Q3 2020 Summit Industrial Income REIT Earnings Call

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Thank you operator, and good morning, everyone. Welcome to summit Industrial income rate Q3 conference call before we begin let me remind everyone that during this call. We may make statements containing forward looking information. This forward looking information is based on a number of assumptions subject to a number of known and unknown risks and uncertainties that could cause actual results to differ.

Were materially from those disclosed were implied we direct you to our earnings release Mdna other security filings for additional information about these assumptions risks and uncertainty.

Joining me on the call. This morning, as Ross Drake her Chief Financial Officer, and Dan to get the sort of new Chief operating Officer. Dana has recently transition from our board of Trustees were very excited. The addition of her role on our executive team Dana brings a wealth of real estate Capitalmark experience, E.S.G. and Texas Tech experience to summit.

She has hit the ground running and we're excited about that contribution she little to make going forward. That's somewhat continues to grow.

Thanks, so much for the warm introduction, Paul and good morning to everyone I'm very excited to be part of such a wonderful organization and have lots of ideas to contribute towards the next stage of growth.

I've had the opportunity already to connect with many analysts bankers and investors individually and I look forward just chatting more in the future.

[noise] I'd like to start by taking this one want to thank all are tenants for their support through this difficult period as well as everyone at the summit team for their hard work and commitment during these unprecedented times.

It is their skill and experience that is the driving force. During this challenging period that we continue to navigate a.

We remain steadfast in our view that the strength of these relationships both internally and externally is what sets summit. So apart from its competitors and I don't use the word proud very often but definitely very impressed with what we've been able to accomplish that.

Through this pandemic so for turning.

Turning to our formal presentation Q3 was another period of strong growth and operating performance for summit, our programs to mitigate the impact of Covance pandemic are proving highly successful and while there's still much uncertainty in the market broadly. We're pleased that we have now returned to more normal operations from an acquisition and financing perspective.

All are key performance metrics are positive year to date revenues and why AFFO and we continue to successfully collect more make arrangements for rent collections, which were over 99%. During the third quarter were optimistic that we should see another record year for summit.

In terms of our specific results slide four outlines our strong performance in Q3, including solid and stable portfolio occupancy at 98.7, notwithstanding the cold and pandemic. The industrial sector continues to perform extremely well and the strength of our portfolio has kept our occupancy levels effectively unchanged at close to full occupancy.

Revenues were up 41% the result of our portfolio growth over the last 12 months, increasing rents and consistent high occupancy.

Active leasing strategies that acquisition programs combined with strong governance and responsible capital management are the backbone of our consistent revenue growth.

The quarter's revenue increase in revenue in turn generated a 41% increase in end of life and a 47% rise in EFO importantly, our growth continues to be highly accretive on an AFFO per unit for the quarter was up almost 22%.

Same property NOI was very strong 4.3, despite some provisions for tenet receivables due to cold at pandemic and rent abatements taken under the secret program.

Looking further ahead, we expect cash flows to continue to improve as rent relief programs wind down and the economies open up in our target markets.

Our strong performance for the nine month first nine months of 2020 are detailed on slide five.

So here, we are managing well during the pandemic and we're on track to deliver another record year.

Revenues were up 38% due to portfolio growth continuing strong occupancy and increasing monthly rents. This growth resulted in 41% increase in net rental income and a 44% rise in EFO sales.

Same property NOI was 3.2, despite the provisions for tenant receivables and the secret payments.

Again, our growth continues to be accretive on an EPS FFO per unit and was up 12%. Despite a 28% increase in the units outstanding.

And we continue our DNA expenses remain consistently very low which is a real advantage as we meet our.

Our ultimate goal of building value to unitholders.

And slide six of the detail a snapshot of the right.

Rich reach many key milestones we're very pleased that we're now passed the 2 billion dollar market cap and 3 billion enterprise value in size alone is not the key thing. It's it's really building the an operating business, creating that critical mass operating efficiencies. We now have full managed offices property management, including Montreal.

We are now set up to be able to effectively build out of a great development program.

We have access to unsecured debt, which is cheaper and more flexible and now we can start to look at you know some dispositions as well. So it's brought a real key pivotal point then we're excited about that opportunity.

Turning to page seven our slide seven details of some of our completed acquisitions year to date on the first part of your pre pre pandemic wrong. The GTK these new properties or making a strong contribution to our results and generate the operating synergies and economies sales as I mentioned, so far this year, we've acquired nine properties totaling 747.

1000 square feet all in the GTR area at a cost of approximately 176 million with a a very good accretive cap rate of 4.4 as you are aware, we paused our acquisition and development programs for six months from April to September due to the pandemic.

As operations and cash receipts.

Return to normal and we saw increased leasing and demand from our tenants improve liquidity from both an equity and debt standpoint, we are in a again confident in an actively resuming our growth activities.

On slide eight we highlight some of the more recent activity.

And just to note all of these were off market deals subsequent subsequent to quarter end, we acquired the remaining 50% of 11 properties in Montreal from our joint venture partner for $88 million.

As part of this transaction, we also sold a 50% interest in there was one office building in that portfolio.

These properties were bought at a very accretive cap rate of 5% and the results now that transaction, we internally property manage all our properties in Montreal.

We also acquired 245000 class a logistics center on a sale lease back in the GTH first 47.3 million. That's a 15 year lease with a with annual steps again, a very attractive cap rate of 4.5% number ripple repo below replacement cost and finally as I commented.

Before we didn't.

Agreed to buy out our two properties from our partner in wealth for a total of $33.9 million importantly.

Patently, we own half of that project at cost and we bought the other half at market and the blended cap rate.

Isn't a meeting, 5.6% and a $174 a square foot clear.

Clearly our growth programs.

Accelerating.

Look forward to announcing more of those in the future Dino will go through some of the.

Details of the development program and how it looks for 2021 days I'll now turn things over to review our property portfolio great.

