CA - Dream Industrial Real Estate Investment Trust (DREUF) Q3 2023 Earnings Call Transcript
2023-11-08 19:13:02 ET
Dream Industrial Real Estate Investment Trust (DREUF)
Q3 2023 Results Conference Call
November 08, 2023 3:00 PM ET
Company Participants
Brian Pauls - CEO
Lenis Quan - CFO
Alex Sannikov - President, COO
Conference Call Participants
Fred Blondeau - Laurentian Bank Securities
Himanshu Gupta - Scotiabank
Brad Sturges - Raymond James
Michael Markidis - BMO Capital Markets
Pammi Bir - RBC Capital Markets
Sumayya Syed - CIBC
Matt Kornack - National Bank Financial
Sam Damiani - TD Cowen
Himanshu Gupta - Scotiabank
Kyle Stanley - Desjardins
Presentation
Operator
Welcome to the Dream Industrial REIT Third Quarter 2023 Results Conference Call for Wednesday, November 8th, 2023. Please be advised that all participants are currently in listen only mode and the conference is being recorded. [Operator Instructions].
During this call, management of Dream Industrial REIT may make statements containing forward-looking information within the meaning of applicable securities legislation. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Dream Industrial REIT's control that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. Additional information about these assumptions and risks and uncertainties is contained in Dream Industrial REIT's filings with securities regulators, including its latest annual information form and MD&A. These filings are also available on Dream Industrial REIT's website at www.dreamindustrialreit.ca.
Your host for today will be Dr. Brian Pauls, Chief Executive Officer of Dream Industrial REIT. Mr. Pauls, please go ahead.
Brian Pauls
Good afternoon, everyone. Thank you for joining us today for Dream Industrial REIT's third quarter 2023 conference call. Speaking with me today is Lenis Quan, our Chief Financial Officer; and Alex Sannikov, our President and Chief Operating Officer.
It's truly a pleasure to announce the promotion of Alex Sannikov as CEO of DIR effective the beginning of next year. Alex has done an incredible job since joining the DIR team in 2019 and has continued to add value and grow his responsibilities throughout the last four years. DIR is in strong financial shape and is in great management hands to navigate the future to keep the company safe and capitalize on opportunities that materialize. I am delighted to remain close to the team as I transition to focus in other areas.
Moving on to our Q3 results, DIR achieved 10.4% comparative properties NOI growth and FFO per unit growth for the quarter, making the fourth consecutive quarter of double-digit FFO growth. We remain focused on expanding the Dream Summit JV in our target markets with the acquisition of 6 assets in the GTA for a total purchase price of approximately $272 million. In addition, the venture is in exclusive negotiations or under contract to acquire 2 additional assets located in the GTA totaling 250,000 square feet for approximately $50 million. These acquisitions are all accretive to the REIT's overall return profile with an expected yield on equity of over 7.5%, while requiring limited equity and hence preserving our balance sheet flexibility.
Our private capital partnerships continue to generate a strong recurring fee stream that is expected to grow significantly over time with over $6.7 million of net margins generated this year from our property management and leasing platform. From an occupier market standpoint, there has been somewhat of a bifurcation in leasing momentum. In the small to mid-phase segments, leasing momentum remains healthy, and we are continuing to push rates. However, we are currently seeing a slowdown and larger bay product across our markets compared to 18 months ago.
We have already seen the future development pipeline slow down with limited spec starts this year and a number of projects is getting pushed out to future years. Development returns have been under pressure due to higher financing costs, and we expect this and continue to keep check on new supply. The outlook for rental rate growth remains healthy with market rents over 30% above in place rents. We can, therefore, continue to capture significant organic growth within our portfolio with less reliance on continued market rent growth.
I will now turn it over to Alex to provide additional color on our business.
