Dream Industrial Real Estate Investment Trust

TSX:DIR.UN

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to the Dream Industrial REIT First Quarter Conference Call for Wednesday, May 6, 2020.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. [Operator Instructions] Your host for today will be Mr. Brian Pauls, CEO of Dream Industrial REIT. Mr. Pauls, please go ahead.

[Brian D. Pauls, CEO & Trustee]

Thank you, Karen. Good morning, everyone. Thank you for joining us today for Dream Industrial REIT's 2020 First Quarter Conference Call. Speaking with me today is Lenis Quan, our Chief Financial Officer; and Alex Sannikov, our Chief Operating Officer.We began the year with tremendous momentum. But the last several weeks have brought on unprecedented changes to how we work, live and do business. This call, we'll review our first quarter results briefly, and we'll focus on providing an update on our business and how we are managing during this global pandemic and corresponding economic disruption. The health and safety of our employees and our tenants remain our top priority. We are interacting daily on a virtual basis and working with our tenants during these difficult times.Our first quarter results were consistent with our original outlook for 2020. However, we expect some pressure on our rental revenue and operating results in the short term as the economic impacts of the global shutdown take effect. Our long-term outlook for industrial real estate remains unchanged, and there are trends arising from social distancing and disruption to local supply chains that could provide further positives for industrial real estate.Before the disruption, DIR had a very active first quarter, $5 million ( sic ) [ $425 million ] of acquisitions across Europe and our Canadian target markets of Ontario and Québec. These acquisitions added 3.9 million square feet of well-located product that is above the average quality of our portfolio and should generate healthy cash flow and NAV growth over the long term.We also commenced the execution of our debt strategy and repaid $149 million of Canadian mortgages during the quarter, funded by a portion of our $230 million equity offering completed in February. We will earn 3.7% return immediately from the interest savings, and the accretion will increase further as we deploy our acquisition capacity.Over the past 2 months, with the incredible challenges brought by the COVID-19 pandemic, our focus has been on tenant and employee safety and managing the business prudently, while complying with social distancing and mandatory closures. While there are limited data points and operating fundamentals in today's market, we expect some near-term impact on market absorption as small and medium businesses deal with the disruption to their operations and strategy.Our focus over the near term will be on free cash flow retention and balance sheet flexibility. We expect the pace of our acquisition activity to slow down over the next few months as we gain further clarity on the business environment and pace of economic recovery in the coming months. We expect leverage to be near current levels for most of 2020, below our average target of the mid-30% range. We continue to watch the markets closely for attractive investment opportunities. And we'll have capacity to complete $300 million of acquisitions before our leverage exceeds 35%.Over the long term, the outlook for industrial space is becoming even more favorable than before in both North America and Europe. The current environment is already showing signs of an acceleration in the penetration of e-commerce. As supply chains evolve to efficiently serve large population centers, we expect demand for last-mile logistics assets to increase further. Within our portfolio, this segment comprises distribution and urban logistics properties that are located close to major population centers and are ideally suited to meet last-mile distribution needs. These properties represent over 75% of our overall portfolio GLA.Furthermore, we expect that additional drivers for demand for industrial space will emerge coming out of this crisis such as reshoring of manufacturing of goods back to developed economies, including the markets where DIR has some presence, in Canada, U.S., Germany and the Netherlands.Looking back, our strategic initiatives over the past 24 months have resulted in a higher-quality portfolio that is considerably larger and more diversified, resulting in increased stability of cash flows over the long term. We continue to retain ample balance sheet flexibility and are well positioned to navigate through this disruption.I will now turn it over to Alex to talk about our operations.

