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

Welcome to the Dream Industrial REIT Second Quarter Conference Call for Wednesday, August 5, 2026. [Operator Instructions] And the conference is being recorded. 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. Your host for today will be Mr. Alexander Sannikov, CEO of Dream Industrial REIT. Mr. Sannikov, please proceed.

Thank you. Good morning, everyone. Thank you for joining us today for Dream Industrial REIT's Second Quarter 2026 Conference Call. Here with me today is Gordon Wadley, our Chief Operating Officer; and Lenis Quan, our Chief Financial Officer. We delivered another quarter of strong operating and financial results and achieved some significant milestones during the quarter. For the quarter, we delivered 10.3% year-over-year comparative properties NOI growth, driven by healthy leasing activity, leasing spreads and strong occupancy. The strong pace of organic growth drove FFO per unit growth nearly 8% over last year. We also announced a 2.5% increase in our distribution, first since 2013. This increase is supported by our robust operating and financial performance to date, the progress we have made in establishing various growth drivers for our business, our solid balance sheet and most importantly, the confidence we have in the outlook for the business. It is also consistent with our objective of increasing the distribution over time at a pace that represents a portion of our free cash flow growth so that the amount of retained cash flow available to be reinvested in our business continues to compound. We are executing on our strategic priorities and a key focus this year is redeploying the proceeds from the initial portfolio sale to the DCI venture with CPP Investments, which was completed in 2 tranches earlier this year. We have made good progress on the redeployment front. In addition to our NCIB activity, since the beginning of the year, we have completed or placed under contract over $515 million of acquisitions across our wholly owned portfolio at accretive returns. Within our wholly owned portfolio, we have completed $332 million of acquisitions so far this year, adding over 2 million square feet of urban infill, small bay and mid-bay assets across Canada and Europe. These assets were acquired at a going-in yield of approximately 6.3% with strong embedded rental growth translating into mark-to-market yield of approximately 7.4%. More recently, we completed the acquisition of an 11 asset portfolio located across major German urban areas with in-place rents approximately 20% below market. We have further $140 million of acquisitions under contract or in exclusive negotiations across Canada and Europe that are expected to close in the third quarter at similar going-in yields and mark-to-market potential. In addition, we announced the Chancerygate transaction last week. This transaction helps us achieve multiple strategic objectives for our European business. We are entering the U.K. multi-let industrial sector, which is underpinned by strong structural demand tailwinds and constrained urban land supply. It is a natural extension of the small and mid-bay strategy we have been executing across our markets. We're entering the market with a high-quality wholly owned portfolio of recently completed development assets in addition to 2 projects currently underway. We expect to invest $150 million in these assets at an expected yield on cost of 8%. Lastly, we are adding immediate scale to our Private Ventures segment in Europe through existing vehicles and a new programmatic JV. For the existing vehicles, we are acquiring just over $40 million of co-investment interest alongside institutional partners in several JVs with a gross asset value of over $2 billion. These assets are expected to generate stabilized unlevered yield on cost of 7.5%. Given the scale of these JVs in the U.K., we will explore opportunities to establish a property management platform in this market to grow our recurring revenue further. In addition, we're in advanced negotiations to set up a new partnership with a target gross asset value of $800 million, also focusing on multi-let industrial assets, primarily in Continental Europe. DIR is expected to have a 5% stake in this new JV and provide property management and leasing services in Germany and Netherlands where we have an in-house platform. Our existing Private Ventures segment is performing well and continues to scale and contribute to our overall earnings. Operationally, the performance is in line with our business plan as we see improving fundamentals across our markets. Since the beginning of 2025, these JVs have completed over $660 million of acquisitions in addition to the recapitalization of the seed portfolio by the DCI JV. And our net property management income grew nearly 28% year-over-year this quarter. The acquisition pipeline remains robust for our JVs through marketed and off-market opportunities. And in addition, we continue to recycle capital out of nonstrategic assets at accretive returns. Lastly, we're making progress on our power procurement program for select assets that we have identified as candidates for data center development. We are responding to various RFPs from occupiers and have seen the level of engagement generally increasing over the past quarter. In parallel, we are working with various utilities to put in place formal agreements for power delivery timelines. We will report back with more details as we make progress. Overall, we are encouraged by our financial results, operational progress and advancement of our strategic initiatives. I will now turn it over to Gordon to discuss our operational highlights.

