Dream Industrial Real Estate Investment Trust

TSX:DIR.UN

Earnings Call Analysis

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to the Dream Industrial REIT Third Quarter 2024 Results Conference Call on Wednesday, November 6, 2024. [Operator Instructions] 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. 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 Third Quarter 2024 Conference Call. Speaking with me today is Lenis Quan, our Chief Financial Officer.

In the third quarter, we continue to focus on executing on our key growth drivers. We reported FFO per unit of $0.26, 4% higher year-over-year. Our year-over-year comparative properties NOI growth was 3.3% for the quarter and 5.1% on a year-to-date basis, which was in line with our expectations. We remain on track to achieve our 2024 organic growth guidance. We ended the third quarter with 95.5% committed and in-place occupancy.

We have continued executing on our capital recycling program where we'll plan to surface additional value through reinvesting the proceeds towards our development and acquisition pipeline, which are accretive on a total return basis. We're currently in active discussions on several build-to-suit opportunities across our excess land portfolio and are also looking to add further scale to our solar program at accretive returns.

In the quarter, we achieved substantial completion on our solar project located in the Hague in the Netherlands with a system capacity of 3.4 megawatts and a forecasted yield on cost of over 8%.

Market fundamentals remain healthy across our key geographies. We have seen an uptick in demand levels in Canada recently and are encouraged to see growing activity levels for larger units. Over the past few weeks alone, in our Canadian platform, we have responded to over 1 million square feet of RFPs. We're also seeing an increase in leasing activity in Europe, primarily in Spain and France, where we have several pockets of availability. Supply remains predictable and we are not seeing new material construction starts across our key markets. As a result, we expect the structural drivers for our core operating markets in Canada and Europe to remain positive as we head into 2025. This translates into leasing activity in our portfolio.

During the quarter, we signed a 10-year lease at our Abbotside development for the remaining 70,000 square feet, with base rents starting at $18.50 per square foot on 4% annual steps. The project is now fully leased, achieving a yield on cost of 7.1%.

We also signed a 300,000 square foot lease for 10 years at our Balzac development at starting rents of $9.75 per foot was 2.5% annual steps. This lease represents nearly half of the development and is one of the largest leases completed in Calgary industrial market in 2024. To date, in '24, we have completed over 800,000 square feet of development leasing at rental rates in line with our initial underwriting.

Within our income-producing property portfolio, rental spreads on contracted leases remained strong. Since the end of Q2, we signed 1.9 million square feet of leases and new leases and renewals at an average rental spread of 25%. In Canada, we signed 1.1 million square feet of leases at an average spread of 39% with rental steps up 3%. In Europe, we signed 745,000 square feet of leases at an average spread of 10%. Year-to-date, we have signed 5.2 million square feet of leases at 40% average spread. This leasing volume is greater and the spreads are also greater compared to the same period in the prior year. As we communicated previously, we are increasingly pursuing opportunities to recycle capital out of nonstrategic assets into our core business and markets at accretive returns. Our capital recycling program continues to progress.

Since the end of Q2, we sold 3 assets across our whole owned and Dream Summit portfolio for gross proceeds to DIR of $29 million. Among these recent dispositions is a sale of 89,000 square foot flex industrial asset located in Montreal, which was sold to the existing tenant. Total proceeds were $20.3 million representing a 17% premium to the carrying value.

As we recycle capital from these assets, our capital allocation priorities remain intact. We remain to reinvest -- 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.

We're also starting to see attractive acquisition opportunities in Europe for well-located urban industrial assets. We continue to focus on growing our industrial platform in strategic Canadian markets. We're currently under contract on $226 million of acquisitions or $35 million at DIR share across Canada, including a 32-acre zoned infill site in Brampton within our development joint venture. With a flexible balance sheet, our business is well funded to pursue these initiatives through existing liquidity, disposition proceeds and retained cash flow.

