Dream Industrial Real Estate Investment Trust

TSX:DIR.UN

Earnings Call Analysis

Solid FFO Growth and Steady NAV

The company reported a diluted FFO per unit of $0.25 for the quarter, reflecting a robust increase of over 10% from the previous year, fueled by robust NOI growth and property management income from equity investments. NAV per unit remained stable at $16.80. Looking into the future, the company forecasts a continuation of its performance with 2023 FFO per unit expected to be in the high $0.90 range, indicating about $0.24 for Q4 and a 10% annual growth.

Financial Highlights and Outlook

The company ended the quarter with significant liquidity, over $526 million, supplemented with a $250 million facility option, which equips them to keep pursuing strategic goals. They provided guidance for full-year 2023 Funds From Operations (FFO) to roughly align with previous forecasts, hinting at an FFO per unit in the high $0.90 range for the fourth quarter. This translates into an FFO per unit growth of roughly 10% year-over-year.

European Market Dynamics and Growth Prospects

European markets present favorable conditions, particularly in urban and last-mile logistics, where limited supply and strong demand promote robust rental growth. Prospects for acquisitions, especially in urban logistics, support an expectation for continued growth. Amidst this, the company isn't budgeting external growth but expects to stay active in the market. Montreal's industrial scene, despite concerns, shows promise with a low supply pipeline, anticipating stronger rental trends over time.

Occupancy and Tenant Retention

The company maintains a retention ratio average around 70-75% over the past decade, with a recent uptick noted. While it's uncertain if this higher retention level will persist, it provides some assurance regarding consistent occupancy rates.

Rental Growth Expectations for 2024

Management is modeling single-digit rental growth in most markets for 2024, showing confidence despite economic uncertainties. In particular, the Greater Toronto Area (GTA) is expected to follow this trend. Valuation metrics for Europe also lean towards strong returns, with low-double-digit or high-single-digit total returns on an unlevered basis in favorable scenarios.

Occupancy Strategies

Without strict thresholds on occupancy rates, the company approaches each asset by considering its best use and the returns from occupancy versus rate. They expect that their long-term average occupancy will align with historical norms.

Regional Insights & Market Rent Adjustments

The company foresees vehemence in Western Canada's fundamentals and European markets starting from a much lower rent base. Therefore, they adjust market rent estimates based on the emerging data points, aiming to seize growth opportunities.

Development and Debt Strategies

A key priority is to conclude ongoing development projects, which may increment leverage slightly in the near term. However, with sustainable cash flow and ongoing capital recycling efforts, the company aims to position leverage on the lower end of their targeted range over time.

Disposition Opportunities

The company is engaged in several potential disposition discussions, which encapsulate both opportunistic offers at high prices and non-strategic asset sales. However, predictability in this area is limited, as outcomes hinge on private buyer negotiations and off-market terms.

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the Dream Industrial REIT Third Quarter 2023 Results Conference Call for Wednesday, November 8, 2023. [Operator Instructions] And the conference is being recorded. [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 also available on Dream Industrial REIT's website at www.dreamindustrialreit.ca. Your host for today will be Mr. Brian Pauls, Chief Executive Officer of Dream Industrial REIT.Mr. Pauls, please proceed.

[Brian Pauls, executive]

