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

Good afternoon, ladies and gentlemen. Welcome to the Dream Industrial REIT Third Quarter Conference Call for Wednesday, November 2, 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 will have a question-and-answer session. [Operator Instructions] Your host for today will be Mr. Brian Pauls, CEO of Dream Industrial REIT. Mr. Pauls, please go ahead.

Good afternoon, everyone. Thank you for joining us today for Dream Industrial REIT's Third Quarter 2022 Conference Call. Speaking with me today is Lenis Quan, our Chief Financial Officer; and Alex Sannikov, our Chief Operating Officer. For Q3 2022, we reported FFO per unit of $0.22 for the quarter, led by strong CPNOI growth. Excluding $1.1 million of lease termination fees and $1.7 million of one-off U.S. fund related income recorded in the prior year, our year-over-year FFO growth was nearly 7%. Our pace of CPNOI growth continued to be robust and was 8.2% in Q3, led by Ontario and Quebec at 17% and 10%, respectively. For the 9-month period, our CPNOI growth was 10%. During the quarter, we leased a total of 457,000 square feet of new expansions and achieved a yield on cost of approximately 7.7%. Our capital deployment activity remains focused on driving cash flow and NAV growth over the long term. Our near-term development pipeline totals nearly 2.8 million square feet with a total cost of $578 million. Based on our current expected unlevered yield on cost of over 6.4%, these projects are expected to add over $30 million of NOI to our portfolio. During Q3 2022, we completed the previously announced acquisitions of 2 properties in Germany, totaling 276,000 square feet for a total purchase price of $37 million. In October, we completed the acquisition of 217,000 square feet situated on 10.7 acres of land in Etobicoke for $66.5 million. The property is immediately adjacent to our existing assets at 161 in the West Mall. This acquisition gives us control of over 21 acres with frontage on both Highway 427 and the West Mall. The best-in-class location allows for significant optionality in the future. Despite the macroeconomic environment, industrial fundamentals remain strong and have supported robust leasing momentum across our portfolio. Our portfolio is located in markets that are in close proximity to large population centers and present significant barriers to entry for new supply. With vacancy in the low single-digit range across our markets and replacement costs continuing to increase, we expect further upside in market rents. We continue to see a long runway for industrial fundamentals, and our business is well positioned to outperform. I'll now turn it over to Alex to talk about our organic growth outlook and operations.