Great. Thanks again Paul.

So I'm going to discuss some its real estate portfolio performance and start by focusing our strong market fundamentals that we can.

Canada in the industrial sector.

So starting on slide 10, we outlined our portfolio distribution by geography.

Were the only publicly traded industrial REIT with 100% Canadian properties and currently over 71% of our portfolio by square footage is located in strong eastern Canadian markets.

We're pleased to have grown our portfolio to over 150 high quality assets that we've maintained consistently close to 100% occupancy.

We continue to be opportunistic with our acquisition and disposition programs and have targets to bring our Ontario allocation closer to 60%, while bringing our alberta allocation at or below 20% on a square footage basis over time.

I'll be discussing each of our three key target markets in more detail, starting with Ontario on slide 11.

Slide 11 highlights the strength of our Ontario portfolio, and really why Ontario, and the GTM particular continued to be an area of focus for the Reed.

TJ market continues to see supply constraints with availability rates near all time lows and we believe that the outlook for the DTA remains strong and we will continue to be the dominant market in Canada.

Same property NOI rose, 4.2% through the first nine months of the year and.

And our leasing programs are driving strong increases in cash flows.

During 2020, we generated a solid 99.3% retail retention ratio on renewals with a 25.3% increase in rents over in place or almost 27% and our DTA target market.

With current embedded rents of 679 per square foot or 666, if you're looking just at the GTN. We're confident we will see further lift as leases are renewed going forward.

Slide seven demonstrates that our cut back portfolio continues to generate solid and stable performance.

As of quarter end another portfolio represented approximately 18.4% of our total portfolio G.L.A.

We believe that there are attractive opportunities out in this market and we are actively focusing in Montreal. In addition to Argentina. So guys.

Our leasing programs are also generating solid increases in cash flows with a 98.4% retention ratio for cut back portfolio. So far this year.

Generating a 4.9% increase in rents.

Again with current in place rents below market, we expect further red list in the future.

Turning to slide 13, we show the metrics of our Alberta portfolio.

Our Alberta portfolio has been considerably stable overall and in fact are occupancy is not only well outperforming the market, but has continued to improve since our acquisition of these assets.

We actively manage these properties and have been strategically identifying select properties for disposition.

You can be maximized at the appropriate time.

We plan to grow out of our overweight allocation in this market over time to achieve our desired geographic weighting of 20% or less.

Alberta represented approximately 28.7% of our total portfolio jelly at quarter end and was subsequently reduced to 27% and if you take into account or some subsequent event acquisitions.

Same property NOI was impacted by the provisions taken during the quarter, including a 25% rent abatement for the secret program.

Our in place rents for Alberta for the 4.3 million square feet of distribution and warehouse space was 774 per square foot at quarter end the in place rent for the entire Alberta portfolio was much higher when you include the properties with very low sales coverage.

[noise] on the leasing front as outlined on slide 14, we continue to proactively manage our lease renewals.

We are pleased that our liquidity position has been strengthened by our ability to collect the vast majority of our rents through the pandemic in fact, our rent collection has been relatively unaffected.

We're generating solid increases in rents on our renewals with an average 19% overall increase so far this year and a much higher 27% increase in our T.G.T. market.

Tenant retention for our 2020 renewals with a very strong 88% to date keeping.

Keeping tenants in place is a key strategy at summit and we were very pleased with our progress.

A few examples of our leasing success, our lease buyout in Montreal were able to release space at a 40% increase in rent as well as the lease term extension in the G. for five years with steps for an overall increase of 50% and I might note. It was a 250000 square foot space.

These are impressive results.

Our leasing team continues to deliver as a result of strong relationships with tenants and our creative and proactive leasing strategies truly set us apart from our competitors.

As you can see on slide 15.

We only have 1.4% of leases remaining to renew this year with manageable and staggered lease maturities over the coming several years.

We believe with our low embedded rents below market. We can continue to generate solid increases in cash flows as leases mature in the years ahead.

Overall, our portfolio is well diversified by tenant base and further information can be found in our appendix listing our top 10 tenants by base rent.

As Paul touched on earlier Slide 16 details our strong development pipeline over the next two years of note also projects listed or any attractive DTA market.

We expect to acquire the remaining 50% interest in the first two girls properties before year end, adding approximately 388000 square feet of brand new space to our portfolio.

100% of this new space has already been leased or committed at attractive rates with strong tenants under long term leases.

Based on the leasing success, we're starting to clear dirt on the next two buildings in wealth and are excited to be started construction in the spring.

The key development projects on summit on land will both begin in 2021 on spec based on our confidence in market demand and leasing rates.

Development and value add opportunities are increasing focus for the Reed and we're excited to be actively looking to expand in this area in proportion with her income producing property growth.

I'll now turn things over to Ross for his financial review.

Thanks, Dana and welcome to your inaugural quarterly conference call.

Turning to slide 18, we continue to me Apple liquidity through the quarter was $430 million available at September thirtyth, including cash available borrowing capacity.

Potential new financing on our unencumbered properties have no [noise] <unk> liquidity position has been to really approve improve since Q2, where we had 220 million available its comparison.

Our new 300 million dollar three year unsecured credit line arranged in March provides us with that with balance sheet flexibility and that's our ability to access the unsecured debt markets with our DBS investment grade credit rating.

In September we successfully completed our inaugural unsecured debenture offering of $250 million at 2.15%.

Our access to attractively priced capital is going extremely strong through the COVID-19, Pat pandemic as evidenced by our oversubscribed hundred $72 million bought deal equity offering in August.

Importantly, the secured mortgage markets remain strong and deep for the write down.

During the quarter, we financed a mortgage on one of our recently acquired growth well properties to $40 million for eight years at a rate of 3.5% and secured a new $30 million 10 year mortgage in October a 2.9%.

Turning to slide 19, as I mentioned, we were pleased to announce our investment grade credit rating from DBRS and September Weve.