To conclude, all of our growth drivers remain intact, and we expect that our 2024 results will be consistent with previously communicated outlook, and we continue to expect reacceleration of comparative properties NOI and FFO per unit growth heading 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 third quarter. We reported diluted FFO per unit of $0.26 for the quarter, 4% higher than the prior year quarter, primarily due to comparative properties NOI growth, early renewals of existing tenants and development leasing coming online. Our net asset value per unit at quarter end was $16.73, which is in line with last quarter. 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 increased the limit on our unsecured revolving credit facility from $500 million to $750 million, and extended the maturity to August 2029. The -- in addition, we extended the maturity date of our $200 million term facility out to March 2028 in order to be coterminous with the corresponding cross-currency swap and enhancing both our liquidity and debt maturity profile.

We ended Q3 with leverage in our targeted mid-30% range and net debt-to-EBITDA ratio of 8x. With total available liquidity of approximately $820 million, we retain sufficient capital to execute on our strategic initiatives, including funding our development pipeline and contributing to our private capital partnerships.

Having completed the repayment of a European mortgage at maturity in August, we have addressed all of our debt maturities for 2024.

Comparative properties NOI growth for the year was partially impacted partially impacted by 534,000 square feet of expected vacancies across Quebec and Spain. We are in discussions to lead these up approximately 75% of these spaces. Our committed occupancy was 95.5% at the end of September, up slightly from last quarter. We expect our committed occupancy to remain largely flat in the fourth quarter.

Our outlook for the remainder of the year remains intact, and we expect our FFO per unit for the fourth quarter to be in line with Q3. As such, our full year results are expected to be in line with our previously issued guidance on comparative properties NOI and FFO per unit.

Looking beyond 2024, we continue to 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. On October 1, we had the opportunity to host many of you at our Investor Day. A recording is available on our website. We discussed the outlook for the business over the next few years and outlined our strategic priorities, including continuing driving organic growth from the portfolio, surfacing value and additional NOI from our extensive excess land holdings, growing our ancillary revenue and driving value growth through alternative uses for our urban industrial assets such as data centers.

These pillars will continue to inform our strategy as we head into 2025 and focus on delivering sector-leading total returns for our unitholders.

We will now open it up for questions.

[Operator]

[Operator Instructions] And our first question comes from Kyle Stanley.

[Kyle Stanley, analyst]

Good morning, everyone. One question, and I'm not sure if you'll have access to this, but I'm just curious, do you have a sense of where space utilization across our portfolio would be today? And how that might compare to Level C in the post-COVID demand move. Just trying to figure out as maybe demand pick back up later next year, how that necessarily translates to net absorption?

[Alexander Sannikov, executive]

Thank you, Kyle. This is a very topical question. We don't have exact data on this. But when we speak with our occupiers, tour their facilities, what we see currently is that space utilization is going up. Occupiers are very mindful of being efficient in their footprints.

During COVID, we've seen or just immediately after the pandemic, we've seen occupiers take some excess space in anticipation of space requirements, demand. That has led to some subleasing activity where maybe some of these requirements didn't materialize. And what we see currently, at least the trend that we see currently is that space utilization is going up as occupiers want to be very efficient with their footprints.

[Kyle Stanley, analyst]

Okay. No, I think that makes sense. You hit on the sublease availability there. And we've seen it kind of tick higher in the last several quarters. Curious, within your portfolio, has sublease availability changed at all? Have you begun to see it pull back?

[Alexander Sannikov, executive]

We have started seeing some pullback. We're not seeing significant sublease availabilities in our portfolio when our occupiers. Generally, when our occupiers have looked to engage in subleasing, we try to work with them to pursue direct opportunities, which work better for us and our occupiers as well. So we haven't seen significant volume of subleasing in our portfolio.

[Kyle Stanley, analyst]

Okay. Fair enough. And then just the last one. You made this comment in your prepared remarks, but talking about maybe a noticeable shift in leasing demand or at least inquiries in the last several weeks or maybe since the end of the summer, can you speak to maybe what you think is driving that at this point?

[Alexander Sannikov, executive]

We see a combination of drivers for that. It's in some cases, space efficiency. In some cases, it's just general outlook and ability to plan ahead with interest environment normalizing and becoming more predictable. So we're seeing a combination of drivers for that.

[Operator]

That was Kyle with Desjardins. And now we have Himanshu Gupta with Scotiabank.

