Dream Industrial Real Estate Investment Trust

TSX:DIR.UN

Earnings Call Analysis

Dream Industrial REIT Q2 2024: Solid Growth and Strategic Moves

In Q2 2024, Dream Industrial REIT reported a 5% increase in comparative properties NOI and maintained an FFO per unit of $0.25. The company completed $50 million in property dispositions above pre-sale IFRS values and secured nearly $600 million in liquidity. Key projects include over 0.5 million sq. ft. leased in Ontario and Alberta, with new developments in strategic markets like Toronto, Montreal, Calgary, and soon, Vancouver. Despite an uptick in market availability, the trust plans to enhance value through selective capital recycling and maintaining low vacancy rates. Guidance remains optimistic, expecting NOI and FFO growth to reaccelerate into 2025.

Strong Financial Performance Amidst Market Adjustments

In the second quarter of 2024, Dream Industrial REIT reported a solid performance characterized by a 5% year-over-year growth in net operating income (NOI) from comparable properties. This growth translated into a funds from operations (FFO) per unit of $0.25, aligning with company guidance. The company demonstrated its financial robustness with an NAV per unit increase to $16.73, driven by enhanced leasing activity that lifted market values in Canada, though this was somewhat counterbalanced by rising cap rates in Europe.

Portfolio Optimization Through Strategic Dispositions

The company actively engaged in capital recycling, completing $50 million in asset dispositions across Canada and Europe, achieving a 12% premium above carrying values. With a targeted approach, Dream Industrial is reallocating these proceeds towards enhancing its existing development pipeline and optimizing returns through its solar initiatives and partnerships, propelling a stronger quality of asset ownership.

Market Dynamics and Leasing Activity Insights

The market for industrial properties is in a transition phase, with an increase in subleasing activity affecting availability rates, which are expected to go up in the coming quarters. Despite short-term availability pressures from subleasing, it is anticipated that the market fundamentals remain strong with demand pressures persisting. The company is maintaining a patient leasing strategy, prioritizing rental quality over quantum, resulting in substantial spreads—averaging 57% across new leases. Notably, high-quality urban industrial space retains a solid demand outlook.

Encouraging Development Progress

Dream Industrial is making advancements in its development pipeline, with over 500,000 square feet leased or conditionally leased during the quarter, demonstrating positive momentum. Specifically, the Courtney Park redevelopment project in Mississauga is fully leased to two tenants generating starting rents of $21 per square foot, expected to yield an annual NOI of over $4.5 million starting September 2024. Moreover, the company remains active in exploring opportunities across key Canadian markets including Montreal and Calgary, further bolstering its growth story.

Guidance for Stable Future Growth

Looking ahead, the management affirmed its expectation for mid-single-digit growth in both same-property NOI and FFO per unit for the remainder of 2024, while projecting a re-acceleration of growth into 2025. The consistent demand for urban industrial space, alongside favorable leasing spreads, underlines the company's strategy aimed at outpacing pressures from rising interest rates. Furthermore, the occupancy is anticipated to trend upward by year-end 2024 as proactive leasing measures begin to take effect, supporting future performance.

Financial Health and Debt Management

Dream Industrial maintains a solid financial footing with nearly $600 million in available liquidity. The company will continue to focus on optimizing its cost of debt, highlighted by a refinancing of its $200 million floating rate debentures resulting in a 50 basis point decrease in borrowing costs. The marginal cost of debt is now approximately 4.01%, aligning with favorable market conditions and enhancing the balance sheet's strength while positioning the company for sustained growth trajectory.

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to the Dream Industrial REIT Second Quarter 2024 Results Conference Call on Wednesday, August 7, 2024. Please be advised that all participants are currently in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]



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 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.

