Q4 2020 Summit Industrial Income REIT Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the summit industrial income REIT fourth quarter and year end 'twenty 'twenty results conference call.
At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone keypad.
If you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your speaker today, Paul Jackman. Thank you. Please go ahead.
Alright, Thank you operator, and good morning, everyone welcome to the summit in industrial income REIT fourth quarter and year end conference call before we begin let me remind everyone that during the call. We may make statements containing forward looking information. This forward looking information is based on a number of assumptions and is subject to a number of known and unknown risks and uncertainties.
That could cause actual results to differ materially from those disclosed or implied we will direct you to our earnings release MD&A on the security filings for additional information on both these assumptions risks and uncertainties joining.
Joining me on the call. This morning is raw strength, our chief Financial Officer, and Dana Gibson, Our Chief operating officer.
Let me begin despite the ongoing impacts of COVID-19 pandemic on the Canadian economy, we continue to achieve our goals of expanding our property portfolio generating strong financial and operating performance and delivering value to our unit holders. We're very proud of the resiliency and dedication of our entire staff at summit and on behalf of.
Our board of trustees on all unit holders I'd like to thank our team for their hard work and commitment over the last year their contribution to our continued success is a testament to their experience the strength of our property portfolio tenant base and the resilience of the Canadian light industrial sector.
Let me begin with a few key highlights for 2020 as shown on slide four the REIT generated record results from 2020, despite the pandemic all of our key performance benchmarks were up significantly compared to 2019 with the fourth quarter of 2020, being particularly strong we added $1 7 million.
We're feet to the portfolio during 2020 and moved to the first two developments from our development pipeline into income producing properties in the fourth quarter.
Importantly, we ended the year with record liquidity, providing us with the funds on Flexibilities tact and grow opportunities going forward.
We're also very pleased to have received an investment grade credit rating during the year, allowing us to access the unsecured debt market.
Turning to slide five.
We can see that we had another strong quarter occupancy remained high and stable and with our portfolio growth. During the year total revenue rose, 24% also driven by increasing rents with the increase of revenue NOI was up 24% <unk> rising 32%.
But most importantly, this growth continues to be highly accretive as <unk> per unit in the quarter was up 10% despite.
The equity offering and a 19% increase in total units outstanding.
Same property NOI was strong at over 5% and we expect to see this continued in the quarters ahead.
On an annual basis 2020 was another record year for summit as you can see on slide six total revenue was up 34% driven by portfolio growth continued strong occupancy and increasing monthly rents.
This growth resulted in a 36% increase in net rental income and a 41% increase in <unk>.
Same property NOI increased three 8% a strong performance given the fact that we did include some provisions for tenant receivables and the secret of tenant assistant Abatements again, our growth continues to be very accretive as our <unk> per unit was up 12%. Despite the 26% increase in our total units outstanding for the year.
<unk>.
As shown on slide seven we acquired interest in a total of 23 properties last year, adding $1 7 million square feet to the REIT portfolio for a cost of approximately $345 million in an average overall going in cap rate of four 7% included in the purchase was the remaining 50% ownership of 11 properties from a joint venture in months.
And two properties from our joint venture with our development partner in <unk> as a result of the Montreal acquisition, we know internally manage 100% of our property portfolio.
We also sold two non core properties for $7 8 million as well as our GTA data center generating a sizable gain of $21 million.
The REIT property portfolio saw more than a 90 million dollar increase in fair value.
Our real estate, which is the majority of $71 million was in the fourth quarter I'll now turn on turn things over to Dana to talk about the operating performance.
Thanks, Paul.
Slide nine our key target markets of the GTA and Montreal continued to demonstrate very strong fundamentals.
Our interest expense, we believe will continue to drive organic growth going forward.
The GTA representing over 40% of our G. L. A remains the strongest industrial market in the country.
High occupancy and limited new supply are driving record low availability rates and record increases in average monthly rates.
The same fundamentals can be seen in Montreal, our second largest target market.
Approximately 20 per cent of our portfolio by GLA.
Both markets have demonstrated many years of consecutive quarterly rental rate growth track record debt. We are confident will continue well into the future.
Yeah.
Turning to our regional overview you can see on slide 10 that Ontario continues to perform extremely well and why the GTA remains a strategic focus for the REIT scrubs going forward.
Our leasing programs continue to drive meaningful increases in cash flow in 2020, we generated a solid 98 per cent retention ratio on renewals with a 26 per cent increase over in place rents.
As mentioned with current embedded rents of $7.04 per square foot in the province, and $7 16 per square foot on the GTA. We're confident we'll see further upside as leases are renewed going forward.
Slide 11 demonstrates that our Quebec portfolio also continues to generate solid and stable performance.
We believe that there continues to be attractive opportunities to be found in this market are actively focusing on Montreal. In addition to the GTA.
Our leasing programs here are also generating solid increases in cash flow with a 98 per cent of retention ratio in Quebec last year generating a 23 per cent increase in rent.
Again with current in place rents below market, we expect further upside in rental rates in the future.
Slide 12 highlights our Alberta portfolio. This portfolio has been stable overall with occupancy outperforming the broader Alberta markets and continuing to improve since our acquisition of the bad debt.
We have been strategically identifying select Alberta properties for disposition, where value can be maximized at the appropriate time.
We plan to reduce our current overweight portfolio allocation in this market to achieve our desired geographic weighting of 20 per cent or less through select dispositions and growth in other markets.
Alberta represented approximately 27% of our total portfolio GLA at year end.
On the leasing front as outlined on slide 13, 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.
Through the second half of 2020 rent collections returned to more normal pre pandemic levels.
We are achieving solid increases in rent on renewals with an average of 24% overall increase last year and with a much higher 27 per cent increase in the GTA market.