[Alexander Sannikov, Chief Operating Officer]

Thank you, Brian. Our Q1 operating results were healthy with 1.2 million square feet of leases commencing across the portfolio and committed occupancy ending the quarter at 96%.On these leases, we achieved an average spread of 10% over prior rents, led by 20% in Ontario and 14% in the U.S. During the quarter, we also successfully onboarded a 2.6 million square feet European portfolio acquired during the quarter. Comparative properties NOI increased by 0.6% for the quarter, driven by higher occupancy and rental rates in Québec, partially offset by lower occupancy in Western Canada.In Ontario, while rental rates have been strong, our year-over-year average occupancy was lower due to 2 vacancies in the GTA totaling 209,000 square feet. Approximately half of this space has been leased at a 14% spread over the prior rent with 3.5% annual escalations. The rent payments on that lease will commence in May. Assuming a full quarter NOI from the space, CPNOI growth in Ontario would have been 3% for the quarter and 1.5% for the overall portfolio.For the remainder of 2020, we have limited lease maturities outstanding. To date, we have secured commitments on renewals and new leases representing approximately 76% of total GLA expiring in 2020, and only 4% of the portfolio is expected to mature over the remainder of the year. The in-place rents on these expiries are, on average, 8% below market. We expect renewals to typically occur as planned, and we are generally seeing limited changes in market rents across our markets. Since March 15, we have transacted 19 leases totaling approximately 450,000 square feet at rental rates that were slightly above our target and represented an average spread of 18% over the prior rates.Over the past 1.5 months, we have been working with our tenants to support them and ensure that they can continue successfully operating the businesses, following the disruption caused by the COVID-19 pandemic.In early April, we have put in place a rent deferral program targeted at tenants whose businesses are most impacted by the shutdown. As part of this program, tenants looking for rent deferral were requested to pay their April rents in full, provide financial information as well as responses to a standardized questionnaire in order to help us assess their requests. For qualifying tenants, we were generally offering a deferral of May and June net rents with the tenants continuing paying operating costs and realty taxes. The deferred amounts are to be repaid in monthly installments starting Q3 2020 over 6 to 9 months. In certain cases, we agreed to apply future free rent or prepaid rent earlier or to defer payment of realty taxes in line with the deferrals announced by various municipalities. To date, we have agreed to rent deferral requests, representing approximately $3 million in total rent or 5% of our Q1 revenue. On these spaces, we note that in-place rents are on average 9% below market rents.We have collected 90% of April gross rents due and have generally not applied security deposits to date. Of the 10% that was not collected, 1% pertains to amounts that we expect to receive in May, 2% were deferred as part of the rent deferral program, and 7% were withheld by tenants.While it is early to draw any conclusions from the rent collection data for May, as of yesterday, we collected approximately 65% of our rents for Canada adjusted for agreed deferrals, which is slightly lower compared to where we were at the same time in April. The U.S. and European collections for May are so far in line with April. However, we typically see collection data to come in gradually over the course of the months in these regions.The Canada Emergency Commercial Rent Assistance program has been announced subsequently to us reaching a commercial agreement regarding rent deferral with the tenants in our portfolio. Some of these tenants have expressed interest in participating in this program as opposed to deferring their rents. We continue monitoring the details of the program, and we'll work with our tenants to reach the most mutually beneficial arrangement.In early March, Spectra Premium Industries filed for CCAA protection to reorganize their overseas operations. They have paid their March and April rents. And from our communications, we understand that the 2 locations within our Montréal portfolio are central to their business, and we currently expect them to stay at those locations.Looking beyond the near-term disruption, our portfolio is positioned to perform well over the long term. With contractual rent escalators that average approximately 2% for the overall portfolio and in-place rents well below current market rents, DIR is well positioned to generate healthy internal growth over the long run.One of our key strengths is the diversity and the quality of our portfolio. We have nearly 1,200 tenants operating and providing logistics services to over 15 distinct broad sectors of the economy. I would like to provide additional breakdown regarding our tenant mix.While our average tenant size is approximately 21,000 square feet, the smallest 65% of our tenants by account represent 15% of our annualized rent. Our smallest tenants may not have the same balance sheet strength to weather the economic downturn as larger businesses. However, these tenants are likely to benefit the most from various government support programs being put in place.From industry exposure perspective, the portfolio is well diversified. We have just over 10% of tenants supporting each of the residential, automotive and food and beverage industries. Oil and gas tenants represent approximately 1% of the total portfolio, while tenants in recreational services industry account for approximately 2% of annualized base rent. Within our portfolio, tenants representing over 45% of annualized base rent are directly involved in or actively support e-commerce operations and stand to benefit further from the accelerating penetration of e-commerce.I will now turn the discussion over to Lenis to provide our financial update.

