Dream Industrial Real Estate Investment Trust

TSX:DIR.UN

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to the Dream Industrial REIT Fourth Quarter Conference Call for Wednesday, February 16, 2022. During this call, management of Dream REIT Industrial 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 and 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, uncertainties is contained in the 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 & Trustee]

Good morning, everyone. Thank you for joining us today for Dream Industrial REIT's 2021 Fourth Quarter and Year-end Conference Call. Speaking with me today is Lenis Quan, our Chief Financial Officer; and Alex Sannikov, our Chief Operating Officer. The DIR team continues to successfully execute on its long-term strategy and our operating results for the fourth quarter in the year were strong and ahead of our guidance. We reported a 13% increase in FFO per unit for the quarter, led by strong CPNOI growth, lower cost of debt and a robust pace of capital deployment. For the full year, we reported over 15% FFO per unit growth. Our pace of CPNOI growth rose to a new record high of 7.6% in Q4 with Ontario leading the year-over-year growth at 17%. For the full year, we reported CPNOI growth of 5.4%, driven by solid run rate and occupancy growth. This was at the upper end of our guidance issued at the beginning of the year. We expect the pace of CPNOI growth to accelerate further in 2022. Our pace of capital deployment remained robust with $499 million of acquisitions closed during the quarter and over $2.4 billion of acquisition closed during the year. In addition, we are under contract or in advanced negotiations on approximately $400 million of additional acquisitions located in Canada and Europe. We have advanced our development pipeline with approximately 850,000 square feet of projects currently underway with an additional 1.6 million square feet of projects that are in advanced planning stages. Looking forward to 2022, we are well positioned to continue to execute on our strategic pillars, which are continued organic growth, expanding our development program focused capital deployment, optimizing our cost of capital and executing our ESG strategy. We have made significant progress on each of these pillars, and our business is firing on all cylinders with a long runway for growth ahead. Our acquisition pipeline has been an important driver for us to add high-quality assets to our core markets in North America and Europe. Our local on-the-ground teams have been very successful in sourcing industrial assets that are above the average quality of our portfolio and have an attractive return profile. 2021 was a milestone year for the REIT with over $2.4 billion of acquisitions completed during the year at an average cap rate of 4.2%, which added 15 million square feet of GLA across our operating markets. In Europe alone, we added over $1.7 billion of assets during the year. We expect the yield on these acquisitions to continue to grow as nearly all the current leases are indexed to CPI, which is accelerating. For example, in the Netherlands, the CPI increased 5.7% year-over-year in December 2021 and 6.4% in January 2022. In addition, the market rent for our European portfolio was 7% higher than in-place rents at year-end 2021, and we expect market rents to continue to grow in Europe. Since Q3 2021, we have renewed over 1.3 million square feet of leases in Europe at a 12% spread over expiring rents. In addition, the new leases are indexed to CPI. Our European portfolio now totals over $2 billion, and we have achieved significant scale in the region to execute on development and asset management strategies, which will provide a strong platform for us to continue to build long-term value. We added over 1.3 million square feet of development potential through our acquisitions in Europe in 2021, which we intend to access over time. In Canada, we continued to build on our attractive market positioning in our core markets of the Greater Toronto Area and Greater Montreal Area through high-quality acquisitions as well as executing on our development and intensification pipeline. Our acquisition criteria focuses on acquiring assets with the potential to generate strong total returns over time. We acquired over 650 -- or $560 million of income-producing assets in these 2 markets during the year at an average cap rate of 4.4%. Current market rents on these assets exceed in-place rents by over 15%, which should support robust rental rate growth as leases roll and market rents continue to trend higher. In addition, we acquired over 175,000 square feet of vacancy, which has already been leased at rental rates significantly higher than underwriting. Moreover, these assets offer the potential to develop over 570,000 square feet of access density over time, and we are already underway on some of these projects. In addition to income-producing assets, we also expanded our greenfield development program with the acquisition of over 65 acres of land in the GTA and Cambridge, which should add over 1 million square feet in the next 24 to 36 months. Our investment pipeline continues to be strong across all our operating regions, and we have approximately $400 million in acquisitions that are under contract or in various stages of due diligence. We believe that our development program is a key driver for DIR's next chapter of growth. Over the course of the next -- sorry, over the course of the past 12 months, we have acquired or under contract on nearly 150 acres of land in our greenfield development segment that would yield over 2.2 million square feet of modern logistics product. These sites are located in the GTA, Cambridge and Calgary. In the GTA, with high-quality assets trading at record high valuations and often above replacement cost, we believe that building is an important driver of generating enhanced returns while adding scale and high-quality space in one of the most attractive industrial markets globally. The Kitchener-Cambridge-Waterloo submarket is becoming an increasingly attractive location for logistics companies, especially in locations that are close proximity to Highway 401. Attractively located between the manufacturing hubs in Southwestern Ontario in the GTA with easy access to labor, this region is poised for significant rental rate growth in the near to medium term. In 2021, we have already seen market rent growth of over 20% in this region. The site totals 28 acres and should support a 420,000 square-foot building. With a total cost base in the low $200s per square foot, we are forecasting an unlevered yield on cost in the mid-5% range. With respect to Calgary, we have been long-term investors in the market. We believe the region has become a key distribution hub in Western Canada, giving us attractive location close to a large population base. And the outlook for industrial fundamentals is attractive. Market availability has declined by over 350 basis points in 2021 with rental rates increasing throughout the year. There is limited new supply with nearly 70% of new projects under construction already pre-leased. We recently acquired a 50-acre site in the Balzac submarket for $14 million and are under contract on a 20-acre site in close proximity to the first site for $12 million. Balzac is one of the most sought-after submarkets in the region with new development from Amazon, Walmart and several other high-quality occupiers. The sites are well located with excellent connectivity to the airport as well as downtown Calgary. They should support the development of nearly 800,000 square feet of modern logistics space with a cost basis in the high $100s per square foot, we expect an approximately 6% unlevered yield on cost. We are underwriting high single-digit rents, which we believe provides further upside in yields. Overall, we see significant long-term value in acquiring land that we can entitle and build on in the future. In addition to our greenfield development program, we have made considerable progress on our redevelopment and intensification pipeline. Our predominantly urban portfolio with significant access density provides us a unique opportunity to add GLA or redevelop certain buildings to accommodate more modern distribution uses. These sites are mostly located in the GTA, GMA and strong urban markets in Germany, France and the Netherlands, including our greenfield program. Our immediate development pipeline will allow us to add approximately 2.4 million square feet of incremental GLA in the next 24 to 36 months. With an overall development cost, including land of approximately $500 million, we are currently forecasting an unlevered yield on cost of approximately 6%, which is significantly higher compared to cap rates on comparable quality stabilized properties. These projects are poised to significantly improve the overall quality of our portfolio and provide an attractive source of cash flow and NAV growth over the long term. Overall, our capital allocation strategy has enabled us to amass a high-quality portfolio with significant embedded growth opportunities for the long term. I will turn it over to Alex to talk about our organic growth outlook and operations.

