Dream Industrial Real Estate Investment Trust

TSX:DIR.UN

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to the Dream Industrial REIT Third Quarter Conference Call for Wednesday, November 3, 2021. 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 or implied by such forward-looking information. Additional information about these assumptions and risks and uncertainties Dream Industrial REIT's filings with securities, including its latest annual information form and MD&A. These filings are also available at 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]

Good morning, everyone. Thank you for joining us today for Dream Industrial REIT's 2021 Third Quarter Conference Call. Speaking with me today is Lenis Quan, our Chief Financial Officer; and Alex Sannikov, our Chief Operating Officer. During Q3, we continued to see the significant positive impact of our strategic initiatives on our operating and financial results. We reported a 25% increase in FFO per unit, led by strong CPNOI growth, lower cost of debt and our robust pace of capital deployment. Our pace of CPNOI growth continued to accelerate and was 7.5% in Q3, the highest pace of CPNOI growth since the IPO of the REIT, led by Ontario at 15%. Our pace of capital deployment remained robust with over $2.1 billion of acquisitions closed or waived year-to-date and approximately $400 million of acquisitions that are in exclusive negotiations. We have advanced our development pipeline with approximately 700,000 square feet of projects currently underway in Canada and the U.S. with an additional 241,000 square foot expansion in Germany expected to commence construction in the next 90 days. We continue to focus on maintaining a strong and flexible balance sheet. During the quarter, we repaid $264 million of secured mortgages, bearing interest at a rate of 3.5%, lowering our company average cost of debt to 86 basis points today. Since the beginning of 2020, when we announced our first European acquisitions, we have grown and upgraded our portfolio quality significantly, including acquisitions that are expected to close this year, we will have completed over $3 billion of acquisitions across North America and Europe, adding over 21 million square feet of high-quality assets to our portfolio and doubling our footprint. These acquisitions have allowed us to expand into new markets in Europe, while adding significant scale in our existing core markets, such as the GTA and Montreal. We are on track to end 2021 with close to $6 billion of assets in some of the most sought after industrial markets globally. Our expansion into Europe has provided us access to a deep pool of high-quality investment opportunities at attractive economics to the REIT. We expect industrial fundamentals in Europe to strengthen further, led by rising e-commerce penetration, reactions to global supply chain problems and high barriers to entry to new supply. We have been able to add EUR 1.3 billion or approximately $2 billion of high-quality distribution and urban logistics products in some of the most densely populated regions on the continent over the past 2 years, and we expect to grow further in these markets. We recently waived all conditions on an off-market 600,000 square foot industrial and high-tech complex in the Hague for EUR 100 million, representing a going in-yield of 4.5% with additional growth expected from raising in-place rents, which are currently below market and fully indexed to CPI. The Hague is the third largest city in the Netherlands and a key component to the Randstad urban cluster. Industrial land in the Hague is scarce with one of the lowest availability rates in the country. The complex is well connected with extensive public transport connections, including a tram station with direct service to the city center. It is 100% occupied by tenants primarily active in the technology and life sciences sector. We plan to expand the footprint by nearly 115,000 square feet. 2 pre-leased expansions totaling 65,000 square feet are currently underway and included in the purchase price. An additional 39,000 square foot expansion is targeted for development in the next 24 months. In Germany, we have waived all conditions on a 250,000 square foot urban logistics facility located near Dorman, the largest city in Ruhr the region of Germany, the most populous urban area of Germany with over 5 million people and density of approximately 2,800 people per square kilometer. The building is fully let to a globally renowned toy manufacturer with their European operations headquartered