PRO Real Estate Investment Trust
TSX:PRV.UN
Earnings Call Analysis
Q4-2023 Analysis
PRO Real Estate Investment Trust
The company displayed a stable debt profile at the end of fiscal year 2023, with its total debt to total assets ratio marginally increasing from 49.6% to 49.8%. In terms of adjusted debt to gross book value, figures remained steady at 50.2% at the close of the fiscal year versus 49.7% in the previous year. A key focus for the future suggests a commitment to lower this ratio over the medium term. Moreover, the company benefits from a well-staggered debt profile, facing no significant mortgage maturities until 2026, and with only about 3% of total debt at a variable rate, providing stability against interest rate fluctuations. The weighted average interest rate on mortgage debt saw a slight uptick, climbing from 3.70% at the end of 2022 to 3.88% at the end of 2023.
The company's leadership expressed gratitude towards their board for steadfast support and looks forward to capitalizing on opportunities in the Industrial sector, anticipating market stability and a possible reduction in interest rates in the near term. Despite this optimism, the company plans to continue prudent balance sheet management to structure the portfolio for future growth, hinting at potential strategic acquisitional moves within the Industrial sector. However, there was no explicit mention of changes in revenue or margins during this part of the discussion.
Gordon Lawlor, an executive of the company, conveys cautious optimism about deal-making activities, suggesting a potential turning point in 2024 driven by more attractive pricing or enhanced clarity in deal flow. While there's no significant excitement over current market offerings, due to a disconnect in pricing, the company seems expectant of a more favorable acquisitions environment in the forthcoming year. Additionally, strong leasing spreads observed in 2023, especially in the industrial sector, are expected to persist, with projections of nearly 50% spreads for 2024 being on track. Stability in small to mid bay tenancies suggests confident leverage for the landlord in negotiations, pointing towards positive signs of sustained NOI growth, targeted at 4% for the year.
An unexpected vacancy of 40,000 square feet in Woodstock, Ontario, primarily affecting the second quarter, presents a temporary challenge. The vacated unit boasts attractive specs lending to the anticipation of significantly higher rental rates from future tenants. Despite this, there is no immediate replacement tenant. Meanwhile, the company has outlined a potential $40 million in dispositions, but uncertainty looms due to dependency on private buyers, financing challenges, and variable pricing, particularly with office assets. Asset sales executed thus far have ranged broadly in cap rates, depending on the asset characteristics, with an average cap rate disclosed for one asset at 7.3%.
Debt refinancing activities are reported with office properties having been financed at rates in the high 6% range (on short-term one and two-year tranches). However, a 4-year $10 million deal is anticipated at approximately 5.5%, representing current market financing conditions for the company. There's an active approach to strategically structure debt, as evidenced by a temporary, higher cost one-year mortgage at 7% on an industrial property, aimed at providing flexibility to improve leasing before locking in longer-term financing.
With regards to acquisitions, the company emphasizes its preference for building on existing platforms in geographic locales like Halifax, Moncton, Greater Montreal, Ottawa, and Winnipeg, capitalizing on market conditions and growth opportunities. The outlook on Atlantic Canada is noted as relatively saturated, whilst Ottawa presents an area of interest for its growth and constrained land availability. There appears to be minimal intent for expansion out west, with a larger portfolio in a market like Calgary being a considerable but not a primary target for 2024.
A nuanced understanding of the industrial market underpins the company's asset appraisal, with stabilized cap rates for certain industrial products assumed to hover around 6.5% to 7%, albeit nuanced by market and asset type. An example highlighted includes the sale of a GTA asset in Mississauga with a stabilized cap rate of 5.9%. The company's acquisitions strategy seems geared towards a balance between value-add opportunities and seeking stable assets that require less active management. Tenant demand remains strong for small to mid bay properties, although larger bay properties are experiencing slower leasing activity, due in part to tenant behavior changes amongst the major users such as Amazon.