[Himanshu Gupta, analyst]

Thank you, and good morning. On the occupancy, Dream Summit, JV occupancy was down a fair bit, 300 basis points quarter-over-quarter. It has been resilient for some time now. So what happened this quarter?

[Alexander Sannikov, executive]

In Dream Summit, in particular, we've had a default of a larger -- on a larger footprint. We are in very active discussions to backfill that. So that has been the more material impact in the quarter. I think that we are particularly worried about nor yes, as we are able to backfill most of that vacancy pretty quickly.

[Himanshu Gupta, analyst]

Okay. Was there like a theme like the larger properties came back or certain markets come back? Any more color there?

[Alexander Sannikov, executive]

So that particularly, it was very unique to that particular occupier in that particular location, it's nothing that we would extrapolate onto markets or submarkets or anything like that. It's really one asset where we had an occupier who ran into financial difficulties and didn't need the space. And so we're working through that. As I said, we have a very advanced prospect to backfill most of that space already.

[Himanshu Gupta, analyst]

Okay. Got it. So larger occupiers leaving and are looking to backfill. Okay. And when you say that flat occupancy in Q4, very similar to Q3, that applies to Dream Summit JV as well. So it's like one-off kind of event there.

[Alexander Sannikov, executive]

It's mostly applying to the DIR wholly owned portfolio. Dream Summit pursues a -- well, both DIR and Dream Summit pursue a total return strategy. I think within the Dream Summit venture, we are much more mindful of rates and less driven by occupancy.

And in some cases, we would be okay to hold an asset vacant if we think we can get much better rents or we can sell an asset to a user. So we're a bit less driven by occupancy within the Dream Summit venture are much more driven by total return.

[Himanshu Gupta, analyst]

Got it. My next question is on the Balzac leasing. I think it was Phase 2, which was done. Is there a reason that like Phase 2 rents on a dollar per foot basis was slightly lower than the one which you did last time on Phase 1? Or is just the size, I mean it's so much...

[Alexander Sannikov, executive]

Yes. They're very different assets and they were targeting a very different audience. So the 50-acre development site is -- was targeting large day logistics demand, largely logistics users, whereas the 20-acre development was always targeting mold to mid-May users. And as a result, we were targeting different rents, around 15% to 20% difference in rents.

What we've achieved on this 300,000 square foot lease was exactly in line with our underwriting on a trended basis. So when we started that development, we assume certain rates and we assume certain rental growth to completion. And so what we've achieved is in line with what we with the trended or grown rental rates.

[Himanshu Gupta, analyst]

Okay. Fair enough. Just last question from me on Europe. I mean between Germany, Netherlands and France, how would you rank them based on fundamentals? What do you like the most or which is the strongest or the weakest?

[Alexander Sannikov, executive]

Putting the Netherlands offers probably amongst the strongest fundamentals, highly concentrated industrial stock very robust demand drivers, diverse demand drivers. So we continue to like Netherlands a lot for that, especially for urban mid-day assets.

And then key markets in Germany and a handful of markets in France would be in the close second I think Germany, despite some economic headwinds that are well documented in the financial press offer long-term value for well-located industrial assets, and we continue to like that when we look for acquisition opportunities.

[Operator]

And the next question comes from Matt Kornack with National Bank.

[Matt Kornack, analyst]

Interesting to hear that demand is picking up. In your discussions with prospective or existing tenants, has the kind of change in immigration policy from the federal level had any implication there? Or have these guys kind of put expansion on hold for long enough and they kind of need to do it at this point?

[Alexander Sannikov, executive]

Thank you, Matt. It hasn't come up in our conversations with tenants. It's not a direct driver. Obviously, it drives the broader demand for goods and services in the economy. When it comes to the outer that we engaging with, to your point, many of these groups have been on sidelines when it comes to expansion industrial premises for well over a year now, and so it's mostly driven by that as opposed to near-term outlook for population growth.

[Matt Kornack, analyst]

Okay. Fair enough. And then it seems like you have settled on converting the property in Montreal to a multi-tenant use. Can you give us a sense as to kind of the cost to convert the existing building to that? Is it going to be a complete rebuild? Or are you using the existing footprint and then kind of the rent and return expectations and lease-up kind of thoughts time-wise?

