Q2 2022 Summit Industrial Income REIT Earnings Call
Please wait the conference will begin shortly.
[music].
Good morning, My name is Joanne and I will be your conference operator today at this time.
I'd like to welcome everyone to the stomach industrial income REIT second 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 answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again Press Star one Mr. Paul Blackman, you May begin your conference.
Thank you operator, good morning, everyone.
Reminder, during this call we may 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.
Actual results could differ materially from those disclosed or implied we direct you to our earnings release MD&A other security filings for additional information about these assumptions risks and uncertainties joining.
Joining me as usual on this call. This morning is Ross <unk>, our chief financial Officer, and gain against our Chief operating officer.
Yeah.
Since inception the.
<unk> growth and track record of strong performance had been driven by our focus and proven set of strategies.
Disciplined approach to growing our portfolio through new acquisitions, and accretive development projects prudent capital management, and achieving organic growth through our strategic leasing and management of our assets.
Through the lens of decades of experience in industrial real estate at current market themes of industrial remains strong as seen on slide four there's multiple demand drivers such as increasing tenant inventories lack of sufficient new supply continued E. Commerce demand population growth are all are a few ongoing themes.
In our asset class.
Development is not keeping up with demand and as such continued rental rate growth is being seen proven by stability to evaluations.
Offsetting any potential cap rate expansion ending simplex inflationary times that we are seeing.
The ability to continue to achieve meaningful rental rate growth and attractive lease terms fuels and attractive development environment, even despite these rising interest rates.
Great.
We've completed a lot so far this year as you can see on slide five we have deployed over $275 million in income producing and development property acquisitions in our core markets, while continuing to strengthen our balance sheet enhanced the Reits overall liquidity, we have raised close to $645 million in new debt and equity capital in the <unk>.
Six months of the year.
With over $1 6 million square feet of lease renewals and new leasing deals completed the REIT has demonstrated over 46% rental rate increases so far this year with an achievement of over 100% on some deals in both Ontario and Quebec.
Importantly, a key indicator of our continued strengthen Canadian industrial sector as well as the track record of this management team our portfolio occupancy remains near fall since the recent inception, almost 10 years ago. Now we have maintained occupancy between 98 and 100% and are confident that this stability will continue going forward.
Turning to slide six our track record on growth and solid performance continued in the second quarter with strong metrics across all of our key performance benchmarks.
For the three months ending June 30th demonstrated a 14% increase in revenue same property NOI, increasing seven 7%, including 13% in Ontario.
Per unit was up almost 24%.
Another very strong quarter in <unk> payout ratio remain conservative, 75% and Thats a decrease compared to Q2 last year. Despite the increase in cash distributions that we've made both last year and this year.
Turning to slide seven you can see we have consistently delivered portfolio growth through many different market conditions or environment since the <unk> inception.
With our current with our growth currently focused on development projects and the existing portfolio. We have the ability to successfully continue to drive overall performance value through internal.
Sources.
Of the $45 million fair market gains that recognized in the quarter.
Significant majority of 34 million was contributed by our properties in our development program that are nearing completion.
With the balance being delivered by top line revenue growth.
I will now turn Ross things over to Ross to discuss our financial results in more detail.
Yes.
Thanks, Paul.
Slide nine highlights the solid performance at the REIT delivered through the first six months of the year Rev.
Revenue was up over 13% with same property NOI, increasing four 8% year to date <unk> rose, 27% with <unk> per unit up a very accretive 16%.
Despite an increase in the overall units outstanding.
While decreasing our <unk>.
Payout ratio from this time last year.
Slide 10 illustrates our track record.
Instantly delivering and growth in <unk> per unit quarter over quarter looking.
Looking ahead, we see this track record of performance continuing as our sector fundamentals remain exceptionally strong in all our target markets.
Turning to slide 11, we have been very active so far this year opportunistically raising attractive priced capital and continuing.
Hence our liquidity profile, we increased the size of Rins.
Credit facilities by a total of $200 million.
Entered into two new 10 year fixed rate secured mortgages for a total of $169 million.
Second a significant portion of which is interest only and raised equity through our successful bought deal and ATM equity offerings for a total of $279 million.
With our current level record levels of available liquidity.
Read as extremely well capitalized to manage operations and to take advantage of some select market growth opportunities.
With the completion of our strategic debt refinancing that we completed in 2022 rig currently has an extremely strong balance sheet a critical tool in today's market environment.
As shown on slide 16.
Overall leverage was a very conservative 26, 7% at the end of Q2 with a weighted average interest rate of 274% and a term to maturity of five one years. Additionally, our coverage ratios continue to strengthen.
On slide 13, we can see that our unencumbered properties now represent 64% of our total assets, which equates to $3 3 billion.
Our proportion of unsecured debt rose to 66% of total debt at quarter end up from 54%. This time last year.
And given the current interest rate environment that we're operating and you can see that we have very little debt maturing for the remainder of it.
This year and into 2022, 23 and 'twenty four.
Slide 14 illustrates the reached one $4 billion of potential available liquidity at the end of Q2, including cash on hand available under our credit facilities and potential financing capacity unencumbered asset pool.
Liquidity level is a key competitive strength that we have worked hard to achieve over the past many quarters.
I'll now turn things over to Dana.
Thanks Ross.
As Paul mentioned earlier, we're pleased with the strong underlying market fundamentals continue to support our property performance in all of our key target markets from.
From a national perspective, the Canadian industrial market remains strong and robust.
As you can see on slide 16 availability remained at its record lows of only one 6% percent. Despite over 6 million square feet of new supply having been delivered in Q2.
Notwithstanding the limited space available leasing activity remained healthy with over 7 million square feet of positive net absorption in the quarter.
In response to strong demand construction levels grew and Canada to a new record of 43 9 million square feet, but still only represents two 3% of total inventory was 64% of new supply already haven't released.
As shown on slide 17, with the ongoing strength and demand rental rates continue to accelerate across Canada in Q2 the.