You don't have any saved screeners yet
Good morning, and welcome to PROREIT's Fourth Quarter and Annual Results Conference Call for Fiscal 2023. [Operator Instructions]. For your convenience, the results released along with fourth quarter and fiscal 2023 financial statements and management's discussion and analysis are available at proreit.com in the Investors section and on SEDAR+.
Before we start, I have been asked by PROREIT to read the following message regarding forward-looking statements and non-IFRS measures. PROREIT's remarks today may contain forward-looking statements about its current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements or other future events or developments. Forward-looking statements are based on information currently available to management and on estimates and assumptions made based on the factors that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct.
Many factors could cause actual results, levels of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by the forward-looking statements. As a result, PROREIT cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements.
For additional information on the assumptions and risks, please consult the cautionary statement regarding forward-looking statements contained in PROREIT's MD&A dated March 20, 2024, available at www.sedarplus.ca. Forward-looking statements represent management's expectations as at March 20, 2024, and except as may be required by law. PROREIT has no intention and undertakes no obligation to update or revise any forward-looking statements, whether as a result of information, future events or otherwise.
The discussion today will include non-IFRS financial measures. These non-IFRS measures should be considered in addition to, and not as a substitute for, or in isolation from the REIT's IFRS results. For a description of these non-IFRS financial measures, please see the fourth quarter and fiscal 2023 earnings release and non-IFRS ensure section in the MD&A for fiscal 2023 for additional information.
I will now turn the call over to Mr. Gordon Lawlor, President and Chief Executive Officer. Please go ahead.
Thank you, Ludy. Good morning, everyone, and welcome. Joining me today is Alison Schafer, our CFO and Corporate Secretary; Zach Aaron, our Director of Investments and Asset Management is also present, and we'll be able to answer any questions during the Q&A session. I will begin with a high-level look at fiscal 2023 before turning the call over to Alison for a more in-depth review of the financial results. Throughout 2023, we continued to operate in a complex macro environment and high interest rate environment. Against this backdrop, I'm pleased with our overall performance. We delivered as planned, both from an operational and financial standpoint.
We stayed focused on our strategy to rotate capital away from less attractive assets and towards growing our industrial footprint while managing our balance sheet. As part of that strategy, in 2023, we sold a total of 7 noncore strategic properties for $26.6 million. In Q4 2023 specifically, we sold 3 noncore retail properties. In November, we sold 2 retail properties, 1 in Halifax, Nova Scotia and 1 in Lévis, Quebec. These 2 noncore properties totaled 49,000 square feet and were sold for gross proceeds of about $10.9 million.
Proceeds were used to repay about $4.4 million of related mortgages with the balance used for general business purposes. Then in December, we sold a third noncore retail property in Quebec City, that totaled 19,000 square feet for gross proceeds of over $2.3 million. Proceeds of this sale were used for general business purposes. With these dispositions, we ended the year with 123 investment properties, corresponding to approximately 6.4 million square feet of GLA. At the same time last year, we owned 130 properties both years with 50% ownership interest in 42 properties.
In total, at year-end, we managed approximately 10.9 million square feet of GLA, 6.1 million square feet relating to our owned portion plus another 4.5 million square feet that we do not own. Of the owned properties, our Industrial segment represents 82.2% of GLA and 73% of base rent at December 31, 2023.
Subsequent to year-end, in February and March 2024, we sold 3 noncore properties totaling approximately 135,000 square feet for gross proceeds of $26.1 million. Proceeds were used to repayable $21.1 million in related mortgages with the balance used for general business purposes. These asset sales have aided in increasing liquidity, reducing certain debt and puts us in a position to purchase industrial assets opportunistically when the time is right.
