected to be substantially complete over the next 18 months. At our 401 Marie-Curie property in Montreal, we have substantially completed the 132,000 square foot Phase 1 expansion. We leased the entire space at record rents for the submarket, resulting in an unlevered yield on cost of 9%. The lease commenced in April 2022. Phase 2 of the project is well underway with construction expected to be completed by the end of 2022. We have strong interest from tenants in the second phase as well. Construction is underway on our 241,000 square foot freestanding building on excess land at our property in Dresden. The expansion will roughly double the GLA on site, and we are forecasting an unlevered yield on cost of 6.5% on the project. We are already in advanced negotiations with those tenants to lease the entire facility. At the end of April, construction commenced on our 8-acre site located in Caledon. We're building 154,000 square feet of high-quality industrial space and expect completion in the first half of 2023. With a total cost of approximately $38 million, including the cost of land, we're forecasting an unlevered yield of 5.6%. In the second half of 2022, we intend to commence the redevelopment of a cluster of 3 buildings on a 10-acre site in Mississauga. We are working towards the construction of a 209,000 square foot best-in-class facility with an unlevered yield on cost of over 5%. We continue to make strong progress on our sustainability initiatives across the portfolio. The scope and the scale of our renewable energy program continues to gain momentum. Our first solar installation project in Sunridge, Calgary achieved substantial completion in the quarter, and the tenant is now using solar-generated power to operate the building. We are also executing on 12 projects across Canada and Europe that will add 19,000 solar panels. We expect the capital investment to be roughly $10 million with an unlevered yield on cost of above 8.5%. We expect this income to come online in phases starting in the second half of 2022. Our U.S. property management and leasing platform continues to generate strong income. We expect an operating profit of over $1.5 million in 2022. Overall, we believe that DIR has significant opportunity to drive CP NOI and NAV growth, both of which should further enhance the quality of our business. I will now turn it over to Lenis, who will provide our financial update.

Thank you, Alex. Our financial results for the first quarter were strong. Diluted funds from operations was CAD 0.22 per unit for the quarter, 16% higher than the prior year comparative quarter due to higher NOI from our comparative properties, successful deployment of our balance sheet capacity towards more than $2 billion of acquisitions over the past 12 months and lower borrowing costs as we executed on our European debt strategy. We have been able to achieve strong year-over-year growth while strengthening our balance sheet. During the first quarter, we also completed a $230 million equity offering at an issue price of $16.30. The proceeds from the offering were utilized to fund our acquisition pipeline, as well as development costs. In Q1 2022, we raised about $90 million through our ATM program at an average unit price of $16.46. We continue to allocate substantial capital towards sustainable initiatives across our existing portfolio and towards acquisitions of green buildings. Last month, we issued $200 million of Series E green bonds, which took our total outstanding green bonds to $850 million. We already deployed $295 million towards eligible green projects and identified $200 million in additional eligible green projects with a further $300 million of projects in feasibility or preliminary stages. We ended the quarter with leverage just below 26% and was approximately $638 million of liquidity. After the quarter, we closed on our $200 million Series E green bonds and formed a GTA joint venture, bringing our total liquidity to over $900 million. Since March 31, we have closed on $110 million of acquisitions across Canada and Europe and funded approximately $60 million of our commitments to the U.S. Fund. We have just over $500 million of acquisitions that are currently under contract or in exclusive negotiations, as well as $90 million of development costs for our near term development pipeline. Pro forma these capital deployment initiatives, our leverage will be in the low to mid-30% range, and we will continue to have significant room on our balance sheet to execute on our growth strategy. We will be able to acquire approximately $500 million of additional assets before our leverage increases to our targeted range in the mid- to high 30% range. Given the recent market volatility, we believe that it is prudent to run the company in the near term at a lower leverage level in the mid-30% range. Our geographic diversity allows us to access debt at the most optimal costs. We continue to see euro debt rates that are 200 basis points lower compared to North America, and that provides us a significant advantage as we continue to execute on our growth strategy. We ended the quarter with approximately CAD 400 million of euro debt capacity. Following our CAD 200 million green bond in April and pro forma the closing of European assets and our acquisition pipeline, we expect our euro debt capacity to grow to over CAD 500 million. With less than $30 million of debt maturing for the remainder of this year, we have limited exposure to higher interest rates in the near term. On future acquisitions, our underwriting continues to focus on assets that generate strong total returns that exceed our return hurdle. Our Europe equivalent debt provides a natural currency hedge to our assets and income from Europe. As our assets are nearly fully hedged, we expect minimal movement in our net asset value per unit from changes in the euro, Canadian FX rate. On the FFO side, there is some impact due to the spread between our NOI yields and interest rates. The year-to-date strengthening of the CAD versus the euro of approximately 6% when compared to year-end 2021 would have an approximate CAD 0.015 to CAD 0.02 impact on our full year 2022 FFO per unit. Looking at the remainder of the year, we expect to run at slightly lower leverage and assume the Canadian dollar stays close to current levels. We are on track to exceed our comparative properties NOI target, as Alex had mentioned earlier, we are expecting 8% to 10% comparative properties NOI growth this year. Putting that all together, we expect FFO per unit for the full year 2022 to be in the range of our prior guidance, which is in the high $0.80 to $0.90 range and will depend on our average leverage and FX rates. Over the past several years, our strategic initiatives have transformed DIR into a high-quality business that can produce strong FFO and net asset value growth over the long term. And we believe that our trajectory of growing and improving portfolio quality remains strong. I will turn it back to Brian to wrap up.