[Alexander Sannikov, Chief Operating Officer]

Thank you, Brian, and good morning, everyone. As Brian mentioned, our global predominantly urban portfolio continues to be attractive to logistics occupiers and private market investors. During the quarter, the value of our assets increased by $167 million, reflecting lower capitalization rates as well as higher market rents in Ontario and Quebec, largely driven by the increase in asset values, DIR's NAV per unit increased to $15.13 or a 21% increase year-over-year and a 5% increase compared to Q3 2021. Leasing momentum in our portfolio accelerated during Q4, and we reported 7.6% year-over-year same-property NOI growth this quarter, driven by a 4.8% increase in in-place rents from strong rental uplift as well as contractual rent growth and 190 basis points increase in average occupancy. For the full year, we reported 5.4% CPNOI growth, a record pace of growth for DIR and at the upper end of our guidance. Looking ahead, the industrial markets across our operating regions continues to strengthen, and our asset management strategies have enhanced the long-term organic growth outlook for DIR. Occupancy across our portfolio remained strong at over 98%, nearly 300 basis points higher than the prior year, and our leasing momentum has accelerated over the past quarter, especially in Europe. Since the end of Q3 2021, we have already addressed approximately 1.9 million square feet of 2022 expiries across 2 markets. In Europe, we signed 1.3 million square feet of leases expected to commence in 2022 at an average spread of 12%. In Canada, the trust signed approximately 600,000 square feet of leases expected to commence in 2022 at an average spread of 30%. In addition, we leased nearly 150,000 square feet of vacancies with the leases commencing in Q4 2021 and 2022. For the full year 2021, we have signed 3.6 million square feet of leases across our Canadian portfolio at an average spread of 21% and 1.2 million square feet in Europe at an average spread of 10.5%. In addition to the strong rental uplift, contractual rent steps as well is an important driver of steady CPNOI growth. Currently, embedded rent steps equate to 2.4% annual contractual rent growth in our Canadian leases. And in our recent leases, we have been able to negotiate significantly higher growth, 4% in the GTA and approximately 3% in the GMA. In Europe, 90% of our leases are indexed to CPI, and recent CPI numbers suggest a strong increase in our rents on our European leases in 2022. In addition, 8% of the leases in Europe have fixed rental rate escalators of 2%. Furthermore, the market rents for our properties have risen significantly, and we are well positioned to achieve and even outperform market rents as leases roll. Currently, the spread between in-place and estimated market runs equates to 19%, considerably higher than 9% a year ago. As a result, the outlook for CPNOI growth remains strong in 2022 and beyond. Our competitive properties portfolio for the full year 2022 will include all acquisitions completed prior to 2021. And we expect that the pace of same-property NOI growth will accelerate. For the full year 2022, we are currently expecting the pace of growth to be over 7%. In addition to CPNOI growth, we continue to see several drivers of NOI growth across our portfolio. We have made significant progress on our development pipeline and are already seeing strong results from our initial slate of projects. At our 401 Marie-Curie property in Montreal, we have substantially completed the 130,000 square foot Phase 1 expansion. We have already leased the entire space with starting rents in the low double-digit range at a record for the submarket, resulting in an unlevered yield on cost of approximately 9%. The lease commences in April 2022. During 2022, we will commence construction on over 1 million square feet of projects, primarily in the GTA and GMA. And on these projects, we expect to achieve an unlevered yield on cost of over 6%, with most projects expected to reach stabilization in the next 24 months. In addition to our development pipeline, we are also advancing value-add refurbishments in the existing properties where we can generate strong yields. In Kitchener, we acquired a 100,000 square foot property in Q2 2021 at a total purchase price of $12 million. The property was vacant at the time of acquisitions. During the underwriting, we saw the opportunity to invest capital in the building to adapt it to more modern logistics users. We are forecasting a total spend of approximately $2 million. This month, we signed a lease for 100% of the building at a starting rent of $10.75. The lease-up will result in an expected unlevered yield on cost of approximately 7.5% on the overall investment of $14 million. We're also actively looking to add solar panels on existing properties across Canada and Europe, which should add significant long-term revenue over time. We're currently in advanced stages of finalizing 10 projects that will add 16,000 solar panels. We have an additional 14,000 solar panels that are in planning stages. We expect overall capital outlay to be approximately $15 million with unlevered yield on cost above 8%. We expect this income to come online in phases starting in the second half of 2022. Finally, our U.S. property management and leasing platform is expected to be a more meaningful driver of our operating results. We expect more substantial contribution to income during the quarters when significant leasing is completed, and as a result, the income is expected to be lumpy. Overall, we expect an operating profit of approximately $1.5 million in 2022. Overall, we believe that DIR has significant opportunities to drive CPNOI and NAV growth this year. Both of which should further enhance the quality of our business. I will now turn it over to Lenis, who will provide our financial update.

