Dream Industrial Real Estate Investment Trust

TSX:DIR.UN

Earnings Call Transcript 2019-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to the Dream Industrial REIT Year-End 2019 Conference Call for Wednesday, February 19, 2019.During this call, management of Dream Industrial REIT may make statements containing forward-looking information within the meaning of applicable securities legislation. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Dream Industrial REIT's control that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. Additional information about these assumptions and risks and uncertainties is contained in Dream Industrial REIT's filings with securities regulators, including its latest annual information form and MD&A. These filings are also available on Dream Industrial REIT's website at www.dreamindustrialreit.ca. [Operator Instructions]Your host for today will be Mr. Brian Pauls, CEO of Dream Industrial REIT. Mr. Pauls, please go ahead.

[Brian D. Pauls, CEO, President & Trustee]

Good morning, everyone. Thank you for joining us today for Dream Industrial REIT's 2019 Fourth Quarter and Year-End Conference Call. Speaking with me today is Lenis Quan, our Chief Financial Officer. We welcome Alex Sannikov and Bruce Traversy to the Dream Industrial team as Chief Operating Officer and Senior Vice President. They will also be available to answer questions after our prepared remarks.In January, we announced our expansion into the European industrial market with the acquisition of approximately EUR 224 million or $327 million of assets in the Netherlands and Germany totaling 3.2 million square feet of GLA. These markets are displaying strong demand for industrial product due to the growing demand from e-commerce and third-party logistics users. We are excited about our expansion into these attractive markets, and it represents an unprecedented opportunity for the REIT to add scale and upgrade our portfolio with significant economic benefits.At the same time, we remain committed to growing and improving our portfolio across our North American target markets. Since year-end 2019, we have completed or are in advanced negotiations on $152 million of assets in the Greater Toronto Area, Kitchener and Montréal. These assets are well located and are expected to deliver above-average NOI and NAV growth.Our acquisition pipeline continues to be robust with over $500 million of properties across our 3 target regions that we are in active -- are actively and in the process of evaluating or underwriting, in addition to our previously announced Canadian and European acquisitions. We are well positioned to capitalize on these opportunities with a solid balance sheet and strong liquidity. We are currently in negotiations on approximately $100 million of acquisitions, predominantly in the GTA. We are also making good progress executing our debt strategy to reduce our overall cost of borrowing and reduce risk. Our European asset base allows us to access debt at rates that are currently 200 basis points lower than North American financing rates. We are aiming to optimize our capital structure where in most of our debt would be euro denominated, which allows us to hedge our euro exposure, while significantly improving our cost of capital and our returns. The proceeds from last week's $230 million equity raise will go toward prepaying approximately $200 million of Canadian mortgages. We expect this to be completed by the end of the month, effectively earning 3.6% on those proceeds immediately. This allows us to fund our future acquisitions with new debt at 1.3% to 1.5%, which will be meaningfully accretive to our FFO.Moving on to our operations. Active asset management remains an important foundation to our strategy. Our focus on driving rents, capturing leasing spreads on renewals and expiries has led to strong same-property growth in 2019 of 4.1%. Of the 1.2 million square feet of 2019 lease expiries in Ontario, we secured renewal and new lease commitments totaling approximately 1 million square feet at an average rental spread of 15%. Notably, during the fourth quarter, we leased 111,000 square foot vacancy in Mississauga at a rental rate that is 17% higher than the prior rate. The lease also includes 3.5% annual contractual rent growth on the 7-year term commencing in March of 2020.In Québec, approximately 750,000 square feet of leases commenced during 2019 at an average rental spread of 11%. Our Québec portfolio occupancy is over 99%, and we are actively evaluating opportunities to access higher market rents as leases roll over or through discussions with tenants on early renewals.In Western Canada, we have been focused on driving occupancy and have seen our average increase by 170 basis points in 2019, resulting in comparative properties NOI growth of 3.2%. While there continues to be some pressure on expiring rental rates, we are building contractual rent growth in our leases and we remain focused on investing capital prudently.Occupancy in our U.S. portfolio is strong at 94%. Our U.S. leasing activity has been concentrated in the Midwest U.S. portfolio acquired in Q1 of 2019. For the full year, we signed 459,000 square feet of leases that commenced in 2019, at an average spread of 22% over prior rents.Overall, it has been another significant year for the REIT. We are excited to have Alex and Bruce join the team, who will significantly enhance our acquisitions and operations team.I will now turn it over to Lenis, who will provide our financial update.