We started 2024 on a strong footing. Our portfolio is strong and stable, including a significant position in the high-growth Halifax region. We continue to benefit from successful renewal rates and the significant value embedded in our portfolio. We renewed 93% of GLA maturing in 2023 at an average lease spread of 45.6%. For leases maturing in 2024, we've renewed 43.7% of GLA at an average spread of 32.8%. In addition, we continue to enjoy a sustained high occupancy rate, which was 98.3% at the end of fiscal 2023, including committed space and excluding 1 industrial property held for redevelopment. Our quarterly numbers are beginning to show the organic portfolio cash flow growth we see in our properties, below market rents of nearly 40% are beginning to positively impact our cash flow and as our rents roll to market rates. A recent 5-year cash flow exercise gave us insight of potential of 6% compound annual rent growth over that period, which is exciting, all other things being equal.
In terms of same-property NOI for the fourth quarter of 2023, we're particularly pleased with the overall notable growth of 7.5% achieved. On a segmented basis, our Industrial sector, which represents close to 75% of our same-property NOI delivered 7.9% growth in the fourth quarter compared to last year. The weighted average in-place rent for our industrial portfolio at December 31, 2023, was $8.39 per square foot, an increase of 7.8% compared to the same date last year. We're also pleased with the performance of our Office segment, representing 8.2% of total same-property NOI in Q4 2003. Our office portfolio achieved a notable increase of 17.1% in the fourth quarter compared to the same quarter last year. Finally, our Retail sector, mainly comprised of necessity-based properties achieved 1.8% increase in same-property NOI for the year.
Before I pass the call over to Alison, I'd like to take a moment to mention that over the past year, we've also been making progress on the sustainability front. Our entire team has been working diligently to improve both tracking and reporting. As we continue our ESG journey, we persistently look for ways to do better -- do things better and do more. We look forward to sharing our progress with you when we publish our 2023 sustainability report in May of this year.
Alison, the call is yours for a more fulsome review of our quarterly results.
Thank you, Gordie, and good morning, everyone. I will begin by noting that total assets at December 31, 2023, amounted to $1.03 billion. Our property revenue for the fourth quarter increased by 2.2% from $25.1 million to $25.6 million and net operating income was $14.9 million, up also 2.2% from $14.6 million in Q4 2022. Both our property revenue and NOI increased as a result of contractual increases in rent and higher rental rates on lease renewals. This was offset by the decrease in the number of properties in our portfolio, as Gordie previously mentioned.
General and administrative expenses for the quarter were down 7.1% to less than $1.3 million compared to Q4 2022. Net cash flows provided from operating activities in Q4 2023 was $9.5 million, up from $8.3 million in the fourth quarter last year. Our basic and diluted FFO unit performance in the quarter both came in slightly above Q4 2022. AFFO totaled $7.6 million for the quarter, relatively flat compared to the same quarter last year. Our AFFO payout ratio was 89.8% for Q4 2023, up only slightly from 88.5% in Q4 2022. It's worth noting that our 12-month results were negatively impacted by some onetime CEO succession and related costs of $2.2 million as well as the successful repositioning of our 100,000 square foot Montreal industrial properties, which had negatively affected cash flow results for the middle 6 months of the year.
On our balance sheet, our liquidity position remained strong with $43.0 million available on our credit facility, in addition to $13.2 million in cash at December 31, 2023. This year, we were able to reduce the indebtedness under our credit facility by $20.0 million. Our total debt reached $515.2 million at December 31, 2023, which was relatively flat compared to the $514.3 million at the same date last year. Our total debt to total assets also remained stable at 49.8% at the end of fiscal 2023 compared to 49.6% at the end of fiscal 2022.
Our adjusted debt to gross book value was stable at 50.2% at December 31, 2023, compared to 49.7% at December 31, 2022. We intend to remain focused on reducing this ratio over the medium term. We continue to benefit from a well-staggered debt profile with limited and material mortgage maturities until 2026 and only about 3% of our total debt at a variable rate. Our weighted average interest rate on mortgage debt was 3.88% at December 31, 2023, compared to 3.70% at the end of 2022. Our weighted average cap rate for the portfolio was approximately 6.2% at year-end or $159.7 per square foot, up from 5.8% at the end of 2022. Finally, distributions of $0.0375 per unit were declared monthly throughout the fourth quarter of 2023.