in an adjacent building. We are buying the asset for just over EUR 20 million, representing a going-in cap rate of 5%. Increasing replacement costs and rising institutional demand continues to push values across our strategic European markets. In Canada, we continue to focus on our core markets of the GTA, GMA and other strong markets in the Greater Golden Horseshoe region of Ontario. Replacement costs and rents continue to rise rapidly in these markets. Demand remains at an all-time high and supply is limited and slow to develop. We have acquired over $550 million of assets in these markets over the past 2 years, below replacement cost and with in-place rents about 20% below market. We expect strong cash flow and NAV growth as we mark expiring leases to market. Recently, we closed on a 78,000 square foot distribution facility near the Greater Toronto area for $18 million. Built in the early 2000s, this asset has a clear ceiling height of 28 feet and is located just north of Highway 401 in Ajax, near Amazon's new 1 million square foot distribution center. We agreed to acquire the asset fully vacant and were able to lease the entire building prior to closing for a 10-year term with 3.5% annual contractual rental rate growth and lower than budgeted leasing costs. Assuming a cap rate of 4% on the fully leased building, we estimate that we were able to increase value by over 15% before even completing the purchase of the asset. With a large portfolio and strong balance sheet, we are now able to meaningfully execute on our development pipeline. We have 3 projects currently underway that will add an incremental 700,000 square feet of GLA to the portfolio over the next 12 to 18 months. The first phase of our 220,000 square foot expansion at our Marie Curie property in the GMA is largely complete with completion expected in early 2022. Market rents have continued to increase, and we are marketing the space at almost 20% higher asking rents than what we underwrote in our portfolio earlier this year. We are also actively looking for opportunities to acquire attractively located land sites where we can build high-quality logistics product that will generate higher returns than buying comparable stabilized product. This year, we acquired 38 acres of land in the GTA across 2 sites for $48 million at an attractive pricing of $1.3 million per acre. The sites can support the development of approximately 700,000 square feet of high-quality logistics buildings within the next 2.5 years. We are targeting unlevered yield on cost of approximately 6% on these projects, which represent a spread of 250 basis points compared to cap rates for comparable stabilized properties. In early 2022, we expect to begin construction on 3 additional development projects across Europe and Canada. In Germany, we're advancing the 241,000 square foot expansion of our existing property in Dresden. The 30.4 acre site is currently improved with a 274,000 square foot warehouse, with site coverage at just over 20%. We intend to nearly double the density by adding 241,000 square feet of brand-new state-of-the-art logistics space. We expect our yield on cost on the expansion to exceed 6.5%. In the GTA, we continue to execute on our strategy to add to our significant concentration near the largest population centers and major highway interchanges. We have a cluster of 3 buildings totaling 212,000 square feet situated on 10 acres of land located in close proximity to highways 401 and 410 near Dixie Road in Mississauga. We intend to commence the redevelopment of this cluster by mid-2022 and build a 209,000 square-foot building with completion expected by the end of 2023. We are currently forecasting a yield on cost more than 150 basis points higher than cap rates on comparable stabilized product. In the spring of 2022, we plan to commence construction at our recently acquired 8-acre site located on Abbotside Drive in the GTA, directly adjacent to Highway 410. We are in advanced stages of obtaining the site plan approval for the construction of approximately 150,000 square feet of modern last mile logistics space. Overall, we expect to have projects totaling about 1.3 million square feet of projects underway in 2022. We have ample room to expand our pipeline before achieving our target of having 5% of our total assets under development. We will balance our development pipeline with our focus of driving FFO per unit growth. We continue to make significant progress on all aspects of our business. I'll now turn it over to Alex to talk about our operations.

