Q4 2019 Earnings Call
All participants please standby your conference is ready to begin.
Good morning, ladies and gentlemen, welcome to the summit <unk> fourth quarter and year end 2019 results conference call.
Be advised that this call is being recorded I would like to turn the meeting over to Mr., Paul Dykeman, Chief Executive Officer. Please go ahead.
Thank you operator before we begin let me remind everyone that during this conference call. We may make statements containing forward looking information as forward looking information is based on the number of assumption subject to a number of known and unknown risks and uncertainties that could cause actual results could differ materially from those disclose or implied we direct you to earnings release EM.
And other security filings for additional information.
Although these assumptions risks and uncertainties.
I also want to remind everyone that we do have a slide presentation, something new that accompanies this morning's call a the linked to those slides are available at investor.
After relations page on our website.
Joining me as always is Ross Drinker Chief Financial Officer.
2019 was another record year.
Record growth at record operating performance for summit.
We expanded our present that increased our size and scale in our key target market.
We accelerated our property development and expansion activities generating strong accretive returns.
We maintain highly conservative financial position, providing us with the resources and flexibility continue our track record of accretive growth.
Let's review some of our accomplishments in 2019.
Turning to slide four we acquired 42 properties in 2019, adding 4.2 million square feet to the property portfolio.
All that prices well below replacement cost for total purchase price of 709 million.
With these acquisitions, the total value or property portfolio rose to 2.5 billion at the end of the year enhancing the size and scale.
And driving further cost synergies and economies of scale to the portfolio.
Acquisitions were funded from the sale of our data center to block the offerings, raising $380 million and new and assume mortgages.
Subsequent to yearend, we purchased another two properties and the G T a.
With an additional six properties and the GT closing.
Before the end of the month, adding another 465000 square foot to the portfolio for $98.3 million.
With our recent acquisition slide.
Five shows how our growth over the past few years has built a very focus and diversified property portfolio totaled 854 properties.
18 million square feet as of February 19, 2020, the portfolio is well diversified across our three key target markets of Ontario, Quebec in Alberta.
We have now established property management offices in each of our key market stuff with proven professionals familiar with our properties and experience in the industrial property business.
Now, we're turning attention to rebalancing the portfolio by expanding our presence primarily in the G. T. A cat is strongest and most vibrant industrial market.
Turning to slide six our largest acquisition in two <unk> 2019 was the purchase of 37 properties in Alberta, totaling 3.3 million square feet of Julie.
Paid 588 million for the portfolio generating a highly accretive going in cap rate of 5.5%. The tenant base was primarily transportation warehouse light manufacturing firms with only 17% in the oil and gas business. Many of those are on long term leases.
The transaction, but many benefits to our unit holders it was significantly and immediately accretive to our AFFO per unit increase the size and scale of our total portfolio.
And we have the opportunity to grow cash flows through the lease up of vacant space redevelopment.
Based on tenant demand.
We're very pleased with the significant an accretive acquisition. It continues to perform very well going into 2020.
Our successful and proactive leasing activities continued in 2019 as detailed on slide seven occupancy remained strong at 98.5% at year end.
To date in 2020, we have successfully have commitments on 155000 square feet of that 259000 square feet.
We completed all of our 2019 race re lease renewals at a very solid 98.2% retention rate.
A very key objective going forward, we were confident we will retain the majority of our tenants renewing them at higher monthly rent, particularly in our core GTT market.
We've also completed early renewals.
On 2020 leases as well as certain leases expiring and 2021 and 2022.
As a result of that proactive leasing program only 6% of the portfolio remains to expire in 2020.
Our leasing activities.
Our generating significant increases in monthly rents demonstrating the strength of our target markets. Overall in 2019, the renewals generated a 14% increase a monthly rents from the expiring rent with a significant 16% increase and the DTA.
It continues to accelerate in 2020 renewals that have generated 17% increase in monthly rents over expiring rents and a much higher 24% increase in that GE market clearly rental growth is accelerating and we're well positioned to capitalize on this growth for years ahead.
Turning to our development pipeline on slide six we've completed the expansion of the kitchen or property late in 2019, adding 65000 square feet.
Cost of 6.6 million and generating a 6% or sorry, 8% return on cost.
Will soon be starting construction on a 92000 square foot building on land that we own a mississauga and another 140000 square foot property in Burlington.
We expect these will get started in 2020 and be completed in early 2021.
With the acquisition of two new wealth properties.
Two properties in wealth, we acquired a 50% interest in 49 acres of land and we entered into a joint venture partnership to develop this new industrial Park. Once completed all these projects will add another 775000 square feet of new space.
Currently there are two buildings under construction, which will add a total of 387000 square feet.