Thank you, Lenis. Our team continues to work hard and achieved significant milestones along the way. We have taken significant steps to position DIR as the premier industrial REIT in each of our operating markets. I'd be happy now to open it up for questions.

[Operator Instructions] And our first question comes from Sam Damiani.

Congrats on a good quarter. I guess maybe just to start off is, I guess, the big question probably on everyone's mind is Amazon in their announcement last week about the capacity issues in their fulfillment operations. Do you guys have any sense as to what they may or may not do and how pervasive that issue might be for other space users in the marketplace, like how big of an issue do you think this is?

Yes. Thanks, Sam. We've heard their guidance, and we don't have a tremendous exposure directly to Amazon. And the exposure we do have, I'll note are in very, what I'd call generic, but highly functional buildings. So it's in generic space that would be very relettable. In fact, in most cases, it's under market rent that they pay. So we don't have specialty buildings. We don't have super high rents that we're receiving from Amazon in the small exposure we do have. I'll let Alex talk a little bit about it as well. But we don't see this having a great impact on us. In fact, most of the markets that we're in, certainly where we have exposure to Amazon, we would welcome some vacancy and the opportunity to mark those leases to market. So it's, I think a big thing in the market because they're such a large occupier of space around the world. But for the most part, the markets we're in are not significantly impacted by them. For example, in the Netherlands, they don't have a big presence at all. In the U.S., where we do have some exposure to them, it's in buildings that are very relettable. So we don't know the extent of -- or can't necessarily quantify their changes, but we know it will create some market noise. Alex, do you want to elaborate on that?

Yes. Thank you, Brian. When we -- Sam, when we look at the markets we're in and the asset types we're in, so starting with asset side, as you know, we are focusing on urban logistics assets primarily. We don't focus on sort of fulfillment centers and very large boxes. We have warehouse distribution assets, they would be in 200,000 square foot, 300,000 square foot range on average. And when we analyze Amazon's guidance when they talk about their excess capacity primarily in fulfillment centers, not in the last mile product. And then if we zoom in into the markets, we ran so in the GTA, the markets are exceptionally strong. And we are hearing that there are plenty of other occupiers who may have been behind on -- in terms of their distribution networks compared to Amazon, who are continuing to ramp up their e-commerce operations. We're seeing strong demand from tenants who are adjusting their businesses for the changes to supply chains, inventory levels, and we're seeing that demand. When it comes to Europe, there's a lot of demand that we see not from Amazon in our portfolio, it's really -- or e-commerce, it's really from various industries as well. And what we continue to see on the ground is that the markets remain strong, and there's lots of demand coming from a variety of sources, not just e-commerce. E-commerce has definitely been a significant driver for industrial and logistics, but there have been significant other drivers added over the last 24 months that are still there in our markets.

That's a great color. I appreciate that. And just moving on to the development pipeline. Have you recast the budgets on the active projects to sort of reflect current market costing? Have you done that? And what impact have you seen? And has it been more of an offset or sufficiently offset by higher rents?

