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

Good afternoon, ladies and gentlemen. Welcome to the Dream Industrial REIT Fourth Quarter Conference Call for Wednesday, February 15, 2023. 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 our 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 year-end 2022 Conference Call. Speaking with me today is Lenis Quan, our Chief Financial Officer; and Alex Sannikov, our Chief Operating Officer. 2022 was another strong year for industrial real estate. Despite several macro headwinds during the year, the operating fundamentals of our markets have not skipped a beat and have continued to strengthen. The outlook remains robust. Vacancy across our Canadian and European markets remains at record lows. We have seen strong market rent growth in Ontario, Quebec and in Europe. In Western Canada, rental growth is starting to accelerate. Supply remains limited in all our markets with building restrictions and rising replacement costs. We have significant growth opportunities embedded in our portfolio as in-place rents are well below market. Against this attractive backdrop in 2022, we delivered strong operating and financial results and completed a number of key strategic initiatives that enhance our growth trajectory going forward. We reported 9.6% comparative properties NOI growth during the quarter and 10.5% for the year, which was ahead of the guidance issued at the beginning of the year. FFO per unit was $0.23 in Q4, up 10% year-over-year. We reported $0.89 for the full year, up 9% year-over-year, also at the upper end of our guidance. We completed over 0.5 million square feet of developments during the year at an average yield on cost of above 7.5%. Over the past 3 years, we've positioned our business to have a strong and flexible balance sheet, allowing us to pursue strategic initiatives while adding multiple drivers of growth across the portfolio. Our results and initiatives in 2022 reflect this effort. Our portfolio quality is the strongest it's ever been following strategic recycling out of low-quality, capital-intensive and low-growth assets into modern logistics properties located in Toronto, Montreal and some of the best markets in Europe. Our portfolio has strong occupancy at nearly 99% with a balanced lease rollover profile, allowing us to focus on capturing upside while managing risk effectively. We increased our average contractual rent steps across our Canadian portfolio to above 2.5%, currently up from 2% in 2021. Our European leases are largely indexed to CPI. Our development program started to contribute to our FFO and NAV per unit this year. We expect this contribution to grow as we complete projects in our pipeline. We are pursuing value-added projects across the portfolio, ranging from refurbishing buildings to solar panes. In addition to these organic growth drivers, since 2021, we were actively focused on expanding our strategic partnerships with private capital markets. These partnerships allow us to grow the scale of our platform, enhance the returns on capital invested through fee income and access investment opportunities that would be difficult for us to pursue otherwise without reliance on capital markets. In 2021, we ceded the U.S. industrial fund and maintained a 25% share in the fund as it continued to add scale in the U.S. and improve asset quality. As the property and leasing manager of the fund, DIR earns PM and leasing fees. The net margin on this fee business was $3.6 million in 2022. In April 2022, we formed a $1.5 billion developed to hold joint venture with a leading sovereign wealth fund to further scale our greenfield development program and increase our presence in the Greater Toronto area and Greater Golden Horseshoe area. Through this partnership, we will have access to high-quality development opportunities in our primary markets. As these development projects reach stabilization, we will be earning leasing and property management fees, enhancing our development returns further. Most recently, the formation of Dream Summit's joint venture with GIC allowed us to increase scale in some of the tightest markets globally, deploy our balance sheet into a high-quality portfolio with significant embedded upside while generating immediate accretion to our FFO per unit. Subsequent to the transaction, we will co-own and manage one of the largest portfolios of industrial real estate in Canada with 43 million square feet of high-quality properties primarily located in Ontario and Quebec. We will also have exposure to over 6 million square feet of near-term development projects in Canada. Pro forma the Dream Summit Venture, our co-owned and managed portfolio will grow to over 69 million square feet across Canada, U.S. and Europe with 46% of the GLA in Ontario and Quebec, up from 33% a year ago. In addition to development upside, we believe that Summit's portfolio offers strong organic growth prospects. While the mark-to-market potential in DIR's Canadian portfolio is strong at over 50%. We believe that the embedded upside within the Summit portfolio is significantly higher. Beyond the significant merits of the real estate itself, our programmatic JV with GIC provides an incredible opportunity to continue growing in our core markets at attractive economics to the REIT. With the property management and leasing fee income, we expect the Summit transaction to be $0.01, $0.02 accretive to our FFO per unit for 10 months in 2023. We expect the accretion from the transaction to more than double over the next 3 to 4 years as we grow the NOI of the portfolio organically and as the property management and leasing fee stream increases with higher rents and income. Overall, our outlook for 2023 and beyond remains positive as we continue focusing on executing on our growth strategies across our entire platform. I'll now turn it over to Alex to talk about our operations.