[Alexander Sannikov, Chief Operating Officer]

Thank you, Brian, and good morning, everyone. Industrial market fundamentals remain robust across all our markets, driven by strong demand for both occupiers and investors. Availability rates have continued to trend down in most of our markets, dropping to the low 2% range across Canada with availability in the GTA and GMA just over 1%. The outlook for rental rate growth remained robust with limited new supply coming online in the context of the ongoing pace of absorption. Since the end of Q2, we signed over 950,000 square feet of leases at an average rental spread of 23% over prior rents. On these leases, we also achieved an annual contractual rental growth of 2%. Year-to-date, we have signed nearly 3.4 million square feet of leases across our Canadian and European portfolio at an average rental spread of over 22%. Our in-place occupancy has increased by nearly 290 basis points compared to the beginning of the year to 97.6%. Including over 140,000 square feet of leases that have been signed but not commenced to date, committed occupancy in our portfolio was 98% at Q3. As a result of strong leasing activity, our CPNOI growth continued to accelerate, and we reported a 7.5% year-over-year growth this quarter, driven by a 4.4% increase in in-place rents from strong rental outlook as well as contractual rental growth and a 180 basis points increase in average occupancy. We reiterate our previous forecast of mid-single-digit CPNOI growth in 2021, and we'll be providing our 2022 CPNOI guidance when we report our Q4 results. Rising land prices and market rents continue to drive higher asset values across our portfolio. During the quarter, the value of our assets increased by $162 million, reflecting lower capitalization rates as well as higher market rents in Ontario and Québec. As of September 30, 2021, our investment properties were valued at approximately $155 per square foot, including the Ontario and Québec portfolios that are being carried at $207 and $151 a foot, respectively. With asset pricing setting new records in most of our markets, we expect the asset values to continue to increase in our portfolio over time as private market transactions provide additional data points. We continue to advance our ESG framework for 2021 and are increasingly prioritizing green investments in our capital allocation decisions. We are in advanced stages of planning renewable power projects in Canada and the Netherlands in collaboration with our tenants and their respective regulatory authorities. Including our existing panels, we are targeting to install over 50,000 solar panels across 3.5 million square feet, which could result in over 10% of the Trust portfolio being powered by renewable energy. We have finalized the feasibility studies as well as the respective agreements for 3 projects, 2 in Alberta and 1 in the Netherlands, totaling 60,000 square feet with the target system capacity of approximately 4 megawatts. The total investment is expected at approximately $5 million, and we are targeting an unlevered IRR of 7.5% and a yield on cost of over 7%. The systems are expected to be operational in mid-2022. Additionally, we have established a target of upgrading approximately 1 million square feet of GLA in 2021 to LED lighting. On a year-to-date basis, our lighting retrofits totaled over 700,000 square feet, and we are on track to achieve our 2021 target. Our initiatives have been well received, and we have seen a significant enhancement in our ESG rating profile by some of the largest rating agencies. In the latest GRESB Public Disclosure Survey conducted during the quarter, we ranked second out of 10 North American industrial peers. We will provide further details on our initiatives and our approach to sustainability in our 2020 corporate sustainability report expected to be released later this year. I will now turn it over to Lenis, who will provide our financial update.

[Lenis W. Quan, Chief Financial Officer]

Thank you, Alex. Our financial results for the third quarter were strong. Diluted funds from operations was $0.22 per unit for the quarter, 25% higher than the prior year comparative quarter due to higher NOI from our comparative properties, successful deployment of our balance sheet capacity towards over $2 billion of acquisitions over the past 12 months and lower borrowing costs, as we executed on our European debt strategy. The pace of our capital deployment remains strong, and we have closed or waived on over $2.1 million of acquisitions thus far in 2021 and have an additional $400 million of assets that are currently in exclusive negotiations.Our debt strategy has allowed us to transform the REIT to operate primarily with an unsecured financing model and has continued to result in a lower cost of debt. To date in 2021, we have repaid approximately $400 million of secured mortgages at an average interest rate of 3.5%. This has lowered the proportion of secured debt to approximately 32% of total debt from 100% a year ago.Our unencumbered asset pool has increased by over $2 billion year-over-year and was $3.4 billion as of September 30, 2021, representing approximately 67% of total investment properties value.Over the past 12 months, we have raised $1.2 billion of unsecured debt at a weighted average interest rate under 50 basis points after swapping to euros, including $800 million of unsecured debentures issued in June of this year at an average interest rate of only 35 basis points after swapping to euros.We continue to allocate substantial capital towards sustainable initiatives across our existing portfolio and in our investment opportunities. Proceeds from our $400 million Green Bond issued earlier this year had been fully allocated or committed towards eligible investments. We intend to provide details on the use of proceeds, including individual projects in our full year 2021 annual report, which will be released in February 2022.We established an at-the-market equity program earlier in the year as an additional and cost-effective source of equity capital used to fund individual acquisitions. Since establishing the program, we have raised approximately $41 million of equity at an average unit price of $16.69.We also completed a $288 million equity offering in October 2021, with proceeds allocated towards funding our acquisition pipeline. Pro forma, the offering, closed acquisitions and after including assets that are firm or in exclusivity, our leverage is expected to be in the mid-30% range, and we will retain over $200 million of acquisition capacity before our leverage reaches our targeted mid to high 30% range. We expect most of the acquisitions in our firm and exclusive pipeline to close towards the end of the fourth quarter 2021. And as a result, our leverage will be temporarily below our targeted range during the fourth quarter.In addition, included in our Q3 results was approximately $1 million of lease termination fees from one of our recently acquired Dutch assets, which allowed us to take back 200,000 square feet and relet the space with no downtime at 20% higher rental rates. As a result, we expect mid to high single-digit FFO per unit growth for the fourth quarter, and we reiterate our guidance of FFO per unit growth of just over 10% for the full year 2021.Looking forward, delivering FFO per unit growth remains a key focus area for the REIT, along with growing and upgrading portfolio quality. We will provide our 2022 guidance on our year-end results conference call in February 2022.I will turn it back to Brian to wrap up.

