Q1 2022 Summit Industrial Income REIT Earnings Call
Good morning, and welcome to the summit industrial income REIT first quarter 2022 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time, we could press star followed by the number one on your telephone keypad, if you would like to have.
Draw. Your question. Please press star one again to allow time for everyone to ask a question. Please limit yourself to one question and one follow up as a reminder, today's conference call is being recorded I'll now turn the call over to Mr. Paul Dykeman, Chief Executive Officer. Please go ahead Mr. Tyson.
Great. Good morning, Thank you operator.
As a reminder, during this call we will make statements that contain forward looking information, which is based on a number of assumptions that 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 other security filings and additional information about these.
Sanctions risks and uncertainties. We also invite you to join US at our virtual annual General and special meeting that will be hosting later this morning.
Joining me on the call as usual is Ross <unk>, our Chief Financial Officer, and Dana groups, our Chief operating officer.
Since inception, the rights growth and track record of consistent operating performance has been driven by a focused improvement set of strategies.
Linda approach to growing our portfolio through new acquisitions crude.
Prudent capital management, and achieving organic growth through our strategic leasing and management of our existing assets.
So kicking things off on slide four so far this year, despite navigating market volatility we accomplished a lot. We started the year off by deploying over $200 million of capital for income producing and development property acquisitions.
In our core markets and we'll continue to strengthen our balance sheet and enhance the overall liquidity, we have raised close to $650 million in new debt and equity capital year to date.
In addition over 1 million square feet of 2022 lease renewals and new leasing deals have been completed so far this year generating over 50% in rental rate increases.
Which include deals where summit has achieved over 100% rental growth, both in Ontario, and Quebec.
Turning to slide five our track record of growth and solid performance continued in the first quarter of the year.
Revenues were up 12% in the quarter with same property NOI, increasing one 8%, including five 2% in the GTA the.
Same property NOI growth was muted by the reversal of certain bad debt for debt bad debt provision for the first quarter of last year.
Due to our successful rent collection of all of the Covid pandemic relief that we gave.
Excluding this historical one time.
<unk> comparable property NOI would have been three 5% overall and 7% in the GTA.
So rose, 15% with <unk> per unit rose was up 9% year over year, another healthy quarter for the REIT.
Our <unk> payout ratio remained at very conservative, 77% and we continue to have a strong participation rate.
Moving to slide six we're very pleased to have announced a 3% increase in our monthly cash distributions yesterday. This increase resulted in a new annualized distribution of $58 one per unit.
On an annual basis and that will be effective with our main distribution with.
With our record performance in 2021, our continued growth in the first quarter. This reflects our confidence in the continued strength of the Canadian industrial markets and our commitment to growing our stable.
Returns to our unit holders unit holders over the long term.
I'll now turn things over to Ross.
Thanks, Paul.
Turning to slide eight and as Paul mentioned, we have been very active so far this year, raising attractively priced debt and equity capital and continuing to enhance our liquidity profile.
We increased the size of our unsecured credit facility.
<unk> entered into.
New 10 year fixed rate secured mortgage financing.
A significant portion of which is interest only and raised equity through successful bought deal and ATM equity offerings.
We now have 600 million available through our unsecured credit facilities, including a $150 million available for green financing initiatives under our green unsecured development credit facility.
With our current record levels available liquidity, we are well positioned to continue to selectively deploy capital as opportunities present themselves.
Turning to slide nine you can see that we have consistently delivered portfolio growth through many different market conditions and environment since <unk> inception.
We now own 159 properties, not including our development program totaling over 21 million square feet of GLA with a fair value of close to $5 billion.
Our portfolio continued to see fair market value gains of approximately 200 million in the first quarter of 2022, primarily as a result of growth in income achieved through lease renewals and new lease deals as well as ongoing growth in market rental rates.
Slide 10 shows the rates total portfolio occupancy at the end of Q1 and as you can see occupancy remains strong at 98, 2%, Quebec occupancy was 100% and there was a slight decrease in occupancy in Ontario, as a result of a short term downtime at one of our properties due to tenant turnover, which will be occupied in Q2 2022.
In addition to our strategic debt refinancing that we completed in 2021, three currently has record levels of available liquidity and a strong balance sheet.
As shown on slide 12, the overall average was very conservative 28, 1% at the end of Q1 with a weighted average interest rate of 247% a meaningful increase over the same period last year.
Slide 13 details the continuing strengthening of our financial position.
Okay.
Unencumbered properties now represent 65% of our.
Total assets were $3 4 billion.
Our proportion of unsecured debt rose to 77% of total debt at quarter end up from 40% at this time last year.
Given the current interest rate environment that we're operating in you can see that we have very limited debt maturity exposure over the remainder of this year and into 2022 and 24.
<unk> as well.
To update you on the specific specifics of our liquidity position slide 14 illustrates the breakdown of the $1 2 billion of potential available liquidity at the end of Q1, including cash on hand available availability under our various credit facilities.
Our financing capacity on our unencumbered asset pool.
I'll now turn things over to Dana.