We believe that rating is a direct reflection.

The consistent ongoing stability of our business and provides us with additional financial flexibility.

Yeah unsecured debt markets, we continue to grow.

We completed our inaugural unsecured debenture offering our 250 million series 80 branches have a five year maturity and a 2.1, 0.5% annual coupon rate, which is an improvement of five basis points on a <unk> repay floating rate debt.

Demand for the auction offering was exceptionally strong with over $1.5 billion across a large cross section of institutional debt investors names.

We are pleased to have the ability to access the unsecured debt market as another potential source of capital as we continue to grow the Reed.

Shifting that meet capital stack from a purely secured debt profile to balance sheet with both secured and unsecured debt financing is a key turning point in the next stage of summit.

Our balance sheet at quarter end continues to remain strong as shown on slide 20.

Our leverage ratio remains conservative 39.8% at September Thirtyth, and we continue to improve our debt coverage ratios we.

We continue to capitalize on the low interest rate environment, reducing our average effective interest rate.

Of note our current unencumbered pool of properties sits at approximately $1.1 billion at quarter end.

Slide 21 details our total debt maturities by year, showing that you have to stagger debt maturity schedule with only 0.6% of total debt coming due through the remainder 2020.

13.9% and 2021, which includes our $100 million outstanding on our bridge loan.

Our $1.1 billion debt profile carries a weighted average interest rate of 3.2% was significantly well rates on our unsecured debentures and secured and unsecured credit facilities.

During 2.15 and 2.2%.

In addition, the average interest rate for our maturing mortgages is approximately 3.7% over the next few years, representing a solid opportunity to generate significant savings on these charities maturities going forward in the current low interest rate environment. We.

We also negotiated an extension of our non revolving bridge loan to receive a one year extension for domain $800 million down on the facility to November 2021 on the same terms.

Turning to slide 20 recollections are back to normal levels October our recollections were.

It'll over 99% and November is tracking the same also we are in the early stages of repayments of a red deferrals that started in October and November.

We discussed at the start of the pandemic, we work closely with our tenants to implement a number of relief programs where needed including referral arrangements agreements early release renewals at higher monthly rents in exchange for free rent and the government of Canada Seeker program.

As shown on slide 22 to date, you venture to deferral agreements for approximately 3 million square feet of July was a total of $3.4 million to be retained paid over the next 12.

12 to 18 months with the majority of it being repaid by May 2021.

Approximately $1.8 billion in free rent has been granted in exchange for early lease renewals and extended terms at higher future monthly rents. We believe this program will help certain tenants work through the economic hardship created by the pandemic.

Keep them in place over the long term finally.

Finally, we applied to the seeker program for qualifying tenants for rents due from April through September for a total of $1.8 million under this program.

We provide a 25%.

Reduction right production with the tenants paying 25%.

The government paying thats, 50% as of September Thirtyth, we have talked to 83% of the government funding alternatives.

I'll turn things back over to Paul to wrap up.

Thanks, Ross looking ahead, we feel confident in our outlook and our ability to continue the success successfully navigate the current and yet unknown challenges of COVID-19.

Given our managerial bench strength deep and long standing industry relationships or the other.

Liquidity attractive assets access to various sources of capital. We believe we are well positioned to not only navigate a potential new covert challenges, but it might present some opportunities for us in our growth strategies going forward in summary, our operations and portfolio remains strong and stable, we have a competitive advantage with a quality or properties and strong.

Tenant relationships, we continue to see high stable occupancy essentially unchanged versus pretend demick levels industrial properties or we see as a highly defensive asset class in our portfolio requires very small amounts of capex and are located in markets with very limited new supply. In addition to these strong fundamentals we are getting content.

Actively managing in a keep a very lean and efficient operation.

We also believe the trends in industrial estate will continue to benefit the rate such as online E commerce and supply chain shifts.

We're very pleased with this trajectory as you can see on slide 28 lots of detail wasn't meant to be read it's in the short term. We will continue to focus growth on the read through strategic acquisitions and development <unk> optimizing returns.

In our geographic distribution liquidity, it's always in the back for our minds, but we have been fortunate that does not has been a concern even during the pandemic longer term objectives include expanding our development pipeline as Dana mentioned continuing to prove our debt coverage ratios, while decreasing the overall leverage.

Improving communication to the market about our ongoing programs and increasing iasci initiatives. We believe that sustainability is a key driver to long term business success, and environmental social and governance considerations should be a priority and all read activities in summary, and I know, we've taken a little bit longer. This morning, we had lots of good stuff to talk about we do believe this.

Another record year for two for someone for 2020, now I'd be happy to take questions.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound.

Please standby compile the culinary roster.

Your first question comes from the line of Chris could freed from CNBC. Your line is now open.

Good morning, and again congrats on the quarter.

Just wanted to maybe touch on the acquisition and disposition activity I guess on the on the former question just kind of what's the what's the pipeline looking like and then on the latter hey beyond what's kind of into held for sale bucket right now are there either.

You know assets that you guys are targeting for as disposition candidates. Thanks.

Okay sure and it's an interesting market I mean, it was it was very quiet or if the beginning of September but a lot of stuff that started to hit the market. There's been some actively marketed deal. So again, we're still kind of looking and focusing primarily on those off market are under the radar type deals.

ER Bolton Tron on Montreal definitely give you. The example of the transaction or just bidding on in Montreal.

It's a significant property over over $70 million in value.

Good quality tenant with a 10 year lease with one rental step after five years at 10 institutional bidders. We were one of those 10 going into the second round.

Guidance was a kind of four and a half, but you know unknown because of the pandemic ends up. The this went soft for this went to 3.75% probably $250 per square foot, which we believe is over replacement cost. So clearly that wasn't one we were going to pursue but it does show the appetite four andas.

Estriol, so I always say that trial, those cap rates should be or could be a little bit lower than Montreal. So if that's an example.