[Lenis W. Quan, Chief Financial Officer]

Thank you, Alex. Our financial results for the fourth quarter were strong, diluted funds from operations was $0.21 per unit for the quarter, 13% higher than the prior year comparative quarter due to higher NOI from our comparative properties, successful deployment of our balance sheet capacity towards over $2.4 billion of acquisitions over the past 12 months and lower borrowing costs as we executed on our European debt strategy. For the full year, we reported $0.81 in FFO per unit, up over 15% year-over-year and ahead of our initial guidance at the beginning of the year. 2021 was a significant year for advancing our capital strategy. We were able to issue a total of $1.1 billion of unsecured debt at an average rate of 40 basis points after swapping to euros to partially fund our $2.4 billion of acquisitions while keeping leverage within our targeted levels. The REIT operates primarily with an unsecured financing model, and this has significantly improved the overall financial flexibility of DIR's balance sheet and allowed us to significantly reduce our average cost of debt. In 2021, we repaid approximately $434 million of secured mortgages at an average interest rate of 3.6%. This has lowered the proportion of secured debt to less than 30% of total debt from 100%, 18 months ago. Our unencumbered asset pool has increased by over $2.7 billion year-over-year and was approximately $4.2 billion as of December 31, 2021, representing approximately 73% of total investment properties value. We continue to allocate substantial capital towards sustainable initiatives across our existing portfolio and towards acquisitions of green buildings. During the year, we issued $650 million of green bonds, including the $250 million Series D unsecured debentures issued during the fourth quarter at an average interest rate of 54 basis points after swapping to euros. We have already deployed or committed approximately $500 million of green bond proceeds towards eligible green projects. We also established an at-the-market equity program in 2021 as an additional tool and a cost-effective source of equity capital to fund individual acquisitions, developments and other value-add initiatives. In Q4 2021, we utilized the ATM Program to raise approximately $56 million at an average unit price of $16.64. Subsequent to the quarter end, we have raised a further $43 million through the ATM Program at an average unit price of $16.27. During the fourth quarter, we also completed a $288 million equity offering at an issue price of $16.50. The net proceeds from the offering were utilized to fund our acquisition pipeline as well as development costs. We ended the year with leverage at 31% and approximately $511 million of liquidity. Our pipeline of opportunities is strong, and we are under contract or in various stages of due diligence on approximately $400 million of assets in Canada and Europe. We currently have acquisition capacity of approximately $500 million before we reach our target leverage. We have sufficient capacity to execute on our acquisitions and development program while maintaining a healthy and flexible balance sheet. As we deploy our balance sheet, we expect our leverage to go up to the mid- to high 30% range as we close on acquisitions in our pipeline and fund our development projects. We currently have approximately CAD 300 million of euro debt capacity, and we expect it to grow as we complete more acquisitions in Europe. While interest rates have increased since the beginning of the year, we have only $33 million of debt maturing this year. And we continue to see interest rates on euro equivalent debt, about 160 to 180 basis points cheaper than North American debt. We are currently seeing 5-year euro equivalent debt in the mid-1% range, which, along with leverage below our targeted levels, should continue to support our capital deployment strategy. For 2022, our FFO per unit growth will be primarily driven by strong comparative properties NOI growth, which is expected to be over 7%, interest expense savings from our European debt strategy, completed acquisitions and the timing of getting our balance sheet to the target leverage range. We are currently expecting FFO per unit to be in the high $0.80s to $0.90 range depending on average leverage for the year. Over the past several years, we have transformed DIR into a high-quality business that can produce strong FFO and NAV growth over the long term, and we believe that our trajectory of growing and improving portfolio quality remains strong. I will turn it back to Brian to wrap up.