Thank you, Alex. The industrial sector is demonstrating resilience despite ongoing volatility from macro events. The Canadian industrial market strengthened over the prior quarter. National availability declined quarter-over-quarter with most major markets posting flat or reduced availability. Moreover, the new supply pipeline continues to moderate, supporting leasing fundamentals in major markets nationally. We expect these trends to support continued absorption and rent growth expectations across most of our operating markets. These trends and improving market dynamics are reflected in our operating results. Committed occupancy in Canada was 96.8% at quarter end, up 150 basis points from a year ago, while our in-place occupancy of 96% is 200 basis points higher year-over-year. This absorption is driven by the lease-up of several vacancies in Quebec and our recently completed development in Alberta, which is now 100%. We are seeing more deal velocity, including development leasing. We have completed 247 deals for over 6.1 million square feet across the whole platform, inclusive of private ventures since January of 2026. Of this, 173 deals for 3.3 million square feet were leased across our wholly owned DIR portfolio at a weighted average rental spread of 21.1% over prior or expiring rents, including 1.1 million square feet of new leasing. Leasing economics remain disciplined. WALT continue to be stable with average lease terms of 4.1 years. Compared to 2025, we are seeing a reduction in lease incentives across major markets, resulting in continued growth in net effective rents portfolio wide. This trend is strongest in Calgary, where we are starting to see a healthy pace of rental growth and upward pressure on rental escalators. We are also seeing it impact the GTA as surplus availability in that market gets absorbed. We expect incentives to normalize further, in turn putting upward pressure on net effective rents and ultimately translating to higher face rents. Our development leasing momentum has also accelerated. During the quarter, we signed over 370,000 square feet of leases at projects across our broader industrial platform, including the Greater Toronto Area and the Kitchener-Waterloo corridor. Notably, we signed a 265,000 square foot 10-year lease with a global automotive manufacturer at our project in Cambridge, Ontario, bringing the property to 100% occupancy starting in the third quarter. This project has now generated an unlevered yield on cost of 6.7%. Subsequent to the quarter, we entered into a binding lease for 127,000 square feet at our recently completed redevelopment project in Whitby and are in advanced negotiations for another 110,000 square feet, which would lift occupancy at the property to over 60%. Over in Europe, leasing velocity for urban mid-bay assets has remained resilient, and we continue to see positive absorption in that segment, while absorption timelines for larger bay products have been somewhat slower. In-place occupancy in Europe was 92.5% at quarter end, primarily reflecting an anticipated transitory vacancy in Spain as well as the vacant value-add asset in the Netherlands that we acquired last quarter. We are in advanced negotiations to lease up both vacancies. The leasing pipeline remains strong with multiple ongoing negotiations. Despite the temporary occupancy pressure, our European portfolio delivered solid comparative properties NOI growth of 5.6% year-over-year in the quarter. This growth was supported by CPI-linked rent increases, higher rents on new and renewed leases and contributions from completed intensification projects. Importantly, our European leases are indexed to local CPI or include contractual rent steps, providing embedded annual growth across the portfolio. As those indexation provisions reset, they provide potential upside to NOI in 2027. In addition, our transitory vacancies are attracting good lease discussions and tours, which when leased, would set us up well for the strong operating performance in our European portfolio to continue into next year in terms of occupancy and CP NOI growth. Overall, our leasing pipeline remains healthy with over 35 deals and 2.5 million square feet in various stages of negotiations, coupled with continued tour velocity and deal economics. We are encouraged by the trajectory of our occupancy across the portfolio for the balance of 2026. I will now turn it over to Lenis to discuss our financial highlights.