2022 was an exciting year for DIR as we outperformed our leasing and portfolio management goals. Tenant demand for industrial product remains robust across our markets. During Q4, we transacted 1.5 million square feet of leases across our portfolio, achieving a rental spread of nearly 60%. More than half of these leases were in Ontario and Quebec, where we more than doubled the rents. For the year, we transacted 7.2 million square feet at an average spread of over 30%. In Canada, we transacted 4.6 million square feet at an average spread of 47%, led by Ontario at 87% and Quebec at 62%. Toronto and Montreal markets continue to display robust fundamentals, and we expect rents to continue increasing. Our Western Canada markets, particularly Calgary, have performed well. We are starting to see accelerating rental growth as vacancy rates tighten and supply remains constrained. Our asset management strategies have allowed us to drive 11% comparative properties NOI growth in Canada for 2022. We expect this pace of organic growth in Canada to continue, driven by strong contractual rent steps and mark-to-market of leases on rollover. In Europe, the macroeconomic sentiment has improved considerably over the course of the year, while industrial rents continued increasing with limited vacancy and new supply. Our portfolio remains essentially full at over 99% occupancy as we transacted 2.6 million square feet of leases at a 7% spread to expiring rents. These rental rate increases are above and beyond the CPI indexation that we captured on our European leases over the course of 2022. CPI indexation had a significant contribution to our 9.2% CP NOI growth for the year. We continue to see strong demand from occupiers. For example, in our portfolio alone, we are currently in discussions with several tenants in the Netherlands, Branson, Germany regarding possible expansions on excess land, totaling approximately 0.5 million square feet. We expect 2023 CP NOI growth in Europe to remain strong in the mid- to high single-digit range, driven by CPI rent adjustments and rent mark-to-market. Overall, we expect our comparative properties NOI growing at 8% to 10% in 2023. As Brian mentioned in his remarks, we achieved strong development yields on our initial slate of projects and outperformed our underwriting. We have a number of projects that are currently underway and 2023 will be another active year on the development front. We're in advanced stages of construction on our 155,000 square foot ground-up development in Canada. We expect completion in mid-2023 and are currently engaging with prospective tenants. We commenced construction for our ground-up development project in Cambridge. This 440,000 square foot building is part of our GTA land joint venture. We expect to finish construction in the first half of 2024 and are forecasting yield on costs well above 6% before any property management and leasing fees. We're currently underway on our redevelopment of a 3-building cluster on a 10-acre site in Mississauga into a 210,000 square foot net zero design state-of-the-art logistics facility. The rendering of this project is featured on the cover of our annual report. We commenced the demolition of the current buildings in late 2022 and expect to finish construction in the first half of 2024. We are already receiving strong tenant interest. And with that, we expect this project to deliver an unlevered yield on cost well in excess of 6% as well. Including projects in advanced stages of planning, we have over 2.2 million square feet of active projects that are expected to be completed over the next 12 to 30 months. Incremental costs on these projects are expected to be approximately $350 million, with a forecast yield on incremental capital of over 9%. Through our Dream Summit venture, we will get access to an additional 3 million square foot pipeline of projects currently underway, primarily located in the GTA and Southwestern Ontario. We also expect strong returns from these development project that will be further enhanced through the leasing and property management fee streams. To wrap up, I wanted to highlight that over the past few years, we have curated the portfolio strategically with the goal of maximizing the organic growth profile of our business. Our asset management strategies, development and sustainability initiatives are all expected to be accretive to our returns and surface value from our assets. This year's strong results showcased the level of organic growth that can be produced by our portfolio. With the Dream Summit venture, we are positioned to be one of the top 3 industrial landlords and managers in Canada across public and private markets. We expect that this scale will allow us to be more efficient as we execute on our asset management and development initiatives and build strategic relationships with our tenants across the country. I will now turn it over to Lenis to talk about our financial highlights.

