Q2 2021 Summit Industrial Income REIT Earnings Call

Good day, and thank you for standing by, welcome to the summit, industrial income, Reit, second quarter, 20.21 results conference call at this time, all participants are in a listen-only mode. After the speakers 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 zero, I would now like to hand

Hop over to your speaker today. Paul Dykeman, please go ahead.

Head, thank you, operator. And good morning everyone. Before we begin, let me remind everyone that during this call, we make statements containing forward-looking information, which is based on the number of assumption is 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, em, DNA and other Securities filings for additional information about these assumptions risks and uncertainties joining me on the call. As usual this morning is raw straight our chief financial

sir, and Dina gives our chief operating officer and you might have noticed we've moved

the call of our our quarter slightly to accommodate a broader range of time zones,

With each passing quarter. I'm pleased to report the REITs office has continued to board move towards the resumption of a hundred percent in person operations. And as well, we will discuss this morning. We were pleased to report that we've delivered, another extremely solid core door. Once again, meeting our goals of generating strong performance and delivering value to our unit holders. Thank you to all our dedicated employees and our Board of Trustees for their ongoing and hard work and dedication during this difficult time at our properties occupancy. Strengthened

Almost full levels. Rental rates were up. We continue to expand the size and the scale of our income producing property, portfolio as well as our development program looking ahead. We are confident 2021 will be another record year.

Turning slide for you'll see was another strong period for Sumit are over occupancy. Strengthened further from ninety eight point eight to ninety eight point. So from to ninety eight point, eight from 98.2, last quarter Revenue, Rose 18% in the quarter driven by portfolio growth and steadily increasing monthly rents and oh, I was up..19% with fo almost Rising..17% are ffo and ethical per unit. Numbers were impacted in the quarter. Buy a four-million.

Home Mortgage prepayment penalty relating to the Strategic repayment, secured term mortgages offsetting this charge was an additional four point seven million dollar realized gain that we received on the the completion and payment of the dc2 data center same property. And no, I was up a meaningful 5.5% with our core markets of GTA delivering, a very strong 8.1% help prevent creasing 4.7% and Quebec, increasing 3.7 compared to

Last year.

As you can see on, Slide Five are strong performance in the second quarter, contribute to solid gains in all their benchmarks through. The first six months of the year revenue is roughly, 16% do the portfolio. Great growth, strengthen occupancy, and increasing monthly rents. This growth resulted in a 17% in that rental income, 21% increase in ffo.

City property in Hawaii, increase 3.7% again demonstrating the strength of the resiliency of our property portfolio. Ffo per unit was impacted by that mortgage prepayment penalty, that they mentioned, which we were proactively repaying, certain term mortgages that carried average interest rate of three point seven for replace that with death roughly around 2.2 percent.

Leasing activity continues to be a strength for the read as deal. Detailed on slide six. Keeping tenants in place is a gold of Sumit. Why we strive to maintain High retention ratios. We are now balancing. This, with strategic leasing an active management. It's a key in maximizing. These rental rates importantly with a strong indication of releasing capabilities and attractiveness of our Target markets we are achieving significant increases in our rental rates over the expire and rents with strong demand.

New.

Availability is very low and tight. In both GTA Montreal, which contributes roughly 51 percent increase in rents over the expiring. Reds the GT in the GTA, sorry in 41% in Montreal and Dana will outline the continuing ongoing opportunity that we have in our Mark to Market over the next few years which is significance. Also of Note 3 completed the 603 million square feet of new, leases generating, an even higher sixty four point four percent in growth in Rancho.

Rates in the GTA on close to 200,000 square feet. And finally we were pleased that we were able to announce a 4.4 percent increase in our monthly cash, distributions in May, which results in a distribution of fifty six point four cents per unit and this distribution increase reflects our confidence in the ongoing strength of the Canadian Destroyer markets. The wreaths continued positive performance in our commitment to generating stable and growing returns for unit holders. I will now turn things over

Two rocks. Thanks Paul turning to slide 9.2021 has been an active financing period for the read through the first six months of the year. We successfully completed the placement 475 million of unsecured to Brent Dentures. Bringing our total activity in this space to 925 million in less than a year.

We have continued to access the unsecured debenture Market on very attractive terms while continuing to extend our maturities. We are also pleased to have been active in the green bond market. As we discussed last quarter proceeds from our unsecured debentures were in part used to strategically addressed early repayments of higher interest rates, secured debt. And we are now comfortably sitting with 72 percent of our total debt being unsecured.

As Paul mentioned earlier, the Strategic restructuring of our mortgage portfolio. Resulted in one time for million dollar, mortgage prepayment penalty in Q2 and a 16 million dollar penalty, and Q3 the expect to generate annual interest Savings of approximately 4.5 million dollars, as a result of these finances refinancings. Our liquidity is strong and continues to grow at Q2 standing at approximately 800 million, including cash, availabilities on are unsecured credit facilities.

And potential financing on our 2.2 billion dollars in unencumbered properties. Following the July and August financing activities are pool of unencumbered properties has grown to 2.7 billion. Furthering, enhancing our liquidity.

Our balance sheet remains strong. As shown on slide 10. We continue to stretch and strengthen our debt. Metrics with our overall leverage at a very conservative 3 /, 33% of quarter in the Reid has capitalized on the low interest rate environment, having reduced our average effective interest rate, 22.8% at quarter, ñ, weíll also extended term as mentioned during the second quarter. We repaid 103 million in mortgages using proceeds from our unsecured debenture. Offering this

Then a reduction in interest rates from 3.7.4% to much lower.