Thanks, Brian. Good afternoon. Leasing momentum in our portfolio remains strong, and we reported 8.2% year-over-year CPNOI growth this quarter. This was driven by a 4.5% increase in in-place rents and a 0.8% increase in average occupancy. Year-to-date, our CPNOI growth was -- has been 10%, which is at the upper end of our previous guidance of 8% to 10%. We ended Q3 2022 with committed occupancy at 99%, essentially unchanged from the prior quarter. We continue to see strong levels of leasing activity across our key markets. Since the beginning of the third quarter, we have signed 2.6 million square feet of leases across our portfolio at an average spread of 39%. In Canada, we have signed 1.5 million square feet of leases at a spread of 60%. Now I'll talk about some of the key highlights. In Montreal, we signed a 206,000 square foot lease at a 55% spread. We achieved 4% contractual rent growth over the 5-year term. In the GTA, we signed a 180,000 square feet renewal, where we were able to more than triple the rental rate with 4.25% annual steps over the 5-year term. We also signed a 10-year renewal with our largest tenant in Regina, totaling 275,000 square feet with 2% annual steps. In Europe, the industrial leasing market remains robust, and we signed 1.1 million square feet of leases during the quarter. The largest lease was added 600,000 square foot building in France, where the tenant vacated upon lease expiry in Q3 2022. We identified in our underwriting last year that we would get the space back and that the in-place rent was above market. We already signed 80% of the building or 467,000 square feet with a global logistics company and the lease commenced in October. Although we achieved the rental rate above our underwriting, this inflate -- this new lease negatively affected our overall leasing spreads for the region. Excluding this deal, the average rental spread for our European leasing volume was nearly 6% for the quarter, and 10.5% year-to-date. We are in advanced negotiations with the prospects for the remaining 130,000 square feet at a rental rate that is over 10% above the deal signed in Q3. In Dresden, in Germany, we leased our 241,000 square foot expansion to 2 tenants with the leases commencing in January 2023. There was significant interest in the space, and we were in advanced negotiations with 4 different tenants. We achieved an unlevered yield of 6.8% on our development, which is above our underwriting. With an essentially full portfolio and strong leasing momentum, the organic growth profile for DIR remains robust. We now expect CPNOI growth for 2022 to be above 9%, compared to our prior guidance of in the 8% to 10% range. During the quarter, the value of our assets increased by $43 million, primarily driven by higher market rents, increased values for properties appraised externally and substantially completed expansions that are now leased. Driven largely by the increase in the asset values, DIR's NAV per unit increased to $17.05, a 19% increase year-over-year. The current carrying value of our assets equates to just over $170 per square foot, which is well supported by private market data points. While the cap rates are likely to increase modestly on the back of rising interest rates, we believe that the spread between in-place and market rents should offset the impact on capital values. We continue to see a significant disconnect between public and private market valuations. For example, our current union price implies a capital value of just about $130 per square foot on our income-producing properties, which is significantly below private market values, especially as our operating performance remains robust. In addition to CPNOI growth, we continue to see several drivers of NOI and NAV growth across our portfolio. We have made significant progress in our development pipeline and achieved strong unlevered yields on our recently completed projects. The 96,000 square foot phase 2 expansion at Marie-Curie in Montreal is substantially complete. And we signed a lease at a rate that is 30% higher than the rate we achieved on phase 1 earlier this year. Overall, we achieved an unlevered yield of over 8.5% on both phases. Also in Montreal, we signed a lease for 120,000 square foot expansion expected to be completed next spring, which resulted in a yield on cost of over 8%. Over the next 12 months, we expect to complete construction on 7 projects totaling over 1 million square feet, and we are currently in various stages of negotiations and marketing for the balance of the space. We expect that these projects will be substantially leased prior to completion. Lastly, moving on to some of the other value drivers within our portfolio. We are executing on 15 sole projects across Canada and Europe that will add over 22,000 solar panels. We expect an overall capital outlay of $12 million with unlevered yields on cost over 10%. Q3 marked the first quarter that solar income came online, and we are realizing nearly $0.5 million from a completed project in the Netherlands. We expect the run rate to increase materially in the coming quarters. Our U.S. property management and leasing platform continues to generate strong income. We have generated an operating profit of nearly $3 million to date in 2022. Overall, we are encouraged by the operating fundamentals in our markets and the opportunities within our business to drive organic growth in NOI and NAV as we execute our active asset management strategy. I will now turn it over to Lenis, who will provide our financial update.

Thank you, Alex. Our financial results are strong and demonstrate the success of our strategic initiatives over the past several years. Diluted funds from operations was $0.22 per unit for the quarter, 0.9% higher than the prior year quarter and 7% higher after excluding the $3 million of lease termination fees and onetime administration fees recorded in the prior year. The strong year-over-year growth was due to higher NOI from our comparative properties and property management income from the U.S. industrial fund. We ended the quarter with leverage just above 29% and with $346 million of available liquidity. In October, we upsized our unsecured facility to $500 million with an additional $250 million accordion, providing us with additional flexibility to capitalize on strategic investment opportunities. Our near-term debt maturities are limited with around $250 million of debt maturing in the next 15 months. With continued access to euro-denominated debt that is around 100 basis points lower than North American debt, we expect refinancing these upcoming maturities to have limited impact on our financial results. Our in-place rents are nearly 30% below market, which should continue to support healthy organic growth, offsetting any increase in interest expense from refinancing debt at higher rates. We continue to expect FFO per unit for the full year 2022 to be in the range of our prior guidance dependent on foreign exchange rates. Our strong and flexible balance sheet and significant opportunities of driving cash flow and net asset value continue to position us well to deliver strong operating and financial results. I will turn it back to Brian to wrap up.