No same kind of cap rates for good quality a properties and so as a result of that we tried to do these sale leasebacks, which are kind of off market or unique deals value add deals but.

But that's why we're going to shift gears and really start to you know the only way to get those kinda quality properties in our mind is to build them yourselves. So we're going to continue to look for more partners in Montreal now that were no longer affiliated are involved with my Tony So we're kind of a free agent there. So we'll try to expand.

That program and on the disposition side, there's it's really again within our core focus but through some a larger transaction. We picked up these small day industrial which are the ones that did the worse during the pandemic.

We have stabilize those we've improved occupancy since we bought them, but there's a couple of properties in Ottawa there that we're going to we're going to list. Shortly the one that we had listed hitting we're getting off it's just before the the pandemic start we're gonna realists that one in Edmonton. So we're still in the range of.

You know $60 million to $70 million, but theres a few properties in the west that are smaller that were you know for which we're leasing it out.

We're letting the market know you know if you do have an end user that's preferring to buy it rather than lease that we're happy to entertain that as well. So we'll continue to chip away or around the merchandise in the west.

And then can I just get a clarification on the on the golf.

Bob Development project that you're acquiring the remaining 50% of so what is your New York for the 5.6% stabilized cap rate I'm I'm, assuming is that relative to the entire cost or is that all just on the incremental 30 34 million or just can you maybe just remind me how you know what the total cost isn't there.

The going in yield on his on on the development Yeah.

So I'm not going to tell you, but I'll I'll tell you what that's left the blended cap rate. So you know we are still building to more buildings and then we want to stay competitive in that market. So yeah. We won't tell you what we paid or partner in terms of market that we won't tell you what the costs up you'll see.

It is but the blend of all of that is 5.6 very attractive and if you look at where cap rates are trading in that you gave for good quality buildings, you're down to four sub four for sure. So that's still a you know a.

160 basis point spread over our all in costs.

It's far over 200 on a 200 basis when spread on the honor cost piece.

And so the $175 a square foot so still extremely attractive where you know I would say every average building and trial is now at least worth 200, and you know in some areas that youre seeing to 20 to 40 is a replacement cost number.

Okay last quick one from me just regarding the the promissory note with respect to DC too.

It said that you guys hit a milestone in in October just what does this mean with respect to the.

Collecting the the proceeds on that promise right now yeah. There was two key key stages. There the first payment will be due in January and.

The exact or seven or $8 million of that comes then the second certification happens in March and then the final payment and rounding out hopefully will happen and.

June through the summer of next year, but the good news is yeah everything is on track. The first half of the power has been delivered to the building and the tenants in there using that.

Thanks, a lot okay. Thanks.

Yes. Your next question comes from the line of Havent you done from Scotia Bank. Your line is now open.

Thank you and good morning good.

Good morning, My follow up just to follow up in terms of your acquisition strategy. So cost of it has come down I mean, you got 2.15 per cent for five year unsecured debentures.

With that kind of course subject can you be even more aggressive in the acquisition market. I mean can you don't compete on.

The Montpelier acquisition.

Acquisitions or the.

Action that you mentioned, which may push up 4%.

We can always compete and when you're looking at a program. We always look at to the entire program. So you know we bought you know 88 million at a five cap, we bought 33 million at a 5.6 cap about another 47 million at 4.5 cap.

Yes.

Which means if we want to do one property that was neutral.

To tap that FFO or even slightly dilutive, we absolutely compete the golden rule and we've been saying this for over 20 years now its replacement cost and not just where replacement cost is today.

But where do we think it's going in the future So where Montreal. We could have competed for that one and we like the asset like the tenet there wasn't a value creation because the the rents were going to be kind of locked in for 10 years.

But at a price for $215 square foot like now it will just be a little more patient and one of our properties. There were were looking at doing 102000, 140000 square foot expansions will be knocked download small building and build out there so and we can build far less on a price per square foot than that that price. So.

Well always go back to replacement cost, but yes in terms of our cost to capital and being accretive we can be competitive on anything that we want to be but when we're looking at going into those low cap rates, we really want to have something compelling. So every one of our GT acquisitions, usually has a bit of a story, there's an upside there some excess land, where there's embedded rents that we think we can cigna.

Frequently improvement, whether that's two or three years when that lease rules for where you're getting rents up to market.

Absolutely so on the acquisition that $47 million you did in Boston that 4.5%. So what was the story there.

And Oh I'm in how those people would you call date of the replacement cost so that one was $193 a square foot.

In bond that land is probably closer to $2 million an acre a year.

You're probably looking you know minimum of like $240 a square foot there and so that's why they try and and again when we say replacement costs than we've seen it go up you know almost by 50% over the last three or four years in the GI we don't see that subsiding 'cause. It's just you know the the amount of land that's available is decreasing those development charges that.

Mentioned they continue to go up you know even the developments were building on balance sheet. When we first modeled those when we bought those land two years ago. We would have been in the 160 Oneseventy you know as we get we're tendering now you know we're probably more into the 180 185, you know so we're still we're averaging into the market because we own that land for a few years, but if you were to go and buy.

New land and that's why.

The millionaire half 2 million dollar acre land you have to have a special situation, where you can get the 10th to pay that much rent and that's why it's kind of pushed us a little bit east a little bit west. So we are looking for additional land with our partner and ourselves.

Whether it's again in 12 Kitchener west of the city or in the east down in Pickering and March one so it's hard to find land that's ready to build that makes sense and rental rates are are catching up we're seeing lots of rents achieved now that are north of $10 a square foot and then some unique situations you know.

$13 per square foot, so, it's catching up but not not fast enough to cover off a decent development yield on a.

$2 million, an acre piece of land.

Got it.

Sounds like the land prices have been going up so.

You should welcome this pretty competitive as well so what could be the size of your development program and then I know you have a couple of hopper, but as you look into 2021 do you have any like it doesn't all that's in terms of how much you have enough. If I can do you need to huh.