2.25 percent while extending term and saving 1.4 million in interest expense per year, subsequent to quarter end. We've repaid another 2226 million in secured mortgages with the proceeds from our series, Dion secured. Debenture offering this to reduce the rate from 4% to much lower 2.44 percent. With the interest Savings of 3.1 million dollars per year including this transaction. The weighted average interest rate on our total debt portfolio declined further to to

Point five, five percent from 2.8 percent of quarter. N I'm out, they turn things over to Dana.

Thanks Ross and good morning everyone.

So turning to slide 12 significant broad-based cap rate compression and transaction volume in our Target markets, especially the GTA has directly and meaningfully impacted the value of our portfolio as see on slide 12 record. Low availability rate limited new Supply continuing demand from e-commerce significant rental, rate, growth and rapidly increasing replacement cost in the GTA and GMA are all key contributors driving industrial real estate valuation.

These doctors continue to drive growth in our nav and through our rigorous, internal valuation process in conjunction with third-party evaluators are bored and audit team. We recorded a very meaningful 589 million or $3.50 per unit, fair market value increased or income-producing property, portfolio and Q2.

We're optimistic that our markets and asset class will continue to show further, strengthen the quarters to come. And I'll now talk about the specific markets in which we operate.

On slide 13. You can see the positive impact that strong Market fundamentals, are having on our key target market out. The GTA availability and Canada's strongest. Industrial Market return to the pre-pandemic availability record of only one point, two percent overall, net runs Rose to eleven dollars and fourteen cents per square foot marking, a record, 17 consecutive quarters of rental rate grows

Over the last five years, rental rate of almost double given these, extremely tight market conditions. We saw an eight point one percent increase in same property. Noi for our GT, a portfolio, in Q2 Arnett runs in the GTA stood at $7.25 per square foot at June 30th. And we believe there's considerable upside. As we renew maturing leases in the quarters ahead to Market rates,

Slide, 14 shows Montreal Canada, second largest industrial Market is also demonstrating strong growth and seems to be following the GTA market trends with the availability rate declining. Another 50 basis points in the quarter, to an all-time low of 1.4 percent, and a 1.7 percent increase in asking rents marking the 11th consecutive quarter of rental rate Rose.

The slide shows that the Rita cheese attractive slam, same property and a wide rows in this market as well of three-point-seven percent in the second quarter and near full occupancy. We are pleased about expanded our presence and this attractive Market with our recent hundred eighty three million acquisition.

We also continue to be encouraged by the industrial markets in western Canada and specifically in Calgary as detailed on slide, 15.

We are pleased to have seen a 4.7 percent increase in same property, and Ally in Alberta, including a 6.6 percent increase in Calgary. Our occupancy in Calgary, is now close to 100%.

Given what we've been seeing in Alberta this year will strategically, and selectively, consider acquisition opportunities in this market. As Calgary grows to become the logistics and distribution center for much of western Canada, as seen on slide 16 fundamentals. Continue to strengthen in Calgary with strong positive absorption. So far this year of 4.1 million square feet, the highest to quarter total in over 15 years.

They can see continues to decline as demand for large format. Space increases telling 24.7% the lowest rate since early 2015,

Availability continues to Trend down at 6.6 percent at quarter end with little new Supply on the near-term horizon.

Looking ahead will focus on the same successful growth strategies that have generated positive unit holder returns to date.

The turning to page 18. Some as three-part growth strategy allows the reap to Pivot in response to market conditions and has proven to generate value for our unit, folders over the long term.

As has always been the case, we continue to employ a disciplined approach to Acquisitions work, to maximizing the returns of our development program. While managing risks and targeting environmentally responsible projects and actively managing managing or existing portfolio, true, strategic, leasing strong tenant relationships and Redevelopment and expansion opportunities as appropriate.

As shown on slide 19, our acquisition program continues to be active with a rate. Having completed over 250 million of income producing property Acquisitions so far this year, while also meaningfully having increased the size of our development program.

We remain active in the acquisition Market, but over the past several months have seen significant tightening as existing and new players recognize the strong fundamentals in the industrial sector, which has resulted in increasing, demand and kaveri. Compressions cap rates are now being seen subtree percent in some GTA transactions with Montreal. Also showing very low rates and valuation metrics shifting more towards replacement cost which is being driven by rapidly increasing land values.

Turning to slide 20 increasing increasingly. We view our development pipeline as an attractive source of source of growth for the reach through development Partnerships as well. As on our own balance sheet are growing development pipeline provides an attractive return profile while providing the read with a source of brand new environmentally efficient real estate. As you can see on this slide, we currently have just under two million square feet under development in various stages of planning or under contract.

The leasing market for our development pipeline is extremely strong.

given the supply demand imbalances that we highlighted earlier, and we estimate that our existing pipeline can achieve spreads of between a hundred to a hundred fifty basis points, over current market, acquisition cap rate,

Our development pipeline also aligns itself. And our joint venture partners with our green financing framework. As we strive to achieve maximum efficiencies and minimize the environmental impact of our newly built buildings.

Organic growth will continue to be achieved through our lease renewals and active management. As we capitalize on the continued, strong demand in our Target markets. As you can see on slide 21 over the next three and a half years. We have just over 7 million square feet of renewals coming up with many of our in place, runs well below Market.

With rental rates forecast to continue to increase in our key target market and replacement cost. Continuing to rise. We believe we'll be able to achieve meaningful, rental rate increases going forward through both renewals as well as annual rental rate, escalations as demand for industrial space continues. I'll now turn things back over to Paul to wrap up.

