Dream Industrial Real Estate Investment Trust (DREUF) Q1 2023 Earnings Call Transcript

Start Time: 13:00 January 1, 0000 1:49 PM ET

Dream Industrial Real Estate Investment Trust (OTC:DREUF)

Q1 2023 Earnings Conference Call

May 03, 2023, 13:00 PM ET

Company Participants

Brian Pauls - CEO

Alex Sannikov - President and COO

Lenis Quan - CFO

Conference Call Participants

Sam Damiani - TD Securities

Mark Rothschild - Canaccord

Himanshu Gupta - Scotiabank

Brad Sturges - Raymond James

Kyle Stanley - Desjardins

Gaurav Mathur - iA Capital Markets

Matt Kornack - National Bank Financial

Pammi Bir - RBC Capital Markets

Michael Markidis - BMO Capital Markets

Operator

Good afternoon, ladies and gentlemen. Welcome to the Dream Industrial REIT's First Quarter Conference Call for Wednesday, May 3, 2023. 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 Web site at www.dreamindustrialreit.ca.

Later in the presentation, we will have a question-and-answer session. [Operator Instructions]. Your host for today will be Mr. Brian Pauls, CEO 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 first quarter 2023 conference call. Speaking with me today is Lenis Quan, our Chief Financial Officer; and Alex Sannikov, our President and Chief Operating Officer.

DIR had an active start to the year. We completed significant strategic initiatives during the quarter that enhanced our growth trajectory going forward. In February, we acquired a 10% interest in the $6 billion acquisition of Summit in partnership with GIC who acquired the remaining share.

At the same time we established a programmatic JV with GIC to pursue additional investment opportunities in the Canadian industrial market. This transaction was a significant milestone for DIR and positioned us as one of the largest industrial platforms in the country with over 43 million square feet, co-owned or managed in Canada and over 70 million square feet across North America and Europe.

We now provide property management and leasing services for 33 million square feet of industrial assets across Canada and the U.S. held in private capital partnerships with institutional clients. These partnerships provide significant opportunities to grow creatively, while requiring limited equity capital from DIR.

Turning to the results for the quarter. We had a great start to the year and our operating and financial results have never been better. We reported 13% comparative properties NOI growth during the quarter. FFO per unit was $0.25 in Q1, up 13% year-over-year, largely driven by CP NOI growth.

We completed at least 820,000 square foot expansion in Montreal, which resulted in an unlevered yield on cost of 8.4%. In the last 12 months, we've completed 700,000 square feet of developments and achieved an unlevered yield on cost of 7.8%. Looking forward, all our growth drivers remain intact.

Demand for industrial space has stayed strong through the volatile economic environment. With availability in the low single digit range across all our markets, we continue to see strong organic growth for DIR's portfolio. The overall macroeconomic sentiment in Europe has improved considerably over the last few months. Occupier fundamentals continue to be strong with rising rents and low supply. Our European spread expired this quarter averaged 13%.

Overall, our outlook for 2023 and beyond remains positive. Our near-term focus is on execution across various initiatives, which include delivering on our organic growth targets, advancing our development pipeline and achieving accretive yields, integrating the Dream Summit operations and delivering on our increasing targets as well as maintaining a strong and flexible balance sheet.

I'll now turn it over to Alex to provide additional color on our business.

Alex Sannikov

Thank you, Brian. Good afternoon, everyone. Industrial fundamentals in our core markets remain strong with rents increasing quarter-over-quarter and vacancy in the low single digit range. In Canada, we are seeing limited new supply delivered to the market with lower proportion of preleasing compared to a year ago. While this increases availability temporarily, we continue to see tenant demand remains strong and rents continue growing.

Within our portfolio, our strong leasing momentum from last year has carried forward to 2023. During Q1, we transacted 945,000 square feet of leases across our portfolio, achieving a rental spread of over 40%. We signed approximately 440,000 square feet of leases in Ontario and Quebec with rental spreads in the 75% to 80% range.