[Lenis W. Quan, Chief Financial Officer]

Thank you, Alex. Diluted funds from operations was $0.17 per unit for the quarter, which was in line with our expectations. FFO per unit was lower compared to the prior year comparative quarter, primarily due to 14% lower leverage, higher undeployed cash balances, and higher G&A expenses related to the European expansion.At the end of Q1, the IFRS value of our portfolio was $2.9 billion. This reflects $425 million of investment property acquisitions during the quarter and currency gains on the U.S. and European assets. IFRS NAV per unit at the end of Q1 was $11.84 compared to $11.76 at year-end 2019. The increase in IFRS NAV per unit was due to a stronger U.S. dollar and euro relative to the Canadian dollar, partially offset by transaction costs on the acquisitions completed during the quarter. We suspended our distribution reinvestment program at the end of March as we did not want to issue equity at prices being impacted by the market disruption and volatility.Our focus on strengthening the balance sheet has positioned us well for the current market disruption. We ended the quarter with net debt to assets at 28%, net debt-to-EBITDA at 5.3x and $66 million in cash. Over the remainder of 2020, we have $17 million of debt maturing. We expect to close shortly on a new unsecured USD 250 million credit facility, which will replace the existing CAD 150 million secured facility. The borrowing costs on the new facility are unchanged for Canadian and U.S. dollar draws and adds the ability to borrow in euros. This new facility will boost our liquidity by $200 million to over $400 million comprised of cash on hand and availability on the credit facility. In addition, we will have unencumbered assets totaling $1.1 billion, representing approximately 38% of our total investment properties value, and this positions us well for obtaining an investment-grade credit rating.Our Q1 results were largely untouched by the economic disruption resulting from the COVID-19 pandemic. However, we continue to monitor our rental collections and work with our tenants. We have taken a closer look at our operating and capital expenditures budget and have deferred over $5 million of nonessential capital expenditures to 2021. We have also pushed out a significant portion of our operating expenses to the latter half of 2020. We will have a full quarter's contribution from the acquisitions completed so far this year starting in the second quarter. However, we are more cautious about the expected timing of vacancy lease-up over the next few months and do not know the impact of the commercial rent assistance program.Referring back to Brian's comments on strategy and capital allocation, we expect to have lower leverage and higher undeployed cash balance for a little longer than our expectations from earlier in the year. The uncertainty in this current environment makes it difficult to forecast, and we will provide an update on our next quarterly call when we have more information and clarity on the situation. We retain sufficient financial flexibility to fund our distributions for the foreseeable future. And while our near-term focus is on preserving liquidity, we are well positioned to execute on attractive investment opportunities.I will turn it back to Brian to wrap up.

[Brian D. Pauls, CEO & Trustee]

Thank you, Lenis. While this has been the most uniquely challenging business environment in recent history, our team shares tremendous pride and gratitude for the strength of our management team, balance sheet and quality of our assets. I would like to thank our operations and leasing teams in every region for keeping our buildings safe, staying in touch with our tenants and supporting them through these challenging times. And thanks to all our employees who contributed to our first quarter reporting, all while working remotely from home.While it is an incredibly difficult time to forecast the impact on operating results in the near term, we continue to work with the tenants in our portfolio and await the reopening of economies in our target markets. We remain optimistic on the long-term outlook for industrial real estate, and DIR is well positioned to take advantage of these strong fundamentals and create long-term value for our unitholders.We will now open it up for questions.

[Operator]

[Operator Instructions] And we do have the first question from Himanshu Gupta from Scotiabank.

[Himanshu Gupta, Analyst]

On the rent collections, you mentioned May rent collections trending at 65%. Can you break out between Western Canada versus Ontario and Québec? Are the collections for multi-tenant portfolio in Western Canada trending any different compared to other regions?

[Brian D. Pauls, CEO & Trustee]

Sure. Thanks, Himanshu. Alex, are you -- can you fill this for Himanshu?

