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spk03: Welcome to the Dream Industrial REIT second quarter 2024 results conference call on Wednesday, August the 7th, 2024. Please be advised that all participants are currently in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. 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 REITs 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 REITs filings with securities regulators, including its latest annual information form and MD&A. These filings are available on Dream Industrial REITs website at www.dreamindustrialrete.ca. Your host for today will be Mr. Alexander Sanikov, CEO of Dream Industrial REIT. Mr. Sanikov, please proceed.
spk11: Thank you. Good morning, everyone. Thank you for joining us today for Dream Industrial REIT's second quarter 2024 conference call. Speaking with me today is Lennis Kwon, our Chief Financial Officer. In the second quarter, we continued to focus on executing on our key growth drivers. We reported 5% year-over-year comparative properties and a wide growth for the quarter, which drove FFO per unit of 25 cents, in line with our guidance. We have made good progress in our development leasing, with over half a million square feet of projects leased or conditionally leased at strong rents across Ontario and Alberta, including our recently completed Courtney Park redevelopment, which is now fully leased. We're executing on capital recycling to continuously upgrade our portfolio quality with the completion of $50 million of dispositions across Canada and Europe at above pre-sale IFRS values. With nearly $600 million of available liquidity and our marginal cost of debt declining by over 50 basis points since the last quarter, our balance sheet remains strong. Starting with broader market observations, the pace of demand across our industrial market has continued to normalize compared to 24 months ago. In addition, there has been some limited new supply delivered to the market, which along with the rise in sublease options has resulted in an uptick in availability. Based on the current subleasing pipeline we see in the market, we expect availability rates to continue trending upwards for the next quarter or two. Sub-leasing activity usually spikes in response to any economic disruption, but drops off fairly quickly as broader demand picks up pace. As such, we do not expect this particular supply driver to impact the market for the medium term. Current supply under construction represents only a minor fraction of existing market inventory, and we are seeing new construction starts dropping rapidly across our market. With that, we expect our core operating markets in Canada and Europe will remain undersupplied in the context of structural demand drivers for industrial products over the next near to medium term, leading to low vacancy rates and upward pressure on rents. Over the last quarter, we saw higher leasing activity in our development pipeline. During the quarter, we completed our conditional on 150,000 square feet of projects in Ontario, and 400,000 square feet in Alberta. Our recently completed redevelopment project at Courtney Park in Mississauga is now fully leased to two tenants. We achieved an average starting rent of $21 per square foot and annual steps of approximately 4%. We expect this asset to contribute over $4.5 million to our annual NOI on a run rate basis with rent commencement in September 2024. During the quarter, we substantially completed our 20-acre project in Balzac. The project is comprised of two buildings, and approximately 70% of the project is leased or conditionally leased. And we achieved an average starting rent of $12 a foot and annual steps of approximately 3%. We expect the stabilized project to contribute over $4 million of annual NOI on a run rate basis. Spread on contracted leases remains strong. Since the end of Q1, we have signed 2.4 million square feet of new leases and renewals at an average spread of 57%. In Canada, we signed 1.7 million square feet of leases at an average spread of 80%, including a 180,000 square foot tenant in the GTA, who we renewed at a spread of over 200%. In Europe, we signed 800,000 square feet of leases at an average spread of 11%, and we have been able to realize solid rental steps on all of these deals. Our approach to prioritizing rental growth in our leasing strategy has proven to be rewarding despite the temporary drag on occupancy. Our 100,000 square foot property in the GTA is a good example of this strategy. The previous tenant was paying mid $14 rent and was terminated in Q3, 2023. A few months ago, we received an offer in the $15 range, which we passed on and recently signed an offer for a five-year lease for 100% of the building at a rent of $18 a foot with 3.5% step. This new lease is expected to commence in Q3. While patient approach to leasing is appropriate for some assets, we are evaluating all scenarios on an asset by asset basis. For our 200,000 square foot property in the Port of Montreal, we were looking to achieve premium rents for significant outside storage component. Based on the response from the market so far, we currently expect that intensification and reconfiguration of the asset to accommodate multiple tenants will result in stronger returns. As such, we're likely going to pivot towards intensifying and refurbishing