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

Good morning, everyone. It's 11:00, and we'll now call the meeting to order. My name is Vincenza Sera, and I'm Chair of the Board of Dream Industrial REIT. Welcome to our Annual and Special Meeting of Unitholders. I will act as Chair of the meeting, Rob Hughes will act as Secretary of the meeting. With consent of the meeting, I appoint Daniela Munoz and Mohammed Sayed of Computershare Trust Company of Canada as scrutineers for the meeting. We will now proceed to our formal business. To expedite the formal part of the meeting, I will move and Shannon Macri, a unitholder, will second all motions. After our formal business is concluded, our management team will make a brief presentation, 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. I have an affidavit from Computershare as to the mailing of the notice of availability of proxy materials and the 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 REIT's records. The scrutineers have advised that there are at least 2 individuals present who are unitholders who represent or who represent by proxy unitholders who hold at least 10% of the votes attached to all the outstanding REIT units. As a result, we have a quorum and I declare the meeting to be regularly called and properly constituted for the transaction of business. The first item of business is the presentation of the REIT's 2021 Annual Report, which contains the REIT's audited financial statements for 2021. I note that the Secretary has placed before the meeting a copy of the 2021 Annual Report. The next item of business is the election of trustees. As stated in our circular, 8 trustees are to be elected at the meeting and 8 nominees are named. They are: Dr. Sacha Bhatia, Michael Cooper, J. Michael Knowlton, Ben Mulroney, Brian Pauls, Vicky Schiff, Sheldon Wiseman and myself. Shannon, will you please nominate the nominees?

I nominate the individuals listed in the Management Information Circular, dated April 22, 2022, for election as trustees of the REIT.

Thank you. Are there any further nominations? Since there are no further nominations, I declare the nominations closed. Based on the proxies received, I would mention that each of the 8 nominees received a majority of votes cast in favor of their election as trustee. After the meeting, we will issue a press release with detailed voting results. Given the proxies received and as the number of persons nominated for election as a trustee is equal to the number of trustees to be elected, I propose, with the consent of the meeting, not to take a formal vote of the election of trustees. Therefore, I confirm that the motion has been carried and the 8 persons who are nominated have been elected as trustees by acclamation. The next item of business is the appointment of auditors. The Audit Committee and the Board 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.

The meeting will now vote on the motion. I propose to take the vote by a show of hands. All those in favor, please raise your hand. [Voting]

Any votes withheld? [Voting]

The motion is carried. PricewaterhouseCoopers LLP have been reappointed as auditors, and the Board authorized to fix their remuneration. The next item of business is to vote on a special resolution authorizing certain amendments to the declaration of trust of the REIT and the limited partnership agreement governing Dream Industrial LP, such amendments described in the circular dated April 22, 2022. The existing declaration of trust of the REIT was also amended on May 18, 2022 to better align the declaration of trust with Canadian best practices with respect to exclusive forum provisions, including as outlined in the 2022 proxy voting guidelines of Institutional Shareholder Services. If approved, the declaration of trust of the REIT will be amended and restated in full to reflect such Canadian best practices as well as the substantive amendments set out in the circular. In order to be effective, the resolution must be approved by at least 66% and 2/3 percent of the votes cast by unitholders who vote on this resolution. I move to approve the resolution in the form set out starting on Page 21 of the circular. May I have a seconder?

I second the motion.

All those in favor of the motion, please raise your hand. [Voting]

Any contrary? [Voting]

The motion is carried. The next item of business is to vote on a resolution to amend the REIT's Deferred Unit Incentive Plan to increase the number of deferred trust units and income deferred trust units that may be granted or credited under the plan by a further 1 million units. I move to approve the resolution amending the Deferred Unit Incentive Plan as set out starting on Page 23 of the REIT's Management Information Circular. May I have a seconder?

I second the motion.

All those in favor of the motion, please raise your hand. [Voting]

Any contrary? [Voting]

The motion is carried. I declare that the resolution in the circular relating to the amendment of the REIT's Deferred Unit Incentive Plan to increase the number of units granted under the plan is approved. The formal items of business as set out in the notice of 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 the management team to make a short presentation. After their presentation, we will have a question period.

Thank you, Madam Chair. It's great to see everybody today. It's really good to do this face-to-face. It's been a couple of years, and we appreciate everybody making the effort to get here and to be together. A lot has happened in the last few years since we were last together for DIR. It's been an incredible 2 years. Our strategic initiatives have allowed us to significantly enhance the quality of our portfolio and business. Today, we'd like to share some of this progress as well as our outlook. We have set our corporate strategy around 4 key pillars, which are: organic NAV growth; focused capital deployment; executing on our development pipeline; as well as enhancing our sustainability profile. We've made a lot of progress in each of these 4 areas, which can be seen in both our operating results as well as our portfolio makeup. As you all know, our portfolio has grown significantly, more than doubling since the beginning of 2020 when we expanded into Europe. Our portfolio now totals CAD 6 billion, with over 44 million square feet owned and managed. At the same time, we have focused on significantly improving the quality of our portfolio through buying newer vintage assets that can accommodate the vast majority of tenant needs that are also well located, that are approximate and close to transportation corridors as well as population centers. Industrial fundamentals remain robust across all of our markets, and the outlook for sustained rent growth positions us as a strong beneficiary to the current inflationary environment. We see multiple drivers of rental-rate growth across our predominantly urban portfolio, which benefits from strong demand and steep barriers to new supply. Ongoing investment demand for our assets combined with robust leasing activity have driven a 40% increase in NAV per unit since the beginning of 2020. Including our attractive distribution of CAD 0.70 per unit, we have generated total returns of 54% over this time period, reflecting our asset quality as well as showcasing our active asset management expertise. I'd like to turn it over to Lenis now to talk about the strength and quality of our business as well as our capital strategy.