I mean, what we showed in the presentation. We have another 730000 square feet, you know use close to $200. A round number. That's you know that's almost $150 million or I think the majority of that is going to be built maybe the expansion.

Mike rollover into 2022, but all of that is going to get into the ground and it wont become income producing probably more towards the end of the year, but clearly we want to see that bigger so there there's.

Theres not a maximum amount that I don't think we'd look at in the GCA that just that much active one of the properties down in on.

When our Burlington asset we have any lifted it yet we've got we've got multiple inquiries for one on one of the buildings built we're building two buildings down there. So I had a very attractive rental rate. So we have no concerns and.

You know that we can build on spec because we sit in the old some at least a called building inventory when you're at 99.3% vacancy you know theres lots of tenants, including our own looking for additional space.

Got it.

Just a last question for me on the Botopoulos Fool you. So your occupancy is actually up year to date.

By depend on mix.

What led to your outperformance was a broad buckets.

Then we noticed that the tenant retention ratio and then go to almost 40% compared to I think over 95% in the other geographies Oh, yes. Good bye.

By design.

No no just that was just one one tenant left in Russia. The diesel, but we released at less than 30 days less than 300000 square feet and it was released.

Yes, very near to yeah. So that's yeah it didn't.

Didn't impact the occupancy for very long, but obviously impacted retention, yeah, and then going the other way I mean, we've talked about this before that market the fundamentals aren't as strong so rental rates aren't aren't going up. So we're just trying to maximize occupancy you have to be flexible you know doing short term deals. We you know you're not trying to push revenue.

Sales in terms of rent.

On on new deals, you're getting some free rent and stuff like that so you just do what you need to do you make sure you're competitive in the market, but people are the thing I think to keep missing about Alberta. They just think of it as oil and it's not it's you know it's still it's still predominantly thats, a big industry out there, but they've been diversifying for quite some time. So all the same drivers that you have in terms of E commerce.

Supply chain.

They exist owed in Alberta in Calgary, and Edmonton as well I mean, there's other drivers with the oil and gas business, but although same drivers that are wanting to expand and trying to control. Some of those users are needing to expand in a in Alberta as well. So there is still activity. We have one large ah lease expiry over 100000 square feet in.

Levitan and that tenant is going to leave and we've got two people that we're you know we're talking to you in a very serious label, taking taking that space. In 2021. So we do anticipate there's going to be a little bit of a some bumps in our occupancy. So we think theres at somewhere between 1% to 1.5% of of turnover in releasing.

Likely to happen.

Got it thank you guys.

Got it.

Thank you.

Your next question comes from the line of Matt Logan.

Please state your company name your line is now open.

Thank you and good morning.

Matt from RBC from RBC, if you Didnt know [laughter] Mobi C.

Today, Weve seen minimal fallout from tenants in Alberta, as well as the non traditional users across your portfolio.

Can you talk a little bit about if you are still expecting some tenant churn as we move through the next 12 months or do you think that is likely behind us.

Now, there's there's definitely going to be turned so I can't announce that we do have two bankruptcies that happened post quarter end and the good news is they're both in Toronto. So the first one was a 39000 square feet.

October.

Which we've already refills so another tenant in the the same group of properties went from 22000 to 39000 square feet, we're going to get an average of the 7% rental stuff over the over annualized rental stuff over that term and then we back filled that 22000 square feet with another user.

The rent, 60% higher than than that so so thats turned into a a win for us even though theres going to be a little bit of costs involved in those those releasing a second bankruptcy in another GSK property on the first one was an advanced planning organization. So they were hit by the pandemic pretty hard, but again I would tell you most of the tenants that are are not going to make it.

We had some issues were weaker the second one is 110000 square foot. It was a printing company. So that industry is been slowly dying from online content its going take a little while to get all the printing materials and stuff.

They were paying $5.25. So we've already released the first bay there of 20000 square feet at 835. So that's a 60% increase now I don't think we're going to if we lease it in bulk we probably won't get those kind of rents, but we're definitely expecting 20% to 30% increases in the rent. So so again, you'll see occupancy in.

Correct. It for one three months, but then we'll get leased up and these cases.

It will be at improved rent in Alberta.

Yes surprisingly some of these tenants like the rock climbing walls and dairy are finding away and you know I think if they can hang in there long enough to get a vaccine and something a little bit more permanent.

Hopefully the majority of them will make it I still have my skepticism. So I stopped as I mentioned, we're allowing for somewhere between one and 1.5% so inter allowances.

It's as if we're operating the portfolio at 1% to 1.5% lower economically so because weve already allowed for that much income in or in our monthly numbers. So we'll see we'll see what happens, but like literally and again secret definitely help them. There's some new government programs that some of these small tenants or are going to do themselves. So we don't have to be involved and do the 25.

Present, so hopefully that will get them, but there's clearly a group of those tenants are not operating at pre pandemic revenue levels. So they've had to cut overheads find other sources of capital to to survive. So there is definitely going to be some of that but as much as you're having that kind of tenancy impacted.

The demand increase all over the board both in terms of short term requirements at long term you know, whether it's from increased inventory supply chain.

Storage of PPS and items like that or E. Commerce, clearly are dying for more space and so we've got tons of incoming calls like I said, we were just in the Burlington, We haven't even listed it for the broker yet and we got an unsolicited offer on the first building down there at very attractive rates.

So.

When you find a tenant that absolutely needs of space or.

Let's say that desperate.

They really they.

The rent the negotiation goes pretty easily because there is more important for them to get in and be able to expand their business then or not.

Not find at home.

That's great color, maybe just dovetailing into my next question.

All of the demand that you've seen even on the post pandemic basis can you give us a sense for where market rents are trending.

But just have you seen any increases in Toronto, either sequentially or since you started the pandemic.