Our financial results are strong and demonstrate the success of our strategic initiatives over the past several years. Diluted funds from operations was $0.23 per unit for the quarter, 10% higher than the prior year quarter. For the full year, we reported diluted FFO per unit of $0.89, which was at the higher end of our initial guidance and up 9% year-over-year. The strong year-over-year growth was due primarily to strong comparative properties NOI growth and property management income from the U.S. Industrial Fund. We ended the quarter with leverage of 31.7% and with over $500 million of available liquidity. Following the acquisition of our 10% interest in Summit, we would have successfully deployed capital to bring leverage to our targeted range in the mid-30s percent with over $400 million of total liquidity. We expect to maintain our leverage around this level with a slight uptick as we fund our development pipeline. Our near-term debt maturities are limited with around $270 million of European mortgages maturing this year. We expect to refinance these mortgages with current market rates in the 4.25 to 4.75% range. Our in-place rents are nearly 40% below market, which along with newly developed projects coming online should help to support healthy organic growth and offset any increase in interest expense from refinancing debt at higher rates. Based on our comparative properties NOI and leverage guidance, we expect FFO per unit for 2023 to be in the mid $0.90 range with potential upside. We expect to provide further clarity in the upcoming quarters. Our FFO per unit growth for 2023 is being driven by comparative properties NOI growth and accretion from the Summit transaction. Our FFO guidance is predicated on our current foreign exchange levels and interest rate expectations. Overall, our strategic initiatives have allowed us to build DIR into a business that can generate sector-leading organic growth consistently. I will turn it back to Brian to wrap up.

It's been an exciting start to 2023, and we continue to set and outperform ambitious targets. We are positioned to become one of the largest industrial platforms in Canada across both public and private markets. We are well positioned to capture the benefits of the scale and deliver strong results for all of our stakeholders. We'd now like to open it up for questions.

[Operator Instructions] And we have our first question from Mark Rothschild with Canaccord.

Maybe just starting with Lenis' last comment as far as positions for continued strong organic growth. Looking at the guidance for 2023 and the lease well that you have, is there any reason you shouldn't be able to do comparable rent growth or NOI growth for several years?

We've provided guidance for 2023 at 8% to 10%. The drivers that lead to the guidance remain intact for the portfolio in 2024 and beyond. We don't expect the underlying drivers to change. Having said that, we're not in a position to specifically guide the 2024 numbers, but I think your statement is accurate.

And maybe moving on to something else on the IFRS cap rates that use, to what extent is that based on transactions that have happened or expectations? And maybe just give a little more color on how you arrived at the increase in the cap rates this quarter, the change.

The IFRS values in Canada are largely driven by transactions. We have seen a fair bit of transaction evidence in Canadian markets. Some of the upside captured in the quarter in Canadian values is driven by expansions being completed. And as the yield on cost in these expansions is well over 7%. We've captured some of the upside on development in the values. In Europe, however, we haven't seen as much evidence, as much transaction evidence. The input from our appraisers was largely based on incomplete data and more of the sentiment than the transaction evidence. And that led to a mild correction in Europe that we recorded in the quarter, whereby the slight cap rate expansion was offset by market rent growth to some extent.

And you kind of answered part of my last question. My next question, just offsetting the cap rates, obviously, you have some operating income growth. Would you have the information, let us maybe take this offline to break down the difference between rent growth versus other positive factors such as completing development of positive yields.