Presuming that, Sam, we -- much of our costs for our -- a lot of our construction right now is locked in. So some of the current projects we're recasting to reflect the market rents, a lot of our costs are locked in as we look to future pipeline, future development, we're certainly looking at cost changes as we go both on the material, labor, land and then we're also looking at rents as well. So our yields and spreads, we think are certainly intact, market rents have been growing faster than costs at this point, even though costs are going up. But we look at it certainly weekly, if not sometimes daily. Alex, would you add to that?

Yes. Thanks, Brian. Yes, as Brian said, so we are locked in on everything that is underway. So we are seeing improvements in yield because on the revenue side, we're still seeing upside as market rents continue to grow. Some projects that are still in planning, yes, we will likely see -- continue to see exposure to fluctuations in construction costs. But as Brian said, we have seen that our margins are staying intact or improving as market rents grow.

Our next question comes from Mark Rothschild.

With the move in interest rates and obviously, the equity market has been a little softer. Have you changed at all your underwriting for acquisitions or maybe just how aggressive you'll be, you've obviously bought quite a bit over the past year and then moving quickly this year so far?

Yes, Mark, it's a good question. We're watching it very, very closely. The things that we've waived on, we're closing on things that we've not waived on, we were basically re-underwriting, remaking sure that our pricing is good, the geography is good, this is exactly what we want. We're watching it closely. I think there's still been a little bit of a decoupling between interest rates and cap rates, but that could change over time. And so we're quite careful, I would say we're more cautious now as we look at noise in the market. And as interest rate risks are out there and things that are affecting, potentially affecting pricing, we're looking at that very closely. So across all the markets. I think it's affecting Canada, Europe and the U.S. potentially different depending on how tight the markets are and what the rent growth outlook is for that particular market. So we -- it's not a broad brush we paint with, but it's very, very specific when we look at each individual market and the underwriting. So we're relooking at it as we go. And I would say we're certainly taking a more cautious eye as we look at underwriting in light of the cost of debt.

Okay. Great. Maybe just one more question. Can you just give us an updated comment specifically on Western Canada, how fundamentals have changed of late? And do you have a more optimistic view on that market now as opposed to maybe 6 months ago or a year ago?

Yes. I'll let Alex reflect on that, but it's certainly changing now.

Absolutely. I would say 6 months ago, Mark, we started to be much more bullish on Western Canada already. 12 -- and when comparing 12 months ago, absolutely, the fundamentals have changed considerably. We have seen significant absorption. The outlook for rental growth has improved considerably. And we are seeing rental rate growth in our own leasing as we go, every week, we're seeing kind of improving turns, higher contractual steps, higher rents. So I would say that we are much more constructive on the market compared to 12 months ago.

Our next question comes from Himanshu Gupta.

So CP NOI growth guidance was increased, I think to 8% to 10% from 7%. Can you elaborate like what or which regions are driving that increase?

Hi, Himanshu, thanks for the question. So we're seeing improving fundamentals across the board. So in Ontario and in Quebec, we are signing deals at higher rents. In Europe, we have had a few successes as well in terms of marking rents to market. We're certainly seeing higher CPI contribution in Europe. We talked about Western Canada just recently. So we're seeing improving fundamentals across the regions that contributed to this improved outlook.

Got it. And are you [ baking ] -- I think you mentioned the CPI index in Europe expected to be 6% to 8% range. So are you expecting that as well in this guidance of 8% to 10% now? Like is that another reason why the guidance have gone up because of CPI pickup here?

Yes. A lot of the CPI pickup for 2022 has already happened. We have a little bit more leases that will be subject to indexation in Europe. A lot of those leases are non-same -- non-same-property and they're not in the same-property pool. So we expect that, yes, CPI will contribute, but a lot of that already is in.

Got it. Okay. And then on FFO per unit guidance. I think that was unchanged. So should we assume the negative impact from Europe, certainly of the Canadian dollar versus euro will be offset by higher NOI guidance? I mean is that how we should look at?

Yes, that's correct, Himanshu. The other moving part was the average leverage that we have assumed. I think we're expecting that we would run at slightly lower leverage, but that again is also offset by the stronger organic growth piece.

Got it. Okay. And then back to the leasing question here. In Europe, over 1 million square feet of leases signed at 16% plus spread. So I mean, Alex, is that a function of expanding them being low or are you seeing market rents, like strength in market rents still as well?

