Q1 2021 Summit Industrial Income REIT Earnings Call
Good day and thank you for standing by welcome to the summit Industrial income REIT first quarter 2021 results conference call.
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I would now like to hand, the conference over to your speakers for today's call day Phil.
Chief Executive Officer. Please go ahead.
Thank you operator, and good morning, everyone. Welcome to the summit industrial income REIT first quarter 2021 conference call before we begin let me remind everyone that during this call. We may make statements containing forward looking information, which is based on a number of assumptions and are subject to known and unknown risks and uncertainties that could cause the actual results.
To differ materially from those disclosed or implied we direct you to our earnings release MD&A and other security filings for additional information about these assumptions risks and uncertainty.
Joining me as usual on the call today is Rob <unk>, our Chief Financial Officer, and Dana Gibbs, our Chief operating officer.
Despite the ongoing impact of COVID-19 pandemic on the Canadian economy, we continue to achieve our goals of generating strong financial and operating performance and delivering value to our unit holders.
Strength of the Canadian light industrial sector was clearly demonstrated in 2020 and has continued through the start of this year. We're pleased to continue continue to maintain high levels of occupancy generate solid growth on our rental rates collect all of our monthly rents and grow our portfolio through acquisitions and development.
We're confident 2021 will be another record year for the REIT.
Briefly recapping the results for 2020, we generated another year of record performance as shown on slide four all of our key performance benchmarks were up significantly year over year illustrating the continued strength of our sector and the REIT operations.
Added $1 7 million square feet to the portfolio and moved our first two development projects into income producing properties. Importantly, we ended the year with record liquidity, providing us with the funds and flexibility to execute the growth opportunities in Q1.
We're also pleased to receive an investment grade credit rating, allowing the REIT to access the unsecured debt market.
Turning to slide five Youll see that we have demonstrated another strong quarter on the heels of a very strong Q4.
For the first quarter of 2021 overall occupancy remained high at 98, 2% and given our portfolio growth over the last 12 months.
Total revenues have rose, 13% driven by increasing rents NOI was up 14% with <unk>.
Rising almost 32% importantly, our growth continues to be highly accretive <unk> per unit was up over 8%. Despite the increase in units outstanding.
Same property NOI was strong at two 6% more importantly in our core markets of GTA Montreal were both up on.
Almost 5%.
And we expect to see this growth continue for the balance of the year.
We continue to Accretively grow our portfolio as detailed on slide six last year as I mentioned, we acquired interest in $1 7 million square feet of GLA transfer two development projects into income producing adding another 388000 square feet of GLA all of those buildings were fully leased to long term tenants.
So far this year, we have deployed another $250 million through acquisitions of two properties in our core target markets, a logistics center in the GTA and a large state of the art distribution with complementary office space in Montreal, adding over 1 million square feet of GLA.
As part of our ongoing strategic portfolio management, we have sold certain non core properties for total proceeds of almost $55 million importantly, we have averaged a very attractive going in cap rate of approximately four 5%.
On these purchase over the last 18 months.
Leasing activity continues to be a strength for the REIT as detailed on slide seven keeping tenants in place as a key goals at summit and even with the pandemic affecting much of the Canadian economy, we consistently maintain high retention ratios and say that 83% so far this year.
Importantly, the strong indication of our leasing capabilities and attractiveness of our target markets. We are achieving significantly increase rents on our renewal rates the GTA and Montreal have both been off to a very strong start achieving 44% and 49% respective on increases rent so far this year.
Our tenant relationship shifts are very important part of our business on slide eight shows that our COVID-19 related rent deferrals are effectively behind us with all of our tenants now paying rent on time for the small number of tenants with whom we range rent deferrals. We have collected all scheduled rents outstanding with just under 700000.
Now remaining to be collected on the original $3 7 million.
As mentioned last year and with no change so far in Q1, we are encouraged that only three of our tenants have defaulted over the last 18 months. The majority of this anticipated vacant space has been leased or committed at an average rental rate increase of over 50%.
Turning to slide nine as you may have already seen in our press release, we're excited to have announced a four 4% increase in our monthly cash distributions. This increase results in a new annualized distribution of $56.04 per unit will be payable in June to unit holders of record in May.
With our record performance in 2020, our continued strong growth in Q1 net after taking a pause and distribution increases last year.
While we were conservative to the nugget navigating the early stages of the pandemic. This increase reflects our confidence of the continued strength of the Canadian industrial markets, our commitment to generating stable and growing returns over the long term, while conservatively managing our payout ratios I will now turn things over to Ross.
Thanks, Paul on.
On slide 11, you can see that we have a number of financing successes there.
Pleased to report in less than a year. The REIT completed three unsecured debenture offerings, raising a total of $700 million on very attractive terms with.
We recently completed on our inaugural Green financing with the <unk> $250 million Green Bond IPO began with very attractive pricing, while continuing to extend term.
Proceeds from our unsecured debenture when part used to strategically address early repayments of higher interest rate secured debt and we are now comfortably sitting with 52 five per cent of our total debt being unsecured.
We also have a $300 million unsecured credit facility fully available to fund our growth platform going forward.
Our balance sheet remains strong in Q1 as detailed on slide 12, we continued to improve our debt metrics with overall leverage at a conservative 36, 4% at quarter end.
And 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% at quarter end, while also extending term.
The recent liquidity position has never been a concern throughout the pandemic and continues to remain strong with ample flexibility, including our cash on hand, the available funds.
Under our unsecured credit facility and the financing potential on a portion of our unencumbered real estate total available liquidity stood at a significant $600 million at quarter end.
Another area, where we can add enhanced unitholder value is to continue to capitalize on current low interest rates.
On to strategically repay higher rate debt.
Slide 13 outlines our mortgage debt maturity schedule by year, and we continue to work to identify opportunities for early debt repayment.