Thanks, Ross and good morning, everyone as Paul mentioned earlier strong underlying market fundamentals continue to drive performance in our key markets.
As you can see on slide 16.
Some of the broader market volatility and noise. The REIT strategy focusing on high growth Canadian markets has served us well in the eastern Canadian markets of Ontario, and Quebec, which make up close to 80% of our portfolio value. We continue to see supply demand imbalances contributing to our ability to achieve meaningful rental rate increases increasing annual escalators.
And providing the REIT with other negotiating leverage with our tenants.
In addition, we believe that some of the potential rest of the market cap rates may be de risks are mitigated by the continued depreciation of incomes maintain industrial property valuations.
Turning to our individual key target markets slide 17 illustrates the positive impact of strong market fundamentals in the GTA.
Dale ability in Canada, leading industrial market saw a net rents rise to $13 59 per square foot in the quarter, marking another record of 20 consecutive quarters of rental rate growth over.
Over the past five years rental rates have almost doubled.
Occupancy at quarter end was reduced from year end due to downtime at one property, resulting from a tenant turnover and will be occupied in Q2 up 42% higher at this tenant will also be occupying 62000 square feet of plant expansion phase at the property.
Our in place net rents in the GTA stood at $7 64 per square foot at quarter end and we believe there is still considerable upside as we renew our maturing leases.
Turning to slide 18, we continued to expand our Ontario footprint and the Kitchener Waterloo, Cambridge wealth market.
<unk> acquisition of two new development sites as well.
This region has become a highly attractive industrial market with lease rates hit historic highs and availability at all time low of 0.6%.
This is the lowest industrial availability rate in all of Canada.
Turning to slide 19, this region seeing very attractive relative rental rate growth with net average reps, having increased every quarter since the start of 2021 with an over 50% current increase over last year.
We have a track record of success in this region, having develop just under 1 million square feet to date in wealth and will continue to benefit from economies of scale as we add to our development program in this high growth area.
Looking to slide 'twenty, Montreal, Canada second largest industrial market is also demonstrating strong growth with an availability rate of 1% and an 11% increase in asking rents. The first quarter of 2022 marks the 14th consecutive quarter of rental rate growth in this market.
At the end of the first quarter, we remained at full occupancy in Quebec, and Theres meaningful mark to market upside in rental rates in this market as leases come up for renewal with rents over $14 per square foot seen on several lease deals in recent months.
Slide 21 shows the details of our Alberta portfolio.
The industrial market fundamentals in Western Canada, and specifically Calgary continue to improve in Q1.
Great occupancy improved in Calgary in the quarter, but decreasing edmondson due to a tenant turnover a portion of which had been leased subsequent to quarter end.
Calgary as year over year same property NOI change reflects 65000 square feet of downtime in the quarter that was a result of tenant turnover as well.
Space is now occupied as well as the impact from bad debt reversal is that occurred last year in Q1 as we've already discussed.
Looking ahead, we will continue to focus on the same successful growth strategies that have generated positive unit holder returns to date.
Turning to slide 23, our growth and performance continues to be based on our three part strategy.
One expanding the size and scale of our portfolio through selective accretive acquisitions.
The proactive development and expansion and.
And capitalizing on strong market fundamentals to achieve organic growth within our existing portfolio.
Slide 24 summarizes that despite the highly competitive market landscape. Our acquisition program continues to be active having completed close to $140 million of accretive acquisitions. So far this year, including our bond acquisition that we announced post quarter end we.
We also expect to close on the 150000 square foot net zero carbon expansion project at our Trans Canada Highway property endpoint clear, Quebec for approximately $40 million upon completion this year.
Our underwriting criteria continues to be one of discipline and patience and the rates being highly selective in pursuing any new investment opportunities at this time.
In addition to our acquisition program and given the current opportunity for attractive relative returns. The REIT continues to grow with development platform.
As seen on slide 25, we currently have over $2 3 million square feet under development various stages of planning or construction.
In Q1, we added three new development properties to our pipeline in Ontario, one in Burlington won in Kitchener, and one in Guelph, which in total have the potential to add over one 3 million square feet of GLA to the REIT portfolio.
Importantly, our development projects continue to align with our ESG initiatives and Green financing framework as we strive to achieve maximum efficiencies and minimize our environmental impact through our newly built buildings with the added benefit of an improved cost of capital.
Slide 26 details the organic growth that we've been able to achieve through our proactive leasing programs.
So far in 2022, we've completed over $1 1 million square feet of lease renewals and new lease deals.
Importantly, these leasing trends transactions generated a significant 52% increase in monthly rents with rents more than doubling in Ontario, and up 74% in Quebec, excluding contractual renewals.
The leasing activity includes specific deals where someone has achieved over 100% rental rate growth in Ontario, and Quebec.
And with record low availability and high demand. We are confident rental rates will continue to grow in all of our key target markets.
The third pillar of our growth strategy is to continue our track record of strong organic growth through our existing portfolio.