[Lenis W. Quan, Chief Financial Officer]

Thank you, Brian. Diluted funds from operations was $0.18 per unit for the quarter and $0.78 for the full year, which was in line with our expectations. Higher FFO from strong comparative properties NOI growth across all regions and the contribution from our recent acquisitions was offset by the sale of the Eastern Canada portfolio in July 2019 as well as 10% lower year-over-year leverage. These strategic initiatives are consistent with our announced strategy of upgrading the quality of our portfolio while maintaining a strong and flexible balance sheet.Comparative properties NOI, or CPNOI, increased by 2.5% for the quarter and 4.1% for the full year. Our year-over-year CPNOI growth was driven by increased occupancy in Western Canada and Québec and higher rents in Ontario and Québec. For the full year, Western Canada experienced CPNOI growth of 3.2%, with Québec and Ontario at 7.5% and 2.9%, respectively.At the end of 2019, the IFRS value of our portfolio was $2.4 billion. This reflects over $370 million of investment property acquisitions during the year, the sale of the Eastern Canada portfolio and $179 million in fair value gains, largely attributed to Ontario and Québec. The fair value increase reflects strong leasing activity, market rent growth and lower capitalization rates.The trust's reported net asset value, or NAV, per unit, increased by $1.22 this year or 12% to $11.76 at year-end 2019. We have made excellent progress in improving the strength of the balance sheet and our financial flexibility. Our net debt to assets ended the year at 23.7%, and our net debt to adjusted EBITDA (sic) [ net debt to adjusted EBITDAFV ] was 4.3x, which reflects $442 million in cash balance at year-end. This cash will fund our announced acquisitions in Europe and Canada in early 2020, largely in Q1. The proceeds of our recent equity offering will be utilized to prepay approximately $200 million in Canadian mortgages by the end of this month, so that we will get a 3.6% return on those proceeds. After these transactions, our net debt to assets will be around 30%, and we will have approximately $250 million of acquisition capacity, and our unencumbered assets will increase to almost $1 billion.For 2020, we expect our Ontario and Québec portfolios to continue to outperform and achieve strong CPNOI growth of 4% to 5%, led by higher occupancy and rental rate growth. There is no lease rollover in our comparative property U.S. portfolio, and we expect CPNOI growth in this region on a constant currency basis to be driven entirely by rent escalators of approximately 1.5% to 2%. In our Western Canada portfolio, occupancy increased significantly in 2019, which resulted in strong comparative property NOI growth. For 2020, we expect CPNOI growth in this region to be driven by the timing of lease up of available space. Depending on the timing of the lease commencements, we expect CPNOI growth to be flat to slightly down. For the overall portfolio, we are looking at CPNOI growth in the 2% to 3% range for 2020. Over the past 12 months, we have upgraded the quality of our portfolio through the recycling of the Eastern Canada region and select noncore assets as well as strengthen the balance sheet by bringing down leverage. This is transforming our portfolio into one that can produce strong cash flow and NAV growth over the long term. Our 2020 FFO growth will be impacted by the lower NOI yields from the asset recycling.Our announced European expansion and debt strategy improved the FFO per unit growth potential of the REIT. Once we have implemented the debt strategy in early 2020, the annualized impact on FFO per unit is $0.02 to $0.03. It will become more evident in our results in the second half of 2020 and in 2021.For the full year 2020, we expect diluted FFO per unit to be flat to 1% higher than 2019. As mentioned above, as we complete our announced European acquisitions and implement our debt strategy during 2020, the contribution to FFO growth will be more meaningful in the second half of the year.With a strong balance sheet and a growing pool of unencumbered assets, we are well positioned to pursue an investment-grade credit rating and unsecured financing in the near term.I will now turn it back to Brian to wrap up.

[Brian D. Pauls, CEO, President & Trustee]

Thank you, Lenis. 2019 was an incredible year for the REIT. We made significant progress on strengthening our operations, growing and upgrading the quality of our portfolio and increasing our balance sheet strength. We acquired over $370 million of assets in Canada and the U.S., adding 4.5 million square feet of high-quality GLA in our target markets, including Ontario, Québec and the U.S.In addition, we completed the disposition of our Eastern Canada portfolio in the second half of the year with proceeds being deployed into higher-quality assets that will generate stronger free cash flow and net asset value growth over the long term. The European asset and finance strategy will significantly add to our asset diversification and operational performance going forward.We are pleased with the progress made in transforming the Dream Industrial portfolio and at the same time, improving and maintaining a strong and flexible balance sheet. The REIT has achieved significant milestones in 2019 and is poised to capitalize on many opportunities in 2020 and beyond. We would now be happy to take any questions.