Great and thanks Dana. So in closing, we see a number of key factors that we are confident will continue to drive unit holder value over the long term. We continue to execute, our discipline acquisition program, which standard does outline with emphasis on a price per square foot compared to replacement cost has always been our Golden Rule and while Acquisitions remain a key element of our growth strategy are expanding development pipeline. Will contribute attractive yield on cost returns and

And brand new environmentally efficient real estate and you know upgrading the the overall quality of our portfolio, the accelerating land values. In our Target markets will continue to drive the nav growth that you're seeing. And the organic growth will continue as we renew leases at Market rents which are considerably higher and continuing to grow over are in place rents. And finally, as Ross mentioned are strong liquidity position access to attractively priced debt and Equity capital.

Well, I was to execute on this Pro strategy going forward. I think everyone further time this morning and now would be very pleased to take any questions that you may have operator.

At this time, I would like to remind everyone in order to ask a question. Press star in the number one, on your telephone keypad management has requested that those wishing to ask questions, please limit themselves to two questions at a time to ensure everyone gets an opportunity. If you have further questions, please re-register

irr and your first question comes from at Logan with RBC capital. Thank you.

Shark droste wanted to take a first crack at that. You want me to

Well, you go ahead. Yeah. So, I mean, they're not significant adjustment. It's in cap rates in both those markets, but that when we look at this, we still think they're still going to be, you know, value appreciation. But we're really looking at where replacement costs are. So as we starting to build in Montreal, we think the the price per square foot for Montreal portfolio, you know, is is very reasonable.

You know, of the 589, you know, the adjustment in Alberta was only 28 million dollars. So the bulk of our fair market value adjustment or 417 million was, it was in the GTA. So was definitely the bulk of of the value change. But, you know, Berta, you know, it's got free to get more competitive in both the TTA Montreal, we looked at track transactions, we bid on transaction and a lot of them haven't closed yet. But by next,

Quarter, you're going to see that there has been a meaningful, you know, change in, in tap recent, you know, particular in Calgary. I don't think Edmonton No Cap rates have changed at all, but I think with overseeing your Montreal, it's more moving towards the, the price per square foot, you know, comparing it to replace the content and cap rates in GTA are just no longer relevant. No one is buying based on a temporary basis in the GTA. So, if you look at all of the deals that we bid on Lost out, on all the ones that you know, last quarter were kind of in the

Light one but now they're closed this close we all the details everything is driving towards you know the price per square foot and we've seen cap rates as low as 0.1 percent in the GTA. So you know, they're clearly it's all about, you know, we RI are, you know, what's that going to be? And, you know, sometimes you have to wait three or four years before the lease is burned off, which you probably can at least double the rents and and move that cap rate from a two percent up to maybe a four percent, something like that.

That great color. Maybe just you mentioned that you're looking at either cap rates or your per square foot values and Alberta increasing, you know, next quarter? Like do you see potential for further increases and either metric in Q3 or Q4?

Who was that earlier values? No, no. There's there's more room to grow. So, like this is a massive adjustment and, you know, when we were looking at last quarter, we knew some of the deals wrote there. I think, you know, the process, we go through internally, you know, we use notes. I'd consultant, the Auditors have to look at it, you know, management, probably felt, we could have, you know, record it. More of this, you know, into one, you know. I think you're going to cost a little bit more comfortable to record at once all these

You know that were in the works, you know, firmed up and and were doubts, but at the same time, you know, we we hadn't been just an unsolicited bid on whatever properties in the Tobago at 15 million dollars higher than our nav any minute. Oh <expletive>. But so they did. I think we have on our books, it's $115 to her $20 square foot. They did $265 square foot, you know, unsolicited. So that's just one example in the GTA. You know, we continue to hear, you know, more and more

insider trading, you know, 280, 300 dollars, a square foot the, you know, that cartera portfolio. You know, there's two properties in Whitby. One was in Brampton the Amazon. Filthy. I cannot tell you how aggressively we did on that. We were in the we're in the next. I think we were number two bitter. And we lost out. I think twelve million dollars in the end. So someone did, let's recap for an Amazon building and close to $400 a square foot for

And the other ones.

Then, you know around 250, you know, Odin would be of all places. So yeah, we're seeing and then what were its leading us to to have comfort here? Because now we're getting on lots of land and we're losing out on a land. So you know, there was a piece of land, 60 Acres in Bolton, that's just I think gone fermat about 2.9 Million an acre out there. So all of this is continuing to push, you know, that replacement cost number

Higher and higher towards $300 square foot obviously. If you're building your you've got to develop and spread their so, you know, when those properties get turned around and sold, you know, they're going to be able to be sold for three hundred fifty or more. So, you know, we bought our man down and some Service Road in Burlington, you know, 2.1 million acre. That's the most we've ever paid, you know? Luckily, you know, the rental rates are probably now already two dollars higher than what we thought they were when we put that but that land under contracts, but we're up into 200.

The two hundred and seventy dollars a square foot building, that particular building. So it's it's it's land going up, its replacement going up and then that's dragging up the you know, rental rates in those markets and and we're seeing all of those same signs in Montreal. So you know, eight or nine hundred thousand an acre is now 1.3.1.4 million, an acre. And it's starting to move very quickly because there's no large format spaces in either one of these markets.

Green color and maybe one last one for me before I turn it back just in terms of your renewal spreads. Do you think those are sustainable with forty to fifty percent in the GTA in Montreal and what sort of same property and Ally growth? Does that support going forward?