Okay.
Tenant retention was a very strong 82 per cent in a year and keeping tenants in place is a key component of our strategy and we're very pleased with our current activity.
Turning to slide 14, 9% of our leases will renew in 2021 with another 11% in the following year.
As mentioned earlier with our current embedded rents well below market. We believe we can continue to generate solid increases in cash flow as leases mature going forward.
Overall, our portfolio is well diversified by tenant base and a listing of our top 10 tenants is included in the appendix of this presentation.
Yeah.
Since the start of the pandemic, we worked closely with our tenants to implement rent relief programs where needed.
As can be seen on slide 15, the REIT had just over 3 million in deferred rent outstanding at yearend with most due to be repaid by mid 2021.
Since year round, a further $1 3 million has already been repaid on schedule and we're encouraged by the strength of our tenant base and our relationships, having already collected more than half of the amounts owed and all on schedule.
Approximately $1 8 million in free rent was granted in exchange for early lease renewals with extended terms at higher monthly rents.
We are encouraged that this strategy will continue to support certain tenants as they work through the temporary economic strain caused by the pandemic and keep them in place over the longer term.
Yeah.
Turning to slide 16 this debt.
Details of our strong development pipeline the more majority of which is located in our target GTA market.
At yearend, we had two properties in wealth under construction and expect to get shovels on the ground on another two projects in the first quarter, one in Mississauga and another in Burlington.
Of which are located on land owned by summit.
We are pleased with the progress of our pre leasing activity relating to our development pipeline, which is another testament to the strength of market demand.
Development and value add opportunities have become an increased focus for the REIT and we're excited to be actively looking to expand in this area in proportion with our income producing property portfolio.
I'll now pass things over to Ross for his financial review.
Thanks Dana.
Turning to slide 18, we continued to build liquidity in 2020 with a meaningful increase in the size of our value and value of our portfolio of unencumbered properties, our new $300 million unsecured credit line.
Two successful bought deal equity offerings of REIT units, raising $368 million and new and up finance mortgages at reduced interest rates we.
We havent successful on capitalizing on today's low interest rate environment, having reduced the REIT exposure to floating rate interest to only 5% of total debt down from 36% at the end of 2019.
Through proactive financing strategies. The REIT ended 2020 with one of the strongest liquidity decisions in its history, well positioned to navigate potential market volatility and to capitalize on growth opportunities as they arise.
As shown on slide 19, including our cash on hand full availability of our unsecured credit facility and the financing potential of a portion of our unencumbered portfolio.
Total available liquidity stood at a significant $600 million at year end.
While we have no intention of assessing all these sources of liquidity at once for illustration purposes. If we fully utilize our leverage ratio would still remain conservative 48%.
A pivotal moment in <unk> history occurred in 2020 with the reach investment grade credit rating from DBS as we as can be seen on slide 20, with this rating we were able to complete two successful offerings of unsecured debentures. One in September and the second in December raising a total of $450 million of proceeds.
The unsecured debt markets remain an attractive source of capital.
As we continue to grow the REIT.
In addition to our increased liquidity position at year end, our balance sheet also remains strong with conservative debt metrics as shown on slide 21, our.
Our leverage ratio was a conservative 37, 4% with improved debt coverage ratios.
As mentioned, we continue to capitalize on the current low interest rate environment, having reduced our average effective interest rate to $3 six 1%.
Slide 22 details our staggered debt maturity profile with only 2% of total debt coming due this year and 9% in 2022.
Our $1 2 billion of total debt carries a weighted average interest rate of just over 3% with significantly lower fixed rates on our unsecured debentures at between 182% and $2 one five per cent.
In addition, the average interest rate per our maturing mortgages approximately three 7% over the next two years, representing an opportunity to generate significant savings on these maturities as they come due.
As mentioned earlier, we've seen a shift in our balance sheet from primarily secured debt to 40% of total.
Total debt being unsecured at year end.
Slide 23 illustrates an important year over year trend for the past three years. The REIT has been successful at reducing its overall leverage while also significantly increasing <unk> per unit.
We are confident this trend will continue going forward as we build value for our unit holders and aim to continue decrease overall leverage on.
Now ill turn things back to Dana to touch on some of our ESG initiatives.
Thanks Ross.
Since inception summit culture has always been one of accountability and high standards relating to all of its business activities.
Having a positive impact throughout our business lines as well as the broader environment in which we operate as a fundamental strategic principle at all levels of REIT operations.
We've outlined some of our early successes and sustainability ESG and corporate responsibility on slide 25.
From simple things such as completing lighting upgrades to motion sensors led lighting low flow toilet installations, the collection of rainwater using recycled flooring.
The our ratings for rich roof replacement staying active in philanthropic efforts in our communities. We are mindful of our daily activities to achieve ever greater positive impact.
Given the REIT increased focus on development lead building standards are also a price priority for us.
To work towards providing greater market communication and transparency of our ESG initiatives, while augmenting targets for the future.
I'll now pass things over to Paul to wrap up.
Great. Thanks Dana.
Looking ahead, we feel very confident in the outlook for the REIT and our ability to generate continued growth and enhanced unit holder value.
Given the managerial bench strength deep and long standing industry relationships significantly liquidity as Ross mentioned.
On an ongoing access to various sources of attractive cash.
Capital, we are well positioned to continue to successfully execute the REIT strategy going forward.
In summary, our operations on portfolio remains strong and stable we.
We have a competitive advantage with the quality of our properties and our strong strong tenant relationships at the core of our operations. We continue to see high stable occupancy essentially unchanged versus pre pandemic levels industrial properties are very highly defensive asset class in today's market our portfolio requires minimal capex expenditures.