the asset in the near term as opposed to leasing as-is. Another approach that we are increasingly exploring is user sales. We have seen significant demand from owner-occupiers in many of our vacant buildings, both in DIR's wholly-owned portfolio and in our private ventures. We are in discussions or have closed on over $100 million of user sales at prices representing a cap rate of approximately 5% on market rent for these buildings, which is accretive to our total returns. As we communicated previously, we are increasingly focusing on opportunities to recycle capital out of non-strategic assets into our core business and markets at accretive returns. During the quarter, we disposed of six non-strategic assets located in Regina at total proceeds of $42 million, representing a 12% premium over carrying value. The consideration included a two-year vended take-back mortgage totaling $29 million and bearing an interest rate of 6.5%. This effectively allows us to continue generating cash flow from these assets for the next two years in addition to $12 million of proceeds up front. We are open to opportunities to sell our remaining Regina assets over time at compelling pricing metrics. As we recycle capital from these assets, our capital allocation priorities remain intact. We plan to reinvest the proceeds towards completing our existing development pipeline, executing on our solar program, and contributing towards our private capital partnerships. which are all accretive from a total return standpoint. To date, in 2024, we have completed over $100 million of acquisitions in the Dream Summit venture. We continue to focus on growing our industrial portfolio in strategic Canadian markets such as Toronto, Montreal, Calgary, and we are starting to explore opportunities in Vancouver. Our business is well-funded to pursue these initiatives on a leverage-neutral basis through existing liquidity and retained cash flow. While the current environment is less certain compared to 24 months ago, all of our growth drivers remain intact. The demand for high quality urban industrial space remains solid and structural supply demand drivers are intact. We expect that our results for 2024 will be consistent with previously communicated outlook and we continue to expect reacceleration of same property NOI and FFO per unit growth into 2025. I will now turn it over to Lennis to discuss our financial highlights.
spk00: Thank you, Alex. We're pleased with our solid financial results for the second quarter. We reported diluted FFO per unit of 25 cents for the quarter, driven by solid comparative properties and a wide growth of 5% and over 2.5 million of net fees generated from our property management and leasing platform. Our NAV per unit at quarter end was $16.73. a slight increase compared to the prior quarter, primarily due to leasing activity driving higher market values in Canada, partially offset by higher cap rates in Europe. We continue to actively pursue financing initiatives to optimize our cost of debt and maintain a strong and flexible balance sheet with ample liquidity. During the quarter, we completed the refinancing of our $200 million Series B floating rate debentures with a new Euro 153 million unsecured term loan. The new term loan bears interest at a rate of 4.01%, approximately 50 basis points lower than the maturing rate. The Canadian equivalent is approximately $225 million, and the incremental $25 million of financing proceeds will be earmarked to repay our European mortgage maturing at the end of August, our last debt maturity for the year. We ended Q2 with leverage in our targeted mid-30% range and net debt to EBITDA ratio of 8.1 times. With total available liquidity of approximately $600 million, we retained sufficient capital to execute our strategic initiatives, including funding our development pipeline and contributing to our private capital partnerships. In July, we extended the maturity date of our $200 million unsecured term loan by two years to match the associated interest rate swap from February 2026 to March 2028, further enhancing our debt maturity profile. No changes were made to the rate or any other substantive terms. Having completed these financing initiatives, we have effectively addressed all of our debt maturities for 2024. The debt markets have become more constructive and recent changes in the underlying rates have resulted in our marginal cost of debt declining by over 50 basis points since the last quarter. Our outlook for the remainder of the year remains intact and in line with our previously issued guidance on comparative properties NOI and FFO per unit. We continue to expect that our occupancy will trend upwards by the end of 2024. Based on the new leasing pipeline and timing of lease commencement, for the third quarter, we expect in-place occupancy to decline slightly, while committed occupancy to remain largely flat to slightly up compared to Q2 2024. Looking beyond 2024, we expect that the pace of organic growth within our portfolio will accelerate and will continue to exceed the pressure from higher interest rates, translating into sustained FFO per unit growth. I will turn it back to Alex to wrap up.
spk11: Thank you, Linus. We look forward to continuing executing on our targets and focus on creating value for union holders. We will now open it up for questions.