Thank you, Lenis. Our strategic initiatives over the past several years have provided a strong platform for DIR to deliver robust organic NOI and FFO growth over time, while upgrading portfolio quality through our development pipeline. We remain well positioned to create value for our unitholders. We'll now open it up for questions.

[Operator Instructions] We have a question from Mr. Mark Rothschild.

Brian, you spoke about the difference in values between private markets and public markets. Can you maybe just expand on how the strategy for capital changes to the extent this goes on with the unit price trading well below NAV?

Sure. Thanks, Mark. I mean what we're seeing is we are constantly underwriting. We're looking for opportunities. We're very aware of our cost of capital. We've got a significant balance sheet strength to allocate to strategic initiatives or strategic opportunities or any distress that we might find. What we're finding is some of our best investment is in development. It's in our own properties and certainly through our organic growth. That's where we see some real opportunity and where we're going to focus, although we're kind of always looking given the capacity we have.

And while you may not need the capital now, do asset sales enter into the picture is something you're considering with the different values?

Sure. I mean, I've mentioned before that we have a model evaluating all of our assets all of the time. And so I think, we -- for example, we have gotten calls from users from some of our properties that may pay more than the market would pay for an investment property if they're going to use it themselves. And we would certainly look at that. It's now probably one-off opportunities or one-off discussions within our team of what we might recycle, rather than a -- we're in the strategic markets we want. So we're not looking to necessarily exit certain markets or make some different kind of strategy exit like that. But we are looking at one-off opportunities to continue to upgrade quality. Quality is what we're very focused on, long-term growth, asset quality, it's why we are performing really, really well in uncertain times right now. So we're going to continue to upgrade quality.

Okay. Great. And maybe just one more question. Clearly, the leasing spreads are quite strong in Ontario, Eastern Canada and not bad, but just not nearly at that level in some of the other markets. Should we expect over the next year or 2 for this to be a somewhat similar range for what you can achieve or what will this converge at all?

Alex, you can talk about our outlook.

When we look at Alberta, Calgary in particular, Mark, we see that rents are starting to rise. And so we expect that our spreads in Calgary will trend upwards over time. We're seeing the same in Europe. We are seeing rents are generally rising. So I expect that we'll be delivering strong spreads. Will they get to the Ontario level spreads? It might take some time, but we think that the trajectory is generally upwards.

Our next question comes from Sam Damiani.

Just a follow on Mark's question. Just wondering what your updated thoughts are on buying back units just given, I guess, you're seeing the asset value continue to increase and have confidence that it's going to continue to do so and how you look at that gap to where the price is traded.

Sure, Sam. I mentioned to Mark that we think some of our best investment is in our own properties through development, and that's a great place to allocate capital. That's where probably our highest priority is right now, is allocating capital there. And Alex, you may want to add to that.

Yes. Thank you, Brian. Sam. As you know, we disclosed our expected yields on our development projects, some of which average to about 6.4% for the program. Obviously, that 6.4% number includes land, which is already owned. So the incremental yield on incremental capital invested in these projects is much, much higher than 6.4%. In other words, not pursuing a development project has an opportunity cost of 8% to 9%, depending on the projects. And so that's how we're thinking about them.

And so you're seeing that as a more favorable opportunity than buying back your own portfolio at whatever it is, a 6% cap rate today?

Yes.

Okay. And just on the interest rates, Lenis, you mentioned about 100 basis point spread between North America and Europe. Was that on a swap basis or is that raising domestic Europe debt? And I wonder if you could just clarify what the absolute rates are right now.

Yes, for sure. I think, right now, the -- I'm looking between unsecured in Canada and swapping to euros would be above that 100 basis points different. Obviously, if we were to look at the secured debt in Europe, the rates could be a little bit lower than that. So we do have some options on that front. They could be about 50 basis points, even lower than what we're seeing on the slot. So that would put you in the mid-4s to high 4s.

