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

Good afternoon, everyone. It's 12:00. We will 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 meeting. I will act as Chair of the meeting. Robert Hughes will act as Secretary of the meeting. With the consent of the meeting, I appoint Daniela Munoz and Jamie { Vazshik ] of Computershare Trust Company of Canada as scrutineers for the meeting. We will proceed with 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. Please -- 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 or who represent by proxy unitholders who hold at least 25% of the votes attached to all outstanding REIT units. As a result, we have a requisite quorum of unitholders present, and I declare the meeting to be properly constituted for the transaction of business. The first item of business is the presentation of the REIT's 2022 Annual Report, which contains the REIT's audited financial statements for 2022 and the report of the auditors thereon. I note that the Secretary has placed before the meeting a copy of the 2022 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, Jennifer Scoffield and myself. Shannon, will you please nominate the nominees?

I nominate the individuals listed in the Management Information Circular dated April 21, 2023, for election as trustees of the REIT to hold office for the upcoming term.

Thank you. Are there any further nominations? Since there are no further nominations, I declare the nominations closed. Are there any questions on this motion? Seeing none, 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 the 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 on the election of trustees. Therefore, I confirm that the motion has been carried and the 8 persons who were nominated have been elected as trustees by acclamation. I would like to take this opportunity to thank Sheldon Wiseman, who is not standing for reelection, for his service and contribution over the years. The next item of business is the appointment of auditors. The Audit Committee and the Board have recommended the reappointment of PricewaterhouseCooper 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.

Are there any questions on this motion? Seeing none, the meeting will now vote on this motion. I propose to take the vote by a show of hands. I would ask those unitholders and their proxy holders who are in favor of the motion to please raise your hand. [Voting]

Are any votes withheld? The motion is carried. PricewaterhouseCooper LLP have been reappointed as auditors and the Board authorized to fix their remuneration. The formal terms of business as set out in the notice of meeting have now been dealt with. As there are no further business to come before this 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, Vin, and good afternoon, everyone. Thank you for joining us today for Dream Industrial REIT's 2023 AGM. This is a great venue. It's great to be back in the hockey Hall of Fame and in the spirit of the good old Canadian game. I'm joined by our right-winger Alex Sannikov, our President and Chief Operating Officer; and on the left-wing, Lenis Quan, our Chief Financial Officer. It has been another momentous year for Dream Industrial. We have significantly enhanced the quality of our portfolio and business. And today, we would like to share some of this progress and our outlook. Our corporate strategy is centered around 6 key pillars: maximizing organic growth within our portfolio; deploying capital towards the optimal opportunities; executing on our development pipeline; enhancing the sustainability profile of our portfolio; leveraging our operating platform; and maintaining a flexible balance sheet. We've made a lot of progress on each of these pillars over the past few years. This progress is evident as we look at our track record. In the past 3 years, our NAV per unit has increased more than 60%, driven by strong tenant demand and robust leasing activity. Including our attractive distribution of $0.70 per unit, we have generated total returns of 85% over the past 3 years, showcasing our active asset management expertise. We remain well positioned to deliver strong returns for our unitholders. Since 2019, our portfolio has more than tripled to $7.4 billion with over 70 million square feet of owned and managed properties across strong markets in North America and Europe. Following the Summit transaction, we are now 1 of the top 3 industrial platforms in Canada. This scale allows us to improve our market positioning and provide best-in-class service to tenants across the country. It also provides the resources to pursue various asset management strategies to further enhance value from our portfolio. I'll now turn it over to Alex to speak about the strategic drivers of our business and provide an update on our operations, development and sustainability initiatives. Alex?

