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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and thank you for standing by. Welcome to the Summit Industrial Income REIT First Quarter 2021 Results Conference Call. [Operator Instructions]I would now like to hand the conference over to your speaker today, Paul Dykeman Chief Executive Officer. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to the Summit Industrial Income REIT first quarter 2021 conference call. Before we begin, let me remind everyone that. During this call, we may make statements containing forward-looking information, which is based on a number of assumptions and is subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those disclosed or implied.We direct you to our earnings release, MD&A and other security filings for additional information about these assumptions, risks and uncertainty. Joining me as usual on the call today is Ross Drake, our Chief Financial Officer; and Dayna Gibbs, our Chief Operating Officer.Despite the ongoing impact of COVID-19 pandemic on the Canadian economy, we continue to achieve our goals of generating strong financial and operating performance, and delivering value to our unit holders. The strength of the Canadian light industrial sector was clearly demonstrated in 2020 and has continued through the start of this year.We're pleased to continue to maintain high levels of occupancy, generate solid growth in our rental rates, collect all of our monthly rents and grow our portfolio through acquisitions and development. We are confident 2021 will be another record year for the REIT.Briefly recapping the results for 2020, we generated another year of record performance as shown on Slide 4. All our key performance benchmarks were up significantly year-over-year a continued strength of our sector and the REIT's operations. We added 1.7 million square feet to the portfolio and moved our first 2 development projects in the income-producing properties.Importantly, we ended the year with record liquidity providing us with the funds and flexibility to execute the growth opportunities in Q1. We are also pleased to receive an investment grade credit rating, allowing the REIT to access the unsecured debt market.Turning to slide 5, you will see that we demonstrated another strong quarter on the heels of a very strong Q4. For the first quarter of 2021, overall occupancy remained high at 98.2% and given our portfolio growth over the last 12 months, total revenues have rose 13% driven by increasing rents. NOI was up 14% with FFO rising almost 32%.Importantly, our growth continues to be highly accretive as FFO per unit was up over 8% despite the increase in units outstanding. Same-property NOI was strong at 2.6%.More importantly, in our core markets of GTA in Montreal were both up almost 5% when we expect to see this growth continuing for the balance of the year.We continue to accreditedly grow our portfolio, as detailed on Slide 6. Last year, as I mentioned, we acquired interest in 1.7 million square feet of GLA transferred 2 development projects into income producing adding another 388,000 square feet of GLA all those buildings were fully leased to long-term tenants.So far this year we have deployed another $250 million through acquisitions of 2 properties in our core target markets, a logistics center in the GTA and state-of-the-art distribution with complementary office space in Montreal, adding over $1 million square feet of GLA.As part of our ongoing strategic portfolio management, we have sold certain non-core properties for total proceeds of almost $55 million. Importantly, we have averaged a very attractive going in cap rate of approximately 4.5% on these purchase over the last 18 months. Leasing activity continues to be a strength for the REIT as detailed on Slide 7.Keeping tenants in place as a key goals at Summit and even with the pandemic affecting much of the Canadian economy, we consistently maintain high retention ratios and say that 83% so far this year. Importantly, the strong indication, our leasing capabilities and attractiveness of our target markets, we are achieving significantly increased rents on our renewal rates.The GTA in Montreal have both been off to a very strong start achieving 44% and 49% respective on increases rent so far this year. Our tenant relationships are very important part of our business and Slide 8 shows that our COVID-19 related rent deferrals are effectively behind us with all of our tenants now paying rent on time. For the small number of tenants with whom we arrange rent deferrals, we have collected all scheduled rents outstanding was just under $700,000 now remaining to be collected on the original $3.7 million.As mentioned last year and with no change so far in Q1, we are encouraged that only 3 of our tenants have defaulted over the last 18 months, the majority of this anticipated vacant space has either been leased or committed at an average rental rate increase of over 50%.Turning to Slide 9. As you may have already seen in our press release, we are excited to have announced a 4.4% increase in our monthly cash distributions. This increase results in a new annualized distribution of $0.564 per unit will be payable in June to unit holders of record in May.With our record performance in 2020, our continued strong growth in Q1, then after taking a pause in distribution increases last year, what we were conservatively navigating the early stages of the pandemic. This increase reflects our confidence of the continued strength of the Canadian industrial markets, our commitment to generating stable and growing returns over the long term while conservatively managing our payout ratios.I'll now turn things over to Ross.