And just handling the refinancing activity that you anticipate over the next 18 months or so, like how much of that could considerably be done in Europe or swapped into euros?

Yes. So the mortgages we have maturing next year, they are all European mortgages. So we would look to be able to replace that with European mortgages.

The next question comes from Kyle Stanley from Desjardins Capital Markets.

You mentioned a little bit on your leasing strategy for new development. I'm just wondering, has there been a shift there at all? Is it still more lucrative to wait as long as possible before signing a deal on a new development? Or would you rather have something locked in a little bit sooner, just given the macro headwinds?

Yes, Kyle, it's Brian. We have started all of our development on spec. We're in very, very tight markets. Many tenants do not plan so far ahead that it works to wait for a pre-lease. And what we're finding is that the financial results on a pre-lease or a prenegotiated deal when you haven't broken ground, are not as good as if we're building into a market that has tremendous need for new supply. So I think our execution has been better to basically build on spec. Sometimes tenants come when steel goes up, sometimes they come earlier or later, but basically prepare -- be prepared to build entirely on spec and lease it, kind of build into a market and it's coming to us. So Alex, you can respond with what's happening on the ground. But he gave some examples in our opening remarks of our results of development, which have proven that this strategy has been working, but go ahead.

Brian. We continue to see that tenants look to make space decisions in relatively short order. Tenants really start engaging on a project when steel is up and -- or we're building it and closed. What we're also seeing is our leasing strategy and generally strategy of the site allows us to mitigate any construction cost increases much more effectively compared to pre-leasing at a defined rate 2 years before when the building is done.

Okay. Great. The 3PLs and e-commerce tenants have obviously been very active in taking up space in the last few years. I'm just wondering, should you see a slight slowdown from those types of tenants? Are there enough tenants that have either been on the sidelines or priced out of the market in recent years that could kind of backfill that demand? And any kind of negative absorption would potentially be mitigated by that?

What we are seeing from 3PLs is that they remain very active, both in Canada and in Europe. And so we've done deals in some of the deals that we talked about work with 3PLs. We also have some users directly taking space in our buildings, but there's a lot of 3PL activity as well, and these are global names who are very active in markets, like Europe. Europe e-commerce still has a lot of runway. And that continues to drive some of that activity. But generally, we continue to see 3PL access.

Okay. Okay. And then I think just the last question is, last quarter, you mentioned seeing some development projects in the nodes that you're currently operating in, maybe being put on hold. Could you elaborate on that? Are you seeing any more of that this quarter?

Yes, we're starting to see more evidence of that or some of the data points that were more speculative when we made that comment last quarter are becoming more firm in terms of projects getting delayed and -- I don't want to get into the exact projects, but examples would be markets like Southwestern Ontario, we're seeing some of the more merchant developers slowing down and putting projects on hold, which is positive in terms of the health of the overall market and positive story from our perspective. For rental growth, the development is that continues to happen is sponsored by well-capitalized players, primarily in build-to-hold programs.

Okay. And actually, I lied, I did have one last quick question. Same property NOI growth in Quebec was still very strong in this quarter, but what did slow a little bit from the second quarter? I'm just wondering what the driver of that slowdown was?

I don't think that there's anything that is in particular, there's some idiosyncratic drivers. What I think we need to highlight and maybe emphasize with respect to same property numbers that you're looking at is, when you look at the year-to-date numbers for 9 months versus the current quarter, the same-property pool is different. So for example -- and when we issued guidance at the beginning of the year and then reiterate that guidance throughout the year, or comment on that guidance in any way, we would refer to the same property pool at the start of that particular year, so at the start of 2022 in the case of this year's guidance. And so when you look at Q3, 2022, the same property pool in Q3 2021 is different because there were some acquisitions that were completed. And -- so that number will move around the quarterly number.

Our next question comes from Himanshu Gupta from Scotiabank.