[Brian D. Pauls, CEO & Trustee]

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

[Operator]

[Operator Instructions] Our first question comes from Sam Damiani from TD Securities.

[Sam Damiani, Director, Institutional Equity Research]

Just wanted to start off on IFRS fair values and maybe we'll look it on Ontario, just to start. I saw the low end of the cap rate range was down 25 basis points on the quarter to 4% even -- just wondering if there's a reason you're not going lower given the recent transactions that we've seen in the marketplace.

[Alexander Sannikov, Chief Operating Officer]

Sam, it's Alex. Thanks for your question. We -- what we see with IFRS values is they are largely -- they largely need to be supported by external appraisals and valuation metrics provided by external appraisers. And sometimes, it takes our external appraisers time to reflect the market comparables in their suggested ranges. So that's the primary factor for the metrics that you're observing. What we are trying to do with our disclosure for the GTA and other regions is to provide certain metrics such as prices per square foot or implied values per square foot, implied cap rate for the current quarter, so that you can then compare that with more live transactional evidence you see in the market.

[Sam Damiani, Director, Institutional Equity Research]

Okay. And I guess a similar thing over in Europe, where there's been some large portfolio M&A of late. Just wondering what your thoughts were on those assets, certainly being priced on a per square meter basis well above where DIR is carrying this European portfolio. If you see those portfolios as being comparable overall or how you view that sort of marketplace, the trend in investment activity in Europe these days?

[Alexander Sannikov, Chief Operating Officer]

It is hard to compare these large portfolios in terms of the assets. That said, what we imply from the recent activity, in Europe is that there is significant investor confidence in the region vis-a-vis rental growth potential, capital value growth potential and the general outlook for European logistics, whether it's last mile logistics or general logistics for the region.

[Sam Damiani, Director, Institutional Equity Research]

Okay. Last question for me is on -- would be on the same property. I guess the guidance for 7% plus is a nice pickup from 2021. How much of that is coming from the acquisitions that were completed in 2020 that will be rolled into the same property pool? And I'm also curious how Europe is going to play into that just given the accelerating same-property NOI growth that your portfolio has seen over the last few quarters.

[Alexander Sannikov, Chief Operating Officer]

So we expected the acquisitions completed in 2020. We'll be on average in line with the rest of the portfolio. There will be some assets that will be contributing more than others. For example, we bought, if you recall, 1 asset largely vacant in Mississauga, that will be contributing a little bit more than average for Ontario. But overall, we expect to be in line. Our Kitchener portfolio is going to be part of our same property pool for 2021, 2022. Brian mentioned that, that region is seeing considerable strength. And that we've seen that in our operating results, and we just announced the value-add project completion in Kitchener as well with rents that are exceeded our underwriting and resulted in very strong unlevered yields. In terms of Europe, we expect Europe to be in the mid-single-digit range. And that inflation -- increase in inflation outlook is not fully factored in. Now mind you that the European portfolio that is included in the same property pool is the 2020 acquisitions that all the 2021 acquisitions, which is the majority of our European holdings today. Is not part of our same property pool.