spk03: Certainly. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, press star then two. Our first question is from Kyle Stanley with Desjardins. Please go ahead.
spk09: Thanks. Good morning, guys. Linus, I think I just missed kind of what you were saying on the occupancy side right at the end, so I just want to kind of clarify. what your confidence level is on kind of regaining occupancy into year end in order to set up for 2025, or if you can provide, you know, I guess the expected kind of exit occupancy for the year.
spk11: Thanks, Ted. Thanks, Colin. Good morning. As we previously commented in May, we were expecting at the time that occupancy would decline into the mid-year and recover back up to the starting point for the year towards the end of 2024, and our expectations sort of remain intact. So we expect to see in-place occupancy slightly down for Q3, committed occupancy to be flat, maybe slightly up as of September, and trend back up into Q4 towards the end of the year. I think one thing to point out on occupancy is that our portfolio is fairly diverse when it comes to rent that we generate for every square foot. So, for example, about 400,000 square feet of vacancy currently in Spain, roughly 1% of the total portfolio. Rents in Spain, both on the net basis and the gross basis, are about a quarter to a third of what they are in the GTA. So if you translate that vacancy into dollars, that's equivalent to about 100,000 square feet, 150,000 square feet in the GTA. So while We want to lease all of that space. Some space contributes far greater than others.
spk09: Okay. I appreciate that context. It's very helpful. You know, I think you kind of gave your outlook on the current state of the market and, you know, maybe not seeing availability peak for a few quarters. I mean, this past quarter, as kind of for the broker reports, we could see absorption in Canada was quite soft. Would you say, in your view, we've kind of, on a market basis, peaked on the negative absorption front? Or would you expect, you know, maybe some more significant negative absorption into year end before, you know, the inflection point?
spk11: Yes, in Canada, we measure availability rate, which includes subleasing activity. As we commented earlier, we expect that there's going to be more subleasing activity in the third quarter, potentially the fourth quarter, based on at least the pipeline that we see in our portfolio and conversations with occupiers. And so as that subleasing activity increases, hits the market, it will impact the reported net absorption. So we expect availability to trend slightly upwards. We're not really seeing significant pressures on vacancy. So vacancy will likely remain consistent. It might trend downwards as some of the new stock gets leased. But the overall availability will likely trend upwards just based on the subleasing activity. Okay, that makes sense. As we said, we expect that for the next quarter or two. We don't expect that this is going to be a long-lived trend.
spk09: Okay, thank you for that. Maybe just switching to Europe quickly for a second. How are you thinking about the European portfolio today? Would you say you're looking to expand it, or would you consider monetizing some assets, maybe given what seems like a bit of an improving transaction environment?
spk11: We're generally encouraged by what we see in Europe from supply-demand Perspective, we are seeing solid demand for urban well-located assets, and so we continue to look for opportunities to add to that segment of the portfolio. We wouldn't be opposed to maybe recycling capital out of some of our larger Bay products. We wouldn't be opposed to recycling capital out of markets such as Stain over time. There's nothing imminent in the pipeline, but we're definitely exploring opportunities like that.
spk09: Okay. Thank you. And just a quick last one. What are your views on a unit buyback program today, just given the stock is trading at a pretty significant discount to book? So curious on how you're thinking about that amongst all of your other capital initiatives. Thanks.
spk11: Thank you for the solop. So we commented on that earlier this year, and the commentary generally stands that we have other immediate priorities for capital, primarily our development program. As we finish that and as we look at availability of capital from either retained cash flow or sales proceeds, then we will look at all opportunities to deploy capital, including share buybacks. But for the foreseeable future, i.e. next quarter or two, we're going to focus on finishing our development program with the capital that we have.
spk09: Okay. Thank you very much. I'll turn it back.
spk03: The next question is from Mike Marchidi with BMO Capital Market. Please go ahead.
spk10: Thank you. Good morning, everybody. Just starting off here, Alex, you mentioned that sublet activity in the market was picking up, but you also said that you're seeing it in your own portfolio. I was just wondering if you could give us a little bit more context there in terms of where you might be seeing it and how material that may be, because it's not in your reported occupancy figures.