[Alexander Sannikov, Chief Operating Officer]

Yes, absolutely. Himanshu, I would say that for -- let me just start with answering your question for April where we can draw a little bit more conclusions from the rent collection data compared to May. We're only in the third business day of May so far. For April, we have seen consistent rent collection across all of our regions. So we have 5 operating regions: Ontario, Québec, Western Canada, Europe and the United States. We have seen all of them come in consistently right around 90%, some higher, some lower. So far, from May, Western Canada rent collections are slightly higher or actually quite a bit higher than Ontario and Québec. Now I wouldn't draw any conclusions from that. As I said, it's still early, but we're seeing reasonable rent collection data so far from Western Canada.

[Operator]

And we do have our next question from Sam Damiani from TD Securities.

[Sam Damiani, Analyst]

Just to start off, Brian, you mentioned reshoring in your opening comments. And I'm just wondering if you're seeing any evidence already of any sort of deglobalization trends in your markets. Hearing anything anecdotally? And does this theme seem to be picking up in your mind? And does it change any of your strategic priorities?

[Brian D. Pauls, CEO & Trustee]

Yes, Sam, we are seeing a lot of interest in companies either increasing their inventory levels, being less susceptible to supply chain disruptions. So I think what this pandemic has done is expose some significant exposure to supply chains around the world to places that maybe people weren't thinking that it was -- there was this much exposure. So a lot of our tenants and a lot of just the general economic talk is that the economies where we're in need to be more self-reliant and less reliant on supply chains around. So I would think inventory levels will go up. Manufacturing will be reshored in a lot of places where it can and will be maybe less reliant on global supply chains and more dependent on local ones. And that's for Europe, the U.S. and Canada. So we're seeing a lot of that being -- I guess, I should say, we're hearing a lot of that being talked about. We do think, as we emerge from this and come back to work, we'll see an increase in demand for industrial space as inventories rise and as some of the supply chain has shortened to be more reliant on local production.

[Operator]

And we do have our next question from Chris Couprie from CIBC.

[Chris Couprie, Research Analyst]

Just turning it back to April. I think you mentioned that 7% of rent was withheld by tenants. Just wondering if you can give any color there and how you're approaching these tenants right now.

[Brian D. Pauls, CEO & Trustee]

Sure, Chris. Let me start, and then I'll let Alex chime in as well. Let me just say, Chris, the short term is going to be lumpy, okay? I think the -- any of the metrics of business day 1, 2, 3, 4, 5 at the beginning of each month is -- it's information. I think it's helpful. It can show kind of what's happening with our portfolio and with our tenants. We are aggressively reaching out to each of our tenants, working with them. My point is that it's going to be lumpy and unpredictable. In any 1 day's data point, I don't think means that much. I think what we're looking at is the strength of our portfolio, the strength of our tenants, the long-term stability of our balance sheet to kind of weather this storm. And we are aggressively working with tenants to make sure the last check they write isn't a rent check to us, but that they are surviving this and that they're paying their employees. And so I'll let Alex comment specifically on the -- on your question on the April collections. But I do want to emphasize the point that we are less focused on any 1 day's data point and more focused on the health and safety of our people, our tenants and the overall company as we kind of navigate this. So we're taking the view that we're really locking arms and walking through this together. But Alex, can you comment more specifically on Chris' question?

[Alexander Sannikov, Chief Operating Officer]

Yes, absolutely. So for 7% that were withheld for April, the largest chunk of that is actually larger tenants in -- we have a couple of cases in Ontario, in Québec, in the United States where larger tenants have withheld rent payments. The working sort of theory for that is as tenants -- as these larger tenants, who we deem to be pretty strong financially, have been looking at the outlook for a couple of months. In early April, it was completely uncertain when the economy is going to come back and what the timing line of this is going to be, so they made some of those decisions to withhold rent payments. We'll continue working with them. We haven't taken a legal action against these tenants so far, but we'll continue evaluating the situation and monitoring when -- what the time lines are for the economies to come back. And we'll work with the tenants accordingly to collect the rents. These are not sort of agreed deferrals nor are these tenants who we would deem qualifying for any rent deferrals given the strength of their balance sheet.

[Operator]

And we do have our next question from Matt Kornack from National Bank Financial.

[Matt Kornack, Analyst]

Yes. I guess we get 1 question, so I'll ask 2 in 1. With regards to the 65%, maybe if you could provide what that would have been in April because I don't think that's where you're ultimately going to end up for the month. And then just with regards to the Spectra space. In the unlikely event that they do end up vacating, is that functional space that could be easily re-leased to someone else?