Alex Sannikov
Thank you, Brian. Good afternoon, everyone. I want to take this opportunity to thank Brian for his leadership of DIR over the past 6 years. It has been a great honor working side by side with him and the with our management team in a true spirit of partnership over the last 4 years, as we have transformed our business to grow to be not only the largest industrial platform in Canada, but a sizable player in Europe as well.
We have established a significant development program and solidified our balance sheet all while delivering sector leading total returns to our unitholders. I'm very excited about the prospects for our platform going forward. I will start with our perspective on the current market environment.
In our key markets in Canada and Europe, we entered the period of rising interest rates with very limited supply pipeline, record low availability rates and significant structural demand drivers for industrial space. These dynamics combined with continued population growth in major Canadian urban centers underpin the continued health in pre-occupier markets. While availability rates have increased somewhat from the start of the year, the supply pipeline, which is already limited, is shrinking as projects get delivered and we expect limited new spec starts and a substantially lower development pipeline in the near-term.
The headline rent growth as published by major market participants has declined compared to prior years and most markets in Canada. While this is in line with our expectations, we note that most of these research reports are based on average asking rents in any given market. As such, the published statistics could be influenced by changes in asking rents and composition of available space.
What we see in our business is that rental growth that we projected for 2023 as a whole has already been achieved. We have completed nearly 4 million square feet of new leases and renewals in Canada across the DIR and Dream Summit portfolios. Our combined spreads averaged approximately 75%, meeting or exceeding our budget for the year, which were set with mid to high single digit growth assumptions. Over and above the leasing spreads, we have crystallized we locked in an average of 4% annual escalators.
The availability rate within our portfolio has increased slightly in the quarter. This increase was in line with our expectations and was factored into the NOI outlook we communicated previously. In a multi tenanted portfolio with staggered lease maturities such as ours, occupancy rates will always fluctuate slightly over time.
As Brian commented, we're seeing limited large pay requirements for units over 400,000 square feet in most markets, but small to mid-day activity remains healthy. Our properties are designed to be flexible and accommodate these changing demand patterns. We remain encouraged by the level of new leasing interest for both existing assets and new development projects. We're currently engaging with several prospective tenants for our 200,000 square foot Dickson property in Montreal. We're in discussions with 4 tenants for our 200,000 square foot Courtney Park development project in Mississauga.
We're continuously responding to requirements for our two developments in Calgary ranging from 30,000 square feet to 300,000 square feet. We have recently signed a 20,000 square foot conditional lease at our recently completed at the site development at rent 6% higher than the first lease signed this summer. In general, we see significant strength in the smaller base segment of the market, especially in the GTA and Southwestern Ontario. So far this year, across our platform, we completed 800,000 square feet of leasing in these markets for premises below 50,000 square feet. We achieved over 100,000% rental spreads and annual escalators averaging 2.5%. Notably, for smaller spaces below 20,000 square feet, annual escalators are 5% on average.
Overall, our organic NOI growth outlook for the year remains intact, and we reiterate our prior guidance of 10% to 11% CP NOI growth for 2023. Looking ahead, over the next 2 years, we have nearly 6 million square feet of GLA maturing in Canada with approximately 74% located in Ontario and Quebec, where average market rent is approximately double the in-place rent. In Europe, we have $2.4 million for these maturing over the next 2 years, and the current market rents for these European leases is over 10% higher than our in-place rents.
With that, we remain optimistic regarding our mid and long-term prospects for organic NOI and FFO per unit growth despite the pressure from interest rates.
I will now turn it over to Lenis to discuss our financial highlights.
Lenis Quan
Thank you, Alex. Our third quarter financial results were strong. Diluted FFO per unit was $0.25 for the quarter, more than 10% higher than the prior year quarter. The solid year-over-year growth was primarily due to strong comparative properties NOI growth and property management income from our equity investments.
Our NAV per unit at quarter end remained steady at $16.80. We continue to focus on maintaining a strong and flexible balance sheet with ethical liquidity. During the quarter, we closed on €229 million of European mortgages with 3 lenders at a weighted average rate of 4.93% for a term of 5 years.