spk11: I would say picking up. I just want to clarify that. I think we just see a little bit more on the horizon. Obviously, we've seen probably most of it already in the market stats, but we're seeing probably a little bit more in the pipeline. So that's kind of informs our outlook for for the broader market. As far as what we see in our portfolio, we have a couple of pockets where we have third-party logistics users who have maybe taken up more space than they currently need, who are looking to optimize their footprints. And it's consistent with what has been driving availability rates going up in the market. or negative absorption, as Kyle referred to.
spk10: Got it. Thanks. Okay. And then just on the in-place occupancy, I guess you guys started the year at 95.9. We're at 95 now. You think it maybe comes in a little bit, but you end the year, if I hear you correctly, sort of back where you started. So I guess rough math, that would put you at an average of 95.50 or maybe slightly lower for this year. Based on your comments on reacceleration in 2025, what kind of average occupancy increase are you expecting? Is it flattish to this year? Is it higher? Because I know you're getting high single digit on in-place rents. So just curious on your thoughts there.
spk11: Look, we're not obviously using guidance right now for 2025. Our portfolio generally operates in the kind of mid to high 90s occupancy and has operated over multiple cycles. And so we don't expect the average run rate occupancy to change dramatically over time. And so our outlook for near medium term for occupancy is in that range. um in addition to that uh our development assets will uh will contribute to the to the occupancy and these are select on long-term basis so that will contribute to the overall occupancy primarily into 2025. right okay and then on the same property basis i guess um just given your comments you don't actually need to see
spk10: You've got a down year this year in terms of average occupancy, but next year, even if you're consistent with this year, we should see same property NOI growth pick up.
spk11: Absolutely. And thank you for pointing this out. And this has been the theme for 2024 that we've also tried to communicate to the market that our business is able to produce mid-single-digit like-for-like NOI growth despite downward occupancy pressure. And as occupancy stabilizes or kind of reverts back to mean, combined with spreads that we're achieving on releasing and embedded contractual rent steps, we should see a reacceleration in these metrics.
spk10: Okay, thanks. Last one from you before I turn it back. Just on the increased demand you're seeing from occupiers and users and the disposition that you've had year to date. Would you say that VTBs are required to get these over the finish line or is that sort of something that you're looking to extend just in order to minimize some of the dilution as you reinvest the proceeds?
spk11: When it comes to user sales, not at all. We are actually seeing no interest from these groups in vendor financing. They frequently have access to very efficient financing, either for the real estate itself or at the business level. So these are typically all cash transactions. And as we commented before, we're seeing strong pricing metrics there.
spk10: Okay. So would this be a one-off or was it a DIR transaction? Was it your choice to do the VTB? I mean, ultimately it's your choice, but was it driven by you or by the buyer in this instance?
spk11: So there are two types of dispositions. So there's the Regina sale where we did the VTB, and that was a combination of us being able to invest the cash flow and the buyer looking for shorter-term financing. So it was, if you will, a win-win. But that's specific to this Regina portfolio. The user sales that we commented on as well in our prepared remarks are in addition to that. So there's about $100 million of user sales that we are pursuing or have closed on, both on DIR's balance sheet and in our private ventures. And there's no vendor financing in any of these deals.
spk10: Okay, so the $100 million is on top of the Regina portfolio. Got it. Okay. That's all right.
spk11: It's not all on DIR's balance sheet, though. Some of it is in our private ventures.
spk10: MR. Understood.
spk11: Thank you.
spk03: The next question is from Gaurav Mathur with Green Street. Please go ahead.
spk06: MR. Thank you, and good morning, everyone. Just on the current in-place occupancy pressure, can you provide some more color on what kind of tenant is driving this in Canada versus Europe? And then as you expect the occupancy to move up in the fourth quarter, again, what tenant type is driving that on both sides of the pond?
spk11: We are continuing to see pretty broad-based trends when it comes to demand. We're seeing some manufacturing users active, traditional distribution needs. Continuing to see strong activity from food and beverage sector, which is significant for us, as you know. Third-party logistics users are on Dallin's giving back space, although we continue to see these groups active both on new leasing front and on called subleasing front or in discussions to give back space. So that's generally what we see. occupancy outlook, it is informed by active discussions that are taking place, LOIs that are being exchanged, et cetera, et cetera.