While we incur some penalties for early repayment is considered in our cost benefit analysis volume in cost savings through the refinancing with lower interest rates. A recent example is our repayment of $103 million on 2023, and 2026 mortgages using the proceeds from our green bond, reducing the interest rate from three <unk>.
Seven 4% on secured mortgages to 2.25% interest only on debt.
The only debt on the unsecured debentures, we are on the process of exploring further similar opportunities with other debt maturities.
Dana will be reviewing our markets next as you will see strong fundamentals are driving value in our asset class, including record low availability rates with limited new supply increasing demand from e-commerce with significant increases in rents rapidly increasingly pipe replacement costs in the GTA and GMA.
All of which are leading to cap rate compression.
These factors are being sent scene in the REIT portfolio and target markets and our front on natural statements reflect a $91 million fair value increase in 2020, and a further $105 million increase in the first quarter of 2021.
We expect to conserve the record further net asset value gains in the quarters ahead, as we anticipate positive market trends to continue over the balance of the year on.
Now ill turn things over to Dana.
Thanks, Ross and good morning, everyone.
I'll spend some time this morning looking at the overall Canadian light industrial market and then discuss how we're capitalizing on the strong fundamentals in each of our key target markets.
On slide 16 details the significant supply and demand imbalance, that's been accelerating in Canada, and the REIT the target markets over the last few years.
Exceptional leasing velocity over the last two years has seen the availability rate in Canada declined two 9% the lowest level on record.
National net absorption with $10 4 million square feet in Q1, one of the largest ever and based on Cbre's forecast. If this level of sustained we could see a number of our markets run out of available logistics space by year end.
With record absorption rates and limited new supply rental rates have been increasing significantly in many Canadian markets.
In our core markets of Toronto, and Montreal rental rate growth has been even more pronounced with average rental rates up 62% and 43% respectively. Since the beginning of 2018 and with both markets at record low availability levels, we expect to see further rental rate increases for 2021.
As can be seen on slide 17 strong fundamentals are resulting in our target markets in Canada, leading North America in terms of lowest availability rates with Toronto and Montreal being the lowest on the continent.
With Canada typically lagging the U S. We expect to see continued international focus on Canadian industrial real estate as we're still exhibiting a meaningful spread to a number of comparative you asked metrics.
With the E Commerce trend, we've already mentioned in combination with Canada's immigration policy targets, Canada is expected to lead the G. Seven from population growth over the next four years, we expect underlying economic fundamentals to continue to drive demand for industrial.
One factor driving the increased demand for industrial space is the significant growth in E. Commerce in Canada as you can see on slide 18.
<unk> certainly accelerated this market trend with e-commerce retail sales increasing at its fastest pace ever.
E Commerce is forecast to represent over 10% of Canadian retail sales in 2022 rising to almost 12% by 2024.
According to CBRE every $1 billion increase in ecommerce sales translates into approximately 1.25 million square feet of additional demand for distribution space and over the next five years E. Commerce alone is expected to create demand for an additional 42 million square feet of Canadian distribution space.
Given that more than 80 per cent of our portfolio is comprised of space that could accommodate distribution, we're well positioned to capitalize on the projected growth in e-commerce.
On slide 19, you can see the very positive impact that strong market fundamentals are having on our key target market of the G. T. A.
Availability in Canada strongest industrial market returned to our pre pandemic availability record of only one 6%.
Overall net rents rose to $10 45 per square foot, marking a record 16 consecutive quarters of rental rate growth.
Over the last five years rental rates have appreciated by almost 91 per cent.
Our net rents on the DTA stood at $7 21 per square foot at March 31st and when compared to market rents for the same type of properties and our GTA portfolio, there's considerable upside as we renew on maturing leases in the quarters ahead.
Turning to Montreal, Canada second largest industrial market, they're also generating strong growth and it seems to be following the GTA market trends.
Slide 20 shows that the REIT achieved attractive same property NOI growth in this market of nearly 5% and that availability. In this market is also at an all time low of close to two per cent.
We're also very encouraged by the improving picture in our western Canadian markets and.
As you can see on slide 21 availability in the first quarter fell 140 basis points in Calgary to seven eight per cent and remained stable in Edmonton at nine one percentage.
We remain cautious cautiously optimistic about Alberta in Calgary in particular as this market seems to gradually be turning a corner and given that Calgary remains the logistics center for Western Canadian E Commerce.
I'll now take a few minutes to highlight some of our recent ESG successes.
Yeah.
Corporate responsibility and sustainability, our priorities for the REIT, our culture and values are the backbone of our operations and act as a foundation for all that we do well.
While the REIT has been actively involved in ESG initiatives and our best practices have remained steadfast overtime. We're excited to share a number of ESG successes from the quarter.
Slide 23 outlines some of the notable ESG highlights from Q1 as Ross mentioned earlier, we're very excited just completed our inaugural green financing through our $250 million Green bond IPO that closed in April.
Our existing LEED certified buildings sustainability initiatives and our development pipeline. We are pleased to now be one of only four T. S X listed REIT to have issued green bonds in Canada.
We've also enhanced our ESG disclosure in our Q1 M DNA and encourage you to review the other details of our ESG program that we've now included.
We plan to continue to enhance our ESG disclosure and transparency in the quarters to come.
Now looking ahead, we will discuss various aspects of the value proposition of the REIT.
With cap rate compression continuing in many of our target markets. We view our development pipeline as an attractive source of growth to complement our acquisition program through.
Through development partnerships as well as on our on balance sheet. Our development pipeline provides an attractive return profile, while providing the REIT with a source of brand new environmentally efficient real estate.
We estimate that our existing pipeline can achieve spreads of 100 to 150 basis points over current acquisition cap rates.
As you can see on slide 25, we currently have almost 1 million square feet currently under development or in various stages of planning and.