[Operator]

Our next question comes from Mark Rothschild from Canaccord.

[Mark Rothschild, MD & Real Estate Analyst]

Brian, you spoke about acquisitions and in markets or properties that are above average quality for the portfolio. Can you give some more information and your thoughts on where cap rates are for those types of properties and the accretion you would need to justify those acquisitions versus the strong growth in the current portfolio? Is it accretion based off of now where you think you can get to over the next year or 2 to same property growth? Or is it just the benefit of being bigger and having higher quality properties?

[Brian D. Pauls, CEO & Trustee]

Yes. Mark, so we judge quality in a lot of ways, location, functionality, rent growth. I mean we're looking at total returns when we talk about the financial outlook. So some of the acquisitions have opportunities to add density. As I mentioned in the opening remarks, some of them have value add just by rolling to market, the leases that are in place. We're seeing a lot of opportunities in Canada, for example, to buy at cap rates that are low. So you asked about cap rates, but cap rates are kind of 1 leg of a 3-legged stool. I mean, we look at cap rates, we look at replacement costs, and we look at in-place rents. So for example, a property in the GTA, for example, that's at a low cap rate, but it has a significant mark-to-market and a short wall would be a great opportunity for us because the going in cap rate is not really representative of our total return. Same thing if we can add density to that. What we're seeing is we're continuing to invest in markets where we see a runway of growth. We talked earlier in the Q&A about IFRS versus currently what's in the market. All of that IFRS is backwards looking and the current market activity is pointing to significantly high rent growth and value growth going forward, and that's evidenced through the private market transactions that are happening. So we're seeing that. We're looking to capitalize on that market and participate in. And particularly in our target markets in Europe, GTA, Montreal, we think the development pipeline we have will allow us to participate in that. So it is some immediate accretion on the acquisitions that we do, but we're very focused on really the long-term value and long-term quality of our portfolio.

[Operator]

Our next question comes from Brad Sturges from Raymond James.

[Bradley Sturges, MD & Equity Research Analyst]

I wonder if you could provide a little bit more context on the amendments to the external management agreement, what the rationale would have been or what prompted the review and the -- I guess, the evaluation to the amendment and whether or not that would have included a review on potential internalization.

[Brian D. Pauls, CEO & Trustee]

Brad, yes, let me just -- the asset management amendments are pretty innocuous. Let me just run through them. They're switching from a fiscal year to a calendar year. They are switching from AFFO, which we don't report anymore to FFO. So that's a much more transparent metric. And thirdly, it's breaking out our regions. So Canada and Europe will have a separate agreement the same economics, but there's nothing anticipated but allow us for flexibility in the future should we need it. And then more importantly, the fourth comment is to add clearly add construction costs to our historic cost when looking at the incentive fee. So that was less than totally clear. And as we focus on developments going forward, I mentioned a tremendous part of our growth and a big part of our focus is development. We're at a scale now where we're doing development in all of our regions. We're looking to do more development and complement our portfolio. The amendment now clearly states, which is beneficial certainly for unitholders that the historic costs will include the construction cost of development, not just the land. So it was meant to clear that up. And so it's a little bit of while we're at it, let's just clear all these things up like the calendar year and those kinds of things. So does that answer your question, Brad?

[Bradley Sturges, MD & Equity Research Analyst]

And sorry, maybe I missed it, but in terms of -- okay, you cleaned up some of the I guess, the metrics in the contract, but would have internalization been part of that review process as well? Or how should we think about that?

[Brian D. Pauls, CEO & Trustee]

The Board has discussed it over the years. Certainly, it's would be up to them, but it was not part of this amendment discussion. And just to clarify, the transition from AFFO to FFO is neutral. It's just using a different metric, but having the same economics.

[Bradley Sturges, MD & Equity Research Analyst]

Yes. In terms of the near-term acquisition pipeline, I think you talked about $400 million under review and a capacity for $500 million. How should we think about that pipeline right now in terms of timing? And then maybe break it down a little bit more by geography or, I guess, stabilized versus development opportunity.

[Brian D. Pauls, CEO & Trustee]

Sure. Lenis, do you want to talk a little bit about what we have in contract?

[Lenis W. Quan, Chief Financial Officer]

Sure. Yes. So at the end of the year, we had just over $510 million of liquidity. I had mentioned we had issued about $43 million on the ATM since the beginning of the year. We are currently working on about $400 million of acquisitions in various stages within the pipeline. So I think we've got sufficient capacity to close on those acquisitions as well as funding our development costs as well. The timing of those acquisitions is a little hard to pin down. I think it's going to be weighted a little bit towards end of Q1 a more of the chunk into Q2. There isn't a significant portion of those acquisitions that are in Europe. So our German acquisitions, particularly take a little bit longer to close, just kind of given the process over in Germany. Was that -- I wasn't sure if I answered your question, Brad?