[Brian D. Pauls, CEO & Trustee]

Thank you, Lenis. 2021 has been an incredibly exciting time for DIR, and we have taken significant steps to position DIR as the premier industrial REIT in each of our operating markets. We'll now open it up for questions.

[Operator]

[Operator Instructions] And our first question comes from Matt Kornack from National Bank.

[Matt Kornack, Analyst]

A quick question on current income tax. I was trying to -- obviously, you paid some with regards to the transaction. But is there an ongoing current income tax item that we should be accounting for as a result of some of your international properties?

[Lenis W. Quan, Chief Financial Officer]

Matt, it's Lenis. So yes, we -- there were some current income taxes that are flowing through from our European operations. It's about $1.1 million, that's impacting FFO. It's a little bit higher this quarter because of the lease termination fees. So I think on a run rate basis, we'd expect that to be a little bit lower going forward.

[Matt Kornack, Analyst]

So around $1 million would be an okay number to run quarterly?

[Lenis W. Quan, Chief Financial Officer]

Maybe a little 20% less than that.

[Matt Kornack, Analyst]

Okay. Fair enough. And then on G&A as well. Can you give us a sense as to what a normalized figure will be after the announced acquisitions come through? I mean maybe just -- I mean we can do the asset management side, but is there any incremental G&A associated with some of these European acquisitions related to platform value?

[Lenis W. Quan, Chief Financial Officer]

Yes, we've been growing our European platform with the expansion. But I mean I think as a general sort of run rate, you could probably run with about 10% of NOI. That's sort of all G&A included.

[Matt Kornack, Analyst]

Sorry, this is one more technical one, and then I'll go to a leasing one. But on the JV accounting, the FFO contribution that you have in the quarter, it essentially should be 2 of the 3 quarters, right? And if we look at that, I don't think you reported an actual segmented income statement for the U.S. assets. Is that going to be the case going forward? Or should we just kind of look at the FFO contribution and grow it accordingly?

[Lenis W. Quan, Chief Financial Officer]

So the -- our investment in the U.S. fund is equity accounted. The closing of the fund was effective July 1. So the FFO contribution would have reflected the full quarter. So assuming same properties, that would be a decent run rate for the quarters and then layering on any acquisitions as the fund grows.

[Matt Kornack, Analyst]

Okay. Perfect. That's helpful. And then with regards to the lease maturity profile for Q4 and also into 2022, the composition there looks a little bit skewed Western Canada and then obviously, Europe figures pretty prominently in 2022. How should we think -- I mean the disclosed rent spreads in Europe, I think, are 7.5%. But I think the view is that, that market is pretty fluid and improving. So how should we think about rent spreads on those leases in 2022?

[Alexander Sannikov, Chief Operating Officer]

Europe is slightly harder to predict specifically because, as you know, in a lot of cases in Europe, tenants have renewal options at indexed rent. So until those options burn off, we -- contractually we cannot push rents to market. On a non-negotiated renewal in tenants exercise the option, if it's a negotiated renewal or a new lease, then obviously, we can move that to market. So Europe will be harder to predict in that regard. But generally, on these lease expiries, they've all been underwritten. A lot of them are in Omega, and those are factored into our occupancy forecast for 2022, which we -- overall, we don't expect any material movements in occupancy for the year as a whole. There may be some temporary vacancy when some of these leases renew or don't. But overall, we expect that the occupancy will remain strong.

[Matt Kornack, Analyst]

Okay. And then the last one for me. With regards to value-add CapEx, it was a bit higher this quarter, but would that also include sort of the expansions that you're doing? Or is that related to something else?