Thanks, Paul. On slide 11, you can see that we have a number of financing successes that we are pleased to report. In less than a year, the REIT completed 3 unsecured debenture offerings, raising a total of $700 million on very attractive terms. We recently completed our inaugural green financing with the REIT's $250 million Green bond IPO, again with very attractive pricing while continuing to extend term.Proceeds from our unsecured debenture were in part used to strategically address early repayments of higher interest rate, secured debt, and we are now comfortably sitting with 52.5% of our total debt being unsecured. We also have a $300 million unsecured credit facility, fully available to fund our growth platform going forward.Our balance sheet remains strong in Q1, as detailed on Slide 12. We continue to improve our debt metrics with overall leverage at a conservative 36.4% at quarter end and improved debt coverage ratios. As mentioned, we continue to capitalize on the current low interest rate environment, having reduced our average effective interest rate to 3% at quarter end, while also extending term.The REIT's liquidity position has never been a concern throughout the pandemic and continues to remain strong, with ample flexibility. Including our cash on hand, the available funds under our unsecured credit facility and the financing potential on the portion of our unencumbered real estate, total available liquidity stood at a significant $600 million at quarter-end. Another area where we can enhance unit holder value is to continue to capitalize on current low interest rates, due to strategically repay higher rate debt.Slide 13 outlines our mortgage debt maturity schedule by year and we continue to work to identify opportunities for early debt repayment. While we incur some penalties for early repayment, it's considered in our cost-benefit analysis of all our -- in cost savings through the refinancing with lower interest rates. A recent example is our repayment of $103 million of 2023 and 2026 mortgages, using the proceeds from our Green Bond, reducing the interest rate from 3.74% unsecured mortgages to 2.25% interest only debt on the unsecured debentures.We are in the process of exploring further similar opportunities with other debt maturities. Dayna will be reviewing our markets next, as you will see strong fundamentals are driving value in our asset class, including record low availability rates with limited new supply, increasing demand from e-commerce with significant increases in rents, rapidly increasing replacement cost in the GTA and G&A, all of which are leading to cap rate compression. These factors are being sent -- seen in the REIT's portfolio and target markets and are from natural statements reflect a $1 million fair value increase in 2020 and a further $105 million increase in the first quarter of 2021.We expect to conservatively record further net asset value gains in the quarters ahead, as we anticipate positive market trends to continue over the balance of the year.I'll now turn things over to Dayna.
Thanks, Ross, and good morning, everyone. I'll spend some time this morning looking at the overall Canadian light industrial market and then discuss how we're capitalizing on the strong fundamentals in each of our key target markets.So, Slide 16 details a significant supply and demand imbalance, that's been accelerating in Canada and the REIT's target markets over the last few years. Exceptional leasing velocity over the last 2 years has seen the availability rate in Canada declined to 2.9%, the lowest level on record. National net absorption was 10.4 million square feet in Q1, one of the largest ever and based on CBRE's forecast if this level sustain, we could see a number of our markets run out of available logistics space by year-end.With record absorption rates and limited new supply, rental rates have been increasing significantly in many Canadian markets. In our core markets of Toronto and Montreal, rental rate growth has been even more pronounced with average rental rates up 62% and 43% respectively since the beginning of 2018. And with both markets at record low availability levels, we expect to see further rental rate increases for 2021.As can be seen on Slide 17, strong fundamentals are resulting in our target markets in Canada leading North America in terms of lowest availability rates with Toronto and Montreal being the lowest on the continent. With Canada typically lagging the U.S., we expect to see continued international focus on Canadian industrial real estate as we're still exhibiting a meaningful spread to a number of comparative U.S. metrics.With the e-commerce trend we've already mentioned in combination with Canada's immigration policy targets, Canada is expected to lead the G7 for population growth over the next 4 years. We expect underlying economic fundamentals to continue to drive demand for industrial. One factor driving the increased demand for industrial space is a significant growth in e-commerce in Canada as you can see on slide 18. The pandemic certainly accelerated this market trend with e-commerce retail sales increasing at its fastest pace ever. E-commerce is forecast to represent over 10% of Canadian retail sales in 2022 rising to almost 12% by 2024.According to CBRE, every $1 billion increase in e-commerce sales translates into approximately 1.25 million square feet of additional demand for distribution space and over the next 5 years, e-commerce alone is expected to create demand for an additional 42 million square feet of Canadian distribution space.Given that more than 80% of our portfolio is comprised of space that could accommodate distribution, we are well positioned to capitalize on the projected growth in e-commerce.On Slide 19, you can see the very positive impact that strong market fundamentals are having on our key target market of the GTA. Availability in Canada's strongest industrial markets returned to a pre-pandemic availability record of only 1.6%. Overall, net rents rose to $10.45 per square feet marking a record 16 consecutive quarters of rental rate growth. Over the last 5 years, rental rates have appreciated by almost 91%.Our net rents in the GTA stood at $7.21 per square foot at March 31 and when compared to market rents for the same type of properties in our GTA portfolio, there is considerable upside as we renew maturing leases in the quarters ahead.Turning to Montreal, Canada's second largest industrial market, they're also generating strong growth and seems to be following the GTA market trends.Slide 20 shows that the rate achieved attractive same property NOI growth in this market of nearly 5% and then availability in this market is also at an all-time low of close to 2%. We're also very encouraged by the improving picture in our Western Canadian markets as you can see on slide 21, availability in the first quarter fell 140 basis points in Calgary to 7.8% and remained stable in Edmonton at 9.1%. We remain cautiously optimistic about Alberta and Calgary in particular as this market seems to gradually be turning a corner and given that Calgary remains the logistics center for Western Canadian e-commerce.I'll now take a few minutes to highlight some of our recent EFG successes. Corporate responsibility and sustainability, our priorities for the REITs. Our culture and values are the backbone of our operations and act as a foundation for all that we do. While the rate has been actively involved in EFG initiatives and our best practices have remained steadfast over time, we're excited to share a number of EFG successes from the quarter.Slide 23 outlines some of the notable EFG highlights from Q1. As Ross