[Bradley Sturges, MD & Equity Research Analyst]

That pipeline would be stabilized opportunities? Or how do you think about adding more to the development pipeline and then how much activity you had in terms of -- on the acquisition from that perspective?

[Alexander Sannikov, Chief Operating Officer]

So in terms of land, Brad, it's Alex here. We sort of do one site that talked about that isn't closed as part of that pipeline. And in addition to that, we're looking at adding a site right next to another site that we own immediately adjacent to that. So that's part of that. It's not very large acquisition, but there's these 2 parcels in the pipeline.

[Operator]

Our next question comes from Himanshu Gupta from Scotiabank.

[Himanshu Gupta, Analyst]

So just on the 2022 lease expiries, I think around 1.5 million square feet is coming due in Europe this year. So what are your thoughts in terms of rental spreads? And do you expect any space coming back?

[Alexander Sannikov, Chief Operating Officer]

Himanshu. So as you've seen, we've addressed a significant amount of leases expiring in 2022 since we spoke last time. There's still a couple of leases that are still expiring. We expect that the vast majority of them will be renewals. There will be 1 or 2 spaces coming back to us which is normal course of business, and we have strong prospects and good pipeline to replace those tenants.

[Himanshu Gupta, Analyst]

Got it. And then in terms of the activity done during the year, like average rental spread of almost 12% in Europe. Was it mostly driven by new leases or you're getting uptick on renewals as well?

[Alexander Sannikov, Chief Operating Officer]

So Himanshu -- you're right. I think your question was in terms of the spreads in Europe, was it new leases or renewals? The line was breaking up a bit.

[Himanshu Gupta, Analyst]

That's right, yes, between new leases and renewals, how is start looking like? I think you have given a full number of 12% for 1.3 million leases. So just wondering, is there a big gap between new leases and renewals?

[Alexander Sannikov, Chief Operating Officer]

The vast majority here were renewals. So we're not seeing a huge gap on those negotiated renewals. So we are -- it's pretty consistent. In some cases, we're working on opportunities. For example, we have 1 lease in Europe for about 200,000 square feet, where we have an opportunity to work with the existing tenants to get the space back earlier. We have another 10 who is interested in that space, and they're willing to pay rents close to double of what the existing -- current tenants are paying. So it's not part of our 2022 expires. This is going to be an additional opportunity. So there's -- there are some opportunities like that, that we're working on.

[Himanshu Gupta, Analyst]

All right. And maybe just to clarify, in your European leases, I mean, does the tenant have the option to renew a [ fixed ] price? I mean are there a lot of those leases or it comes to market at the time of renewal?

[Alexander Sannikov, Chief Operating Officer]

The vast majority of what we have left will be market discussions.

[Himanshu Gupta, Analyst]

Okay. Okay. So that's fantastic. And then if I look at the in-place rents per square footage in European portfolio again, I mean it's less than EUR 5 or call it, CAD 7 per foot, I mean, is there a reason why European rents can go to like $9, $10 range or even closer to North American levels?

[Alexander Sannikov, Chief Operating Officer]

Well, we believe that there is strong upside in European rents over time. And we are starting to see pockets of rental growth emerge in Europe, specifically Southern Germany. We've seen certain markets grow at mid- to high double-digit pace over the course of 2021. We're seeing that in our own leases. We're seeing that kind of in many pockets across Europe, Spain, pockets in the Netherlands. So we think that it's a great advantage to have low starting rents and because there's much more upside than downside over time.

[Himanshu Gupta, Analyst]

Got it. That's helpful. And then with the CPI rising in Netherlands and Germany, I mean, has that impacted the cost of borrowing in Europe? I think you have done euro-denominated swaps I think like 0.5 percentage last year. Where are the rates now or where the cost of borrowing there in Europe?

[Lenis W. Quan, Chief Financial Officer]

Sorry, Himanshu, it was a little hard to hear you, but I think you were asking about our cost of debt, is that right?

[Himanshu Gupta, Analyst]

That is correct. Yes, exactly. I mean with inflation picking up and CPI going up? Any major inventive?

[Lenis W. Quan, Chief Financial Officer]

Sure. I mean we're continuing to see the cost of European debt being significantly lower than North American debt. And for 5- year euro-equivalent, we're seeing about mid-1%.

[Himanshu Gupta, Analyst]

Okay. Okay. And the last question is on the land development. I mean, you have now landed Cambridge, Caledon, Calgary as well now. Will all this be built on speculated basis?