We have the option to acquire 100% of these new buildings once they are at least.
We have already pre leased 132000 square feet of the of the first of those two buildings.
With an average term of seven and a half years. So we're well underway construction of both of these buildings will be completed.
By the middle of this year.
In total we currently have approximately 620000 square feet of new space under development all in the very strong GTH market with significant future growth opportunities that other properties. We expect these niche initiatives will provide strong and accretive return for unit holders in years to come.
Another major transaction that we spoken about before in 2019 on slide nine was the sale of our interest in the data center properties proceeds from that say over 107 million generating I realized gain of 41.5 million or 35% 35 cents per unit. We also had a working capital mezzanine loans repaid a which amounted to.
Approximately $70 million with the realized gain on the sale. We're we're very pleased issues, especially the seven special distribution of seven cents per unit in October which is our third special distribution to unit holders, we remain very optimistic and our capital deployment in recycling strategies by monetizing the significant gains on the datacenter property.
Reducing our loans, we freed up capital that was quickly invested back into the core light industrial markets. We believe this [laughter] an excellent example of how we move quickly and accretive lead to build long term value for unit holders I will now turn things over to Ross to detail, how our property growth and strong operating performance translates into a record financial results.
Thanks, Paul.
As you can see on slide 11, some of the has generated solid and significant growth in both revenues and F O since our inception in 2012.
With our growth over the past eight eight years.
This is now is ensuring we deliver strong and accretive growth in AFFO per unit for our unit holders.
Turning to our results for 2019 on slide 12.
Can see that revenues rose, 54% over the prior year driving a 59% increase in net rental income at 54% growth in ethanol.
Our proven property management and leasing program also resulted in solid organic growth at same property NOI rose, 6% in 2019, driven by the strong gains in our key target markets of 6.4% in the GTH, 2.8% in Montreal at 15.6% in Alberta looking ahead.
We are confident the current 1.6% contractual annual rent increase creases combined with the strong growth, we're achieving on our lease renewals will continue to generate solid accretive growth.
2019 was also significantly accretive for unitholders with FFO per unit up 3.9%, despite the significant 48% increasing units outstanding.
As I mentioned, our emphasis now is on growing our AFFO per unit.
With the internalization of our management team and May you can see that our DNA expenses are only 0.24% of assets and 6.12% of net rental income.
We believe these are among the lowest gene expense ratios in our industry.
I'd also like to not that DNA figures include approximately four and a half months of external management DNA. Prior to internalization. We expect these ratios to further decrease in 2020 with a full year of internalization.
Slide 13 shows.
Significant increases in our key performance benchmarks for the fourth quarter of 2019.
Clearly our portfolio growth continued strong occupancy and increasing rents are jetting rate are generating real benefits for our unit holders again DNA as a percentage of net rental income is now quite low entire internalization in may.
We continue to made solid progress on the financing front as shown on slide 14, as we capitalize on current low interest rates and extended the average chairman for the mortgage portfolio, that's helping us to mitigate the impact of rising rates going forward.
As an example, our financing activities in 2019 included locking in long longer term mortgages, which added more than a full year of average term to maturity rising to 5.8% at year end compared to 4.8%, sorry, 5.8 years compared to 4.8 years at the end of 2018.
During the year, we increased our revolving operated credit facility to $150 million of which 127 million was available at December 30, Onest 2019, our acquisition capacity at December 31st was 350 million that target level of 50%.
With the acquisitions completed so far in 2020, our capacity currently stands at approximately 250 million.
Since slide 15 details our mortgage portfolio maturity by years, showing that we only have a 11% of mortgages coming due in the next three years. This balances ensures we are not overly exposed to any potential interest rate increases in the future.
With our proactive leasing program in the early renewals of some 2020 leases, we only have 6% of the portfolio remaining to release. This year as you can see on slide 16.
As well bank balance.
Ah portfolio ensures that can only continue deliver stable insensate sustainable.
Cash flow supporting our monthly cash distributions to unitholders I'll now turn things back to Paul to wrap up thanks Rod.
We want to provide you with more color on a key target markets starting with the G. Eight the main object of our growth programs going forward through a combination of property acquisitions and new development.
Slide 18 shows why GTK remains our key focus and how stronger performance continues to drive unitholder value at December 30, Onest. The GT represented around 41% of the total portfolio size.
Same property enterprise and Hawaii Rose, a very strong 6.4% in the GTH in 2019, our leasing programs are driving strong increases in cash flows with a solid hundred percent retention in 2019 lease renewals generating a 16% recent increase in rents a year.
Over in place rents on top of the 12.6.
Present increase in 2018.