And the leasing market for our pipeline is extremely strong given the supply demand imbalances, we've highlighted earlier.
In addition to our current projects, we expect to have another 1 million square feet of development potential this year through new land purchases as we continue to focus on growing our development and expansion program.
As we consider the and the implicit value of our portfolio in the context of rapidly rising land prices in the GTA and GMA and.
Another area of embedded value for the REIT as a land that we currently own.
As shown on slide 26, we have identified and continue to monitor our portfolio for intensification potential.
The table on this slide outlines the estimated intensification potential of our existing portfolio with the expansion column, including really straightforward expansions on existing buildings, driven primarily by tenant demand and the redevelopment column being mostly our Alberta portfolio, where we could repurpose properties and has very low site coverage.
As you can see we currently estimate that including expansions or the addition of new buildings on land, we already own we could add an incremental 5 million square feet of potential new space when timing is appropriate.
This intensification strategy is a real on accretive pop on opportunity for us to build value over both the medium and longer term.
Our opportunity to enhance cash flow on lease renewals is significant.
You can see on slide 27 through the balance of 2021 and over the next three years, we have approximately seven 5 million square feet up for renewal with many of our in place rents well below current market rates and an increasing rate environment and our two two core markets of the G. T E N G M a.
We believe we will continue to be able to achieve meaningful rental rate increases going forward through both renewals as well as annual rental rate escalations.
And I'll now turn things back over to Paul to wrap up.
Thanks Dana.
So in closing we see a number of key factors that were confident will drive increased unitholder value over the long term our acquisition pipeline remains strong.
Acquisition growth has been augmented by our expanded development pipeline at very attractive yield on cost returns.
Accelerating land values in our target markets will continue to driver.
We also have a real opportunity for cash flow increases renew leases at market rents, which are considerably higher than our in place rents.
And we're also capitalize on the current level interest rate environment.
Increase our cash flow.
All tied into our continuing commitment to corporate responsibility sustainability and ESG initiatives.
That's the end of the formal presentation and at this point, we're happy to take questions operator.
At this time, we'd like to take any questions to ask a question. Please press star one on your telephone keypad. Your first question is from Humana.
With Scotiabank your line is open.
Thank you and good morning.
Good morning, Andrew.
Just looking at the leasing done them, but so far it looks like more than half from Illinois completed.
So can you elaborate on low 40 to 50 person includes events you are seeing in <unk>.
D Montreal market on it looks like we're seeing an acceleration from the destocking levels.
So.
Im sorry, im not quite.
Maybe I'm not understanding the question so the rents maybe.
Maybe just repeat your question so.
Yeah. So I think my question was that you are seeing a 44% increase in G. D in terms of rent increases.
You can see in.
49 per se. So can you elaborate on that what was maintained strength what other new venture machine okay.
Moving on to the market.
Yes, so I mean, that's a.
A bit of a small sample size, but roughly the Ross can correct me on the math, but the rental rates in place were in the mid fives to $6 rents a lot of these rents have moved up into the high eights in in Montreal.
We're in the a and the.
The low nines in Toronto.
So that's what's getting the rental bumps suraj.
That math right.
The high sixes to high nines in the GTA and yes, Thats correct low fives to.
Around eight in Montreal right.
We're starting to take a more aggressive leasing approach I mean during the last 12 months and the pandemic, maybe a little bit more risk adverse. So we were trying to renew tenants a little earlier ahead of their expiry by six to 12 months now we're back to the pre pandemic strategy.
You know kind of waiting to see if they have options that they can renew if not.
Theres not a lot of alternatives if in both markets. If you you know you are looking for space.
We're from 50000 to 100000 square foot up there's very very few options you have so and then I think the brokers are getting more educated the tenants are definitely getting more educated so and we did do one.
The tenant where we let them leave maybe they once a day.
But we were able to push the rent up you know what it was like 85%. So so part of that strategy going forward. It might be you know not that we wont incur a significant amount of.
They can see but in select cases, the best strategy might be to let a few tenants leave where we think we can re tenant debt at a much higher.
Great.
Got it.
So clearly it'll net increases out there, but are you seeing any bifurcation in terms of you know philosophy versus class B product.
These markets I mean other than even the smallest volume.
You seem to suggest me yes.
Yes, not really so the AP product and I was asked this question not too long ago. It really makes a difference in the first lease so when your first going into any building youre doing is very specific fit out for that particular tenant.
You can probably get a higher rent after that lease comes up in five years.
Our building next door is a 20 year old building has the same kind of physical attributes.
Pretty much identical spaces at that point, so theres nothing about an industrial building I mean, obviously, we're building to higher standards in terms of energy efficiency and lighting.
You can also accomplished some of that on existing buildings.
On the renewal process. So yes, it's really the premium you get is usually on the first lease so for the first five years. So the people that are out there building today and the numbers that they were asking for we're seeing.
11, 12, and now $13 rents being asked for some brand new space.
Got it okay.
And then just turning to the non core.
This positions announced on the notice the properties, which are being sold on <unk>.
The multi tenant properties is that a conscious effort to concentrate only on single tenant larger properties now.
Yes, and that's been always the strategy of.
This version of summit is to get larger tenants I think our average tenant size is around 75000 square feet today, those particular properties in Ottawa Theres nothing wrong with them its good solid real estate.
But theyre very management intensive and they were particularly intensive during the pandemic and you know a lot of handholding with those smaller tenants during the lockdown period. So.
I think there was 70 tenants in just those few buildings. So we dropped the number of tenants in our portfolio by about 20% by just selling those three buildings. So yeah. We've got a couple more identified and.
In terms of quantum you know there might be another 20 to 40 million square $20 million to $40 million worth of property that we would look to dispose of between now and the end of the year.
Got it that's helpful.