Good afternoon, everyone. Thank you for joining us today for Dream Industrial REIT's third quarter 2023 conference call. Speaking with me today is Lenis Quan, our Chief Financial Officer; and Alex Sannikov, our President and Chief Operating Officer.It's truly a pleasure to announce the promotion of Alex Sannikov to CEO of DIR effective at the beginning of next year. Alex has done an incredible job since joining the DIR team in 2019 and has continued to add value and grow his responsibilities throughout the last 4 years. DIR is in strong financial shape and is in great management hands to navigate the future to keep the company safe and capitalize on opportunities that materialize. I am delighted to remain close to the team as I transition to focus in other areas.Moving on to our Q3 results. DIR achieved 10.4% comparative properties NOI growth and FFO per unit growth for the quarter, making the fourth consecutive quarter of double-digit FFO growth. We remain focused on expanding the Dream Summit JV in our target markets with the acquisition of 6 assets in the GTA for a total purchase price of approximately $272 million.In addition, the venture is in exclusive negotiations, or of a contract to acquire 2 additional assets located in the GTA totaling 250,000 square feet for approximately $50 million. These acquisitions are all accretive to the REIT's overall return profile with an expected yield on equity of over 7.5%, while requiring limited equity and hence, preserving our balance sheet flexibility.Our private capital partnerships continue to generate a strong recurring fee stream that is expected to grow significantly over time with over $6.7 million of net margins generated this year from our property management and leasing platform. From an occupier market standpoint, there has been somewhat of a bifurcation in leasing momentum.In the small to [ mid-space ] segment, leasing momentum remains healthy and we are continuing to push rates. However, we are currently seeing a slowdown in leasing velocity in larger-based products across our markets, compared to 18 months ago. We have already seen the future development pipeline slow down with limited spec starts this year and a number of projects getting pushed out to future years.Development returns have been under pressure, due to higher financing costs and we expect this to continue to keep a check on new supply. The outlook for rental rate growth remains healthy with market rents over 30% above in-place rents. We can therefore, continue to capture significant organic growth within our portfolio with less reliance on continued market rent growth.I will now turn it over to Alex to provide additional color on our business.

[Alexander Sannikov, executive]

Thank you, Brian. Good afternoon, everyone. I want to take this opportunity to thank Brian for his leadership of DIR over the past 6 years. It has been a great honor working side-by-side with him and the entire management team in the true spirit of partnership over the last 4 years as we have transformed our business to grow to be not only the largest industrial platform in Canada, but a sizable player in Europe as well.We have established a significant development program and solidified our balance sheet, all while delivering sector-leading total returns to our unitholders. I'm very excited about the prospects for our platform going forward. I will start with our perspective on the current market environment.In our key markets in Canada and Europe, we entered the period of rising interest rates with very limited supply pipeline, record low availability rates and significant structural demand drivers for industrial space. These dynamics, combined with continued population growth in major Canadian urban centers underpin the continued health in the occupier markets.While availability rates have increased somewhat from the start of the year, the supply pipeline, which is already limited is shrinking as projects get delivered and we expect limited new spec starts and a substantially lower development pipeline in the near term. The headline rent growth as published by major market participants has declined compared to prior years in most markets in Canada.While this is in line with our expectations, we note that most of these research reports are based on average asking rents in given market. As such, the published statistics could be influenced by changes in asking rents and composition of available space. What we see in our business is that rental growth that we projected for 2023 as a whole has already been achieved.We have completed nearly 4 million square feet of new leases and renewals in Canada across the DIR and Dream Summit portfolios. Our combined spreads averaged approximately 75%, meeting or exceeding our budget for the year, which were set with mid- to high-single-digit growth assumptions. Over and above the leasing spreads, we have crystallized we locked in an average of 4% annual escalators.The availability rate within our portfolio has increased slightly in the quarter. This increase was in line with our expectations and was factored into the NOI outlook we communicated previously. In a multi-tenanted portfolio with staggered lease maturities such as ours, occupancy rates will always fluctuate slightly over time.As Brian commented, we're seeing limited large bays requirements for units over 400,000 square feet in most markets, but small to mid-bay activity remains healthy. Our properties are designed to be flexible and accommodate these changing demand patterns. We remain encouraged by the level of new leasing interest for both existing assets and new development projects.We are currently engaging with several prospective tenants for our 200,000 square foot [ Dixon ] property in Montreal. We're in discussions with 4 tenants for our 200,000 square foot Courtney Park development project in Mississauga. We're continuously responding to requirement for our 2 developments in Calgary, ranging from 30,000 square feet to 300,000 square feet.We have recently signed a 20,000 square foot conditional lease at our recently completed Abbotside development at rent 6% higher than the first lease signed this summer. In general, we see significant strength in the smaller bay segment of the market, especially in the GTA and Southwestern Ontario. So far this year, across our platform, we completed 800,000 square feet of leasing in these markets.For premises below 50,000 square feet, we achieved over 100,000 rental spreads and annual escalators averaging 4.5%. Notably, for smaller spaces below 20,000 square feet, annual escalators are 5% on average. Overall, our organic NOI growth outlook for the year remains intact and we reiterate our prior guidance of 10% to 11% CP NOI growth for 2023.Looking ahead, over the next 2 years, we have nearly 6 million square feet of GLA maturing in Canada with approximately 74% located in Ontario and Quebec, where average market rent is approximately double the in-place rent.In Europe, we have 2.4 million square feet maturing over the next 2 years and the current market rents for these European leases is over 10% higher than our in-place rents. With that, we remain optimistic regarding our mid and long-term prospects for organic NOI and FFO per unit growth, despite the pressure from interest rates.I will now turn it over to Lenis to discuss our financial highlights.