We raised $107 million of capital through our ATM program at an average price of $14.27 per unit. These proceeds were immediately used to repay outstanding indebtedness accretively to FFO per unit and reduced our leverage by approximately 100 basis points. This also created additional balance sheet capacity to ultimately fund our development and co-investments in private capital partnerships, leading to NAV accretion in the medium-term. We have addressed all of our 2023 debt maturities.
Looking forward to 2024, we have approximately $300 million of debt maturing at an average rate of 3.5%. 95% of this maturing debt is euro denominated. We are presently evaluating various financing options with existing relationship lenders at favorable rates that allow us to optimize our cost of debt.
We ended the quarter with leverage of 35.1% and debt-to-EBITDA of 8.2x. With over $526 million of available liquidity at the end of the quarter plus some additional $250 million security on our facility, our balance sheet strength positions us well to continue executing on our strategic initiatives. Looking forward, we expect our 2023 FFO to be in line with our previously updated guidance, which is FFO per unit in the high $0.90 range. This translates into approximately $0.24 for the fourth quarter, assuming FX rates near current levels and leverage largely in line with Q3 and represents FFO per unit growth of approximately 10% year-over-year.
Just before I turn it back to Brian for wrap-up, I would like to say thanks to Brian for his leadership and guidance over the past six years. I look forward to the continued growth and success of our industrial platform under Alex's leadership.
Brian Pauls
Thank you, Lena. It is truly been an honor for me to lead EIR for the past six years. I am grateful for all the friendships I have made, and I look forward to DIR's continued success. We will now open it up for questions.
Question-And-Answer Session
Operator
[Operator Instructions]. Our first question comes from Fred Blondeau of Laurentian Bank Securities.
Fred Blondeau
First question for me, Alex, we discussed Germany in August and obviously the portfolio continues to perform well in Europe. But I was wondering with the increasing macro headwinds in Europe, I was wondering if you are starting to see either signs of stress within your portfolio and/or if you are starting also to see either distress or interesting acquisition opportunities?
Alex Sannikov
Thanks, Fred. What we see in Europe is generally supply demand dynamics are pretty favorable for landlords in most markets, so, that's Germany. Netherlands, France, we see very limited supply and continue to see strong demand across the board. So we are encouraged by the occupier fundamentals. One aspect to note about our European portfolio is, our European portfolio is not pure logistics product. Roughly half of our portfolio in Europe is what we would describe as urban and last mile logistics, and the supply demand dynamics in that segment of the market are even more robust with virtually no supply that is either on the horizon or has been added recently translating into rental growth and strong occupier fundamentals. There are some markets in Europe, particularly in and around Barcelona where we see a little bit more supply compared to other locations. So we're watching that. But Europe as a whole and our portfolio as a whole is well positioned. As far as acquisition opportunities, we are starting to see interesting opportunities, especially in that urban logistics and last mile logistics segment of the market, where we expect continued rental growth and continued thought of supply.
Fred Blondeau
And one last from me. Just in terms of the Dream Summit joint venture. I was wondering what are you budgeting in terms of expected external growth for 2024?
Alex Sannikov
We're not budgeting external growth generally across our businesses. We're not budgeting growth for DIR nor we're budgeting for Dream Summit. Having said that, Dream Summit continues to be active in the market, and we continue looking at opportunities as we have so far this year. So we don't expect to remain active. The volume is hard to predict.
Operator
Our next question comes from Himanshu Gupta of Scotiabank.
Himanshu Gupta
So my question is regarding the Montreal industrial market. So are you seeing any weakness in the leasing demand in this market in particular. And then if I look at the lease expiries next year, you have a sizable 1.2 million square feet coming due. So any thoughts on the lease expiries next year?