As you can see on slide 27 over the next five years, we have over 10 million square feet of lease renewals coming due with meaningful mark to market upside potential and over half of our lease maturities in the high growth, Ontario market.
In addition, we continue to explore and discuss select expansion opportunities within our existing tenant base to further maximize rental rate opportunities on existing REIT on labs.
I'll now turn things back over to Paul for some closing comments.
Thanks Dana.
In summary, we continue to be optimistic about the strength of our underlying fundamentals in our key target markets as they are the backbone of our operations. We expect to continue to be able to execute on a selective and disciplined approach to acquisitions. We continued to deliver on our development program will contribute attractive yield on cost returns and create brand new environmentally efficient real estate.
To our portfolio.
Granite growth as Dana mentioned will continue as we renew leases at market rents, which are considerably higher than our in place rents today.
Finally, our strong.
In place liquidity position that Ross outlined will allow us to navigate the potential market volatility and continue to execute on the growth opportunities as they present themselves.
Alright. Thank you for your time this morning, and now we'd be pleased to take any questions you may have operator.
At this time I would like to remind everyone in order to ask a question press star one to allow time for everyone to ask a question. Please limit yourself to one question and one follow up we'll pause for just a moment to compile the Q&A roster.
Our first question comes from the line of Sam Damiani with TD Securities. Your line is open.
Thanks, and good morning, everyone I guess just to start off.
Paul I'm wondering if you could give us a sense of your perspective on what Amazon announced a couple of weeks ago, what's their overcapacity issues.
And so what are you hearing or seeing in the marketplace with respect to that or other fulfillment tenants in the marketplace.
Sure.
We are in.
Right.
Sorry, we invited the CBRE into our board meeting the other day and.
They have a global platform.
It captures a lot of that information and.
They've also had very good contacts within the Canadian context.
Context within Amazon So.
Clearly I think it took everyone by surprise, but.
But when they talked about what it actually means I think theyre talking about subletting some of their space, which will be primarily in the U S market.
For some shorter term period of like two to three years.
They don't see that over extension happening in Canada, it might slow down their amount of.
Continuing.
It's taking more space within Canada.
Really isn't Neil trickling down into anything that we're seeing in any kind of substantive way so.
When we talk about our leasing we're still doing a lot of leasing to third party.
Logistics companies, but also theres lots of other automotive.
Different types of tenants in our portfolio that have that steady demand and then theres still an onshoring of inventory.
That we're starting to see and it is happening where.
Walmart would say we need an extra <unk>.
15 days of inventory so those kinds of tenants, which don't have options are coming to us and started can we expand your property and that thing so.
If we only have the one Amazon tenant which was in Calgary.
$7 and something rent they are there for 10 years.
Buildings very leasable.
David you want to add something.
Yes, no I was just going to add I think theres a couple of ways to look at this and we can chat for quite a lot of time of Amazon here don't want to take up too much time, but I think there is a broader market impact on industrial generally speaking and then you need to be specific and to be clear, what's the impact for summit and our portfolio as Paul already touched on sort of our exposure specifically to Amazon If you think a little.
More broadly just to close the loop on our portfolio our exposure to e-commerce in general So theres, the one aspect where.
Their take up of real estate space, but also the comments about sort of softening e-commerce demand I think we shouldnt overlook.
In terms of our portfolio our exposure to E. Commerce, we have direct exposure so tenants like essence at our <unk> property Amazon, obviously, that's probably about call. It 5%, but then there is sort of follow on exposure that you would have.
Indirect and servicing you know if you think of the likes of Fedex and cheer later, so there is.
Think about direct exposure, it's 5%, even if you lumped in all of the ancillary exposure.
You are below 15% just sort of rough rough numbers, so really thinking there's very little potential risks, even if this were to become something bigger down the road.
But importantly, I think it's a theme that we've seen in other aspects of real estate, where Canada lags the U S. So from.
The conversations that we have in the Intel that we have they really Amazon really doesn't have an adequate distribution network set up in Canada as yet as yet. So this news coming out of the U S is much much further ahead of us impact on U S retail Amazon as people have been talking about for years now.
One tenant in a number of the large U S industrial rates not the case, obviously in Canada. So I think that's a key differentiating points.
But really keeping an eye on.
Consumer spending and E Commerce I think it is.
He is going to be a focus that we should not lose sight of.
That's excellent color.
I appreciate that.
And just for my second question just with the <unk>.
Rising interest rates, what are you seeing in the investment markets.
All time in terms of each of the last few weeks in terms of.
Deals being may be repriced or bidders backing away. What do you. What are you seeing and do you expect an impact on cap rates in the short term.
Yes, so again.
There's going to be an impact we're not seeing a whole lot of it yet.
Totally we were bidding on a $200 million portfolio in Montreal <unk>.
Glass buildings.
We bid below the guidance and we think we could get into the second round. So there was three three groups.
The guidance or higher.
Wasn't the kind of real estate that we want to push for and we will talk more on this call but.
We're going to be very selective on how we do it and strategically grow we're still very comfortable that spending capital on our development program is number one.