I always liked robbed, answer that next the second part of that question but it's absolutely, you know, it it absolutely supports, you know, though the the spreads that we're getting and if anything they're going to, they're going to continue to lie. And then I don't know if you understood the subtlety, we're trying to say is our retention was a little bit lower because we purposely didn't renew a couple tennis. So we were getting, you know, 40, 50 % bumps nonrenewals Pub. When you have a vacant space, we can even push that little bit higher and, you know, we're able to get up to

64%. So you know sometimes which is a foreign concept we're going to actually you know if they don't have a renewal option or going to actually ask tenants to leave. So yeah. There if anything you know they're going to accelerate I always say to put a number on there but we're going to have strong same store noi in Toronto and and I think it's going to continue to increase in Widen in Montreal as well, but as I do, I will need to give a specific guidance but now I think

I'm quite comfortable with where we're at and our ability to provide produce similar in the upcoming quarters. I mean, all these all these rental rate growth that were quoting. A lot of add is, you know, it's just starting to kick in in that and it'll kick it in the third and fourth quarter. And the stuff that we even announced last year was later in the year. So, you know, so we're seeing that's very strong, rental rate growth and and there's no, there's nothing we're seeing on the horizon for

occupancy declined, particularly in the GTA and

Factory. We would like some tenants to leave in the GTA so we can because we've achieved higher rental rate growth on New Deals as you see in our in our md&a on do deals with that. But it's, you know, it's it's still very all. Very positive on occupancy and rental rate growth. They are very comfortable with where the quarter isn't and the ability to do that. Going forward. Thanks Paul. So I'll turn the call back. Thanks Matt. Okay, thank you.

Your next question comes from and Brad Sturgis with Raymond jeans.

Hi there. Just pull up on the discussion on the fair market value, but more as it relates to you, put through a pretty large for Value gained. You know, that's the creases of Leverage on the balance sheet. You know, how do you think about leverage going forward on a Target basis? Given the ramp up in the development program.

So, I mean, you know, clearly it's ultra-conservative this point and you know, the numbers eight or nine hundred million dollars of liquidity, with that unencumbered pool. The two things were balancing. Brad is the, the debt to ibadah number. You know, so that we can maintain and, and possibly improve our abs are, you know, rating. So but you know, as we increase our development and some of the developing you're going to see that we're doing with Partners, you know, we're going to fund.

All amount of equity, but a bigger part of our commitment through those J. He's is going to be through a mess loan where we're actually learning and earning a return. So it has a little bit different different profile but no, I don't think you're just, you're leveraged a lot. We you know we did the offering last December most of that was to repay debt. So we're purposely, you know, delivering a little bit to continue to improve our that the even a numbers. But at the same time, if we have good opportunities, we have, you know, we've got tons of liquidity and

You know, you want to have that flexibility even though we can go into the capital markets for both equity and debt quite easily, you know. Ideally, you want to you'd want to have the ability to do, you know, do it through dead, in your balance sheet, as the equity markets, aren't right when you need to fund some of those future development programs.

And it also had to do with the addition of our ATM program that gives us some incremental flexibility, just for some smaller, sort of capital or Equity, Capital raises for things, like development and such.

So it's helpful in terms of the development program, the 1.2 million square feet in the near term development expansion, pipeline. Mainly GTA, what would be your expected construction cross on a price per foot basis, or do you have a budget in mind for that near-term pipeline? Yeah, so yeah, there's two kind of phases. So, you know, you know, we've hit a home run with our partner down and well, because we thought that that land

Under 600 Thousand Acre, we were the two additional remaining pieces that they had control of, they have their bending them in, you know, roughly at that same at that same number. So, you know, we're, you know, comfortably under $200, a square foot the other properties on Bouncy. You know, whether it's North Service Road or survey or again, we own that plan on balance sheet, so we're still under 200 dollars a square foot there. So that's why we've got you know, call it

$100, you know, development profit spread.

The so Service Road will be are more expensive. One thing isn't a 2.1 million we're looking at two designs to building which would be a little bit more expensive. All in would be like 270, we probably can be a little bit more efficient with a one building design. It's probably a two hundred fifty dollars a square foot but anyone that's buying land at that 2.8.3.1, you know, you're definitely you know, very very close to a 300 million or sorry 300 dollars a square foot replacement cost, but if you're like a car Tara,

You know, they definitely built that Amazon building probably well below$..300 square foot, you know, but they're selling it at four hundred dollars a square foot. So that was an interesting transaction because it doesn't, you know, their 10-year locked in Lisa's and it's still traded for a 3 cap. So that's what people are prepared to pay for stabilized. Real estate. So you know and then you have MS older real estate that's trading at a 3 cap at three hundred dollars a square foot as well because I think there's so much rental of side that's

Blackstone purchase of the artist portfolio in the GTA which you know, geographically is, you know, very very similar to ours and our buildings are a little bit larger per square foot than and some others.

A lot of questions just related to that be, you know, based on the pre leasing, you've done and where rents of move to like, where would you say, you think the the stabilized unlevered yield might be for the for that pipeline?

Yeah, so overall I know it's we're doing really well down in glow again you know, it's a 50/50 so 50% at cost, so on the cost side, it's over 6%. You know, it will blow up and out in the in the in the mid fives a lot of the other stuff earlier stuff on balance sheet will be north of five, the Social Service Road. You know it's probably four and a half to five but the minute we think we put a number. Let's just pick I think are so service. Road was 12.