In Europe, we signed 250,000 square feet of leases at a 13% spread over prior rents. Within the Dream Summit JV, we completed over 0.5 million square feet of leases during the quarter. On these leases, we achieved an average spread of 150% over prior rents. These spreads are in line with our underwriting and validate our thesis on significant mark-to-market opportunity embedded in the Dream Summit portfolio.

For the quarter, we reported 13% comparative properties NOI growth. In Canada we achieved CP NOI growth of 14.3%, led by Ontario at over 22% and high single digit growth in Quebec and Western Canada. In Europe, our leasing momentum remains robust and is also supported by CPI indexation across the portfolio.

For the quarter, we reported a 12% increase in European CP NOI. We expect 2023 CP NOI growth in Europe to remain strong in the mid to high single digit range, assuming mid single digit inflation in 2023. Overall, we expect our 2023 comparative properties NOI growth to be at the high end of our initial guidance range of 8% to 10%.

Turning to our development program. We're close to completing our 154,000 square foot ground-up development in Caledon. We are seeing strong interest from occupiers. We are in very advanced negotiations with a prospective tenant for a portion of the building at terms that are in line with our underwriting.

In addition to Abbotside, we have four projects totaling 690,000 square feet at our share currently underway. Construction is progressing well and we continue to receive interest from occupiers. In addition to these projects, we are about to commence construction on two new projects totaling approximately 1 million square feet.

[Technical Difficulty]

We're also finalizing plans to commence construction at our 50 acre site in Balzac sub-market in Calgary, which was acquired last year. We have been able to increase our density forecast to 650,000 square feet from 475,000 square feet in our underwriting. We expect construction costs of around $90 million with a targeted unlevered yield on cost in the mid 6% range, including the land cost.

We're starting to leverage our sizable industrial platform in Canada and globally as we proactively engage with our occupiers across multiple properties to drive synergies for our customers' business and our entire industrial platform. Our property management and leasing platform allows us to generate strong and growing net margins. For the quarter, we reported $1.6 million of net margin from this business, which included six weeks contribution from the Dream Summit JV.

I will now turn it over to Lenis to talk about our financial highlights.

Lenis Quan

Thank you, Alex. Our financial results for the first quarter were strong and reflect the success of our recent strategic initiatives. Diluted FFO per unit was $0.25 for the quarter, 13% higher than the prior year quarter and includes $0.04 of lease termination income related to an end-to-end anticipated vacancy in Europe. Our net asset value per unit at quarter end was $17.03, increasing slightly from the $16.97 at year end 2022. This was largely due to the completion of an expansion in Montreal.

The solid year-over-year growth was primarily due to strong comparative properties NOI growth and property management income from the U.S. Industrial Fund and the Dream Summit Industrial joint venture. The Summit transaction was accretive to our first quarter FFO and we are on track to achieve our target FFO accretion in the $0.01 to $0.02 range for 2023. We expect the accretion to increase over time as we mark rents to market on rollover and achieve stabilization on development and expansion projects.

We continue to focus on maintaining the strength and flexibility of our balance sheet. During the quarter, we closed the $200 million unsecured term loan in connection with the closing of the Dream Summit JV at a fixed rate of 4.85%. In March, we issued $200 million of unsecured debentures at a rate of 5.38%, which was used to partially repay our credit facility, allowing us to reduce the proportion of variable debt increase term and lower our average interest rate.

We ended the quarter with leverage of 36% within our targeted mid 30% range and debt to EBITDA of 9.3x and with over $430 million of total liquidity plus an additional $250 million accordion. We expect to maintain our leverage around this level as we deploy capital into our development and solar projects and look for opportunities to grow our Dream Summit and the GTA development ventures.

Looking forward to the remainder of the year and consistent with our business plan, we expect that investment opportunities can be fully funded with our current balance sheet capacity. Our near-term debt maturities are limited with approximately $265 million Canadian equivalent of European mortgages maturing this year. We are in advanced discussions with our European lenders and expect to refinance these mortgages with all-in rates in the mid to high 4% range.