And we are focused on markets with very limited new supply.
In addition to strong fundamentals, we are actively managing our G&A, keeping overhead lean and efficient.
As well, we believe ongoing trends on the Canadian.
Industrial markets will continue to benefit the REIT, such as E commerce and shifts in supply chain.
In conclusion as you can see on slide 28, we have delivered a very busy slide delivered on our growth objectives. Since we began the second summit in 2012 looking ahead, we plan to continue to grow the REIT through strategic acquisitions.
Expansion expanding development program, while opera optimizing returns.
As Dana mentioned ESG initiatives will become <unk>.
A larger priority for the REIT to all of all of the REIT activities and we believe that sustainability and corporate responsibility are key drivers to long term business success. In summary, we're very pleased with our performance in 2020 and very bullish looking forward to another record year in 2021.
Thank you for your time and attention this morning, and we'd now be pleased to answer any questions operator.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad again. It is star then the number one we'll pause for just a moment to compile the Q&A roster.
And your first question comes from the line of Mark Rothschild with Canaccord.
Thanks, and good morning.
So you had you had strong suit.
You had really good leasing spreads last year can you talk a little bit about what the outlook is for that should we expect the pace of that to continue and then on that point are you seeing any difference in the types of properties you have whether it'd be the smaller ones or or larger it's more single tenant type properties.
Is the rent growth changing by type of asset.
Yeah. So the spread growth I think if anything is accelerating will talk about the limited availability, particularly in Toronto and Montreal at that 2%, it's very much a landlord's market.
As much as we try to bring on new supply that's not happening so.
We're seeing a pretty long runway for spreads so when I look forward I think we'll continue to see a.
Similar and if not some better spreads in particular, I think Montreal, which we would've said is a you know a year or two behind Toronto in terms of that availability rate going down. So we're starting we're definitely starting to see an acceleration of rental growth in Montreal that we saw you know two years ago in true.
So so similar if better out west.
That market is kind of more of a flat market, but it's not a bad market I mean, there's still a lot of the E. Commerce demand out there you know we have tenants that are bursting at the seams and trying to expand them.
We're ready to do a new lease deal.
Above $10 rent on a 50000 square foot space on a short run on shorter term basis. So.
So we're quite optimistic about the retro script now.
New leases that we don't do any more but would have some fixed price a reasonable option. So there's one in other Ontario. This year for a couple of thousand square feet that had a fixed price readable.
3% bump so there'll be some outliers by that.
But in terms of rental rate growth its changing every six months and we'll see that in the leasing of our revenue developments, you're going to start to see new rates debt. Some of it is not seen before.
Okay, Great and you mentioned Western Canada, and Dana mentioned in the comments about reducing exposure to Alberta, which is something that had been spoken about previously.
Has there been any change on the view towards the exposure to Alberta over the past few months as some of the other markets remained strong and as you mentioned seeing further acceleration on rent growth.
Yeah.
We were still very happy with debt portfolio, we bought it at a five 5% yield we've improved net yield to about five eight but when we look at it and you know we've gone through the pandemic. We do have one property listed for sale you know a 10 to 15 million dollar asset we've got some small day product listed for sale in Ottawa.
It probably dispositions of you know hopefully in the first half of the year of about $60 million, but it's really focused on that small day product, which kind of answers. Your second question. The real focus is on these larger distribution tenants that.
Net of bursting at the seams and you know, they're not as sensitive to the rent, but saying that small day works well. It's just that summit. One you know we had the majority of our portfolio was that and it's just there's a lot of turnover. There is a lot of leasing cost. So it's just a different it's just a different segment on the industrial but we're happy to be focused on the larger tenants.
And you know when we talk about the development, we're seeing exactly what we saw on summit, one taking tenants from your existing base and moving into our new our new properties. So that reduces your leasing risk.
Okay, great. Thanks, so much.
Yeah.
Okay.
And your next question comes from the line of Himanshu Gupta with Scotiabank.
Thank you and good morning, So just a good morning.
Just staying on Alberto on occupancy declined slightly in Q4 versus last quarter and I know you had previously mentioned about the large hundred thousands square feet lease expiring in mid June.
How is are these all going on that space on a box on debt are there any major leases coming up on the new ones in Calgary or Edmonton markets.
Sure and we've talked about.
The good news and I keep saying surprising news, we haven't had any business failures in Alberta. So the only two we've talked about and that's why our occupancy dipped in the in the GTA, which which we're happy with.
There so.
First it was just a couple of tenants that didn't renew so you know clearly there their businesses you know head on.
Change so they either were downsizing or looking for different different space theres different reasons to.
To do that but you.
You know as I mentioned, just because it's Alberta, everyone thinks of oil and gas it's not that bad. So Calgary is extremely active there's a very limited supply of larger space in Calgary as those E. Commerce tenants are try to do that.
We had a lease expiring in the fourth quarter, we've done a very creative thing there by putting a tenant in that needed some temporary space knowing.
So we got we essentially let them test drive the spaces. So about 100, a little over 100000 square feet.
Found out yesterday that our board has approved the deal so we're going to be putting them in in that space for on a 15 year lease. So so theres lots of activity as I mentioned, we've got a short term deal on about 50000 square feet one of the vacancies that the rent net rent is over $10. It's an 18 month lease so there's a different strategy than Toronto. So.
You're plugging holes youre keeping income.
In place, we don't need to no.
Grow the rents the same to still have a very good yield because we're already we're already.
Thank you.
And then if I look at the overall on same property NOI growth, which was five percentage in the quarter and I think Paul you mentioned in your remarks that you expect to continue to see that kind of go to the quarters ahead.
How much are you baking in for Ed.
And are you expecting much stronger growth for the other two markets once you're on the job.