We're 1250 square foot. You know, there's people already talking 1352.49 are so North. North Service Road in inferior location across the street. We did some pretty leasing there, you know, in in and around $10. There's a second building that we're now talking to a tenant in the back at 1275 with three and a half percent steps on top of that. So literally every six months this is changing. So it's so Service Road you know, it's going to take us a little bit of time. It's kind of like a

Nine monthly time to order steel. We've got to get site plan approval, you know, by, you know, we start leasing, you know, eight or nine months from now, you know, thirteen or fourteen dollars is very doable which is, you know, going to then push that yield up to up to five, you know, and stabilize, you know, it's three to three-and-a-half tab. So you know you're easily a hundred and fifty maybe even higher spread on your, on your developments friends there.

Great thanks. I'll turn it back. Okay. Thank you.

And your next question comes from Sam. Domani with TD securities.

Thanks. Good morning, everyone. This is awesome. This is welcome feeling. Feeling is mutual on the contractual renewals of which there was a little bit, year-to-date, can you give some context as to why those leases rolled at that? No uplift in. Do you see more of this happening in in, in the rest of this?

Next year. That's how one was it. They had a got in the way Paul.

So these are some historical buildings that we've owned and you know, kind of had stuck. We you know, stuck with. So this was a that properties up in very and you know, there would that was a two-year, you know, fixed price Reno. And so at least it's a good news is only two years. So in two years were going to get another crack at it, we have one down in Kitchener they're paying 350. And I think they've got one more five-year renewal to go to 375 those the only two off the top of my head that have these

The Over Heels. So, our standard lease is we don't even, we don't even give options, let alone options at fixed prices anymore. So, yeah, we bought the property in Montreal, it has nice, you know, rental steps in there. And then there's some renewal options that have further bumps, but by the most part, our standard lease, you know, we don't give up, we don't give a renewal options at all and we definitely don't do the many at a fix things. So you want to be able to go to market. But we are flexible in our. These terms is where we're happy to do. One, two, and three year lease

Us as we've got a u.s. tenant that I'm sure is taking themselves because they did a one-year two-year. Now they're talking to us about a three or four year and you know, every time we've been able to bump the rent, you know, twenty to thirty percent each time. So, you know, over the three renewals over three years, we're going to probably pump the rent, a hundred percent. So yeah, it's crazy. Like literally, you know, I'm sure if you talk to me, six months ago, I would have told you what rents are, but they just keep surprising and we're really seeing

we asked this question are born yesterday, you know, affordability, like when two tenants start to Bach and say, you know, we can't afford it, we're going to have to accept that we haven't hit that wall yet, you know, the e-commerce, tenants, when you look at their, their gav

But, you know, most tenants not over, but don't have a renewal option or like to thank you for renewing us at 60% higher so because they have no physical. So, it's a, it's a bizarre. We've got to be, you know, in 30 plus years. We've never seen this environment. So it's so weird. You know, it's a, it's a good thing to the end, but we're still learning and trying to figure out how to, how to max met that. And you'll notice that overall annual contractual steps. Went from 1.6 to 1.8. That's because we've been able to start to later on. Three, three and a half.

Percent annual steps in a lot of releases going forward, so weird.

Continue to build on that, you know, contractual bump every year. Thank you. And then just do you actually touched on, you know, a couple of the questions I had on my list here was the response to tenants to the spiking rents and I, you know, the understand the larger users, maybe not so price-sensitive, but I imagine some of the smaller tenants are thinking hard about, you know, relocating or or doing different, you know, different things to not renew the lease and as well.

Well I think in your leasing schedule it looked like there were some properties, some Lisa's expiring maybe later this year that are slated for redevelopment. And so does that represent some rental rate, rental income down time, temporarily

Yeah, there's yeah. So yes, there would be. So one of them we it was a sale-leaseback with Kubota. They had, you know, some six months extension. So that's a building where we can expand by 60,000 square feet. We've got two or three people that are are knocking on our door to do that, you know, we think there might be a scenario there where we can do that expansion. Well, the tenant optimized existing building. So we're looking at that. So hopefully, you know, even if we have, you know,

Four to six months down time while we do the expansion, the rental rates that we were performing would have been, you know, you know 929.50 when we bought that and you know now we're talking 12 to 13. So so a little bit of downtime for more than making it up on the rental rate and in Montreal, it's a, you know, it was like a 40,000 square foot building, you know, that was quite old. We're going to knock it down and build it. You know, we're enhancing the the size up to about a hundred forty thousand square feet. So we're adding ink.

Irr. Mental, you know, a hundred thousand square feet. So those are the two leases that are, you know, we will have a little bit of, you know, possible downtime on the, on the Kubota building and and probably, you know, probably a years downtime on the on the Montreal, by the time, you will be able to get at least but again the minute you own a piece of land and you announce that you're going to start building tenants and Brokers are knocking down your door. So that the the hardest part for us is to just say, we're not ready to talk to you yet will come and talk to us, you know, six months.

Alan because they're just there, I think of the number in both GTA and Montreal of what's under development somewhere between 80 and 90% is already pre least. So like, you know, even though, you know, whatever the number is 10 or 12 million square feet and I'm sure all four or five million square feet. Sorry 10, 12 and Toronto or 5 million in Montreux, you know, a time 80 or 90% of that's already pretty late. So it's not like even when that comes on, it's not like, oh, it's going to change anything.

It's already being absorbed and we've got so many times in our portfolio that are bursting at the seams and they're kind of saying like do you have any buildings anywhere, even short term so it's a it's a it's it's going to be interesting few years because in both Toronto and Montreal there you just can't build any look over three to five years. There just isn't enough land, it's not service, it's not ready to go and it's getting very, very expensive to buy, so,

That's great. I'll turn it back.