The National average net asking rental rates rose another dollar in <unk> to a new record high of $12 25 times aside.
This is almost a doubling of industrial rents compared to only five years ago when the national average was below $7.
Turning to the REIT portfolio more specifically slide 18 shows our focus on densely populated high growth markets and the attractive metrics in these regions.
Our target markets are typically key urban centers with strong labor pools and population growth that have good access to major highway and transportation links.
In our eastern Canadian target markets, within Ontario, and Quebec, which make up close to 80% of our portfolio value. We continue to see supply and demand imbalances contributing to our ability to achieve meaningful rental rate increases realizing annual escalators and providing the REIT with other leveraging our leasing activities.
Slide 19 shows the reeds overall portfolio occupancy occupancy at the end of Q2 and as you can see occupancy remains strong at close to 100%.
Paul mentioned earlier, the REIT has consistently operated above 98% occupancy since its inception, where lower occupancy levels for the most part have typically been a result of minimal short term downtime during the due to tenant turnover.
Yeah.
Turning to our individual key target markets slide 20 illustrates the positive impact of strong market fundamentals in the GTA.
The DTA is track record of strength continued through Q2.
Availability in Canada's leading industrial market saw net rents rise to a new high of $15 nine central foot, marking 21 consecutive quarters of rental rate growth.
Availability held steady at a record low of <unk>, 8% all of this within the backdrop of record levels of construction activity in the quarter with over 14 million square feet under development.
Turning to slide 21, Montreal, Canada second largest industrial market has also been extremely strong.
Its availability rate hovering around 1% the greater Montreal areas average net rental rates continue to rise to all time highs of $13 47 per square foot in Q2.
Land prices have continued to increase in this region, marking a record year over year increase of 20% to $1 $7 million an acre.
Slide 22 outlines some details of our Alberta some of the details of our Alberta portfolio.
In Calgary vacancy and availability rates are near historic lows in Q2 rental rates statistics printed the largest quarterly increase recorded to date at six 7%.
Momentum in demand continues in this market with approximately 2 million square feet of net positive absorption in Calgary for the quarter, marking the sixth consecutive quarter of at least one 5 million square feet.
The one 1 million square feet of new supply that was delivered.
The Edmonton market continues to accelerate as well as availability rates and vacancy rates continue to fall in light of close to 800000 square feet of new supply added in the quarter.
And how the existing vacancy in our Alberta portfolio. We currently have commitments on 50% of the space.
Looking ahead, the reach focus will continue to be driven by our proven growth strategy.
Slide 24 outlines our three verticals with growth.
Expanding the size and scale of our portfolio through selective accretive acquisitions proactive.
Proactive development and expansion and capitalizing on strong market fundamentals to maximize organic growth within our existing portfolio, all while focusing on ESG and environmental accountability.
Turning to slide 25, while our acquisition program is currently quieter than normal given broader market considerations. We stayed on track with a strong acquisition program for the year.
We completed the purchase of four income producing properties for a total of 137 million generating solid going in cap rate of four 5%.
<unk> also acquired the remaining 50% interest in a development property in Guelph, Ontario is nearing completion as well as two additional income producing industrial properties in the GTA subsidy subsequent to quarter end totaling 175000 square feet for $59 million.
We have also closed on three development sites expanding our presence in the very strong wells Kitchener market, providing the REIT with the potential to add another one 3 million square feet of green buildings to our portfolio in the future.
Turning to our development pipeline on Slide 26, we currently have over two 3 million square feet under development in various stages of planning or construction, including the three new sites, we acquired this year.
Currently 41% of our development program is on balance sheet with the remainder through joint venture partnerships.
As well, we continue to pursue three Walt expansion projects on existing REIT owned land.
Approximately 330000 square feet is expected to become income producing by the end of Q3 this year.
Importantly, our development projects continue to align with our ESG initiatives and Green financing framework and we've completed our inaugural Green Bond allocation report and are pleased to have reported not only green building initiatives, but also energy efficiency improvements storm water reclamation waste diversion and biodiversity and conservation Alan.
<unk>.
The third pillar of our growth strategy is to continue our track record of strong organic growth through our existing portfolio.
Meaningful embedded growth exists within the reach of existing portfolio of real estate slide.
Slide 27 illustrates on a province by province basis, the spread between average market and in place rental rates for our portfolio as a whole.
Significant upside exists as the reeds expiring leases come due as well as for our development projects that have yet to be leased in eastern Canada.
As you can see on slide 28 over the next five years with nearly 10 million square feet of leases coming due with meaningful mark to market upside potential with over half of our lease maturities in the high growth, Ontario market.
In addition, we continue to have ongoing discussions to identify further potential expansion opportunities within our existing tenant base.
Slide 29 details some of the specific results that we are achieving through our proactive leasing programs.
So far in 2022, we have completed over one 6 million square feet of lease renewals and new lease deals generating a very significant 46, 5% increase in rental rates.
Drilling down further into eastern Canada rental rate growth was even higher with a 76% increase in Ontario, and 74% in Quebec.
With record low availability and high demand, we're confident rental rates will continue to grow in all of our key target markets for the foreseeable future.
And I'll now turn things back over to Paul for some closing remarks.
Thanks Dana.
So in summary, we continue to have.
A lot of confidence in the strength of our team and the real estate and our key target markets as they are the backbone of our operation and while our acquisition program as the acquirer than critical we will continue to leverage our development program and deliver attractive yield on cost returns with brand new environmentally efficient real estate to our portfolio.
And as Dana mentioned organic growth will continue to renew our leases at market rents, which are considerably higher than our in place rents in this volatile market.
Like this our balance sheet strengthened the management team experience are Paramount are strong in place liquidity allows us to strategically allocate capital and execute on selective growth opportunities as they present themselves.
I. Thank everyone for their time this morning, and we'd now 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 then the number one on your telephone keypad well pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Mark Rothschild with Canaccord. Your line is open.