[Alexander Sannikov, executive]

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 Lenis Quan, our Chief Financial Officer. In the second quarter, we continued to focus on executing our key growth drivers. We reported 5% year-over-year comparative properties NOI growth for the quarter, which drove FFO per unit of $0.25, in line with our guidance. We have made good progress on our development leasing with over 0.5 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 are 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. Subleasing activity usually spikes in response to any economic disruption but drops off fairly quickly as broader demand and 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 markets. With that, we expect our core operating markets in Canada and Europe, we 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 or are conditional on 150,000 square feet of project in Ontario and 400,000 square feet in Alberta. Our recently completed redevelopment project at Courtney Park in Mississauga is now fully leased to 2 tenants. We achieved an average starting rent of $21 per square foot and annual steps of approximately 4%. And 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 2 buildings and approximately 70% of the projects 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 remained 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 rents 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 5-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 are 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 rents 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 nonstrategic assets into our core business and markets at accretive returns. During the quarter, we disposed of 6 nonstrategic assets located in Regina at total proceeds of $42 million, representing a 12% premium over carrying value. The consideration included a 2-year vendor 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 2 years in addition to $12 million of proceeds upfront. 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 ventures. 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 Lenis to discuss our financial highlights.

[Lenis Quan, executive]

Thank you, Alex. We're pleased with our solid financial results for the second quarter. We reported diluted FFO per unit of $0.25 for the quarter, driven by solid comparative properties NOI 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 EUR 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 or 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 8.1x. With total available liquidity of approximately $600 million, we retain 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 2 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.

[Alexander Sannikov, executive]

Thank you, Lenis. We look forward to continuing executing on our targets. And focus on creating value for unitholders. We will now open it up for questions.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Kyle Stanley with Desjardins.

[Kyle Stanley, analyst]

Lenis, I think I just missed kind of what you're 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, I guess, the expected kind of exit occupancy for the year.

[Alexander Sannikov, executive]

As we previously commented in May, we were expecting at the time that occupancy would decline into the midyear and recover back up to the -- the starting point for the year towards the end of 2024, and our expectation sort of remains intact. So, we expect to see in-place occupancy slightly down for Q3. Committed occupancy to be flat, maybe slightly up in -- as of September. -- and trend back up into Q4 and 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 rents 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 a net basis, on a gross basis, are about 1/4 to 1/3 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're -- we want to lease all of that space, some space contributes far greater than others.

[Kyle Stanley, analyst]

Okay. I appreciate that context. It's very helpful. I think you kind of gave your outlook on the current state of the market and maybe not seeing availability peak for a few quarters. I mean, this past quarter, as kind of for the broker reports, we did 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 maybe some more significant negative absorption into year-end before the inflection point?

[Alexander Sannikov, executive]

Yes. So, 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 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.

[Kyle Stanley, analyst]

Okay. That makes sense.

[Alexander Sannikov, executive]

As we said, we expect that for the next quarter or 2. We don't expect that this is going to be a long-lived trend.

[Kyle Stanley, analyst]

Okay. 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?

[Alexander Sannikov, executive]

We are generally encouraged by what we see in Europe from a 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 product. We wouldn't be a poster recycling capital out of markets such as tan over time. There's nothing imminent in the pipeline, but we're definitely exploring opportunities like that...

[Kyle Stanley, analyst]

Okay. Okay. 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.

[Alexander Sannikov, executive]

Thank you for the follow-up. 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 2, we're going to focus on finishing our development program with the capital that we have.

[Operator]

The next question is from Mike Markidis with BMO Capital Markets.

[Michael Markidis, analyst]

Just starting off you, 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.

[Alexander Sannikov, executive]

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 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 taking up more space than they currently need. We're looking to optimize their footprint. And it's consistent with what has been driving availability rates going up in the market or a negative absorption as Kyle referred to.

[Michael Markidis, analyst]

Got it. 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. As -- based on your comments on reacceleration in 2025, sort of 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.

[Alexander Sannikov, executive]

Look, we're not obviously seeing guidance right now for 2025. Our portfolio generally operates in the kind of mid- to high 90s occupancy and has operated for 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. In addition to that, our development assets will contribute to the occupancy, and these assets are let on a long-term basis. So that will contribute to the overall occupancy primarily into 2025.

[Michael Markidis, analyst]

Right. Okay. And then on a same-property basis, I guess, just given your comments, you don't actually need to see -- 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 a same-property NOI growth pick up?