You okay. Thanks man.

Your next question comes from a Mike a Curtis with the Georgians.

Just curious, Michael Michael, we can't hear you Michael. We can hear you really

Okay. Is that okay? That's perfect. Yeah, sorry about that. Just on the on the Alberta portfolio, the call it nine or ten percentage roll down, on new leases and renewals. Is that something that you would expect to continue for the foreseeable future? Or was that specific to the the pool during the shoe that was specific? And, you know, and a lot of that was in the Brewing, you know, in in a

boats the, you know, during the pandemic. So again just to remind everyone we bought that portfolio in 2019 at a five point, five percent yield at least it up that deals went up, you know closer to almost 6%. You know the key there was just to keep that income as hole and keep the occupancy is high. Most of those deals were in Edmonton so Edmonton still the you know, the weaker the market. That's why we started to break out Calgary and Edmonton. We see Edmonton as a very stabilized.

Market and in Calgary, you really need to look at sorry Calgary State. You you diddly Dee look at the larger base basis. So 50,000 square feet and up. You know, is the availability rate is even lower than the overall market and and that's where we're seeing rental grow. So it really need to look at where the renewals are coming and you know. So we think we can expand rinse in that kind of space in Calgary and Edmonton and still about, you know, just trying to manage and Deepak and see as high as we can.

So we're we've got some short term deals that we're doing in Edmonton. We just signed the it was their only business failure in Edmonton Earth. Straight three at three business failures to were in Ontario one of us in Alberta 35,000 feet and we just put a new, you know, 10-year, you know, deal in there, you know, rent, started around 10:00, you know, go up to about 11, you know, over the over the 10 years. So, yeah, there's minor adjustments on a few deals. We just didn't want to have any big holes in a week or Market.

But now that we don't eat do that in Calgary anymore. You know, will still take their chances in in Edmonton Focus. First strategy is, you know, you try to provide a bit more incentives and keep the rental rate. The same is still the strategy. So, you know, providing some free rent or they need some, you know, TI work will spend more money there. Whereas, in Toronto Montreal you, the number you spend is, is 0. You may have to pay at least and commission on leasing but otherwise, you know, anybody that needs to be.

if you get the tenant to spend it,

Right. And then the last one for me before I turn it back, just on the I mean we're all aware of what's going on in Toronto Montreal and the the strategy to develop. I'm just curious what you've seen from a transaction perspective in Calgary. If anything at all and I know in the past you've talked about reducing the Alberta exposure but just given what we've seen the last call at six to nine months, is that a market where I'm at a certain price, you'd be willing to invest through acquisition again.

Yeah, so so the answer is absolutely and it's not lost on you that we're presenting information showing, we're at a hundred percent, but when you look at cap rates going down into two percent in the in Toronto or between two and three Montreal is, you know, you know, mid to high threes, all of a sudden, you know, deals that were in Calgary at five. Four identical quality buildings are now starting to go down but you know there's you know, at least, you know, a hundred

A hundred or hundred..25 basis points difference in cap rates in yield, you know. So we're cost of capital is, you know, it makes sense. So I think it's important for Sumit being a pure play Canadians, you know, the continue to have that significant waiting to both Toronto and Montreal, you know, personally, you know, we've always been comfortable with what we've done in Alberta and you will do, it will definitely do some select Acquisitions because they'll be highly accretive. But when you compare that property and overlay it with some of the transactions that you've seen and in Toronto, it's

Going to look like a Stan, Lee Lee, good deal but we're not going to we're not chasing real estate out there. We still think there's as that market improves. We're still going to do some dispositions of you know smaller you know where there's no more value to be had. So you know, we'll continue to do some dispositions out there. So it might take a little bit longer to reduce that allocation to Alberta, but we're very comfortable with it, but it would just be Calgary, wouldn't it wouldn't be anything in it since then.

Thank you, and congrats on strong quarter.

Thank you.

And your next question comes from mr. Cub job with Scotiabank.

Thank you and good morning.

Good. So I'm looking at the sheet needs over the last eight months. We looked at 3.5 billion of real estate 1.3 billion we passed on and and some of that actually was in Vancouver. So we've never been able to crack the Vancouver Market we could. So we did look at this. There were some properties, you know, Balsam land leases as well. The metrics have never made sense for us because on a price per square foot, it's more expensive than Toronto cap rate lower than Toronto.

there's a lot of barriers land prices, if we think they're bad in,

In Toronto there, even higher in Vancouver. So the problem we've always had with Vancouver, you know, we use Toronto pricing and valuation is a, it is the as the anchor and then, you know, Vancouver always looks more expensive than Toronto. And then the second problem is you can never get critical mass. So we don't like to go into a market unless we can gain, you know, we can do whatever doing in the other markets by properties, you know, expand properties, you know, build new property. So so

In a perfect Canadian industrial portfolio, you would have Vancouver, we represent our four cities represents 75% may be added in Hoover, you probably about 85% of the you know, the representation. So so no we can't crack Vancouver and we're not going to because we can't gain that critical mass, you know, because our cost of capital is low, like we've aggressively bid on stuff and and again, we can go very low in terms of cap rate and still make it work. But

but we we hit that price per square foot and it always goes back to okay we're going to bid you know $280 square foot for this 25 year old property. Well why would I do that? When if I wait you know, 18 months you know we're going to have a brand new building in Burlington at $250 square foot, right? So it's you know it's why would we now I do think replacement cost of it's $300. Now you know the people that are buying properties its hundred dollars a square foot.