And maybe the last question is more on the replacement cost. So I'm looking at the Burlington site that $12 70 growth would you announce he said he it.
Looks like it's $2 billion per vehicle.
Could be the construction cost on a dollar per foot basis on that property.
Yes, so I mean, we would have this replacement cost numbers is moving very very quickly and clearly a $2 million sounds really expensive to us, but there's lots of other sites in other parts of on.
<unk> that are now over $3 million an acre so.
Youre starting to get into the mid two hundreds all in us.
And in the higher land prices of $3 million youre going to be starting to push closer to the $300 per square foot.
Got it and what kind of events will you be looking to underwrite on that kind of halted due to just two very good.
Very good Brad.
Yes, yes.
Yes.
Then we got to let some other people ask some questions here so.
I think we're going on.
They are changing so quickly so once you start the construction.
That's the best time to start to get rents, but I would think 12 $12 and up should.
It should be a very.
Very much achievable and and hopefully we can outperform that when the when the time comes.
Got it. Thank you. Thank you and all the time okay. Thanks.
Thanks.
Your next question is from Brad Sturges with Raymond James Your line is open.
Good morning.
Maybe just to follow up on <unk> question, there I guess with the recent acquisitions and some of the new disclosures on potential future density where do you see the development pipeline trending in terms of size next couple of years.
Yes.
Yesterday, it was two days ago, we announced our.
For new land.
Land acquisitions three of them are with our joint venture partner to in wealth and one in Kitchener and then the one we're doing on balance sheet in Burlington ourselves, which is not.
Just right across the highway from the other development that we're building on our existing land. So theres some theres some continuity.
You know again I'd love to see our pipeline grow by another million square feet, because I think.
It's the best thing to do right now and you know Lou and I have talked over 2030 years now that replacement cost numbers or are the key guiding and we're seeing acquisitions that are now starting to be priced at or potentially above replacement costs. So it's the obvious time to pivot into construction, so youre getting brand new real estate.
Youre getting that minimum 100 to 150 basis points. So.
Now.
The majority of the 1 million square feet is kind of under underway. You know a lot of that is pre leased so now we're loading up with next day $1 million.
Square feet and will continue to try to add another million dollars on some component of that will be in in Montreal, and whether we do it on balance sheet or with partners. We're flexible. The main thing is to get good quality brand brand new real estate. So.
If you take $1 8 million square feet at $200 square foot, that's about a 360 million dollar value. So you know that's about 10% of our balance sheet, but again, it's a different stages. So the stuff that is pre leased.
It's kind of not in the same risk basket, that's just owning land when we see very little risk in this because we have so many tenants in our portfolio that want to expand right now.
So.
That's the thing and then sorry, the last piece.
The exercise we did on the intensification. The first column is just three wall expansion. So any property that can be expanded by a minimum of 30000 square feet. We just kind of looked at those and.
In the past if youre doing a 30 or 50000 square foot expansion, the math didn't quite make it.
Land was only 15% or 20% of your replacement cost with these kind of land values now the land and development charges are as high as $50 to 60 per cent of your overall all in costs. So it's driving to make these smaller expansions more economical because you are only having to spend your.
Your hard construction costs to do that so a lot.
One of these or tenant base for the first $1 7 million square feet, so whether it's maple leaf foods.
And down in London.
Moving to wait and talk to them about because they are they have lease term less so it's more as their business expand and then if at some point when some of these tenants come up for renewal and they don't want to expand then we might just build the building at least two other tenants at that point or might ask that tenant, leaving and buildup.
Building the building and then re lease it.
As part of your disclosures as well.
Highlighted the potential for mezzanine, our mezzanine financing program I guess could you elaborate in terms of how large or what that program could look like in the short to medium term.
Yes, so again, that's kind of the structuring we're looking at with.
Our development partner on the three new ones that we announced so the idea would still be the same 50 50 partnership.
But some of the financing for the project could come from summit, so kind of like a second mortgage we do construction financing.
Then we would put some mezzanine money in and then.
With ourselves on our partner we put in the 50 50 50 on the equity on the equity side, but we would be able to earn a return so rather than putting all of your.
Money and as our equity not earning income we found this opportunity to do some element of financing. So in terms of dollars it won't be very significant in the first year, but.
In my mind it allows us to do a slightly larger development program, because it's not as dilutive figure out sitting on as much non.
Non income producing assets.
As you would have with doing these mezz loans.
Great I guess my last question would be just acquisition pipeline today.
You just announced a couple deals obviously with a little bit more of a development angle to it.
Does the pipeline going forward continue to have above average exposure or more exposure to development or how do you how do you see the pipeline today.
Yes, so we keep using the same words patience and disciplined because we have lost out on so many deals in the last little while and we're not losing out in the fact that someone else Scoop. This is just there's people coming in and paying prices that we just can't get our head around and that we believe there's going to be some market.
Comps that are coming down the pipeline of transactions that are either announced or will be announced shortly that's going to really start to focus and I think cap rate is going to become secondary. So we're seeing cap rates continue to go down and theyre almost being ignored at this point, because if you're buying a property with a five or six dollar in place rent.
Where do you think that upside is going to go. So if there's two or three years less people are just buying it on a on a per square foot basis. So.
If the acquisition market is going to be tough now we're happy to look at some of those properties are first one that we bought in.
In the year has excess land hasn't low embedded rents, but the leases there for five years, So we'll have to be patient.
To get the upside there, but other places.
We don't have the same amount of upside we're just passing because we're saying like why would a theres a transaction out there in Milton net $280 a square foot for 15 10 to 15 year old building. So it's just like that doesn't make sense to us so we're going to be selective.
Bidders continue to be that aggressive.
Appeals in Montreal that goes up.
On a four cap, which is okay as long as the price per square foot is the right number. So we're going to look at some tax deferred rowlands like we've done in the past, maybe some sale leasebacks, but more and more of our growth is going to come through development and I don't have an exact number right now, but I think it's more 50 50 would be my guess.