[Alexander Sannikov, Chief Operating Officer]

Primarily, it will be on a speculative basis. We might find tenants who are interested in taking space early, but it's primarily going to be on speculated basis. But what we're seeing is that as we break ground, we start negotiating leases with [ Senon ]. So for example, with Marie-Curie, we signed the lease there well advanced of the completion on another expansion in the GTA. We already are talking to a prospect tenant for a completion in September, October. On another greenfield project in the GTA. We already started talking to tenants with delivery expected end of 2022, or early 2023. Same in Germany, where we were building a freestanding expansion.So we're seeing that we will be entering into lease discussions with tenants before completion. So it's highly likely that many of our projects will be leased leading to completion. And the reason we like that strategy is we're generally seeing much higher rents as a result compared to pre-leasing that.

[Himanshu Gupta, Analyst]

Got it. And then in terms of getting development permits or getting it done, is it any different between GTA and Calgary? I mean, is the pace of construction or getting things done, any different from, say, GTA and Calgary? Is it much easier to get it done in Calgary, let's say, compared to Samsung, for example?

[Alexander Sannikov, Chief Operating Officer]

It's very site specific. It depends on whether you need to go through the rezoning process or not, whether your site is -- has the zoning in place. As far as site approval process, it's a bit shorter in Calgary than it is in the GTA. But rezoning might be different for different properties.

[Himanshu Gupta, Analyst]

Fair enough. And my last question is, Europe exposure is almost 40% of portfolio based on GLA. Is there an upper ceiling where you want your Europe exposure to be?

[Alexander Sannikov, Chief Operating Officer]

Well, so our European exposure is in that 40% range. We expect it's going to be in that range. With Canada being targeted as the majority of our company. But it will move around over time as we say, often the opportunities don't always come at perfect time and perfect sizes. So it will move around. But generally, the long-term target is that Canada and GTA, GMA primarily are the majority of the portfolio.

[Operator]

Our next question comes from Sumayya from CIBC.

[Sumayya Syed Hussain, Associate]

Just firstly a question on renewals done in Western Canada in the quarter. They were coming in on a flat basis, which is, I guess, an improvement over the prior quarters. Just wondering if that was specific to the leases that roll, are you seeing more of a broader improvement in that market?

[Alexander Sannikov, Chief Operating Officer]

This is -- the spreads in the quarter were primarily related to specifics of the leases. What we're generally seeing is that there is improvement in the market. The rents are starting to trend upwards. We are starting to put higher rent escalators in our leases as we do renewals and new leases, we're seeing strong leasing momentum in the region in terms of absorption of vacancy. So we are very encouraged by the fundamentals overall.

[Sumayya Syed Hussain, Associate]

Okay. And then just more broadly in terms of market presence and mix, are you sort of happy with your current European footprint? Or could you see potentially exiting some of the markets where you don't necessarily have scale there?

[Alexander Sannikov, Chief Operating Officer]

Yes, Sumayya, we're very happy with the markets that we're in. There are many of the markets that we'd like to add scale. We do look at all of our assets regularly. So every quarter, we go through asset plans and look at recycling assets that we think have lower growth profile, or growth outlook than other opportunities. So I would say it's a constant work in progress where we are looking to recycle small portions of the portfolio within all of the regions, and add more in areas where we see more growth. For example, we're doing certainly more development in the markets that I mentioned earlier, and we are continuing to look at recycling some assets that have a lower growth profile or maybe where we've created all the value that we plan to -- we will recycle out of some of those and invest more in the more opportunistic areas. So we're happy with the allocation we have right now, but we'll continue to look to reinvest and grow in our target markets.

[Sumayya Syed Hussain, Associate]

All right. Makes sense. And then just last question for me is just on the NOI margins, which have come up quite a bit, probably helped by occupancy. So just wondering if the full year level in the mid-70s is a good run rate to go with?

[Lenis W. Quan, Chief Financial Officer]

Sumayya, I think that's definitely a good run rate to continue using. I mean, obviously, as we increase the scale of our portfolios, as well as move up the quality in the portfolio. It's definitely showing through in our margins. And obviously, our European portfolio are -- have slightly higher margin than in North America, just with the cost base structure, the operating cost structure in Europe is a little bit lower than what it is in North America.

[Operator]

Our next question comes from Matt Kornack from National Bank.

[Matt Kornack, Analyst]

Just wanted to quickly ask a few questions on the guidance. Is the occupancy level assumed, I guess, on an average basis consistent with where it was at 98% in Q4. And then how should we think of the CPI that you have forecasted in this guidance? Does it sort of blend to about 3% in terms of rent escalators annually when you take into account both the Canadian and European portfolio.