[Alexander Sannikov, executive]

Yes. Thank you, Matt. We commented on that last quarter. What we are aiming to do with that property is to convert it into a multi-tenantable asset. So we're expanding the asset slightly then changing some of the layout in the building, so it can be -- it can accommodate 3 to 4 units, which is where we see most of the demand in Montreal right now is in that mid-day segment.

And so that's the goal with this repositioning project. We will be providing additional disclosure on costs and expected yield on cost. But as far as the rental rates that we're targeting there, kind of in the mid-teens range for that asset.

[Matt Kornack, analyst]

Okay. And then 2 quick last ones. One on straight-line rent. It was up this quarter, but I think that's on development deliveries and maybe associated fixturing period. But if you could give us a sense as to how that will trend? And then maybe on same-property NOI growth for '25, I know you're not providing a guidance at this point, but there's going to be a base effect that somewhat established at this point given that your occupancy is stabilizing, but you're still getting rent spreads. So would you expect that kind of we're at a troughing level on same-property NOI growth at this point.

[Lenis Quan, executive]

So Matt, I'll start on the straight-line rent comment. So correct that some of the development leasing is contributing to there, but more significantly. So it's some of the early renewals that we have done of leases that are maturing beyond 2024, and we're able to lock in higher rents and extend the term on that. So that's what's contributing to the straight-line rent this quarter.

[Alexander Sannikov, executive]

And Matt, on the same-property outlook, as we founded before, we do expect acceleration and whether it's this quarter or next quarter, we expect that on a quarterly run rate basis, it's going to start picking up from here.

[Operator]

And the next question comes from Gaurav Mathur with Green Street.

[Gaurav Mathur, analyst]

Thank you, and good morning, everyone. When you're looking at the Canadian market and the performance from a CP NOI perspective, how do you rank sentiment in terms of tenant leasing abilities across the Western Canada, Quebec and Ontario going forward?

[Alexander Sannikov, executive]

Thank you, Gaurav. We didn't quite fully catch the question. So in terms of the geographies, we caught that part, but maybe I didn't quite follow the ranking you look at -- or can you elaborate?

[Gaurav Mathur, analyst]

Sure. Sure. Just trying to get a sense of how tenants are responding to take up of industrial space across Canada. And then we've seen the CP NOI numbers come in, but just looking 12 months ahead. Is there anything that's surprising you at this stage among the 3 markets? Or it is Western Canada going to lag the rest of the country?

[Alexander Sannikov, executive]

Well, Okay. Understood. Thank you for the clarification. We expect that from an absolute take-up, Western Canada is going to lead as opposed to lag. We've seen strong levels of activity in Western Canada and expect to continue seeing that the next 12 months or so. We are also expecting supply pipeline to level off in markets like Calgary and that will continue supporting the fundamentals.

We haven't seen significant rental growth, in Western Canada. It's been steady, but not as significant as markets like Toronto. So we're probably not expecting material rental growth in Western Canada, i.e., the similar levels to what we've seen in GTA in 2021. But we expect it's going to be steady in the low to mid-single digits range over the next 12, 24, 36 months.

So we continue to be bullish on Western Canada and specifically, Calgary. We commented before that we're looking for more opportunities in Vancouver. Obviously, market that behaves differently compared to Calgary, given its supply constraints, but certainly a market that we like. GTA is obviously the largest and the most liquid market in Canada, and we continue to see strong levels of activity here.

We have been seeing slower pace of demand in Montreal. We don't expect that it's going to be very long-lived because the market is fundamentally supply constraints. It has limited construction pipeline or none really to speak of going forward.

And as port activity picks up and general economic demand picks up, we expect Montreal to see more levels of leasing activity, but for the past 12 months, it's been slower.

[Gaurav Mathur, analyst]

And just last question. We've also noticed that over a 9-month period between '23 and '24, there has been a significant uptick in lease incentives and indirect leasing costs. Is that something we can expect will continue to accelerate over the next 12 months?

[Alexander Sannikov, executive]

Well, I wouldn't expect an acceleration. I think it's probably going to stay at the current levels for the foreseeable future. And we are obviously focusing on the NER, focusing on the face trends we're achieving. We commented before that we have not seen in our portfolio, significant pressure in -- on face rents. Again, some of the commentary that we provided earlier, hopefully speaks to that.