[Alexander Sannikov, executive]

Absolutely in that 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 occupancy -- downward occupancy pressure and as occupancy stabilizes or kind of reverts back to mean, combined with spreads that we are achieving on re-leasing and embedded contractual rent steps, we should see a reacceleration in these metrics.

[Michael Markidis, analyst]

Okay. Last one for me before I turn it back. Just on the increased demand you're seeing from occupiers and users and the disposition success 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.

[Alexander Sannikov, executive]

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've seen strong pricing metrics there.

[Michael Markidis, analyst]

Okay. So would this be a one-off or was it a DIR? Was it your choice to do the VTB? I mean, ultimately is your choice, but was it driven by you or by the buyer in the sense?

[Alexander Sannikov, executive]

So there are 2 types of dispositions. So, there's the Regina sale where we did the VCD and that was a combination of us being able to invest the cash flow and the vendor -- 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.

[Michael Markidis, analyst]

Got it. Okay. So, the $100 million is on top of the Regina portfolio. Got it. It's not all on the IR's balance now. Some of it is not our private ventures.

[Operator]

The next question is from [ Gaurav Minter with Green Street ].

[Unknown Analyst]

Thank you, and good morning, everyone. And 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?

[Alexander Sannikov, executive]

We are continuing to see pretty broad-based trends when it comes to demand. We've seen 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 balance giving back space, although we continue to see the group's active both on new leasing front and on, call it, subleasing friends or in discussions to give back space. So that's generally what we see. As far as the occupancy outlook. It is informed by active discussions that are taking place, LOIs that are being exchanged, et cetera, et cetera.

[Unknown Analyst]

Okay. And just lastly, you have about $870 million of euro-denominated debt that's coming due through '24 and '25. Now that's sort of 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?

[Lenis Quan, executive]

Thanks. So, the debt maturities for 2024 have been addressed. And for 2025, we've included in our disclosures, those are maturing towards the end of the year. Obviously, our beyond 2024 outlook for FFO growth is informed by this as well. Because, as I had mentioned, they don't mature until the very end of 2025 being November and December. So current -- 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 rates, 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 5-year terms, which is typically what we would refinance that. So that's what the typical rates that we're seeing today are. But again, these ones don't roll until the end of 2025. And we're just focused on our organic growth drivers. We continue to grow NOI because we do believe that the growth from our organic -- on our operations will outpace the pressures from higher interest rates.

[Unknown Analyst]

Okay. Thank you for the color. I'll turn it back to the operator.

[Operator]

The next question is from Matt Kornack with National Bank Financial.

[Matt Kornack, analyst]

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 they -- are these tenants typically looking to occupy and in what geographic locations?

[Alexander Sannikov, executive]

We -- 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. And these buyers are focusing on midsized freestanding assets. They don't have to be new or can be older vintage, functional, well-located but freestanding assets that are obviously preferred without other tenants.

[Matt Kornack, analyst]

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 -- or will it just fluctuate between those 2 guidelines with rent growth being kind of the ultimate goal?

[Alexander Sannikov, executive]

Yes. So, if you look at our disclosure over the last 10, 12 years, the portfolio has averaged 96%, 97% consistently, and we don't expect that this environment should fundamentally change that trend. If you look at 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.

[Matt Kornack, analyst]

And then on the Montreal property near the port, I appreciate the update there. Can you give us a sense -- I don't know if you have these numbers or if you 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?

[Alexander Sannikov, executive]

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 midday 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 if 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, so call it 25 to 75. And so, we want to make sure that the assets are well positioned vis-a-vis the demand patterns that we see. So, we would want to make sure -- we want to make sure that it's a [ indiscernible] as we pursue this intensification and refurbishment.

[Matt Kornack, analyst]

That makes sense. And then just a last one quickly for me, and I don't know, if you can answer it. after you get through this year of development spend, I think next year, you 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 Dream Summit additional developments and buyback kind of equaling at this point? Or...

[Alexander Sannikov, executive]

We're looking at all of these -- we're looking at all of the opportunities available to us in terms of deploying capital. And market environment is highly dynamic, and so it's hard to comment on capital allocation priorities 6 to 12 months out, but we will keep updating investors on how we're thinking about that every quarter.