[Alexander Sannikov, Chief Operating Officer]

So as far as occupancy, Matt, we expect that occupancy is going to be -- for the comparative portfolio will remain largely constant. There's going to be some movements, but nothing significant. -- just part of normal course of lease rollover transitory vacancies and new leases taking effect, et cetera, but largely stable overall. When it comes to contractual growth outlook. So for Canada, we've quantified that, as we said, about 8% of the leases in Europe have contractual steps. When it comes to the CPI indexed leases, the majority of leases in Netherlands have an annual indexation. So at the anniversary of the lease, the rent gets adjusted. There are leases in some other markets such as Germany that have threshold. So the index needs to reach a certain level before the rent gets adjusted. So let's say the threshold can be set at 5% to 10%. And as soon as the index -- the cumulative index reaches that level than the entire 5% or 10% or 80% or 90% of that depending on the lease gets reflected in the rent escalator. So that might -- that would be a bit lumpy as a result of the structure, which is similar to for example, when what Dream Global had with this Deutsche Post lease.

[Matt Kornack, Analyst]

Fair enough, yes. Remember those days. okay. So some lumpiness there. On the development side, I just wanted to thank you guys for the incremental disclosure. It's very helpful. But also in terms of the CapEx, it looks like most of this CapEx is still taking place in the IPP portfolio because it's expansions versus greenfield development. Is any of that CapEx related to sort of other expansionary but maybe not adding GLA type investments in the portfolio? Or is the bulk of it development at this point?

[Alexander Sannikov, Chief Operating Officer]

A significant component of that is development. It is sort of the expansions. There is some CapEx relating to refurbishments, for example, that Kitchener assets we talked about, we did not add GLA, but rather, we took a building that was not really ready to be occupied by a modern logistics tenant and refurbish the interior, did some exterior work and signed a lease. So it was more of a value-add refurbishment. So things like that would be part of that number as well.

[Matt Kornack, Analyst]

Okay. But if I'm looking at sort of ongoing portfolio CapEx, I should be excluding the $30 million that you've spent in the last 2 quarters because it seems like it's onetime in nature or related to development.

[Lenis W. Quan, Chief Financial Officer]

Yes. That's correct, Matt.

[Matt Kornack, Analyst]

And congrats on a good quarter and a very solid outlook.

[Operator]

Our next question comes from Mike from Desjardins.

[Michael Markidis, Real Estate Analyst]

Just a quick confirmation. I think the answer here is it doesn't. But the $400 million of product that you have in the pipeline, does that contemplate any additional investment through the U.S. fund would be part one. And second question is, when you're thinking about the U.S. fund, maybe you could to the best of your ability is just give us an update in terms of what the growth outlook is there and what the REIT's opportunity for additional investment would be in the next 12 months.

[Alexander Sannikov, Chief Operating Officer]

So Mike, the $400 million does not include the U.S. fund contributions -- we do have some capital that is committed to the vehicle hasn't been called. But the $400 million does not include that.

[Brian D. Pauls, CEO & Trustee]

Yes. And then ongoing, Mike, it's Brian here. We're waiting to see the fund's performance for Q4. We're expecting them to do well as logistics is doing well everywhere. And we anticipate the fund to do quite a lot of development and value-add in some new liquid markets, and we'll look to participate in that, as we see the results and as we see fit, we think it will be a good complement to everything we're doing. Certainly as we enhance our yields through property management and leasing that helps us quite a lot. So we anticipate growing with the fund to roughly the 25% level as they continue to expand.

[Lenis W. Quan, Chief Financial Officer]

Sorry, Mike, I just want to also clarify that we do have sufficient debt and balance sheet capacity for the $400 million of acquisitions, the development spending that we're planning for the year as well as the commitment for the U.S. fund.

[Alexander Sannikov, Chief Operating Officer]

And Mike, I was going to add that I reiterate the property management and leasing platform operating profit that is rising and will be more meaningful as the fund scales up, and we're already seeing that. And we guided roughly about $1.5 million of operating profit in 2022, and we expect that will scale up as the fund grows.

[Michael Markidis, Real Estate Analyst]

Okay. And the $1.5 million that you said, Alex, is that all flowing down to the bottom line? Or is there some outsourcing that leads into that.

[Alexander Sannikov, Chief Operating Officer]

That's net operating profit.

[Michael Markidis, Real Estate Analyst]

Net operating profit.

[Operator]

And at this time, I show no further questions in queue, and I will turn the call back to Mr. Brian Pauls for closing comments.

[Brian D. Pauls, CEO & Trustee]

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

[Operator]

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