We are seeing market rent growth. And yes, we had built in mark-to-market potential, but we are also seeing market rent growth.

And then the mark-to-market opportunity on your European portfolio, I think in the disclosure, it's mentioned around 6%. I mean, do you think there is -- that's a conservative number, given what you're seeing in the market rent here, like it could more look like double digits here in terms of mark-to-market?

It could over time. As more leases roll, we could see more upside than downside to that number.

Our next question comes from Sumayya Syed.

Alex, in your remarks, you spoke to getting success, getting those 3% and 4% contractual steps in your renewals. Are you seeing any signs of resistance from certain groups of tenants or do you have any concerns about tenant affordability at this point in time?

Thank you for that question. Yes, we're seeing those levels in our recent negotiations, they -- it became sort of the market norm to have the built-in escalators. What we see from our occupiers and when we have the discussions with the occupiers about the market rent levels, rent is important, but it's still a small component of your overall P&L. And so it's not necessarily an affordability issue for many of the occupiers. For a lot of the occupiers, it comes to being in the right location with close proximity to major arteries, labor pools, that is much more important, competitors are, let's say, negotiating the last [ CAD 2 ] on the rent or moving to a location that is perhaps cheaper in terms of the overall occupancy costs [ that ] will result in additional other costs.

Okay. And you also spoke about sort of the non-e-commerce demand for us, especially in the European portfolio. Could you give some examples of sort of the biggest user type or types that are leading demand or is it sort of well around the demand from a variety of industries?

In our portfolio, we see a lot of food and beverage tenants, these tenants have been very active and we've seen them grow. We are seeing tenants taking more space to carry more inventories as they're adjusting their operations for changes to supply chain. So we see that in North America. We see that in Europe. So there's lots of examples of non-e-commerce demand in our business.

Our next question comes from Matt Kornack.

Just a quick follow-up to Mark's earlier questioning with regards to the acquisition pipeline and what you're looking at. Has this bond yield environment changed, which markets look more attractive at this point or I guess, said differently, would you rather have leases that are trading at lower cap rates with more upside on the rent side or in markets like Europe, where interest rates, you still have a positive spread, I guess, between interest rates and cap rates? Just interested in your general thoughts as to where you're targeting capital these days and where you think putting incremental money makes sense?

Yes. Thanks, Matt. We're still very, very focused on the same strategy. We're focused on liquid markets. We're very, very focused on quality assets. None of that has changed. I mentioned to an answer to Mark's question that we are looking at the mark-to-market. We look at WALTs, for example, longer WALTs are getting repriced probably more substantially just because of the debt or bond yields, shorter WALTs and marking to market with significant growth is very, very competitive. So we're looking at all of those attributes to acquisitions that we are chasing, but really the core fundamental of great markets, great locations, Alex mentioned proximity to main arteries, proximity to population centers, long-term values that we're focused on. So that has not changed in the markets that we're in are still our core markets. And those markets will continue to be the stronger markets and the ones that perform best for us over the long term. So none of that has changed. Some of the specific pricing, we are looking very closely at and taking a pretty conservative eye toward the cost and the incremental accretion to those acquisitions. So none of our overall strategy has changed. It's just we're focused on the unique pricing to each individual asset or the unique attributes to each market that we're in.

Fair enough. So it sounds like pricing at this point is fairly efficient to cross markets based on those different characteristics. And then I guess the flip side is the euro has depreciated against the Canadian dollar. Does that make a difference in terms of that market being a little bit more attractive at this point to put capital into? And then maybe a follow-up question for Lenis. In terms of the way you issue European debt, can you speak to the difference in cost between maybe issuing in Europe directly on an unsecured basis, if that's even possible as well as kind of the cost differential to the swaps that you're doing on existing financing?

So there's a series of questions there, Matt. I'll just start with the first one to say, our allocation towards the different markets hasn't changed.

Okay.

So the attraction to the FX side of the business hasn't changed, where we want to allocate capital on kind of our overall geographic allocation or mix. So then I'll let Lenis comment on the kind of the balance of your questions as it relates to our balance sheet, but...

Sure. The question I do recall is the one about the euro, the issuance of European debt. So we are looking into opportunities to whether or not we could issue debt directly in Europe. From a cost perspective, it's fairly equivalent. It may be a few basis points cheaper the method that we are doing it currently. There is some -- I guess, some pricing that's to be gained through the swap mechanism, but it's a few basis points. We're looking into whether or not we could issue directly in Europe, there is some additional steps required, an additional rating -- additional rating from a another rating agency would be required, and just looking at how that would be structured, et cetera, but it is something that we are exploring as well.