spk06: Okay, thanks. And just lastly, you have about 870 million of Euro-denominated debt that's coming due to 2024 and 2025. Now, that's at quite a low weighted average interest rate. How are you thinking about the refinancing mix ahead, and what sort of spreads are you currently seeing in the market?
spk00: Thanks. So, the debt maturities for 24 have been addressed. And for 2025, we've included in our disclosures, those are maturing towards the end of the year. You know, obviously, our beyond 2024 outlook for FFO growth is informed by this as well. because, as I mentioned, they don't mature until the very end of 2025, being November and December. The current – you know, our current outlook is – and we'll provide more information. We have an investor day coming up in October where we will provide some more color regarding our outlook beyond 2024. But current interest rate as we've mentioned in our prepared remarks, have come down about 50 basis points or so in the last quarter. We're currently looking at Euro equivalent debt in and around 4% for five-year terms, which is typically what we would refinance at. So that's what the typical rates that we're seeing today are. But again, these ones don't roll till the end of 2025. And we're just focused on our organic growth drivers. We're continuing to grow NOI because we do believe that the growth from our organic operations will outpace the pressures from higher interest rates.
spk06: Okay. Thank you for the call. I'll turn it back to the operator.
spk03: The next question is from Matt Kornick with National Bank Financial. Please go ahead.
spk12: Hey, guys. Just with regards to the end users that are buying assets, can you give us a sense as to the depth of that market and what type of assets are these tenants typically looking to occupy and in what geographic locations?
spk11: Thank you for this question, Matt. We were generally encouraged by the depth that we're seeing. The $100 million that we commented on are active discussions, or advanced discussions rather. There are many other discussions taking place. We generally see these groups active in Toronto and Montreal, with more activity perhaps in Toronto. These buyers are focusing on mid-size, freestanding assets. They don't have to be new or can be old or vintage, functional, well-located, but freestanding assets are obviously preferred without other tenants.
spk12: Makes sense. And then on your kind of outlook for occupancy, I understand you're not providing guidance. But you noted mid to kind of high 90% occupancy historically. Should we infer that kind of 97% or so is where you think this portfolio should be on a stabilized basis, or will it just fluctuate between those two guidelines with rent growth being kind of the ultimate goal?
spk11: uh yeah so if you look at the our disclosure uh over the last 10 12 years uh the portfolio has averaged 96 97 uh consistently and we don't expect uh that this this environment uh should fundamentally change that uh trend um if you look at uh summit's historic disclosure which is also a significant component of what we operate. This is consistently in that range. Maybe a little bit higher in the kind of 98% range over the long term for Summit, but we expect it to settle in that 96, 97, again, as we are prioritizing rents across the business.
spk12: And then on the Montreal properties near the port, appreciate the update there. Can you give us a sense, I don't know if you have these numbers or if you've thought about it, but the capital deployment that would need to go into that repositioning and the potential return that you'd be getting on that capital?
spk11: We will provide an update on that perhaps next quarter or kind of towards the end of the year. perhaps premature to comment on that specifically. But the idea for this site is to activate the land holdings that we have and position the assets to benefit from mid-bay demand that we continue to see across the board. As we have previously commented, Montreal is a small market compared to Toronto. And therefore, what we see is that in Toronto, most of the demand we currently see is in that 50,000 to 150,000 square foot range. It is smaller in Montreal. We call it 25 to 75. And so we want to make sure that the asset is well positioned vis-a-vis the demand patterns that we see. So we would want to make sure that it's multi-tenant. multi-tenantable as we pursue this intensification and refurbishment.
spk12: That makes sense. And then just the last one quickly for me, and I don't know, Linus or Alex, you can answer it. After you get through this year of development spend, I think next year you'll probably generate in the order of $90 million, according to our model of free cash flow. Is there a preferred destination for that, or are you looking at the Dream Summit additional developments and buyback equally.
spk11: We're looking at all of the opportunities available to us in terms of deploying capital. And, you know, market environment is highly dynamic, and so it's hard to comment on capital allocation priorities six to 12 months out, but we will keep updating investors on how we're thinking about that every quarter.