If there is some day location dislocations here, we'll be able to take advantage of that.
Other than that we really haven't heard too much but I think everyone is kind of probably doing what someone is doing right now which is let's just stop for a second and think about what's going to happen and how long this Mike.
Might go on for so I think theres going be a bit of a pause. The other thing we're hearing is.
Lots of people are going to bring properties to the market.
This year or last year, if they didn't get a good bid Lee we'll just refinance it. So the impression is that option is not as attractive anymore. So I think youre going to start to see a little bit higher volume of <unk>.
Property is coming to the market. So if there is some softness in the bidding but when you look at all of the real estate asset classes and you look at the markets that they're in.
Drilling Canada still takes an awful lot of boxes in terms of availability being the lowest in North America highest rental rate growth.
So it's got growth and its defensive so I think it's still going to be an attractive asset classes people recycle out of <unk>.
Office multifamily and other other things given some of their issues as well.
Thank you I'll turn it back.
Our next question comes from human <unk> with Scotiabank. Your line is open.
Thank you and good morning, So just on 2022 leasing activity I'm clearly very strong <unk>.
Montreal in particular looks strong dealer on the <unk> have spoken for some time.
So do you think the losing space in line or above your expectations. What do you have what you have in 2022, so far.
And I'll break it down into two cities so.
It continues to give us a smile on her face with which leaves because it just it keeps increasing gradually in the GTA.
Big Smile on her face for Montreal, because in place rents roughly the same as GTA at seven to 750. So we were thinking we'd get to me when are we going to hit $10 in Montreal, which would be a nice nice rental bumps.
But then as <unk>.
Things continue to tighten I think year over year, the Montreal rental rates were up according to CBRE, 35%, but one deal was 106000 square feet, we actually have two tenants and we basically just ran an auction.
And we ended up at $14 and then three or three 5% steps.
That kind of rent. So then you think okay, maybe thats, a one off but we turned around and.
Did it again, we had a $40 $50 rent that property had a little bit specific.
Theres rail going to it so maybe there's a bit of a premium for that that particular asset but somehow.
That market has kind of jumped over the 10 11 and 12, so that's not for every space, but if youre well located.
Quality, but ceiling height.
That's definitely a pleasant surprise and then finally, Alberta, we've talked about it for a number of quarters now.
Clearly has turned the corner or availability sub five in Calgary and getting closer to five in Edmonton.
We are actually testing that market, we've done some at 15.
20%, but there is that Theres a couple that are going to happen later in the year early 2023 that we will start to see 30% or 40% bumps and some of the select Calgary practice, which is good.
Last two years was primarily maintain occupancy maintain rent.
And clearly that mindset is changing.
And we don't think we're that far away from some of that.
Tapping in Edmonton as well once the market gets below 5% availability.
Yes.
And we're optimistic about the future is still it's still tight so even with that Amazon announcement.
Anecdotally, we're starting to hear numbers that are 15, 16, 17 and 18 so.
We know Theres still room.
To go.
I can make another prediction somewhere in the next couple of hours $20 is going to is going to be achieved in the GTA.
I am writing down your.
Predictions.
<unk> is the new three Hudson two ideas of new 15, so thank you David.
Thanks.
And then the impact of higher debt financing on valuation.
My follow up question here, so based on your experience fall, we will see the impact on valuation.
That would be secondary markets look since our primary market.
Or will it be like lease term specific.
Property is a three year.
You should be fine with sand when you would be impacted I mean any thoughts there.
Yes. So again, we have all these good dialogues or stay with CBRE in the room.
And again, it's still a little early to tell.
Ron Robinson with doing this for 30 years underwriting egos.
Property rates, so those those those spreads and cap rates. So what's happened when the market has been as frothy as it has been a last few years ABC exactly where they are located they kind of all blend together so.
I think the way we use was bifurcation, so youre going to start to see a little bit of that we'll start with the C.
The good news is even b quality properties. If they are in the right locations are really seeing no different rental rates than a buildings like across the street. So youre in the GTA.
Seen it in some of our buildings 25 years old at $14 <unk>.
Building being built down the street is $15 or something so.
Very little or no.
<unk> there so again, because we cobble together this portfolio very carefully over the last seven years, we have ANV buildings, but we don't have any C. Building. So we think we're pretty insulated from that so you'll see some of that and then geographically again.
And if anything in the GTA Montreal Vancouver.
Youre not youre not going to see that and everything that's been going on has been benefiting Alberta in terms of population growth and immigration and stuff like that so we're not seeing any major changes in.
And market specific that we're in.
Got it and maybe just follow up and I'll give you. My final question is what happens with land pricing in middle upon this I mean that $3 million per acre or more.
Yes within four years away I mean, how does that get impacted now.
Well and again, that's going to go to how long do we think things are going to go on so right now in Canada.
It would be a record year of what's under construction roughly 35 million square feet. When we probably averaged 25 million square feet in the last three years.
I think the number of that $35 million is pre leased at somewhere up in the 60% to 70%.
It's not going to fix the problem, so where it's at.