[Operator]

[Operator Instructions] Our first question comes from Brad Sturges from IA Securities.

[Bradley Sturges, Equity Research Analyst]

Starting with the plan to repay $200 million of Canadian mortgage debt, is there any costs associated with that payment at the end of the month -- by the end of the month?

[Lenis W. Quan, Chief Financial Officer]

Yes, there is. The prepayment penalty or yield maintenance costs are about $3.5 million associated with that. And the payback on that, with the 3.6% interest savings, is less than 1 year.

[Bradley Sturges, Equity Research Analyst]

Great. In terms of the balance sheet capacity or the acquisition capacity going forward and your guidance on FFO per unit, what are the expectations for -- right now baked into those assumptions in terms of deploying that capacity on the balance sheet over the course of the year?

[Lenis W. Quan, Chief Financial Officer]

Sorry, could you repeat that question?

[Bradley Sturges, Equity Research Analyst]

In terms of getting the balance sheet up to target leverage and deploying, I guess, acquisition capacity, what's your expectations in terms of timing, in terms of getting leverage closer to the longer-term target?

[Lenis W. Quan, Chief Financial Officer]

So as I mentioned, we've got about $250 million of acquisition capacity. We probably -- I mean, that's going to be dependent on how quickly the pipeline materializes, but we kind of see that sort of in mid- to second half of the year.

[Bradley Sturges, Equity Research Analyst]

And what leverage is that based on the $250 million of acquisition capacity?

[Lenis W. Quan, Chief Financial Officer]

That will take us to the mid-30s. And our targeted leverage range is in the sort of 30% to 39% range. So we'll be right in the middle of that.

[Bradley Sturges, Equity Research Analyst]

Got it. And in terms of the lease expiries for 2020, I think in terms of what's been done so far, there's -- I think the REIT's achieved 8% rent spread. How do you see that trending over the course of the year as you work on the remaining lease expiries for the year?

[Alexander Sannikov, Chief Operating Officer]

I would say, overall, Brad, it's going to be consistent with what we have achieved so far. And obviously, largely driven -- the positive spread largely driven in Ontario and Québec.

[Bradley Sturges, Equity Research Analyst]

Any update on the Louisville space?

[Alexander Sannikov, Chief Operating Officer]

We're in negotiations with a prospect. So it's currently between us and another property in a different market. So we're going to be in advanced negotiations. So we'll know if that prospect will materialize pretty soon, and beyond that, we're marketing the space actively. And there's good pipeline, good turning activity.

[Operator]

Our next question comes from Sam Damiani from TD Securities.

[Sam Damiani, Analyst]

Brian, just on the acquisition pipeline. You mentioned you're looking at over $500 million of potential acquisitions right now. What would be the geographic mix of that bucket right now?

[Brian D. Pauls, CEO, President & Trustee]

Yes. We've got -- we're very active in all 3 markets. We're in advanced negotiations, on probably 1/3 of that in Canada, spread in the GTA and Montréal. We've got probably over 1/3 of that, more like 40% in Europe that we're looking at. And then we've got a pretty active pipeline in the U.S. So it's spread not quite evenly, but I would say our priorities, if we had to rank them, would be Europe, Canada, U.S. But we've got active opportunities that would fit our portfolio and be very complementary in all 3 markets. I think we're -- you'll see us probably active in all 3 of those target regions throughout 2020 on the acquisitions front.

[Sam Damiani, Analyst]

That's helpful. And when we see the leverage metrics that you mentioned, were that -- were those for a target quarter end 1, like into the first quarter, that 30% net debt figure?

[Lenis W. Quan, Chief Financial Officer]

So the 30% net debt figure was after all the things that we've got in terms of acquisitions and the debt prepayment. So that will probably triple into April before we're at that 30%. There's a couple of acquisitions that may slip out of Q1 into early April.

[Sam Damiani, Analyst]

Right. And that you still have another $250 million capacity to utilize towards some of the stuff that you're looking at right now.

[Lenis W. Quan, Chief Financial Officer]

Correct.