But there is a higher degree of -- or higher quality of fit-out that goes with leasing on these spaces. And that's what's reflected in the leasing costs. We don't expect it to go up materially from here. Your comment about significant -- it's significant relative to 2022 for example, but in a historic context, more broadly, the level of leasing cost is very much in line and NERs are obviously above what we were achieving pre-COVID on this industrial leasing.

[Operator]

Question comes from Sumayya Syed with CIBC.

[Sumayya Hussain, analyst]

I have a follow-up on Montreal. Just looking at the renewal activity in the quarter, still seeing healthy spreads, but they were notably lower from recent quarters. Any more color on was there anything lease or tenant specific there? And are these trends holding into Q4 leasing that you've done to date?

[Alexander Sannikov, executive]

Thank you for the follow-up. We see spreads will move around from one quarter to another. As we commented earlier, overall, on the leasing that we've done this year, our spreads are higher than the spreads that we've achieved last year and spreads are mostly a function of what's expiring as opposed to necessarily the indicator of where the market rents or the market generally is trending.

So there's obviously some of the idiosyncratic leases that drive any given quarter. This particular quarter, we didn't have a significant volume in Quebec. We only had 194,000 square feet of leases in Quebec this quarter compared to almost 800,000 square feet of leases in the quarter before. So it's not a significant sample, if you will, to draw any material conclusions from it.

[Sumayya Hussain, analyst]

Right. Okay. And then I also wanted to follow-up on your comments around occupancy generally. I think previously, you had indicated that it would trend upwards by the end of 2024. And now with it being flat, is that just tied to the larger default you mentioned? Or if there's anything change there? And how much you think that occupancy uptick has been pushed out by.

[Alexander Sannikov, executive]

Well, as we commented before, we expected on a same-property NOI basis full basis, the guidance stays intact. When it comes to occupancy, it's a function of timing of completing some leases. And as we mentioned, we are in discussions on a number of leases in Spain and in France that will materially move the occupancy number. They're not going to contribute a significant amount to the NOI because rental rates are lower.

So I think what Lenis was aiming at that comment is we expect occupancy kind of to more or less stay at this level when we think about our guidance, the strategy that we have remains intact, where we prioritize achieving the right rents versus necessarily filling up every space.

So to give you an example, the 100,000 square foot lease that we just announced in Oakville at $18. So we've got signed at the end of summer. In March, we had the ability to lease that space at $15, and we passed on that opportunity. And so that goes to say -- or goes to illustrate the strategy that we have with leasing is prioritizing rates versus occupancy. And so we're staying the course there.

[Lenis Quan, executive]

And Sumayya, just to clarify, I think when we were guiding towards flat to slightly up last quarter, we were also referring to committed occupancy not just in place because, to Alex's point, there's some timing of leases that will -- we're targeting to sign by end of year.

[Sumayya Hussain, analyst]

Okay. So just a timing issue there. Great. And then just lastly, in terms of capital deployment, how much of an area of focus are land deals for you and noting you have one in Brampton under discussion? And just what are you seeing for pricing for industrial land these days?

[Alexander Sannikov, executive]

We continue to look for well-located infill sites that can accommodate functional multi-tenant layouts for mid-bay industrial, these sites are difficult to find. But when we do find them, we continue to be active, especially in the context of our development JV. This -- the site in Brampton that we mentioned is going to be acquired for that venture.

As far as pricing metrics, we are looking to achieve high 6% untrended yield on cost and with some moderate rental growth, it's going to be at around 7%, maybe slightly north of 7% yield on cost by the time we complete that particular development. We will provide more color on that project as we close on the site. It's a great location. It -- our layout accommodates multiple units of around 100,000 square foot mark, where we've seen the bulk of demand over the past 12 months. The building can also accommodate larger users if that large pay demand continues to rise.

[Operator]

And our next question comes from Sam Damiani with TD Securities.

[Sam Damiani, analyst]

Thank you. Good morning. So maybe just, Lenis, just to clarify your comment on Q4 for flat occupancy on a committed basis. Would you say the same on an in-place occupancy level, too?