[Lenis Quan, executive]

Thank you, Alex. Our third quarter financial results were strong. Diluted FFO per unit was $0.25 for the quarter, more than 10% higher than the prior year quarter. The solid year-over-year growth was primarily due to strong comparative properties NOI growth and property management income from our equity investment. Our NAV per unit at quarter end remained steady at $16.80.We continue to focus on maintaining a strong and flexible balance sheet with ample liquidity. During the quarter, we closed on EUR 229 million of European mortgages with 3 lenders at a weighted average rate of 4.93% for a term of 5 years. We raised $107 million of capital through our ATM program at an average price of $14.27 per unit. These proceeds were immediately used to repay outstanding indebtedness accretively to FFO per unit and reduced our leverage by approximately 100 basis points.This also created additional balance sheet capacity to ultimately fund our developments and co-investments in private capital partnerships, leading to NAV accretion in the medium term. We have addressed all of our 2023 debt maturities. Looking forward to 2024, we have approximately $300 million of debt returning at an average rate of 3.5%. 95% of this maturing debt is euro-denominated.We are presently evaluating various financing options with existing relationship lenders at favorable rates that allow us to optimize our cost of debt. We ended the quarter with leverage of 35.1% and debt-to-EBITDA of 8.2x. With over $526 million of available liquidity at the end of the quarter, plus an additional $250 million accordion on our facility, our balance sheet strength positions us well to continue executing on our strategic initiatives.Looking forward, we expect our 2023 FFO to be in line with our previously updated guidance, which is FFO per unit in the high $0.90 range. This translates into approximately $0.24 for the fourth quarter, assuming FX rates near current levels and leverage largely in line with Q3 and represents FFO per unit growth of approximately 10% year-over-year.Just before I turn it back to Brian to wrap up, I'd like to say thanks to Brian for his leadership and guidance over the past 6 years. I look forward to the continued growth and success of our industrial platform under Alex's leadership.

[Brian Pauls, executive]

Thank you, Lenis. It's truly been an honor for me to lead DIR for the past 6 years. I'm grateful for all the friendships I've made and I look forward to the DIR's continued success.We'll now open it up for questions.

[Operator]

[Operator Instructions] Our first question comes from Fred Blondeau of Laurentian Bank Securities.

[Frederic Blondeau, analyst]

Congratulations, Brian and Alex. First question from me, Alex, we discussed Germany in August and obviously, the portfolio continues to perform well in Europe. But I was wondering with the increasing macro headwinds in Europe, I was wondering if you're starting to see either signs of stress within your portfolio and/or if it's starting also to see either distress or interesting acquisition opportunities?

[Alexander Sannikov, executive]

Thanks, Fred. What we see in Europe is generally supply-demand dynamics are pretty favorable for landlords in most markets. So that's Germany and Netherlands. France, we see very limited supply and continue to see strong demand across the board. So we are encouraged by the occupier fundamentals. One aspect to note about our European portfolio is our European portfolio is not pure logistics product.Roughly half of our portfolio in Europe is what we would describe as urban and last mile logistics and the supply-demand dynamics in that segment of the market are even more robust with virtually no supply that is either on the horizon or has been added recently translating into rental growth and strong occupier fundamentals. There are some markets in Europe, particularly in around Barcelona, where we see a little bit more supply compared to other locations.So we are watching that. But Europe as a whole and our portfolio as a whole is well positioned. As far as acquisition opportunities, we are starting to see interesting opportunities, especially in the urban logistics and last mile logistics segment of the market, where we expect continued rental growth and continued rental supply.

[Frederic Blondeau, analyst]

That's great. And one last from me. Just in terms of the Dream Summit joint venture. I was wondering what are you budgeting in terms of expected external growth for 2024?