Alex Sannikov
So lease expiries, maybe I'll start with your second question, lease expiries especially in a market like Montreal, generally provide an opportunity and we are excited to get the space back and be able to capture that market upside. When it comes to general health of Montreal markets, we remain encouraged by what we see, especially for a portfolio like ours, which is very urban, generally targeting small to mid-day users and mid-May in our definition.
So 50,000 to 200,000 square foot range, and small bays, everything below 50,000, we remain well positioned, and we generally don't compete with some limited new supply that was added to the market, especially in the South Shore. I know that Montreal market is generally in the headlines given some of the recent statistics show, sequential negative rental growth. We commented earlier that those statistics need to be interpreted, understanding the how they are derived. What we are seeing in our portfolio is rental outlook is intact compared to what we expected.
Himanshu Gupta
And then just on the market rent growth, and we'll keep these statistics aside. What are your thoughts for the market rent growth in Montreal in the next year? Do you see that flattening out? Or do you see chances of maybe a negative end growth as well?
Alex Sannikov
We would generally expect a comparable rental growth in '24 compared to '23, so in the mid-single digit range. What we are seeing in Montreal, in particular, is that supply pipeline relative inventory is very low. And our understanding is that the vast majority of market participants are not looking to add new spec starts, and we expect that they inevitably that will translate into stronger rental growth over time. It's hard to predict exactly when, but that supply pipeline that is shrinking will inevitably support the market.
Himanshu Gupta
And maybe the last question, Alex, you mentioned about achieving 4% rent escalators in the near-term, that's what you have been printing. Has that coming down now? I mean, as we started to see some normalization of leasing demand and also like inflation moderates as well? So is that 4 like becoming like 3 or like 4 is pretty intact?
Alex Sannikov
So 4% was the average around 4 million square feet that we've completed this year so far for the industrial platform as a whole. So it's a pretty representative data set. It includes leasing in Ontario or GTA in Southwestern Ontario and Montreal and Western Canada, so it's the average for the entire leasing volume. We commented also that for the year, we completed about 800,000 square feet of smaller Bay Leasing, let's say, in the GTA, and Southwestern Ontario achieving roughly 4.5% escalators. So those are the numbers that we've seen so far in 2023.
When it comes to go forward, we do see some pressure on escalators, but so far for our portfolio, which is again, small to mid-day, on average, we've been achieving our targets.
Himanshu Gupta
And maybe just one last follow-up. I think you have a vacancy around the Port of Montreal, and I think you mentioned 4 tenants or prospective tenants. Any thoughts when should we expect to backfill that vacancy?
Alex Sannikov
We expect that it will be leased and the producing income in the first half of 2024, exact timing is challenging to predict. As we communicated prior, we are targeting to capture the value for significant land component that this particular sites offers. And therefore, the users who are looking at this site, somewhat specific audience that requires that outside storage component for either the fleets or trailer storage, etcetera. And that will inform both the market rent and the timing. And as we communicated previously, we remain confident that we'll achieve those rents.
And if we don't, then the site does offer significant development opportunities, which we can capitalize on.
Operator
Our next question comes from Brad Sturges of Raymond James.
Brad Sturges
Just to continue on the discussion around leasing. Given, I guess, 75% of your lease maturities over the next couple of years around -- Quebec, I guess, just curious to get a sense of what you would be forecasting in terms of retention rates for the space holding? Would it be similar to historical averages?
Alex Sannikov
Thanks, Brad. So if you look at our investor presentation, we disclosed our long, long-term track record of retention ratio. You will see that retention ratio generally averages around 70%, 75% for us over the past 10 years. We have seen somewhat of an increase, so far this year in retention, as occupiers generally decide to stay within the existing footprint. It remains to be seen whether that elevated retention ratio will persist or whether we will revert back to normal. For modeling purposes, you can assume the long-term average, if that's the direction of the question.
Brad Sturges
Okay. That makes sense. I appreciate the market commentary around market rent growth on Montreal. I am curious if you are expecting market rent growth in Toronto to be similar, in 2024 as 2023 as well?