Nationally one 6% availability in our markets, it's 1% or less.
You have to have multiple years of.
Negative absorption did have any dent on that.
That availability rates. So, let's just start seeing the availability rate go north of 3% and probably closer to five.
People are still going to be.
Bidding.
For Atlanta.
That's able to go like it's a challenge we're buying land.
It still takes two or three years to get it.
The pipeline approvals.
David I think you mentioned you I'd just I'd just add to that as well that if you think about the bifurcation that Paul mentioned, when youre thinking about the b or poorly located b and C properties when you've got the development side. What you are putting out is larger.
Larger newer buildings. So that obviously is a consideration as well as you think about some of that softening that you would really have to have that trickle through in a very meaningful lady or a class buildings.
New buildings will see a direct impact on that side of things.
Yes, I'll give you one more note.
So I'm going to give you one more piece of information right now land prices in Montreal, now roughly around $1 $7 million, an acre and that's up 100% over the last 18 months. So what you would expect in a market thats.
Building a whole lot of space. So that same phenomenon thats been happening in Toronto is starting to accelerate and in Montreal, and Youre seeing both in land prices and rental rates.
Thank you Paul you back Okay.
Well, thank you I'll turn it back.
Yeah.
Our next question comes from Matt <unk> with National Bank Financial Your line is open.
Hi, guys.
In terms of the financing you did subsequent to the end of the quarter I'm interested in your rationale.
Behind sort of secured the term <unk>.
And what the use of proceeds is ultimately.
For that financing.
Very very good question and we cringe as we watch bonds moving around as I'm sure everybody is on the line here, we try not to look but.
We were spoiled for a very long time with pricing in the unsecured market. So that obviously would be have been our number one preference in terms of debt financing I think we've chatted a fair bit about in the past about our target leverage and really trying to keep that on the lower side with our focus on debt to EBITDA multiples, obviously, so mindful of.
Sort of the looming market ahead of us thinking that we would like to have some debt capital.
Sort of under under our belt and really tried to replicate as much as possible what we've been achieving in the unsecured market.
Ross mentioned in our prepared remarks.
The majority of that is interest only and as we got into the weeds in the secured mortgage market.
See what some of the pricing options, where we found really.
As opposed to just under the last time, we were in this market, which is several years ago.
<unk> had changed quite a bit with lots of different appetites lots of different underwriting criteria from the lenders perspective, you know we had some flat pricing frankly across the entire curve, whether you're going five to 10 years and really just dependent on sort of their acts for data and what they were looking for but we found a bit of a window a bit of what we thought was a pricing gap.
In terms of spreads versus where the unsecured market was we were able to act quickly and access that market. We did some some rate locking in terms of the underlying bonds to improve our pricing there, but just felt that now in terms of tenor being 10 years. There was a very meaningful gap to what we would see in the unsecured market.
Felt that the pricing was attractive.
And where we thought things were headed and frankly, where they have had since we announced that.
Okay.
Second part of your question.
The funds.
We have a couple of acquisitions that we're currently looking at.
To some debt repayment.
We've allocated those funds and.
Those acquisitions are done and we still have a full $600 million available on our unsecured lines to.
To transact.
Act on any opportunities that we see going forward that so.
Very strong.
Healthy balance sheet.
And then Theres very little maturities.
And the balance of the year debt maturities in the valve.
The euro or 23% and 24.
So we feel like we've put ourselves in a good position for the time being.
Yes, no that makes sense.
Two quick follow ups, one on the mortgage side was that a single asset that you've encumbered or was it.
A group of assets and then maybe another operate sorry.
Yes, sorry finish your question sorry, no no no it's completely unrelated so I'll ask I'll ask okay.
Okay. So it was it was two properties.
In two different markets.
So two fairly large properties.
One mortgage was for $100 million for 10 years five years interest only five years 30 year embarked on it and the other property was.
$69 million mortgage on his 10 years interest only so it's acting almost like a bond with a significantly lower spread the government of Canada and the bonds are offering today.
One was this is russ inside but youll find it somebody once calibrating ones Montreal, So about what we are comfortable as the lenders or if we get good quality buildings with good quality tenants and leases.
They are prepared to lend.
No matter, where the market is or how the perceived strength of that market is so it's not like PTA is getting a better pricing in Montreal or Calgary.
And we had expressions of interest from a six to eight lenders on those so very very healthy.
Interest.
<unk> had a lot of different options that we could choose from that.
Okay.
Perfect and then just quickly on the I.
I guess, it's transitory vacancy and you guys are pretty good at filling things quickly, but is there anything else whether it's by.
Design on your part because you want to get up to higher rents or otherwise in terms of expected kind of vacancy.
Going forward in 2022.
Yes.
I think it's in our MBA somewhere but are you keep an eye on our retention number because we are doing what I'm, calling more strategic leasing which means we're kicking tenants owner letting them letting them lease. So I think it's down into the 60 percents. So that we are being a little bit.
More aggressive on whether we don't like to use we don't think the covenant their ability to pay the higher rent and that sort of thing.