[Sam Damiani, Analyst]

Okay. And does your guidance include any acquisitions beyond that $250 million that would require additional equity later on in the year?

[Lenis W. Quan, Chief Financial Officer]

No. No.

[Sam Damiani, Analyst]

All right. And just looking back to the operations on the quarter, the press release seemed to indicate that the REIT basically sort of terminated a lease in Oakville, 98,000 square feet. I wonder if you could give a little -- give us a little bit of color on that. And what the backfill prospects are?

[Lenis W. Quan, Chief Financial Officer]

Sure. I can start, and Alex can jump in to add any additional color. We had a tenant in there. It's 98,000 square feet in Oakville, single-tenant property. They were a difficult tenant and behind on their rental payments. They were also in there at below-market rents. So we took the opportunity to terminate them and are actively touring that asset.

[Alexander Sannikov, Chief Operating Officer]

Yes. And Sam, we're in negotiations with one prospect there, and we expect to see a significant lift on the rent, 20%, 30%. And we're also marketing the space. So if it doesn't materialize with that prospect, there's a pipeline of other tenants. At the end of the day, the timing of it will, obviously, impact how same-property NOI looks for the year. But overall, this is a positive move for the asset and the value of the property and the long-term income of the property.

[Sam Damiani, Analyst]

And was any rent from that former tenant included in the Q4 NOI?

[Lenis W. Quan, Chief Financial Officer]

No, there was not.

[Operator]

Our next question comes from Brendon Abrams from Canaccord.

[Brendon Abrams, Analyst of Real Estate]

Lenis, just to clarify on the $250 million of acquisition capacity. Just to confirm, that is -- that's an equity number. And so it would translate into a higher asset value or purchase price.

[Lenis W. Quan, Chief Financial Officer]

No, those are -- those -- that's a total asset figure. And presumably, that would be funded by 100% debt at about -- at 1.5%.

[Brendon Abrams, Analyst of Real Estate]

Okay. And when you guys are referencing the rates available in Europe, can you just remind us again exactly kind of what terms or length of term you would be looking at?

[Lenis W. Quan, Chief Financial Officer]

So when we quote the 1.3% to 1.5%, we're looking at a 5-year fixed rate.

[Brendon Abrams, Analyst of Real Estate]

Okay. Maybe just turning to the Québec portfolio, performed pretty well in 2019, and that's basically full occupancy. When I took a look at market versus in-place rent in the MD&A here, it's essentially in line, but renewal spreads for 2019 were over 11% higher. So just wondering what your expectations would be for renewal spreads in 2020 for the Québec portfolio.

[Alexander Sannikov, Chief Operating Officer]

So on a same-property NOI basis, we expect to see, call it, around 5% growth in 2020, as Lenis mentioned in her remarks. And that's largely driven by moving rental rates and built-in escalators.The fact that in the MD&A, we're saying that rents are largely flat to market is driven by a couple of properties that don't mature for quite some time.

[Brendon Abrams, Analyst of Real Estate]

Okay. That's helpful. And then just last question for me before I turn it over. The U.S. portfolio looks to be running at around 94% occupancy. I'm just wondering if kind of that 6% vacancy, would you suggest that's kind of just structural for the portfolio? Or do you expect that to trend up over time?

[Brian D. Pauls, CEO, President & Trustee]

Yes, Brendan, we'd expect that to trend up. Louisville is a significant part of that. And we're -- we've got a lot of activity on that. It's a very usable, good, well-located building. And we've got a good activity on that, so we'll see that tick up as we lease that space and some of the other kind of residual spaces that have come up with the leasing. The whole portfolio has been really good. So we're optimistic that, that will -- we'll close that gap.

[Lenis W. Quan, Chief Financial Officer]

And just to add on to that, the Louisville vacancy itself would contribute 4% of occupancy.

[Operator]

Our next question comes from Himanshu Gupta from Scotiabank.

[Himanshu Gupta, Analyst]

So on acquisitions, around $170 million announced in GTA and other markets at a cap rate of 4.6%. So what is the NOI growth potential here? And how would you describe the quality of these properties in terms of age, tenants, location?