[Operator]

The next question is from Brad Sturges with Raymond James.

[Bradley Sturges, analyst]

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, 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 mark-to-market opportunity a bit from albeit pretty healthy levels still today?

[Alexander Sannikov, executive]

Thank you, Brad. We expect that market trends that we are achieving on our leases will remain consistent with our disclosure. As you know, we measure market rents for our assets differently compared to what you see for our market reports. So, when you look at market reports, what's measured that market rent is the asking rent for available space, when we report market rents and our MD&A, these metrics reflect weighted average market rents for rebuilding in our portfolio. And as you would have seen from our disclosure, market rents remain largely consistent from Q2 to -- from Q1 to Q2 and throughout the year, which is perhaps different compared to what you see from market reports from the brokerage community, just -- and this is a reflection of how these market trends are measured.



And so, we expect for the next quarter or 2 that market rents will remain consistent. -- as we measure it within our MD&A reporting. And in the near medium term, we continue to expect upward pressure on rents 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.

[Bradley Sturges, analyst]

And building on that based on what you've achieved to date on the development leasing that 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.

[Alexander Sannikov, executive]

Yes. That's exactly right. And the leasing that we've done with about 0.5 million square feet that we've announced that are either done or very close to them. These rents and yields are consistent with our disclosure.

[Bradley Sturges, analyst]

Okay. Just maybe switching gears, just 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, the opportunity set versus some of the existing markets like Toronto and Montreal that you're already in today?

[Alexander Sannikov, executive]

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 that will be consistent with [ Automarkets ]...

[Bradley Sturges, analyst]

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's the appropriate scale to operate there in Vancouver efficiently?

[Alexander Sannikov, executive]

The assets that we have on our radar or less management in sense of 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 are 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.

[Operator]

The next question is from Himanshu Gupta with Scotiabank.

[Himanshu Gupta, analyst]

So, can you comment on the leasing done in Ontario in Q2? I mean, was there anything related to 2025 expiring?

[Alexander Sannikov, executive]

There's been -- thank you, Himanshu. There's been a couple of deals done for late 24 or 25 in Ontario. We've done a large deal in Quebec relating to 2025 for about 400,000 square feet -- generally speaking, 6 to 9 months out, with the exception of that Quebec please.

[Himanshu Gupta, analyst]

Okay. Okay. And Alex, I think you mentioned also 180,000 square feet done at 200% spread. I mean is there anything specific to this property to get that kind of rental spread?

[Alexander Sannikov, executive]

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 rents.

[Himanshu Gupta, analyst]

Okay. Fair enough. And then you the broader market, and thanks for the discussion so far. So, do you expect leasing demand to recover by the end of the year or more like next year? And what could drive that if the confidence is demand come back in Q4?

[Alexander Sannikov, executive]

There's a number of ways to measure demand. And so, one way to measure demand is just a 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 to subleasing activity. So, we don't expect that, that will last for very long.



As we commented before, we are aware of some pending leases 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 we did some of the demand that we are talking about, the activity when it comes to tours or RFPs, is taking a bit longer to materialize, decisions are taking longer. And so, 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 0, 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 subleases and versus pressure from new groups looking for space.

[Himanshu Gupta, analyst]

All right. Okay. And then subleasing, is it mostly a GTA problem or you're seeing in like Montreal as well.?

[Alexander Sannikov, executive]

We're seeing that across the board. And I would say that we see that in the GTA seed Montreal, a little bit in Calgary. So, it's been state GTA phenomena per se.

[Himanshu Gupta, analyst]

Okay. Okay. So just turning to FFO guidance, mid-single-digit growth. Lenis, like what FX do you assume for Euro CAD? And do you already assume like occupancy becoming Q4 in your FFO guidance?

[Lenis Quan, executive]

Yes. So, as we commented, I think all those factors would be baked into 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.

[Himanshu Gupta, analyst]

Okay. And so. the FX, what about the Euro cad assumption in your model?

[Lenis Quan, executive]

We're assuming it's close to a current level, maybe a little bit stronger CAD.