Sorry, you meant to break the components, the moving pieces on the value changes.

The higher cap rate, obviously negatively impacts value, but then you had a lot of that or almost all of it offset by income growth or other positive moves in value. What I'm trying to understand is how much of that is from rent growth that maybe you didn't have in your Q3 IFRS NAV that you have now versus value that was actually created from this development.

I think the components are in the MD&A, Mark, and we can connect separately to walk you through that. You can see the market rent movements in the portfolio. We disposed in-place cap rate or implied cap rates in our MD&A, and we also disclose prices per square foot. All the ingredients are there. We'll be happy to walk you through that.

The large part of the positive offsets are driven by market rents given that we had about 600,000 square feet of developments coming online, and that would be when the value creation would be recognized. The large component of the positive piece is coming from market rents.

We have our next question from Kyle Stanley with Desjardins.

In your prepared remarks, you noted seeing an even greater mark-to-market upside within the Summit portfolio. Just wondering, could you elaborate on that? How do you expect to kind of capture that? And maybe where are the differences within the Summit portfolio that was acquired versus kind of the legacy DIR asset base?

We will provide more detail in terms of numbers as we close the transaction and report on the combined portfolio over the coming quarters. In terms of drivers, our portfolio has a short volt, and it's a more multi-tenant portfolio. The leases turn faster. Summit's portfolio has longer rolled and they're more single-tenant buildings. And leases historically have been maybe turning slower. The embedded upside is greater, we believe. We were exposed to the same trends in the markets in terms of growing market rents, but a function of longer rolled in Summit's portfolio, that embedded upside is now greater at this point in time, we believe.

Maybe just switching over to development. Lenis, you just mentioned the developments that came online during the year. I'm wondering, can you disclose what the NOI contribution from the developments that were kind of substantially complete during the quarter was? Just trying to figure out how to model that going forward.

We disclosed that during the quarter, if there really was only about $0.5 million contribution in Canada as they were coming online throughout the year. Some of them have been substantially completed with occupancy starting in early 2023 as well.

If you refer to our development table in the MD&A, you will see that the total cost and completed project is about $80 million at 7.6% yield on cost. If you're trying to model the contribution to NOI going forward, multiplying those numbers will give you a relatively accurate number.

I was just curious on, what was there may be a half quarter's worth of contributions in the fourth quarter. And we can follow up offline just on the timing of the deliveries. That's no problem.

We can do that. It's also on the table as well. But we can certainly reconnect.

Looking for your view on private investment volumes on the industrial side in Canada and Europe in the year ahead. Obviously, it seems we saw a decent amount of transaction comps in Canada, but would just be curious on your thoughts on kind of what happens in the market in the year going forward in both Canada and Europe and if you expect Dream to be active on the external growth side?

We expect to be active through our programmatic JV through the Dream Summit venture. We continue targeting key markets in Canada for that venture being Toronto, Montreal. And we think that the underlying fundamentals are strong with low vacancies, low new supply and rising rents and a lot of the properties that come for sale have embedded mark-to-market upside. That's the type of product that we're targeting, and we expect to be active. As to the market activity, it's hard to predict. We have seen a reasonably strong level of activity in Canada recently. Nothing that points to that slowing based on our conversations with market participants.

We have our next question from Brad Sturges with Raymond James.

Just to go back to the guidance for a second, $0.95 of FFO. What would that -- for fee income, what range should we be thinking about in terms of fee income for the REIT given the partial contribution by the Summit fund but also the U.S. fund as well.

We're not in a position to disclose specifically the fee income for confidentiality purposes and reasons. As we report on the combined property management and leasing fee business, including the U.S. fund property management business, then you will be able to separate the 2 potentially. But at this point, we can't really comment specifically on the fee levels. That said, we refer you back to the accretion guidance that Brian mentioned in his remarks, combined with the cost of funding that we've disclosed in our announcement press release as well as your estimates of the going in cap rate. You probably can back into the margin on that business in approximate terms.