Today.
It could even go higher on the development side.
If these.
Ah metrics stay in place.
Okay.
That's great I'll turn it back thank you.
Thanks, Brad.
Your next question is from Matt Logan with RBC capital markets. Your line is open.
Thank you and good morning.
Good morning, Matt just just building off from some of the questions on the development pipeline. When we think about your planned land purchases to support another 1 million square feet of development.
Should we think be thinking about that total investment and non income producing real estate.
Yes, so I mean, we'll go.
It's conceptually and then Raj probably can follow up with the the precise math so the one in.
The one in.
Burlington is on balance sheet. So all of the costs will be in a property underdevelopment category, where the interest will be capitalized. So it will just be at.
At the end of the day.
That whole investment is going to be north of $200, you know, probably a net closer to $250 per square foot.
On on that.
<unk> development, so that will all be non.
On non income producing assets.
By the way, we haven't even closed on that yet and we should.
We've got people knocking our door down trying to.
Lease it so.
It's never going to be an issue of kidney lease it or when can you lease it it's going to be whats the range youre going to achieve to whats your ultimate yield on costs, but.
We're seeing at least 100 basis points and the difference so the next three.
And if you read the press release, the land prices, obviously in wealth in Kitchener significantly last outside the Green belt.
So under roughly 600000 on acre, but that those three is going to have very little non income producing.
Equity into that so we're going to we'll put a small amount of equity and as I mentioned the balance of our investment and those will be through a mezz loans that then converts.
You know from us owning 50% at cost and then buying the other 50% of market and we will do that by converting our mezz loan into equity once the property is built and stabilized and Thats why we want to build up the program. So we won't have as big a number in the the non.
Non income producing category. So some kind of combination so from Braskem go through the precise math with you on on that but the it will be a minimal amount of equity in those those three development.
Just maybe on that Paul I was more referring to future land purchases this year.
Correct me, if I'm wrong, but you had mentioned that you haven't put a million square feet on the pipeline today and plan to grow that by another million square feet over the next year, just thinking more about how much more land can we be could we see purchased and brought on our balance sheet.
So on the pipeline we have today that we've already announced on been talking about from last year, that's just around 900000 square feet.
The press release, we did on Monday announced that we bought enough land to build another million square feet. So that's already done.
Got you got you so no more land purchases.
No no no no no no no we're still looking for it.
Not opposed to trying to go up to another.
To go from.
Two to three now I think a lot of the stuff in the first million is gonna be complete at the two properties in Guelph are well underway.
This up.
Already pre leased.
On the tenant fit ups will happen late summer or the fall. So those will come into income producing.
Some of them, we have got some other pre leasing on our property down in nor service wrote in Burlington as well. So yes, so stuff is going to be coming out of that pipeline, but so today on on our books would be 181 9 million square feet that we can build and if we can add more land between now and the end of the year that could add another 1 million.
On fine with that as well.
Good good that's fine maybe just.
Go ahead.
It's just it's really hard to find stuff we've looked at land we've lost out on on land and we're trying to target land, where essentially it's kind of ready to go we were still in that call. It <unk>.
Two to three year time horizon. So we're not looking at larger parcels of land that are going to take three to five years or longer to build out. So we're kind of it's still in that segment. So we've got involved in a few land acquisitions and because of the municipality or additional studies or testing or hurdles that you'd have to go it puts it into that.
<unk>.
Four five years and we passed on that so at some point our development pipeline might include some element of the debt longer term land, but for now the target is kind of ready to go on when I say ready to go it's still going to take you probably <unk> 29 in the GTA, probably 24 months.
Once you've identified a property.
Atlanta, North service road, the previous owner had already started.
On the site plan approval process. So that when we think we might be able to get on the ground. Even later this year. If we go ahead with their two building design. So we're looking at that.
All great color really appreciate that.
Just changing gears to the same property NOI growth print in the quarter.
Looks like there was a small vacancy in Alberta.
And when we go through the MBNA. It looks like you have about half of your total vacancy leased.
Two questions one how much is in Alberta, and two how should we think about the same property NOI growth.
Say over the next 12 months.
Ross do you have that 150000 square feet do you have a summary, I probably could find it but you probably can find out quicker GAAP.
I can find it.
Yes.
I know a big part of that Matt as the property out in Pickering.
Where we had that printing company fail that was in the vacancies So I know.
There was quite a bit of that.
Yes.
A good chunk of it.
Yes.
50, 89, thousands in the GTA and the balance of that is in Alberta, Yes, 41000 in COVID-19 19000 net.
Yes.
Actually that once we leased that spacing in Calgary Theres, one other expiry coming up there, which.
Thank the tenants, leaving but we're you know we're going to we've got a new offer.
We could be close to a 100% occupied and Capri. So.
Very happy with where Calgary is going again.
Tightness in the market at the larger spaces in Calgary, So youre looking for 100000 square foot plus in Calgary.
Very very difficult to find and you still have a 7% availability, but that's more concentrated in the smaller part of the market. So so Calgary definitely has turned the corner faster than Edmonton and we're seeing activity in <unk>. So it's not debt, but it's it's a little bit a little bit slower and thats why for the balance of the year we have.
Very little lease Expiries remaining and theyre kind of spread out across again I think between the market. So I think of the $2 45 left 100 isn't.
As in Alberta, 100, and correct.
Third 20 is in the GTA and a small growth in Quebec and Montreal.
Yes.
And then if some of that committed space comes on line do you think same property NOI goes back that 4% to five per cent range.
Yes, we're definitely the numbers for GTA in Montreal, Theres, nothing that should change that.
On.
Alberta, Ross I'm not as close whether that is how we're going to see a pickup in Alberta, so pick up in Alberta from occupancy.