Thanks, and good morning, everyone.
Maybe just following up good morning, Mike.
Some of the last comments from Dana It sounds like you're still pretty bullish on the outlook for rental rates continue to grow.
At what point does the amount of space under development.
Have a more material impact on that and slowed down rent growth or maybe even negatively impact that in.
Rising development costs play into that as well.
Hi, good morning, Thanks for the question.
I think it's a million dollar question and frankly, we chat about it with our board we chat about it at the management level, we chat about it with our investors.
Right now what we're seeing in terms of our development program and our conversations with our tenants.
Certainly we think you will continue to rise and again.
Specifics in each of our individual markets certainly talking about Calgary is quite different in the GTA.
But places like the GTA the market just the stats are so tight that we expect growth to continue I think the sense is that the trajectory of that growth or the velocity of the growth certainly will well.
Tempur.
And the question is are you going to you know $20 right. How quickly are you getting to certain points and that clearly has a direct impact on our underwriting of our development projects that have a longer time horizon. So all that to say I don't know that we have a concrete answer in terms of what's that.
A decrease in trajectory will look like but we do definitely anticipate growth to continue in rental rates and the offsetting factor. If you think about a place like Calgary.
That momentum is just starting to pick up you know notwithstanding that is a very development a friendly environment and so product is much easier to come online. If you think about the building that's happening out there you know, whether it's Amazon or some other behemoths projects.
That market still continues to plug along and show strength even with.
New construction at very very high levels. So.
We expect the growth to continue but perhaps at a slightly slower pace not not only just because of new construction, but some of the broader <unk>.
Economic challenges that we're seeing out there.
Okay, great, Thanks, and Mark just to add sorry.
So I just wanted to ask why it really drives two weeks and we've said this for 10 years now replacement cost is really the driver of rental rates.
We're still not seeing any slowing down there might be some what they call a transitional inflation factors and some of the the hard cost of construction.
So those are those might start to moderate down in terms of their percentage growth but.
But we haven't seen that in land, yet or development charges. So so those are the two big.
Pieces that make up the replacement costs.
I still stick by it.
Inside the Greenbelt $350 a square foot is probably what it's costing today.
But we see that migrating closer to $400 a square foot over the next year or two.
I think also this time horizon like if you think about how long it takes for new supply to come on line, even with the construction levels that we're at this is certainly not something that's going to have an impact on <unk>.
As tied to the market as we're in right now overnight.
So it would be something really that you'd likely see further down the road or expectations of what's to come down the road.
Okay, Great and just.
One more from me, maybe looking at the retention rates from tenants.
That high is that somewhat reflective of existing tenants, just not being able to pay that rent or is it needing more space. What is it and obviously you are full so it's not like there isn't demand.
So yes so.
Combination of things.
Yes.
There is several large tenants that.
If you recall a couple of years ago, we bought a building we called a kubota building 184000 square feet, we knew that tenant wasn't going to renew because they were building their own a new building. So that that tenant left in that space was released with one months of downtime and at a 42% increase in rent there's another tenant.
140 <unk> out of.
<unk> 40 odd thousand square feet in the GTA.
They've been subletting their space for several years and so we knew they weren't going to renew and then we re leased that space with zero downtime and 117% increase in the REIT.
There is a tenant in Montreal, a little over 100000 square feet, we couldnt accommodate their growth and we are aware of that and well in advance and we re leased that space with 109% increase in the rents so that so the beauty of the larger spaces is when the tenants.
Youre, having these conversations well in advance of the <unk>.
Their maturities.
And so you're able to.
Well in advance and limit the downtime on those spaces. So it's a combination of.
Tennant's, new workload to renew and and.
And kind of.
Just going to accommodate the growth but overall.
There's no there's no major issue other than that.
Okay, great. Thanks, so much.
Oh.
Your next question comes from the line of Sam Damiani with TD Securities. Your line is open.
Thanks, and good morning, everyone.
Excuse me.
Just just on the.
Look for the sector in light of the potential for an economic slowdown just given.
This rich history of for summit.
History everyone's experience I mean, how do you think about the impact of a recession on the Canadian industrial market and specifically some of those portfolio after years, where demand has exceeded supply at the vacancy rates are so unsustainably low and just curious how youre thinking about how a slowdown.
Would be different this time.
It all and perhaps by region.
Yeah.
Yes, so Sam and I'm glad to have that question now I remember when the Covid hit two years ago I have no clue. So we've seen this cycle before.
It really it starts from similar.
Similar places where you were.
When the Covid disruption happen.
Fundamentals are that solid so with the availability rate at sub 1% pretty much everywhere.
Hum.
We see that it has to be a pretty long and prolonged recession to move that number in a big way Dana talked about 43 million square feet.
Significant amount of that that is already pre leased so on in order to test and start having business failures. So.
Portfolio, which we've built kind of building by building.
A lot of international multinational tenants good quality companies. They are not clinical bankruptcy might look at their needs and say do we need to downsize.
But again, we're still behind places like the U S. In terms of E Commerce penetration I think Colby.
Push that along.
So if anything there might be a bit of a pause but.
Just anecdotally in our portfolio in Toronto, and Montreal, we're talking to five or six tenants about expanding their buildings by $50 70000 square feet, they're bursting at the themes.
Looking at taking a mezzanine office mezzanine and other buildings to try to make the extra space that required because of those buildings.
That can't be done.
We're excited about Alberta, because we finally after three years of answering the question.
What all the scary things youre seeing availability rate and I've always said, 5% is kind of imbalance in my mind.
Once you get below 3%.
Significantly a landlord, that's where you start to see rents moving up which is the phenomenon. We're seeing in Calgary now if you ever go below 1% then it's.
It's highly unusual in a great market to be and because we are doubling rents were getting 3% to 4% escalators.
Tenants are going thank you.
They have no other place to go so it really goes to the.
The length and the severity of potentially a slowdown so I think the only thing we're seeing right now our tenants are saying, okay. Instead of that 100000 square foot.
