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

Good morning, everyone. It's 10:00, and we'll 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 [ Arlene Arlelo ] of Computershare Trust Company of Canada as scrutineers for the meeting. We will first proceed with our formal business. To expedite the formal part of the meeting, Robert Hughes, a unitholder, 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 mailings 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 2023 annual report, which contains the REIT's audited financial statements for 2023 and the report of auditors thereon. I note that the secretary has placed before the meeting a copy of the 2023 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. R. Sacha Bhatia, Michael Cooper, Alison Harnick, J. Michael Knowlton, Alexander Sannikov, Vicky Schiff, Jennifer Scoffield and myself. Rob, will you please propose the nominees for election?

I nominate the individuals listed in the management information circular for election as trustees of the REIT to hold office for the upcoming term.

I second the motion.

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 trustees. 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 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 Ben Mulroney and Brian Pauls who are not standing for reelection for their 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 PricewaterhouseCoopers LLP chartered professional accountants as auditors. Can I have a motion?

I move that PricewaterhouseCoopers LLP be appointed auditors of the REIT net subsidiaries for the ensuing year, and on the Board of Trustees be authorized to fix their remuneration.

I second the motion.

Are there any questions on this motion? Seeing none, the meeting will now vote on the motion. I propose to take the vote by a show of hands. I would ask that those registered unitholders and duly appointed proxy holders who are in favor of the motion to please raise your hands. Any votes withheld? The motion is carried. PricewaterhouseCoopers LLP have been reappointed as auditors and the trustees authorized to fix their remuneration. 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. Can I have a motion?

I move to approve the resolution amending the deferred unit incentive plan as set out starting on Page 19 of the REIT's management information circular.

I second the motion.

I have been advised by the scrutineers that a majority of the proxies received by management prior to the meeting have been voted and that more than 50% of the proxies received by management prior to the meeting have been voted for the deferred unit incentive plan amendment resolution. Therefore, I propose to take the vote by a show of hands. I would ask those registered unitholders and duly appointed proxy holders who are in favor of the motion to please raise your hand. Any against? 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 or credited 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 are no further business to come before this meeting, I declare the formal part of the meeting to be concluded, and the formal meeting adjourned. I now invite the management team to make a short presentation. After their presentation, we will have a question period.

Thank you, Vincenza. Good morning, everyone. Thank you for joining us today for Dream Industrial REIT's 2024 AGM. It has been another strong year for Dream Industrial as we focus on executing on our key growth drivers, and we are excited to share our outlook for the business with you today. Over the last several years, our industrial platform has grown to $15 billion of gross assets with over 71 million square feet of owned and managed properties across strong markets in North America and Europe. Over the $15 billion, $8 billion is comprised of assets held in our co-investments with our private partners providing new avenues for us to grow. The other $7 billion is wholly owned by the REIT and comprises a portfolio of high-quality assets that are well located in supply-constrained markets. Following the Summit transaction, largest industrial platforms in Canada, spanning nearly 50 million square feet. This scale allows us to improve our marketing positioning and offer differentiated service to our customers across the country. Our acquisition strategy over the past few years has transformed our portfolio into an attractive mix of urban assets with base sizes that balance growth with stability. We focus on urban mid-day assets that are well located close to major transportation hubs, main highways and population centers. We like functional buildings that are attracted to several types of occupiers. Our markets like the GTA have occupancy constraints -- have supply constraints and consistent demand, resulting in assets that often have long-term value creation potential from redevelopment to higher and better uses. This slide details the key strategic drivers of our business that contribute to our growth. Maximizing organic and NAV growth within our portfolio is our top priority. Executing on our development pipeline and driving incremental NAV and FFO growth has been an added driver for our business. We're also leveraging our operating platform and fee potential of our business. And last but not least, we are optimizing our cost of debt, maintaining a flexible and conservative balance sheet. We have made a lot of progress on each of these pillars over the past 2 years. This progress is evident as we look at our track record. Over the past 5 years, our NAV per unit has increased by nearly 60%, and we hit 3 consecutive years of double-digit FFO per unit growth as a result of strong comparative properties NOI growth and active asset management. In the next couple of slides, we will go over each of our strategic pillars. Starting with the outlook for organic growth within our business. We remain encouraged by the healthy leasing momentum across our portfolio. We continue to execute on our strategy of maximizing rental rates on new leases and renewals and we have been able to achieve solid rental spreads, both on [ DIR ] and Dream Summit portfolios. Our lease maturities are well staggered with over 7 million square feet of leases rolling in the next 2 years, of which nearly 70% is located in Canada, where the average market rent is more than 60% higher than the in-place rent. We're optimistic that we'll continue to capture significant organic growth within our portfolio as leases roll. Our development pipeline is another meaningful driver of FFO and NAV growth and remains a top capital deployment priority. Over the past 2 years, we have delivered nearly 1 million square feet of expansions and new developments at an average yield of 7%. We currently have 1.7 million square feet of new projects underway. We expect an incremental investment of just over $100 million to complete these remaining projects over the next 12 to 18 months. Including the cost of land, we are targeting an average unlevered yield on cost of 6.6% on these projects. On this slide, we wanted to highlight our recently completed redevelopment project located in Mississauga. This new urban logistics asset totals over 200,000 square feet, featuring 40-foot clear height, net zero radio certification and is located in close proximity to highways 401, 403, 407 and 410, just to name a few. And it's also located in close proximity to the Toronto Pearson Airport. We're pleased to announce that we have successfully leased the entire space to 2 tenants, achieving an average rent of $21 a foot and annual steps of 4%. With rent commencement scheduled for September, we expect $4.5 million of incremental annual NOI contribution on a run rate basis. With that, we achieved an overall yield on cost of about 6.6%. These strong leasing results highlight the continued demand and strong rental rates for well-located mid-bay urban industrial product in the GTA. Beginning in mid-2021, we successfully partnered with global institutions to enhance the scale and profitability of our business. Currently, we have 4 partnerships that drive incremental FFO per unit while requiring limited capital. Our private capital strategies have also resulted in growing in meaningful property management fee stream, generating over $15 million in net fees to date. We continue to explore accretive opportunities to grow our private industrial business and add scale to our industrial platform. I will now turn it over to Lenis to talk about our sustainability and financial highlights.