Thanks, Brian. Good morning, everyone. It's really good to see you all here today. As Brian mentioned, one of our strategic objectives is to enhance our portfolio quality, and our acquisition activity has been a key contributor to achieving this. Over the past 2 years, we have grown the portfolio by CAD 3 billion, acquiring high-quality assets with higher average clear heights and of newer vintage. In addition to the quality of our buildings, our well-diversified portfolio caters to a broad tenant base across over 20 different industry sectors. At the same time, we have strengthened the balance sheet and transformed the REIT to operate on an unsecured financing model. This has significantly increased our financial flexibility and we obtained an investment-grade credit rating in late 2020. The credit rating and our European expansion allowed us to materially lower our average cost of debt by almost 300 basis points in the past 2 years. In addition, our euro equivalent debt provides a natural hedge to the movements in the Euro-Canadian dollar exchange rate, so any fluctuations have a minimal impact on our net asset value per unit. As we close on European acquisitions under contract or in exclusive negotiations, we expect to have over CAD 400 million of euro debt capacity. We continue to see interest rates on euro equivalent debt that are about 200 basis points lower than comparable North American debt, which provides us a competitive advantage as we execute on our growth strategy. Green bonds are an additional source of capital available to fund our ESG initiatives, which Alex will speak to more about later in this presentation. We currently have CAD 850 million of green bonds outstanding with the entire proceeds already deployed or allocated to projects in varying stages of execution. We maintain one of the strongest and most flexible balance sheets in the Canadian REIT sector, and we retain sufficient liquidity to execute on our strategic initiatives. I will now turn it over to Bruce to talk about our investment strategy.

Thanks, Lenis. DIR has been intensely focused on buying functional, well-located assets in our core target markets. We buy the low replacement cost with a particular emphasis on identifying assets that can generate meaningful rental uplift in the near term. We've acquired many properties targeted for expansion of ground-up development with brand-new, high-spec logistics facilities, and we always buy with an eye to sustainability. We've amassed significant scale in our core markets and our acquisitions should drive strong NOI and NAV growth over time. We continue to expand our portfolio in the GTA, select markets in the Greater Golden Horseshoe and the Greater Montreal area. Since the beginning of 2021, we have acquired over CAD 650 million of assets in Canada, adding over 3 million feet to our portfolio. We're very excited about the return potential of these assets. In-place rents are, on average, 20% below market rents, and we are acquiring well below replacement cost. In Europe, we have continued to gain scale through over CAD 1.8 billion in acquisitions across our core Western European markets since the beginning of 2021. We are already seeing strong rental-rate growth in our target markets, and the low initial capital values on our acquisitions should drive ongoing NAV growth. We've acquired urban logistics assets as well as core distribution assets, all well located in their respective markets and poised to take advantage of strong rental growth. As part of our acquisition program, we have built a material land position through 2 approaches. First, we have targeted properties with significant excess density that we can develop over time. Since the beginning of 2021, we have acquired 16 underdeveloped properties with the potential to add over 2 million square feet of density in the coming years. Second, we have selectively targeted well-located greenfield parcels in our core markets, 6 in Canada so far. We've already begun to develop these sites with state-of-the-art logistics facilities. At the end of the presentation, we will share a short video that showcases the quality and strategic locations of some of our European acquisitions. I will now turn it over to Alex to speak on our operations, development and sustainability initiatives. Thank you.