I will now turn the call back to Gordie for closing remarks.
Thank you, Alison. As it has been nearly 12 months since I became President and Chief Executive Officer of PROREIT, I'd like to thank the entire team for a great year. I would also like to thank the Board for their support and guidance. At every level, I am proud of our ability to navigate these challenging times and of the high-quality portfolio we have built over the last decade. Looking ahead, we remain steadfast in our commitment to stakeholders to create sustainable value. Our capital allocation strategy remains on course which includes paying regular distributions to our unitholders while focusing on our debt level.
We are well-positioned for the future and look forward to capitalizing on opportunities in the Industrial sector. We anticipate that the market stabilized and interest rates will start to come down in the near term. In the meantime, we'll continue the disciplined management of our balance sheet while structuring our portfolio for future growth.
As this concludes our formal remarks. I'll now turn the call back to Ludy begin with the question-and-answer portion of the call. Thank you.
[Operator Instructions] Your first question comes from the line of Mark Rothschild from Canaccord.
Gordie, maybe just following up on or trying to drill in a little bit on your last comments in regards to growth picking up as far as on the acquisition side. Is the expectation that you'll be able to do more deals more a comment on what you expect there to be better pricing or more clarity on pricing and more deal flow? Or is it the hope that the unit price will offer you a better return, a better cost of equity. And to what extent does that matter as far as how you're looking at growth and doing deals in 2024?
I wake up every morning hoping for both, Mark. Stock price obviously is driven by the interest rate environment that we're in and there's an expectation we will see some better rates towards the end of the year. That said, we've sold some assets, and we're going to sell some more. So we have a little bit of room for some industrial acquisitions when we -- when it makes sense. Honestly, we don't see a lot out there. We still see disconnect on pricing. So we're not jumping up and down at anything right now. But from being around in the 3 months and marketing and that type of thing. We feel that there is a bit of a turning point coming somewhere in 2024, and we really look forward to that.
Okay. Great. And then just on the leasing. Obviously, the leasing spreads were really strong in '23. Do you see anything slowing down in that regard from the leases that you have under negotiations than what you're working on now?
I'll just turn that to Zach and he can make a couple of comments there.
Sure. Thanks, Gordie. Mark, to touch base on the leasing. So obviously, pretty good start of the year for 2024 as well with overall spread of just over 32%. And specifically in our industrial deals, we're already trending around 49%, 50% again for 2024. So being almost halfway through our '24 expiries, and we're essentially in contact with most remaining tenants in the portfolio, we feel pretty good that what we're achieving so far will kind of stay throughout the year with a good portion of our portfolio being small to mid bay tenants, leverage still remains really high with landlords where on a lot of 2,000 to 5,000 square foot units, whether it be Halifax, Winnipeg, Ottawa we're still in scenarios where if the space comes available.
It's typically the neighboring tenant who's interested or we have 2 or 3 offers in a matter of a week for that unit that allows us to continue to push rents and kind of minimize TI. So we see that as continuing to be a bit strong on the larger format spaces, which we don't really have that many of it's definitely slowed down a bit in terms of momentum of getting deal flow, but tenants continue to renew. And then it's the new deals where things are a bit slower, but rents are still at an attractive basis.
And your next question comes from the line of Brad Sturges from Raymond James.
Just to touch on the asset sales and your commentary that you could be looking to do a little bit more. Do you have anything else in the market right now for sale? Or I guess, put it a different way, how do you think about the volume of potential asset sales over the next few quarters?