One in Toronto, I think we're thinking of it as a case study.
That was a component sale leaseback, we did two years ago.
They are building their consolidated building their own building.
They put a $9 market rent on that.
As Dana mentioned.
Rent that we're actually going to achieve now with a new tenant.
43% higher than that most importantly, because of the lack of space. They are prepared to go in and lived through a 60000 square foot expansion. So when you know with the increased rent.
And not having the downtime our yield on this is now going to end up being closer to five five. So if you just look at that if you look at cap rates.
The value creation NAV once all of that work is done is around $30 million. So it's over $100 a square foot. So so it is kind of another thing that some of it does that I don't think Youll see every day.
It's not building is not buying it.
As a value add proposition so a combo.
The thing I'd add to that is our downtime given the size of these tenants well in advance.
They know well in advance you're not renewing them. So we've already marketing it to the downtime has been really the time to transition from one tenant to the others. So you've got a tenant in place even before the leases expired.
You've done years strategic thing.
I'll add is when you say you guys you mean Kim Hill.
[laughter], yes, yes, yes.
Russell I don't Dcs.
Yeah.
Okay. Thanks, guys I appreciate the color thanks, Greg.
Our next question comes from Brad Sturges with Raymond James Your line is open.
Hi, there.
Just to go back.
To the discussion on valuation.
Given the obviously the horizon that cost and you did talk about maybe a little bit of dislocation short term is that do you think thats more specific to longer duration assets or.
Could that be more of a kind of a general comment the market at the moment.
I think as a general comment I mean.
Theres, so many different buyers for different asset listed Montreal.
These were longer term in place leases, but rents were below market. So this wasn't sure.
Short term weighted average lease term.
Can flip those clearly in the GTA Thats seems to have had the most attention and the most bidders was the that type of thing and Thats, where you saw cap rates down in the.
Two to two 5% in.
The price per square foot of $350 a square foot. So I think for those kinds of opportunities just still going to have.
Number of bidders, but then these long term leases.
In the past you'd call coupon clippers that attracts a different type of capital usually a non levered buyer.
It's not going to it's not going to be an issue. So there might be some levered buyers might have some negative carry in the early years on a couple.
On some of these GT acquisitions, but.
I think it's going to go down to the quality of the assets, so somewhere along the way there might be some.
Change in pricing of some of those assets, but as I said, we're not seeing it yet.
In our portfolio.
What we're seeing right.
So I guess the balancing effect.
Inflation youre seeing on rents.
Placement courses can help offset.
The higher cost of capital.
Yes.
So I mean, I think the fundamentals are what's going to drive the situation mid and longer term, what's going to happen in the next however, long what's going on.
On three months six months 12 months, we've seen that before but I think the underlying fundamentals are very very strong and theyre not going to change we haven't talked a lot about it yet, but you will see our in place contractual rental bumps have moved from like $1 six up to two that means most of our new releases now we're getting 335.
Rent bumps on top of already a very good.
Rental bump percentages of over 50% on average so I think we are.
We're combating some of that inflation and not just the initial bump in the rent, but we're getting higher higher escalations and so all of those contractual rents theyre very meaningful and let alone our mark to market So for sure.
<unk>.
Concerned about cap rates is going to be more than offset by that and then the second valuation metric as our development pipeline and we're achieving very very good spreads.
Development spreads there.
Going to be some value created through that pipeline as well.
And just a couple of acquisitions, you're looking at now that's the the $95 million in the GTA that was previously disclosed.
Yes, we've got that and we're always looking at stuff. So it looks like now it's a very active pipeline and as I mentioned earlier, we expect that pipeline to even grow.
Whether we pursue deals or lock them up.
That's going to depend on where we think the strategic.
Value is.
So yes, so we've got that and some other stuff we're looking at but we're not like I said, we've given we've already had a quick jump start to the year. We believe we're already kind of on track to hit our normal growth rate. We know we've got.
1233, more properties that are going to come out of our development pipeline into income producing leases are in place. We're just finishing the construction. So June July .
Third quarter fourth quarter, we will we'll bring in three or four more buildings.
Into the income producing from the development pipeline as well.
And also not to lose sight of where our unit price is trading right now, which we think frankly is a real disconnect. Our underlying valuation. If you think about what we're talking about this quarter versus last quarter and what's changed in our markets and we have seen improvements that we think certainly there is a dislocation in the capital markets. So are very happy that we were able to raise the debt and equity.
Capital at the pricing that we had.
Just to have the opportunity and flexibility to continue to have these conversations about selective growth.
Okay, Great I'll turn it back thanks.
Thanks, Brad.
Our next question comes from Sumit Sayed with CIBC. Your line is open.
Thanks, Good morning.
Just finally on the outlook for rent growth I think you noted in the press release that the visibility is pretty good for 2022.
I don't know if its too early but what are your thoughts on how that looks for 2023.
Better.
Like we literally and that's why we've changed our strategy on development leasing until then we have the site plan approval. We're actually under construction. We are just delaying development, we've seen that in some of the projects were released.