We remain optimistic with respect to the performance of our business in 2023, and for the long run. As Alex mentioned, we expect our comparative properties NOI growth for 2023 to be at the upper end of our previous guidance. Combined with the leverage level and accretion from Dream Summit venture, we reiterate our previous guidance of FFO per unit for 2023 to be in the mid $0.90 range. Our FFO guidance continues to be impacted on current FX levels and interest rate expectations.

I will turn it back to Brian to wrap up.

Brian Pauls

Thank you, Lenis. [Technical Difficulty] I would also like to take this opportunity to congratulate Alex on his appointment as President and COO recognizing that Alex has been fulfilling his role already. We're providing him with the appropriate title. Alex and I will continue working closely together on all aspects of Dream Industrial's business. With Alex taking on additional responsibilities within DIR, I will also be able to focus on additional time on Dream's growing U.S. platform.

We will now open it up for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin our question-and-answer session. [Operator Instructions]. We have our first question from Sam Damiani with TD Securities. Please stand by while I open your line. And your line is now open.

Sam Damiani

Thanks and good afternoon, everyone. And congratulations, Alex, on your expanded title. Well done. Maybe just first question just on Europe, very strong same property in the quarter. I gather some of that was from the CPI linked nature of your leases, with the average rent moving up nicely on the quarter. What's your view on that market's ability to see market rents sort of move in step with inflation, or over this inflationary environment just simply bring rents closer to market as we go through this period?

Brian Pauls

Thank you, Sam. We continue to see rental growth in Europe. What we've seen in 2022 in many markets in Europe, including Germany, certain sub-markets in the Netherlands, certain sub-markets in France such as Paris, we've seen real rental growth, so rental growth and excessive inflation. And we continue to see upward pressure on rents in Europe as supply remains limited. And there's increasing pressures on supply resulting from capital markets. There's strong occupier demand across the board. So we expect that there's going to be continued upward pressure on rents.

Sam Damiani

Okay, great. That's helpful. Next question is just on the spreads that were achieved in Canada, particularly Ontario and Quebec. After really spiking over the course of 2022, it looked like the spreads moderated a bit this quarter. Was there any particular reason in Ontario, Quebec for those spreads to moderate?

Brian Pauls

Thanks, Sam. No particular reason. As you can imagine, the spreads are idiosyncratic to a large degree. It's a function of the space that is rolling and the leases that are in place. So we haven't seen any downward pressure on rent. If anything, we're seeing continued upwards pressure. We are routinely doing deals in $20 range, with 5% steps, especially for mid bay units in that 20,000 to 50,000 square foot range. We've recently signed a few deals with well into the 20s NER. So we continue to see strong rental development.

Sam Damiani

That's great. Last question for me just a quick one. What sort of acquisitions is the Dream Summit JV looking at currently or any preferences by region or building age or class?

Brian Pauls

We're looking at a few opportunities primarily in the GTA at the moment, and they would be comparable to what Dream Summit's typical assets are on average, good quality locations, strong sub-markets, relatively short leases with strong market potential. We're also looking at a few covered land opportunities to -- these would be sites that could be leased volatile storage, capitalizing on the scarcity of this product and in the market.

Sam Damiani

That's great. Thank you. I'll turn it back.

Operator

And thank you. We have our next question from Mark Rothschild with Canaccord. Please stand by while I open your line. Your line is now open.

Mark Rothschild

Thanks. Good afternoon. And congrats, Alex. Maybe just following up on this last point talking about acquisitions, with the balance sheet the way it is right now and cost of capital haven't gone up, how do you view your acquisition capacity and how much you'd be willing to do with the current balance sheet? And should we interpret from your remarks that you view Canada as a more interesting opportunity than other markets? Or maybe I shouldn't read into that at all?