Alex Sannikov
Yes. We are generally modeling single-digit rental growth in 2024, in most markets.
Brad Sturges
Most markets, okay. And my last question would be just on the...
Alex Sannikov
In the GTA.
Brad Sturges
In the GTA, okay. With the commentary around, you are starting to see some more opportunity within Europe for acquisitions. Can you comment on where evaluation metrics in Europe for the target markets you are looking at and the type of assets that meet your investment criteria? Where cap rates or price per square foot would be today?
Alex Sannikov
Thanks, Brad. What we continue to like in Europe is, the urban logistics last mile type assets, which would have significant exposure through in our portfolio. We continue to see strong rental growth in that segment. If you look historically, rental growth for urban assets, in Europe has outpaced the big box logistics, and we expect that that trend will continue. As far as metrics, we are generally starting to see opportunities that translate into double-digit, low double-digit or high single-digit total return on an unlevered basis. The going in metrics can vary, depending on the lease term and the rents, in place rents relative to market. But the mark-to-market rents, which is market rents over capital value would be comparable on average to what our portfolio is marked at. And provide attractive opportunities for the total return.
Operator
Our next question comes from Michael Markidis of BMO Capital Markets.
Michael Markidis
I guess just we talked a lot about the market rent growth, so I guess two-part question here for next year. How are you guys thinking about maybe occupancy, just given the environment, are you expecting maybe a little bit of a trickle down over the next 12 to 18 months and I guess I'd also be curious to hear, notwithstanding your comments on how strong the small and mid-day tenants or product type has been, if you've seen any increase or you're getting a little bit more incrementally worried I would say about potential tenant failures over the next 12 to 18 months?
Alex Sannikov
With respect to occupancy, we will be providing guidance, as you know, in February and that will include the outlook for the year for the following year in terms of NOI and occupancy. We generally see some lease up opportunities within the portfolio, including, so the development projects such as Abbottside, our Dixon property in Montreal, et cetera, so there's going to be upward possibility for occupancy, but then as we commented earlier, we do have some expiries.
So we expect certain natural non-renewals there. So there will be ups and downs in terms of occupancy outlook. But on average, our portfolio has always remained stable in the high-90% range over a very long period of time as we also disclose in our materials. And so we don't expect that there's we don't see anything that would change that long-term trajectory.
When it comes to tenant health, we generally continue to see health from tenants. We're not concerned about any particular group. We do see subleasing activity from 3PL users in particular, but that's reflected in the overall availability rate in the market. And generally speaking, we're still able to capitalize on those opportunities when tenants need to give back space. We're able to capture the upside that is not budgeted, if you will, because we didn't count on that space coming back to us.
And we're working through a few cases like this where tenant approach that's either in DIR portfolio or Dream Summit portfolio looking for less space, and we immediately found replacement tenants at significantly higher rents to take their space. So we do see some of that, but again, it usually results in an opportunity in the lapsed side.
Michael Markidis
Maybe just over to Lenis. You made your comment about 24 maturities and working with lenders and you were able to do achieve a good outcome on the last refinancing that you did. But maybe in the last couple of months, have you seen any sort of change in the lending environment at all? Or would you expect barring anymore with volatility in the long end of the curve is your expectation that you'll be able to achieve a similar outcome in 2024 as you just did in the last maturity?
Lenis Quan
There's a few questions in there, Mike. I think in terms of the lending market, I don't think we see seen, I just want to make sure I answer all your questions. I don't think we've seen a significant change from secured lenders. Unsecured debt market seems to be functioning open and healthy. So no concerns or we're not seeing any cause for concerns in any of those markets. In terms of what we think we can achieve for next year, obviously, we all read sort of what the outlook is for future interest rates. But I think I had mentioned that of the debt maturing next year, it's an average rate of 3.5%. The mortgages that we just closed are and 95% That debt maturing is euro. The euro mortgages that we did close were just below 5%. So we expected to do something similar in that range if we were to replace euro mortgages.