[Alexander Sannikov, Chief Operating Officer]

Yes, it does include expansions. We are also looking at ramping up our value-add program for -- and you will see that in the fourth quarter. We have accelerated some of our roofing projects for buildings that have loan leases at below-market rents, where we probably could have managed the roof for another couple of years or replace it now and amortize it with interest. We've accelerated some of those projects, and we think that, that will provide higher value for the buildings in the long run and will improve sustainability. So you will likely see some of that as well in the fourth quarter.

[Operator]

And our next question comes from Mike Markidis.

[Michael Markidis, Real Estate Analyst]

You guys have had a tremendous year in 2021 just from an acquisition sourcing perspective. I know it's tough to predict, but do you think that the conditions are still there when you look at your cost of capital, when you look at where you think property pricing is going, that you could potentially have a similar year in 2022?

[Brian D. Pauls, CEO & Trustee]

Mike, I'll start. We have big plans to grow in '22, '21 had a few anomalies like Omega that were really, really big. We can't predict to find something like that, but we would expect to grow at a more normalized pace and '22 relative to the size of the company we are now. So we intend to grow in the 3 main geographic regions. We're sourcing deals directly to Canada, and we'll likely find more opportunities there. The rent growth there continues to show really good promise.Europe, we will continue to grow in our core markets, particularly in Germany and the Netherlands, and we have boots on the ground finding deals regularly there. We've got a very strong pipeline, and then we'll grow with the U.S. fund. So I would expect that we would grow in all 3 areas. It's hard to say whether that would likely be to the extent of 2021. That would be unlikely, but we do anticipate strong growth in all 3 of those geographies.

[Michael Markidis, Real Estate Analyst]

Okay. Great. And then just with respect to the U.S. fund, can you remind me, is the strategy now different in terms of how DIR would have acquired previously when it was aside from just the volume of transactions, but in terms of target markets would be the first part? And then just in terms of sort of how you guys look at your unlevered returns in Canada and Europe, would the target be similar in the U.S?

[Brian D. Pauls, CEO & Trustee]

The U.S. fund will likely target more liquid, more expensive markets and more development. The fund will be geared toward -- more toward total return rather than current income as we are as a REIT. So we like the opportunity to participate in that growth without the dilution of if we did it 100% ourselves. So that's part of the strategy there. We would expect the percentage of our assets in the U.S. to grow higher than what it is today as that fund has opportunity, and we have the opportunity to grow with it. So the metrics are the same in Canada, but we would expect the U.S. fund to target more total return than current income. We would expect our returns to be higher through our participation in the fund than if we were doing it by ourselves.

[Michael Markidis, Real Estate Analyst]

Yes. No, fair enough. Okay. And then last one for me, and this might be technical. But Lenis, I think you answered Matt's question just about the FFO contribution or I guess lack of contribution from the sale of the 75.5% interest in the fund. Did that all flow through as an equity count investment? I just noted some fee income, there's an administration fee as well that's in there. I'm just trying to get a sense of if that's part of that or how that all works?

[Lenis W. Quan, Chief Financial Officer]

Yes, that's right. So as an investor and the fund, so DIR would be eligible for the full quarter of equity income, which is reflected in the statements. The actual acquisition legally closed towards the end of July. So there was included in interest, and other income about $1.7 million just related to the FFO or cash flow that was generated by the properties for that 1 month at 100%.

[Michael Markidis, Real Estate Analyst]

So that would be a proxy for 1 month FFO?

[Lenis W. Quan, Chief Financial Officer]

At 100%. Yes.

[Michael Markidis, Real Estate Analyst]

At 100%. Okay. So technically then, so I don't know, okay, I guess I have to revisit it. But if that was reported at 100%, was that deducted out of FFO?

[Lenis W. Quan, Chief Financial Officer]

No, they're all in FFO. That's in FFO. And then we -- for our FFO reporting purposes, we picked about $1.6 million of FFO for the U.S. fund. That sort of -- we can also kind of go through this offline, I can walk you through the details. But in our reconciliation in MD&A and that last quarter of the U.S. fund at 25%.

[Michael Markidis, Real Estate Analyst]

Okay. No, that would be useful if we could connect offline, that would be great. And I can turn it back to higher-level questions.

[Operator]

[Operator Instructions] And our next question comes from Sam Damiani from TD Securities.