Thank you, Gordon. Our portfolio delivered comparative properties NOI growth of 10.3% for the quarter, led by 14.6% growth in the Canadian portfolio and 5.6% growth in Europe. This strong pace of organic growth, along with higher property management income, contributions from acquisitions and development lease-up and the benefit of our NCIB activity drove diluted FFO per unit to $0.28 for the second quarter, 7.8% higher than the prior year quarter. These factors more than offset the impact of refinancing at higher interest rates and operating at lower leverage following the asset sale to the DCI JV. Our net asset value at quarter end was $16.76 per unit, in line with the prior quarter, reflecting stable investment property values. At the end of June, we closed the second tranche sale of assets to the DCI venture for net proceeds of $353 million. The proceeds were used to partially repay our revolving credit facility and to fund acquisitions completed subsequent to the quarter. We ended the quarter with approximately $750 million in available liquidity, leverage of 35.8% and a net debt-to-EBITDA ratio of 6.6x. As we deploy our available balance sheet capacity over the remainder of the year, we expect leverage to trend back towards our targeted high 30% range and our run-rate net debt-to-EBITDA to trend towards the mid-7x range. The 2.5% distribution increase will take effect with our September 15 distribution, bringing the annualized rate to $0.7175 per unit. With an FFO payout ratio of 63% this quarter, the increase is well covered. We intend for future distribution increases to be sized at a level below the pace of FFO per unit growth, ensuring the business continues to grow its retained cash flow. Our first half performance demonstrates the strength of our business, and we remain confident in our growth trajectory for the balance of the year. For the full year 2026, we continue to expect average in-place occupancy in the high 94% to low 96% range. With our strong results for the first half of the year and the healthy leasing momentum across the portfolio, we are raising our full-year expectations for comparative properties NOI growth to be 7% to 8%, well above the 5.7% growth we delivered in 2025. Based on the pace of our capital deployment, we expect full-year FFO per unit to come slightly ahead of our previous outlook. Overall, the previously communicated range of $1.08 to $1.10 is intact, and we are now expecting the results to be slightly above the midpoint. The Chancerygate assets are not expected to have a significant impact on 2026 FFO. We expect them to start contributing to FFO as they are stabilized and become income-producing over the next 6 to 18 months, depending on their stage of development completion. As always, our FFO growth expectation is predicated on current foreign exchange rates and interest rate expectations. I will turn it back to Alex to wrap up.

Thank you, Lenis. Dream Industrial's business is anchored by a functional high-quality portfolio supported by a diverse occupier base and meaningful new revenue streams. Our results this quarter highlight the evolution of the total return model for DIR offers to its unitholders. We remain focused on delivering sustainable and growing free cash flow that we'll look to reinvest back into the business as our opportunity set continues to expand. We will now open it up for questions.

[Operator Instructions] The first question comes from Brad Sturges with Raymond James.

On the new pan-European JV that you're in advanced discussion on, I'm just curious if you could give a little bit of color in terms of if it gets consummated, what the investment strategy and return profile could look like for that new fund?

Thank you, Brad. Well, the investment strategy will be focused on multi-let industrial assets. So a similar profile to what Chancerygate already owns and manages. It will be a mix of standing assets in development with an overall value-add return levels and geographically geared towards Continental Europe.

Would there be potential to be seeding some of that portfolio from the wholly owned assets you own today? Or would it be strictly more of a third-party acquisition vehicle?

It's generally focused on new acquisitions. We are not contemplating seeding this JV with any of the assets right now, but there's always possibility to have conversations. Nothing is ongoing at the moment.

And just for my understanding on Chancerygate, what's the pre-leasing rate of the assets either substantially completed or under construction, just to get a sense of what leasing is left to do, if any?

Yes. So these are multi-let assets. As such, they don't get pre-let during construction. They get leasing starts generally when the assets are built. So out of just under 300,000 square feet of assets that are the most advanced vis-a-vis construction, just over 100,000 has been built and delivered in Q1. So that asset has been in lease-up. And there, we are just about to finalize the lease for about 30% of the space and in advanced negotiations for another 15%. So it's going quite well, and the asset was just delivered in the first quarter, just highlighting the leasing velocity for this kind of product. And then the other 2 assets are going to be delivered in September. So leasing marketing is starting, but the lease-up will likely start ramping up.

And sorry, what would be generally your expectations for the time line for a full lease-up process to reach stabilization once the construction is completed for these type of assets?

It will be gradual over the next 12 months, maybe shorter. It will be gradually ramping up for these assets.

Your next question comes from Sam Damiani with TD Cowen.

Congrats on the good results in the quarter and securing the opportunities to deploy the capital from the DCI JV. With the sort of slightly raised guidance for this year, just wondering how that makes you think about the trends going into 2027, both on same property and FFO growth.