Yes, so I would say in the second you know when we shut down our acquisition program, everyone was being a little defensive not knowing what was going to happen. So we're probably kind or on some of our renewals in terms of still getting is 35, 40% increases, but we're kind of pushing that that envelope.

You really start to see it on new leases. So orlando's got some buildings out there. They just did a lease deals very effectively it's going to be over $11 on new build.

And so yeah, I know theres, absolutely stronger and stronger rental.

Rental growth to the pro forma or 10% to 15%.

Of our rental targets in the Gulf properties. So again, just because tenants of the GTS couldn't find couldn't find space. So because of our cost of land. We have about a three to three to $4 per square foot pricing advantage, but.

But its again, so tenet whatever big tenants that went down well came from a an oak Hill properties. So just like we can't we can't operate.

In our space, we need to expand and they couldn't find it close to where they were so they had to go a little bit further out but as a result, we were able to get very attractive rental rates. There. So I can't I don't like pin a number but you know it's it's for new space, It's definitely north of 10, well get the test that on or our survey Roe.

Property, and Mississauga, which 95000 square feet. So we were just looking at the list that we've got all the building permit so that will be start in the spring, but we'll we'll start to do the marketing there I've no question that there will be multiple tenants I'm interested in that space. So we'll get to test and you know somewhere in the next six months what what.

What that rental market is but I'm I'm, hoping for very good outcome there.

Would it be fair to say the trend is flat to incrementally positive in Montreal in Alberta as well.

Yes, Bert is flat for sure and I think the main thing we're seeing there should increase.

Primarily free rent, but I was going to say incentives, but most of it in the form of free rent. So you know to maintain your rents revenue give a bit more frequent whereas in Toronto, we don't give anything and and then same thing I'm not sure my Charles very interesting market because they have been trending down. We think there are only two or three years behind were trying always in terms.

So their supply.

Supply demand mixes and their availability is below 3%. So that's why we're looking at this one development on land that we own but we're also exploring possibly from Jvs in Montrose I definitely think there's an opportunity for development and that's because we think rental rates are getting poised to.

To start to accelerate there so they're very comfortably in that seven 850 range for good quality property, but I think I think that number's going to start to move up because there is just not good quality space into Montreal, you really have it and.

And inventory, where you know, there's a lot of old product that might be five or $6 space.

But tenants.

Tenants that want the good quality space are going to be willing to pay for it and they'll they'll pay eight 910 to getting the right location with the right quality properties.

And in terms of your development in Montreal would it be fair to use your JV with Cooper construction as a benchmark, but maybe a little bit more in the intellectual property.

Oh, well because we own the land we were going to you know a very low cost base. There. So we havent explored we haven't got far enough along the path to get preliminary costing but yeah I would I would think thats why when we saw that number go.

North of 200 for that asset there it's like I.

I know we can build for you know, whether it's 175 185 like it's somewhere in that kind of range I would I would think so we'll see where we'll see we'll see where it goes but land is definitely creeping up and but the strange thing. If you look at the CVR east at almost I think there's a couple of million square feet, maybe underdevelopment, Montreal and I think.

85% of that is pre leased so the development community there doesn't build spectrum. So.

Whereas summit, we're perfectly happy to.

Build inventory as we I call it.

Not really pursued that.

All for me I'll turn it back thank you.

Thanks, Matt.

Your next question comes from the line of Joanne Chen from BMO capital markets. Your line is now open.

Hi, Hi, good morning.

Joanne for your your inaugural Oh, Yeah Paul.

Thanks, very much I'm glad I made it on the call I'm, having some technical difficulties, but that kind of made it on today, but.

And maybe just really quickly high level.

In terms of kind of give us obviously gross profit growth in your core markets. How should we think about organic growth trending I guess and 2021.

Oh, that's a that's a tough question [laughter], if I heard it all.

Like I said I don't like.

I'd say there was a six month pause in the GT, but all of the same accelerations and our in place rents going from six something you know again, we're not branded product, but we're going to the eight you know.

We're starting to get a 50.

We're definitely getting the same levels of bumps, which this year, we've averaged 25%, but there was some fixed bumps in their metro.

Metro we just haven't had a lot of lease expirees. So you know that.

That one just because of the volume is going to be lower and then as I mentioned the strategy on Alberta is really just keep occupancy up and we're.

We're not expecting growth there because we bought that portfolio at a 5.5 yields we push it up to about 5.8 and.

Our our goal over the next couple of years definitely given the backdrop of the pandemic is just maintain that portfolio occupancy as high as we can to keep that that yield as high as we can until that market finally starts to recover.

Recover a little more.

Firmly so and again the idea is most of our growth is happening in Toronto, Montreal, So that Alberta piece as Dana mentioned.

Short short term target, we think within five or $600 million of new growth from acquisitions or development.

At Alberta number will hit 20% and we could celebrate that if we were able to complete a couple of these dispositions that I mentioned.

Right. So I guess I guess I mean, we touched upon the acquisition quite a bit but just in terms of how should we expect the balance I guess the growth is coming from organic versus acquisition.

Over the next year.

Oh, yes, good modeling questions, that's less [laughter], plus we don't provide I mean guidance I mean, like we can definitely buy accretively, we definitely can build highly accretive Lee.

You know I I think we can get equal contributions from internal growth from external growth would be my gut feeling healthier.

But again were very optimistic and the death. This a long time, and we don't like being optimistic because it scares me but.

No things are looking are looking very good we definitely theres going to be a.

I would describe it as driving a standard care, we've got the foot on the gas and the break so we're kind of letting go of the.

The break a little bit here and pushing the gas, but we're still aware that there's going to be a second wave and hopefully there's a vaccine and there's definitely some economic hurt that's still out there but.

The industries are changing so as much as you know retail in some.

Companies are going to feel like our printing company Theres lots of other companies that are desperately in need of expanding and those businesses are growing and very profitable. So it's just sorry rejigging of use.

Uses I guess.