[Alexander Sannikov, Chief Operating Officer]

I can start and then maybe Brian can jump in as well. So we're expecting kind of that 4% 5-year compounded average growth from these properties. These are largely under rented. The weighted average lease term is just under 5 years, so there's good room to move the rents. I would say one of the assets is a redevelopment site, so in its current condition, we can see strong rental growth. It was a sale and leaseback with 3 years term, but we would also look to intensify the site and potentially add a significantly larger building to the property. And obviously, that will affect the property's economics over time.

[Brian D. Pauls, CEO, President & Trustee]

Just to add to your quality question, Himanshu, I think we rate quality in terms of its functionality, its location, how usable is it to the widest array of tenants. This -- all these assets that we've mentioned here in the portfolio that Alex was referencing is very, very high quality, very functional or it's in locations -- some of this is off-market that we -- our team was able to source, and we're very happy with it. And it shows a lot of potential to be able to push rents in great locations. So we're very happy with it.

[Himanshu Gupta, Analyst]

And maybe how competitive is the market right now for these kind of products? I think you mentioned off market. But I mean, who others are competing -- what other peers are competing against these properties?

[Brian D. Pauls, CEO, President & Trustee]

Everybody wants them, Himanshu. This is probably one of the most highest-demand kind of investments right now from other public companies, to life companies, to even private investors. So it's very competitive out there. Our deal flow is good to be a trusted buyer, one with a reputation that we'll close and do what we say we're going to do is very valuable. So we've executed well. We see a lot of the deals. We've got great relationships with not only the transaction guys like brokers, but also the owners who are selling the properties. So that's some of our competitive advantage in a really competitive market.

[Himanshu Gupta, Analyst]

Got it. And maybe just switching gears on same-property NOI growth guidance. So thanks for that. I think you mentioned 4% to 5% for Ontario and Québec, and probably flat to down for Western Canada. Not -- did you mention any number for U.S. portfolio as well?

[Lenis W. Quan, Chief Financial Officer]

It's going to be largely driven by the rental escalators. There's no rollover in the U.S. portfolio -- in our comparative U.S. portfolio, so 1.5% to 2%.

[Himanshu Gupta, Analyst]

Got you. And then when you say on Western Canada, you mentioned flat to down. Do you assume any occupancy gains here? And what are your assumptions on the rental spreads? Because I know it was around, I think, maybe 9% negative this quarter? What are your assumptions for 2020?

[Alexander Sannikov, Chief Operating Officer]

So on the occupancy side, we expect that the average occupancy will be largely flat. And as Lenis mentioned in her remarks, a lot of the same-property metrics are affected by timing of when some availability is leased up. We are in active negotiations with a number of prospects. We have a couple of pockets of vacancy, including in Edmonton, and that would, depending when we can lease that, will affect the numbers on same-property basis.And in terms of rental spreads, we're looking to see a slight roll down in rental spreads, kind of mid-single digits in 2020. And that will be offset in 2021 as we gain some occupancy there. Just wanted to add, sorry, the built-in escalators will also be moving that number up over time.

[Himanshu Gupta, Analyst]

Got it. Okay. So maybe last question from me on development. So any update on Las Vegas development? And where does the development in the U.S. sit in terms of priorities, I mean, over acquisitions in Europe and Toronto, Montréal?

[Brian D. Pauls, CEO, President & Trustee]

So the development in Las Vegas is going well. We expect to break ground later in 2020 as we work through entitlements and approvals to get permitted to start. But there is strong, strong demand in that location, and that market continues to do very, very well. So we're optimistic that, that development will be very successful. We are looking at other opportunities, both here and in the U.S. So it's a priority for us in both countries. And we've got a team in place looking at opportunities in both places where we could either enhance value by adding density and adding development on some of our current properties as well as new greenfield development, where it's appropriate and where it's available. So it's a priority for us. It's a small part of our balance sheet, but it's a priority to us to add that to our portfolio.

[Operator]

Our next question comes from Chris Couprie from CIBC.

[Chris Couprie, Research Analyst]

Two quick ones from me. In Alberta, I think you did an early renewal, 351,000 square feet for your largest tenant in Western Canada. Can you maybe just talk to us as to what the thinking was there on going for an early renewal? And how were the TIs relative to what you thought they might be? And then just kind of a broader question on just your thoughts on Alberta or Western Canada, in general. When you talk about your acquisition pipeline, you flag pretty much everywhere that you're active, with the exception of Alberta. Any kind of thinking about what you want to do here in the longer term?