[Sam Damiani, Director, Institutional Equity Research]

Lenis, just on the fourth quarter with the acquisition scheduled to close, what was the plan for debt -- for raising debt to fund that for the balance of the year?

[Lenis W. Quan, Chief Financial Officer]

So we currently have sufficient liquidity to do that on the balance sheet. But if markets are open and available, we could look to raise some additional debt in markets. So the opportunity is there. But we have sufficient liquidity on our balance sheet to take that.

[Sam Damiani, Director, Institutional Equity Research]

Yes, for sure. But I guess if you were to do some long-term debt, how much capacity is there to do a cross currency and interest rate swap on, with your pro forma assets at the end of the year?

[Lenis W. Quan, Chief Financial Officer]

Sure. So at the end of the third quarter, there's about EUR 200 million. That capacity plus whatever else we have in the pipeline, that's based out of Europe. So by the end of the year, that number could increase to about EUR 400 million plus.

[Sam Damiani, Director, Institutional Equity Research]

Sorry, EUR 400 million or dollars?

[Lenis W. Quan, Chief Financial Officer]

Euros.

[Sam Damiani, Director, Institutional Equity Research]

Euros. Okay.

[Lenis W. Quan, Chief Financial Officer]

That including pipeline. Yes, what's left to close.

[Sam Damiani, Director, Institutional Equity Research]

And based on the markets today, sub-1% is achievable? Would you say sub-0.5% as well is achievable? Or how attractive is it today versus the last time you did it?

[Lenis W. Quan, Chief Financial Officer]

The interest rates in North America have increased. They have not increased to the same extent in Europe. So we're looking at somewhere between 70 to just under 100 basis points for 5- to 7-year terms. So it really depends on the terms that we're looking at.

[Sam Damiani, Director, Institutional Equity Research]

Okay. Just switching over to Western Canada. The occupancy, I guess ticked up in Q2 and then slipped back in Q3. I guess if you could comment on that and also just generally how you're looking at Western Canada, if any differently today for growth?

[Alexander Sannikov, Chief Operating Officer]

So Sam, it's Alex. With respect to occupancy, as you know, our Western Canadian portfolio has lots of tenants. So the occupancy will move around in this territory as leases mature. So that's sort of natural for the portfolio to see a bit of fluctuation. Overall, fundamentals in Western Canada have improved across markets where we are present. And we expect that they will continue to strengthen with dropping vacancy rates to basically low to mid-single-digit range in all markets. We're starting to see upward pressure on rents. So the fundamentals have definitely improved, and we're generally positive on the outlook.

[Sam Damiani, Director, Institutional Equity Research]

So it could be an area of growth for the REIT going forward?

[Alexander Sannikov, Chief Operating Officer]

We intend to continue -- we have -- as we talked on our prior calls, we've identified certain assets in our portfolio as nonstrategic, where we'll part with them at the right time, at the right price. With improving fundamentals, we expect that there's going to be more liquidity in the markets. And we could look at recycling capital within the region. And we're looking at opportunities. We haven't seen significant opportunities on the income side, so trying to stabilize our core assets. We haven't seen significant risk-adjusted return premium, but maybe we're looking at development opportunities in the West to see if the risk-adjusted returns are there. So we are evaluating what options there are.

[Sam Damiani, Director, Institutional Equity Research]

Okay. And last one for me before I ask, I just say a great quarter all around. But the last question I have is just on the markets. With the market rent growing at a good clip yet again this quarter and expected to continue to do so, are you seeing any change in the trend of tenant turnover and some tenants deciding to relocate to cheaper locations?

[Alexander Sannikov, Chief Operating Officer]

No. We haven't seen that trend. There is no space really for a lot of the occupiers to relocate. We're continuing to see occupiers prioritize location vis-a-vis access to major transportation routes and vis-a-vis access to labor pools over rent. So that continues to be a priority for occupiers, and it's hard to find cheaper alternatives in locations for those attributes.

[Brian D. Pauls, CEO & Trustee]

Yes. Sam, I think the opposite is true that tenants are hunkering down. They want higher inventory. They need more space and wanting to secure the space they have, especially if it's in a strategic location and want more of it. So we're seeing probably the opposite rather than tenants fleeing, they're coming and wanting longer terms and more security in their space.