So just looking on the acquisitions, the Etobicoke property for around $67 million, a very recent acquisition. So what was the pricing on this? And do you think the values have changed a lot in the last 6 months? Any color there?

So maybe I'll start with the color. So this is -- as Brian commented, this is a very strategic side. It was -- it's immediately adjacent to the site we own. It allows us to assemble over 20 acres of land in a prime node that's at Highway 427, just North of [ Sherway ] Gardens. This is could be a prime location for double-story warehouse, if this were to be in industrial node over time, there could be higher net of uses. In terms of pricing metrics for this particular building, the price per square foot was just in around $300 mark. And just around 5 cap going in yield was upside, obviously, as leases roll and as rents continue climbing up. But the true merit of the deal was the land assembly and the strategic merit of having 20 acres in that location. And lastly, I would just add that there's a couple of assembly opportunities we're looking at within that node, much smaller than this deal to almost complete of luck.

Got it. And Alex, you mentioned around 5 cap rate. Are the in-place rents quite different from the market rents today on this property?

Yes. The in-place rents are below market, and we continue to see that market rents rising, especially in these locations.

Got it. Okay. Fair enough. And then sticking to the valuation theme, but moving continent. So on European portfolio, your IFRS cap rate was adjusted around 25 basis points. I mean was it enough, like given the macro and given the cost of financing, which just Lenis told us. So maybe can you elaborate in terms of what are you seeing in terms of asset value pricing there?

Yes. That's a good question. When we look at the European values, it's about EUR 100 per square foot that these properties are at, which is very low number compared to, obviously, what you see in North America. We continue to see rising rents there. And overall, we see that -- while there is upward pressure on cap rates, maybe from rising interest rates, capital values are generally holding because the market rent growth offsets a lot of the pressure ongoing in cap rate because at the end of the day, if you look at the total return and the total return equation generally holds given the rising rents.

Okay. So far, you're happy with that 25 basis point adjustment that kind of takes into account the new cost of financing and market rent growth.

Let me [indiscernible] seen in the context of the rent -- of the market rents. But obviously, as you know, the leases in Europe in our portfolio, in particular, are indexed to CPI. So we're getting a direct pass-through in in-place rents, which is obviously, if our rent steps in Canada averaged just over 2.5%. Obviously, we're signing kind of in the 4s as we do new deals. In Europe, we're seeing high single digits, in some cases, double digits adjustments contractually.

Got it. And speaking of the rent growth profile here. So CPNOI was very strong this year, almost 9% guidance. Any expectations for the next year? Or what are the expectations for the next year, 2023?

As I mentioned, we don't issue guidance at this time of the year, but we will, as always, provide more context in February. We hope that all the ingredients for our same-property NOI performance and outlook are in our public materials, and you can arrive at some directional conclusions with that.

Okay. Or maybe just a follow-up there. What are you expecting on the European lease expiries next year in terms of the rental spread? And then I think not much is coming to you anyways next year, being less than 1 million square feet. Any discussions there?

We have nothing -- so this year, in 2022, we had this large 600,000 square foot expire in France, as we talked about. That was a bit of deosyncratic in the sense that the space was overrented to begin with. We underwrote it that way. But now that's leased and just a small pocket left 400,000 square feet that we're in the process of backfilling as we commented. When we look at 2023 rollover, there's nothing of that profile that sticks out, if that's helpful color. And we generally expect that our performance on leasing spreads and general leasing activity will be strong in Europe.

Last question, housekeeping. Current income taxes, I think, was higher in Q3 relative to previous quarters. Lenis, what is the run rate expected going forward? And I mean, do you now expect higher income taxes in the Netherlands?

The higher income taxes are not from the Netherlands. We're active in other countries. It's actually coming from our Spanish subsidiaries. But I would say for a run rate, I would take the average of the first 9 months and that kind of gives you the quarterly run rate for the cash taxes on that basis.

Our next question comes from Gaurav Mathur from iA Capital Markets.

Firstly, just focusing on the European portfolio. Do you think that we have gone through most of the price discovery mechanism that most industrial markets have in Europe have seen? Or do you think there's still more to come?