Brian Pauls

Thank you, Mark. So our Dream Summit JV allows us to continue to be active in the market and find good opportunities, while requiring very limited capital from DIR. As you may have seen in our AIF, we have provided additional disclosure on structure of the venture. We continue to look for opportunities in Canada. We're monitoring the markets in Europe. We think that the risk adjusted returns at the very moment are a bit stronger in Canada, although we're starting to see interesting opportunities in Europe emerge as well. And the additional benefit of pursuing acquisitions within the Dream Summit venture is the property management and leasing fee revenue that enhances DIR's return on capital.

Mark Rothschild

Okay, great. Thanks. That's it for me.

Operator

And thank you so much. We have our next question. Our next question is coming from Himanshu Gupta with Scotiabank. Please stand by while I open your line for you. Your line is open.

Himanshu Gupta

Thank you and good afternoon. So in your CP NOI growth guidance, now you're obviously expecting on the higher end? Are you assuming any occupancy slippage in any of your portfolio?

Brian Pauls

Thank you, Himanshu. We do not generally expect significant occupancy slippage, as you would have seen from the disclosure this quarter, occupancy did decline in Montreal compared to December that was driven by one property that was slated for redevelopment. However, as we look at the market today, we think that there's also merits to explore lease up as is. So we think that that property could contribute to CP NOI growth later in the year, if we do indeed pursue that alternative. But generally, we expect the occupancy to remain at these levels on average.

Himanshu Gupta

Got it. And then, Alex, based on the brokerage reports, like CBRE and others, you're seeing some slowdown in leasing volumes in Q1. Are you seeing any softness in leasing volumes in your markets as well?

Alex Sannikov

We're not seeing softness in volumes also. I think we need to take into account that the leasing volume is a function of availability, to some extent, and availability is very low. Available space is very low. We're seeing very strong renewal activity. And generally tenants want to stay where they are. And we obviously want to work with them to keep them in locations they're occupying with us, facilitate their business needs. We're engaging the tenants on expansion possibilities within the portfolio. And when it comes to new leasing volume, what we see, especially when it comes to developments, is that occupiers now don't tend to prelease these developments, they tend to wait until these projects are substantially complete, to then engage in leasing discussions. So we're seeing that in our Abbotside project, for example.

Himanshu Gupta

Got it. Thanks for the color. And then just sticking to the development comment, you have this Mississauga redevelopment I think at the Courtney Park. What kind of cost of construction are you projecting there on $1 per foot basis?

Brian Pauls

Thank you. I will refer you to the development table in the MD&A.

Himanshu Gupta

So the reason I brought it up is I calculate around $300 per foot. My question was does that include the cost of land as well? It looks like it's more of a demolition project, right, and redevelopment?

Brian Pauls

Yes, thank you for that question. As a general principle, in our disclosure, intensifications tend not to include the cost of land because the land is already included in IFRS value of the income producing asset. For redevelopment projects and new development projects, the total cost that is estimated in this table includes the cost of land or the value of the building in case of redevelopment. And this would be also the case for Courtney Park.

Himanshu Gupta

Okay. I just wanted to confirm that if just to cost us like $300 for which I thought probably is pretty on the higher side. Okay, so thanks for that. A couple of -- probably one or two questions more. In your FFO guidance, Lenis, what is the Euro-CAD you're assuming?

Lenis Quan

The current rates are right around 145. So it's very close to our current rates right now.

Himanshu Gupta

145, okay, fantastic. And I think the last question was just on CP NOI in Europe, it was very strong in Q1 at 12%. Was it better than your expectations in Q1? And what's the outlook for the full year?

Brian Pauls

It's generally in line with our expectations for the first quarter, and then we provided some color in our prepared remarks as well on the expectation for the balance of the year. We expect it to be in the mid to high single digit range.

Himanshu Gupta

Awesome. Thank you, guys.

Brian Pauls

Assuming inflation stays at the mid single digit range for 2023.

Himanshu Gupta

Fair enough. And thanks, Alex, again. And I'll turn it back.