mentioned earlier, we're very excited to have completed our inaugural green financing through our $250 million Green bond IPO that closed in April. Through our existing lead certified buildings, sustainability initiatives and our development pipeline, we are pleased to now be one of only 4 TSX listed REITs to have issued green bonds in Canada.We've also enhanced our ESG disclosure in our Q1 MD&A and encourage you to review the other details of our EFG program that we've now included. We plan to continue to enhance our ESG disclosure and transparency in the quarters to come.Now looking ahead, we'll discuss various aspects of the value proposition of the REIT. With cap rate compression continuing in many of our target markets, we view our development pipeline as an attractive source of growth to complement our acquisition program. Through development partnerships, as well as on our own balance sheet, our development pipeline provides an attractive return profile while providing the REIT with a source of brand new environmentally efficient real estate. We estimate that our existing pipeline can achieve spreads of 100 to 150 basis points over current acquisition cap rates.As you can see on slide 25, we currently have almost 1 million square feet currently under development are in various stages of planning and the leasing market for our pipeline is extremely strong given the supply-demand imbalances we've highlighted earlier.In addition to our current projects, we expect to have another 1 million square feet of development potential this year through new land purchases as we continue to focus on growing our development and expansion program As we consider the implicit value of our portfolio in the context of rapidly rising land prices in the GTA and GMA and other areas embedded value for the REIT is a land that we currently own.As shown on Slide 26, we have identified and continue to monitor our portfolio for intensification potential. The table on this slide outlines the estimated intensification potential of our existing portfolio with the expansion column including really straightforward expansions on existing buildings, driven primarily by tenant demand and the redevelopment column being mostly our Alberta portfolio, where we could repurpose properties and has very low site coverage.As you can see, we currently estimate that including expansions or the addition of new buildings on land we already own, we could add an incremental 5 million square feet of potential new space when timing is appropriate. This intensification strategy is a real and accretive opportunity for us to build value over both the medium and longer term. Our opportunity to enhance cash flow on lease renewals is significant.As you can see on slide 27, through the balance of 2021 and over the next 3 years, we have approximately 7.5 million square feet up for renewal, with many of our in-place rents well below current market rates and in an increasing rate environment in our 2 core markets of the GTA and GMA. We believe we will continue to be able to achieve meaningful rental rate increases going forward through both renewals, as well as annual rental rate escalation.And I'll now turn things back over to Paul to wrap up.
Thanks, Dayna. So, in closing, we see a number of key factors that we are confident will drive increased unitholder value over the long term. Our acquisition pipeline remains strong, acquisition growth has been augmented by our expanded development pipeline at very attractive yield-on-cost returns, accelerating land values in our target markets will continue to driver NAV. We also have a real opportunity for cash flow increases renewed leases at market rents which are considerably higher than our in-place rents and while also capitalize on the current low interest rate environment will help increase our cash flow, all tied into our continuing commitment to corporate responsibility, sustainability and ESG initiatives.That's the end of the formal presentation. And at this point, we're happy to take questions, operator.
[Operator Instructions] Your first question is from Himanshu Gupta with Scotiabank.
So, just looking at the leasing done in the year so far, looks like more than half a million of leasing completed, so can you elaborate on the 40% to 50% increase in seen in the GTA in Montreal markets. I mean it looks like you are seeing an acceleration from already strong levels.
So I'm sorry, I'm not quick, maybe not understand the question, sort of the rents -- maybe just repeat your question so.
Yes, so I mean, my question was that you are seeing 44% increase in GTA, in terms of rent increases, in Montreal, you are seeing 49%. So can you elaborate on that. What was the in-place rent, what are the new that you are seeing, are you seeing further acceleration in the market value?
Yes. So I mean that it's a bit of a small sample size, but roughly the -- Ross can correct me on the math, but the rental rates in place. We're in the mid-$5 to $6 rents. A lot of these rents have moved up into the high $8s in Montreal, there in low $9s in Toronto. So that's what's getting the rental bumps. So, Ross, I don't get that math.
Yes. That's high 6's to high 9's in GTA. And yes, that's correct. Low 5's to around 8 in Montreal.
And we're starting to take a more aggressive leasing approach. I mean during the last 12 months in the pandemic, maybe a little bit more risk adverse. So we were trying to renew tenants a little earlier ahead of their expiry by 6 to 12 months, now we're back to the pre-pandemic strategy of kind of waiting, see if they have options that they can renew if not, there's not a lot of alternatives in both markets, if you -- you're looking for a space anywhere from 50,000 to 100,000 square feet up, there is a very, very few options you have. So, and then I think the brokers are getting more educated, the tenants are definitely getting more educated. So -- and we did do one tenant where we let leave, maybe they want to stay, but we were able to push the rent up, I think it's like 85%. So part of that strategy going forward might be not that we won't incur a significant amount of vacancy, but in select cases, the best strategy might be to let a few tenants leave where we think we can re-tenant it at a much higher rate.
Got it. So clearly increases are there, but are you seeing any bifurcation in terms of Class C versus Class B products in these markets. I mean other than in a small higher for Class C versus Class B.
Yes. Not really. So the product and I was asked this question not too long ago, it really makes a difference in the first lease. So when you're first going into any building, you're doing us very specific set out for that particular tenant, you can probably get a higher rent. After that lease comes up in 5 years and our building next door is a 20-year-old building has the same kind of physical attributes, they are pretty much identical spaces at that point. So there's nothing about an industrial building. I mean, obviously, we're building to higher standards in terms of energy efficiency and lighting, but you can also accomplish some of that on existing buildings during the renewal process. So yes, it really the premium you get is usually on the first lease, so for the first 5 years. So people that are out there building today and the numbers that they're asking for, we're seeing $11, $12 and now $13 rents being asked for some brand new space.
Got it, okay. And then just turning to the non-core distributions announced, I mean noticed the properties, which have been sold out smaller, the multi-tenant properties. Is that a conscious effort to concentrate only on single tenant, larger properties now?