Yes, I think for the year I mean, I think Albert is roughly flat on looking at Ross because he's got all the details on the budget numbers.
But true.
<unk> just continues to surprise on on the upside so weird.
There's a there's a tenant that we're gonna let go what are the portfolio is just under 50000 square feet. They're currently paying under $5 and we list that space for $10, that's almost impossible to do on a renewal. So so it's a different strategy, but this particular tender we werent happy with them.
For other reasons, so that's gonna be a doubling of the rent in one space, that's 50000 square feet, but it all adds up the one area that we're pleasantly surprised and we thought this was going to happen, but we're actually now seeing the fact is as Montreal. So we just did a the fourth quarter. We did it used to be at 400000 square foot tenant we downsize them.
But we signed them onto one on a new long term lease that rent went up 23% on the renewal and we've got them locked in for 10 years, we backfill the space with some other tenants at a 20% bump in the rents as well there. So so Montreal is definitely consider it.
Starting to accelerate the rental growth there.
Right.
As our portfolio gets bigger I think same store NOI, it becomes more and more important as more of our portfolio.
But it's still you know it can be impacted.
Impacted by one time events and stuff, but yes. So that's kind of how that blends out. If we don't you know we don't give guidance on a same store NOI for the whole year, but we're very bullish.
Answer.
Okay, and then you don't want the event to leasing spreads just a follow up there.
I looked at GTE the tenant retention ratio was almost 98 listen I'm going to call 800 per cent and yet the increases our likelihood of 20% to 25% plus so the question is do you think the existing tenants on it will.
Do a food on the all the existing tenants are able to afford that kind of higher rents and do you have a sense on what absolute.
Oh, you know on a dollar per foot basis, we'll do too much for the agenda I'm going to say there is the opposite operating won't be debt.
Yes.
And we have lots of discussions around that and clearly we havent hit the high high part because.
Rents continue to go up these are not easy discussions you know I'm looking at our sheet here for the 250000 went from 528, almost $8 50 per cent increase on on a very large space, but you don't they also signed on for another five years, so they're gonna be there for 10 years. So it.
It all depends on the industry and the tenant type some of them are just desperate to have the space and there is a growing trend.
You know in terms of running a business its really labor and access to labor and I think when it comes to rent tenants need to be in certain places, which are closer and closer to their labors.
Our market, but what we're seeing though is we have some tenants and that's why I think well development is doing so well.
We have a $3 per square foot advantage. If you want to go to the well if you can get a brand new building.
And youre going to be paying less than you would in Brampton Mississauga Oakville. So we're seeing the migration for some of those tenants that are having trouble meeting the topline rent, but the topline rents are going to continue to accelerate.
When we talk about replacement cost unlimited supply, there's now a new high watermark of a piece of land in Toronto trading at $3 $5 million an acre.
And with development charges, you are probably $160 a square foot.
Land costs before you put a shovel on the ground. So that means replacement cost in Toronto is not $200 anymore, it's not $250 anymore, it's north of that and I wouldn't be surprised on that particular development, you'll see a number that we would've thought was crazy a couple of years ago close to $300 square foot, which implies a 5% yield if that's.
What you need today, maybe it's less.
Somewhere in that 14 or $15 per square foot. So that's going to be on outlier, but that's the new bell, rather and then everything trickles down.
After that some of the deals that we've been looking at.
Or north of 10.
For our existing space and stuff, which is still that GAAP between in place of roughly seven to up to 10, but it's really whereas the 10 going where is that 15 going on over the next few years, which is going to be interesting to watch but in my mind. There is there's not enough land and it's not easy to bring on a that's going to fill that debt.
Supply side of the equation.
So really the non pricing deciding the upper limit for the debt I think that makes sense.
And then just Tony on the iPhone as fair value gains on the $70 million per quarter.
Was it mostly gd on Montreal or combination of the two and anything we wanted to do was developed on basket, which is I think now it could produce it.
Yeah. So.
A significant portion of debt.
70 odd million was GTA.
About 70% of it was the GTA.
And then the balance would have been in Montreal with the small relatively flat in Alberta, and net and as far as the development that moved into income producing.
There was.
The overall gain on that.
That's part of the <unk>.
On the GTA gaming as Rob was increase.
The increase was around $7 million, so about a 20.
25%, 30% increase in the value of that.
On our 50% yeah, yeah. The IR on that development was about 45, 45%, 50%. So yes. So there is definitely still decent the developments, but interestingly in our presentation on the auditors yesterday, they have on Istent fancy software program and they lineup based on all kinds of inputs, where our valuation.
Our in Montreal is the one that's really changing quickly there's been a number of sales that are sub four cap.
Our cap rate came down quite a bit but still you know I think the average they're using it from Montreal portfolio was $4 six and a lot of our evaluations are or are not.
Not going on pushing the envelope. So I think there's still some more room for cap rate compression, particularly in Montreal.
And then obviously as we continue to expand the rental income youre going to see some value pick up there and we're going to do some more work going forward you know talking about our non mark to market on our development program because when you look at where it is today or pre leasing you know what we expect the yield yield on cost to be.
There's a pretty significant development spread there so we've got.
On a nice opportunity to pick up so many of them.
And maybe just last question for me I mean, since you talked about development I'm on for you on I think you added another developing properties Montreal This quarter I can see 130000 square feet for redevelopment. So what's the plan what's the.
What's the upside.
Yes, Rick the rig site. So that was part of the downsizing of that type large tenant that I just mentioned they had a note building its about a 20000 square foot footprint, probably 40 years old two story office Little building, we're going to knock that down.
And then build 130000 square feet, we're going to test the market.
I will not be surprised if this will be the you know the highest rent.