[Brian D. Pauls, CEO & Trustee]

Thanks, Matt. We'll answer both of those. Alex, go ahead. I have some thoughts. I'll let you answer both those questions for Matt.

[Alexander Sannikov, Chief Operating Officer]

Okay. Sounds good. Thanks, Brian. So Matt, as I said in the prepared remarks, the 65% from May is as of the third business day. And so we're comparing it -- we're monitoring how rent comes in daily and also comparing that to prior periods. So as of the same time in April, we were just sort of right around 70% mark depending on the region. That said, we didn't then receive some -- some of our checks bounced back, and then we collect them again. So it's not exactly day-for-day comparison. So that's why our assessment right now is that we're tracking slightly behind where we were in April, but not substantially behind at this point. And as we said as well in our press release and in our remarks that, overall, for April, we ended up at around just over 90%.With respect to Spectra, as we said, we expect them to stay in both of the locations in Montréal based on the restructuring plan that they have put forward. The restructuring plan, and it's a public document, is really centered around them continuing manufacturing in Québec. So the 2 locations we have with them in Montréal, one is about 400,000 square feet, and that's their largest and the most important facility. So that is to us essential to them, in our mind and what we hear from them as well, is essential to them continuing the operations. The other location is probably less essential. And it's sort of a standard 200,000 square foot warehouse, and we can either relet. And there's plenty of demand in Montréal right now for logistics space. And I should note that there's also a 14,000 square foot unit we have with them in Ontario. That's not material.

[Operator]

Our next question comes from Pammi Bir from RBC Capital Markets.

[Pammi Bir, Analyst]

Just maybe I've got -- I'll try to slip in a couple of questions as well. Just curious between your small-bay versus large-bay tenants. Can you maybe comment on what you're seeing in Q2 to date from a leasing perspective in terms of new leasing and renewals? And then secondly, if you could comment on the progress for lining up the euro-denominated debt refinancing strategy.

[Brian D. Pauls, CEO & Trustee]

Sure, Pammi. I'm going to -- Lenis, why don't you start on the -- with the second part of that question first in terms of lining up the euro debt? And then, Alex, if you could follow up with just some of the renewals. Just as a preamble, Pammi, our renewals are actually coming in really well in terms of our rental rates and our renewal -- the renewals that are being done. I'll let Alex comment more specifically on that, but we've been pleasantly surprised with the spread to expiry rents and our renewals. But Lenis, go ahead on the euro debt.

[Lenis W. Quan, Chief Financial Officer]

Sure. So Pammi, we initiated sort of the overall debt strategy earlier in the year, starting off with our initial European acquisitions. And then following our equity raise in February, we repaid $149 million of Canadian mortgages, bringing down our leverage. And the strategy is that, for future acquisitions, we would line up the euro debt with -- pairing that with additional acquisitions. As Brian had mentioned, the pace for acquisition activity is expected to slow down in the near term until we sort of evaluate the situation. And as the acquisition activity picks up again, we'll resume executing on that debt strategy.

[Alexander Sannikov, Chief Operating Officer]

And just switching gears to renewals. So as we said, over the last 45 or so days, we transacted just under 20 leases. It's not a large enough sample, if you will, to draw any statistically significant conclusions. Nevertheless, that totals 450,000 square feet. And the rents that we saw in those deals, mostly renewals, are slightly higher than our budgeted rates, and we actually increased our rental targets early in Q1 2020. So those rates are generally exceeding those targets as well and represent also a healthy spread to the prior rates. So what we're drawing -- the conclusion we're drawing from that and also from various conversations we've had with market participants in our markets, private and public, is that industrial rents are holding, and we're not seeing significant downward pressure on rates. And that is true for all unit sizes so far. We haven't seen any data that would suggest that there's different trends for smaller units versus larger units.And with respect to renewals going forward, what we expect is that, generally, tenants are not looking for making sort of drastic space decisions. And if some of our tenants were thinking of moving to different premises, they will likely look to stay where they are for the time being until they have more certainty in terms of the outlook for the economy. So we expect positive impact on the retention ratio for the balance of 2020.