Yes. That's been always the strategy of this version of Summit is to get larger tenants. I think our average tenant size is around 75,000 square feet today. Those particular properties in Ottawa, there's nothing wrong with them. It's good solid real estate, but they're very management intensive and they were particularly intensive during the pandemic, and a lot of handholding with those smaller tenants during the lockdown period so. I think there is 70 tenants in just those few buildings. So we dropped the number of tenants in our portfolio by about 20% by just selling those 3 buildings. So we've got a couple more identified and in terms of quantum, there might be another $20 to $40 million square million worth of property that we look to dispose of between now and the end of the year.
Got it. That's helpful. And maybe the last question is more on the replacement cost. So I'm looking at the Burlington site that 12.7 acres which you announced recently. It looks like it's $2 billion per acre. What could be the construction cost on a dollar per foot basis on that property?
Yes, so I mean we would just replace on cost number moving very, very quickly and clearly a $2 million sounds really expensive to us, but there, lots of other sites in other parts of our GTA that are now over $3 million an acre. So you're starting to get into the mid '200s all-in costs, and in the higher land prices of $3 million you're going to be starting to push closer to the $300 dollars per square feet.
Got it and what kind of events, will you be looking to underwrite on that kind of property to just...
Yes. Then we're going to let some other people ask some questions here. So the -- I think we're going to -- that are changing so quickly. So once you start construction, that's best time to start to get rents, but I would think $12 should be very much achievable and hopefully we can outperform that when the time comes.
Your next question is from Brad Sturges of Raymond James.
Maybe just a follow-up on Himanshu's question there. I guess, with the recent acquisitions and some of the disclosures on potential future density, where do you see the development pipeline trending in terms of size in the next couple of years?
Yes. So yesterday or 2 days, we announced 4 new land acquisitions, 3 of them with our joint venture partner, 2 in Guelph and we want to catch there and then 1 we are doing on balance sheet in Burlington ourselves, which is not -- it's right across the highway from the other development that we're building on our existing land. So there is some continuity. Again, I would love to see our pipeline grow by another million square feet because I think that's the thing to do right now and we will not talk over 20, 30 years now that replacement costs numbers are the key guiding and we're seeing acquisitions that are now starting to be priced at or potentially above replacement costs. So it's obvious time to pivot in to constructions. We are getting brand new real estate, we're getting that minimum 100-150 basis points. So right now, we -- the majority of the million square feet is kind of underway, lot of that pre-leased. So now we are loading up with next million square feet and we continue to try to add another million and some component of that will be in Montreal and whether we do it on balance sheet or with partners, we are flexible. The main thing is to get good quality brand new real estate. Let's take 1.8 million square feet and $200 square foot, that's $360 million value. So that's a good 10% of our balance sheet, but again at different stages. So to stop as pre-leased kind of not in the same basket as just [indiscernible] very little risk in this because we have so many tenants in our portfolio that want to expand right now. So that's the thing. The exercise we did on the intensification, the first column is just 3 wall expansion. So any powerplay that can be expanded by minimum of 30,000 square feet. You just kind of look at those another term. In the past, if you are doing 30,000 to 50,000 square feet expansion, the mass didn't quite make it because land was only 15% or 20% of your replacement cost. With these kind of land values now, the land and development charges are as high as 50% to 60% of your overall all-in cost. So it's driving to make these smaller expansions more economical because you're only having to spend your hard construction cost to do that. So one of these are tenant base of the first 1.7 million square feet. So whether it's Maple Leaf Foods, [indiscernible] down in London, we had to wait and talk to them about could they have lease term less. So it's more as their business expand and then if at some point, when some of these tenants come up for renewal and they don't want to expand, then we might just build the building at least to other tenants at that point, or might ask that tenant to leave and build out the building and then re-lease it.
As part of your disclosure as well, you highlighted the potential for mezzanine financing program, I guess could you elaborate in terms of how large or what that program could look like in the short to medium term?
Yes. So, again, that's kind of the structuring, where we're looking at with our development partner on the 3 new ones that we announced. So the idea would still be the same 50-50 partnership, but some of the financing for the project could come from Summit. So kind of like a second mortgage we do construction financing, then we would put some mezzanine money and then with ourselves and our partner, we put in the 50-50 on the equity side. But we've be able to earn a return. So rather than putting all of your money and as equity not earning income, we found this opportunity to do some element of financing.So in terms of dollars, it won't be very significant in the first year, but in my mind, it allows us to do a slightly larger development program, because it's not as dilutive you're not sitting on as much non-income producing assets, as you have with doing these mezzanine.
Great. I guess my last question would be just acquisition pipeline today, you just announced a couple of deals obviously with a little bit more of a development angle to it. Does the pipeline going forward, continue to have above-average exposure -- more exposure to development or how do you see the pipeline today.