Right and I guess, you touched on the development pipeline I'm, a little bit in terms of building on spec with it going forward do you think it will be a combination of.

Building on spec, but also a significant portion being currently Netflix.

Yes.

Right.

In this market, it's better to not pre lease because lease rates are changing that quickly so and again, we joke. We joke. When we say we are building inventory, but our biggest threat to our portfolio right. Now is we don't have space to accommodate tenants. So so the bigger we can build our land bank and build build buildings, we have lots of tenants there.

Okay.

I needed I, just got another contract to store PPS or some other critical supply chain thing I need at a 50000 square feet or 800000 square feet. So.

We need to build that space or at some point that time is going to say, okay. I have to go out here to another place for another development. That's so that's why development becomes critical for our growth at the stoning standpoint, so it's not only because you can.

Upgrade the quality or portfolio, you can get higher than average return, it's a necessity at UTI that and that's why if you look at Orlando is the top industrial owner in Canada. That's how they grew their business like 90% of it is come through their own tenants expanding and development program. So.

Someone wants to keep increasing that.

That ability so its very difficult to GTT I mean, when you're looking at land. Its like 15 acres here. Its 22 acres. There is you know.

50 acres here like it's not even big Big parcels. So that's why it's so difficult to say GTH needs. Another 30, or 50 million square feet Oh, let's just build it like the land does not exist I get at it here and if you're if you're going out to me you're starting to go very far east and north and west.

To be able to accommodate that so yes, so even we have one property and Barry with some excess land well.

And in that areas, even increasing so it's increasing everywhere and you know that.

That announcement, the reopening towards reopening the the plan and onshore we had already seen a big increase in demand on the east end.

The city and if anything that's just going to accelerate now so I'm very optimistic as you can tell about the GTS.

No for sure.

And maybe just one last one for me.

And with regards to your access to the unsecured market.

That's another thing and I'll hop on issue.

But just the.

Just to see what your what you're thinking about the balance between the unsecured and secured next going forward and with.

With the Triple B rating now.

The leverage has to be maintained kind of around eight times.

Mark.

Yes.

What we're seeing.

The triple B rating and some of those those metrics are.

One factor in doing deals I think when they the investors really we're looking at the underlying business they felt.

Under exposed to industrial so I think those bond investors are appreciated our business. So I think we're seeing favorable things but of course any improvements you can make in your financial metrics, we've seen granite even.

Dream industrial now or Triple B, So we kind of know where their metrics are so I think.

Were the next part of summit is trying to phase into what are the steps and requirements to get to triple B. So we can even improve our cost of debt further so if the if we can get the cost of debt, where we got this and continue to have good access I think one thing.

Hopefully, we can grow into as longer term, so we'd like a term to maturity of were five and a half years now so we can't keep doing five year unsecured. So if we're going to keep that that's why we did a little bit of eight and tenure secured mortgages. So that's really the right now the only time, we would use the secured mortgages to go to.

Hope for a little further term, but I think as we grow and get more experience in the unsecured area, we've seen lots of or other competitors.

We have started the due to the 878 and 10 year bonds.

Bonds as well so overtime, we think we've got a great start in terms of unencumbered pool. So we were off to a pretty fast start. So we have that $100 million bridge and you know as we continue to buy properties will think there will be another opportunity to answer your question see.

Sometime in 2021 is there a good opportunity to do a second unsecured or whether we go for that this year, but the good news is they're they're both very deep markets right now so.

Sure.

Okay, Great. That's it from me I'll turn it back okay. Thank you.

Again, if you would like to ask a question press Star one on your telephone. Your next question comes from the line of Matt Karnak from National Bank. Your line is now open.

Morning, guys.

Just asking the a 2021 same property NOI growth and good question in a little bit of a different form but should we expect.

The rent spreads that youve achieved in 2020 that you'd get that type of rent spread and 21 and.

And then maybe on top of it if you could comment I know you present, your lease maturities and that of the commitments. If you could comment on what you've committed.

To date in 2021.

That would be great.

Yes. So these are all the questions that was.

We clearly don't like providing guidance.

If anything we're seeing it in.

Increase strengthening of the GT markets, so talking with that one so I would think that and again, it's educating the brokers. It's educating the tenants I mean, Dana mentioned the the one that we bump the ramp on a 200 that was just a rental reset on a 10 year lease from a.

Market, Oh, sorry, setting that rent from market or straight to existing rent to market and we were able to negotiate 50% that was not easy. It took six months to convince them that the rent actually had gone up that much it.

We supposed to be just a onetime fix the.

The increase and we were able to get annual steps and they go what we don't want to do this again so they added another five year terms for that at the end of thing and we have ongoing I think we averaged about 2.5% steps for the remainder of the 10 years. So.

Yes, absolutely.

It takes time, but I think theres theres been an acceleration so tenants like that you cannot you know they can't move their business, it's not easy.

I think we are going to be able to see at least that much kind of rental growth and and some of our rental growth, it's a little bit.

Hidden here is we had a couple tenants that they had fixed the options. You know went from one of our attendance down kit Cape Cambridge. This year 300000 square feet went from 325 to 350, so that they are still way below market. So it's.

It's hard to put an exact number like I said I think Montreal, the rental growth, we're starting to see an acceleration there and again in the west we have low expectations in terms of we're not going to be pushing rents. There are whole idea is to maintain a rent and maintain occupancy there.

I'm sorry, you had a second question I didn't write it it just in terms of the abilities maturity profile I think is 1.6 million square feet. The maturing according to the Mdna, but I know that that's usually net.

Commitments. So I don't know if you have commitments for 2021 at this point.

We haven't we haven't done much so far in 2021, Yeah, we were just yet.

Yes.

Very small number that started in 2020, I think Ross and we looked at the half of our early EPS lease rollovers GTH next year. So again, we've been taking the position we're in no rush because we think in March.

Just got some good news on an email so.