[Lenis Quan, executive]

Yes. To clarify, the flat is referring to on an in-place basis and the committed is -- that's the timing of signing future leases as well.

[Sam Damiani, analyst]

Okay. Great. And for same-property NOI growth, you're still targeting mid-single digits for this year. So we can assume probably in and around that level in Q4, suggesting Q3 hopefully was the trough. Just wondering if you would agree with that. And when we look out to 2025, maintained an accelerated outlook. I wonder if you could be a little bit more specific in terms of the quantity and by how much it could accelerate.

[Lenis Quan, executive]

Sure, Sam. So I did indicate that our FFO per unit for the fourth quarter would be expected to be flat to Q3 and correct our comparative properties NOI guidance is still intact. So full year -- sorry, year-to-date, the 9 months, we're at about 5.1%. So that would sort of imply based on the guidance of the mid-single digits that we come back into what Q4 range-wise would be approximately, but yes, FFO per unit would be flat as well.

[Sam Damiani, analyst]

And then [indiscernible] 2025?

[Alexander Sannikov, executive]

Yes. So we tend to provide guidance, as you know, in February, we'll provide more guidance in February, the degree of reacceleration we're not talking 50 basis points. So it's more material than that. So -- but beyond that, we would rather provide more specific guidance in February.

[Sam Damiani, analyst]

Okay. Sounds good. And then just on the acquisitions that you're under contract on in terms of the income property producing component of that, what sort of yields or IRRs are you targeting there?

[Alexander Sannikov, executive]

On capital deployment?

[Sam Damiani, analyst]

Yes. On the $226 million or $35 million...

[Alexander Sannikov, executive]

Yes. So the acquisitions remain to be in that high 6% -- mid- to high 6% mark-to-market yield range with high single digit, low double-digit unlevered returns. We remain to target that and remain to see opportunities that pencil to these returns.

[Sam Damiani, analyst]

And I guess just when you buy on a mark-to-market sort of high 6%, is it going in -- like are you playing the strategy of buying really low and then capturing the upside? Or are you playing a little bit less aggressive tactic on acquisitions today? Just wondering what the upfront NOI could look like?

[Alexander Sannikov, executive]

We do both. Obviously, we're solving for a total return at the end of the day. The particular income producing assets that is part of the $220 million we just commented on has a higher going-in yield than some of the acquisitions we pursued prior to this. Again, it's an asset that we're very excited about. And as soon as it's firm, we'll provide more color on that particular investment.

[Sam Damiani, analyst]

Okay. Great. And just with this group of assets include an entry into the Vancouver market or yes?

[Alexander Sannikov, executive]

It could. It could. As I said, we'll provide more color on the assets, geographies and why we like them as these deals come up.

[Sam Damiani, analyst]

Great. And last question for me, just on the rent growth, touched on it a little bit in the call already, but I guess just bigger picture, are you -- when would you say the rent growth could really reaccelerate in Toronto and Montreal? Like how comfortable are you seeing that could happen in 6 months, 2 years, what would be your best guess at this point?

[Alexander Sannikov, executive]

So we generally share the view that was expressed by Colliers as part of their presentation during our Investor Day that we'll see rental growth coming through in 2025. When exactly in 2025, it's more difficult to predict, but we think that the market is shaking up well for rental growth to resume in 2025.

[Operator]

Next question comes from Pammi Bir with RBC Capital Markets.

[Pammi Bir, analyst]

Just wanted to go back to your comments. I think at the outset, Alex, you mentioned that maybe you're looking at -- or you're seeing some more acquisition opportunities in Europe. I think later you've said perhaps in Germany. So can you maybe just expand on that?

Again, maybe just some color on which markets what sort of volume you're talking about and how you would expect to fund it just given your current cost of capital?

[Alexander Sannikov, executive]

Thanks for that follow-up. Yes, we are seeing interesting acquisition opportunities in Europe for smaller ticket sizes, anywhere between EUR 10 million and EUR 30 million per asset, mid-day assets. And we're seeing stronger going in yields right around that 6% mark with mark-to-market potential that ranges from 7 plus to, in some cases, double digits on a yield basis.