In 2020 that continues to accelerate we're now generating 24% the increase in rents with only 6% of the for fully remaining to be renewed in 2020 and our contractual.
Rents in place have escalations at 1.6% on an annualized basis, which will drive further gains going forward.
Gee. It's also the main focus for development and expansion programs with the 232000 square feet currently under development as we mentioned Gtlds, our prime focus going forward.
Driving our record performance are the strong fundamentals in the GJ industrial market as shown on slide 19 with hike land cost low availability increased development charges replacement cost for industrial properties are rising significantly and quickly. Additionally demand continues to far away new supply, resulting in a decline.
The availability.
As a result, the GT has had the lowest availability in history and vacancy rates in the country at 1.4 0.0 for at year end. Most importantly, all of these factors are resulting in rising monthly rents.
And we've seen our lease renewals.
Which we've seen in our release lease renewals over the last few years.
Slide 20 outlines the acquisition criteria and growth strategy for the DTA.
Acquisitions will continue to be made at below replacement costs with in place rents below market. We're looking for modern easy to rent space high ceiling height, multiple loading bays ample parking potential and expansion Atlanta for expansion and new development, we're targeting purchases of between 200 250 million in 2020.
And by the end of February we've already completed just under 100 million at 98 million I.
Additionally, as we mentioned we currently have approximately 615000 square feet either directly or with our our partner in the GT much of which will be completed in 2020 enter in early 2021.
But the more majority of our property purchase in 2019, we continue to believe Alberta presents a strong opportunity for growth going forward.
Slide 22, our performance in Alberta demonstrates why we remain confident in this market with the major acquisition last year, Alberta now represents just under 30% of our portfolio size same property NOI rose, a very strong 15.6% and contractual in place a rental escalators or 1.8% annually, which will drive further gains.
Going forward.
Turning to slide 23, we see Alberta as made up of two distinct markets Calgary and Edmonton. We believe Calgary has fully recovered from the past economic slowdown and we are seeing rising occupancy and monthly rents since the acquisition. We have already leased approximately 69000 square feet of the acquired vacant space in 2019 and another.
Lastly, hundred 11000 square feet today in 2020.
We are taking more proactive defense approach to Edmund 10, and looking at consolidating restructuring the portfolio Akteks Cds that will include the.
Some noncore asset sales to fund our growth in the GTH.
Montreal, Canada second largest industrial market remains a another key geographic region for summit as you can see on slide 25, we continue to see solid performance in our greater Montreal region properties at December 30, Onest Montreal represented just under 20% the portfolio same property NOI was a very strong two points.
8% in 2019.
Leasing program programs also generated strong increases in cash flows with us all at 100% retention in 2019, and our lease renewals generated 12.1% increase in rental rents over in place rents and again, our contractual in place a rental bumps in this portfolio is 1.8% driving a further growth.
Montreal continues to demonstrate strong fundamentals as shown on slide 26, like the DTA availability and vacancies are declining driven by increasing demand coming from the expansion of the Cds major shipping for us its proximity to large eastern us market availability in Montreal is approaching 3% would you.
Usually is the early signs of a trigger for accelerated rental growth.
Looking ahead, we will continue to deliver saw deliver the same growth programs have generated such strong growth in performance over the last many years.
We require quality properties in our target GTV markets purchasing newer well maintain assets at below replacement cost with rents below market, where we believe we can generate value through or our proven management leasing programs.
Our cash flows will grow organically as we capitalize on the continuing strong fundamentals in the light industrial sector and our low DNA costs.
Build on a contractual rental increases.
Which will generate increasing operating synergies and reduce costs through the size and scale of or property portfolio management.
We will leverage our proven expertise in development and estimate at 700000 square feet on land on nine parcels, we own all primarily within the vibrant GT market. These investments will be highly accretive to our unit holders.
And we will maintain are proven track record of delivering stable sustainable and growing monthly cash distributions to unit holders, we recognize that in todays uncertain economic times, our investors look to submit to provide stable predictable income.
The main too focused on.
On everything we do.
In summary, we're pleased with our gross and performance in 2019, we look for forward for continued progress in the years ahead with the strong industry fundamentals best in class properties, a proven experience management team, we're well positioned deliver stable sustainable increasing value to unit holders over the long term.
Thank you for your time and attention. This morning, we'd now be pleased to answer any questions.
Operator.
Thank you we will now take questions from the telephone line.
The other question and you are using your speakerphone, Please mr. Han before making your selection.
She has a question. Please press star one on your telephone keypad. It's any time you wish to cancel your question. Please press Star One time. Please press star one at this time if you have a question. It will be response with the participants register Thank you for your patience.
Your first question is from Matt Hogan of RBC capital markets. Please go ahead.
Thank you and good morning.
Matt.
