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Good day, and thank you for standing by. Welcome to the Summit Industrial Income REIT Third Quarter 2021 Results Conference Call.[Operator Instructions]Please be advised that today's conference is being recorded.[Operator Instructions]Thank you. I would now like to hand the conference over to your first speaker today, Mr. Paul Dykeman, President and Chief Executive Officer. Sir, please go ahead.
Thank you, operator. Good morning, everyone. Before we begin, let me remind everyone that during this call, we may make statements that contain forward-looking information, which is based on a number of assumptions and is subject to known, unknown risks and uncertainties that could cause the actual results to differ materially from those disclosed or implied.We direct due to our earnings release, our new MD&A and other security filings for additional information about these assumptions, risks and uncertainties.Joining me, as usual, on this call is Ross Drake, our Chief Financial Officer; and Dayna Gibbs, our Chief Operating Officer.We are pleased to report again this quarter, we achieved a number of key accomplishments, driving solid growth and strong operating performance, pointing towards another record year for Summit in 2021. Overall occupancy hit almost 100%. Rental rates were up as a result of strong leasing activity, and we continue to expand the size and scale of our property portfolio and development pipeline.Slide 4 summarizes the significant growth we have achieved in our income-producing portfolio since the inception of the REIT in 2013. So far this year, we completed 4 industrial acquisitions, 1 in GTA, 2 in Montreal and 1 in Calgary and in close to 2 million square feet to our portfolio and deploying close to $400 million of capital.Our growing industrial base continues to drive revenues, NOI increases as well as operating efficiencies and economies of scale due to our increased presence in all our key target markets. The graph on this slide also demonstrates the significant value our portfolio is generating for unitholders. Given the strong fundamentals in our key target markets in Canada, our income-producing portfolio continues to benefit from meaning fair value increases quarter-over-quarter.Strengthening occupancies are also driving the REIT's growth as detailed on Slide 5. Even though through most of the challenging pandemic months, we consistently generated solid and growing occupancy in all our target markets, leading to near full occupancy at September 30 of 99.2%. The key to our occupancy strength this quarter was the improvement that we were able to achieve in Edmonton, which rose from 90.1% at December 31, 2020, to 97.4% at September 30.And in the past, I've talked about some tenants that we had on our watchlist. And the good news, all of those are continuing to thrive and some were actually renewing and increasing the rents. So we don't have a watchlist for our tenants anymore.As shown on Slide 6, in addition to our portfolio growth and increasing occupancy, monthly rental rate increases have also been a key driver of growth year-to-date. Through the first 9 months of the year, we completed over 1.7 million square feet of lease renewals and new lease deals. Most importantly, these leasing transactions generated a 29% increase in monthly rents with a significant 68% increase in Ontario and 41% increase in Quebec, excluding the contractual renewals. With low -- with record low availability and high demand, we are confident rental rates can only continue to grow especially in GTA in Montreal, where approximately 80% of our portfolio is located.With these achievements, the third quarter of 2021 was another strong period for Summit. As you can see on Slide 7, revenue rose 12% with net rental income up almost 16%. Organic growth continued with same-property NOI rising 5.4%. As Ross will discuss later, our strategy to repay secured mortgages with unsecured debenture offerings resulted in a nonrecurring prepayment expense in the quarter. We estimate the net benefit from the strategic refinancing will result in annual interest savings of approximately $4.5 million per year. Not including this nonrecurring cost, FFO rose 26% with FFO per unit up 7.1%, another strong quarter for Summit.With that backdrop of our strong Q3 performance, we are on track for another record year in 2021 as you can see on Slide 8. Year-to-date revenues are up 15%. Same property NOI has increased close to 5%, the second consecutive quarter, the same property annualized tracked around that 5% mark. Organic growth was particularly strong in our key target markets, with same-property NOI of 6.5% in Ontario, 4.2% in Alberta at 2.6% in Quebec. Not including these nonrecurring mortgage prepayment costs, FFO was 28.8% through the first 9 months to September 30, with FFO per unit up 7.1%, and our payout ratio ended the quarter at a very conservative 79%.I will now turn things over to Ross.
Thanks, Paul. Turning to Slide 10. 2021 has been a very active period for the REIT. Over the last 12 months, we successfully completed the placement of $925 million of unsecured debentures with a low average interest rate of only 2.18%, while sequentially extending our maturities and tightening our credit spread pricing.During the third quarter, we were pleased to continue to expand our participation in green financing with the structuring of our new $75 million green unsecured development credit facility as well as a $25 million conventional tranche to finance our current and future development projects. Proceeds from our unsecured debentures were in part used to strategically addressed early repayment of $330 million in higher interest rate secured mortgage debt.As Paul mentioned earlier, we expect to generate annual interest savings of approximately $4.5 million as a result of these refinancing. During the quarter, we also successfully completed a $127 million bought deal equity offering used to finance our recent Alberta acquisition.Slide 11 details the continuing strengthening of our financial position over the past 12 months alone. Our strategic debt restructuring program has resulted in an unencumbered properties -- in our unencumbered properties growing to $2.8 billion, representing 64% of our total assets up from 37% at the same time last year. Our proportion of unsecured debt rose to 72% of total debt, up from 28% last year. We also decreased both our overall average interest rate and leverage ratios both down from this time last year.Our strategic balance sheet repositioning will generate considerable savings going forward and provide us with the financial resources and flexibility to continue our growth trajectory in the quarters ahead.Liquidity and financial flexibility is always top of mind. And as you can see on Slide 12, we continue to build on our available financial resources. At September 30, we had approximately $1.1 billion in available liquidity, including cash, available credit facilities and the potential financings on our available unencumbered asset pool. Hypothetically, if we were to use all of our available liquidity, our average -- our leverage ratio would remain a conservative 43%.In summary, our financing achievements over the last year have supported a strong capital structure and balance sheet, as shown on Slide 13. The REIT's overall leverage was reduced to a very conservative 29% at quarter end, and we continue to capitalize on the lower interest rate environment in Q3, reducing our average effective interest rate to 2.5% at quarter end, while also extending term. I'll now turn things over to Dayna.