Yes. So we keep using the same words patience and discipline because we have lost out on so many deals in the last sort of while, and we're not losing out in the fact that why would someone else scoop this it's just, there's people coming in and paying prices that we just can't get our head around and that we believe there's going to be some market comps that are coming down the pipeline of transactions that are announced or will be announced shortly. That's going to really start to focus and I think cap rate is going to become secondary. So we're seeing cap rates continue to go down and they're almost being ignored at this point, because if you're buying a property with a $5 or $6 in-place rent, it's just where do you think that upside is going to go through if there is 2 or 3 years left buying it on a per square foot basis. So if the acquisition market is going to be tough, now we're happy to look at some of those properties, our first one that we bought in the year has excess land, has low in-place rents, but the leases there for 5 years, so we'll have to be patient to get the upside there. But other places, we don't have the same amount of upside. We're just passing, because we're saying like why would -- there is a transaction out there and [indiscernible] $280 a square foot for 15 -- 10 to 15-year-old building. So it's just like that doesn't make sense to us. So we're going to be selective, but if bidders continue to be that aggressive in a number of deals in Montreal, that goes up [indiscernible], which is okay as long as the price per square foot is the right number. So we're going to look at some tax deferred roll-ins like we've done in the past, maybe some sale leasebacks, but more and more of our growth is going to come through development, and I don't have an exact number right now, but I think it's more 50-50 would be my guess today, and that could even go higher on the development side if these metrics stay in place.
Your next question is from Matt Logan with RBC Capital Markets.
Just building off of some of the questions on the development pipeline. When we think about your planned land purchases to support another million square feet of development, how should we think -- be thinking with that total investment in non-income producing real estate?
Yes. So I mean -- we'll go -- I'll give it conceptually and then Ross probably can follow up with the precise math. So the one in Burlington is on balance sheet, so all of the costs will be in our property under development category, where the interest will be capitalized, so it will just be -- at the end of the day, that whole investment is going to be north of $200 -- probably a net closer to $250 a square foot on that particular development. So that will all be non-income producing and by the way, we haven't even closed on that yet and we've got people knocking our door down trying to lease it. So it's never going to be an issue of can you lease it or when can you lease it. It's going to be, what's the rent going to achieve to -- what's your ultimate yield on cost, but we're seeing at least 100 basis points in the different. So the next 3, again, if you read the press release, the land prices obviously in wealth and Kitchener significantly last outside the green belt, so under roughly 600,000 an acre. But that's -- those 3 is going to have a very little non-income producing equity into that. So we're going to look for small amount of equity and as I mentioned, the balance of our investment in those will be through a mezz loan that then converts from us owning 50% at cost and then buying other 50% at market and we'll do that by converting our mezz loan into equity once the properties built and stabilized, and that's why we want to build up the program, so we won't have as big a number in the non-income producing category. So some kind of combination, so I can brush and go through the precise math with you on that, but It'll be a minimal amount of equity in those 3 developments.
Just maybe on that all, I was more referring to future land purchases this year, correct me if I'm wrong, but you had mentioned that you have about a million square feet in the pipeline today and plan to grow that by another million square feet over the next year, just thinking more about how much more land, could we be -- could we see purchased and brought in our balance sheet.
So, now the pipeline, we have today that we have already announced, have been talking about for the last year. That's just around 900,000 square feet. The press release we did on Monday announced that we've bought enough land to build another million square feet. So that's already done.
Got you. So no more land purchases.
No, no, we're still looking for it. So I'm not opposed to trying to go up to another -- go from 2 to 3 now, I think a lot of the stuff in the first million is going to be completed, the 2 properties in Guelph are well underway, leased up -- they are already pre-leased in the [indiscernible] will happen late summer or the fall. So those will come into income producing, something -- we have got some other pre-leasing on our property down in North Service Road in Burlington as well. So it's stuff is going to be coming out of that pipeline, but so today on our books would be 1.8 million to 1.9 million square feet that we can build and if we can add more land between now and the end of the year, that could add another million. I'm fine with that as well. It's just, it's really hard to [indiscernible]. We looked at land, we lost out on land and we're trying to target land where essentially it's kind of ready to go. We are still in that, call it 2 to 3 year time horizon, so we're not looking at larger parcels of land that are going to take 3, 5 years or longer to build out. So we're kind of, it's still in that segment. So we've got involved in a few land acquisitions and because of the municipality or additional studies are testing or hurdle that you have to know it puts it into that 4 or 5 years and we passed on that. So at some point, our development pipeline might include some element of that longer-term plan, but for now the target is kind of ready to go and when I say ready to go, it's still going to take you probably 29 in the GTA, probably 24 months once you've identified a property in Atlanta North Service Road. The previous owner had already started the site plan approval process, so that when we think we might be able to get on the ground even later this year if we go ahead with their 2 building design. So we're looking at that.
All great color. Really appreciate that. Maybe just changing gears to the same property NOI growth print in the quarter, looks like there is a small vacancy in Alberta and when we go through the MD&A, it looks like you have about half of your total vacancy leased. Two questions, one, how much is in Alberta; and two, how should we think about the same property NOI growth, say over the next 12 months.
Ross, do you have stuff that 150,000 square feet, do you have a summary, I probably couldn't find it, but you probably can find.
Yes. I can find it.
Yes, I know a big part of that Matt is the property out in [indiscernible] where we had that printing company sale that was in the vacancy. So, I know there was quite a bit of that.
There was, yes. So a good chunk of it. Yes, of the 150,000, 89,000 in the GTA. And the balance of that is in Alberta.
Yes, 41,000 in Calgary, 19,000 in [indiscernible]. so, actually that once we lease spacing in Calgary. There is one other expiry coming up there, which I think potentially [indiscernible], we're going to -- we've got a new offer, we could be close to 100% occupied in Calgary. So very happy where Calgary is doing. Again the same tightness in the market at the larger spaces in Calgary. So you're looking for 100,000 square feet plus in Calgary, it's very, very difficult to define, you still have a 7% availability, but that's more concentrated in the smaller part of the market. So, Calgary definitely has turned the corner faster than Edmonton and we're seeing activity in Edmonton. So it's not dead, but it's a little bit slower and that's why for the balance of the year, we have very little lease expiries remaining and they're kind of spread out, but again I think between the markets I think of the 245 left, 100 is in Alberta, 120 is in the GTA and a small part in Quebec and Montreal.