On industrial that we will have seen in again on the summit portfolio. So because it's on land that we own you know youre going to have a very very attractive.
Attractive development yield there. So we're very bullish and if anything we'd love to expand at least double the development pipeline across summit, you know I Wouldnt. If we can even make a bigger I would I'd be happy to do that but we really want to start to.
Get some development on the ground in Montreal because of that market.
They don't do spec development and so you know there's there was last night check there is about two to 3 million square feet in Montreal being developed which is very very small, but 80% of that was pre leased so we're more than happy we don't use the word spec internally we call. It building inventory because we're 100% occupied we have tenants that are saying.
We're bursting at the seams and if so it will get to test the market. It's it's tricky to test the market rents on renewals because.
You have that relationship with the tenant, but you know when you're starting with a vacancy or an empty building.
You really got to test the market and there's lots of demand there.
Got it. Thank you so much on it.
Okay. Thank you.
Your next question comes from the line of Matt <unk> with National Bank Finance.
Good morning, guys.
Just a follow up to matches questioning there on on Montreal and development I think you've said in the past and there's been even acceleration on that price per square foot on existing assets on the Montreal market, but that.
That you could actually develop for less than where assets are trading at this point has there been a big move in the value of land I mean, we've seen it in Toronto, presumably it will follow in Montreal as well I'm just I'm just wondering on your thoughts there.
Yes, so we're looking for land sites and clearly it is growing and accelerating so it's happening and that's what I'm, saying.
Montreal, we're seeing a picture that we saw a couple of years ago and in Toronto.
It's not in the words I used it's not on the crazy on them, yet, but it's it's accelerating so youre going to see that you know pulp.
Youre going to see.
Either high single digit or.
Low double digit.
Expansion of replacement cost I think starting to happen in Montreal. So the quicker we can get it into the ground and the way we think of the development is we're averaging in.
The quicker we can get in lock in our land prices locked in or construction price. We haven't talked about that I was on a panel.
Presentation at <unk>.
I was talking about construction cross costs all across Canada.
A lot of things in the construction side that are growing above inflation as well. So I think overall you'd have to say construction costs are increasing at least 5% on average given all the components and then still the major drivers of our land and in Toronto their development costs. So yes, so we'd love to expand so we're you know we're looking at.
On balance sheet developments now that we were we don't have a joint venture partner in Montreal that opens it up to talking to various local developers, we're happy to replicate them.
J D. A program that we have with Cooper in southern Ontario, So much.
Montreal, So we'll do it either way, but we definitely want to expand and I think there's a exciting opportunity in Montreal.
And then on the acquisition front, I mean, you've been able to acquire.
In your commentary in the MD&A on Thank you had mentioned that there has been more activity as vendors are looking to crystallize some gains but.
Just wanted to get your sense of I mean, you've got a great cost of capital but.
It does it does it scare you a bit the pricing on some of these assets and how are you thinking about expanding through acquisitions.
Sure.
We had a really good discussion at our board meeting yesterday, and I think the word.
Patience and discipline kept getting spoken about and if anything we've we've been or been active looking at and didn't succeed on about $500 million of real estate over the last three or four months some of those bigger ones were in Montreal and again, we just keep hitting that debt ceiling in our underwriting.
That says we won't go above replacement costs and even if you're in Toronto, you can say I won't go below.
Net replacement cost is going to be in 12 months from now so we're willing to.
Stretched that that factor, but in Montreal.
<unk> for existing income producing is creating a price per square foot, but I think it's it's.
Tricky right now.
It's like some vendors we're talking to.
We've got bids out on another $300 million. So you know theres a reasonable amount of activity again, we're being very disciplined.
But it also logistically is a little more difficult to sell a property. So this time of year wintertime in Canada is not easy, but with all of the COVID-19 restrictions on travel restrictions.
I think a lot of vendors potentially youre going to wait to the spring sale. The vaccination program goes because if you can't get out and be able to comfortably you don't do a lot of touring of abilities that we have people on the ground that can see it but the people we'd like to see it.
Not easy for them to do that so I would think.
We will see increased activity as the year proceeds and as the vaccination program proceeds. So we will continue to use those words of patience and discipline.
But we're also optimistic and a lot of our time is now.
Probably half of our time is also looking for land opportunities, so with Cooper or on our own.
So we bid on lots of land we've lost out on some.
We think buying existing properties are difficult buying land is another level again, because you get not only the vendor youre dealing with those municipalities you know all the issues around zoning and permitting and trying to get your head around all of that so.
The good news is the more we do that the more we understand the value of our existing portfolio has gone up because.
How difficult it is to bring on this this new new supply.
Makes sense.
Quick sort of technical I guess for rasp, but also just a view on where these things are right now on.
On the technical front just.
For same property NOI growth what is what is the impact if anything from free rent and I think the 400000 in the quarter that would've been provisioning for bad debt is that in that number and then secondary to that.
I think some of the deferrals and free rent that you're granting were related to the height of the shutdowns during COVID-19, but presumably given the market strength youre not.
Youre not continuing those programs at this point or is that a fair comment yes.
So on the on the same property NOI free rent is not.
It impacted in that it's treated as part of our leasing cost.
As far as the.
The 400000 of allowance from the quarter is a little less than half of that would have been on the same properties.
So that is on properties that are outside of that.
With regards to deferrals.
There have been no new deferrals granted or asked for.
Since that April May June period, and so we are now seeing the collection of those which is very.
Very pleased to see that 100 percentage has been required to be repaid up to now has been repaid on time.
As part of the monthly rent collections on that so that we've got we've had.
50% of the.
Total amount that was deferred collected in that and the.
80 over 80% of it will be collected by the end of May with just a small amount that will be.