In terms of your 2020 lease renewals it looks like you achieve some fairly material rent increases on about 260000 square feet this quarter.
Just wondering if you could tell us if theres anything unique about the transactions or how we should be thinking about renewal spreads going forward.
Short and Ah Theres, a few things that I wanted to talk about this the actual number is a little bit deceiving bundles or the low side, including the that 24% increase.
There's a property that we bought a couple of years go 276000 square feet. The rent in place was 325 and they had a fixed option to go to 350, which was about 8% increase sold excluded that the 24% actually would be would be higher.
There is one renewal in particular I wanted to.
Right as a 150000 square feet and deal I think it inside them with a day as of June or something is coming up that that particular rent is going up 46%.
From a low five into tend to a low eight a low eight number.
The important thing there is this is a international tenet that operates in many different countries has lots of options and ability whether to buy or build their own facilities. So what I see there is a very sophisticated tenet.
Looked at the market and go so we find them up to a new seven year lease so within that 46% I think we're close to 3% annual escalations as well in that are in that facility, but when they look at the cost of moving and all of the other things, but again that particular tenet can probably flow through this rental increase into their their end products.
So that that was an interesting one.
Second one I'd like the highlights another 150000 square feet last year, we did.
One year renewal going from 530 to 630, we've just done a two year renewal more than that which goes to 757 75. So when you take those increases together you're roughly in that same 45% rental increase so what we're seeing is theres an acceleration, but we're really trying to understand which tenants can afford to pay these these amounts.
So when you look at Theres, new product not a lot of spec development.
You know Orlando and others, they are asking closer to $10 for brand new.
Facilities.
The Blackstone Who's got some vacancy you're asking north of $10. So theres, a real acceleration others, because really at whether it's one or half a percent availability in my mind. There's there's no vacancy. So when you get into our tenant size of 50000 square foot and above they don't have a lot of options and.
That's why it's interesting and that's why we went to as well because you have lower land cost lower development costs. So our cost of developed down there we can.
Provides space so wealth has a little further oak, but not for every tenant, but that's where we're seeing tenants are going down there were already you know 50 to 75 cents ahead of our pro forma is on the the lease rates for the the stuff that's going on as well so they are.
Good question is where where where's is going to end and so we're happy to do tenants want to lock up.
I do longer term leases, we're happy to short term leases, we're being very flexible trying to.
Work with the tenants so that you know whether if they can't afford quite as much rental growth in the first years, we have higher steps in the rent some some kind of combination of that and then.
One thing that's not in our future renewals and and try to we're waiting to the kind of like a few months before so we're not having to push or talk to tenants early the closer to the expiry date gives a the landlord leverage.
We have another tenet that was on a 10 year lease in November of 250000 square feet and that land that that triggers to a market reset.
And again, we're going to see a market bump in that rent of over 40%. So.
It all drives them to replacement costs and everything that's driving some costs.
Our pushing.
Building costs of over $200 square foot and that's that's accelerating almost by double digit every year.
That's a appreciate the color there and maybe just on the contractual rent steps it seems like across the portfolio they've increased by an average of maybe 40 basis points to just under 2%.
How would that blended would it be able to 3% on new leases the any color would be great. Yeah. We're I mean again, it's it's.
We don't have target felt like we can get the guide to go up 46%. Great. Then we say okay can you go up.
2% to 3%, but if a guy can only afford or the tenant can only afford the 20 or 25% increase.
We'll put 5% increases so.
Definitely on the newer deals were able to get higher higher percentages and then Ross's I keep wondering why the number is not going out even quicker, but he keeps reminding me that some of them.
Our are clicking in so they've they burned off so you're you're doing that but it's a great system that we developed in some at one you know the concept of annual escalators again, when we picked up the Alberta portfolio that has a healthy 1.88%. So sometimes when you pick up leases. They don't have resets every year or the other every three years every five years so.
The more we can get into a program of annual steps. So that's what we're trying so yeah. We're happy with that number hopefully we'll continue to migrate up but it takes a lot to move that needle.
Of course, and maybe just last one for me rolling It all up for your same property NOI growth.
Last quarter, you talk to vote, a range of maybe 4% to 5% do you think thats still valid today.
While we always like to underperformed.
Yes, and hope for perform so yeah, I mean, it's a comfortable number there's there's nothing on the horizon that doesn't make us believe that.
Everything is continuing to move into right direction.
Yes.
Zero issues in Toronto in Montreal, we're being proactive on some of the leases, so theres going to be a bit of noise around their alberta.
Transaction, but the good news as we're already because of some of the early leasing success and so there.
And locking up stuff, we're already ahead of our pro forma 5.5% yield on Alberta, So we've created a bit about buffer there so.