[Brian Pauls, executive]

We're not budgeting external growth generally across our businesses, we're not budgeting external growth for DIR nor are we budgeting for Dream Summit. Having said that, Dream Summit continues to be active in the market and we continue looking at opportunities as we have so far this year. So we generally expect to remain active. The volume is hard to predict.

[Operator]

Our next question comes from Himanshu Gupta of Scotiabank.

[Himanshu Gupta, analyst]

So my question is regarding the Montreal industrial market. So are you seeing any weakness in the leasing demand in this market in particular? And then if I look at the lease expires next year, you have a sizable 1.2 million square feet coming due. So any thoughts on the lease expiries next year?

[Alexander Sannikov, executive]

So lease expiries, maybe I'll start with your second question. Lease expiries, especially in a market like Montreal, to generally provide an opportunity and we are excited to get the space back and be able to capture that market upside. When it comes to general health of Montreal markets, we remain encouraged by what we see, especially for a portfolio like ours, which is very urban, generally targeting small to mid-bay users and mid-bay in our definition, so 50,000 to 200,000 square foot range and small bays, everything below 50,000, we remain well positioned.And we generally don't compete with some limited new supply that was added to the market, especially in the South Shore. I know that Montreal market is generally in the headlines, given the -- some of the recent statistics show sequential negative rental growth. We commented earlier that those statistics need to be interpreted understanding the -- how they are derived. What we are seeing in our portfolio is rental outlook is intact compared to what we expected.

[Himanshu Gupta, analyst]

Fine. And then just on the market rent growth, we'll keep the statistics aside, what are your thoughts for the market rent growth in Montreal in the next year? Do you see that plateauing out? Or do you see chances of maybe a negative rent growth as well?

[Alexander Sannikov, executive]

We would generally expect comparable rental growth in '24 compared to 23%. So in the mid-single-digit range, what we are seeing in Montreal, in particular, is that supply pipeline relative to inventory is very low. And our understanding is that the vast majority of market participants are not looking to add new spec starts and we expect that inevitably that will translate into stronger rental growth over time. It's hard to predict exactly when, but that supply pipeline that is shrinking will inevitably support the market.

[Himanshu Gupta, analyst]

Okay. And maybe the last question, Alex, you mentioned about achieving 4% rent escalators in the near term. I mean, that's what you have been printing. Has that come down now as we started to see some normalization of leasing demand? And also like inflation moderates as well. So is that 4% becoming 3% or 4% is pretty intact?

[Alexander Sannikov, executive]

So 4% was the average around 4 million square feet that we've completed this year so far for the industrial platform as a whole. So it's a pretty representative dataset. It includes leasing in Ontario, or in the GTA, Southwestern Ontario, and Montreal in Western Canada. So it's the average for the entire leasing volume. We commented also that for the year we completed about 800,000 square feet of smaller bay leasing, let's say in the GTA and Southwestern Ontario, achieving roughly 4.5% escalators.So those are the numbers that we've seen so far in 2023. When it comes to go forward, we do see some pressure on escalators, but so far for our portfolio, which is again small to mid-bay on average, we've been achieving our targets.

[Himanshu Gupta, analyst]

Okay. And maybe just one last follow-up. I think you have a vacancy around the Port of Montreal and I think you mentioned 4 tenants or prospective tenants. Any thoughts when should we expect to backfill that vacancy?

[Alexander Sannikov, executive]

We expect it will be leased and produce income in the first half of 2024. Exact timing is challenging to predict. As we communicated prior, we are targeting to capture the value for significant land components that this particular site offers and therefore the users who are looking at this site is a somewhat specific audience that requires that outside storage component for either the fleet or trailer storage, et cetera.And that will inform both the market rent and the timing. And as we communicated previously, we remain confident that we'll achieve those rents and if we don't, then the site does offer significant development opportunities, which we can capitalize on.

[Operator]

Our next question comes from Brad Sturges of Raymond James.

[Bradley Sturges, analyst]

Just to continue on the discussion around leasing, given I guess 75% of your lease maturities over the next couple of years are Ontario, Quebec. And just curious to get a sense of what you would be forecasting in terms of retention rates for the space holding. Would it be similar to historical averages?