[Operator]

[Operator Instructions] And our next question comes from Himanshu Gupta from Scotiabank.

[Himanshu Gupta, Analyst]

So just to follow-up on Sam's last question in terms of tenants doesn't have much place to go right now. And then looking at the recent user activity, rental escalators are in the range of 3.5% to 4% in GTA. So are you seeing any pushback in that regard in terms of and pushing back on the rental escalators?

[Alexander Sannikov, Chief Operating Officer]

Himanshu, it's Alex. We are obviously -- it is obviously an education process with tenants when it comes to renewal and some tenants come to the negotiation table more educated on the market, some less. And all of them, once they do their homework as to what's available in the market and what's the environment is like relatively we get over that a sticker shock. So it's definitely a conversation. But so far, we have not lost any tenants over price.

[Himanshu Gupta, Analyst]

Okay. And the most of the reason which is being done, let's say, this year or so far, is the annual escalator getting in that range, like 3%-plus range? Or is it still like CPI plus rent...

[Alexander Sannikov, Chief Operating Officer]

So in Canada, we're doing contractual rent escalators. We are -- our average for the GTA has been in 3.5% to 4.5% on the more recent leases. We have been doing around 2.5% to 3.5% in the GMA, around 3% to 3.5% in markets like Cambridge and Kitchener. Western Canada is at 1% to 2%. And Europe is CPI, although we are starting to see some contractual rent bumps as well.

[Himanshu Gupta, Analyst]

Okay. And so Europe is mostly CPI, but is the market rents in your core European markets, are they increasing at the rate high CPI, Germany or Netherlands?

[Alexander Sannikov, Chief Operating Officer]

They are on average. We have seen certain markets in Germany increase by 20% year-over-year. Some markets in the Netherlands are growing. So it is definitely outpacing CPI so far.

[Himanshu Gupta, Analyst]

Okay. And then just sticking to Europe. How are the cap rates trending in your core markets in Europe? I mean obviously, in North America, we're seeing a fair bit of capital compression, but any thoughts in the open market in the context of lower than compared to North America?

[Alexander Sannikov, Chief Operating Officer]

We have seen cap rate compression in Europe. And I think what's important for Europe is that we're still looking at very, very reasonable capital values despite the cap rate compression compared to some of the North American markets. And given the historic rental growth has been lagging in North America, we expect that the growth going forward and the potential for rental rate growth going forward is significant, and that could lead to more cap rate compression and expansion of capital values.

[Himanshu Gupta, Analyst]

Okay. That's fair enough. And maybe the last question, switching gears to development program. So any update on the Las Vegas development? And then given the U.S. JV now, is it fair to say that most of the future developments will be in Canada and Europe and not much in the U.S.?

[Alexander Sannikov, Chief Operating Officer]

So our development program, as Brian touched on, we are pursuing development in all of the markets we're in. In the U.S., we will be participating in development via the fund. The fund intends to grow its development program significantly. Our Canadian pipeline is very robust with a significant pipeline of expansion, redevelopment and greenfield projects in GTA and GMA. In Europe, we have one project underway. We talked about approximately 1 million square feet of density that we've acquired with Omega. So we are working on activating that. And we're also working on a couple of intensification and redevelopment projects in the Netherlands. Those are in earlier stages. So we haven't included them yet in our MD&A disclosure. But as they advance, we will be providing more detail and color. So there's a much larger pipeline than we are, yes.

[Brian D. Pauls, CEO & Trustee]

Yes, Himanshu, I'd add to that, that our pipeline -- we're adding density in a lot of properties across the regions Alex mentioned. We've got greenfield development. And then we're also looking at a little bit further out development of land that may take 2 years to 3 years to bring into production. But what we want to have is a steady pipeline of development opportunities to add to our assets. I think we've mentioned that a good long-term target would be 5% of our balance sheet in development. We're not there yet. So we continue to look for opportunities in this area.

[Operator]

And we have no further questions. I will turn the call back over to Brian for final remarks.

[Brian D. Pauls, CEO & Trustee]

Thank you, everyone, for your time today. We look forward to speaking again soon. And in the meantime, stay healthy and stay safe. Take care.

[Operator]

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.