Expansion that I'm trying to talk about let's just let's just put that on hold and see how things flush out over the next three or four months before we.
We signed on the paper.
Dana do you want it.
Yes, no I think I'd just add.
And those questions, sometimes I think assume we're smarter than we are thinking about what's going to happen in the broader perspective of the Canadian economy, but if you compare it to something like the GSE.
Paul touched on the market is certainly.
As much stronger footing right now and I think even you can draw that analogy to the broader market. So unless there is really.
Long sustained recession and again I think the view could also be argued that youll experience, perhaps maybe not a technical recession by the definition of the term, but perhaps subset sub sectors of the economy dipping down into recessionary areas barring something thats quite prolonged and deep going.
Going into this you know the consumers is much more or much better capitalized. So if you think about the potential impact on our tenant base if he's got a shift from.
Good <unk>.
Pending to service spending.
And some of that sort of.
Stress testing, we saw through through Covid right. So.
I think theres a lot more resiliency on the consumer side are not expecting a long prolonged deep recession, and we have a diverse tenant base. So we've got some exposure to E. Commerce, we think that obviously.
The growth in that market has slowed down a little bit, but there is still continued growth and we're well diversified across all different types of tenants. So you don't think that theres strong footing going into this.
With pent up demand so again, it's a timeline.
That you need to match the two pieces. So if you think theres going to be economic weakness you know how much and for how long and how is that offset by all of these offsetting demand factors things like pent up demand population growth.
And continued but slower growth in e-commerce.
Yes, and I think that results finally, with Dana mentioned earlier was maybe rental rates don't go up by this filter or 15 or 20% per year. So that starts to moderate a little bit, but even if you get any rental growth over where the market rents are today compared to where in place rents are we still have.
Significant upside there so.
No.
Okay, Great answer, yes, no it's going to create a tough one but thank you.
Just for my follow up.
Allocating capital today, I guess, it's an easier call to have to put some acquisitions on hold and it's probably a relatively easier call to shift capital more in favor of development, but how do you think about.
Returns on development relative to your current cost of capital are you more inclined to initiate spec development today versus six months ago.
And again I'll keep correcting as we build inventory and we don't expect so.
We have a lot of demand in our portfolio.
Get you to say that building inventory at some point.
And in fact, we found the least risky way to build right now is your spec or building inventory.
Because of you try to pre lease theres, so many variables in delivering buildings whether it's.
The site plan approval process, which is very much outside of our control.
But even once you get site plan approval preordering steel and pre tasks can be eight to 12 months.
Through Covid.
Trikes and stuff like that.
Easily you can have three to six months late delivery of building. So we found as base.
Basically the point, where we start to put steel on the ground.
As well, we will start to activate the leasing process and given the tightness in the market.
We're fine, but every pro forma that we put together Sam in terms of we're buying land.
We put some buffers in there in terms of growth in terms of the hard costs.
But every single time, the rental growth has been.
Exceeded in our in our forecast and that's more than made up so so if anything we're seeing slightly better yields on cost.
So you're still preserving a very healthy call it out.
150 basis point yield spreads.
<unk> equates to <unk> 75.
Buildable square foot and so we've got roughly $2 3 million square feet, but we've got some other land that.
Should come on line later in the year that will push the development program closer to 3 million square feet. So, yes, we're happy to keep growing that and in a staggered kind of almost equally but over the next two to three years. So it's the ones. We have under construction now theyre all pre leased they'll come on income producing between now and the end of the year.
And then we're starting to get site plan approval and steel ordered for.
Construction will start in the spring of next year.
Yeah, I'd just add too just if you think about sort of the proportion of development as a percent of our overall portfolio. While we haven't stated target. We are still in what we would consider the build out of the growth stage of our development platform. So barring any type of release financial shock, which as Paul mentioned, we're not seeing it we certainly would.
Even without the disruption in the broader markets, we would be continuing to grow our development platform and.
The optimism, which I'm sure you're hearing from other.
Our peers in the market for the first time in a very long time.
In a positive inflation print out of the U S. Today, but we're starting to see some of the inflationary pressures easing hard.
Hard costs in our development pipeline and availability of labor and trades, improving as well. So those are all up.
Positive signs that we're seeing in <unk>.
And we're in the fortunate position that these are all still making sense for us and we're now just really trying to push the envelope as far as possible to make these as energy efficient as part as possible. So really having some buffer there to do that extra green spend whether it's lead or net zero in that youre already.
For the project so a good position to be in a nice to start to see some of these.
Hard costs are the inflation on the hard cost side.
Using off a little bit.
That's great. Thank you I'll turn it back.
Okay.
Your next question comes from the lines.
Stanley The Jordan Securities. Your line is open.
Thanks, Good morning, everyone.
Hello.
Heard some anecdotes of maybe some developers potentially hitting the pause button in the GTA.
Just given certain.
Uncertainty related to exit cap rates and IRR is I'm. Just wondering is this something that you've seen to date are believed could be occurring and I'm just thinking of it from we've been talking about the supply response, if you were to start to see supply potentially slowdown the positive attributes that would help the market rent growth.
Sure.
Starting to Indiana.
So again you have to look at the group of developers and there is a broad spectrum of developers so.
If I'm a developer that.
Merchant developer and I have to have an exit to create my or in my promotes and stuff like that.
Youre going to be maybe a little bit more cautious or careful in what you're doing if you're in Orlando that has the land bank and you have tenant demand youre, just going to keep the machine going.
For us if we look at our pro forma.
If we paused our developments.
Maybe the return would be that much higher than a year. So the way. We're looking at is building out and kind of averaging averaging and so you're never going to be perfect as long as we're making a proper development spread it's significantly better than buying income producing we're getting brand new real estate.
Okay plugged.
Plugging a lot, but then you have your pension funds again, theyre not going to be.
Impacted in a big way so the only place that.
Haven't seen evidence of it yet.