[Himanshu Gupta, analyst]

Okay. And it includes rent from the – from Courtney Park [indiscernible] as well, whatever the leasing done so far.

[Lenis Quan, executive]

That's right. When they come online during Q3 as they start coming online during Q3.

[Himanshu Gupta, analyst]

I'll turn it back.

[Operator]

The next question is from Sam Damiani with TD Cowen.

[Sam Damiani, analyst]

Thanks. Good morning, everyone. I guess, Alex or Lenis, the comment about NOI growth picking up and overcoming interest expense to Bider's 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?

[Alexander Sannikov, executive]

Thank you, Sam. Generally, we would, and that's what -- when we say that what we're working on is ensuring that 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 into 2025 from interest expenses going up because our maturities are in November and December, but that comment is primarily aiming at 2026.

[Sam Damiani, analyst]

Okay. And 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?

[Alexander Sannikov, executive]

Thank you for that follow-up. We are looking at development opportunities, more infill mid-day assets in the GTA for the account of some of our private ventures. We also have our site in Brampton that is in preconstruction phase right now, and we are advancing predevelopment 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 is -- sits in one of our private ventures.

[Sam Damiani, analyst]

Perfect. Thank you, and I'll turn it back.

[Operator]

The next question is from Pammi Bir with RBC Capital Markets.

[Pammi Bir, analyst]

I just wanted to come back to the market rent commentary. And I guess the earlier commentary on the same proppant NOI growth accelerating next year, does your -- does that comment about next year's acceleration of organic growth? Does that assume stable market rents or possibly moving up?

[Alexander Sannikov, executive]

It assumes stable market rents Pammi.

[Pammi Bir, analyst]

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?

[Alexander Sannikov, executive]

We have not commented on that specifically. It's a significant portion, but we haven't commented on that specifically. And 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.

[Pammi Bir, analyst]

No, I'm just curious if you think it's maybe roughly in line with where broader market levels are, more or less.

[Alexander Sannikov, executive]

Yes. So subleasing is about 1/3 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 just 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 on subleasing. It's going to create sort of a bit of imbalance between -- in terms of the objectives that our occupiers have versus what we have. So yes, we would prefer to work with termination -- 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 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 in -- within the DIR UN portfolio. We've had a few cases within our private ventures.

[Pammi Bir, analyst]

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 type of interest you're getting on the Cambridge side as well beyond, I think, the 15% that's already done.

[Alexander Sannikov, executive]

So, starting with Cambridge. So, we are pursuing a multi-tenant strategy there. We've 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 4 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 a location perspective and just the physical attributes of the building perspective, it offers obviously older motor in specs, 40-foot clear height and excess trailer storage and various other attractive attributes. When it comes to Balzac there are 2 development projects, as you know.



So, for the 350,000 square 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.

[Pammi Bir, analyst]

Got it. That is very good color.

[Operator]

The next question is from Mr. Sumayya Syed with CIBC.

[Sumayya Hussain, analyst]

Just following firstly, on the occupancy discussions. Obviously, the drop there was as expected. And you did talk about demand from various users type. But would it be fair to say that, that drop in occupancy was more meaningful impact to your larger assets versus the smaller and mid-base.

[Alexander Sannikov, executive]

Thank you for the follow-up, Sumayya. Yes, 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 devisable, and so we'll work to reconfigure them to then respond to the demand that we see in the market.

[Sumayya Hussain, analyst]

Okay. And then just secondly notice that the lease incentives jumped sequentially and year-on-year a bit this quarter. It looks like some early renewals on the Dart; how should we think about that figure going forward?

[Lenis Quan, executive]

Yes. Thanks, Matt. So yes, that's correct. The increase was 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, just generally speaking, overall leasing costs on deals are relatively in line. They may have ticked up slightly, but not enough to offset healthy growth in the starting rents and ERs as well.

[Operator]

This concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Sannikov for any closing remarks.

[Alexander Sannikov, executive]

Thank you, operator, and thank you, everyone, for your interest in Dream Industrial REIT. We look forward to reporting back next quarter.