And then, some of that committed space comes online, do you think same property NOI goes back that 4% to 5% range.
Yes, I think we're definitely -- the numbers for GTA and Montreal, there's nothing that should change that it's on Alberta, Ross. I'm not as close whether that if we're going to see a pickup in Alberta. So...
Pickup in Alberta from occupancy pickup in the GTA from occupancy, and then the contractual rents as they continue to kick in on the rollover, there you'll see some growth and as long -- as well as the contractual steps and rent built into all the leases in that. So yes, I expect to pick up in the third -- in the second, third and fourth quarters net.
Yes, so we're optimistic that number is going to continue, it just keeps getting stronger as the year goes along, unless something unexpectedly bad happens in the tenant fields. But if it happens in GTA, that's probably a good thing long term.
Your next question is from Michael Markidis from Desjardins.
First off, let me just begin by saying thank you very much for the net exposure, certainly appreciate it on our end and lot of working sort of pay off with investors and other stakeholders. Couple of quick ones from me and a high-level question, so just on the [indiscernible] avenue expansion, can you remind me is that an expansion being in many of the place or I think it was property where you knew there were the part?
Yes, [indiscernible] border, so we're operating at a 2 or 3 different facilities. They bought a piece of land, they've been developing it, because that's taken them pretty year longer. They had a number of extension, the last extension expires in October. I think they're trying to talk their way into staying to the end of December, but the idea is -- they are matter of leading, so we're just going through and getting all of the approvals ready. We're already actively marketing it. And then, the question is going to be, are we going to be able to lease the existing building while we're adding on the 60,000 square feet. So anyone that we're talking to -- where they're going to be leasing the full bill -- being including the 60,000 square feet expansion. So we're just, but people are so desperate for space today, so we're just trying to see if there is a plan that we can kind of do the [indiscernible] still in there, so that when a new tenant could start to occupy the building at the same time we're building expansion and just kind of work around them. We're confident that it's not going to be again an issue of leasing it, just where we're going to find the final rent to land on that, so.
Right, okay. And then, it would be more of a 3 [indiscernible] so presumably the cost of that expansion, it's not a full period...
Oh, no, no. That was the attraction to this property. I think it was a 18-month sale leaseback, they own the property, and this was always the plan. And even in the 18 months, the land value has gone up remarkably now construction costs are going up, steel is getting more expensive so availability of building products is starting to be a bit of a concern and issue. So again the big drivers are land cost and development charges, but what's increasingly getting more difficult now is just you're hard cost construction and timing of that in terms of pre-ordering all your steel and pre-hospital.
That's a good segue, a high-level a question. So by using very prosthetic over the last couple of years in terms of calling out the and rapid, just the direction of the quantum of replacement cost increases, do you get a sense that we're so lots of runway there or do you think. Just given all the factors that we've seen in terms of the COVID disruption and what we've seen there that perhaps you might be seeing.
Yes, I think to be as bullish as I am, but I don't see it because what we're really getting a little bit more sophisticated on our leasing of tenant types that the rent is not a big consideration which absolutely drives you to, we need to be in France or we need to be in a particular location. And if you find the right kind of tenants, an Amazon or some of these other e-commerce, the rent component of their total cost is very insignificant. So they can withstand higher rental rates. So there is a segment of our portfolio more of the market that's more sensitive for the margins. They can't pass through these extra costs. So I think they're going to get pushed out to the periphery. So I think that's why you're seeing lots of construction in Pickering and Oshawa would be. That's why we're being successful in Guelph where leasing, probably 15% to 20% above our pro forma rates, but there is still 25% less than the GTA rate. So some investors that are going to be -- and tenants are a little more sensitive, they're going to go out there and that's why we think whether it's picture in Cambridge Waterloo that's going to be a catchment area for the tenants that can't afford to pay the rents to be closer, but what we're finding is a lot -- the sticker price of $12 or $13 or $14 rent is not [indiscernible] some of these land, once they're built out that costs $3 million or $3.5 million an acre. I wouldn't be surprised that you're going to see like $15 rents on those. So -- and the interest part, we're going to get, everyone's focused on the GTA. We've talked about this Montreal is turning this quarter and we don't have the same regimen of development charges there, land is -- hasn't taken off crazy yet, but if you look at Toronto 3 years ago, I think it's where Montreal is today. So we're very excited about that opportunity and love to start to be able to build more property there, but again the same issue, if you're a tenant and all the same e-commerce tenants are in Toronto, Montreal, Calgary right across the country, they can find these figures basis. So anything over 100,000 square feet is becoming precious and you can get premium rental rate on the larger spaces and sometimes in the past, the larger spaces would lease for less and in this case it's actually the reverse. You can, they're so rare that you find that right tenant, they don't really care what the rent is, not they won't care, but there are less sensitive to it.
So I know your focus is increasingly on development with, where prices are going, but it's the goalposts if your outlook is still that replacement costs are going to continue to inflate an above average the that we can choose to pay what we consider to be replacement cost today.