Pick up in the GTA from occupancy and then the contractual rents as they continue to kick in on the rollover here Youll see some growth and as long as well as the contractual steps.
Steps in rents.
The adult polices on that yes.
No.
I expect to pick up in the third second third and fourth quarters net yeah. So so we're optimistic.
Domestic that number is going to continue to just keep getting stronger as the year goes along.
Unless something unexpectedly bad happens when a tenant sales but.
It happens GTA, that's probably a good thing long term.
Yes.
Well, thanks, Paul Thanks, Ross I'll turn the call back Okay. Thank you.
Your next question is from Mike Murky day.
Your line is open.
Good morning, everyone on this.
First off let me just begin by saying Thank you very much for the Max exposure certainly appreciate it on our end.
On a lot of work.
Sure.
Youre welcome Busters and other stakeholders.
Couple of quick ones from me on a high level question. So just on the Mark on the revenue expansion can you remind me is that from expansion that's remaining in place or I think that was a property.
Property, where you knew they were a part of it yes.
Yes.
Yes, it's kubota kubota so they they were operating on a two or three different facilities. They bought a piece of land they have been developing it.
Because that's taken them a pretty year longer they keep they had a number of extensions. The last extension expires in October I think theyre trying to talk their way into staying to the end of December.
But the idea is yes, there is a matter of leaving so we're just going through and getting all of the day approvals ready.
We're already actively marketing it and then the question is going to be are we going to be able to lease the existing building, while we're adding on to 60000 square feet. So anyone that we're talking to.
They're going to be leasing the full bill being including the 60000 square foot expansion. So we're just but people are so desperate for space. Today. So we're just trying to see if there's a.
Our plan that we can kind of do the prep work well Kubota is still in there so that when.
A new tenant could start to occupy the building at the same time, we are building the expansion and just kind of work around them.
But I think our work on it.
Go ahead I'm sorry go ahead Paul.
Yes, I mean, we're confident that it's on.
Not going to be again, an issue of leasing it to just lower.
Where are we going to find the final rent to land on that so.
Alright, Okay, and then it would be more of a three wall expansion. So presumably the cost of that expansion, it's not a full purion on renewal.
Oh no no. That's yes that was the that was the attraction to this property I think it was 18 months sale leaseback they own the property and this was always the plan.
Even in the 18 months the land value has gone up remarkably now construction costs are going up steel is getting more expensive. So availability of building products is starting to be a bit of a concerned on an issue. So.
Again.
Big drivers or.
Land costs and development charges, but.
Whats increasingly getting more difficult now as just your hard cost construction and timing of that.
Terms of Preordering, all your steel and.
And precast and all of that.
That's a good segue into my high level question, so far you've been.
Barry prosthetic over the last couple of years in terms of calling out.
And Robert just a direction, but the quantum.
Replacement cost increases do you get a sense that were.
Still lots of runway there or do you think just given all the factors that we've seen.
In terms of the COVID-19 disruption.
And what we've seen there, but perhaps we might be.
Yeah, I hate to be as bullish as I am but I.
I don't see it because what we're really.
Getting a little bit more sophisticated on our leasing of tenant types that the rent is not a big consideration, which absolutely drives you to we.
We need to be in Brampton, or we need to be in a particular location.
And if you find the right kind of tenants in on Amazon or some of these other ecommerce the rent component of their total cost is very insignificant. So they can withstand.
Higher rental rates. So there is a segment of our portfolio more of the market. That's more sensitive on the margins you know they can't pass through these extra costs.
So I think they're going to get pushed out to the per free. So I think thats why youre seeing lots of construction and I'll pick three in Ottawa would be that's why we're being successful in Guelph where leasing.
15% to 20% above our pro forma rates, but there is still a two.
25% less than the GTA rates. So some some investors that are going to be a core tenants that are a little little more sensitive it they're going to go out there and that's why we think whether it's kitchen, Cambridge Waterloo.
That's gonna be a catchment area for the tenants that can can't afford to pay the rents to be closer, but what we're finding is a lot.
The the sticker price of the 12 or 13 or $14 rent.
It's not because Gary on some of these land once they're built out debt cost three or $3 $5 million, an acre I wouldn't be surprised that youre going to see like $15 rents on those so in the interest free and again everyone's focused on the GTA. We've talked about this Montreal is turning this corner and don't have the same regiment of development.
Charges their land is hasnt taken off crazy, yet, but if you looked at Toronto three years ago. I think it's we're Montreal is today. So we're very excited about that opportunity.
And love to start to be able to build more more property there, but again the same issue.
You have a tenant and all the same e-commerce tenants are in Toronto, Montreal, Calgary right across the country. They can't find these bigger spaces. So anything over 100000 square feet is becoming precious and you can get premium rental rate on the larger spaces and sometimes in the past the larger spaces would lease for less and in this case, it's actually the reverse you can.
There is still rare debt.
If you find that REIT tenants, they don't really care what the renters.
Sales are but they are less sensitive to it.
So I know Youre focus is increasingly on development, just with where prices are going but if the goalposts in Europe on there so that replacement.
Replacement cost.
On the slate on above average cliff.
Mtc pay.
Consider the replacement cost today.
We will look at it has to be unique.
Yes.
The one on Milton.
$208 square foot that kind of implies a two and a half to $3 million an acre for land price of Milton and we're kind of like.
We can understand from Brampton or Mississauga or some of these other areas.
Things are things are definitely getting aggressive, but when we buy a property like that.
You always are looking to developing which takes longer.
So why would I pay $208 to buy a 50 year old building when I can build on and Burlington are brand new for less than that that it.
It takes the time, but we were okay to pay.
Attorney at replacement costs, if there is a value add component. So if there is excess land, where we think we can enhance the value.
Through an expansion.