Obviously believe that you know replacement costs are going to be four hundred dollars before a few lat. I'm shocked that I'm even saying that. So thankful that, you know, we did the Montreal deal had a, you know, an office component and you know, an e-commerce, you know, we bought that at 4.5%, you'll brilliant deal. We got a early deal in the year in Ajax with Volkswagen and 68 million. We're looking at some stuff now. So you know, I think will be over 400 million dollars on the acquisition front this year. It's always hard to say like they're, you know,

We looked at that artists, do we look at other ones you can, you know, you may get lucky and and able to pull off something that's larger New York. But you know three or four hundred million should be a comfortable number and then hopefully we can you know, add a you know a couple hundred million dollars of development every year in terms of growth profile. But you know we're also you know with our unit price. You know we're capable of doing these large MMA types transaction if it's the right, one comes along as well.

Awesome. That's that's right.

No, I think he's covered in during okay. Okay? Yeah. Obviously you know you're mentioning the GTA replacement cost is more like $300 but for now so you know, 300 is only 200. What's the ceiling in Vancouver. I mean I'm just thinking you know like after sitting for Toronto would be actually be decided or Vancouver so any any range there how's the replacement cost looking in Vancouver Market.

So we do. Yeah. So I mean we we talk

Who was trying to Thailand, I just couldn't make sense of it. So, you know, we were looking at possible, you know, a JV development partner for Vancouver and you know, basically at the end of discussion, it's just, you know, we're both shaking your heads and it doesn't make sense. So yeah no, it's huge like if you're paying five to six million dollars an acre, you know, you're going to start pushing up into the the high 300s but we don't, we don't, you know, we don't we're not an active in. We're not active in Vancouver so I, you know, I wouldn't want

To speculate too much exactly what it is. Like, I can tell you because I've got sheets in front of me here on on every other Market except Vancouver, but obviously it's is higher because the biggest the biggest driver is he's landed and we know land. But you know there I heard a an adult league. You know there's the Amazon buying a piece of land so they're starting to buy into policing and they're paying something over five million dollars an acre for something in the GTA. So yeah. So it's going to happen in Toronto because you know

There's just no land. And again, we're trying to, you know, we look down in Kitchener. We've got some land there. We got some ink. Well, and we're trying to look on the outer edges a little bit, you know, where the, you know your price to build is a little bit more reasonable but anything that's in the called the ready to go category, it's getting you know, there's 10.10 to 12 meters on a piece of land. And so, you know, that's why, you know, land is up over three million dollars, an acre in most parts of the GTA already.

Last question on I first value games, obviously begins until you Kathy down to 3.44. Do you think artists transaction was one of the key drivers for moving Captain's hundred basis points, lower and Q2.

I'm not sure that that's the biggest one. But again you know the chart I'm looking at has one point eight billion dollars so that was the single largest deal. You know, the you know there's there's a few other ones but you know / Terror was just under 200 million dollars in the GTA and that was from Brand, you know, brand new real estate but you know there's there's there's other deals that are significantly lower than than that's recap. So we've been on deals down in sub 3 and we lost me.

Not by little by by a lot. So we for deals that go as low as 2 point 1. So on some level. You just yeah, these cap rates are absolutely reasonable. The cap rates are not. The thing that people are looking at. It's all about price per square foot. And what can I move that rent to over a period of time? And then what's met? Our I are going to be and so are our guiding discipline is always been, you know, will be can be aggressive because we can make most things work from a creative standpoint.

But why would we buy a 25 year old building that we can build brand new high-quality environmentally, you know, sound it's just going to take a little bit longer so. So we'll pick our spot. So, you know, we're, you know, we're we're being very selective and, but when we find properties were being very aggressive on our Acquisitions and like that, we went as aggressive as we possibly could on this Amazon blind, and we lost out by, not a little, but by a lot. So we thought we were super aggressive there. And, you know that

That's rated up to know that Amazon building this corner dollars a square foot.

So somebody wants something that they know that. Yeah. Okay, it looks pretty tight and pretty strong. So, thank you for that and I'll turn it back on that note. Yeah, okay, thanks very much.

And your next question comes from Joanne Shen with BMO Capital markets.

It's the morning you say that it was kind of you know just kind of like it across the board for all your assets or was it, you know, primarily driven by a few select acids.

Ross, maybe go through. I mean, this, you know, we spend a huge amount of time and energy, both through appraisals external Consultants, you know. But you know, we scrub these in many different ways of starting from looking at, you know, the rental rates. But Ross, do you want to give her a little bit more? We took a hard look at the like with the growing rental rates. We, you know, we are analysis. We did a complete review on and increased, our rental rates in our, in our analysis, in the GTA.

It's and, and the game with the cap rates. The same thing with showing the, the comparables, as on the, the deals that have happened, and the deals that we, we lost out on, but it spread out across the portfolio. It's not. There's no specific acids, you could point to. Now some of them have you know, with the, you know, with the, you know, those big bumps in the rent, you know, they're your because he's slightly higher increases than the ones that the rent. The the

The growth is two or three, three to four years out but overall it's spread across the portfolio. There's no one that you could point to that was significant on its own in that. And so yeah.

And they also has as call mention just the stories of some of the the timing as well. That it just, you know happened to hit in this quarter versus being spread sort of over q1 and Q2 by virtue of the fact that we wanted to wait for things to be announced in close. So it's perhaps feels a little bit more lumpy because it's in one quarter as opposed to some of it being recognized in q1.