[Alexander Sannikov, executive]

So if you look at our investor presentation, we disclose our long, long-term track record of retention ratio. You will see that retention ratio generally averages around 70%, 75% for us over the past 10 years. We have seen somewhat of an increase so far this year in retention as occupiers generally decide to stay within the existing footprint.It remains to be seen whether that elevated retention ratio will persist or whether it will revert back to normal. For modeling purposes, you can assume the long-term average if that's the direction of the question.

[Bradley Sturges, analyst]

Okay. That makes sense. I appreciate the market commentary around market rent growth on Montreal. I'm curious if you're expecting market rent growth in Toronto to be similar in 2024 as 2023 as well?

[Alexander Sannikov, executive]

Yes, we're generally modeling single-digit rental growth in 2024 in most markets.

[Bradley Sturges, analyst]

In most markets. Okay. And my last question would be just on the...

[Alexander Sannikov, executive]

Including in the GTA.

[Bradley Sturges, analyst]

In the GTA. Okay. With the commentary around you starting to see some more opportunity within Europe for acquisitions, can you comment on where valuation metrics in Europe for the target markets you're looking at and the type of assets that meet your investment criteria, where cap rates or price per square foot would be today?

[Brian Pauls, executive]

Thanks, Brad. What we continue to like in Europe is the urban industrial, urban logistics, last mile type assets, which we have significant exposure to in our portfolio. We continue to see strong rental growth in that segment. If you look historically, rental growth for urban assets in Europe has outpaced big-box logistics and we expect that that trend will continue.As far as metrics, we're generally starting to see opportunities that translate into low-double-digit or high-single-digit total return on an unlevered basis. The going in metrics can vary depending on the lease term and the rents -- in-place rents relative to market. But the mark-to-market rent, which is market rent over capital value, would be comparable on average to what our portfolio is marked at and yes, provide attractive opportunities for total return.

[Operator]

Our next question comes from Mike Markidis of BMO Capital Markets.

[Michael Markidis, analyst]

I guess just we've talked a lot about the market rent growth, so I guess a 2-part question here for next year. How are you guys thinking about maybe occupancy, just given the environment, you're expecting maybe a little bit of a trickle-down over the next 12 to 18 months? And I guess I'd also be curious to hear, notwithstanding your comments on how strong the small and mid-bay tenant or product type has been, if you've seen any increase or you're getting a little bit more incrementally worried, I would say, about potential tenant failures over the next 12 to 18 months?

[Brian Pauls, executive]

Thanks, Mike. With respect to occupancy, we will be providing guidance, as you know, in February and that will include the outlook for the year -- for the following year in terms of NOI and occupancy. We generally see some lease-up opportunities within the portfolio, including some of the development projects, such as Abbotside, our Dixon property in Montreal, et cetera.So there's going to be upward possibilities for occupancy, but then as we commented earlier, we do have some expiries, so we expect some natural non-renewals there. So there will be ups and downs in terms of occupancy outlook, but on average, our portfolio has always remained stable in the high 90% range over a very long period of time as we also disclosed in our materials.And so we don't expect that there's -- we don't see anything that would change that long-term trajectory. When it comes to tenant health, we generally continue to see health from tenants. We're not concerned about any particular group. We do see some subleasing activity from 3PL users in particular, but that's reflected in the overall availability rate in the market.And generally speaking, we're still able to capitalize on those opportunities when tenants need to give back space. We're able to capture the upside that is not budgeted, if you will, because we didn't count on that space coming back to us. And we're working through a few cases like this where tenants approached us either in DIR portfolio or Dream Summit portfolio looking for less space and we immediately found replacement tenants at significantly higher rents to take their space. So we do see some of that, but again, it usually results in an opportunity in the last site.

[Michael Markidis, analyst]

Okay. Maybe just over to Lenis. You made your comment about '24 maturities and working with lenders and you were able to achieve a good outcome on the last refinancing that you did. But maybe in the last couple of months, have you seen any sort of change in the lending environment at all, or would you expect, barring any more volatility in the long end of the curve, is your expectation that you'll be able to achieve a similar outcome in 2024 as you just did on the last maturity?