Yeah, I'm I'm pretty comfortable with the things continue along the same trajectory are now I. Appreciate the color. That's all for me. Thank you okay.
Thank you.
The following question is from human Chukka of Scotia Bank. Please go ahead.
Thank you and good morning. Good morning that you are on recently acquired Alberta portfolio. So it's been a few months now since you. All these properties what is your view in terms of occupancy growth potential into any 20 and markets in general.
Okay, Yeah. So.
It's very interesting because we as part of the transaction we picked up the eight employees as part of that they were in the midst of working on various lease deals.
But weve you know very intensely tackle that issue with with that those those employees, helping us out so of the 259000 square feet of vacancy that we have it at year end, we've got a 155000 of at least one space in Calgary 51000 square feet. It was vacant for two years and we've now starting March Onest have a tenure.
At least there and again I think it's just it's the it's a new set of eyes. We came in said like is there deals to be done and we did a deal.
But the great quality company at $5 going to like 525, I think the the previous landlord was thinking that space was a $6 basin for whatever reason just didn't get leaf.
Theres three vacant spaces in Edmonton for 62000 square feet that we've leased up.
Some of them at very attractive rents of.
We've got one that dying dollars one at 625 go into 650.
There's a 35000 square foot property in Edmonton, that's more of a cross dock facility. So we have rents in the 16 $17. There so and again that particular attended that went in that building was also attended and the Calgary portfolio and then what we're really doing is proactively looking at the to lease expiry. So we have a 400.
20000 square feet between Edmonton and Calgary. So the 260000, we've got a 107000 of that virtually done now and that was not as renewal that was actually a tenet.
I had indicated they were likely believe and we found another tenant and put them in there and again when we can we're we're locking them into 10 year leases. So you know in Edmonton, you've you've got a fair amount availability and vacancy so people have options. There so whether it's giving them a little bit of break on the rent or giving a bit more concessions in terms of T.I.s and that's really.
So it's all about stabilizing occupancy so I think in Calgary. The overall portfolio, we bought was 91%.
Think Calgary is going to be.
95, 96, and above Edmonton will probably move it from 91 did like a 93.
And again, I'm, probably being conservative, but just because there is a few moving parts and there's a few Dennis will come and go for the balance of years, but we'll have more clarity, but I'm very pleased with the progress that we've made as quickly as we've made it a there.
That's great color and just to follow this a twofold parties in Edmonton were classified as held for sale I think this quarter.
Do you see more properties from this portfolio being available for sale in the near future.
Sure and up the two properties that.
Smiling because one of these properties called the terminal center, we own it somewhat one we picked up in a portfolio transaction. It's it's really a retail center, it's about 80% occupied on average tenant sizable 3000 square feet. So we've got that one listed.
Theres. Another one that has a month to month tenants, a 40000 square foot building, which I think we value that you know under $60 a square footage of the hard building. There are other buildings that don't fit our profile, but right now they're lease there on.
A solid ground, but we're going to continue to.
Evaluate that.
Up until this point most of the properties, we bought in summer one one or two at a time. So there's not a lot of calling that we'd have to in this portfolio in our other the balance of the portfolio, but and this one there is probably another call. It 30 or 40 million, that's probably not core real estate, that's others too small or in a use that we don't particularly like but it's not.
That's right now so we'll watch the market and see if the fundamentals and there's a lot of pointers that look like there is you know continue improvement in both Calgary and Edmonton.
That continues we may sell it.
Sell those a little bit over the next slide 24 months. There is no rush, they're not hurting us. These two properties just absolutely.
Made sense to just get list and get rid of them.
Okay got it and then just turning on the acquisitions since the last three G.D. acquisitions in Marco mental close.
You have announced the entity and you have 200 dollar to do $50 per foot.
Exactly you see most of their transaction in the private market today I meant is that the new replacement cost.
And then if you don't hold me valuation perspective, your own I first dilution is like $145 per foot. So do you see like more upside to I first valuation debt.
And.
I'm shaking my head now because they FRS valuation is a looking back we have these discussions with our board all the time.
Very difficult to get the I FRS valuation to reflect what we're currently doing in the market. There is theres very much a lag I strongly believe a replacement costs are in that $200 square foot range and and we know for sure that those those are going up so again when we're looking at these prices.
For us because the key here is always the rental growth and so our acquisitions they kind of fall into one of the two different buckets.
Where the rent we think is 50% below market like take one to three years. So the the Cochran business when that's gonna close at the end of the month. We believe those markets are those rents are our 50 presents over the next three years that yield will go from a a low for too.