Now in Europe, you need to underwrite longer mark-to-market because in some cases, tales of options. But with these pricing metrics, we're seeing very attractive total returns.

As far as funding goes, we have an ongoing capital recycling program with selling assets on a one-off basis in Europe, selling some assets in Canada, as we commented on earlier. And with that, the balance sheet as well funded to pursue some of these smaller acquisition opportunities that are additive to our portfolio and screen very attractive on an individual investment basis.

[Pammi Bir, analyst]

Okay. So maybe not something big enough to pursue through some new -- some private capital JVs?

[Alexander Sannikov, executive]

Very much -- very -- these assets will very much fit any potential JV, but we can pursue them without having one formed. And if we do have a JV form, then these assets will be well positioned for a larger venture that would allow us to then scale up that acquisition program beyond what we can do on balance sheet and obviously get additional return for the read through our property management and leasing platform.

[Pammi Bir, analyst]

Okay. I wanted to come back to the comments around the drop in the occupancy and the Summit JV related to that tenant. Was the entire 300 basis points attributable to just one tenant?

And then I'm just curious if you could, without naming them, just sort of give us some context as to what industry that related to.

[Alexander Sannikov, executive]

So that particular tenant is in 3PL. That was the vast majority of it. We also bought a vacant assets into some adventure, 400,000 square feet. When we bought it, it was bought a very attractive basis in the mid-100s per square foot on a 6-month sale leaseback. So we knew that the tenant would be vacating and that asset became in the quarter. So that has contributed to the vacancy.

It was -- again, it was more of a refurbishment redevelopment acquisition. So we obviously knew that they would have a vacancy component going in. So those 2 are the accounts for the bulk of the -- of that vacancy change.

[Pammi Bir, analyst]

Great. Last one for me. Just the -- with respect to like rent steps in terms of new leasing or even on renewals any change at all in terms of -- or any pushback from tenants in terms of being able to put through or incorporate these steps into leases?

[Alexander Sannikov, executive]

We continue to achieve rent steps that we have been achieving. So this quarter on our Ontario leasing which is about 400,000 square feet. We signed 3.9% escalators. In Quebec, escalators were around 3.3%. And in Western Canada 2.5%. And last quarter, for example, we had 4%, 2.7% and 2.8%, so very consistent levels in terms of rental steps that we're achieving.

And just following up on that question that Sumayya had about rental spreads this quarter. The rental rates that we've achieved this quarter on 1 million square feet of leasing on average are $13.50. And they are very consistent with the rental rates we have achieved last quarter. But the expiring rents -- or the prior rents are up almost $2 higher this quarter on that 1 million square feet of leasing compared to last quarter. Hence, the spreads are slightly different.

So the absolute rents that we're achieving are in line or higher both in Ontario and Quebec, but the rental spread -- the expiring rents are different.

[Operator]

Question comes from Mike Markidis with BMO Capital.

[Michael Markidis, analyst]

Alex, earlier in the call, you just mentioned that the REIT is focused on prioritizing rents, but that desire is maybe stronger in the Dream Summit JV? And I guess maybe I'd hope that you could expand on that a bit more, just given the size of your wholly owned platform balance sheet being at 8x debt to EBITDA and material payout improvements that you've seen on an FFO basis.

[Alexander Sannikov, executive]

So thank you for the call, Mike. So obviously, Dream Industrial REIT is a REIT. And so we do pursue a total strategy, but we want to have a balance, especially given the focus from the market on occupancy, if you kind of keep score just on this call alone, more than 60% of questions were around occupancy.

When it comes to Dream Summit, its private venture pursues a total return strategy. And if we can buy vacant assets that will move our overall occupancy by 50 basis points in any given quarter. And given that we're buying it at mid $100 a foot, and we already have offers from users on it at mid $200 a foot. It's a great investment.

And we very much like that within the context of a private venture in the context of a REIT, especially given the laser focus from the market on occupancy, we're being a bit more balanced, but still are pursuing that rental rate strategy, as we commented on before.

Just to give you further color, when we get an asset that is vacant or getting assets back in our private ventures and some in particular, we would look at options as to whether we should sell that asset to a user or lease it.