[Operator]

And our next question is from Sam Damiani from TD Securities.

[Sam Damiani, Analyst]

Just a couple of follow-ups. Lenis, both, I guess, for you. And maybe I missed it, but how much debt has been swapped into euros at this point? And how much more do you expect to do in the second quarter? And my second question would be on the expected credit loss hit in NOI for Q1 of $312,000. How is that number determined? And any guidance you would give for Q2 on that line item?

[Brian D. Pauls, CEO & Trustee]

Go ahead, Lenis.

[Lenis W. Quan, Chief Financial Officer]

Sure. Okay. If I miss one of the questions, just remind me. I think you were talking about the timing -- or sorry, the euro debt strategy, just a little bit more details on the execution of that. To date, we have not put in place any euro-denominated debt. As I had mentioned, the -- setting up the -- I guess, setting up for that, we closed on the European assets and repaid some Canadian mortgages to bring down our leverage level and saving 3.7% in interest costs initially. And the thought was to pair new acquisitions with additional debt denominated in euros. So that will occur over the remainder of 2020 when the pace of acquisition activity picks up.In terms of the bad debts, it ticked up a little bit this -- in this quarter. As Alex had mentioned on his script, Spectra had filed for CCAA restructuring in respect of its overseas operations. That was filed in March. They have paid their March and April rents. May is not actually due till next week, but they have not paid their February rent. So we just -- in conjunction with their CCAA filing process, we did provide for their February rents in our Q1 numbers.

[Alexander Sannikov, Chief Operating Officer]

And Sam, I just wanted to add to Lenis' comment about debt. We have repaid the Canadian mortgages earlier in Q1 with the intent to then put in place euro debt, draw on that debt and invest that capital in acquisitions. So since we have not been actively deploying capital, we haven't drawn any euro-denominated debt or any debt for that matter.

[Operator]

And we have our next question from Mike Markidis from Desjardins.

[Michael Markidis, Real Estate Analyst]

I don't want to buck the trend, so I've got a 2-part one. The first one, just with respect to Spectra and their CCAA filing. Not specific to Spectra, but could you comment, firstly, if there are any other tenants in your large tenant list that you disclosed that would be on a watch list? And then the second question is more hypothetical in nature. But Brian, you've noted that you've got a tremendous amount of flexibility, which is great given the current environment, but that you wouldn't hesitate to take advantage of opportunities if they were there. And I'm just curious as to what pricing adjustment you would need to see given the state of the world today versus where we were 2 to 3 months ago in order for you to want to transact on something.

[Brian D. Pauls, CEO & Trustee]

Yes, Mike. Good questions. Let me answer the second one first, and then Alex will answer the Spectra's large tenant watch question. For new opportunities, there's no real data points. We're not seeing any transactions right now which are kind of indicative of where market value is. However, we do expect, because of the disruption in income and the uncertainty, that there will be some impact on pricing or on values. We haven't seen that yet. And it's likely -- there's not likely to be a lot of distress in the industrial real estate world. There's a lot of liquidity out there. There's a lot of interest in this asset class for the long term, and it's -- the asset class in general is quite healthy. And as I mentioned in my earlier remarks, we think we'll come out of this. The industrial real estate sector will come out of this healthier than probably went in given the new demand generators. So we are, however, looking for opportunities. We think cap rates may -- cap rates will probably come up, but the income you're capping is going to be suspect. So I think prices per foot may come down a little bit. We're looking for opportunities that will be accretive on a free cash flow basis, will be accretive on an asset quality basis in our target markets. So we don't have a specific cap rate or a specific price per foot that we have targeted. However, we're watching closely any transaction that happens in these markets. Most of what's happened is properties that didn't transact earlier were just pulled from the market and are not available. So our teams are watching any transaction closely. We're also talking to some of the previous sellers that we were in communication with to see if they may want to sell. So our liquidity is precious. However, we are seeing potential opportunities that we could buy that will be at probably better metrics than would have been prior to the pandemic. So Alex, you want to comment on our large tenant list and any other watch -- tenants on the watch list that you might have?