Okay. Fair enough. And another really solid quarter, guys.

Thank you.

Thank you.

Our next question comes from [ Vaibhav Mathur ].

Great quarter. I have 2 quick questions, and I'll start with the first. Now we've seen fair value gains across the portfolio, and I'm trying not to paint everything with the same paintbrush. But I'm wondering if you're witnessing greater cap rate compression across the European portfolio as compared to Canada, given where demand of private asset is and where capital flows going to?

Thanks for that question. Overall, when we think about capital values, not necessarily cap rates, because the cap rates can be very challenging to compare across assets. As Brian said, shorter WALTs with mark-to-market versus longer WALTs with mobility to mark-to-market. When we think about capital values, capital values remain lower in Europe compared to North America, compared to Toronto, in particular, Montreal. We are continuing to see upward movement in capital values, especially as rental growth takes place. In the GTA and GMA, capital values remain strong, and we have seen upside in our own portfolio from a capital value perspective in the Greater Toronto Area, Greater Golden Horseshoe Area generally to reflect kind of the comparable transactions that we've seen in the market over the last few months.

Okay. And then my last question, now we've also seen impressive quarter-on-quarter growth with respect to your NAV per unit. How should we think about NAV per unit growth for the rest of the year? And I'm just wondering if there's any guidance that you'd like to provide about?

Well, we can't really guide into our future value changes because obviously it's valuation is [ done ] at a time. However, we continue to see drivers for organic and asset value growth. As we talked about, our same-property outlook is robust. We are completing value-add initiatives across the portfolio. We're completing development projects across the portfolio. And we expect that all of these initiatives will contribute to our net asset value growth over time.

[Operator Instructions] And our next question comes from Pammi Bir.

Just with respect to the $500 million of acquisitions that are in the works, can you just comment on where pricing is coming in, in terms of cap rate ranges or -- and what sort of debt costs on an overall average basis are you underwriting there?

So we expect that the cap rates are going to be consistent and the growth profile is going to be consistent with what you've seen from us. We are doing some deals in Greater Toronto Area that are immediately adjacent to some of our holdings in core GTA that will allow us to pursue a land assembly strategy. Their cap rates on those assets would be lower, let's say, in the 3% range, but with significant upside as we mark rent to market and then further upside as we pursue the redevelopment of those assets, for example. In Europe, we're seeing deals in the 4% range, in the mid-4% range was upside from CPI and marking rents to market, et cetera. As far as the cost of debt, we are -- we have issued the costs -- we have issued bonds recently. So we're -- we still have to deploy that money. But generally, we're underwriting 2% to 2.5% range when we look at new capital.

Got it. And maybe just sticking to the, I guess, the acquisition market. I'm just curious if you're seeing any changes in terms of the types of buyers at the table, just again, with the move up that we've seen in the back of the bond yields?

We've seen that some of the buyers that rely heavily on financing are more cautious. So more private buyers or I would say, smaller private equity players who need financing and need a lot of it. But at the same time, we continue to see that large institutions in Canada and in Europe operate with very little leverage and no leverage and they continue to be active.

Got it. Maybe just -- it was interesting actually just hearing a broker presentation last week in Europe, and I guess their expectation for cap rate expansion in industrial, but offset by rent growth. I'm just curious, do you share that view? And do you think that the rent growth is more than sufficient to offset the impact of rising cap rates in your portfolio? And maybe just to add on, have there been any conversations about whether it's with appraisers of potentially adjusting cap rates going forward?

Yes, Pammi, I'll start on that. If you look at our spreads, our renewal spreads, they're significant. Rent growth right now has been very significant. So we haven't seen an impact on cap rates. Appraisers will wait for data points before they can kind of recognize the change in that. We expect that may come over time. But right now, we're seeing rents that are trying to meet replacement costs. So economic rent will justify new construction, and that is somewhere in the mid- to high-teens in the GTA, for example. So we've still got some rent growth to go, and we are seeing that outpace cap rate expansion. So that's the current state of the market. And we expect that to continue until rents can justify significant new construction.