Do land prices start to moderate.
Right now good luck trying to find land, but if you can we haven't we haven't seen a lot of land trade in the last three or four months, so that would be the only place where you'd start to see maybe saying, okay I'm not going to pay $3 million an acre maybe I'll try to stay two and a half or whatever but.
There's no evidence that land prices have moderated, but that's where you'd probably see it first.
Yes, I, just I mean, I don't I don't have too much that I'd just say no.
It was a broad question, but if you think about perhaps some other asset classes things like condo development, certainly there would be pausing and that type of activity. They don't have that same type of profile, where we have the ability really to as Paul mentioned earlier.
<unk> to lease the space to sort of.
The absolute last moment to capture all of that upside.
In market rental rates so.
Assuming that we've got.
Inflation in hard costs slowing down a little bit and we're still able to move rental rates you know between now and the end of completion of a project.
The big assumption that people are not overpaying for land you certainly are have no concern in that regard.
Okay, Great and then maybe just for my last question moving over to the leasing environment, Alberta, I mean, you've discussed it kind of at length. So far I'm. Just wondering what are your expectations with regard to leasing spreads on maybe the balance of the space expiring in 2022.
According to the disclosure of the in place rate looks relatively low compared to market. So just some general thoughts on that.
Your leasing activity Alberta.
Sure I'll start and then Ruskin Ruskin give you all the facts and figures but.
No.
And again.
Strategy definitely has shifted in Alberta.
From the last call. It two two years, where it's just like let's keep our buildings occupied let's do month to month tenants, let's be creative let's try to hold hold market rents to okay, let's take our.
Our selective shot you have to look at each individual asset and tenant and decide what you wanted to you. So we decided to do that this year, we have a 94000 square foot space is coming up.
A $5 rent.
The tenant didn't want to go to market, which was closer to $8. So they're going to they're going to overhaul to the end of the year at a higher rate and then we'll put a new tenant in next year and I think Ross that numbers of 40, 40, 45 or 50% bump in the rent there.
It's a one off so it's hard to kind of.
I can choose that will.
Overall, we're going to start to see.
Our rents move up in the market, but we'll do it on a selective basis. So every property every tenant situations are the same but Ross do you have any more.
Flavor than the one I'm thinking about that.
Yes.
Quoting Alberta, there is yes, there is.
Theres been an increase in rents and in.
And then it's a little flatter.
The tenant.
They are continuing to.
We're continuing to see improved rents and <unk>.
And as well the.
Improved steps in the rent in that so.
And so so.
So far that's been a little bit of.
In Calgary year to date, we've seen an 8% increase in Rins, that's being offset by.
The slight decline in it.
It hasn't been but had been Tim we still focusing on getting the occupancy up a bit in that so, but but we're seeing healthy step to the rent going forward on that as well so yes, yes.
Sorry go ahead Paul.
I say that.
Or even as recently as a quarter ago or at call. It six months ago, we would have seen a larger gap in what we were able to achieve in those annual escalators and it's really closing in closer to what we're able to push in the GTA and you know again, it's it's some sort of test market seeing what the market can withstand and where we are.
I'm really quite happy with what we're able to achieve so that's encouraging notwithstanding as I mentioned earlier all of the new construction thats happening there. So all of that in light of a lot of new supply coming into the market, it's still still moving in a positive direction.
Okay, Great. That's it for me I'll turn it back thanks.
Great. Thank you.
Yeah.
Your next question comes from the line of Brad Sturges with Raymond James Your line is open.
Hi, there.
To go back to the.
The development pipeline there for a second I think you said pro forma youre expecting the pipeline to be 3 million square feet does that include.
Some of the expansion or intensification discussions, you're having or is that.
Excluding those potential opportunities.
Yeah.
Yes.
You could stop my risk because there is a piece of land that it over we're likely to acquire which hasnt been announced yet.
It just needs to go through some severance that will allow us to deliver another 500000 square feet of new so that's that's primarily where the the difference between the 2.35 in the 3 million square foot, although Brian we're actively proactively going through our portfolio, starting with where we have the bigger expansion. So.
Russ had mentioned earlier that Cabo to building, we put the new tenant in there we're getting a 60000 square foot expansion yield on cost on a three well expansion is higher that was going to be north of 7%.
We have another one thats under contract or signed up in Berry for 70000 square foot expansion.
We're talking to at least three other tenants couple of Montreal.
Other in Ontario that could add up to another.
Yes.
Two to 300000 square feet, but thats not in my 3 million all the numbers. So we usually only count the expansion once they are once they are signed up and ready to go. So the only two were counting right now are the <unk>.
70000 to 80000 square foot, sorry, 60000, 70000 square foot.
<unk>.
Yes, okay that makes sense.
I guess youre about to.
<unk> about 300000 square feet as you noted.
Just based on where you are from planning and permitting perspective like how much could you commence construction on in the short term and potentially deliver by the end of next year.
So just to give a okay go ahead go ahead.
Can you just give sort of a quantum of that 2.3.
Call. It 850000, we're expecting for 2023, and then again as we get further out some of the timing is a little less certain but call. It another 360000 square feet for 2024, and then the balance after that.
Okay.
But in terms of actual projects just to give you because.
We just got the permit to clear clear the dirt down in South surface Road in Burlington we.
We had ordered this deal 10 months ago. So it is getting delivered this month. So the construction will actually start this fall with the total number for that one Ross do you remember I think at the 260000 square feet.
The last project in.
That approach I think what else is around 200000 square feet.
That's well underway in terms of construction, so that will get delivered in two.
<unk> 2022, we've got some pre leasing on about half of the building there now so between now and the spring and that will get complete and fully leased up.
So the two the two major ones the rest of it probably wont get delivered in.
2020.
Three but.
A lot of it will be underway, we'll have some updates as we go.
Okay.
Helpful I'll turn it back.
Okay. Thanks.
Yeah.
Your next question comes from the line of Matt <unk> with National Bank Financial Your line is open.