We still think even at the you know the 1562 or whatever it may be the price per square foot. Still looks very reasonable for the overall portfolio and particularly for the GTA portfolio which is you know whatever 200 and snow load a little $200. Number less than 200 for the the entire portfolio, right? First one that actually the price per square foot. Would you say on average is four zero g. Ta go for your Montreal portfolio right now. But terios to the GTA's 225

Its own.

Okay? And for Montreal, or would you have that orange is 188 just under 90? Okay. Yeah. And so and we know there's transact for transactions, we bid on them and for all that traded for 2:15 to 2:30 we know where land prices are going. So you know replacement cost is definitely north of 200 dollars. A square foot in in Montreal do and and continuing to grow, probably a double double digit. So that that one has Room to Grow, you know, we've talked a lot about Toronto.

You know, being at high high twos or three hundred dollars square foot and likely to continue.

You guys to grow as well. So there are still gaps there. And I think that's why, you know, you see where our unit price is trading. So obviously other people around are looking at the same analysis and saying, okay, well, you know, you could probably, you know, Toronto at 260.270 like Mission. Where's where's the right number? You know, and then it's what's a private, you know, private real estate, you know, value versus a public company valuation.

And that's helpful and we just one last one, for me, I guess maybe this is more for us, but how should we think about, you know, being in a wide margins for the remainder of the year, you know, given that you guys have consistently been improving on that front. So you same property and a why it is that you really are your question or the. Oh yeah. I again I I don't there's I didn't I don't see any decline in occupancy happening.

You know, there might be a, you know, some temporary stuff but in that. So I I think steadily, you know, we're five and a half, we shown for the quarter, I think is a reasonable conservative number to look at for Q3 and but we don't, we don't really forecast that but I'm comfortable with with the quarter and I don't see anything happening in the next quarter. That, that would be a downturn on that.

That sure is.

All the overall Noy dollar or overall. I know, I will be a, will be a slight increase in in Q3 because, well, just because of the, the full, the full value of the, the Montreal acquisition was not in complete, it wasn't a full quarter in Q2, and you're going to continue to see some rental rate increases in that and and some

The occupancy improvements that happen in the quarter, was partway through the quarter. So yeah, so on the overall you'll see is you know, with without any Acquisitions, you'll see some increase but not nothing. Nothing dramatic like you know, and that's all. Okay well that's helpful thanks. I will turn it back.

Back. Thank you. And as a reminder to ask a question, press star any number one and your next question comes from Sam. Domani with TD securities.

I think so, just a couple, a couple of follow-ups on the on the same store, at a wild growth of five and a half percent, can you quantify any bad debt expense or reversal that was in the queue to number and also what the year-over-year growth would have been without bad debt expense.

There would have been no, there would have been minimal if any bad debt expense. I don't think there is any and they can in Q2.2021 in Q, 220. It was probably around 500,000 in a whole portfolio. I don't specifically have on same property but the majority of the portfolios in that. So you know

Going to half a million dollars.

Ian can get to 21. Yeah, and there was no reversal, this car, we made a Revival in q1. We still have some bad loans that, you know, potentially could get reversed later in the year. But we just wanted to, you know, we didn't mention it. But, you know, we don't talk about receivables anymore because we collect a hundred percent, and we're down less than 300,000 of any of our referrals. So so the as that, you know, it's coming to an end, you know, there's probably an opportunity

Another small reversal of the balance of the amount that we set up last year during the pandemic, and I've collected over two and a half, almost close to three million of that in 2021. And there's, as of, as of August, there's under under 400,000, probably to $300,000.

Remaining of that. So, as Paul said, we had a provision to hold on to, but we maintain but, you know, some in the in the next quarter, we might see a small reversal of bad debt. Provisions from 2020, got it and Andros your response to the last question. Did you say you expected, you know, five and a half percent, same store in a wide growth for the balance of the year as being reasonable.

Yeah, but I saw in the quarter, I think, you know, I don't see anything happening in the third quarter. That's going to see any any downturn in the NY. So that's, you know, there's the occupancy I think is going to hold relatively and we're continuing to see the add-on of the, the, those rental rate bumps that we're seeing. Yes. So yeah. Okay. Yeah.

Under promise and over perform. So Ross is always you know probably going to be the more conservative the two of us I'm very bullish that you know things are just progressively going to continue to improve because as Ross mentioned you know looks like occupancies relatively stable at around that 99 percent number. They'll be a little minor bumps here and there but you know the rental

Renault rights, you know, are continuing to achieve if not widening. So you know that's it's just going to be continual, you know, building exercise. I think that those numbers are going to continue to get stronger and stronger. So hopefully we can know perform what Ross is talking about for sure. And just just a real quick one here on the, on the fair value took the cap rates down took the discount rate down to it looks like around 9 basis points or so, just curious. What did what did you do if anything to your terminal cap rates in

Your models.

They're down as well but not not you know like typically in those models you your terminal cap rates are just slightly above the the cap rates that you're you're doing your your your on the, the current calculations and that. So, yeah. So it's they've been adjusted as well. Yeah.

There there.

But not probably probably 50 to 75 basis points. Thank you.

And there are no further questions, I will now turn the call over to Paul Dyckman for a closing remarks.

Okay. And thank you everyone. As you can see it was another another exciting quarter. We think we're positioned well to take advantage of the, the environment or in the staying went through air or three-prong approach. You know, getting rental increases looking for very good quality Acquisitions and continue to expand the development pipeline. So that's, that's the strategy. Stay in Canada. Don't go to Vancouver. Keeping it simple. So look forward to

Other discussion three months from now, hopefully it's all going to be continuation of all this very positive news. Thanks a lot.

This concludes today's conference call, you may now disconnect

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