And then finally just to add to that is specifically for Europe, when it comes to cap rate expansion argument, we had -- there hasn't been a lot of evidence of it. However, where the speculation is, what happen is assets that are -- have very long leases with very limited upside and no ability to mark-to-market core assets that already have low going in yields. That said, as we talked about earlier, when we think about overall capital values for logistics in Europe, logistics in -- or industrial in Canada, we continue to see capital values rise, and there, it's really a function of rental growth. And we do see that for assets that have mark-to-market potential in Europe that is more near term. Market is generally baking in -- sorry, is making assumptions about mark-to-market and underwriting.

Okay. Maybe last one for me. Just with respect to the ATM, just given where the unit price is, how would your view maybe changed with respect to using the ATM?

Go ahead, Lenis.

Yes. The -- I mean, we still think the -- of the ATM is a cost effective way of raising equity, but we are cognizant of the costs that we're issuing at versus our net asset value. So I think we're going to be very cautious in terms of topping that. I think we've got a sufficient amount of liquidity right now to address our pipeline and development, upcoming near-term development costs. So kind of given some of the recent market volatility and where the unit price is trading, I think we'll be a little quiet on that in the near term.

That makes sense.

[Operator Instructions] And our next question comes from [ Todd White ].

Yes. Hi, Brian, Lenis and Alex, thank you so much for this call. Just a quick question. It's more on data that we've struggled to find. And can you quantify -- do you have data to quantify what Amazon has meant to the annual take-up in Europe and Canada as a percentage of total take-up? I mean we've seen the numbers for the U.K., which is very high, for the U.S., which is high. What is that number for Canada and Europe if you have that data?

We don't have the exact data at our fingertips right now, but we can get back to you in the GTA, it's -- it hasn't been significant for -- in Toronto specifically. It's -- the footprint of Amazon is less than 1% of the market, of the overall stock in the market. So we don't think that the impact of them slowing down. If they will slow down in the GTA, for example, that would be the market that is based on the list of excess capacity, it's -- the impact is going to be significant.

And Todd, just to add to Alex's comments, their impact is not equal across all product types. So for example, their fulfillment centers don't have much of an impact on urban logistics, as we discussed earlier in the call, we don't think it will have a meaningful impact on our portfolio. It may have an impact on creating some space in the large very rural logistics fulfillment markets maybe by providing some space there. But in terms of our portfolio and the locations where we are, we don't see that having a meaningful impact.

And just a follow-up, somewhat related, do you have a sense either from discussions with Amazon or from those that are linked to are related that their comments about excess capacity in the kind of the logistics market? Was that a U.S. specific comment or was that a global comment?

We have not had those conversations, it's early days. What we are seeing is that they remain active in some markets and less active than others. We have footprint in the U.S. We have footprint in Canada and Europe. So we think that Canada is probably a bit different than the U.S. where they have the largest footprint in Europe. And I'm talking about Continental Europe, their footprint is growing. They haven't -- they haven't reached fully the, let's say, the footprint they need to service the entire market. As we talked earlier in the Netherlands, they're just starting in the Netherlands. They've been servicing that out of Germany primarily. We see them taking more space in France, have seen them taking more space in France as recently as 6 months ago, and significant space. We're talking about [indiscernible] in some markets. We'll continue to see the impact in Germany. They looked at our development site in Dresden, for example. We were engaging with them 6 to 9 months ago. So we continue to see activity from them across various markets.

It is fair to say that e-commerce penetration is highest in the U.S., probably next in Canada and then the lowest in Europe. So if that follows their capacity or the efficiency of the e-commerce market, that's what we see or how we interpret that data.

And do you have the latest snapshot in terms of just from a market perspective, square meters per capita or square feet per capita for Canada, U.S. and Europe and how they compare? I know there's that rule of thumb, the Rule of 10 for U.S. is 10x everyone else in terms of square footage per person. Do you have any updated view for Canada and Europe?

In terms of industrial inventory that is required -- still required per capita?

Not required, just existing as a percentage of population. Just getting a sense of how that is out there...

We have in there, but we don't have it right with us. Todd, so we -- that's okay. We'll circle back with you after the call.

Thank you. And at this point, we have no further questions. [ Turning it ] back for any closing remarks.

Thank you so much for your time today. We hope you have a safe day, and we look forward to circling up soon. Take care.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect. Speakers, please standby for a debrief.