If we were to look at unsecured market, I think that's to € 2 would be in the low 5s. So again, any guidance that we will be providing in early next year will incorporate similar assumptions.
Michael Markidis
And then just timing wise, is that spread out, is it more of a bullet maturity and weighted to a specific part of the year?
Alex Sannikov
So we do have an unsecured debenture maturing in the middle of next year is less about two thirds of next year's maturities and the rest are fairly spread out there in mortgages.
Operator
Our next question comes from Pammi Bir of RBC Capital Markets.
Pammi Bir
Just coming back to your comments on the slower large day leasing velocity, are there any known sort of large vacancies that you're aware of that are coming back to you over the next call it 6 months or even years, if you know that far out?
Alex Sannikov
Within the portfolio, there's 100,000 square foot space in GTA that is going to be coming back to us, and we're working through leasing that unit. Other than that, there's nothing significant that is as a known vacancy.
Pammi Bir
Sorry, Alex, did you say that was in the Summit JV portfolio, or?
Alex Sannikov
No. Within the DIR on balance sheet portfolio.
Pammi Bir
Okay. All right. And sorry, is that coming in Q4 or 2024?
Alex Sannikov
In Q4.
Pammi Bir
Okay. And then just coming back to the commentary around the maturities for the lease expirations for next you're being weighted to Ontario and Quebec. And there is a big mark-to-market opportunity there. And then just maybe layering your comments together on around the leasing velocity, etcetera. Is there perhaps anything that might impede from your standpoint, the ability to put up high single digit organic growth on an NOI basis, as you think about the next, call it, 12 months or would that be unrealistic based on what you're seeing today?
Alex Sannikov
Pammi, thank you for the question. As we said, we've generally providing guidance, more specific guidance in February. And we trying to summarize the ingredients for organic growth for us, for the next 12 months and 24 months. So I think the conclusion that you are getting to is probably informed by some of our disclosure. And we will provide more color for the next 12 months in February.
Pammi Bir
Okay. All right.
Alex Sannikov
I hope this is helpful answer.
Pammi Bir
Yes. I guess, we will wait for the full update a few months. And just with respect to the ATM, just given where the unit price is and where leverage is, what are your thoughts on further use at this point?
Alex Sannikov
Pammi, your line got cut out for about 30 seconds. So we missed a part of the commentary. But we did get the question about ATM. Should we switch to that? Or do you want to make your commentary?
Pammi Bir
Yes. Sure. Can you hear me now?
Alex Sannikov
Yes, we can hear you.
Pammi Bir
It was just really a question around the ATM use just given where the leverage is and where the unit price is, just curious how you are thinking about the ATM use going forward?
Alex Sannikov
Yes. So as Lenis has commented in her remarks, when we used ATM in late August, we had great use of proceeds that was accretive to FFO per unit, immediately improved leverage and was accretive to NAV in the near to mid-term. And we haven't, as you have seen from our disclosure, we haven't used ATM since then. And as we commented previously, we will remain very disciplined in terms of using the ATM vis-a-vis these are proceeds and obviously the price. So, there is no immediate usage of the ATM plan given the current unit price.
Pammi Bir
Got it. Last one for me. Just on the -- development, what's your sense of timing of getting the balance of that site leased up?
Alex Sannikov
So we have one conditional lease signed already, which is finalizing the actual lease. And then we expect that before we report next time, we will have the balance leased, in terms of having the document signed.
Operator
Our next question comes from Sumayya Syed of CIBC.
Sumayya Syed
Thanks. Good afternoon. Just wanted to touch on the leasing activity in the quarter, in terms of, what are the average lease terms you are doing and if there has been any change in trend from prior leasing?
Alex Sannikov
Thanks, Sumayya. It is generally inline. We signing anywhere between five to 10 year leases with escalators. We haven't seen any sort of significant changes vis-a-vis term of the leases. It's generally inf We said, we have generally providing ormed by the tenant's requirements, the investments that they would like to pursue in the premises, and those are the main factors for our occupiers.