[Alexander Sannikov, Chief Operating Officer]

Yes, absolutely. With respect to Spectra, I just wanted to point out that the CCAA filing is not connected to COVID. This was -- the filing happened prior to sort of the pandemic, and it's primarily relating to the tariffs on Spectra's overseas operations, primarily Chinese operations. So that's kind of was the main driver as we understood from various documents and conversations with the tenant and the tenant representatives. So I just wanted to sort of highlight that this is not a COVID-related filing. With respect to other tenants on the watch list, nothing specific to highlight at this point. We're obviously in conversations with a lot of our tenants. We've had -- we have spoken with pretty much every single tenants in our portfolio over the last 45 days and trying to understand how they're doing and how we can support them and how they're taking advantage of various government support programs out there. There are no tenants of size that would be on the watch list other than maybe a couple of tenants who we already were watching prior to the pandemic, but they're, again, not material to the overall portfolio.

[Operator]

And we do have our next question from Himanshu Gupta from Scotiabank.

[Himanshu Gupta, Analyst]

Just a follow-up. On your European expansion, does COVID change anything now? I mean in terms of your plan to increase exposure to the region. Do you think European industrial markets will prove to be less or more resilient compared to North America coming out of this crisis? And any differences you are seeing in terms of rent collection or leasing in the respective region so far?

[Brian D. Pauls, CEO & Trustee]

There's a lot of questions, Himanshu, but let me start, and then I'll let Alex follow up as well. Our strategy remains the same. As we come out of this, we think our exposure to Europe -- our targeted exposure there, it remains the same. Our growth strategy remains the same. Kind of the global holdings and the asset quality strategy remains the same. So we expect that to continue. Europe, in some respects, is opening up faster than North America. We do expect industrial real estate, e-commerce proximity to large population centers to increase industrial demand the same as it would in North America, but Europe was a little behind North America in terms of e-commerce penetration and in that growth. So we see that potential being high in Europe, and that doesn't change. So as we emerge from this, we're looking at acquisition opportunities in all of our target markets, but we'll continue on the same strategy that we were before this hit. And Alex, you can talk a little bit about the asset quality there, the tenant quality there in Europe.

[Alexander Sannikov, Chief Operating Officer]

Yes, absolutely. So fundamentals-wise, we're seeing comparable fundamentals in Europe to North America. Rent collection data, as I mentioned earlier, for April, was right in line with what we are seeing for the rest of our operating regions in North America. So we think that the industrial fundamentals will continue to be strong and will strengthen. Brian mentioned that the e-commerce penetration in Europe is obviously lower than it is in North America and growing faster. One of the -- on the flip side, the trend that Brian talked about of reshoring has been generally growing faster in Europe, especially in a market like Germany. Germany has been sort of more of an early adopter of reshoring. And we expect that, that trend is only going to accelerate in that market, which is a well-known manufacturing heavy, and we expect that there's going to be more demand from reshoring in Germany specifically.

[Operator]

And our next question is from Brad Sturges from Industrial Alliance.

[Bradley Sturges, Equity Research Analyst]

It's a 2-part as well. In terms of the leasing activity, you talked about the renewal activity that you've been experiencing. Just could you maybe expand upon what you're seeing from new -- prospective new tenants and whether there's been a material change on that type of leasing activity? And then secondly, in terms of your rent deferral strategies, you highlighted that the May and June deferral and with the [ repayment ] back, but what other strategies would you consider at this stage in terms of dealing with tenants looking for a little bit of rent relief in the short term?

[Brian D. Pauls, CEO & Trustee]

Sure. I'll let Alex answer that, but just in terms of -- I do want to -- before Alex goes, Brad, let you know that we're talking to every tenant. And we're proactively talking to every tenant. There's a couple of government programs. There's our own programs. And then we're customizing certain things to meet tenant needs as need be. But their health and longevity of those tenants is important to us, and we're working with everybody. But Alex can tell you a little more specifics of what we're doing, what programmatic programs we're offering as well as kind of how we're dealing with each tenant.