Thank you, Sam. I think the trajectory is intact. We haven't provided a formal outlook for 2027 yet but the overall trajectory is consistent and the drivers are all intact and are compounding as hopefully, you can see from our results and the progress we're making whether it's the same-property NOI pace, whether it's additional revenue sources are contributing. And our in-place cost of debt is getting closer and closer to our marginal cost of debt. Therefore, the refinancing headwinds are going to be less pronounced into '27 and into '28. And so we are encouraged by that and encouraged by the overall trajectory of the earnings growth.

And just, I guess, more specifically, would the slightly higher growth this year in any way sort of take away from the potential next year? Like are you capturing growth earlier than expected? Or is the absolute growth?

No, we're not capturing growth earlier than expected on same property side. If anything, recapturing the growth that we are delivering with kind of occupancy levels that are generally below the run rate. So there's more potential from occupancy going up. And as Gordon suggested in his remarks, we're starting to see more evidence of rental growth, especially in Alberta, starting to see net effective rents moving positively in markets like GTA. We continue to see rental growth in certain pockets in Europe. So the rental growth should be an added driver as that trend continues.

And maybe on the intention to establish a property management platform in the U.K. Do you have a timeline on that as to when, I guess, the expenses might ramp up and revenues start to be recognized?

Yes, Sam, I wouldn't say that that's the intention, it's an opportunity. So we underwrote the Chancerygate transaction primarily on the basis of the assets that we're buying and the returns that we're buying. And then obviously, that opens up the opportunity set for us to continue deploying in the U.K. through an established operation, both in development and standing assets. When we looked at the existing ventures the returns that we're getting there is compelling and attractive. And so that's how we underwrote it. The opportunity to establish a property management platform is going to be additive to that. And then we're putting emphasis on this new JV that is going to be ramping up in the markets where we're already present from a property management capability standpoint.

And last question for me is on the property management margin. I think previously, you had communicated some sort of 5-year guidance on how that margin could grow. And now with the Chancerygate announcement made and the new JV being created, do you have a new kind of growth target for the property management fee margin?

We'll provide that when we communicate the guidance for '27. But generally, it's intact, perhaps slightly better as we're seeing more scale to that business.

Your next question comes from Himanshu Gupta with Scotiabank.

So guidance was increased on same-property NOI growth for this year. Which region is driving that increase in expectations? And then on the Spain vacancy, do you see that being backfilled in your guidance?

Thank you, Himanshu. On the Spain vacancy, it's not materially impacting our NOI outlook. Rents in Spain are growing, but they're still relatively low. So while this is impacting the occupancy numbers, especially occupancy numbers for Europe, optically, it doesn't really change the NOI all that much given the rents are still relatively low. We are in advanced negotiations there, as Gordon suggested, to potentially commence for the occupancy to commence this year, but it doesn't change our outlook dramatically. And regionally, as we communicated when we issued the same-property NOI outlook earlier in the year when we said that it would be stronger than '25 despite relatively strong first half of '26 being expected, we kind of baked in some reserves for timing of lease-up. And now we're seeing the leases -- contracted leasing coming through, strong retention. So we are confident to increase that outlook, and that's across the board, really. It's not driven by any particular region.

And then on the lease incentives, how do you see that evolving? I know you made a comment in your prepared remarks on incentives. Just wondering what was the peak and where are we now, specifically in the GTA?

Yes. Good question, Himanshu. It's Gordon. We're seeing some NER compression right across the portfolio. It's most pronounced in Western Canada. But as the new supply starts to dry up, which it has been and get absorbed in Toronto, we're starting to see reductions as well too in the GTA. Where we're noticing the most of the reductions in Western Canada has predominantly been driven by direct deals of our leasing teams. So we're mitigating commission costs. And then also, too, we've been mitigating some deal and allowance costs. In the GTA, we're predominantly seeing less free rent in deals. And the other spot where we've been doing quite well as an operating team is on renewals. We're having a number of tenants exercise their option to renew given the low supply. And in many of those cases, costs associated are being reduced. So, we're seeing that predominantly in Western Canada, the GTA and some marginal tightening as well, too, as the supply gets absorbed in the Greater Montreal area.

And sorry, in Montreal also, you're seeing that trend coming through lease incentives reduction?