[Brian D. Pauls, CEO, President & Trustee]

Sure, Chris. It's Brian. I'll start, and I'll let Alex chime in as well. The large renewal was an opportunity to secure a very large tenant early. They're a significant player in our portfolio. It's a great building. It works really, really well for them. It's a good opportunity for us to lock in for the long term, that tenant. They're now, obviously, committed to the space, and it's locked up with good annual escalators, and we're very happy with the deal. The tenant improvements, Lenis can talk about the specifics of the TIs, but we're very happy with the economics of the deal and kind of what that means for us long term, gives us some flexibility on that asset.In terms of that region, we are looking at specific asset recycling within the West. We don't have -- we're certainly not doing a regional-type exit or entrance there, but we are -- as we are with the whole portfolio, all the way across the 3 regions, we're looking at asset recycling. So we're looking at opportunities where we can buy assets that have significant growth and sell assets that aren't growing as fast or that may be worth more in other's hands. For example, where there are users, and there's an opportunity to sell to a user who's going to use the building, that's a good opportunity for us to sell at prices that are likely higher than our IFRS value and buy other assets that have some growth potential or places that we can add value.

[Alexander Sannikov, Chief Operating Officer]

And just to add to that. With respect to this specific building, this renewal was sort of a significant value driver. So I wouldn't -- I think we didn't look at this deal from a traditional leasing lens, if you will, when you look at the NER of a deal or what have you. So it was more of a -- having this renewal secured with the capital investment, what does that mean for the value of the building relative to the cost of the deal? So in this particular case, the total leasing cost were a couple of $2 million, just thereabouts. But the overall value impact was significantly greater than that. So it was a great investment for us and the right move for the asset.

[Chris Couprie, Research Analyst]

And circling back on your comments on capital recycling, Brian. So last year, kind of excluding the Eastern Canada portfolio, was kind of, what, $10 million to $15 million. What do you think -- any sense for what it might look like this year?

[Brian D. Pauls, CEO, President & Trustee]

It's probably more than the net -- excluding the east for 2020, we'll see kind of what opportunities there are. But we've got a model, and Alex is very involved in this. We've model to look at every asset and to see whether we should be recycling the asset, adding value to it, adding density to it, where can we kind of get the highest performance out of each assets? So that's part of kind of our continuing transformation of the REIT is having a deeper dive into each region and all the way down into each asset.So we will be actively looking at recycling. I think, in many cases, we'll be recycling into the same region. For example, if we've got a sale of an asset in Ontario, we'll likely replace that asset in Ontario and look for opportunities where we can add value in high-growth, good, long-term high-quality assets.

[Operator]

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

[Pammi Bir, Analyst]

Just on the investment-grade credit rating that you're working to secure, can you maybe just comment on perhaps the color -- or some color on the talks with the agencies? And any sense of the possible timing of when you might be able to secure a rating?

[Lenis W. Quan, Chief Financial Officer]

Sure. We've had some preliminary discussions with a couple of the different agencies as well as rating advisers. A lot of the strategic initiatives that we've been doing and the resulting impact on our balance sheet, being the lower leverage, financial flexibility, growing our pool of unencumbered assets, all of that is clearing a well-positioned path towards obtaining the investment-grade credit rating. It will be definitely something that we're working to achieve in the near term within the next -- if it's this year, within 12 months. That's what we're striving towards.

[Pammi Bir, Analyst]

And maybe just following up on the European acquisition commentary. Can you talk about how the pipeline of what you're looking at today, not the stuff that you've already announced, but what you're looking at in the future might compare with the announced acquisitions to date?

[Bruce Traversy, Senior VP & Head of Investments of Europe]

It's Bruce. I think what we're looking -- we're looking at a really broad range of assets. We've got a deep and growing pipeline. Obviously, the announcement of Dream Industrial's entry into the European market shift lose a lot of opportunities for us and helped with our existing relationships. I would say that the quality of what we bought so far is good, it's high. We're always looking to upgrade the quality. We're -- I would say it's a little bit higher quality overall, if that's possible in what we're looking at, a bit more on the logistics because urban industrial is just hard to find. What we bought in the large portfolio in the Netherlands is difficult to find. If we can find it, we'll buy it, but it's tough to find. So the focus would be on moving up the quality scale always.

[Pammi Bir, Analyst]

Got it. And that's helpful. I guess, with that, is it a bit more competitive in the logistics space than perhaps the light industrial? And I guess, from a pricing standpoint, perhaps cap rates might be a bit lower? Or...