For the balance of the year on that but it'll be at by by May it'll be just an insignificant number.
And that's in our DNA is a very conservative nature of our trading so the allowance that we have overall.
As a general allowance.
To be honest, we haven't seen and I talked about the business failure that we thought it was going to happen at some of these small entertainment type tenants and stuff like that they just keep battling away and Theres, a new government program, they're tapping that they're trying to find ways to do that so.
If we go through the next three to six months, probably even an opportunity to reverse some of the day allowances that we've made so we haven't had to we haven't had to use that we've made them too to be conservative. So there's just the two tenants that the.
Actually declared bankruptcy Luckily they were both in Toronto.
We've already leased one of the spaces at 60% higher than the tenant failed at so if.
If they fail on the right places, we're happy so but otherwise GAAP.
Pleasant.
He used the word pleasantly.
Pleasantly surprised or.
Jacques debt some of these tenants are hanging on but but big picture, it's a very very healthy environment for us.
Fair enough you guys are lucky to be in the industry, you're in and so it's nice to have some good news stories take care.
Your next question comes from the line of Julien <unk>, Chen with BMO capital markets.
Hi, good morning, guys on.
I have a follow up.
Maybe just a follow up on that question in terms of.
Where should we be thinking in terms of a run rate for I guess the leasing costs right.
'twenty 'twenty one do you think it would be kind of similar to what we saw in 2020.
Well, we have we have about one 6 million square feet.
Of Expiries and then we have some vacancies to fill on that and typically.
It's on our on our renewals it's a.
Two to $3 a foot and.
And on.
On a new deals.
Between four and $5 per foot is your typical so.
The number.
No.
B.
I don't want to give too much guidance on the total leasing costs.
<unk>.
Similar but a little lower this year than then.
2020.
We use some of the we use some leasing cost to it.
Sort of deferring rent, we gave some free rent and lease extension. So there was $1 8 million as anomaly.
But in the backdrop of this market you know if you're on a trial like you should be happy to be in this space. So we really don't need to spend as much I mean again Ross, saying typically those are the average is long term, but in today's marketplace, unless we're doing something from an ESG standpoint, upgrading lighting or doing something that we think is enhancing the building.
We're not spending a lot of capital so it really.
The only time per spending capital as we're enhancing the building, but the tenant is going to then pay for that and then increased amortized rent over so whenever we do spend leasing gets to enhance whatever so if we're able to get a 50 or $9. If they want something then that 850 or nine is going to go up to include an amortization.
I don't know if that makes sense.
Maybe just shifting back to on the development side of things with respect to some of your upcoming development completions in late 'twenty 'twenty and 'twenty one.
Hum.
What sort of yields do you think we should be expecting from cars.
Some of those projects.
Very good yields.
I tried.
Yeah.
Hey, listen.
The spread is going to be at least 150 basis points potentially 200 in some cases, depending on where your exit cap rates.
But.
Comfortably into the into the fives could get to five and a half.
Some of them, possibly even higher so very very healthy and again.
You know a lot of these all of the development is land that we bought just two or three years ago, and so we have a lower a lower cost base, which is helping us.
As I mentioned the replacement cost numbers on construction are going up but on a pro forma as we were looking back you know when we bought some of this land pro forming $6 50 to $7 and now we're thinking 10 or higher on some of those those new spaces, and I think well, if it's a little bit less less but we're definitely everywhere we look.
We're both oak performing in terms of rental rates on on development, which more than makes up and enhances the yield.
But the other thing about development is timing I mean.
Things are moving quickly the two in Guelph they were able to construct through the winter we've got pre leasing on the first building.
130000 of the 190 is pretty much dealt with there's the next building 250000, we've got an existing tenant that's likely to move into that building. The only question is are they going to keep their existing space or not so this shows the program that summit did in the first summit, we see it happening again.
Cultivate these relationships with the tenants so when youre starting to build it's really not taking a huge amount of non development risks once you're on the land pretty much everything else in terms of the development fees and construction costs you understand so it's just a matter of how quickly you will you lease and what the rental rates and so we're outperforming both on speed and <unk>.
Rental rates. So everything is good now that's why it's a race to <unk>.
That's number adds up to 870000, you know I love for this number to be 2 million square feet and it has.
On a bigger element.
In Toronto the.
The one on Mississauga, we've got offers on them at the highest rent that we would have seen in the summit portfolio to date.
The one down in Burlington, we have our first there's two buildings there. The first 190000 square feet. That's already leased so it's just a matter of working as quickly as we can with the municipalities to get the final approvals on on those the one in Mississauga, We've got all the permits and so that ones going into the ground as quickly as possible on the expansion for 60000 square feet.
With that tenant is yet.
He is consolidating some space on moving into a new building so until he indicates he's leaving so we're just getting all the planning and everything ready. So once they let us know they are finally, leaving the building. So that's that one might slip into 2022, because they're new buildings not ready for them yet.
Okay got it.
Maybe just one last one from me is shifting to the balance sheet.
Given how attractive you on.
Unsecured market is right now.
He has very little refinancing.
For the remainder of this year do you see the opportunity for.
The potential early recycling with your 'twenty 'twenty two 'twenty three correctly from.
So your maturity schedule does that.
Weighted average cost of it so much lower now.
Then what's outstanding.
Absolutely.
Yeah, no it's there.
We're taking a very serious look at that so you know.
Very pleased by the outcome of being in the unsecured market.
Spreads continue to tighten, but particular for industrial Reits and ourselves and others that are you know there's two other industrial Reits that are right. We are all performing well and the secretary markets.
<unk> moved a little bit, but overall financing costs are very very attractive. So we're looking at that and where there might be some unique opportunities because a number of our a lot of our debt. We did over the last three or four years, we actually.