Six months before we started construction.
<unk> ourselves a little bit so we're not going to do that again, so we believe.
Youre seeing and I think we've.
Talked to other people, what they're doing in underwriting at least.
10% growth in rents for the next three years is kind of what most people are using their underlying models, which is still substantially less.
And what we've seen historically in the last couple of years. So.
Yes, we still see theres lots of runway for rental growth and it's just it's a tenant by tenant deal by deal and some of our tenants that don't have options to renew.
They don't have they don't they don't really stuck because they don't have the option to move somewhere else or are they going to go out of business or retrench to some other some other area, but most of the time.
Uh huh.
Rent cost for a lot of our tenants is very small part of the G&A. So transportation labor all of the other things so rent they see if we're not hitting that.
Ceiling, where we're running into affordability yet.
Okay, that's fair.
And then just for my second question. Then are you kind of went over the kitchen I want a little market and the strong fundamentals there.
Based on what you see today or perhaps some other markets and a greater GTA, which market would you say is.
Up and coming and poised to become the next Kitchener Waterloo.
Sure.
A big Crystal Ball question I mean, there's been a lot of interest and just talk about.
On the Hamilton area and a lot of investors looking to that now we're quite comfortable in terms of the markets that we're in and this kitchen of wireless market and there's a lot for us facility. There. So we are focusing on our core markets and things <unk> been rewarded for sort of keeping in our central areas.
Opportunities for high rental rate growth and development.
Okay, Great I'll turn it back thank you.
Thanks.
Our next question comes from Mike <unk> with Dr. James Your line is open.
Thank you good morning, I promise I only have one.
On the land deals that you did this quarter.
Different geographies, but stove western Ontario.
There's a pretty wide range in terms of the price per acre. So I was wondering if you could just give us a bit of color. There was that solely due to the difference in geography or is there a significant difference in terms of.
Where the entitlements are where they are and the zoning process. Thank you.
Yes.
Merrily location so.
In the Burlington one we've.
We're close to putting one site in the construction later this year the social service Road. We just finished north service rule, which will be completed this year and so we're kind of looking at what's going to happen in the $2023 2024. So that's why we bought the piece of land there.
Just kind of the migration.
When we originally bought the <unk> property that was probably about $1 million an acre. So service road was just under $2 million an acre and now this new one is $2 three I think.
With my recollection, so so thats still inside the Green belt is very important to kind of differentiate and so then once you go outside the Greenville, that's where the prices start to go down.
Let's go to defer this one is.
In.
What's it called sorry in.
Kitchener, yes, so kitchener.
Kitchener. So those originally when we were looking down there $5 to 700000 acres, that's probably migrated up to $1 million an acre.
But what data has talked about and shown in the slides the rental rate growth has been historically the highest year over year. So even if those land prices are yield on costs are going to be extremely better than inside the green belt, where it's at.
Uh huh.
A little trickier and then the last one we bought is kind of on the outskirts of growth rate across our maple leaf foods.
That is kind of the first stop between Milton go through the Green belts and 15 minutes later at our site. It's only three three minutes off the 401.
There was 24 bidders on that and we ended up winning.
Again, because we were able to close in 30 days.
But our partner Cooper.
Is the whole area, where they've been doing things for 30 to 40 years. So those connections with the municipalities to.
Get the entitlements to get all the little things that you need done.
No go a lot smoother. So we're very excited there because we do think we're going to be able to build larger scale on that Mclean wrote property with 40 acres, we can do one or two buildings, but almost 800000 square feet.
And again, what we're seeing and even our existing low rental rates originally were $7 three years ago.
<unk> 950 last year now the most recent deals 11, 11 50, the new <unk>. So it just it just keeps going up and up so we're very confident that.
Mclean Road is.
He is even a better site than our existing.
The location is a little bit better than existing ports.
Group of properties that we built involved.
So that's that's kind of the lay of the land there, but we're still hearing about the $3 5 million and $4 million and if you look at the stats for Vancouver interrupted the six six and a half those hit now so so at least.
The belief is there is still more room.
Growth in land prices inside the particularly inside the Green book, but it's growing everywhere because it just you just can't find it.
Thank you thank.
Okay.
Our next question comes from Paul Remember with RBC capital markets. Your line is open.
Thanks, Good morning.
Dana you mentioned that you are mindful of the trends in E. Commerce, I guess earlier in the call I just wanted to clarify your comments. There are you seeing demand in this segment actually start to taper off at all among others beyond of course, Amazon and then and then secondly, as we hear more talk of a possible slowdown on the horizon at some.
I guess, we don't know when from an economic standpoint, but any signs of perhaps slower than we've seen from.
Summary, some of the users that might have been more active over the last 12 to 24 months.
No I mean, it's a really big question and I think everybody is looking to it and Theres again disparity between the U S market and the Canadian market. So certainly in the U S. We've been seeing.
Things drop off in terms of e-commerce penetration.
The question in my mind is.
That temporary in terms of sort of the reopening post pandemic and where we go back to.