No, not necessarily lease incentive reductions, but we are starting to see more absorption. This was one quarter if you look at some of the national stats where Montreal has had some positive absorption. So, we're starting to see more good deal flow. The small and mid-bay sector in the GMA has been quite good and quite resilient. So we're seeing more competitive deals there. But traditionally, as we have advised over the last few quarters, Himanshu, the larger bay is still quite competitive and soft in the region.

And then just moving to capital deployment. A bunch of these acquisitions announced -- so are the proceeds from CBG disposition, is that fully deployed now? Like once we include the post-quarter acquisition, Chancerygate and the under due diligence acquisitions?

Thanks for that, Himanshu. We still have -- we're largely through the redeployment. They still have some acquisition capacity to get to our target leverage on the debt-to-EBITDA basis and well, to get back to the leverage that we were at prior to the transaction. So we have a little bit more capacity to go.

And then just looking at the acquisitions, I mean, almost $200 million in Germany, I think, post quarter. You mentioned 20% below market, I mean, in that sense, what is the lease term for that particular acquisition in Germany?

It's relatively short lease term, 3 to 5 years, depending on the assets, but on average, I think, in the 3 and change range. Good assets, urban mid-box product in major markets, strong diverse occupier base. There's some single assets there, but also some are portfolio where one portfolio deal that we just completed. We very much are enthusiastic about the profile of this acquisition given the strong going-in yield and the mark-to-market potential. So, we're looking at kind of on the German assets overall, we're looking at about 6.3 going in cap rate with mark-to-market cap rate taking us to kind of mid-7 range, which we think is a compelling profile.

And maybe just the last one. I mean, how does Germany compare to the U.K., like in terms of market rent growth expectations? And I know you just entered the U.K. with a great chance. So just wondering, do you rank one over the other in your outlook?

Look, we will look at every opportunity, and we will compare the total return underwriting between -- well, amongst all acquisitions that we pursue. And we also try to look at sort of the risk-adjusted returns, vis-a-vis the assumptions that we need to put into our model to get to that level of total return. And so, the more assumptions that we need to put in, the higher the risk of that underwriting. So, what we like about Germany is that we can get to attractive total returns without necessarily putting a lot of stress into the underwriting model. And from our existing portfolio, we've seen strong evidence of rental growth in the urban nodes, especially for these midsized footprints. And so, we expect that that will continue because we're not seeing a lot of supply of this kind of product. And so, we're not really seeing how that pressure on the occupier market is going to be change. When we look at the U.K., well, part of the reasons why it took us a while to enter the U.K. market is we were looking at opportunities that would provide a return premium relative to deploying in our existing markets that we know well already. And so, with Chancerygate opportunity we found that where we're acquiring very high-quality assets that we target 8% yield on cost, and that's untrended yield on cost. So, we think that that's attractive. We also think that the U.K. opportunity offers differentiated growth profile through the rent review mechanism that doesn't exist on the continent, doesn't exist in Canada. So, we expect that that is going to be additive to our contractual rental growth opportunities. And rental growth-wise, again, as it is everywhere in our markets, at least, there's no widespread rental growth. There are pockets of rental in Canada. We're seeing Calgary emerging as a market that is seeing the strongest rental growth, for example. There's growth suggests were seeing pockets of that in GTA and similar in Europe. We're seeing pockets of that in our current portfolio and in the U.K. Some markets are doing better than others. And we think that the markets that we're getting exposed to are going to outperform just given the lower starting point.

Your next question comes from Kyle Stanley with Desjardins.

So it was interesting to see the REIT be much more active with on-balance sheet acquisitions versus growth within the various JVs. So, I'm just curious, what's the driver of how that capital is being deployed? Just trying to understand, I guess, the strategic decision-making on how the capital is kind of invested across the various buckets at this point.

Well, we're trying to do both, Kyle. And timing-wise, it just so happened that we've been able to redeploy more capital on balance sheet, but there is a long and pretty active pipeline for our private ventures. We're just not in a position right now to announce any deals, but there's meaningful pipeline that we're pursuing in Canada across the private ventures. So we expect to do well for our own balance sheet program vis-a-vis hitting our deployment targets, and we expect to do well for our partners as well.

That makes sense. It was small, but within the DSI JV, there was the GTA West disposition and the pricing at roughly just over $500 a square foot. I was just curious what is the type of asset type of buyer, just thoughts on the value achieved. Just wondering, is that reflective of a shift in kind of the private market value of assets in the GTA West?