Thank you, Bruce. Good morning. As Brian mentioned, industrial fundamentals remain robust, and our portfolio continues to outperform the market. We're seeing the strength in our operating results. Our properties are essentially full. As leases roll, we expect to achieve strong rental spreads and include higher contractual steps on new leases. We expect our portfolio to continue delivering solid organic growth, and we recently increased our 2022 guidance to 8% to 10% same-property NOI growth. We also continued executing on our development program, which allows us to enhance the overall quality of our business while delivering NOI and NAV growth. We have various levers to execute on our development strategy. Overall, we have about 5 million square feet of development opportunities within the current portfolio, and that is across 3 categories: expansions, redevelopment and greenfield development projects. We have about 3 million square feet of potential expansion opportunities, of which roughly 1 million square feet is currently underway or in advance planning. These are highly profitable projects as we already own the land, and we expect to achieve a yield on cost of over 6% on average. And we're already seeing strong results. On the screen, you can see our 401 Marie-Curie expansion project in Montreal. We completed the 130,000 square foot expansion project last month. The project was completed on time and on budget. We leased the entire space at record rents for the submarket and achieved a yield on cost of 9%. Phase 2 of the project for 90,000 square feet is well underway, and we expect completion in the second half of 2022. We are currently pursuing 6 other expansion projects for a total GLA of over 650,000 square feet. We also have the opportunity to redevelop some of our buildings to accommodate more modern logistics users and increase density on site. In the near term, we intend to commence the redevelopment of a cluster of 3 buildings located on a 10-acre site in Mississauga. We expect the building to be certified zero carbon upon completion. Our new development program comprises 70 acres of sites in the GTA in Calgary as well as the 25% interest in a CAD 1.5 billion joint venture targeting to buy land and build best-in-class logistics facilities in the GTA and the Greater Golden Horseshoe region. We expect that our development program will also significantly enhance the sustainability profile of our business as we are targeting to achieve green building certificates on all of our development program -- projects. In addition, we're completing several sustainable initiatives across our portfolio. Our solar panel program is well underway in Canada and in Europe. On the screen, you see a recently-completed project in the Netherlands. We're targeting completion of 13 projects for 20,000 solar panels in 2022. Our overall project portfolio will result in 75,000 panels spanning over 5 million square feet over time. These projects significantly improve the sustainability profile of our buildings and also provide strong financial returns. Our 2022 projects correspond to an investment value of CAD 11 million, and we are targeting to achieve a yield on cost of 8.7% on average. Our acquisition program also added 1.8 million square feet of assets that have green building certificates, and we are in the process of certifying additional 2.5 million square feet of assets that are already built to green building standards. As part of the Dream Group of companies, we are increasingly focusing on reducing emissions and managing climate risk in our business. We expect to achieve net zero on Scope 1 and 2 emissions by 2035 and select Scope 3 emissions by 2050. We recently published our inaugural net zero report that outlines our plan to achieve this goal. And our sustainability efforts continue to be recognized by third-party agencies. In May, we received Gold Level award for executing our Green Lease program. Our 2021 Sustainalytics score puts us in the top quartile of global real estate peers, and we're one of the top 3 industrial REITs in GRESB's ranking of ESG-related public disclosure. I will now hand it over to Brian for closing remarks.

Thank you, Alex. As a team. We'd like to thank everybody here for your support as we continue to execute on our strategic pillars. We remain well positioned to continue to create value for our unitholders, and I'd be happy to take any questions now from the field.

Yes, sir.

Okay. I don't see how anybody could really complain based on the shareholder return. It's very nice with all of the acquisitions. My understanding is that buying and -- well, the GTA industrial property vacancy rate is about 1%, and the price to buy the land is very high relative to the rest of Canada. I understand that. However, there's something I want to point out here. It's all very well during the COVID to shop on the computer screen. If the supermarket or the department store is closed, you have to. But as the COVID ends, maybe I'm old fashioned, I want to go to the department store. I want to ask the salesman the questions and work the knobs. And could that really be to the detriment of warehouse floor space? My understanding is that something of the order of about 3x is the warehouse space you need compared to the back of the department store -- the backroom of the department store. So a lot more space. So going forward on the COVID, it will affect UPS. All this delivery for free, Amazon delivery for free, I don't think they can do that anymore with gas prices going the way they are. I think there could be a migration back to the department stores and live shopping. That's just me speaking. Go ahead.

Paul, it's good to see you after a few years. The industrial market here is very, very healthy. Certainly, online shopping and online penetration into retail sales has contributed a lot to the industrial space. We see that trend continuing because of convenience and because of cost. Certainly, as stores open up, people may want to turn knobs as you described. We think that's probably going to be a trend that continues. What we found is that well-located -- shopping is an experience that some people enjoy and for certain items that will continue to well-located retail. For blocking and tackling things that are staples, we find that it's convenient and cheaper to continue to shop online, and we don't see that trend backing up. The industrial space we have is very full. There's a tremendous supply-demand imbalance. We don't see that changing even as COVID runs its course. We found that some more supply would help the industrial market become more healthy. That supply comes at a tremendous cost. Our portfolio -- we're way under replacement cost in our NAV and in our portfolio, so we see that as an opportunity to grow. Rents are certainly continuing to grow. So we see that as healthy. It's good observations you've made in terms of what could potentially happen as COVID matures and people do to -- maybe go back to some shopping in person, but we see the convenience and the cost of online shopping continue to be an advantage over brick-and-mortar stores. So any other questions? Hearing none, I again want to thank everybody for coming. So the last 2 years have been really important for DIR. Our European expansion has certainly been a highlight for us. We -- because of COVID, because of travel restrictions, we have not been able to bring our investment community, our analyst friends to see the assets in person. I'm happy to announce we are going to do a property tour in September, so we look forward to that. But in the meantime, we have put together a video to kind of highlight some of our European assets, give you a flavor of the asset quality and some of the markets we're in. So this will end the formal presentation. The video of the European assets will play now. We will also be around as the management team to answer any further questions you might have. But thanks again for coming.