spk12: Fair enough. Thanks.
spk03: The next question is from Brad Sturgis with Raymond James. Please go ahead.
spk07: Hey, good morning. I guess a lot of discussion around the occupancy, and I apologize if I missed it, but based on what you're seeing today, what's your expectations around market rents in Toronto and Montreal? I guess there has been a little bit of a pullback in that, but how are you thinking about where market rents go, and would that narrow the rent market opportunity a bit from, albeit pretty healthy level still today?
spk11: Thank you, Brian. We expect that market trends that we are achieving on our leases will remain consistent with our disclosure. As you know, we measure market rent for our assets differently compared to what you see from market reports. So when you look at market reports, what's measured at market rent is the asking rent for available space. When we report market rents in RMDNA, these metrics reflect weighted average market rents for every building in our portfolio. And as you would have seen from our disclosure, market rents remained largely consistent from Q1 to Q2 and throughout the year, which is perhaps different compared to what you see from market reports. from the brokerage community. And this is a reflection of how these market rents are measured. And so we expect for the next quarter or two that market rents will remain consistent as we measure it, so within our MD&A reporting. And in the near-medium term, we continue to expect upward pressure on rent as kind of demand patterns stabilize, as subleasing activity normalizes, and as we continue to see supply vacuum sort of building in the market into 2025 and 2026.
spk07: And building on that, based on, you know, what you've achieved to date on the development leasing plus I guess your expectations for demand to recover next year or in the coming quarters, I guess you're still pretty comfortable in achieving your targeted or your estimated development yields that you disclosed again this quarter.
spk11: Yes, that's exactly right. And the leasing that we've done with about half a million square feet that we've announced that are either done or very close to done these rents and yields are consistent with our disclosure.
spk07: Okay. Just maybe switching gears, I want to touch on, it sounds like on the acquisition side, you'd be open to looking at opportunities in Vancouver. Just wanted to get some thoughts on, I guess, your return expectations there or the opportunity set versus some of the existing markets like Toronto and Montreal that you're already in today.
spk11: We think Vancouver is a great market for industrial. It has significant barriers to entry from a new supply perspective. And it's certainly a key market in Canada. From a total return perspective, we expect to see comparable total returns to other markets where we are already active. The composition of total return may be slightly different in Vancouver compared to a market like Calgary or the GTA, but overall on a total return basis, we expect it will be consistent with other markets.
spk07: I assume you'd be open to doing it, I guess, through individual asset purchases, but is there a medium-term, long-term target in terms of if you do enter the market, what what's the appropriate scale to operate there in Vancouver efficiently?
spk11: The assets that we have on our radar are less management-intensive in the traditional sense. So these are not, let's say, small bay, multi-tenant assets that require constant presence in the market. So as we think about entering the market, we are definitely aware of operations that we'll need to maintain there and how we would run the assets. So the assets that we're looking at are well-positioned in that regard and we'll create a good starting point for us to build operating presence in the market.
spk07: Okay, thanks Vaughan. I'll turn it back.
spk03: The next question is from Himanshu Gupta with Scotiabank. Please go ahead.
spk02: Thank you and good morning. So can you comment on the leasing done in Ontario in Q2? Was there anything related to 2025 expiring?
spk11: There's been a couple of deals done for leg 24 or 25 in Ontario. We've done a large deal in Quebec relating to 2025 for about 400,000 square feet. Generally speaking, six to nine months out with the exception of that Quebec lease.
spk02: Okay. And Alex, I think you mentioned also 180,000 square feet down at 200% spread. I mean, is there anything specific to this property to get that kind of rental spread?
spk11: Nothing specific other than the expiring rent was relatively low, and we were able to capture the market rent that we expected to achieve, which is in the high teens range. And that resulted in the spread. And as we commented before, spreads will fluctuate from one quarter to another based on expiring rent.
spk02: Okay. And then, you know, the broader market and, you know, thanks for the discussion so far. Do you expect leasing demand to recover, you know, by the end of the year or more like next year? And what could drive that, you know, if the confidence is, you know, demand comes back into force?