It's debt with was float were floating rate debt and then we use swaps to fix the rate so there might be a way to unwind some of these things.
That is more attractive than just repaying debt early so hopefully we'll have some good news on that in the next quarter. Okay got it and maybe just sorry to sneak one more in you know you touched upon your ESG.
You know from your peers have looked into the green on market would this be something that's.
You guys would consider.
Down the road.
Dana do you want to take a crack at that on.
We look very closely on it.
You know I guess most people are aware at this point in Canada, and you know, there's just very little pricing differential but for sure it would be impacted on the.
The demand side. So you open up on a broader investor base.
So yes, we've gone down and understand you know what's required for a green bond framework and you know, we're really sort of trying to quantify in terms of the look back.
Period, and then some of the things that we may have upcoming to the extent that we can have that critical mass to be able to do a green bond is definitely definitely on our radar.
Yeah.
Bought some LEED certified buildings, so theres a bit of that look back you know a lot of them on Tony JV properties that we bought this year.
Fall into that category and as we go forward more and more of our development.
It was gonna be leitz LEED certified two appointments at some point so it's definitely on the radar and I do think.
As Dana mentioned, there's not much of a differential the day, but with all of the attention on this.
Area I think it will be at some point, so we're lining ourselves up to be able to take advantage of that.
Okay, that's great to hear Okay, I will turn it back. Thank you guys. Thank you.
Yeah.
Your next question comes from the line of Matt Logan with RBC capital markets.
Thank you and good morning.
Hi, Matt.
Just following up on some of the acquisition.
Initiatives with $300 million of bids outstanding would you be able to give us a general sense for the range of our volumes in 2021.
Well.
It's the same speech I've done for the last seven years, Matt. So I go if we don't see anything of a large portfolio and the crazy thing is because the price per square foot is going up you don't have to buy as many square feet to put on.
So, but I always start the year, saying, we can do $350 million of acquisitions by doing ones and twos. So that's I would've said in the past 30, 40 50 million now those are 60 $70 million to $80 million.
Some sale leasebacks some off market type deals like that so I think we can comfortably do that I think we're now trying to enhance the overall growth program with.
This 800000 square feet of development and hopefully growing that so that we can start to a third of our growth or more will start to come from the.
The development pipeline and hopefully continue to grow over the years, but last year, we basically put pens down for six months of the year. So we did $350 million in six months.
Last year. So so the $3 50, as you know I would think as a conservative but it is competitive I mean, if if everyone didn't like industrial before the pandemic. They they certainly like it now lots of reasons to think cap rates are going to continue to go down.
So it's.
We're gonna be disciplined as I mentioned earlier, we're going to be patient, but we also see a good opportunity when we see one and we can take advantage of that with our current liquidity and I think.
Continued access to very good cost of capital so.
Could we grow by $1 billion this year absolutely do.
Do we expect to know, but we're always on the on the look out for that so.
That's kind of the answer to that so it's more of the same and I think prop.
Over the last three years for us we've average closer to $500 million of buying so so my $3 50 is under under promise and then and then outperform.
Fair enough, maybe just changing gears to some of your comments with respect to match his questions.
When you talk about the $300 per square foot development costs and Toronto.
You talk about what component of that is lance.
On a per square foot basis or on a per acre basis.
Yes, so I mean, it was a crazy deal and it finally my guess it is public because we are hearing this number it's going to be above three and then all of a sudden it was about three and a half.
So three and a half million dollars. This is brampton and it's a large piece of land. So this is like a $150 million purchase by this one group.
That translates into a $150 a square foot and you add in development charges, there are probably some grandfathering.
You know the development charge credits, so youre, probably closer to 150 $160 on land cost and.
That's unheard of in the past, we would've said land and development charges as a component of your overall costs should be 20, or 25% that's going to pay that at 50%. So that's it.
I don't think we want on I mean, we've had this discussion on the trustees meeting yesterday, it's like well that's not just think that this is a brand new normal but it happened. This is a range.
A real example that I think there's a trickle down and getting tenants.
Up to speed on that so yeah, and then like as I mentioned in the discussions with the PCL presentation.
Labor costs curtain wall like Theres, a lot of you know.
Construction components that are going above going up by Steve.
Steel and fabrication you know theres a lot of things that are going above inflation costs.
Use a number of over 5% for just hard costs and then the the last one is the soft cost and timeline. That's the one that's surprised as we looked at a piece of land 25 acres in the GTA.
We thought it was like a two year process and then they true and we need to do a water conservation study and that was going to take another 18 months. So like it's just very very difficult and owners to bring on and that was going to be for three or 400000 square feet. So and that's when you look at the landscape around Toronto, There is probably 15 developers.
And you know Theres, probably 30 or 40 projects, but all of them or 300000 here 500 out it doesn't add up to the 20 to 30 million square feet that probably needs to be to be built and then clearly the.
One of the big drivers on the short term and the question is how long will this persist as Amazon like they they absorbed I think eight to 10 million square feet in Canada last year I think they are going to do the same again in the next year or two so.
They're just sopping up massive amounts of this this new building and they're paying big rents doing long term leases, so developers from more than happy to.
Put them in their portfolio. So yeah. So everything is pointing to this there's rising replacement costs. We thought there was a bit of a pause last year.
It's just continuing to accelerate so that's why lots of people are starting to buy land positions in Hamilton.
Airport down there we've been looking at golf in Kitchener, Waterloo, but everything or eastern Pickering offshore HSE all of that stuff out there, it's becoming very very popular as well because you can still get land little more recently price than the $3 $5 million an acre so but everywhere land is going up by.