Above five or mid five and then there's other properties, where we have excess land and because it's so difficult to find land it's difficult to do development. When you build and expansion on a building whether it's 840000 square feet. It very economical because you don't have the same level of development charges. So your your development returns on those expands.
Ones are quite positive, but yeah. It again you have to look at the.
The type of buildings and what's going on there and the size of them. The one in Cochrane. Each building as you know 50 60000 square feet. So on a price per square foot not as efficient to build that size building. So to replace those those numbers are already well north they would be well north of $200 per square foot, if you're building a five or 600000 square foot distribution Senate you can prop.
We still do that less than $200 per square foot, but everything is accelerating and that replacement cost a.
Strategy.
Sure sure very helpful and maybe just last question for me on Montreal markets, obviously market is very tight.
And you mentioned an early sign off pretty good accelerated rent growth. So can you elaborate on your comment duties Montreal is a few years behind Judy in terms of what we can see de then could potentially ahead.
Yeah. So again I think CB Aerie published some reports on seen a few other people and if you look at the two cities that are already below.
The 3% availability, which will be Toronto and Vancouver.
When we don't own property Vancouver, So I can't speak to directly but you know what I've heard it you're seeing all of a similar things that you're seeing and trial just that lack of land the difficulty to build because we're building buildings out. It's a 24 month process you know in some at one or would have been 12 months, so very hard to get new product to make up for that that excess demand.
So and what we found is once you a balanced market in my mind would be closer to 5% and then once you get below 3% it really becomes a landlord market and unless you're seeing a really big pickup in development again, which is what we're not seeing in Montreal, There's still a lot of maybe build to suit going on but the level of development in metro still very much.
Yes, but that economy is quite strong growing well, it's doing a very good job of attracting new business.
With their their green and low cost energy and other other incentives that they're putting in place. So yes. So I think again theres a bit of a lag effect. So it takes while for the market the brokers to kind of go hey, theres not a lot of.
Vacancy in space and options around so you know landlords start to.
Clue into this and then you can say, okay. We're not just going up by 3%. We're gonna go up by 10 or 15%. So yes. So it's not quite there, but we're seeing the signs and that's why we're bullish on Montreal, and we'll start to FICO and talk to different partners of vote, possibly even doing some spec development in Montreal.
Over the next couple of years.
Got it okay. Thank you. Thank you for the Culotta I'll turn back thank you.
Thank you.
A follow on question is from Brad Surgeons of Ice Securities. Please go ahead.
Hi, good morning.
Morning, Brad.
Just a follow up on the Montreal discussion there.
But I think within the slide deck, you gave the in place rents for GCA, what would be the in place rents right now for material in the portfolio.
Let me turn turn to that slide I think it's in a something I have in front of the here, but they're right there.
657.
67, and you're saying.
In terms of leasing spreads right now you're looking at.
It much all content, the 15% potentially yeah, it and again, it's I hate to generalize every time, but until you start talking to the specific tenet, what do they need in the space and stuff.
We're not being as aggressive in Montreal, I mean again the key for US is always about high tenant retention, which means you spent a lot less money capital on leasing costs and renewal costs.
But.
We see that that the potential for that is going to start to accelerate so within that average we have some tenants that are still below $5 square foot. So those are the ones, we're going to be able to get higher rents you got a tenant paying 657.
Rental increases probably not going to be as large there, but it's really on a tenant by tenant a basis, but Montreal, we only have shown to more spaces coming due we're talking to them. This year. So there's not as much volume on the renewal front in Montreal, So it's not going to make a huge differentiator in terms of what we're doing but more talking about.
Our position of our portfolio there now and comfort that we have that you know, it's well set up for the next three to five years.
I guess with the acquisitions, you're going to be focused on <unk> Donnelley terminal and I guess, given where cap rates have moved to Montreal.
Have you been looking at development opportunities in Montreal, and how far along in the process would you be.
Consideration of doing development in Montreal.
Well I'd like to do it I you know metrology unique market ideally, we would want to do it in partnership so it's becoming more obvious to me that that's something we need to explore so I would say, it's it's early early stages, but when you look at the cap rates and I know there was a big transaction that who.
Sold some properties we were in that bidding process 250 million it traded at 3.9 cap and we've always looked at Montreal as a yield that should be you know 50 basis points higher than trials. So I am not compelled to buy properties in Montreal, if I can by the same properties of the same yield and try.
Because I still believe.
The fundamentals and Tron, all or that much more healthy then then Montreal I'd like Montreal, and we would buy their only if we can get that you know that differential in the yield or really low embedded rents are has to be something unique what I do see development.
Something that we would look out there if cap rates continue to trade I'm, sorry, the acquisitions or investments continue to trade in that four sub four in Montreal, we probably won't be competitive on those so I'd rather build you can build to a yield of five and a half get brand new real estate, but again its development everywhere right now.