Thanks, Alex, and good morning, everyone. To support our strategic initiatives and the drivers of our business, we continue to maintain a strong and healthy balance sheet with total available liquidity of over $600 million leverage in our targeted mid-30% range, we retain sufficient capacity to execute on our development pipeline, value-add initiatives and invest alongside our private capital partners. Our debt maturity profile remains well staggered over the next few years. We have already addressed all of our 2024 maturities, consisting primarily of our $200 million floating rate bond maturing next week, which we are refinancing with a new unsecured term loan denominated in euros at a rate that is 50 basis points lower. We expect that the pace of organic growth within our portfolio will continue to exceed the pressure from higher interest rates. The majority of next year's maturities will occur in November and December 2025. We are expecting FFO per unit growth in the mid-single-digit percentage range for 2024. Combined with several development assets achieving stabilization by the end of this year that are accretive to NAV and cash flow, our business is positioned well to continue delivering both NOI and FFO growth well into 2025 and beyond. Our sustainability initiatives, which I will speak about next have allowed us to access additional financing alternatives. And on this chart, you can see the $850 million of green bonds that we have issued over the past few years, the box highlighted in green. We believe that investing in sustainability has to be good business for it to be sustainable. Our solar program is a great illustration of this approach as it allows us to combine value-add strategies with meaningful contributions to our net zero targets. Our completed projects generated more than $1 million in solar revenue in 2023, achieving a yield on cost of more than 10%. While our investment to date has been focused in the Netherlands and Alberta, Canada, we continue to underwrite opportunities to scale up our solar program. We have a strong pipeline of projects that are currently underway or in feasibility across Canada and in other countries in Europe. As I mentioned, our focus on sustainability opens the door to additional financing options available to fund these initiatives. To date, we have issued $850 million in green bonds with approximately $690 million allocated to the end of 2023 towards eligible projects. We expect to allocate the remaining $160 million this year. We currently have green-certified buildings totaling 5.4 million square feet across our wholly owned portfolio, and we just released our 2023 sustainability report, detailing our key performance indicators, recent accomplishments and go-forward initiatives and commitments. As part of the Dream Group of companies, we are one of a select group of landlords that have increased our focus on reducing emissions and managing climate risk. 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 it back to Alex for closing remarks, and then we'll be happy to take any questions.

Thank you, Lenis. And we thank everyone here for their support as we continue to execute on our strategic pillars, and we remain well positioned to continue creating value to our unitholders. We will now open up for questions.

I'm [ Calderon ] from Burlington. Just looking at the accounting, the annual report, I'm looking at Page 1 and Page 22.

Yes.

My question is this, why are there negative numbers for income in the last 3 months, but not of course, for the whole year. And that applies to both pages. Looking at Page 22, it's a bit more detailed. What's the problem in the last quarter of '22 and '23 that does not apply to the rest of the year.

As you know, we report under IFRS. And under IFRS, we revalue our properties on a quarterly basis. And every quarter, we see fluctuations in property values. And so some of these fluctuations get reflected in our net income results. And so valuation gains or losses that are not realized in many cases, are then included in net income. And that's what's driving the fluctuation of net income, which is why ourselves, but generally, the industry is primarily focusing on other drivers of -- and other metrics when evaluating performance such as FFO per unit, which does not include those -- does not include those accounting metrics.

Okay. But when you're actually changing the value of the properties, I don't understand how that directly affects net profit, rents taken in and costs of running the system.

It does not. It's something we need to reflect under IFRS. If you look at, let's say, companies in the United States who report under U.S. GAAP, which is a different set of accounting rules, and they don't include those valuation adjustments. But under IFRS, changes in property values are reflected in net income. They don't reflect or don't affect the business' ability to generate cash flow, and that's why we are focusing on FFO per unit as an alternative metric to evaluate that ability and evaluate the ability to continue paying distributions.

Okay. But why would the value of properties be going down when you have high occupancy and good rental income and new properties opening. It's hard for me to picture a negative number flat in there?

So what we have seen over the past 24 months is interest rates have been increasing. And as a result of increasing interest rates, we have seen cap rates on properties expand. Especially in Europe, we've seen more cap rate expansion than in Canada and what has been offsetting that is rental growth. So both market rents and in-place rents have been rising. And so absolute values of properties in markets where we've seen significant rental growth such as Toronto have stayed stable. But in other markets, we've seen a little bit of adjustment and correction as a result of rising interest rates. Are there any further questions? It looks like no further questions. We thank everyone again, and we look forward to seeing you next year.