[Lenis Quan, executive]

There's a few questions in there, Mike. I think in terms of the lending market, so we've seen -- I just want to make sure I answer all your questions. I don't think we've seen a significant change from secured lenders. Unsecured debt market seems to be functioning open and healthy. So no concerns or we're not seeing any cause for concerns in any of those markets.In terms of what we think we can achieve for next year, obviously, we all read what the outlook is for future interest rates, but I think I had mentioned that of the debt maturing next year, it's an average rate of 3.5%. The mortgages that we just closed are -- and 95% of that debt maturing is euros. The euro mortgages that we did close are just below 5%. So we expect to do something similar in that range if we were to replace the euro mortgages.If we were to look at unsecured market, I think that's well up to euros, would be in the low 5s. So again, any guidance that we will be providing in early next year will incorporate similar assumptions.

[Michael Markidis, analyst]

Okay. And then just timing-wise, is that leases spread out? Is it more of a bullet maturity and weighted to a specific part of the year?

[Lenis Quan, executive]

So we do have an unsecured venture maturing in the middle of next year, so that's 2/3 of next year's maturities and the rest are fairly spread out. They're mortgages.

[Operator]

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

[Pammi Bir, analyst]

Just coming back to your comments on the slower large-bay leasing velocity, are there any known sort of large vacancies that you're aware of that are coming back to you over the next, call it, 6 months or even years, if you know that far out?

[Alexander Sannikov, executive]

Within DIR portfolio, there's 100,000 square foot spaces in GTA that is going to be coming back to us when we're working through leasing that unit. Other than that, there's nothing significant that is a known vacancy.

[Pammi Bir, analyst]

Sorry, Alex. Did you say that was in the Summit JV portfolio or...

[Alexander Sannikov, executive]

No, within the DIR on balance sheet portfolio.

[Pammi Bir, analyst]

Okay. All right. And sorry, is that coming in Q4 or 2024?

[Alexander Sannikov, executive]

In Q4.

[Pammi Bir, analyst]

Okay. And then just coming back to the commentary around the maturities, the lease expiries for next year getting weighted to Ontario and Quebec and there is a big mark-to-market opportunity there. And then just maybe layering your comments together around the leasing velocity, et cetera, is there perhaps anything that might impede, from your standpoint, the ability to put up high-single-digit organic growth on an NOI basis, as you think about the next call it 12 months? Or would that be unrealistic based on what you're seeing today?

[Brian Pauls, executive]

Pammi, thank you for the question. As we said, we're generally providing guidance, more specific guidance, in February. And we're trying to summarize the ingredients for organic growth for us for the next 12 months and 24 months. So I think the conclusion that you are getting to is probably informed by some of our disclosure. And we will provide more color for the next 12 months in February.

[Pammi Bir, analyst]

Okay. All right.

[Brian Pauls, executive]

I hope this is a helpful answer.

[Pammi Bir, analyst]

Yes, I guess we'll wait for the full update in a few months. And just with respect to the ATM, just given where the unit price is and where leverage is, what are your thoughts on further use at this point?

[Brian Pauls, executive]

Pammi, your line got cut out for about 30 seconds, so we missed a part of the commentary, but we did get the question about ATM. Should we switch to that, or do you want to get back to your commentary?

[Pammi Bir, analyst]

Yes. Sure. Can you hear me now?

[Brian Pauls, executive]

Yes, we can hear you.

[Pammi Bir, analyst]

Yes, okay. It was just really a question around the ATM use, just given where the leverage is and where the unit price is, just curious how you're thinking about the ATM use going forward?

[Alexander Sannikov, executive]

Yes. So as Lenis commented in her remarks, when we used ATM in late August, we had great use of proceeds. That was accretive to FFO per unit immediately, improved leverage and was accretive to NAV in near to midterm. And we haven't, as you have seen from our disclosure, we haven't used the ATM since then. And as we commented previously, we will remain very disciplined in terms of using the ATM, vis-a-vis the use of proceeds and obviously the price. So yes, there's no immediate usage of the ATM plan, given the current unit price.

[Pammi Bir, analyst]

Got it. Last one from me. Just on the Caledon development, what's your sense of timing of getting the balance of that site leased up?

[Alexander Sannikov, executive]

Yes. So we have one conditional lease signed already. We're just finalizing the actual lease. And then we expect that before we report next time, we will have the balance leased at least -- in terms of having the document signed.

[Operator]

Our next question comes from Sumayya Syed of CIBC.

[Sumayya Hussain, analyst]

I just wanted to touch on the leasing activity in the quarter in terms of what are the average lease terms you're doing and if there's been any change in trend from prior leasing?