Our rate of growth in terms of penetration, but maybe at a slower pace that I think is my view in Canada again being a laggard.
I would say.
Less of an impact because we have been a little bit behind the curve in terms of e-commerce penetration and I think I read a forecast every day that there was some I think.
The CAGR for the next four years, something like growth of 6% to 10% versus what we've been seeing like in and around 15% looking backwards. So I think there'll be some softening or perhaps maybe the measurement is slowing down but not to the point, where it's going to be a cliffs you have such as such a big impact we put a lot of it.
Emphasis on Amazon, if you think about sort of the Canadian landscape. You've also got the Wal Mart and home depots of the World I think across the three Amazon Walmart home depot they.
They make up something like 40% to 50% of total online revenue in Canada.
You have to go back and then you know that.
Can be too much of an economist here, but say.
Consumer spending how much of that is going to be impacted by interest rate hikes and central bank movements to try to contain inflation. So I don't know if I have a good answer for your question here I think we're going to see some slowdown, but not not a cliff that were going to be falling off of and then in terms of how does that trickle down into.
The businesses and the tenants in our space.
There is still so much backlog as we've talked about across so many different aspects of our business, whether it's rental rates space requirements.
Element, there's still so much as a backlog.
But even if these things temper the markets. We have so much catch up still to do in Canada that I think it will take really some time on a sustained basis for that to really.
Hit bottom lines and we've got I mean, we're looking at tenants who are just expanding bursting at the seams.
Were there at the point, where they are trying to convert some of their office space and using it for things like returns or sort of pick and pack because they just are trying to get absolutely every square foot that they can so I think that even this conversation we're talking about is something much further down the road.
In terms of seeing any impact.
Yes, and yes.
Couple of comments there sorry.
Sorry, I just wanted to add a couple of years.
You can't underestimate the amount of population growth and is the immigration numbers start to come back and likely expand.
The markets that we're in are experiencing.
<unk> significant population growth and you're seeing that even in kitchen, Cambridge wireless so simple things like some of our recent tenants as a.
He makes sauces and food distributors and stuff like that.
It's just a growing market because you have that many more people. So some of the other consumer spending that Dan was talking about might be more discretionary, but theres a lot of.
Distributions, that's just purely based on population growth.
It's only improving in these markets.
Thanks for that just maybe maybe one followup can follow up on the whole discussion around cap rates and pricing.
Have you seen any change in terms of maybe the buyers at the table the composition of capital that's in the market.
From the Canadian industrial standpoint, if that changes at all yet or is it really just too early at this point.
It really is too early so I think it's more just the discussions that somebody like ourselves are CB or you are having with other brokers are having with <unk>.
Buyers and sellers right now so I think everyone's just kind of having these discussions what do you think what do you think.
Your brain would tell you.
Sure.
<unk> buyer is their cost of capital has gone up obviously and so that should impact.
How theyre going to view, how theyre going to do things a little bit but.
We have been having new 24 bidders on a piece of land, where having multiple bidders and in Montreal for class B stuff like there always seems to be.
Willard willing.
Buyer in some places.
The issue will be how much supply comes on and if there is more supply than you might start to see people picking and choosing where theyre going to go go after that capital, but we're seeing more and more foreign capital coming into Canada looking to allocate because they'd like.
The dynamics I think Dana the stats, we saw yesterday was like Canada is one of the best GDP growth prospects one of the popular.
Population crafts.
Yes.
Canada the country takes a lot of boxes, and then I think when you start looking at industrial it's sticking more boxes because of that supply demand imbalance.
And again, we just do not see where the supply is coming from so for us it's only.
Ever happens if it goes on for a long time and there is there is a true slowdown.
You will gradually start to see it but I don't think youre going to see any changes quickly.
Yes, I'd just add to that that kind of as usual suspects are still there at the table, perhaps the leveraged buyers are less aggressive on pricing, which you know they were very aggressive understandably, so where interest rates were.
Paul's comments getting more and more interest from from international money because on a relative basis.
Canada still has those market fundamentals, we don't have the same exposure to Amazon and if youre looking at one or two.
So very attractive asset class multi resin industrial Canada on a global scale.
It's very very attractive on a relative basis.
Thanks, very much I'll turn it back.
Okay. Thank you.
We have reached the end of the question and answer session I will turn the call back over to Mr.
<unk> for closing remarks.
Great.
Thanks again for everyone.
Quarter, obviously lots of market turmoil I think back to the the pandemic, which I think is still ongoing but with all the opening up.
The good news is.
Looking back in hindsight, we've now been through it we had three bankruptcies anyone that was on our watch list is now off our watch list, we collected 100% of any deferral agreements we've had so.
That was a big unknown for us this market that we're currently in and we've been through this one before so we know what we're doing.
We'll pick our spots our balance sheets in great shape.
Look forward to talking next quarter.
Thanks, a lot.
This concludes today's conference call you may now disconnect.
Please wait the conference will begin shortly.
Sure.
[music].
Okay.
Okay.
[music].