Thinking about capital allocation for this year, how do you think about your best use of capital right now? Obviously, you've got a decent sized development program. Is that the main source of capital for now? Or do you see a return to opportunities on the acquisition side as your cost of capital stabilize and perhaps improves?

We continue to see opportunities organically in the business within the development pipeline, some of the value-add capital that we're investing in our portfolio, whether it's solar or refurbishment or other value-add initiatives. And we have a programmatic component to the Dream Summit venture that we're very excited about. And those are great avenues for us to grow externally if we choose to.

Would part of the capital allocation be additional contributions to the new and existing JV funds that you have?

Yes. As we disclosed in the announcement press release for the Dream Summit venture that there is a programmatic element to that JV. And we intend to grow together with GIC, with our partner in our target markets.

Do you have any guidance around how much additional equity you would expect to potentially deploy not just that fund, but you're still growing the U.S. fund and the development fund as well?

We think that the equity deployment is going to be opportunity driven. We don't usually guide acquisitions, whether it's on balance sheet acquisitions or any other deployment of capital initiatives other than what's organically is embedded in the business, such as the development pipeline. As the year progresses, we'll be providing more color on opportunities that we see to deploy capital increasingly.

We have our next question from Matt Kornack with National Bank Financial.

Just a quick follow-up to Brad's line of questioning there. Would you anticipate maybe contributing some of your existing wholly owned assets into the joint venture and then either use that capital to buy additional assets within that joint venture or in the development one?

Nothing like that is contemplated at the moment.

And then on the G&A front, Lenis, I don't know if you can give us a bit of additional color as to what we should run. It's been pretty stable on a percent of revenue or NOI basis for this year. But is that a good kind of margin to use going forward? Or is there any incremental cost that we should assume in 2023?

I would say it's a good run rate in terms of the percentage of NOI in that 10% to 11% range of NOI. That's a good run rate for 2023.

You mentioned that you've crossed 2.5%, I think you're at 2.6% embedded rent escalators in the existing portfolio. Can you give us a sense there? Are you still on top of these sort of 100% rent increases, putting through 3% and 4% annual escalators on top of that?

Yes, what we typically see in the GTA is -- we're targeting 4% to 4.5%, in some cases, 5% annual escalators on top of the current market rents.

With regards to just looking out a bit further on the debt maturity profile. There's a bit of financing to be done in 2025. Do you anticipate being opportunistic around that or waiting and seeing kind of where the euro interest rate environment goes? And given where rates are between Europe and Canada, just your general thought on the financing side of the business at this point?

Given how volatile the markets were in 2022, 2025 does seem like there are a lot could happen between now and then, let's just say. But yes, we're constantly monitoring. And yes, if there's an opportunity to be opportunistic, we would certainly look to do that. I think our focus, obviously, right now is in the near term. And I think I had mentioned it in the prepared remarks, just addressing the near-term maturities in Europe. That's quite the focus. And we don't see any issues on refinancing the European mortgages on that front. But we'll be opportunistic and continue monitoring to see if we can extend the debt maturity stock further out. In terms of where we're seeing rates, I think that was the second part to your question. I would say for the European mortgages, I'd mentioned the rates in that range of 4.25% to 4.75% for European mortgages, which is the most attractive rate of financing that we're seeing right now for European swapped, we'd probably be somewhere in that 25 to 50 basis points higher for equivalent rates on an unsecured basis in Europe.

We have our next question from Gaurav Mathur with iA Capital Markets.

As 2023 rolls forward, can you discuss how the return profile may have changed when you're thinking of the capital allocation decision between acquisitions, development and potential unit buybacks?