Not a quick process and as I mentioned in Toronto, you know, we're talking to Cooper. Both you know the next the final two buildings, a 400000 square feet. So we'll start the permitting process will start to build those other late this year or into 2021, but things are just not moving as quickly so.
It's a little better in Montreal, but it's still not not easy to develop anywhere. So it takes time to slow right.
And with the the so the plan development in the GT as as you return expectations changed at all given where construction costs moving to and combined with the change of the runs.
Well the good news on a couple of months it and then try though is.
The two properties that we have excess land, so mississauga down in Burlington.
When we bought those properties, we allocated a land price and somewhere around 950000 to a little over a million dollars an acre to those five and seven and a half acres.
And our pro forma rents would have been around $8 and.
Because of the delays in the time to get the permitting done and get the building started.
The longer we wait the higher the rents are going to go. So the building costs will go up a little bit, but because of land costs has already set.
I would it I would think rents of $10 or higher gonna be easily achievable. So instead of.
Low five yields you know, you're probably a high 5% yields so again, but if you. That's if you have land and that's why when we bought.
This one property that can be expanded by 60000 square feet again, you can do those kind of expansions in a very economical way, but if you went out and said, okay I'm going to go by 10 or 20 acres that 1.5 million a square or an acre and then I've got 25 to $30 a buildable foot for development charges and I've got this and I've got that I got away 20.
Four months do you know all inside and you need to get at rent of north of $10 to even get a 5% development. So development yields are definitely under pressure.
And I think that's why we've we want to do as much as we can but.
Time always is helping your right now in terms of what's your development Pro Formas, they're gonna look like because lumpy await the rents just keep going up.
Okay, great. Thank you okay.
Okay.
Thank you.
Following question is from Chris pre of CNBC. Please go ahead.
Morning, guys.
Hey.
Just wanted to circle back on some color you were providing with respect to the types of a steels that you're doing.
I'm, obviously, not it seems as though not do you get some pushback from some tenants on the kind of big a mark to market, but you're able to extract a higher and higher rent steps on them is there any anything that you can say on.
Types of candidates that would be maybe in the bucket where.
They cat is that they can't afford that that high initial mark to market or just any any any color on not sure and we have these discussions that are our board meeting yesterday and it all comes down to.
Another version of affordability, so you'll see that on the multifamily side and you know at what point do you start to hear hit these affordability issues and it really goes to the understanding the underlying tenants business. So this is one that I talked with the international company. It's a it's a manufacturing.
Apart.
Their contracts are kind of update at all the time, so they're they're able to pass that in flow that costs through and again, because they have they've got a lot of other inputs into their product of manufacturing equipment people. This rent component is not a big game changers. So they can flow that kind of cost increase through a second tenet.
Who's Who's got a a multiyear like a tire distributor who's got a multiyear contract with a bridgestone or something.
You know if we go in start to push the ramp that contracts already fixed all of this goes against as bottom line. So those are the tenants. Her you are struggling to move out and the example is we have a tenant that is actually in or offshore property.
And he is actually is one of the people that went to go up because the rent was lower because you know in his business moving around.
Cash while he's in the.
Hi, fours or $5 a square foot. He is not that can afford to pay the nine or 10, because it's just going to cut Intel's margins. So he went and set up a shop of another another operation down as well because he can rent space down there about $3 cheaper than in so he's he's making the sacrifice in terms of location.
You know to to get that low rent. So that's why say, but it's really hard to distinguish on a case by going to on a broad market you really need to talk to each tenet fear, what's going on at but it really goes too. It's a refinement of a leasing process and understanding your tenant base, what their businesses and how how these costs flow through and what percentage of rent makes up their final.
<unk> product and so you can start to target tenants that are little less sensitive.
To that so most of the co light manufacturing assembly guys. Those there they're fine. It's the it's the pure third party logistics that have type contracts, but again.
If there if they're not tied into long term contracts. They just gets reset and you know if every other logistics players seeing the same kind of rent you know there could end up being competitive so.
Okay got it.
And then just maybe a clarification on the balance sheet.
Properties under development.
In your total IP peak number do you have essentially what that number is.
Looking at Ross.
Your properties under development properties under development, all that said right now it's not like the the there yes equity accounted death.
The properties that are held.
On your equity accounting is our development in.
In wealth and the rest is on that there's very little cost. We spent to date. So it's just the lad costly assets. So that we that that are included in properties and development. So it's like.
10, or 12 million or 12 million so between the Mississauga five acres of $6 million nature in Netherlands.
So it's another five or 6 million and then yes, as Ross mentioned that the joint venture with Cooper, It's the equity method and that's that's what you see there so that one pot and then we spent maybe somewhere between 500 million on that.