spk11: There's a number of ways to measure demand. And so one way to measure demand is just the level of activity. And so we generally see levels of activity are pretty healthy. We continue to see RFPs. We continue to see tours, and so there's lots of activity in the market. What's creating pressure on availability is primarily the subleasing activity. So we don't expect that that will last for very long. As we commented before, we are aware of some pending subleases that are not captured in the market stats. And so extrapolating from that, we expect availability to trend upwards into Q3, perhaps slightly into Q4. And, you know, some of the demand that we're talking about, the activities, at least when it comes to tours or RFPs, is taking a bit longer to materialize. Decisions are taking longer. We expect that it will kind of reach an equilibrium into Q4 where groups will start making decisions. And again, subleasing activity will normalize or come down to effectively zero. And then we expect kind of availability rates to trend downwards from there. Again, we're not seeing new supply on the horizon, so we don't expect new supply will be a big driver of availability into 2025. So it really will come down to existing availability and pressures from sub-leases versus pressure from new groups looking for space.
spk02: All right, okay. And then, you know, sub-leasing, is it mostly a GTA problem or, you know, you're seeing in, like, Montreal?
spk11: We're seeing that across the board. And I would say that we see that in the GTA, see in Montreal, a little bit in Calgary. So it's not a GTA phenomena per se.
spk02: Okay. Okay. Thank you. So, just turning to FFO guidance, you know, mid-single-digit quotes. Lennis, like, what effects do you assume for EUROCAD? And do you already assume, like, occupancy pickup in Q4 in your FFO guidance?
spk00: Yes. So, you know, as we commented, I think all those factors would be baked in. to our expectations. So, in terms of the FFO, I mean, if you want to be more precise, I think we would say consensus is probably a good base case estimate.
spk02: Jomana Musmar- Okay. And so, FX, what about the EuroCAT assumption in your model?
spk00: Close to current levels, maybe a little bit stronger CAD.
spk02: Okay. And it includes rent from the, you know, from Courtney Park and Balzac as well, whatever the leasing is done so far.
spk00: That's right, when they come online during Q3, as they start coming online during Q3.
spk02: Okay. Thank you so much. I'll turn it back.
spk03: Thank you. The next question is from Sam Damiani with TD Cohen. Please go ahead.
spk05: Thanks. Good morning, everyone. I guess Alex would lend us the comment about NOI growth, you know, picking up and overcoming interest expense to produce FFO growth in 2025. I don't know how much more specific you can get, but would you extend that comment into 2026 as well in terms of FFO growth being positive?
spk11: Thank you, Sam. Generally, we would, and that's when we say that what we're working on is ensuring NOI growth outpaces pressure from interest expense line. We're not just focusing on 2025. As you know, we're not going to see significant pressure or significant additional pressure in 2025 from interest expenses going up because our maturities are in November and December, but that comment is primarily aiming at 2026. Okay.
spk05: You know, again, thank you for the sort of detail on the plans on the Montreal port. Beyond that, do you anticipate adding more to the active development pipeline from a Greenfield perspective in the near term?
spk11: Thank you for that follow-up. We are looking at development opportunities, more infill mid-bay assets in the GTA for the account of some of our private ventures. We also have our site in Brampton that is in pre-construction phase right now, and we are advancing pre-development work there. So we will evaluate towards the end of the year, whether we will start going vertical on that site in 2025. Again, that site sits in one of our private ventures.
spk05: Perfect. Thank you, and I'll turn it back.
spk03: The next question is from Tommy Beer with RBC Capital Markets. Please go ahead.
spk08: Thanks. I just wanted to come back to the market rent commentary. And I guess the earlier commentary on the same property and why growth accelerating next year. Does that comment about next year's acceleration of organic growth, does that assume stable market rents or possibly moving up?
spk11: It assumes stable market rents, Tommy.
spk08: Okay. And then I'm not sure if you provided this, but roughly how much of your portfolio is being subleased or on the sublease market at the moment?
spk11: We have not commented on that specifically. It's not a significant portion, but we haven't commented on that specifically. we wouldn't have that metric readily available. We can come back to you or come back to the market next quarter if it's a material metric to, for investors to take into account.
spk08: David Plylar- You know, I'm just curious if you think it's maybe roughly in line with where broader market levels are, more or less.