Yes. I mean, interestingly enough, a lot of the deals that we've done have been basically unsolicited offers on certain of our assets. And so that's interesting because you don't have to go market them and that you get an independent quote on them on the value and see if there's something of interest there. I mean, we sat down at the end of 2023 and besides what's already announced, we circled maybe about $40 million more in dispositions for the year, but it truly depends on a lot of -- it's all private buyers, and there's long due diligence periods, they're not totally adept from the financing side.
So they think they can get financing and then they go to their bank, and they can't. So there's just a lot of that noise that goes on. So we circled $40 million, but whether any of that will close, honestly, it's up in the air. And some of it is office, too. So which we'd like to sell. But again, it's really dependent on the buyer or whether they can come through at the pricing that we think the assets are worth.
And with the 3 assets sold already this year, what type of average cap rate or NOI contribution, what do those assets have.
The Strip Mall in Tantallon, Nova Scotia, that was about a 7.3% cap. That was a pretty strong asset for us. We were indifferent if the deal went away, we would have been happy to keep it. The other one, it was an asset we had held for develop an industrial long-term Hydro-Québec tenant that left. So we put some money into it at least about 25,000 of the 65,000 then when we did the math about what we needed to finish versus an offer that we got, we sold that. So I think on an in place, it would be like a 4% cap, but it was really more price per square foot on that one.
Yes. Okay. And last question, just how do you think about same-property NOI growth this year, just given the strong leasing spreads that you're achieving? And given that you've had, I guess, the lease-up of some of the vacancy, how are you thinking about the near-term organic growth outlook?
We've got some -- we got some tos and fros coming in the year, I guess, in some of these moving parts. But when we sat down and looked at it, we'd like to see 4% NOI growth for the year. That would be a successful year for us. But that really depends on occupancy. If we have any downtime in some of our leasing or anything like that on renewals, but that would be a good year for us if we achieve that for '24.
At this stage, are you expecting some transitional vacancy then or anything material of note.
The only -- sorry, yes, the only piece that really hits me right now or Zach can allude to, but there's 40,000 square feet in our wood -- in one of our Woodstock, Ontario properties that tenant left the end of February, and we don't have a new tenant there. So that would be 40,000 feet, really affecting Q2, not so much Q1.
And just to add on about the tenant in Woodstock. So that was a scenario where the tenant needed 60,000 square feet, and we just couldn't accommodate them. But on the 40,000 square foot unit that they lap, it's a 28-foot clear distribution warehouse center in great shape, one of our best assets, I would say. And they're coming off a $6.20 base rent where a market for that space would be kind of in the $11 to $12 range. So we might see some downtime there and we're marketing it currently, but we expect the new tenant to have a significantly higher rent than the previous tenant. So a good problem to have at the end of the day.
And your next question comes from the line of Sam Damiani from TD Cowen.
Most of my questions have been answered actually. But I guess just on the debt that was raised on a couple of properties, I think, late in the quarter. I think the coupon was in the higher 6s. What is market today for mortgage debt on properties you're looking to refinance in 2024. What kind of spread is that.
So those 2 specifically, Sam, they were office. So we put 1 and 2-year tranches on them. So that was part of it. And -- but right now, we've got a 4-year deal on $10 million. We've got commitment letters in the inbox there, that will pencil at about 5.5. So give or take, 200 over. That's our borrowing piece generally ranges from between 180 to 210 over, depending on 5-, 7- or 10-year money. So that's what we're kind of around 5.5 right now, and we're hoping that will get better towards the end of the year. We do have 1 building where we're just going to do another year on it an industrial building. So that will be a little pricier, that will be more in the 7% range. That's about $8 million. We're doing that on purpose just because we want to lease up that 28,000 feet that's there and put it with another building that we're leasing up at the same time and put a longer-term piece on it. So we're just being advantageous and hoping that we can clean that up better towards the end of the year.
Sorry, that 7% one, that was a 1-year term. That's why it was so high? Is that what you said?
Yes, yes.
Okay.
Yes. With a lender that we assumed. So it wouldn't be one of our normal lenders, so a little bit higher rates for that one.