Just piling on the development, so yes, not not very significant number today.
Perfect and lastly, just on the the bridge facility any color on what the plans are to try that out.
Well, we're looking at various options said today in that.
And just.
Okay.
So we still got plenty of time, so we're not that that's going to talk about what we're finding that right. Now we did mentioned in the past. We are we are exploring the whole unsecured a potential and stuff like that so we've got lots changed. So we're just kind of examining a few things we don't see any concern that rents are at rents that interest rates are going to go.
In the short term, but it's something that is top of mind with.
Too much floating rate debt the target for floating rate debt would be.
18% or left on a longer term basis and that would primarily just be in your a revolving line of credit right have you had discussions with the rating agencies at all.
Yeah, I'd, rather not say so it's just something we're considering in looking at so we'll let you know when when and if we do that understood. Thanks guys.
Thank you.
Once again, please press star one at this time she is it's a question.
In the following question is from trend Mclean BMO capital markets. Please go ahead.
Good morning, I'm on Android just kind of curious for your development projects like when you look a into future would you think about doing maybe something like more ecommerce type related or are you ignostic on tenant type as long as you're you're in the right geographic market.
We.
We'd like to keep our world simple choice, so where we.
I'd like to say, we just build boxes, but it's.
We don't need to become the leading edge on on the whole ecommerce thing we're happy to be a recipient of just the band that that's pressuring so.
Right now you know you're not even seeing 50 million square feet under construction Orlando, probably has five or 6 million of that.
Sometimes in ecommerce player comes in whether it's an Amazon and scooped up some of that not just means that's less product available to the next guy.
But it does go to the types of tenants that when we do or developments is more.
To that other quick question I, just answered a boat rental rate sensitivity. So I think when we target or new developments, it's going to be more focused on this round of E commerce tenant, but what types of users you'll have more flexibility. When it comes to you know rental rates in the future. So try to get away from the tenants that are more sensitive to that so.
That's kind of the but again, we're just going to be opportunistic. So that's just these two properties that we're building on balance sheet.
We're going to start building them. The walls will go up and we'll start entertaining we're not going to put a asking rate there and we'll see who is who is the most desperate at the last minute and that happens mean ecommerce tenant will probably put them in there, but will like we'll wait and to.
We can get the highest and best returns.
In that particular event, but we're not yet we're not trying to become a especially as I do think in trials. One thing. We pondered is no and I think Amazon is the only one that's doing it is multistory industrial because with the cost of land and development charges. You have to believe that that is something and I know, it's still very expensive and new technology, but a lot of other cities.
You are starting to see that experience so I.
I would like to think that that's going to start to work its way into the the trunnell landscape just because of the scarcity of land.
Thats, great color and then speaking of like rising construction cost.
We're like development spreads insurer in Toronto have bake impressed.
And kind of what are your thoughts there, but what kind of spread you want on development.
Well look at a spread we kind of look at a.
Everything that we've been pro forma they said was in a low.
And then get to mid Fives, and maybe if you will perform or getting to six it's like.
What is the new property worth and trauma today I mean.
I think if Montreal is trading at a.
Properties that.
3.9, Cronto cap rates are probably less than that right, so three and a half or something like that so.
So.
I think theres still healthy healthy spreads, but most people are not developing to.
Flip it right. So you know in Orlando or whatever it's all you know owners intending on that's or things. So you kind of look at it a little bit differently as more what's my yield that I'm going to expect and for US It's a combination.
We're buying properties today at a four.
Three present yield we think there's rental growth than we can push that up to five or five and a half if I can build a brand new building today and get something that the 5% yield I know it only be my going in acquisition yield, but I'm also upgrading the quality of the portfolio. So so it's not an absolute number I I'm I'm not really even concerned the boat.
Initial going in yield or spread that really isn't my phone because it's just upgrading the portfolio building and quality properties because even if they don't get the you know I get that they don't get the highest yield on the first lease when that rolls over in three years five years or whatever.
That confident that the next lease will even push the yield up higher if you're if you're you've built a good building in a good location.
That's great color I'll turn it back thank you.
Thanks.
Thank you.
There are no further questions registered at this time, we'll turn the meeting back over to Mr. Jackman.
Okay, well. Thank you operator, and thank you everyone I'm actually can see we had a busy time and we're definitely doing this is this pivot now.
Trying to consolidate the all our properties do some geographic fixing start to focus on development a lot more focus on.
FFO per unit type of growth.
So we're in a we're in a good position right now access to capital both equity and debt is there. So we think it's going to be exciting 2020.
And we'll talk to you again in May Thanks, a lot.
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