We've consistently pointed out that from the return profile, the opportunities within the business, such as our development pipeline, provide we believe the highest risk-adjusted returns in terms of what we see, as we mentioned in our prepared remarks, when we think about allocating incremental capital to our development program, we're looking at generating close to 9%, if not over 9% yield on that incremental capital, which we think is very compelling and these opportunities are proprietary to us. We think that's an advantage. When it comes to acquisition opportunities, as we mentioned to Brad's questions, we continue monitoring opportunities across Canada. We think that our Dream Summit venture allows us to generate enhanced returns through property management and leasing fee income, which is going to be compelling going forward when we evaluate opportunities together with our partner. When it comes to buybacks, as we communicated previously, we absolutely are open to that, and we're monitoring relative opportunities between buybacks and the development pipeline in terms of the risk-adjusted returns and the impact on financial leverage and financial flexibility and as well as any other strategic opportunities that are available to us.

And then just lastly, on the development pipeline and especially the spec development. Any concerns of leasing softness in the markets which you're targeting over the next sort of 12 to 18 months? Or is it steady and strong ahead?

We don't have any specific concerns on leasing. What we always communicated that the way we have organized our development pipeline is we don't pursue very large projects on spec, we tried to pursue sort of what we would call bite-sized projects that were right for the submarkets, the buildings that we try to build are flexible, so we don't need to lease them to a single occupier, if that's not the demand in the market. All the product that we're building is subdividable, and we are engaging with occupiers already on some of our developments that are targeted for delivery in 2024. We're seeing demand and we're encouraged by the level of interest.

[Operator Instructions] Our next question is from Pammi Bir.

Just with respect to the FFO guidance for the year, the mid-$0.90 range. I think you mentioned with potential upside. Is there something specific that you were referring to or had in mind that could drive that upside, whether it's same profit NOI or fees or developments? Or was it more just a general statement?

No, I think as the year progresses and we execute on the leasing, I think we'll have a bit more certainty around what the NOI is going to look like and what the rental spreads and the upside on that front will look like throughout the year. That's really what it's referring to.

And then just with your pro forma leverage post the Summit portfolio acquisition, with the kind of in your target range, what are your thoughts with respect to maybe recycling some capital either in the existing portfolio or any of the other Summit properties?

Absolutely capital recycling is on our radar. We have started that, as you would have seen in our press release this quarter, we completed a couple of small dispositions in Europe at a premium to carrying value. And there's a few dispositions like that. across the portfolio that we are currently evaluating. We always communicated that we have a pool of assets that we consider nonstrategic. And where we would consider dispositions for the right time. And we are gradually executing on that.

And would these assets be scattered across the portfolio or more specific to Europe or anything you can share there?

Yes. It's primarily smaller assets, assets that came with various portfolios, assets that we don't think really belong in the business going forward. Again, the reason we call them nonstrategic as opposed to noncore, is that they are performing assets. We're not disposing them because we're trying to deal with risk per se, but we think it's not really course of the portfolio going forward because the business has grown considerably. Some of these buildings require attention and capital, and we think our attention and capital are better spent elsewhere.

And is this maybe possibly in the, I don't know, $50 million to $100 million range for the year? Or is there no specific sort of figure that you have in mind at this point?

It could be in that range. Timing will be challenging to predict. We're engaging on some potential opportunities, but it could be in that range.

And then just lastly, with respect to the same property NOI, I just want to clarify, are you assuming sort of stable occupancy at these levels with the vast majority of that 8% to 10% same property guidance being driven by just predominantly from re-leasing or higher rents?

That's right. Yes, we're not assuming significant occupancy gains.

And sorry, one last one, just with respect to, again coming back to the Summit deal, can you remind us the cost of debt that you're underwriting in that?

As we communicated in the announcement press release, we are assuming the existing debt.

No, I meant just in terms of the, your equity funding of that transaction. If I recall, I think you've upsized I believe the time-line. I think it was -- is it still coming in at around 4%?

Yes, that's right. There was a few components to it. But I think on the blended rate of the components was 4% incrementally from the announcement date.

[Operator Instructions] We have our next question from Mike Markidis with BMO Capital Markets.