spk11: Yes, so subleasing is about a third to 40%, depending on the market, of the overall availability. And in our portfolio, in many cases, when occupiers look to get rid of the space, and subleasing is important for them to maintain financial health of the underlying business. We would rather engage in proactive termination discussions against the termination penalty and then get the space back directly so we can then benefit from the mark-to-market and achieve better rents. As you know, in Canada, the standard lease does not allow for occupiers to profit from subleasing. So it creates sort of a bit of an imbalance in terms of the objectives that our occupiers have versus what we have. So we would prefer to work with practice terminations of excess space against the termination penalty. And this is partially what's reflected in our occupancy for the year, where we've worked with some of our occupiers to take back space against either a penalty or extending the remaining, the lease on the remaining premises, things like that. We've pursued these kinds of options for some of our, primarily in our private ventures. We haven't done a lot within the DIR's wholly owned portfolio. We've had a few cases within our private ventures.
spk08: Got it. That's helpful. Just on the development pipeline, what's your sense of getting the balance of the Balzac property leased up? And then I'm curious what types of interest you're getting on the Cambridge side as well, beyond I think the 15% that's already done.
spk11: So starting with Cambridge, so we are pursuing a multi-tenant strategy there. We leased one pocket already, and we are in discussions with a number of occupiers who are looking for about 100,000 square feet on average. And so it will take about four of those deals to materialize for the property to be fully leased. We are encouraged by the level of activity, and we think that our property is very well positioned relative to other options that are available in that node from location perspective and just the physical attributes of the building perspective. It offers, obviously, old and modern specs, 40-foot clear height and excess trailer storage and various other attractive attributes. When it comes to BALSAC, There are two development projects, as you know. So for the $350,000 per foot project on the 20-acre site, we've seen strong activity at, call it that $12 range rents. We are targeting users ranging from 26,000 square feet to 100,000 square feet. And this is where we've seen most of the demand. So with the conditional deals that we commented on earlier and in our press release, the front building is fully leased and the back building has about 80,000 square feet available. And so we're working with a number of occupiers to fill that. Again, the building was designed to be multi-tenanted and demised. And so that's the demand we're responding to. We generally are seeing very healthy levels of activity in Western Canada. We're not seeing that activity to translate into significant pressure on rents just yet because availability is kind of a touch higher in Calgary compared to, let's say, Toronto. But the sheer level of demand is relatively healthy. And for our larger developments, we are in a very advanced discussion with one user to take one of the buildings fully, and the second building is available, but we expect that to be leased before or shortly after completion.
spk08: Got it. That is a very good caller. Thanks, Alex. I will turn it back.
spk03: Once again, if you have a question, please press star then one. The next question is from Sumaya Syed with CIBC. Please go ahead.
spk01: Thanks. Good morning. Just following firstly on the occupancy discussions, obviously the drop there was as expected. And you did talk about demand from various user type, but would it be fair to say that that drop in occupancy was more of a meaningful impact to your larger assets versus the smaller and mid-peso?
spk11: MR. Thank you for that follow-up, Samaya. Yeah, I think that's a fair observation. We've seen some of the decline in occupancy being attributed to maybe a couple of larger spaces. In many cases, these spaces are demisable, and so we will work to reconfigure them to then respond to the demand that we see in the market.
spk01: Okay, thanks for that. And then just secondly, notice that the lease incentives jumped sequentially in Yon-Yur a bit this quarter. looks like some early renewals were the dollar, but how should we think about that figure going forward?
spk00: Yeah, thanks, Maya. So, yes, that's correct. The increase is due to some commissions payable on earlier renewals of some larger deals, so that's going to be a little bit lumpy. I would say, you know, just generally speaking, overall, decent costs on deals are relatively in line. They may have ticked up slightly, but not enough to offset, you know, healthy growth in the starting rents and NERs as well.
spk01: Okay, thank you. I will turn it back.
spk03: This concludes the question and answer session. I'd like to turn the conference back over to Mr. Sanikov for any closing remarks.
spk11: Thank you, operator. Thank you, everyone, for your interest in Dream Industrial REIT. We look forward to reporting back next quarter.
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