[Alexander Sannikov, Chief Operating Officer]

Yes, absolutely. So well, I'll start with that and just to continuing on the rent support and deferral theme, and then we can talk about new leases. So our main program, as we mentioned, is deferrals of net rent for May and June. We have been working with the select tenants who have, let's say, future free rent or prepaid rent that is to be applied to future months to push that forward and to, let's say, if they had a free rent for October, then we will let them apply that free rent for May, and then the October doesn't have the free rent any longer. In certain instances, we've been working with tenants who are largely single-tenant buildings where the municipalities have deferred payments of realty taxes and tenants reached out to us and requested that they pay the realty taxes to us in line with the schedule proposed by various municipalities, and we have been generally accommodative of that. And lastly, the Commercial Rent Assistance program has been announced. However, the details are limited. And we -- and there's a discussion about a [ new assistance ] program coming for larger tenants. So we're closely monitoring that, and we'll evaluate the impact of that and how we implement that in our portfolio as more details become available.With respect to new leases, we have generally seen slower leasing activity, new leasing activity and touring activity across the portfolio. The new leasing activity is slowly coming back in the Netherlands, where, as Brian said, the economy is opening slightly faster. So we actually are in discussions on some new leases for some of the vacancy in the portfolio we just acquired. But generally, in Canada and the United States, where we have seen slower leasing activity, and that is the case -- again, from the conversations we've been having with various market participants, that is the case for the market overall. The new leasing activity has been slower. Touring space with social distancing measures is pretty difficult, and tenants are generally taking a pause in terms of making expansion decisions on their real estate. There is discussion around e-commerce, larger e-commerce users and RFPs in the market, both in Montréal and Toronto. We're monitoring all of those RFPs, but there hasn't been any material transactions to our knowledge so far.

[Operator]

We'll have our next question from Brendon Abrams from Canaccord Genuity.

[Brendon Abrams, Analyst of Real Estate]

Within your Western Canada portfolio, what percentage of tenants in that region are directly involved in the energy sector? And I guess, a second, I know there's probably a limited amount of leasing volumes, but have you seen any material changes in renewal spreads over the past few months in that region? And what would your expectations more broadly be for your Western Canada portfolio on a go-forward basis?

[Brian D. Pauls, CEO & Trustee]

Thanks, Brendon. Go ahead, Alex.

[Alexander Sannikov, Chief Operating Officer]

Yes. Thanks, Brendon. The energy sector represents about 1% of the total portfolio in Western Canada. It's about 7% of the rent is from the oil and gas sector. With respect to rents in Western Canada, again, we have limited data. But so far, we're seeing those rents are holding, and we haven't seen significant declines in rents compared to our targets or pre-COVID rents. The broad outlook so far is that we will continue maintaining occupancy and trying to grow occupancy in a few vacancy pockets that we have. And we're in discussions -- we were in discussions on about 50,000 square feet of vacancy in Edmonton prior to the pandemic, and that tenant is still interested in this space. We have the city's approval to proceed. Obviously, we'll wait for the economy to come back and reengage with the tenant. But hopefully, that deal will go through, and that will be a significant boost to the overall occupancy in the region.

[Operator]

And we do have our next question from Sam Damiani from TD Securities.

[Sam Damiani, Analyst]

My last question is just related to the acquisitions in Europe. It looks like around $50 million or $60 million didn't close that was originally targeted back a couple of months ago. Are those still pending and may take a little longer? Or have any of those been just dropped?

[Brian D. Pauls, CEO & Trustee]

Yes, Sam. Some of those that were previously announced are closing and will close. Some of them we're taking a longer look at and we're deciding it. It depends on kind of how far we were on due diligence. And for example, there's one acquisition in Germany that we actually readjusted the price and will proceed on. And then there's others that we're kind of continuing to watch that we were negotiating on or underwriting. So it depends on which one. We're taking a general pause on acquisitions right now. Certainly, on new deals, we're looking at what's available, which is not much, and we're looking at what's trading, which is almost nothing. And we'll continue to look at acquisitions and, when there's opportunity, capitalize on it. Alex, what would you add to that?

[Alexander Sannikov, Chief Operating Officer]

No, no. Yes. I think that's a complete summary.

[Operator]

And we have no further questions at this time. I will now turn the call over to Brian Pauls for closing remarks.

[Brian D. Pauls, CEO & Trustee]

Well, I'd like to thank everyone for your time today. We look forward to speaking again soon. And in the meantime, we hope everyone will stay healthy and stay safe. And we look forward to our next call, take care.