Thank you, Brian. Good afternoon, everyone. We're focused on building out various levers to enhance the value of our business. These key drivers are summarized on the slide behind me. Some of them are relatively new, and some have been in place for quite some time. I will now elaborate on how these factors contribute to the growth of our business. The charts behind me illustrates our strong operating performance metrics. Without going over every single one, these numbers highlight both our track record of delivering organic growth as well as the potential for more growth in our business. The outlook remains robust. Market rents are nearly 40% higher than our in-place rents. And as leases roll, we expect to capture this significant upside. In Q1 2023, we reported 13% year-over-year same property NOI growth. We expect full year organic NOI growth to be at the high end of our guidance of 8% to 10%. Our development pipeline is a key driver of FFO and NAV growth. We're also improving the quality of our portfolios through our development program. We currently have [ 4 ] million square feet of development opportunities underway in our -- in advanced stages of planning. We expect an unlevered yield on cost of 6.5% on these projects. Our pipeline is comprised of expansion projects on vacant land adjacent to our income-producing properties, redevelopment projects and greenfield development. On the following slides, we'll show a few examples of projects from each category. Starting with expansion projects. This video highlights our expansion project in Germany. A 240,000 square foot expansion in Radeberg near Dresden was completed last year. This expansion was started on spec, but was fully leased to 2 tenants prior to completion. We achieved a yield on cost of 6.8%, and we also received a DGNB Gold certification for this development. Our Radeberg property overall delivered exceptional returns. Since the acquisition roughly 3 years ago, we achieved leasing spread of 50% on leases that rolled over and increased the value of the entire property by 70% net of construction costs. Moving on to redevelopment projects currently underway in Mississauga. The location of this property truly is centralized when it comes to GTA industrial with superior access to major highways. This new logistics asset will total 200,000 square feet of GLA with 40-foot clear height. We are building to new net-zero standards and expect the building to be both net-zero and LEED certified. We are consistently receiving strong interest in this property and expect to achieve a yield on costs in the mid-6% range. Lastly, we wanted to highlight an example of a greenfield project. Our greenfield program allows us to add best-in-class industrial properties to -- at substantially higher returns compared to acquiring assets. Our development at Abbotside Way is now substantially complete. Abbotside is 150,000 square foot multi-tenant logistics facility, which we also expect to be LEED certified. We have recently signed our first lease of the property at rents above our pro forma. We're also engaging with several prospect tenants for the balance of the space. Over the past 2 years, we successfully partnered with global institutional investors to enhance the scale and profitability of our business. These partnerships provide us an opportunity to grow accretively while requiring limited equity capital. The intense scale of our platform allows us to work -- more effectively work with our key tenants across multiple assets and markets, provide access to additional investment opportunities and diversifies risk. We now provide property management and leasing services to 33 million square feet of properties in Canada and the U.S. We started this business 2 years ago. Since then, we have grown our net margin from management services by 5x. We expect the run rate to continue to increase as we drive organic growth and add further scale to our platform. Lastly, we're dedicated to our sustainability program. While Lenis will elaborate on our ESG initiatives in greater detail, I wanted to highlight one of the key aspects of our approach to sustainability. We believe that investing in sustainability is good business. Our solar program is a great illustration of this approach as it allows us to combine value-add strategies with meaningful contribution to our net-zero targets. Our completed projects to date have achieved an annualized unlevered yield on cost of 20%. We're hoping for some sunny weather this year, which will help us achieve over $1 million of revenue from renewable energy. We also have a strong pipeline of new solar projects across our portfolio. I'll now turn it over to Lenis to talk about our financial highlights and ESG.