Hey, guys, just maybe first off management.
If you could provide a bit more detail.
Going forward in your disclosure as to the timing of deliveries plus the outlay of Capex on the development side that would be quite.
Quite helpful from a modeling standpoint, but with regards to <unk>.
Questions just on your ability to deploy.
Excess liquidity at this point.
Even taking into account your.
Acquisition post quarter should we assume that that liquidity is maintained and just deploy it into development or should we expect some incremental acquisition activity through.
Through the balance of the year.
Yes, so Matt I don't know the answer.
We're.
Monitoring the market, there's quite a few transactions in each market.
We haven't talked about this yet, but still seems to be quite a depth in the bidder, it's a property by property.
Activity.
We just see development as a logical.
Can't fail at that because it's bringing on higher quality higher yielding.
Our ESG friendly property. So we'll continue to put that is priority number one in terms of external growth.
More land or.
Opportunities.
Got.
As you know, we do lots of off off market.
Off market.
Tight.
Deals so we're talking to people that we might be able to.
Pick up a property here or there we do have the one forward purchase in Montreal, but thats your appropriate $39 million, but theres a few things on the market just to give you a sense.
Some stuff that's out there there is one.
The rent is at $17 and expected.
Price per square foot of that sale is going to be over $400 a square foot.
That's in the GTA, so we're not going to bid on something like that.
Where we can build we can build below that and we're seeing activity both in Calgary, Edmonton lots and lots of it.
Ontario, but Montreal has been approved.
Yes.
But.
So we're I can't even I can't come up with a number for you but.
It really just depends on if.
If we see something maybe a little bit to divest or an opportunity.
Yes, I'd just add to the source of capital for any potential acquisition, yes, so not only what's happening in the investment market, which we're obviously being extremely selective but have been very successful in off market deals.
But just looking at what's happened with our unit price, which we obviously think is undervalued at the moment anything we would do with that liquidity right now would be.
A debt component certainly and while we're comfortable with where our leverage is now Inc.
Think of it in terms of some type of temporary increase in leverage if we were to do something meaningful. So again, there could be sort of smaller one off deals but to focus.
<unk> focus on a larger transaction that would be more meaningful to the REIT.
Have to take into account, obviously, the cost of our equity capital right now which to US is clearly below NAV.
Fair enough.
The only thing I would add the only thing I'd add to that Matt is we have $117 million of cash that we've allocated to that subsequent event acquisition that it's in the notes and we have a forward purchase on a property in Montreal, that's being developed.
As part of the acquisition that we did in the first quarter and that so so some of the cash will get used up but then we'll just add to our unencumbered assets and have no change in our liquidity.
Our leverage because were just trading assets for cash for assets in that.
Okay, No fair enough I had forgotten about the Montreal forward purchase but.
We will incorporate that with regards to the ability to buy.
Sort of a similar type yields to what <unk> been able to get.
But with I guess higher or closer to market.
Rents how should we think about the availability of opportunities like that going forward versus kind of a lower cap rate, but below market rents and then secondarily just quickly.
The Montreal rent growth has been kind of jaw dropping.
Doesn't seem like there's too much in the way of new development there.
Is there just no land with what's going on why is nobody building in Montreal.
So another another interesting question phenomenon. So the Montreal marketplace has less developers they tend to be a bit more conservative you do a lot more build to suit there. So I think as a percentage of inventory. It has the lowest amount of construction going on and whatever is under construction I think the pre leasing numbers.
Up in the 70 or 80% I think it is just happened so quick.
That.
So there is land.
We're only trying to build one building there not having much fun with the government there.
Our site plan approval so.
The learning that market, but literally we seem to have skip the rents going from nine to 10 to 11 to 12, we went from nine to now we're doing deals at 14 right.
So I think I think that's just happened in such a quick period of time.
We saw the right way to start to move up.
Even ourselves didn't anticipate that it would move up at the rate it has so.
So thats definitely but when we're looking at a sheet in front of me probably close to $1 billion of opportunities that are out in the market right. Now you mentioned the one in Toronto with over 400, but theres a bunch of other ones there that.
We're kind of putting numbers on their sub three cap.
Whether it's 320 to $330 a square foot, there's like four or five of them there. So.
Again.
If we can get everything at the right price per square foot, we will do it but again when you get up into 330 to $3 50.
More comfortable to build at that price and not take all the risk on the 25 year old asset you have to move their rent from here to here. So.
And there's been a few deals in Montreal, but.
Again, not quite the quality.
We would like but definitely a little bit higher cap rates.
But still sub four in Montreal in terms of cap rates and.
Surprisingly, but people are becoming more bullish because the fundamentals are improving in Alberta. So there is a few.
Properties that current announced yet.
<unk> Calgary Edmonton portfolio that included some land in Edmonton, that's over $300 million Thats under contract and.
A few few properties in Calgary that would be low four cap rate.
Great stuff, so there's lots of lots of stuff going on and I think.
The word from the brokers are sub.
Sorry post labor day.
Expect to see some more listings come out so.
That's kind of the delay.
Okay.
I appreciate the color sounds like our summit units through the best buy out there.
I think so.
[laughter].
Your next question comes from the line of <unk> Gupta with Scotiabank. Your line is open.
Thank you and good morning, So just building on the previous question on the acquisition market.
So Paul you mentioned almost a billion dollar sort after in the market.
Just wondering how competitive.
Is the market for sub III yourself full product now and you're seeing you a lot of some players out of the market, which would you like six months back.
Yes, so I mean, there's <unk>.
Again, there's not a lot of data points, yet so a lot of it's anecdotal a lot of it's in.
In the market right now.
But we do know theres multiple bidders and it really comes down to it asset by asset selection. So if you've got this brand new 10 year lease.
That's going to have $17 rents that are that's going to be appealing to a certain group of investors and thats, probably going to be more of your pension fund.
Types of investors. So they are probably going to look at that pretty similar to the way they did.