[Bruce Traversy, Senior VP & Head of Investments of Europe]

They certainly range. I think depends on the scale of what you're going after. The larger deals are certainly competitively bid. There's a lot of capital chasing them. We try to fly below the radar screen where we can and find deals in maybe a less competitive sector, so maybe sub-EUR 50 million, sub-EUR 40 million deals. And there, as you get a little bit smaller, you can find slightly higher yields. But there's no question that the core logistics attracts the highest prices right now. That is changing quickly though.

[Pammi Bir, Analyst]

Got it. Maybe just last one. Lenis, maybe to clarify your comments on FFO growth guidance. Does that -- does your guidance for 2020 include the debt prepayment charges?

[Lenis W. Quan, Chief Financial Officer]

Yes. Sorry, it includes the impact of the interest savings from the debt prepayment. But the $3.5 million in prepayment charges are not in that number -- they're not deducted from that guidance.

[Operator]

Our next question comes from Mike Markidis from Desjardins.

[Michael Markidis, Real Estate Analyst]

Got to clean my ears out a little bit this morning. Lenis, did I hear $200 million or $230 million on the defeasance of prepayment?

[Lenis W. Quan, Chief Financial Officer]

It's approximately $200 million of the -- it's not -- prepayments, not defeasance. It's early repayment of the Canadian mortgages, approximately $200 million. The equity offering size was $230 million.

[Michael Markidis, Real Estate Analyst]

Got you. Okay. Okay. So it's the $200 million still plus the $3.5 million of prepayment penalties.

[Lenis W. Quan, Chief Financial Officer]

Right. Correct.

[Michael Markidis, Real Estate Analyst]

Okay, got you. Okay. I guess, Brian, you talked about how competitive it is in Ontario, GTA and Québec in terms of sourcing acquisitions. How would you characterize the competitiveness of the acquisition market in Western Canada?

[Brian D. Pauls, CEO, President & Trustee]

It's still quite competitive, Mike. We're seeing spec development in the West, which -- it's a head scratcher that the rents in the West are actually higher than they are in Ontario still. That's changing over time, but slowly. It's still quite competitive. There are opportunities out there. However, we're basically remaining flat in terms of our holdings in the West. And investment in industrial real estate is very competitive everywhere you go. Where there's consistent, reliable yield in high-quality assets in functional buildings, it's competitive. So we're finding it competitive everywhere. However, I think we've got amazing deal flow. We've got good teams that are able to find things in all these markets, and we're seeing more competitiveness in Calgary than we would in, say, Edmonton or other areas in the West.

[Michael Markidis, Real Estate Analyst]

Okay. And your sort of longer-term commitment to that market, is that really just based on optimism for a recovery? Or would -- you talked about not contemplating an on-block sale, and we saw you guys get out of Eastern Canada last year. Is that more credit rating and tax driven at this juncture?

[Brian D. Pauls, CEO, President & Trustee]

I think it's more than optimism, Mike, we're seeing actual results on the ground. We're seeing rent growth, we're seeing occupancy growth. These markets have been quite dynamic, especially Calgary, where there is long-term demand, and it's a good complement to our overall portfolio. So we're committed to that region. And we're committed to continuing to upgrade our portfolio and drive growth, but we're not looking at some sort of regional exit like it would compare to the East somehow.

[Michael Markidis, Real Estate Analyst]

Okay. That's great. I guess just another higher-level question here. If we were to ignore the spread or the arbitrage opportunity on your balance sheet with respect to optimizing the balance sheet, how would you look at the returns or maybe the NAV growth potential of buying assets in Europe right now versus buying assets in your target markets in North America?

[Brian D. Pauls, CEO, President & Trustee]

Good question, Mike. I'll start and I'll let Alex expand on that as well. The cap rates are similar to the U.S. So we see the opportunity there of diversifying risk and accretion in terms of just yield and acquisitions being a great opportunity. Those are good, long-term, high-demand markets that we think will add a lot to our portfolio. When you layer on top of that the arbitrage or the debt accretion, it becomes really, really compelling. So the combination is really an incredible opportunity. We're stepping into an entire platform and deal flow that Dream Global was using. We don't have to build that platform, don't have to build that portfolio. So it's a very unique opportunity to Dream Industrial that others would have to go build and spend years to build to get there.So it's really a great opportunity on all fronts. From a straight real estate standpoint, straight investment standpoint, it makes a lot of sense. When you layer on the debt, it's very compelling.Go ahead, Alex.