Well. It has to be a unique. Yes, so to one in Milton, $280 square foot that kind of implies a $2.5 to $3 million an acre for land price in Milton and work like we can understand for Brampton and Mississauga or some of these other, so it's things are definitely getting aggressive, but when we buy a property like that you always are looking to develop, which takes longer. So why would I pay $280 to buy 15 new building when I can build one in Burlington, a brand new for less than that. Yes, it takes the time, but we were okay to pay at or near replacement cost, if there is a value added component. So if there is excess land where we think we can enhance the value through an expansion, clearly I think rents are going to continue to move up. So again, the person buying that I'm sure they're taking a view that $280 in 3 or 5 years is going to look really good. And then they might be right.. So, we will be selective in acquisition. So, but it's -- we're seeing a lot of better stand and from all the regular pension funds, what you're seeing for money come in, I think the chart we showed earlier that profile, the availability rates in all our major cities in Canada, we're talking to our American investors, they kind of go wildly. These markets are crazy type. So that's why it's attracting foreign capital as well to coming into industrial, so it's becoming a very, very sought after asset class.
Your next question is from Jian Chen with Bank of Montreal.
I was thinking on that development front. What I think was, sorry Paul, our last quarter we mentioned that with respect to kind of yields, the spread are expecting to get on and to government completion in late 2020 and 2021 kind of around that. 150 to 100 basis points spread. With respect to the current, I guess, environment which on the cost side of things, are you still kind of, is that still the target that you guys are -- you need to achieve. And I guess, with respect to some of the newly announced GTA development just this week -- just kind of thinking about the spread on that as well?
Yes, I mean, when you first buy a land, which you think is like the highest you've ever bought land for in your career and kind of going, okay, there is no way we're going to get the same kind of spread or kind of yield. So I would say, the yield on cost is definitely coming down on a couple of those projects like that, but what I think you're going to see on the other end is cap rates that you hadn't seen before. So there is some portfolios that are out in the market now, somewhere holder B Class properties, you're going to see cap rates that you've never heard of, price per square foot, you've never heard of, and then we're going to see brand new real estate, and I think you're going to see cap rates that are even lower than you've seen in the past. So even if our yield on cost is coming down 25 or 30, 40 basis points, I think the cap rate -- if you were to turn around and potentially try to sell those is coming in at the same amount, so I still think we can preserve that 100 and the stuff in Guelph, we're just, we're really doing well with that, because we're still able to buy land at much more reasonable prices out there, so yield on cost are may be coming down a little bit, but are still hanging in there at very attractive numbers. So, some of the yield on cost, we're closer to 200 basis points on our Guelph development, so those have been phenomenal successes so far.
Okay. I guess the supply shortage definitely.
Yes.
Well, keep that going, but I guess you mentioned that the land prices is not [indiscernible] as it has here in GTA. But I guess it's turning to -- would you kind of comment on how, I guess, in terms of timing where Montreal potentially could catch up?
Yes. So it's one of those unknowns and like the market, the funny thing in Montreal, the development community and people that do own land have had more of a philosophy of doing build-to-suits and not spec development. There is a couple entrepreneurial type groups that are trying to create some funds to do some spec building in Montreal, but I think the last number I heard was 4 million square feet in much under construction Montreal and 1215 million square foot market, so very, very small amount and I think the number was like 80% of that is pre-leased or already committed, so still very small amount of spec. So, again all these cities, whether it's Toronto, Montreal, Vancouver, like there is no more land in the core areas. So, I do think Montreal has the ability potentially to do redevelopment, because you have some obsolete buildings there. But otherwise, the same thing is going to happen, you're going to start to push West and North in Montreal and South, It's going to keep expanding your development area. So, land prices I think aren't going to move up as quickly, but I think we're definitely seeing this acceleration and rental rate moving up. So when that happens, the next thing happens is I get those kind of rental rates are going to start buying land and you going to see more people jumping into this game. So I think it's a matter of time before you start to see a ramp up of spec development in Montreal and hopefully we're part of that in the early days.
Got it. Okay, that's helpful. And maybe just back on the very strong leasing spreads this quarter, can we kind of expect driving just given the momentum on that core markets right now. And at that level, leasing spreads to 2021.
Yes. And we try to provide that additional data and by our different markets and over the 4 years. So you kind of look at the average rate in the GTA is 721, but most of the leases expiring are less than that. So, they're in the of the 650. There is lots of new re-leasing rents that are now in the north of $10 a square foot. So it's -- we had a good discussion at our Board meeting our is at the time to start to keep tenants. That's never been our philosophy. It's more, having a good relationship, trying to push rents, but when we had the one bankruptcy, we had the one vacancy. We definitely have been able to push rents higher on vacancy. So. So we're looking at selective opportunities potentially to say, this tenant is not the kind of tenant can afford to pay that rent and maybe we need to look for a new, a new type of tenants. So the rental bumps or the rental level or the increases are definitely there to be had in the market. So the question is the particular tenant that's coming up for renewal willing to pay that. In the past, we've -- we might have gotten a little bit lower, whether it's 30%, we built 4% or 5% annual escalations in -- but at some point, we might make a decision on few tenants that thing, if you can't pay the $10 - $11 dollars rent, we're going to have to ask you to leave. So some tenants and their leases have options to renew, but for the most part when they don't, that it's our decision to make. So, but -- so it's all very, very positive. Here we're still flexible, there's some tenants that they're growing so quickly. They don't know what their plan is. So we're still open to doing 1, 2, 3-year type leases because we're that confident that the rents are growing. So whether they leave or stay at 3 years, it's doesn't matter because the rents are going to be even that much higher in the future. And there is some tenants that are smarter and so they're trying to do 10-year leases, just to lock it down because they don't like the trajectory where rental rates have gone.