Alex Sannikov

Thank you.

Operator

Thank you. We have our next question. Our next question is coming from Brad Sturges - Raymond James. Please stand by while I open your line for you. Your line is open.

Brad Sturges

Hi, there. Just to maybe touch on potential for asset sales, I think you alluded to it last quarter in terms of reviewing the portfolio for potential opportunities. Where would that stand? And do you have a quantum of potential asset sales in the pipeline for this year?

Brian Pauls

Thank you, Brad. Well, as you would have seen, this quarter there was one smaller sale in Europe as we continue opportunistically dispose of non-strategic buildings. In Canada, there is interest in a few of our properties, including from occupiers. So we don't have specific guidance, as we always communicated. There's no target to sell certain amount of buildings. We have a pool of non-strategic buildings that we would dispose off at the right time for the right price. And we continue working at it. In terms of volume for modeling purposes, as we indicated in February, $50 million could be a reasonable modeling assumption to use. It may be lower, it may be higher, depending on the timing and some of the other factors I mentioned.

Brad Sturges

Depending on your growth capital needs, whether it's the development program or contribution in your JV investment funds, would that accelerate or decelerate your appetite for sales? Or is it just really based on the opportunity presented at each asset that you're reviewing right now?

Brian Pauls

It certainly is a factor. And when we will look at disposing assets, we would be looking at the go-forward return we expect from these properties adjusted for risk. And then where can we use this capital in the business, and certainly ones who make it accretive to the business overall.

Brad Sturges

And then I guess you're reviewing opportunities for [indiscernible] all regions, but would there be a way towards any particular region?

Brian Pauls

Nothing specific, no. These are idiosyncratic to assets within -- each of our regions we have some non-strategic assets.

Brad Sturges

Okay. Last question just on the lease termination fee income, just looking for a little bit more color, maybe I missed it, but just looking for a little bit more color in terms of what drove that vacancy and your expectations for transitional vacancy at the facility?

Brian Pauls

So this was an expected vacancy in France. We expect positive leasing spread when we re-tenant this asset. This is sort of pre-specific clause that for this lease that resulted in the termination penalty. We have quite a bit of notice. So we're not going to get the space back until the very end of 2023. So in terms of the average occupancy impact for 2023, it's going to be minimal.

Brad Sturges

Okay, that's helpful. I'll turn it back. Thanks.

Operator

And thank you. We have our next question from Kyle Stanley with Desjardins. Please stand by. I will open up your line. And your line is open.

Kyle Stanley

Thanks. Good afternoon, everyone. And congrats, Alex, on the expanded role. I'm just wondering, so is it safe to assume based on your commentary that the majority of the REIT's external growth, at least in the near term, is likely to come within the Summit JV?

Brian Pauls

Thank you, Kyle. We think that this is one of the best opportunities for us to allocate capital when it comes to acquisitions is through that venture at the moment. And we commented earlier, not only is that allowing us to scale an otherwise strategic relationship, but also the economics to the REIT from investing through the JV are significantly enhanced by the property management and leasing fee revenue. And the margin on that incremental revenue as well is higher because obviously the platform is already in place and doesn't require significant incremental staffing. So we think that that's pretty compelling overall, and we're excited to continue scaling that partnership.

Kyle Stanley

Great. Just on the leasing side, I guess it comes down to affordability a little bit. Are you seeing any differences in your leasing negotiations with maybe some of the smaller tenants in your portfolio versus maybe some of the larger tenants?

Brian Pauls

That is a great question. We do see, as we commented earlier, for smaller units, we are achieving pretty strong rents in terms of starting rents, but we're also achieving stronger growth on average. So we would be pushing 5% per year with $20 starting rents in many of our 20,000 square foot pockets with larger occupiers. We're certainly seeing more of a negotiation. However, our larger occupiers' customers come very well prepared to negotiations, and they're educated about the market and the options.