[Alexander Sannikov, Chief Operating Officer]

Well, if we look at the sort of our 3 target markets from a rental growth perspective, and that's, in our mind, will be the primary driver for NAV growth. We're seeing pockets of cap rate compression, but a lot of the cap rate compression is driven by growth expectations as opposed to maybe the yields dropping themselves.In GTA, we're seeing strong rental growth. In Montréal, we are still seeing strong rental growth, and we expect to that to continue. That said, that's a well-understood phenomenon, and so a lot of the growth is already priced in when you acquire an asset.In Europe, we haven't seen as much rental growth to date. We're -- we've seen in some markets, but we expect to see more rental growth in Europe. And one thing that we're liking about the European strategy is that you don't have to pay for that rental growth today. Or we do not have to pay as much. And so the upside that you can capture from -- in terms of NAV and value, as rents start growing, is significantly higher in that market. Some market participants believe that we're kind of at a tipping point now in terms of rental growth in Europe. So that's our expectation as well.And in the U.S., we're generally seeing good rental growth, but not to the extent that we're seeing in markets like GTA and Montréal.

[Operator]

We have another question from Sam Damiani.

[Sam Damiani, Analyst]

Just wanted to drill into the U.S. same-property NOI growth guidance of 1.5% to 2%. I think you mentioned that was going to be mainly the result of rent escalations. Just curious how the Columbus strategy announced last quarter in terms of creating some vacancy and fixing up some spaces to capture higher rents and also the Louisville when that gets backfilled. Is that -- are those occupancy gains built into the 2020 guidance? And if so, why not?

[Lenis W. Quan, Chief Financial Officer]

So Sam, when we closed the comparative property NOI portfolio for the U.S., it doesn't include the Midwest U.S., which is where Columbus and Louisville are only because they were acquired March of 2019. So they're not -- they weren't owned for the full year.You are correct in terms of the rent -- of the leasing that we've been doing in Columbus at 21%, 22% rental spreads in 2019, the lease-up of Louisville, adding that to our NOI. We'll move our total NOI and FFO. But it is excluded from the comparative property portfolio for 2020. And that's why we're only quoting 1.5% to 2% because that's really all the initial DCT portfolio and the Nissan building, plus the first 2 Columbus assets that were acquired in 2018.

[Sam Damiani, Analyst]

Got it. That makes sense. And just finally, on the debt strategy, you will have over $300 million worth of European assets by the end of the quarter. When do you expect to have placed in excess of $300 million of euro-denominated debt?

[Lenis W. Quan, Chief Financial Officer]

So our intention is to put up to 100% of euro-denominated debt. So we're targeting around $300 million. We could have close to half of that in by the end of the quarter and may need a few more months, partly as we wanted time for the next financing with the next acquisition, so that we don't have too much undeployed cash on the balance sheet.

[Sam Damiani, Analyst]

It's a good question, actually. How much cash do you expect you will have on the balance sheet at the end of the first quarter?

[Lenis W. Quan, Chief Financial Officer]

We could have either utilized all of our cash to up to close to $100 million of cash.

[Operator]

We have another question from Pammi Bir.

[Pammi Bir, Analyst]

Just one, hopefully, a quick follow-up. On the further reduction in your leverage target to, I guess, the mid-30% range, that's come down even from last quarter. Is this where you want to keep it longer term? I'm just curious. So maybe some, I guess, color on to the decision to bring it further down. And -- or could we see that even shift down to close to maybe 30%?

[Brian D. Pauls, CEO, President & Trustee]

Yes, Pammi, I think we've continued to move our targets as we see appropriate. Less than 40% is certainly in our long-term target. Mid- to high 30s is a good place for us as -- that we see as a kind of risk for the company and go-forward leverage state. With the low cost of debt in Europe, it affords us the luxury of having less debt with having it affect our results less.So -- as there are more opportunities, that leverage may go up, and it will be somewhat opportunity driven. And as we find good places for the capital, we'll manage that debt. From a long term, as the dust settles, mid- to high 30s is a good target for us.

[Operator]

We have no further questions at this time. I'd like to turn the call back over to management.

[Brian D. Pauls, CEO, President & Trustee]

Thank you, everybody, for your time today, and we look forward to speaking again soon. Take care.

[Operator]

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