And in many cases, the user sale value informs our rental rates, which may well be 20% or 30% higher than what the nearest 10 comparable leasing transactions will suggest. But then we would nevertheless aim to achieve that given the alternative of an attractive user sale. And in many cases, we do achieve those rental rates or in some cases, we pursue those user sales as we commented earlier.

Again, as being much more of a total return and value, purely a value-driven strategy and exercise. So the sale that we just completed and announced this quarter was down at $380 a foot, which is very attractive price. And it was at around 5% or sub-5% yield on what we would have been able to achieve in the leasing market.

[Michael Markidis, analyst]

Okay. I mean, actually, that was a good segue, so I was going to ask you about that asset in the $380 a square foot. Were there any unique attributes about that property that would have contributed to that $380 per foot? I mean I think that would probably be a little bit higher than most people would think about when valuing urban -- even urban infill assets in the GTA?

[Alexander Sannikov, executive]

No, not at all. If anything, it had some attributes that would make it a bit more difficult to lease because it had a higher office component. But well located GTA assets, midsized footprint. And in fact, we have multiple offers on that asset from multiple users.

And we continue to see that the user market being very active. We have a midsized asset right now that in Brampton, it has a little bit of excess land to it, a bit of a yard. The price per square foot that we've seen offered on that asset is north of $500 a foot. And that goes to say or go to illustrate the value of urban industrial.

[Michael Markidis, analyst]

Okay. And that asset you're referring to, is that a wholly owned or a Dream Summit asset?

[Alexander Sannikov, executive]

The $500 a foot one?

[Michael Markidis, analyst]

Yes.

[Alexander Sannikov, executive]

That's within Dream Summit. But situations like this inform our leasing strategy, where we can lease that asset at low 20s a foot or maybe mid-20s a foot. But when you have an alternative to sell it north of $500, you need to -- the rent that you need to achieve to delay that sale to a user and needs to be very high.

And so that informs our leasing strategy where we can take a little bit of vacancy within Dream Summit and be patient with it. Maybe even a little bit more patient than we would be on the wholly owned portfolio to achieve that right balance and the right outcome.

[Michael Markidis, analyst]

Okay. Last one for me, just to wrap it up here. Obviously, you're not going to guide to 2025 specifically until February. So we understand that. Just with respect to the NOI bridge that you laid out in the Investor Day on October 1. Would it be safe to say if you were to do it again today, there could be no changes to that? Or have you seen anything that would suggest that, that should be increased or decreased?

[Alexander Sannikov, executive]

No changes to that. Again, the methodology that we use for that NOI bridge was conservative. As you recall, we didn't assume activation of our excess land holdings and things like that. We've only modeled for that bridge a very moderate pickup in occupancy of 100 basis points, give or take, relative to current levels.

So yes, if we were to follow the same methodology, i.e., conservative outlook, there wouldn't be any changes. And as we commented on earlier in our prepared remarks, for our excess land holdings, for example, we are in multiple discussions at the moment on build-to-suit opportunities in Europe and in Canada, in fact. And so these developments will enhance that outlook further.

[Operator]

Our next question comes from again Himanshu Gupta with Scotiabank.

[Himanshu Gupta, analyst]

Just a follow-up question on European lease expiries next year in 2025. I think the filing, you mentioned market rents are like 25% higher for European expiries next year. Is that your expectation as well? And is there a reason the number is high. I think it's -- number is higher relative to what you have achieved rental spreads in Europe so far.

[Alexander Sannikov, executive]

Yes. So we have some expiries where it is -- we do expect to see some pickup. As you recall, yes, on average rental spreads in Europe are in that 10% range, but it -- we've seen some higher spreads. Last quarter, we announced the deal in Germany, for example, with 20% spreads deal in the Netherlands at much higher spreads. So we do have some expiries that will have a higher spread.

[Operator]

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

[Alexander Sannikov, executive]

Thank you for your interest in our company and support of Dream Industrial REIT. We look forward to reporting on our progress next quarter. Goodbye.

[Operator]

And this brings a close to today's conference call. You may disconnect, and thank you for participating, and have a pleasant day.