Clearly I think rents are going to continue to move up so again the person that's buying that I'm sure, they're taking a view that $280 in three years or five years is going to look really good and then they might be right. So so we'll be selective in acquisitions so but.
It's we're seeing we're seeing a lot of interest.
And from all the regular pension funds, but youre seeing for money come in because I think the chart. We showed earlier that profiled the availability rates in all our major cities in Canada.
When we're talking to our American investors Theyre kind of go on Wow.
These markets up or crazy tight so that's what attracting.
Foreign capital as well to coming into industrial so, it's becoming a very <unk>.
Very very sought after asset class.
Thank you. Thank you okay.
Your next question is from Joanne Chen with Bank of Montreal on your line is open.
Hi, good morning, everyone.
Sticking on the development front.
Also as a loss.
Sorry, Paul I last quarter, we mentioned that with respect to assist on a yield the spreads that you guys are expecting to get on.
Total net completion in late 2020 in 2021 kind of around that.
100 <unk>.
Point spread them with respect to the current I guess.
Environment on the.
The cost side of things are you still kind of is that the sofa target that either you need to achieve and I guess with respect to someone.
The newly announced.
Okay.
Just this.
This week.
On just kind of how should we be thinking about Oh, that's right on.
On that as well.
Yeah. So I mean, when you first buy land.
Do you think is like the highest you've ever bought land for on your career you kind of going Okay. There is no way, we're going to get the same kind of spread or kind of yield. So I would say the yield on cost.
Is definitely coming down on on a couple of those projects like that but what I think youre going to see on the other end is.
Cap rates that you haven't seen before so there is a.
Some portfolios out on the market now some are older.
<unk> class properties Youre going to see cap rates that you've never heard of price per square foot you've never heard of and then we're going to see brand new real estate and I think youre going to see cap rates that are are even lower than you've seen in the past. So even if our yield on cost is coming down 25, or 30 or 40 basis points I think the cap rate.
If you were to turnaround and.
Potentially try to sell those as coming in at the same amount. So I still think we can preserve that 100 and the.
Stuff in Guelph, we're just we're really doing well with that.
Because we are still able to buy land at.
Much more reasonable prices out there so yield on cost or maybe coming down a little bit but are still hanging in there at very attractive track from members, so and some of the yields on cost.
We're closer to 200 basis points on her on her Guelph development. So those have been phenomenal successes so far.
No that's great I mean, I guess the supply shortage definitely.
Yes, we will get that going but I guess, you mentioned that you know the land prices in Montreal.
Yes.
Kind of as Crazy as it has here in detail, but I guess, it's starting to wood you.
Kind of comment on how I guess in terms of the timing, where Montreal potentially couldn't catch up catch on Toronto.
Yes, so it's one of those unknowns in the market.
The funny thing in Montreal, the development community and people that do on land.
<unk> had more of a philosophy of doing build to suits and non spec development Theres. A couple entrepreneurial type groups that are trying to create some funds to do some spec building in Montreal, but I think the last number I heard was 4 million square feet under.
On a construction Montreal on a 250 million square foot market. So very very small amount and I think the number was like 80% of that is pre leased are already committed so still a very small amount of spec.
So again all of these cities, whether it's Toronto, Montreal Vancouver, like there's no more theres no more land in the core area. So I do think Montreal has the ability potentially to do redevelopment because you have some obsolete buildings there, but otherwise you know the same thing is going to happen you're going to start to push them.
West and north in Montreal, and so you know it's.
It's going to keep expanding your development area. So so land prices I think aren't going to move up as quickly but.
I think we're definitely seeing this acceleration in rental rate moving up so when that happens. The next thing happens is if I can get those kind of rental rates are going to start buying land and you're going to see more people jumping into this game. So I think it's just a matter of time before you start to see a ramp up of <unk>.
Spec development in Montreal, and hopefully hopefully we're part of that in the early days.
Got it Okay. That's helpful and maybe just back on the very strong leasing spreads. This quarter can we kind of expect I mean, just given development on that tells me that.
On your core markets right now.
That level of leasing spreads are true.
2021.
Yes, and we tried to provide that additional data and by your different markets and.
Over the next four four years. So you kind of look at the average REIT in the GTA is 721, but most of the leases expiring or less than that so they are in the $6 50.
Theres lots of new.
Re leasing rents that are now in.
North of $10 a square foot so.
It is.
We had a good discussion at our board meeting yesterday about.
Is it the time to start to kick tenants, that's never been our philosophy, it's more having a good relationship trying to push rents.
But when we had the one bankruptcy we had the one vacancy we definitely have been able to push rents higher on vacancy. So so we're looking at selective.
Opportunities potentially to say this tenant is not the kind of tenant that can afford to pay that rent in and maybe we need to look for a new a new type of tenants. So the rental bumps are the rental level or the increases are definitely there.
To be had in the market. So the question is is the particular tenant that's coming up for renewal willing to pay that debt in the past. We've we've we might have gotten a little bit lower whether it's 30, 30% we build for a 5% annual escalations in but at some point, we might make a decision on a few tenants that thing.
If you can't pay the debt.
$111 rent, we're going on we're gonna have to ask you to leave so some tenants on their leases have options to renew but for the most part when they don't.
That's our decision to make.
So it's all it's all very very positive here and we're still flexible there are some tenants that.
They are growing so quickly they don't know what their plan is so we're still open to doing one to three year type leases because we're that confident that the rents are growing so whether they leave or stay at three years. It doesn't matter because the rents are going to be even that much higher.
In the future and there are some tenants that are smarter and so they're trying to do 10.
10 year leases just to lock it down because they don't like the trajectory where rental rental rates have gone on.
We will hit $20 per square foot.
I don't know 50, 50, and 15 is going to happen.
To make that prediction and 33 at the easy number $300 a square foot replacement cost is is.