Sumayya Syed
And then just also on your occupancy dipped a bit, I guess you're being more strategic in going after the rent lift. To what extent would you be okay with it shipping a bit more or going lower than 97 or is that sort of the floor in terms of your occupancy targets?
Alex Sannikov
We don't necessarily set floors or ceilings vis-a-vis occupancy. We generally approach it from the perspective of what's the highest and best use for the space, what sort of return we are getting or foregoing by pursuing occupancy versus rate for any given asset and any given space for certain spaces that are perhaps more customized and may have at a higher degree of tenant specific fit out. We would maybe be less open to getting that space back compared to some other units. So that's how we generally approach it. So as we commented earlier, on average over the long-term, our occupancy is being in line with our historic averages and it will fluctuate over time with any given maturities or any given situation.
Sumayya Syed
And then lastly, I wanted to touch on the acquisition activity you have at the JV in the quarter and just any more info on what pricing looks like and cap rates on the recent transactions?
Alex Sannikov
We generally haven't been kind of disclosing the acquisition metrics other than what's in the press release in terms of the return parameters, prices per square foot. So we'll refer you to that. Generally speaking, when we talk look at mark-to-market cap rates that we are achieving on these acquisitions. They're kind of in the call it high sixes on average for the properties that we've tied up so far.
Operator
Our next question comes from Matt Kornack of National Bank Financial.
Matt Kornack
With regards to the vacancies in the quarter, namely the one in Spain for 216,000 square feet and then the 300,000 square foot expiry in Edmonton with the Dream Summit JV. Do you have prospects on those? You disclosed that they were below market rents, but any interest there? And also it looked like there was Sort of another 100 bps slippage in occupancy in Montreal, did that relate to multiple tenants or is it a single tenant?
Alex Sannikov
So the assets in Spain is growing through a minor refurbishment. So we were expecting to get this building back for some time the tent that was occupying it was extending for shorter periods as we were getting ready for our refurbishment program. So we're going through that currently. And as that program gets finished, we expect to see more activity on that particular unit. The property in Edmonton is currently getting being marketed. It's being marketed as one project one contiguous unit or a subdivide option. And we expect to see some activity there over the next quarter. The vacancy in Montreal is really multiple tenants and nothing significant in particular to 0.2.
Matt Kornack
And then I guess, it looks like from your disclosure standpoint, you held market rents flat for this quarter across the board. You had, had growth year-to-date already. But the one that I guess is maybe a little bit surprising just given what's going on in the market is Western Canada. And you did move rent up a bit in Europe, but should we expect those two geographies to be the place that you'd potentially get more market rent growth of late or sorry, I should say in the near future?
Alex Sannikov
We are generally encouraged by the fundamentals in Western Canada, and we expect to see continued rental growth there and same for Europe. And Europe, as you know, we're starting on a much lower basis. So as we get more data points in Europe, we'll continuously adjust our market rent estimates.
Matt Kornack
And then maybe quickly, Lenis, with regards to the guidance for the year and just the sequential FFO per unit decline. Is that a function of kind of the timing of some of these vacancies impacting NOI? Or is it something else? I assume there's an aspect of just G&A seasonality as well.
Lenis Quan
No, I think and I believe in the prepared remarks, Alex shared some color there. I think some of these were expected and included in our forecast. So that's really the biggest driver of that.
Operator
Our next question comes from Sam Damiani of TD Cowen.
Sam Damiani
First question just on the pre-leasing of the development pipeline. You talked about Caledon being put to bed early next year. Is that the kind of time line you're thinking for the other half dozen or so developments that are active currently sort of being fully leased up 6, 9 months post completion?