[Alexander Sannikov, executive]

It's generally in line. We're signing anywhere between 5 to 10-year leases with escalators. We haven't seen any sort of significant changes vis-a-vis term of the leases. It's generally informed by the tenants' requirements, the investments that they would like to pursue in the premises. Those are the main factors for our occupiers.

[Sumayya Hussain, analyst]

Okay. And then just also on your occupancy, it dipped a bit, I guess. You're being more strategic in going after the rent lift. To what extent would you be okay with it dipping a bit more or going or than a 7? Or is that sort of the floor in terms of your occupancy targets?

[Alexander Sannikov, executive]

We don't necessarily set floors or ceilings vis-a-vis occupancy. We generally approach it from the perspective of what's the highest and best use for the space, what sort of return we are getting or foregoing by pursuing occupancy versus rate for any given asset and any given space. For certain spaces that are perhaps more customized and may have a higher degree of tenant-specific fit-out, we would maybe be less open to getting that space back, compared to some other units.So that's how we generally approach it. So as we commented earlier, on average, over the long-term, our occupancy is going to be in line with our historic averages. And it will fluctuate over time with any given maturities or any given situation.

[Sumayya Hussain, analyst]

Okay. And lastly, I wanted to touch on the acquisition activity you have with the JV in the quarter. And just any more info on what pricing looks like and cap rates on the recent transactions?

[Alexander Sannikov, executive]

We generally haven't been kind of disclosing the acquisition metric other than what's in the press release in terms of the return parameters, prices per square foot. So we would refer you to that. Generally speaking, when we look at mark-to-market cap rates that we are achieving on these acquisitions, they are kind of been call it high 6s on average for the properties that we have tied up so far.

[Operator]

Our next question comes from Matt Kornack of National Bank Financial.

[Matt Kornack, analyst]

Just with regards to the vacancies in the quarter, namely the one in Spain for 216,000 square feet and then the 300,000 square foot expiry in Edmonton with the Dream Summit JV, do you have prospects on those? You disclosed that they were below market rents. But any interest there? And also it looked like there was sort of another 100 bps slippage in occupancy in Montreal. Did that relate to multiple tenants or a single tenant?

[Alexander Sannikov, executive]

So the asset in Spain is going through a minor refurbishment. So we were expecting to get this building back for some time. The tenant that was occupying it was extending for a shorter period as we were getting ready for our refurbishment program. So we're going through that currently and as that program gets finished, we expect to see more activity on that particular unit.The property in Edmonton is currently being marketed. It's being marketed as one project -- one contiguous unit or as a subdivide option. And we expect to see some activity there over the next quarter. The vacancy in Montreal is really multiple tenants and nothing significant in particular to point to.

[Matt Kornack, analyst]

Okay. That makes sense. And then I guess it looks like from your disclosure standpoint, you held market rents flat for this quarter across the board. You had had growth year-to-date already. But the one that I guess is maybe a little bit surprising, just given what's going on in the market, is Western Canada. And you did move rent up a bit in Europe. But should we expect those two geographies to be the place that you'd potentially get more market rent growth of late? Or sorry, I should say in the near future?

[Alexander Sannikov, executive]

We are generally encouraged by the fundamentals in Western Canada. And we expect to see continued rental growth there. And same for Europe. So in Europe, as you know, we're starting off a much lower basis. So as we get more data-points in Europe, we'll continuously adjust our market rent estimates.

[Matt Kornack, analyst]

Fair enough. And then maybe quickly, Lenis, with regards to the guidance for the year and just the sequential FFO per unit decline, is that a function of kind of the timing of some of these vacancies impacting NOI? Or is it something else? I assume there's an aspect of just G&A seasonality as well?

[Lenis Quan, executive]

No, I think, and I believe in the prepared remarks, Alex shed some color there. I think some of these transitory vacancies were expected and included in our forecast. So that's really the biggest driver of that.

[Operator]

Our next question comes from Sam Damiani of TD Cowen.

[Sam Damiani, analyst]

First question is just on the preleasing of the development pipeline. You talked about Caledon being put to bed early next year. Is that the kind of time line you're thinking for the other half dozen or so developments that are active currently, sort of being fully leased up 6, 9 months post-completion?