Have you hit $20 a square foot?
No. Yes. $15 is going to happen, so I'll make that prediction, the easy number $300 a square foot replacement cost is already happening, so that was not much of a blue sky number.
You did mention that some of the tenants, I guess, that are, I mean, matter less, I think it's more of the global e-commerce players?
Yes. So, there's a number of factors, but transportation costs, employee costs if you're in a manufacturing type setting are not going to be -- have some of these third-party logistics, people where they have a tire distribution with contract with the Bridgestone, their margins to get that contract are thinner than some of these more retail oriented e-commerce type tenants where they can pass that, those additional cost on, but transportation costs and other costs of outfitting their space are bigger compared to the rent numbers, so they're less sensitive to that. So it's the kind of tenants that we're trying to continue to upgrade or put into our portfolio that we think have above average ability to handle these rents.
Our final question is from Matt Kornack with National Bank Financial.
Congrats on the third quarter. On the land infrastructure and employment base side, do you think KW and Guelph can become sort of a release valve for the GTA or are those fairly limited in the opportunity size in terms of how much industrial could be built up there?
There is definitely opportunity out there. So there is some more land that's available. So it's just a matter of how quickly these communities can get through the rezoning process and servicing and all the other things that are necessary to do it, but we're keeping our eye on it. Like I said, we're very, very happy with what we've done in Guelph and kind of sets you up for that whole quadrant outside of the GTA going down the 401 there. So anything along that major transportation hub is in play in our mind, so because some developers building as far out as like Hamilton and the Hamilton Airport area, we think that possibly will make sense at some point, but it's a little more speculative. But I think anywhere along that corridor is in play for us, and we like, we like going east as well. So we're constantly on -- we've been building up our portfolio both in acquisitions and looking for land going east as well.
And all things considered, I mean the price point at which you're getting the land in those areas. I mean you're not that many kilometers beyond where it's substantially more expensive. So is the view that land cost well accelerate in those markets as well in the near term.
And yes, they are, but do not like -- they're not going. It's all relative. So literally land in some of the places, but this land that we're buying it for $2 million acre that was 900,000 acre, 3.5 years ago when was sold. So it's, that's how quickly [indiscernible]. We don't see that happening out there, but it's going from $600 to $700 and $800 million an acre. That wouldn't that wouldn't surprise me, but I don't think you're going to get into the, the same kind of numbers that you're seeing inside degree, but that's why we intensification metrics that we put in there. One of the things on that pace, we want to people to focus on is just how much land we own and if you start to do an analysis and look at our IFRS valuations and say okay if you apply that $2 million or $2.5 million dollar value to our land position what we've accomplished. And I can tell you to answer it probably makes up 50% 60% of our IFRS value is just land put so and in some case, I mean you look back historically, the value of the land is more than what we paid for the planned in the building, 4 years ago. So it's just -- it's crazy numbers and we would have never thought about that, but our biggest asset is both on our balance sheet is land and how you use it can you intensify it and that's the thing that's going up very, very quickly. And again, long-term lenders, our land gets used a higher use and you can redevelop into something else. We're not taking that into account, but this is just the industrial land pricing alone is increase that much.
Yes. We will definitely looked at your fair value disclosure. With regards to per square foot numbers and I know you took a gain this quarter. And so there is future gains. But I think you can take quite a few future gains to get up to where the market is. On the [ 230,000 ]. I think you spoke about with Mike the GTA asset, it's, it sounds like the 185,000 may not necessarily come offline, but the Montreal property will come offline and then be expanded, that's correct. Right.
Yes. It's only 40...
47,000 square feet.
But the footprint, it was a 2-story buildings. So the footprint was only 12,000 square feet. So, but we are releasing out whatever it is an old building, we're going be able to be between 130,000 and 150,000 brand new space. So that income will disappear.
Okay that makes sense and the last one for me on there is I think $700,000 recovery in this quarter, you've done better on some of the bad debt that was provisioned for. Is there any more of that to come in subsequent quarters or we kind of past COVID related to adjustments at this point.
So we still have a general allowance for roughly that same number again. So we're still just kind of monitoring a few tenants and I keep saying the same thing.I've been saying is I still shocked at some of these tenants are still finding their way through these various lockdowns and opening in the ways that had to open to survive, so they continue to do that. But we have specific allowances and then we have a, we still have a general allowance of roughly the same amount, but I wouldn't be. We're not going to be in a rush to reverse that. So I think if by the latter part of the year, whether it's third or fourth quarter if we haven't had to utilize that we would take into account, but I wouldn't count on the event reversing. But if we get lucky and continue to these tenants continue to survive, then we build reverse later in the year.
And regardless, I would assume that if you get that space back, you're not going to be particularly unhappy.
No. Let's I'm saying. Even in Calgary, now that we're almost on a present for that market has gotten very tight again. So if -- we wouldn't be surprised at rental rates are going to start to firm up and potentially increase in coverage in the mid-term.
We have no further questions at this time, I'll turn the call back to presenter for your closing remarks.
Okay. Well, thanks again for everyone listening and I know we've given you lots of new information to noodle on and we do plan on continuing to refine that, so we're open to input and feedback from investors and analysts. We will continue to upgrade and try to make or MD&A and other disclosures as user-friendly as possible and we look forward to having another discussion next quarter with I think a lot of more positive news. So thanks a lot.
This concludes this conference, you may now disconnect.