Gaurav, I'll attempt to answer your question. I'm not sure I understand it fully. But when we think of it fundamentals in Europe, we think that the rental growth is accelerating. So some of the comments that we made about slowing down supply very much applies in Europe. As we commented before, our experience is that in Europe, we see more merchant developers generally. And so many of these players are slowing down in terms of putting out new products or repricing existing projects, and that leads to more rental growth generally in rental -- rising rental levels. So we see that. When it comes to pricing mechanism or price discovery mechanism, as you know, they're competing forces. We've got rental rate growth, rising interest rates, certainly a factor. So overall, the data points that we've seen so far point to stable capital values. But I think it's a new in phenomenon Europe in terms of accelerating rental growth.

Okay. Great. And just switching the lens here to the development pipeline. Has the pressure on construction costs subsided in any manner? Or is that still proving to be a deterrent across most markets, thereby causing projects to be delayed?

We are -- we're starting to see that the overall construction cost is stabilizing. There are some elements that are -- that continue to rise roofing, for example, is still kind of on an upward movement as a cost item generally. But some other cost positions that have been rising over the last 12 to 24 months have stabilized to some extent.

Okay. Fantastic. And just lastly, look, the REIT has a robust development pipeline, a very strong mark-to-market opportunities as well. But if I may ask, what will prompt you to consider an NCIB down the road, especially given where the units are currently trading at.

Yes, Gaurav, I'll jump in and then kick it back to the team as well. I mentioned before that we're focused on right now, investing in our own properties, making them better, building very good, best-in-class buildings on land, much of land that we already own. So that's where our capital is being allocated. We will kind of review this as we go. But right now, we're seeing opportunities within our portfolio that are very accretive, very attractive and probably the best use for our funds. We are watching the market very closely to see if there's any opportunities that would be very strategic or opportunistic for us. So right now, that's where we have prioritized our capital.

Our next question comes from Pammi Bir from RBC Capital Markets.

Maybe just coming back to the broader backdrop, leasing does seem to be, again, fairly strong. But I'm curious, can you comment -- are there any signs of maybe early softness or early signs of weakness that from a demand standpoint in any particular markets or any even particular user types? And I'm just curious if you're seeing -- if any of your European tenants or other markets are facing some cost pressures that may limit the ability to push through some of the leasing spreads that you've been getting?

Yes. Pammi, we're looking every day. We're looking every day very, very closely for distress for chinks in the armor, for any kind of signs of weakness. Alex mentioned a lot of what we're seeing. We're signing a lot of leases. We sign a lease on -- if you take all the leases, divided by the days of the year, it's probably a lease a day. And so we're seeing real-time data. We are not seeing distress on the ground. We're not seeing rents back up or any kind of softness in demand. Alex, I'll let you add any color to that?

Thank you, Brian. And Pammi, I think we would point to the leasing activity that we reported very recently. So most of these deals that we talked about, whether it's our large deal with France, the lease up of [ Rottenburg ], some of the deals that we did in Montreal or the renewal -- 200,000 square foot renewal in Toronto. Those are very, very recent deals. So we didn't sign them, in May, and they're coming kind of online now. These are all signed in August, September, October. And so these are recent data points that hopefully point to the operating fundamentals that we see.

Got it. No, that's helpful. Just in terms of next year's lease maturities across the portfolio, is there anything -- any larger vacancies or anything that you expect to get back that you know at this point is going to be coming back? Or is it still too early?

It's still too early. The one property that is -- we're definitely getting back, and that's on our redevelopment list is that if you look at our development disclosure on our development table, you will see a project in Montreal, Quebec and our planning. So that property we're getting back and then -- but we are excited about the opportunity because that allows us to intensify the site. It's a very centrally-located property. So that's the one we'll be getting back and it's going to be a development asset. Other than that, we are not seeing anything that would be substantial. I should correct myself as well. You see it with the assets as well on the redevelopment list. So that, again, was always identified as a redevelopment property. So we're going to get -- the property is 200,000 square feet. So the [indiscernible] 200,000 square feet, we intend to knock down the building and build 400,000 square feet roughly. So again, that's -- it's a development opportunity. So both of these have been on our radar for a long time and disclosed in our development pipeline.