I know you're reluctant to give specifics on the fee business, and I get that. I was just wondering if you could help us just in terms of how you guys think about it. I know there's a base management fee and then there's leasing fees, et cetera, et cetera. But high level, do you guys look at it in terms of it would boost your unlevered yield on the acquisition by a certain number or range of number? Or do you kind of look at it as a consistent ongoing, because I know it's lumpy, but more of a, on gross revenue basis. I just hope you could give us a little bit of a guidepost in terms of how to think about that going forward.

Yes, we think about it as more of a consistent revenue stream. As we communicated in the prepared remarks, you refer to Brian's remarks, we expect that, that fee stream is going to scale as the income of the portfolio scales as well. As you know, the market standard property management fees are tied to gross rental revenue of the properties. And so as we mark leases to market as gross rental revenue and NOI of the portfolio growth, the property management fee stream will scale with that. And in addition, the leasing fees are tied to the rents achieved on lease rollover and new leases. Directly is connected to the market rent levels from that perspective.

And with the terms, again without getting into the specifics because you do have disclosure for the U.S. fund over the last 3 or 4 quarters, will the terms of, be similar to the U.S. property fund?

As we communicated, we'll try to provide as much disclosure as we can without reaching any confidentiality provisions. We communicated previously in the announcement press release that the fees are, set of market levels.

But when you guys go from gross to net, is that just simply an allocation from your existing OpEx? Just trying to think about that going from the gross fee to the net.

Yes, gross revenue includes base rent recoveries and then the NOI would be deducting operating expenses.

No, no, sorry. Again, I was just talking about the fees because you have it as a net fee contribution, but there's obviously a gross component to that. I'm just wondering if that's just an allocation of your existing OpEx or if there's -- how that all works.

No, it's a distinct business that we're modeling and when we are communicating accretion from the joint venture that takes into account the expenses that we anticipate incurring. It's a net margin.

[Operator Instructions] Our next question is from Sam Damiani with TD Securities.

What's the biggest change you've seen in the leasing markets in your core regions over the last year? What industries are looking for more space, what industries might be contracting, rents are obviously up in a big way in the last year. Any change in the tenants' willingness and ability to pay these higher rents? And what's been the biggest impact from inflation, higher interest rates and the economic uncertainty?

When we think about Europe, for example, we mentioned in our remarks that we're engaging with a number of occupiers across 3 countries on expansion opportunities. Those occupiers are all from very different sectors. When we look at our new leasing volume in Europe, we've seen significant 3PL demand. We've done new leases with end users. We've done deals with tenants engaging in electric car manufacturing, supply chains. We would say that the demand is pretty diverse, and we haven't seen kind of any specific group outperforming. There's been some news of maybe pure e-commerce-driven demand being slower. What we see in our business is that it's very hard to separate e-commerce from the broader supply chains, given a lot of the occupiers that we deal with are engaging in e-commerce one way the other. In Canada, for example, to switch gears, we have been pleasantly not necessarily surprised but encouraged by the developments in Calgary. We're starting to see accelerating rent growth, vacancy levels are pretty low, and Calgary is really becoming a strong alternative for Western Canada in terms of being a distribution hub that is affordable relative to other markets in the West and where occupiers can find space. We have certainly seen that in Canada when it comes to new demand, again, when we look at our diverse tenant base, we haven't seen any particular group of tenants outperform or kind of do worse or significantly better than others. We've done deals as again, with 3PLs, with end users, with manufacturers throughout the year. In terms of tenants willingness to pay rents, obviously, it's in negotiation. However, tenants come to these negotiations usually very well informed of the alternatives and the market. And the location, the labor force that these tenants employ as well as the access to major transportation corridors remain the key drivers for a lot of the occupiers.

Just to confirm, Sam, nothing further?

That's it for me.

We have no further questions in queue. I will now turn our call back over to Mr. Pauls for closing remarks.

Thank you so much for participating today. Please take care. We'll talk soon.

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