Thanks, Alex. It's great to see everyone here today. To support our strategic initiatives and the drivers of our business, we continue to maintain a strong and healthy balance sheet. With growth in funds from operations or FFO and several development completions coming online that are accretive to net asset value and cash flow, we retain a conservatively financed balance sheet with ample liquidity to fund our development pipeline and invest capital alongside our capital partners. We are forecasting 2023 FFO per unit in the mid-$0.90 range with potential for upside. With several drivers of cash flow growth, our business is positioned well to continue delivering FFO growth in a higher interest rate environment. Our focus on sustainability opens the door to additional financing options available to fund these initiatives. To date, we have issued $850 million of green bonds with nearly 50% allocated towards green buildings and eligible green projects such as solar panel installations and LED lighting upgrades. We have $500 million of eligible projects in the pipeline with a further $150 million of projects in feasibility. We currently have green-certified buildings totaling 1.6 million square feet across our 100% owned property portfolio. And we are in the process of certifying an additional 4.5 million square feet of buildings that are already built to green standards. We have committed to achieving green certifications on all our new developments as we expect our development program to significantly enhance the sustainability profile of our business. As part of the Dream Group of companies, we are one of a select group landlords that have increased focus on reducing emissions and managing climate risk. We have set a target to achieve net zero on Scope 1 and 2 emissions by 2035 and select Scope 3 emissions by 2050. Last week, we released our updated sustainability report, detailing our key performance indicators, recent accomplishments and go-forward initiatives and commitments. Our sustainability efforts continue to be recognized by leading third-party agencies, and we expect further improvement over time as we continue executing on our initiatives. I will now pass the puck back to Brian for closing remarks, and then we'll be happy to take any questions from the audience.

Thank you, Lenis. And on behalf of management and our Board, I want to thank everybody for your attendance in support of Dream Industrial. We remain committed to the game plan that we outlined today as well as our strategic pillars. And I think we're well positioned to continue to drive growth and value for our unitholders. So thank you for your attendance today. We'd be happy to answer any questions from the audience.

Yes, sir?

Is there any kind of rent increase maximum [ like on various ] buildings that were built before 2018 for residential, the maximum [indiscernible] [ the most we can raise ] Is there anything like that in any of the countries in your system where the government is mandating the maximum rent increase or [ somehow ] [indiscernible]?

Thank you, Paul. Industrial is very different than residential. We don't have the same kind of government restrictions that you would find in that asset class. The markets drive a lot of our restrictions. For example, in Europe, you have an indexation concept that would determine the rent growth each year. We're certainly experiencing tremendous spread to expiry. When tenants roll, we're able to mark to market. We've got -- we've reported on that. Alex, you can talk about the different markets or the nuances. But in many of our markets, we have contractual rent steps, and then we can mark-to-market when the tenant expires or when a new tenant comes in for that space.

[indiscernible].

No. Alex, you can comment on that. You don't have any further comments here?

Thanks, Brian. Yes, there's no government restrictions. There's contractual arrangements, and that's what govern -- in the market overall is governing the spreads on lease rollover.

Any other questions? Yes, sir?

I have some questions. I'm sorry, I missed the first half of the presentation. The first question I have is regarding the [ unit ] that was mentioned. Is that on the cost of the new builds, is that on the cost of construction that does not incorporate the land value? Or does it incorporate the land value?

Alex, I'll let you elaborate on that because on an expansion property, it's different than on a greenfield property. But go ahead.

Thanks, Brian. So our year loan cost includes land for our greenfield projects and redevelopment projects. For expansion project, the land is already acquired and owned next to income-producing assets. We don't include that.

The expansion [indiscernible] just on the cost of [indiscernible]

On incremental capital invested. And when it comes to greenfield and redevelopment project, that includes the value of the land.

Sure. I have -- maybe ask another question. But I have other question was regarding the solar that you mentioned. Is that solarization happening from the Dream Industrial side? So are there any owners or is somebody else the owners, and they are getting some part of the...

Good question. Go ahead, Alex.

Yes. Thank you. Yes, our solar program is such that we invest capital on our own roofs, we then generate power and depending on where we are, In Europe we can sell to the grid. In Alberta, for example, it's a microgeneration program, and we can sell it basically to the tenant who is using the power in the building. But then we generate the power, we invest the capital, and we get the revenue from it.

[indiscernible] it's Dream who contract out [indiscernible] and Dream is the owner as well?

That's right.

Thank you. Any other questions? Well, thank you so much for attending today and for your support of Dream Industrial.