Crazy amounts on the ones that one deal we passed on about going from the next day. He had an offer at $100000 more on acre [laughter] for something that's going to take four years to two to have at least so yeah. It's a it's a tough tough tough tough market, but that's why summit is not going to try to do it on its own.
You really need to twist in term to try to find to find your land positions.
And I guess, if you took that same.
Our approach in Montreal.
Would it still be fair to say that development costs are less than replacement or has that started to just shift.
Montreal.
Again, I'm not sure how much I want to talk about because it because I don't want everyone going to Montreal, and starting to buy land and develop they just don't build a lot of spec over there. So we do think theres an opportunity land prices are going up not nearly as quickly as Toronto you don't have the same development.
<unk>, so you're going to have your construction cost going up.
But I know for sure very very confident that rental rates are going to make up for any kind of inflation that we're having on the on the cost and replacement cost side. So yeah, I think the quicker we can get in and build a land bank and start developing in Montreal, and we're gonna be pleased with the.
Outcome. So anything you do now and particularly on trial whatever you think is a crazy number or whatever your underwriting said yesterday.
You're stretching your stretching six months after you buy it you got to go back and go well that was a good deal, which I did more of that range. So I think that that same principle is going to happen and in Montreal. So again, we're not going to do at a crazy crazy, but we've just directionally, we definitely want to expand overall development pro.
Graham and we definitely want to make Montreal, a bigger piece of that.
That development pie.
Well, that's all from me I appreciate the commentary I'll turn the call back.
Okay. Thank you Matt Thanks, Pat.
Yeah.
Yeah.
And Dean your line is open.
Hi, Thanks, good morning.
Alright, Dean and welcome back.
Youre 10 times bigger than the last time on luck.
Okay.
Joe.
Multi part question from me Paul when you look at these big.
GAAP getting on the renewals.
How much do you think of that is driven by the dynamic of having long term 510 year leases wherever they may be maturing debt.
Didn't have adequate contractual steps in Melbourne.
And then what would that mean for steps going forward and perhaps the.
The argument for shorter lease terms.
Yeah.
Yeah, good good commentary so steps going forward.
We keep moving this benchmark and Theres a couple of leading developers.
Developers on land owners that are kind of going it's now street. So a 3% annual escalations, we've always been a little bit more flexible on our lease escalations because sometimes on tenant will say Oh, my God I can't afford it to 50% pumped on my rent you know maybe I can squeeze 25, and then we say, okay, well if youre going to do that we will do 20.
And then we will do 5% bumps over the next.
The next few years.
So we've been kind of a little bit lenient are flexible with our existing tenants but.
Absolutely.
If you look back 10 years annual steps and industrial rents have like as you mentioned have been almost non ignite existence. So typically if you did a 10 year lease there was one reset it at five years, maybe it was a 10% bump or something of that so yeah. So that is definitely a problem. So I think the lease structures in particular, Toronto most ones we see the.
Ones, we're doing with our new tenants down in Guelph, all have annual steps and and I think it's easier for tenants because they're not having to manage a 40% bump all at once you start getting those three three to three 5%. So steps definitely are higher they're more easily attainable and stuff in terms of lease terms as again, we had some interesting discussions yesterday.
Our tenants are that we're going to put into one of the new developments wants to do a five year deal we're spending almost no money on the space.
A couple of percent.
Office at the front.
And the question was asked look why wouldn't you do a 10 year deal because we go we know in five years. These rents are going to be higher. So we don't give options. We don't give options or we definitely don't we don't give options, where we do all of the options now are at market. So we get another kick at the can.
That's the whole thing we've got a glorious opportunity here. It's just how do you manage it and how do you take advantage of it. So these are all the REIT questions building steps into the rent.
Any tenant in the GTA, that's wanting to do shorter term leases, we're okay with that because we know the market is only continuing to strengthen and rents rents are going out. The only time, we have one lease term is if they start to ask for.
Money, who counts on the rig.
Yes.
Want that then we want to advertise that and we want to make sure we do that but we're very specific about the type of inducements and we love when they want to do things that are environmentally friendly upgrading lighting as a very popular one trying to reduce their energy costs and stuff like that so again, we're talking about we're in a great place with great time on.
Someone saying, we're lucky, but you know this.
This is a.
It has its own challenges like our property management people are talking about the person I was negotiating with the other day I said the rent is going to go 50%. They start to cry right. It's like you know this is hard for some businesses to accept except these large increases so.
It's not as easy as you think now is the opportunity where you have vacancy or new developments. Then it's just you know highest highest highest bid.
<unk> the space so yes.
It's not it's not perfect, but we try to spend less money on leasing costs try to get more steps on the rent try to be flexible.
Tenants and particularly on the west.
You know right there, it's all about maximizing occupancy.
Availabilities in that seven 8%.
It's tighter than that for certain types of space, particularly in Calgary, but there it's all about.
Keep the places full and so you know we do month to month tenants. We do your deals 18 month deals again were comfortable that that market is going.
On the continued to improve over time, because there won't be a lot a lot of new development going on although where there is there arent do develops in both Calgary and Edmonton surprisingly.
Okay, great. That's it from me thanks.
Thanks, Steve.
And there are no further questions at this time I would like to turn the call back over to Mr. Jackman for closing remarks.
Okay, well, thank you everyone.
It's an incredible year for lots of reasons, some good and some bad for for summit in 2020.
We're trying to be realistic.
2021, again with the pandemic and golfing everything we do creates a whole bunch of challenges I think my takeaway from this year is experienced management is key and whether you're on a good market you are in a pandemic market.
That's what shines through so very very excited about 2021 on the opportunities and look forward to talking to you again next quarter. Thank you very much.
This concludes today's conference call you may now disconnect.
Okay.
Okay.
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