Kyle Stanley

Okay, fair enough. And then just looking at your management's expectation of market rent, it ticked up about 2.5% quarter-over-quarter. That is a bit lower than what we saw last quarter. Is that reflecting anything on a seasonal basis? Or are we just starting to see just overall market rent growth maybe slow a little bit.

Brian Pauls

I think the rate of growth not only in our portfolio, but also if you look at various market reports and statistics, the rate of growth in the first quarter of 2023 is lower than in 2022 as widely expected. Whether that should be extrapolated into the future or not, that's early to say, we think that the underlying ingredients for rental growth remain there across all of our markets. In some markets, such as Calgary, rental growth is accelerating. But in some other markets, it is decelerating, partly because of the strong rate of growth experienced in 2022 and 2021 in markets such as GTA and Montreal.

Kyle Stanley

Okay, understood. And just the last one and you may not have this at the tip of your fingers, so no problem. But just wondering, do you know what percentage of your European portfolio would have had the rental rate reset based on CPI so far this year?

Alex Sannikov

I don't have this in the exact statistic. But our leases are organized such as the majority of leases are in Q1, but not the vast majority. So it's a bit skewed towards the first quarter in terms of the CPI adjustment timing. But there's going to be a fair bit in Q2 to Q4.

Kyle Stanley

Perfect. Thanks very much. I will turn it back.

Operator

And we have our next question from Gaurav Mathur with iA Capital Markets. Please stand by while I open up your line. Your line is open.

Gaurav Mathur

Thank you and good afternoon, everyone. Just from an acquisitions viewpoint, are you seeing any distressed asset opportunities in Canada or Europe that you could potentially execute on?

Brian Pauls

Thank you for that question. No, we're not seeing distress. We actually are seeing generally that landlords are well capitalized. And we're also seeing that there's underlying investor interest. What we see is that smaller tickets generally attract more demand. And there's not a lot of large tickets out there, whether in Canada or in Europe. But the demand for those $22 million, $16 million to $17 million tickets is still very strong. And these processes attract multiple bips still.

Gaurav Mathur

Okay, great. And then just lastly, given the dislocation in public and private market asset values, do you perhaps see valuations converging in the near term? Or is that still going to be played out over a longer time period?

Brian Pauls

That is a challenging sort of question to comment on. We are focusing on the underlying fundamentals in our business, whether it's organic growth, the returns that we are achieving on our development program, as well as the returns that we can achieve in the private markets through our private capital partnerships. And we think that these returns are accretive to our overall cost of capital, whether in the short run or the long run, and we continue focusing on that. As to whether the valuation gap between public and private markets will close, it's hard to comment on that.

Gaurav Mathur

Great. Thank you for the color. I'll turn it back to the operator.

Operator

Thank you so much. We have our next question from Matt Kornack with NBF. Please stand by while I open your line. Your line is now open.

Matt Kornack

Hi, all. Just quickly with regards to the Montreal asset, can you kind of describe what the thought process is around kind of in as is replacement of the tenant versus it sounded like there's a low site coverage there and you can potentially expand, but why would you go with one over the other at this point?

Brian Pauls

Thank you, Matt. The analysis that we perform is sort of a classic opportunity cost analysis. We would look at what the existing property could command in terms of rent. And that rent for the existing property, especially today, is significantly impacted upwards by the outside trailer storage components. And then we would compare it with the rent that we can achieve on the extended property. It would likely be a lower rent per square foot, because obviously it's going to be a larger building, but less of that outside storage. And then what's the capital that will be required to achieve one versus the other. And then we just try to look at estimate, the return on that capital. And if the rents for the existing property as is, is lower, then obviously that incremental return is very compelling. As the rent for the existing property goes up, then it will lease up as is, at least for the next little while. It could be more compelling. And then redevelopment is always an option that is available to us. Obviously, we take into account factors such as downtime and the risk to develop. And we've seen this before in early 2020. We had a site in Cambridge that could accommodate -- and we still own it obviously, that could accommodate 120,000 square feet of density, there's about 40,000 square feet of density on site right now. We got the building back and we were planning to redevelop it. But then we had a tenant who needed the space and they needed the yard, and they were willing to pay record rents for Cambridge at the time. And with the rents that we achieved for the building, we just couldn't justify the construction. But then we're getting the building back where the lease is going to roll in the next couple of years. And then we'll have another ability to reevaluate this redevelopment. And so that's the same sort of analysis that we're going through for the Montreal project.