Alex Sannikov
Thanks, Sam. Yes, we generally see that there's a bit of a normalization in the market terms of how new development gets absorbed. What we've seen coming out of the pandemic is not sort of normal occupied behavior where new development gets absorbed prior to completion, not normal vis a vis historic context. And what we are seeing now is that buildings get delivered and that's when they generally get leased. So that 6 months on average is a reasonable estimate.
Sam Damiani
Okay. And the last one for me is just on the balance sheet. With the leverage coming down, absent any major transaction that, like, we have seen on occasion over the last few years. But absent those, should we expect leverage to continue to moderate lower into 2024, Lenis?
Lenis Quan
So, one of our capital allocation priorities is to complete the development pipeline that's underway. So that could, in the near-term result in leverage picking up a little bit. But obviously we are generating free cash flow. And capital recycling is always something that is on our radar as well. So it could move up and down. But I think, just in this environment, I think we have spoken before that, having leverage in the longer-term on the lower end of our targeted range is probably prudent, just given the higher rate environment.
Operator
Our next question comes from Himanshu Gupta of Scotiabank.
Himanshu Gupta
I just have a follow-up question. So any thoughts on how CPI indexation in Europe would look like next year? And obviously, this is one of the key drivers for NOI growth in Europe. So any thoughts there?
Alex Sannikov
Thank you, Himanshu. As we commented before CPI adjustments in Europe are generally backwards looking. So what we see in a given period is a reflection of CPI over prior 12 months or in case of, let's say, German leases, it can be accumulative effect of few prior years. And so we expect to see that in 2024. So there is a delay effect as inflation comes down. There is going to be a delay effect in terms of what comes through our net rents.
Himanshu Gupta
Okay. So, Alex sitting in November right now, for leases coming due in January, you would already have a sense of how that, look back 12 months would look like. So any sense that, is there a material deviation for '24 versus '23 so far?
Alex Sannikov
So we think that '24 will be lower than '23 as rate of CPI change has been coming down in most European markets.
Himanshu Gupta
But we don't have a sense of how much lower it could be for now.
Brian Pauls
We obviously do have our modeling. It is generally reflecting the slowdown in pace of inflation in Germany, Netherlands and France. So I think our outlook is generally informed by the same research that everyone in the market would be looking at. And we will obviously incorporate the CPI outlook in our guidance for next year.
Operator
[Operator Instructions]. Our next question comes from Kyle Stanley of Desjardins.
Kyle Stanley
Just one quick one for me. You mentioned in your disclosures that you are actively exploring several disposition opportunities. Just wondering if you can elaborate on that a little bit. Is there specific markets or asset types that you might looking to recycle out of? And then further, is there any expectation on timing or quantum of deal flow?
Brian Pauls
We generally see 2 types of dispositions. There are opportunistic dispositions where we are getting significant volume of inbound interest on select properties, primarily from private buyers or users, and those properties are not necessarily targeted for disposition, but at the right price, we would consider it and we would generally model those properties in terms of go forward return at the proposed price and look at our reinvestment alternatives, and we want to make sure that we're selling assets at accretive returns.
And then there's a second category, which are non-strategic assets where we are gradually engaging with market dispense in terms of disposition of those properties. The filter is the same. These assets are performing or are in performing markets. And therefore, we're not looking to park with them at any price. We're looking to park with them at the right price. Whereby, we can reinvest the proceeds accretively from an FFO perspective, from a return perspective, et cetera.
Quantum wise, it's generally challenging to predict. We've commented on it previously and timing of these dispositions, especially given that we are frequently working with private buyers and in many cases, off market discussions, it's hard to predict because some of these discussions may or may not result in the transaction. So we're engaging, as we commented in our disclosure, we are engaging in a number of discussions. Some of these discussions may or may not materialize.
Operator
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Pauls for any closing remarks.
Brian Pauls
Thanks so much. I'd like to thank everybody for your time today and look forward to speaking you again soon. Take care.
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Dream Industrial Real Estate Investment Trust (DREUF) Q3 2023 Earnings Call Transcript