Got it. Just on -- coming back to that Etobicoke acquisition. What's the remaining lease term on that space?

Yes. The lease term is pretty short, which is -- it's less than 2 years and allows us to capture some upside pretty quickly.

Got it. Okay. And then just 1 last one. Regarding the disclosed incentive fee payable, I think it's $250 million. If I recall, I think this is the first time you've actually disclosed the amount, although you can certainly calculate it over the past few years. Was there any particular rationale for perhaps providing that disclosure this quarter?

Pammi, it's Lenis. Yes, there was -- it's the 10th year anniversary of DIR this year, so there was a date within the original asset management agreement. And so since we've passed that key date in there -- I mean, as you mentioned, all the pieces were in our disclosures to be able to calculate the fee, but we've just started to -- under the disclosed assumptions in there, provide the number for the readers.

And so presumably, that you'll continue to provide that? Or is it just sort of just for this quarter because of the expiry?

Yes. No, no. Yes. It will be in our quarterly disclosures going forward.

[Operator Instructions] The next question comes from Matt Kornack from National Bank Financial.

Just with regards to the lease in France, you noted that it came in ahead of your underwriting pro forma. Can you give us a sense as the how market rents moved in that market relative to your expectation over, I guess, the last year?

It came in -- so we did underwrite a significant rental growth when we acquired that mega portfolio as we commented back in 2021. Our investment thesis for Europe has been throughout 2020 and 2021. That's our underwriting didn't have to include significant or outsized rental growth for us to achieve the returns that we needed and that we're compelling and [ effective ]. So that -- so that's kind of one data point. The other data point is, yes, it did exceed our underwriting and our growth expectations. So it was kind of in the mid-single-digit range in terms of the growth relative to underwriting in summer of 2021.

Okay. No, that makes sense. And then I guess it doesn't sound like there's any similar type properties in 2023, but are there other leases in that portfolio or other aspects of the European portfolio that would have above-market rents? Or is it -- I guess there's a 7% mark-to-market opportunity across the portfolio? Is that kind of how we should think of modeling it at this point?

Yes. I think that's right. This was a fairly large building. It's a fairly large certainly, a large expiry that was somewhat unique in that portfolio.

And then, I guess, lastly on that front, is the expectation that industrial rents would grow at higher than inflation? I mean they've been growing inflation by a pretty significant magnitude in Canada, but the same would be true in Europe and that we would see a continuing widening spread, notwithstanding capturing the CPI increases. And then maybe as a secondary and last question to that. How much is left to capture of the current increase in CPI just through, I guess, the mechanism of the leases, the anniversary dates, like how much of the sort of 10% CPI have we captured at this point?

Yes. So starting with the second question. Most of our lease anniversaries are at the beginning of the year. So we've captured a fair bit in 2022, but then we'll see more in 2023. Some of the leases, as you know, have hurdles, especially in Germany. So those hurdles can be met at any point. So it's harder to predict. When it comes to the rental growth relative to inflation, we have seen certainly this year in Europe that rental growth has been higher than inflation because it's driven by supply and demand, primarily. It's difficult to project that. But what our outlook generally is that the rental growth will remain strong. So it's difficult to predict supply-demand dynamics. What we're seeing is that supply is generally shrinking demand remains strong. And so if that equation holds, combined with inflation, it should lead to rental growth that is above inflation. We're not banking on that, but that's kind of a reasonable to expect.

That's clear enough. Congrats on the quarter.

Thank you.

We have no further questions currently. I will turn the call back over to Mr. Pauls for closing remarks.

We'd like to thank everyone for your time today. We look forward to speaking again soon. And in the meantime, please take care.

Thank you. This concludes today's conference. Thank you for participating. You may now disconnect.