So I think.

On one of our on whatever it was that was timely.

So with yeah its a.

We're not we're not we're not nervous but again, it's the exact same strategy. This year, we're going to push rents as hard as we can in GTN GTH I think there is increasing ability to increase in Montreal, Although you still got to be.

Aware of each situation, but not a lot of.

Rollover in Montreal and in the West we're just being very proactive. So most of those tenants were starting to talk to but in the west it's not big blocks of space.

Space. So its 2030 50000 square feet. So you know, it's the expirees are pretty spread out. So yes, I know so we're we're pretty pretty optimistic that what you saw in 2020 is going to continue and hopefully accelerate.

And I know, it's a modest difference, but I think it speaks to what you're doing on the leasing side. Your organic I guess rent steps increase from 1.6% to 1.7% is the goal to get 2% to 3% in terms of annual lease ups or is it a case by case.

Absolutely and I go or leasing people are on the line listening, but theres been a couple of landlords that have taken these steps that have only been a new phenomenon. The last 10 years, we were doing quite a bit in the first summit normal.

Normally it was a 10 year lease you'd have one step after five years. It will go up 15 or 20%. These annual sales make a lot of sense and the largest landlord and the GCA.

He is requiring the tenants pay a 3% and theres. Some others that are three to three and so I think there's opportunities in GTT to push that number harder.

As Ross keeps reminding me every time, we increase some rents or have some steps going to two to two and a half some of the other ones are burning off so it that's a hard number to move but clearly we've made some progress and I'd like to think that we're going to push up the two three so it would be a long shot I can't picture that we get the.

Get that high for that but like I said, we're trying to get a minimum of two and a half to three is kind of the the internal target zone and as that happens that number will gradually move up but it's a slow moving number.

That makes sense and then last one for me.

As that I think there were 700000 and in Covidien related provisions and Abatements do you know what portion of that would have been in the same property portfolio just to get a sense of what the same property NOI growth would have been excluding the impact of it.

I can give you the exact number but its around its around four to 500000 that was directly in the in the same property NOI.

Buckets in that yes.

So if I said it was like a half a percent yes.

Yes, hi impact that Matt was like profit would have half a percent impact on same store NOI yep. Okay.

Okay perfect. Thanks, guys.

Okay.

Your next question comes from the line of Alex Leon. Please state Your company name. Your line is now open.

Hey, there I'm with dish or Dan, but just.

Just a slight my questions on the 2021, a leasing program so I'll turn it back.

Okay. Okay. Thanks.

And your next question comes from the line of immense you good data from Scotia Bank. Your line is now open.

Hi, Thank you I just have a couple of follow ups, Okay first of all.

Thanks for disclosing the list of top 10 tenants in the slide deck.

Some of them are going to be ready capitalized large tenants. So just wondering are any of the top tenants on larger leases coming up for renewal next year.

Do you think you know any large tenants are in the producing to push back on.

Redcoat.

Yes, so the average lease materials top 10 tenants as both five and a half years.

I think the earliest one is somewhere in that two to three year range and we did put.

I don't see them I see but last week. So some of these top tenants have multiple locations and some of them are actually in multiple provinces. So you know it's going to come up in a in a staggered way Mcewen Nagel our largest tenet is both in.

Albert and Montreal, so their their leases come up but at different times. So yes, that's it.

So we will see so it's.

I know one of the tenants on here is one of the ones that we did a lease extension. So there are other leases out to 10 years now so.

Yes, we will.

We won't know for a couple of years, but and the interesting thing weve.

Looking to Ross to produce the top 20 tenants and decide whether we should do that the interesting thing and this happened with the old summit. This this is kind of a ranging between 2% to 3%.

Once you get past number tenant number 20, you know you're almost at less than 1%. So the goal for summit and I agree.

Again, if you look at these companies some of them are subsidiaries of large American companies.

Like impact auto and stuff like that so it might not be a public company or they might be.

The U.S., but it's really the space that they're in and what other uses we can do it. So we're comfortable that these tenants are in great quality buildings, the maple leaf foods, they've got the various options difficult refrigerator. They are never going to be moving from there and they have a.

Again, it goes back to that issue. The reason you lose tenants is you can't expand them. So in some of these properties like that May believe food they have the ability to expand by about 150000 square feet. So that.

That would be your biggest threat to why why they would want to buy they want to leave.

Awesome Awesome and then just one small socialism question, but in terms of convergence on leading into industrial.

That's a possibility and have you heard any non performing the Dayton mall shopping center being proposed to be converted.

Especially given your development background and knowledge of flat pricing, how sceptical as they've done what are the challenges.

Yes, so I mean I've been on a couple of panels with some of my other industrial colleagues and this has come up several times, it's just not going to be a big impact it and.

You've got some zoning issues in terms of truck courts and trucks going through.

These these retail centers they.

They definitely can be converted to do some that last mile fulfillment, but you see like in as a section of the whole foods and stuff like that but you're not getting conversion into big bigger use distribution.

Type centers so.

Yes, there's nothing really in our portfolio that would fit that that category and it's just not something that we we think is necessary for us to CECO. So on the on the edge of everything I'm sure there's going to be some of this.

But if anything some of these sites probably make more sense as multifamily, particularly the GTH theres such a shortage of.

Housing and affordable housing, so I would think highest and best use might be to put more residential is a lot of the those retail rates are doing so so it might have some impact, but it's going to be.

Insignificant in the overall picture.

Awesome. Thank you. Thank you I jumped on that thank you.

There are no further questions at this time I will now turn the call back over to Mr., Paul Blakeney well.

Well, thank you operator, and as I said, no or our presentation went on a little further they are a little longer than usual. Good we had lots of good information so.

Thank you again for participating today, and we look forward to talking to you again in February up with our year end results. Thanks, a lot bye.

Right.

Ladies and gentlemen, this concludes today's conference call. Thanks for participating you may now disconnect.

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