While you have some opportunities where you are going to be using a bit more leverage leverage buyers are going to have to reset some of their underwriting criteria, but if you remember a lot of this bidding process that happened in GTA you'd have eight or 10 bidders.
There's more than enough to have a very.
Good process, so I think.
You might lose a few bidders and sort of it six or eight but you still have the ones that are going to pay that.
Price that they really want that particular portfolio or are those assets, there's going to be lots of competition.
We're seeing the same thing in Quebec, and if Ed.
Anything that's a little bit of an increasing interest in Alberta, just because you can get a premium yields compared to Toronto Montreal, but.
Again, it all depends on it.
It's really where does where do people think the long term bonds or moving rates. So they were going up up up up and never going to stop going up and Lo and behold they come down right. So so.
So it just people trying to again, maybe use that word pause again.
Until they can figure out exactly what that long term financing is going to look like.
Cause somebody to pause a little bit before they roll up their sleeves, but the background of everything we've talked about there's pension funds.
If theyre getting out of retailer office, they want to move into industrial so there's those dynamics Theres international money Thats looking in Canada, and they like the dynamics in Canada, even more than potentially some of the U S markets.
Got it.
Fair enough.
And then you know looking at the <unk> cap rate.
Yes.
Slightly this quarter.
Is there a reason like once he always or just some quality. This is wanted versus <unk> 20.
Is that a function of existing NOI much highest one months, we always see Judy.
Any color there.
So it was pretty well evenly across the board around 20 to 25 basis points, but as you can see our our valuation has remained.
Relatively flat there was a small uptick in it because the income.
Uh huh.
There were showing growth and income the other thing I would comment is.
That note to the financial statement that is.
The cap rate, you're using for the market cap.
Method.
But we're relying.
Mainly on the disc.
Discounted cash flow method on our valuation because that captures the the growth in the rents that youre seeing so so.
So overall, yes, there has been a slight increase in cap rates, but it's been more than made up for the continuing growth in income and that so that's very very positive in that and thats.
That's good.
Yes.
Okay, and then maybe just one sorry go ahead Bob.
Yes.
The number I continue to focus on because cap rates are a little bit elusive, depending on where the market rent is on that building compared.
Compared to the in place.
If you look at the price per square foot. So at the end of the day.
I would focus less on the cap rate and more on that price per square foot. So I think in <unk>.
Our GTA.
Was it $250 $60 square foot rose to $62 60 up to 60, yes.
We're very very comfortable that.
There is a pretty significant cushion between that and replacement costs in particular, where replacement cost is going.
Yes.
General the feel of our underwriting and certainly obviously, there's that third parties, who do work and we had about 5% appraised this quarter, so lighter than in last quarter, where we had a chunkier piece because of some of our mortgage financings, but in general we've been on the more conservative side in terms of.
When cap rates were well contracted a little bit more conservative on the way up I guess, we could say so there is just really sort of some some buffer in there I guess from our perspective from an overall perspective.
Okay. Thank you maybe just a final question.
Follow up on the recession question, Australia as well.
So obviously you know Paul you mentioned portfolio occupancy has been in the range of 90% to 100% since inception.
Like what happened to the occupancy level the buses session.
Or maybe what category of tenants do you think will be more vulnerable.
Without it.
Yes.
So the first part second the second part is a little harder answer so in the first one the.
The reception on what we saw you would see an overall change in occupancy of the entire industrial market.
Going let's just say it was that 75 going down to like a 92 so.
There was like a 3% shifted but hasnt been look at what type of properties and we're and that's how we designed the summit number two so what we looked at where where do you have the biggest dips in the secondary market and its in smaller type tenants, where there is more.
Options for them to move out we call at midnight moves 10000 square feet that sort of thing. So we purposely designed this portfolio to eliminate the two biggest.
Concerns there so one we're only in Toronto, Montreal, and the major market average.
Average size tenant is 75000 square feet at higher and bigger buildings, a lot of them single tenant, which would have gone from 99 down to 98% or 97 and a half so there's much less.
Volatility is Ross eventually have.
Lots of lead time or when a tenant is going to lead to replace them. So.
So in our particular portfolio.
I do not see occupancy changing that much because you always have options. So just matter.
He used the word how greedy do you want to be in terms of your rental rate, but there's clearly enough tenants to keep our portfolio near full occupancy.
Strategically paths of vacancy so that you could try to push push rents.
A little bit more.
I think Dana mentioned earlier, we have really broad cross section of.
Different type of tenants and different types of industry.
Manufacturing a lot of third party logistics.
Groups and most of our buildings are.
And thought of as to be very generic. So you could have a we are a magnet doing some.
Auto parts Assembly, if they leave tomorrow.
Building can be converted into a distribution center so.
So we don't feel like we have any major.
Closure I think our largest tenant is around 5% and then a very quickly goes down to less than 1% of our income in terms of concentration.
Yes, I think also it would come back to the comment we had earlier about pent up demand. So if you think of the data points filling through COVID-19.
Well, not a recession, but certainly a shock to our tenant base.
The situation, where we had.
Space come back to US was frankly, an opportunity because there was ample demand to fill that space, which as Paul mentioned as easily convertible from one tenant's use to another.
And if you think about things like <unk>.
E Commerce demand, which again is a balanced piece of our portfolio.
There still has been.
Expansion requests coming in so you've got a buffer there where even if things were to slow down that pent up demand is more than offsetting it for the time being.
Thank you excellent color and pattern back database.
Thank you.
Yeah.
Your next question comes from the line of tomato Sayed with CIBC. Your line is open.
Thanks, Good morning, just on the upcoming development.
Deliveries could you just remind us of the expected yields on the upcoming 300 odd square feet that are almost complete.
Yes, let me go to that schedule, so again I try not to be.
Overly specific here.
So.
A couple of these.
We use a range of Ah.
Probably.
No.
Five to as high as almost almost 7% so.
We've over achieved and Thats, where some of that you have seen these now that their lease.