Matt Kornack

Okay, that's very helpful. So I assume at this point that you've probably listed it to at least see what that rent is to get a number there, or have you made a decision one way or the other at this point as to which way you'll go?

Brian Pauls

No decision yet, but we think that if we can achieve the rents that we think should be achievable, then we think it makes sense to just lease it as is for the time being and then reevaluate redevelopment in three to five years. So we are marketing the space right now.

Matt Kornack

Okay, makes sense. And then just two quick accounting questions. With regards to the FFO contribution from the joint venture, obviously it closed partway through the quarter. Am I right to think there's about 1 million of incremental FFO per quarter I guess to be added in Q2 and then carried on at that run rate for the joint venture?

Lenis Quan

So, Matt, we actually have included some disclosures within the MD&A on the FFO contribution. I can certainly give you a call after just to point to the specific tables.

Matt Kornack

Okay, that would be helpful. And then similarly on the fee income, I don't know if that number in your NOI, it was pretty high. Do we prorate that for kind of the percentage that the portfolio was in, or is that provided in the MD&A as well somewhere?

Lenis Quan

We've provided the total margin from the property management leasing business. It obviously includes both the U.S. Industrial Fund and the Dream Summit joint venture. So there was only half a quarter from Dream Summit joint venture. So you could probably do a high level estimation based on what was in Q4 versus Q1 and kind of make an estimation or proration from there.

Matt Kornack

Yes, that's fair. I can do that. I appreciate the color. Thanks, guys.

Operator

And thank you. We have our next question from Pammi Bir with RBC Capital Markets. Please stand by while I open your line. Your line is now open.

Pammi Bir

Thanks. Hi, everyone. Maybe just building on that last question, the pickup between Q4 and Q1 in terms of the fee income, just wanted to clarify. Was that entirely from the Summit transaction? Then tied to that, I guess was there anything non-recurring issue or any lumpy amounts in that maybe tied to leasing?

Brian Pauls

Thank you, Pammi. As we commented in February, we don't disclose specifically the fees or the margin from the Dream Summit venture for confidentiality reasons. And the best disclosure we could come up with to provide transparency to investors and analysts for modeling purposes is kind of to blend the margin from the Dream Summit venture and our U.S. fund property management and leasing business. And we cannot comment specifically as to the increases for those reasons. But naturally, the Dream Summit would have been a significant factor in the increase year-over-year. When it comes to the overall revenue from property management leasing business, as you can imagine, the leasing fee stream is indeed lumpy. We have -- it's a function of when leases get signed and property management fee revenues much more predictable and steady quarter-over-quarter.

Pammi Bir

Okay. And then just really one last one for me. Clearly, the operating metrics, portfolio performance is quite strong. And maybe I guess really just building on one of the questions earlier on, are there any maybe tenant segments where you're perhaps not seeing yet but maybe anticipating a slowdown, whether it's in some of the retailers looking to build out their warehouse distribution space or 3PL or any tenants on your watch list in any of your markets?

Brian Pauls

Thank you for that. No tenants on the watch list. And we generally practically engage with our tenants throughout the year in terms of understanding their business needs, help with the business issues they're facing, and there's nothing other than a few tenants here and there which is natural for the portfolio of our size and nothing that is a red flag. When it comes to incremental demand, yes, we have seen obviously that incremental demand has shifted from commerce led [ph] in early to mid 2021 to more 3PL activity to then more underlying user activity. But generally, we're seeing strong demand across the board. And a lot of the end users in -- not 3PLs, but the end users whether they do manufacturing or tenants who are more vertically integrated, we're seeing quite a bit of incremental demand from these occupiers. And they're frequently asking us to facilitate expansions for them and are generally looking for additional space.