He is already happening so that was not much of a.
A blue Sky number.
I'd mentioned that some of the tenants I guess.
Alright, alright.
Matter less.
I think it's more the global E Commerce players.
Yeah. So I mean, there's a number of factors but.
Transportation costs employee costs, if you're in a manufacturing type setting are not going to be.
You have some of these third party logistics people, where they have a <unk>.
Higher distribution with contract with Bridgestone their margins to get that contract our centers in some of these more retail oriented e-commerce type tenants, where they can pass that.
Those additional costs on but transportation costs and other cost of outfitting their space or bigger compared to the rent numbers. So they're less sensitive to that so so those are the kind of tenants that were we're trying to continue to upgrade or put into our portfolio that we think have above average ability to.
No.
Handle lease rents.
Okay.
Super helpful.
That's it from me I'll turn it back okay. Okay. Thank you.
Our final question is from Matt.
Total bank financial your line is open.
Hey, guys congrats on any volume quarter.
On the on the land infrastructure and employment base side do you think kw in Guelph can become sort of a release valve for the GTA or are those fairly limited and the opportunity size in terms of how much industrial could be built out there.
There's definitely opportunities out there. So there is some more land thats available. So it's just a matter of how quickly these communities can.
Get through the rezoning process in servicing and all the other things that are necessary to do it but yes.
We're keeping our eye on it like I said, we're very very happy with what we've done in Guelph and it kind of sets you up for that whole quadrant.
On the GTA going down the 401, there so anything along that major transportation hub is in play in our minds so because.
Some developers are going as far out as like Hamilton in the Hamilton Airport area, we think that possibly we will make sense at some point, but.
A little more speculative, but I think.
Anywhere along that corridor is in play for us and we like we like going east as well. So we're constantly on we've been building up our portfolio, both on acquisitions and looking for Orlando going east as well.
And all things considered I mean, the price point at which you're getting.
And in those areas I mean, you are not that many kilometers beyond where it is substantially more expensive. So as is the view that land cost will accelerate in those markets as well and in the New York.
Yeah, they are but they're not they're not going on.
It's all relative so literally land and some of the places.
Land that we're buying it for 2 million acre that was 900000 acre three and a half years ago.
When it was sold so it's that's how quickly the lands going on we don't see that happening out there, but you know if it's going from 600 to 700 800.
On a million dollars an acre that wouldn't that wouldn't surprise me, but I don't think youre going to get into the same kind of numbers that youre seeing inside the Greenville, and that's why we did.
Intensification.
The metrics that we put in there one of the things on that pace. We want people to focus on is just how much land, we own and if you start to do an analysis and look at our buy FRS valuations and say, okay. If you applied a $2 million or two and a half million dollar value to our land position.
What was that comp with and I can tell you the answer is.
It probably makes up $50 60 per cent of the RIS higher for us value is just land.
So and in some cases I mean, you look back historically the value of the land is more than what we paid for the land and the building four years ago. So it's just the it's crazy numbers and we've we would've never thought about that but our biggest asset is it's on.
On our balance sheet as land and how you use it can you intensify it.
And that's the thing Thats going up very very quickly.
Again long term, whether it's our land gets used as a higher use and can redeveloped into something else, where you know we're not taking that into account, but no. This is just the industrial land pricing alone.
As increase that much.
Yes, we have definitely looked at your fair value disclosure with regard to the per square foot numbers and I know you took a gain this quarter and said there's going to be future gains, but I think you can take quite a few future gains to catch up to where the market is.
On on the 230000, I think you spoke about with Mike the GTA assets.
It sounds like about 185000 may not necessarily come offline, but the Montreal property will come off line.
Can be extended if thats correct right.
Yes.
It's only a 40.
The 47000 square foot, but the footprint. It was a two story buildings. So the footprint was only like 12 out of 12000 square feet, so, but we're releasing of the or whatever.
It's an all day, it's on all building, we're going be able to be built between 130 150000.
A brand new brand new space, so that that income will disappear.
Okay that makes sense and the last one from me on <unk>. There was a I think a $700000 recovery in this quarter, you've done better on some of the bad debt.
Was provisioned for.
Is there any more of that to come in in subsequent quarters or will you kind of pass on COVID-19 related adjustments at this point.
We still have a general allowance.
For roughly the same number again, so we're still just kind of monitoring a few tenants and I keep saying the same thing I've been saying is still shocked hit some of these tenants are still.
Still fighting their way through these various lockdowns and opening in the ways they've had to open to survive. So they continue to do that.
But we have specific allowances and then we have a.
We still have a general allowance of roughly the same amount, but I wouldn't be we're not going to be in a rush to reverse that so I think if by the.
Latter part of the year, whether it's third or fourth quarter. If we haven't had to utilize that we would take into account, but I wouldn't count on any of that reversing but if we get lucky and continue to these tenants continue to survive and.
We might be able to reverse later in the year.
And regardless I would assume that if you get that space back youre not going to be particularly unhappy.
No, that's what I'm, saying that and even.
Even in Calgary now that we're almost on a present for that market has gotten very tight again so.
We wouldn't be surprised that rental rates are going to start to firm up and potentially increase in Calgary.
In the midterm.
Okay, great. Thanks, guys Okay.
Okay. Thanks, Matt.
Thanks, Matt.
We have no further questions at this time I'll turn the call back to presenters for closing remarks.
Okay, well, thanks again for everyone listening in I know, we've given you lots of new information to noodle on and we do plan on.
Continuing to refine that so we're open to input and feedback from our investors and analysts.
We'll continue to.
Upgrade and try to make our MD&A and other disclosures as user friendly as possible and we look forward to having another discussion next quarter with I think.
A lot of.
More positive news so thanks a lot.
This concludes today's conference you may now disconnect.
Yes.
Moving on.
Good day.
[music].
Yes.