Got you. Did notice that the -- it looked like the contribution from Compass Property Management was quite a bit above normal in the fourth quarter. Just wondering what drove that and how you expect that to play out in 2024?
Yes. I mean that one is a bit lumpy. I think we target between $1.5 million and $1.8 million for the year. It's driven for them because that's the third-party piece of it, so not related to us. So project management fees when they're doing tenant fit-ups for -- they manage a lot of office buildings in Halifax as well. And then they have a little brokerage or so they do some asset sales. So sometimes you'll get a $200,000 or $300,000 pop there for an asset sale. So that's really the driver there. But if they do $1.5 million or north on that, we're happy with that.
Got you. And I guess, just back to sort of, I guess, the main topic, I guess, is on obviously, dispositions and eventual acquisitions. Is it your intention, if you can, to reach that 45% goal in 2024? Do you need to get there before you're willing to start to deploy capital on acquisitions?
No, that would be a 3- to 5-year plan. I mean, we went from 58% to 50% in the last number of years, obviously, and purposely and people would say that affected our AFFO per unit growth, but we did it on purpose because we want our balance to be a better spot. The 45% -- I mean we're happy at the 50% here. So we don't need to do anything overnight on that. The reality is getting to the 45% would be driven by eventual some equity issues where you take a little piece and pay down debt on that basis. So we -- at the 50% range where we are today, we may do an acquisition or 2 because we're comfortable with that but the 45% is directional really, and it just depends on the market for us.
Last one for me. Just on acquisitions, when they do resume. What's the goal in terms of evolving the geographic footprint of PROREIT's industrial portfolio?
Yes. So I mean, we like buying assets around our platforms. So obviously, what we own in Halifax is 50-50 with our partner, Crestpoint we see some opportunities there. They're happy to grow the footprint there as well. We're in Moncton basically by ourselves. There's one asset with Crestpoint, but that's been a strong market for us. But we're looking at assets back on the island here in Montreal, just off island as well, whether we'd be able to execute on them, that's a question mark eventually.
But really back in Greater Montreal here, Ottawa, we've got a full platform of folks there, love to get more industrial in Ottawa, [ so fester ], Ontario and then Winnipeg as well. So we're just looking in all of those areas. We're pretty full up on Atlantic Canada, and that's partially driven with our partner as to what we want to do there. But Ottawa is 1.5 hours down the road from us here in Montreal, seeing great growth, constrained land it's just harder to buy assets there.
So -- and then when you talk about out west, as you see, we're selling our retail out there. We've got a couple of cold storage facilities in Edmonton. We haven't really been looking out west. We -- I said it before, if there was a large portfolio in Calgary, perhaps that we could get our head around that would allow us to put a platform there. We do that, but that's kind of like on top of our list for '24, really.
[Operator Instructions] Your next question comes from the line of Matt Kornack from National Bank Financial.
Just a quick follow-up on Sam's line of questioning there. Just in terms of what you're seeing for stabilized cap rates for the type of product that you're looking at. Can you give us a sense on that?
Sure. Zach here. So yes, it's a bit of an interesting conversation, and it's one that seems to be evolving every day speaking with brokers and particularly speaking with brokers in the GTA where you just see the highest level of transaction volume. I think the philosophy now in industrial, and again, it depends on the exact asset in the market. But I think the view is that the asset needs to kind of stabilize around 6.5% to 7% cap. And that's really, again, market and kind of product dependent. So you're still seeing deals and hearing about deals where they're trading at 4.5%, 5% caps but there's a story there of short-term wallets and below-market rents where the buyer has a view that they can stabilize the asset in year 2, 3 or 4, that 6.5%, 7% range.