Pammi Bir

Thanks for that. I'll turn it back.

Operator

And thank you so much. We have our next question from Michael Markidis with BMO Capital Markets. Please stand by while I open your line.

Michael Markidis

Hi. Thanks, everybody. Lenis, I don't know if this was intentional, but last quarter I think you said the guidance for FFO was mid 90s with potential upside. And I don't know if I'm reading too much into this, but you dropped the potential upside. Was that intentional?

Lenis Quan

No, it wasn't. That wasn't intentional. I think obviously we still have the strong CP NOI guidance. And we've reiterated that that's -- if that still holds, we'll come in on the upper end of that guidance. So from the FFO standpoint, there's still -- we still have the second half of the year. There's obviously additional leasing that we continue to work on that could trickle through. But I think we wanted to just reiterate that mid 90s in terms of FFO, again, based on current leverage and the foreign exchange rates there.

Michael Markidis

Okay, yes, I don't want to split hairs, but I guess your CP NOI growth at the high end of your initial range and the euro I think is actually a little marginally stronger. So what would be the other offsets that sort of make you not want to pump that up a little bit?

Brian Pauls

There's no offsets. As Lenis commented, this was not intentional. But thank you for pointing this out for the audience.

Michael Markidis

Okay. Thank you. And then just last question for me. Maybe you could just help us out in management's view on the distribution. And the reason I ask is that your business is much stronger than ever was in history. And here we are on your guidance, I think you're kind of trending into a 70, if not low 70% FFO payout ratio at your target guidance? And if you aren't sort of thinking that it might be sooner rather than later, how do you -- can you give us a target for leverage? How can we think about distribution going forward?

Lenis Quan

I think we've indicated in the past that as our FFO continues to grow and the payout ratio comes down, it's something that gets reviewed on a regular basis internally and with our Board as well. We're obviously -- we want to target the payout in the low 70% range. And we're obviously on the right trajectory to that. So I think it's just -- right now, we're really focused on the strong balance sheet and keeping leverage in this level. So, obviously, something we continue to monitor, but nothing near term that we feel that there's any announcement or changes required.

Michael Markidis

Okay, I appreciate that. I'm not -- I probably missed a bit, but I don't think I've ever heard you say the low 70 payout range on the distribution. And just to clarify, is that an FFO or an AFFO metric?

Lenis Quan

FFO. That's just regarding what we publish. In terms of the payout ratio, low 70s is something where a lot of the Canadian peers are. When you look to U.S. peers, it's even lower than that. So it's something that we're cognizant of. And that's obviously something we continue to benchmark as well.

Michael Markidis

That makes a lot of sense. Thanks so much.

Operator

Thank you. [Operator Instructions]. We have a follow-up question from Sam Damiani with TD Cowen. Please go ahead. I will open up your line in just a moment. And your line is open. Please go ahead, Sam. Your mic is open. Just to confirm if you are muted on your end, please unmute.

Sam Damiani

I am unmuted. Apologies everyone. Lenis, just one quick follow-up accounting question just for interest expense in Q2, there's a lot of moving parts in Q1. Do you have kind of a rough number you'd be comfortable putting out as an interest expense run rate for the second quarter?

Lenis Quan

Sam, can we get back to you on that? Like I said, there's quite a bit of moving parts.

Sam Damiani

Of course. Thank you.

Operator

Thank you, Sam. Nothing further for you?

Sam Damiani

That's it. Thank you.

Operator

You're so welcome. And I see no further questions in queue. I will now turn the call over to Brian Pauls for closing remarks.

Brian Pauls

Thank you. I'd like to thank everybody for your time today. We look forward to speaking again soon. And in the meantime, take care and stay safe.

Operator

And thank you. This concludes today's conference. Thank you for participating. You may now disconnect.