[Brian Pauls, executive]

Thanks, Sam. Yes, we generally see that there's a bit of a normalization in the market in terms of how new development gets absorbed. What we've seen coming out of the pandemic is not normal occupier behavior where new development gets absorbed prior to completion. Not normal vis-a-vis historic context. And what we are seeing now is that buildings get delivered and that's when they generally get leased. So that 6 months on average is a reasonable estimate.

[Sam Damiani, analyst]

Okay. And the last one for me is just on the balance sheet. With the leverage coming down, absent any major transaction like we've seen on occasion over the last few years, but absent those, should we expect leverage to continue to moderate lower into 2024, Lenis?

[Lenis Quan, executive]

So one of our capital allocation priorities is to complete the development pipeline that's underway. So that could, in the near term, result in leverage picking up a little bit. But obviously we're generating free cash flow and capital recycling is always something that is on our radar as well. So it could move up and down. But I think just in this environment, I think we have spoken before that having leverage in the longer term on the lower end of our targeted range is probably prudent, just given the higher rate environment.

[Operator]

Our next question comes from Himanshu Gupta of Scotiabank.

[Himanshu Gupta, analyst]

I just have a follow-up question. So any thoughts on how CPI indexation in Europe would look like next year? And obviously this is one of the key drivers for same-property NOI growths in Europe. So any thoughts there?

[Alexander Sannikov, executive]

As we commented before, CPI adjustments in Europe are generally backwards-looking. So what we see in a given period is the reflection of CPI over prior 12 months, or in case of, let's say, German leases, it can be a cumulative effect of a few prior years. And so we expect to see that in 2024. So there's a delay effect as inflation comes down. There's going to be a delay effect in terms of what comes through our net rents.

[Himanshu Gupta, analyst]

So Alex, sitting in November right now, for leases coming due in January, you would already have a sense of how that look back 12 months will look like. So any sense that is there a material deviation for '24 versus '23 so far?

[Alexander Sannikov, executive]

So today we expect that '24 will be lower than '23 as CPI, rate of CPI change has been coming down in most European markets.

[Himanshu Gupta, analyst]

Okay. Okay. But we don't have a sense of how much lower it could be for now?

[Alexander Sannikov, executive]

Well, we obviously do have our modeling. It's generally reflecting the slowdown in pace of inflation in Germany, Netherlands and France. So I think our outlook is generally informed by the same research that everyone in the market would be looking at. And we'll obviously incorporate this CPI outlook in our guidance for next year.

[Operator]

[Operator Instructions] Our next question comes from Kyle Stanley of Desjardins.

[Kyle Stanley, analyst]

Just one quick one from me. You mentioned in your disclosures that you are actively exploring several disposition opportunities. Just wondering if you can elaborate on that a little bit. Is there specific markets or asset types that you might be looking to recycle out of? And then further, is there any expectation on timing or quantum of deal flow?

[Brian Pauls, executive]

Thank you, Kyle. We generally see 2 types of dispositions. There are opportunistic dispositions where we are getting significant volume of inbound interest on select properties, primarily from private buyers or users. And those properties are not necessarily targeted for disposition, but at the right price, we would consider it. And we would generally model those properties in terms of go forward return at the proposed price.And look at our reinvestment alternatives and we want to make sure that we're selling assets at accretive returns. And then there's a second category, which are non-strategic assets, where we are gradually engaging with market participants in terms of disposition of those properties. The filter is the same.These assets are performing or are in performing markets. And therefore, we're not looking to part with them at any price. We're looking to part with them at the right price, whereby we can reinvest the proceeds accretively from an FFO perspective, for a return perspective, et cetera.Quantum-wise, it's generally challenging to predict. I think we've commented on it previously. And timing of these dispositions, especially given that we are frequently working with private buyers is -- and in many cases, off-market discussions, it's hard to predict because some of these discussions may or may not result in a transaction.So we're engaging -- as we commented in our disclosure, we are engaging in a number of discussions. Some of these discussions may or may not materialize.

[Brian Pauls, executive]

As soon as we have more concrete updates, we'll give. Thank you, Kyle.

[Operator]

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

[Brian Pauls, executive]

Thanks so much. I'd like to thank everybody for your time today and look forward to speaking again soon.

[Alexander Sannikov, executive]

Take care.