And then yes, if you're looking at an asset that's long-term lease at market rents with 2% to 3% growth, I think the idea is that, yes, you need to be ideally looking the 6.5%, 7% cap range on something more stabilized like that. I know there was a GTA asset sale in Mississauga, a newbuild building, 150,000 square feet long-term lease market rents. And from what I was told by local brokerage, it's sold at a 5.9% cap. And so to me, that kind of shows a bit of a marker of Mississauga stabilized GTA asset long-term lease, 5.9% cap is kind of maybe the low mark there on a stabilized asset. So that seems to be the kind of to and fro on stabilized versus nonstabilized asset cap rates in the industrial market. And so that's kind of the framework we're working with and having a view on assets as we do continue to look at opportunities on market and off-market.
And do you have a preference whether to buy the higher kind of at market cap rate or value add with a bigger upside on renewals in the context of kind of where demand is in the market today. Or are you bullish and would be kind of indifferent between those 2 as long as they're priced appropriately?
I think we fell into a great opportunity since 2021 when we got a lot of assets with low vaults and good undermarket rents. When you look at the portfolio as a whole, and it's not really a comment on where the economy is going. It's like if we had some nice stable assets that we didn't have to talk about every second day, that would be helpful as we build the portfolio longer term. So yes, I mean, if there were low cap rate assets or under market rent assets with sort of vaults around our platforms, we'd look at them. But some of the nice stable or 10 years with 2.5%, 3% steps, put some good debt on it and just leave it and have it tied up. I think we'd like to see a little bit more of that in the next couple of years just because -- we have all this internal growth already baked into where we think we're heading. So it would be nice to just get some stabilized assets to kind of balance the portfolio.
Makes sense. And then just on the demand side, I think you kind of noted earlier, your small bay tenants. It seems like retention rates are high, but have you seen any kind of at least temporary pullback in demand on the industrial side? Or is it still pretty strong in the market and assets that you own?
Yes. I mean, again, it's -- our specific view when it comes to our portfolio, which, again, is largely small to mid bay, that sector remains really strong. We -- for example, we had a 2,000 square foot unit in Ottawa come available, shipping door behind 18, 16-foot clear small office in the front. And we have 3 offers in it and you're kind of bidding against one another $0.25 at a time to achieve a new high market rent. And that's a similar story we're continuing to see in our Burnside portfolio. Similar story we even see in Winnipeg as well on the small bay front. So that side remains really strong. There does seem to be a bit of a bifurcation between that small, mid-bay and then larger bay. And that large bay always depend on the market, what you mean large bay.
But I think leasing and that stuff has slowed down just given the tenant roster that was going into these larger format properties where your 3PL users, your Amazons of the world, who have been kind of the slower tenants of the last several months now. So yes, I think before where some of these larger formats were getting leased up within 2, 3 months, now it's taking maybe 6 to 9 months and you've got to put in a little bit more TI.
But at the end of the day, I think the market rents are still pretty strong and leases are still getting done. So overall, still a very good story. Vacancy remains low overall and a lot of still construction and land supply constraints. And I have a bit of a view that as construction and development slows down over the course of this year and into next year, that should kind of help stabilize and improve absorption.
Yes, just follow-up on that. The only annoyance I have in the portfolio is basically 100,000 feet of industrial, and it's 230,000 spaces on the [ 40,000 ] that I mentioned earlier, like those are great spaces. They come off of low rents. They should be leased by now. It's not a comment on, Zach. We work on it every day. But it's just a little annoying that it hasn't been as fleet of foot from leasing it up that takes a couple of more months. So to say, you got to get used to that world again because it wasn't like that for 2 years, so.
Fair enough. Last one for me, and it may be too early to ask this, but I just noticed when looking at the top 10 tenants, DRS mature as I presume in 2025. I haven't had the benefit of going to that out, and I think it's a pretty unique space. But are you in discussions with them at this point? Or is that something that would be dealt with closer to maturity?
We will have a great story on that eventually.
And ladies and gentlemen, this concludes the Q&A portion of today's call. Thank you, everyone, for joining. That concludes today's conference call. You may now disconnect.
Thanks very much.