And a half.
The pro forma and all the costs. That's why we were able to do that fair market value bump up $33 million on these particular properties. So.
And again, that's one that's closer to five 5% cap we.
We made a we made an error in judgment there thats the way we thought pre leasing was a good thing.
We were probably six months later six to eight months later delivering that than we thought but we've leased it.
Even before construction began so we probably left some rental rate there so that that cap rate could have been.
Closer to quote is closer to 6%, we will get another kick when those five year leases rollover and it will get the bump bump the rents there, but but very healthy development spread the one on our 60000 square foot expansion, that's going to be north of 7%. That's just the three wall expansion.
And again the ones that are JV, our yield on costs are typically over six and when you blend it with the half we're still comfortably in that.
In and around that 5% range.
The range for combined.
Yield on cost.
For both parts.
Okay. Thanks for that and just to touch on the point on fair value gains. This quarter. It was mostly on development would you say there's more to come there have you guys captured a major development milestones on the upcoming deliveries and it's already showing in this quarter's fair value gains.
Yes, so just just the ones that were coming into income producing in the balance of 2022, so essentially it.
We've had these discussions with our auditors whats the right time to do that so it's basically once we move to.
The risk element, so we know the timing.
Steel costs down to a pretty close number and we have leasing information. So once you have all those three things that's why we make the assumption so.
Pro forma is again these would be the yield on cost that we'd be looking at and therefore, we'd have that 150.
Basis points, roughly development spread which equates to about $75 a square foot, but we will start to recognize that until.
Until at least so it just was 330.
Net square feet.
The $30 million came from.
So almost 100, okay, so almost $100 a square.
It was a square foot, which is good good stuff.
Yes for sure.
That's all for me thank you.
Okay. Thank you.
Your next question comes from the line of Tommy <unk> with RBC capital markets. Your line is open.
Thanks, Good morning, hopefully a couple of quick ones on my end just.
Any change in terms of maybe how youre thinking about the leasing strategy over the next call. It six to nine months, maybe just again given the.
The potential for some further softness in the economy any thoughts on shifting anything from maybe doing early renewals.
Like changes to lease durations or even the rent bumps in the leases.
So that's dramatically Sam we're still I mean.
We're very because we don't have a big portfolio, we talk about this every Monday.
And have a strategy on a tenant by tenant basis. So.
If we thought a tenant needs to be talked to a year in advance we've already been doing that and then if theres other tenants.
We wait until they they missed their option to redo and then where the driver's seat. So yes. So I think it's a combination.
But clearly the with that backdrop of inflation, we've been accelerating our rental bumps both in GTA and now for the first time in Alberta.
But.
In terms of.
Any other big changes, we really haven't set other than you've seen.
What Rusty had mentioned we've also asked tenants.
Thats 10 or building so if we don't like their use we don't like.
The way the relationship we've actually asked a few tenants.
But we're not renewing them. So that's why our retention number.
Purposely been a bit lower to have that.
We're able to capture that higher rental bumps.
Yeah.
I'd just add tammi that it's market specific.
The conversations we have and are in somewhere like Calgary versus the GTA, obviously would be quite different and now more than ever being in touch with our tenants on a regular basis is extremely important and as everybody has asked the questions around this call and in other investor calls.
We're cognizant of where interest rates have gone and the broader economy. So are looking for any signs of capitulation on the tenant side.
So those conversations are really really important but in the same context, we continue to try to to push rates push escalators and.
And again it may be property size specific it may be tenant business specific but part of our strategic leasing is trying to find the tenant types that.
Our least sensitive to rental rate increases as well and also obviously, who align with our ESG initiatives.
Real time conversations and we're constantly looking for.
For areas of concern and so far really things are things are holding up and so far as our portfolio and also trying to be in touch with the broader market. So whether it's leasing agent and seeing what's happening outside of our portfolio as well for signs of potential things.
Cause for concern, particularly on the development side, you know places like wealth or areas, where you think there's going to be meaningful new products coming online what that competitive landscape might look like from a leasing perspective. So that we can really fine tune our pro forma for projects that are in the works.
Got it.
That's good color.
Just lastly in terms of capital allocation you have of course flag to the disconnect between your NAV and the unit price. So I'm just curious whether.
Unit repurchases factor into or under consideration at some point or is it still look you can get maybe some better returns from the developments that are coming online over the next or that are in planning over the next 12 months to 24 months. So just just if you have any color there.
Yes.
[laughter] go ahead Paul.
Especially I have my color Dana is going to give you the right answer, but my color as Lou and I've done. This a long time I think once and maybe start with why we might have done.
Some buybacks, but we've never thought it was strategically so mathematically even if it works it's nothing that we've ever felt it wasn't enough to change the needle unless youre going to go into the program.
Massive massive way so we've never been it's what.
We think it's more of a psychological.
<unk> indicated to the market. So that's my personal view and I'll, let it slip data.
Oh, no that's they're both right answers.
We see some of the other reads out and if you think about <unk>.
Potential select dispositions that we could do we've got a very short sort of disposition on watch list again trying to hit the market at the right time and in this specific examples that we're thinking of but it.
Again, it's really not going to move the needle and we'd like to think that it's a temporary disconnect and so if there is something for a longer sustained period. You know again, if you could do something in a meaningful way, perhaps it moves the needle, but it sounds more like a you know optical mathematical exercise for for the size at which means it needs to be thinking about it and hopefully our.
We expect unit price to come back so hopefully as a temporary.
Dip in valuation here in the capital markets.
Thanks, very much I'll turn it back.
Okay.
There are no further questions at this time I will now turn the call back over to Mr. Dykeman for closing remarks.
Okay, well, thanks again, everybody for joining us today, and if you have any follow up questions sure to reach out to us.
But had good discussion today and look forward to.
The discussion in November Thanks, a lot.
This concludes today's conference call. Thank you for participating you may now disconnect.
Please wait the conference will begin shortly.
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