Thanks, Ross, and good morning, everyone.As Paul mentioned, we have enjoyed significant fair market value gains in our property portfolio over the last several quarters, driven by ongoing demand for industrial in Canada and the underlying strong market fundamentals in our key target markets.As you can see on Slide 15, we've recorded total fair market value gains of $933 million or $5.54 per unit so far this year. These value increases are being driven by record low availability rates, limited new supply, continuing demand from e-commerce, significant rental rate growth and rapidly increasing replacement costs in the GTA and GMA, particularly. These fair market value gains are being experienced in all of our target markets.And as you can see on Slide 16, with the most significant increases across our Ontario and Quebec properties, which represent close to 80% of our total portfolio value. We're optimistic that our key target markets and asset class will continue to show further strength in the quarters to come, and I'll now discuss our specific markets in which we operate.Slide 17 details the positive impact, strong market fundamentals are having in the GTA. Availability in Canada's strongest industrial market returned to the pre-pandemic availability record of below 1%. Overall net rents rose to $11.63 per square foot, marking a record 18 consecutive quarters of rental rate growth. Over the last 5 years, rental rates have almost doubled. Given these extremely tight market conditions, we saw a 9.8% same-property NOI increase in our GTA properties in Q3. We -- Our net rents in GTA stood at $7.35 per square foot at September 30, and we believe there's still considerable upside as we renew maturing leases in the quarters ahead.Montreal, Canada's second largest industrial market is also generating strong growth, as you can see on Slide 18. With the availability rate declining further in the quarter to an all-time low of 1.2% and a 6.9% increase in asking rents, Q3 marks the 12th consecutive quarter of rental rate growth in this market.During the third quarter, we also achieved same-property NOI growth in Quebec of 0.6% and are at near full occupancy. The industrial markets in Western Canada and specifically in Calgary, have improved throughout 2021 as can be seen on Slide 19.We are pleased to have seen a 4.2% increase in same property NOI year-to-date in our Alberta portfolio, including a 2.6% increase in Calgary and 2.7% increase in Edmonton for Q3. And as Paul mentioned earlier, we are seeing strength in Edmonton with occupancy in that market increasing meaningfully in the quarter by almost 6 percentage points. The improvement in Alberta is due in part to the trend of Calgary and Edmonton becoming distribution centers for Western Canada.As detailed on Slide 20, companies are recognizing the relatively high leasing and land cost in the Vancouver region and with little room for expansion in that market due to land scarcity, many are choosing instead to locate their logistics and distribution centers in Alberta. It's estimated to still be 30% less expensive to locate distribution centers in Calgary versus Vancouver even when considering the incremental transportation costs to and from ports in Vancouver. Alberta also has significant expansion potential in both main cities, which is attractive to companies looking for flexibility and scale in their logistics centers. With this trend in mind, we continue to selectively consider growth opportunities in Alberta. A key example as shown on Slide 21, is our recent acquisition of a 725,000 square foot brand-new Class A logistics center near Calgary located in close proximity to the airport. This new facility consists of 2 buildings, both with 36-foot clear ceiling heights, numerous loading docks and ample trailer parking.The first building built in 2020 totaled 525,000 square feet and is 100% occupied by Amazon. The second building soon to be completed is already 60% pre-leased to an existing tenant of ours who has an option to lease the balance of the space.Looking ahead, we'll continue to focus on the same successful growth strategies that have generated positive unitholder returns to date. Our growth and strong performance continues to be based on our 3-part strategy, expanding the size and scale of our portfolio through accretive acquisitions, proactive development and expansion, and capitalizing on strong market fundamentals to achieve organic growth in our existing portfolio while striving to achieve our ESG initiatives and targets.As shown on Slide 24, our acquisition program continues to be active, completing over 380 million acquisitions in our target markets so far this year. We also sold 7 non-core properties, generating a little over $60 million in proceeds as we continue to actively manage our portfolio.While we still remain active in the acquisition market, we continue to see a significant tightening as existing and new players recognize the strong fundamentals of the Canadian industrial sector, fueling increased investment demand and cap rate compression.Cap rates continue to be seen sub-3% in several GTA transactions with Montreal also showing very low rates and valuation metrics shifting more towards replacement cost, which is being driven by rapidly increasing land values. The REIT has been increasing its focus on development and expansion as a result of the current acquisition market landscape.As you can see on Slide 25, we currently have over 1.2 million square feet under development in various stages of planning or construction. The leasing market for our development pipeline is extremely strong, and we estimate we can achieve return spreads of between 100 to 150 basis points over current market acquisition cap rates. We are also seeing more expansion opportunities with our existing properties and tenant base. Our development pipeline also aligns with our ESG initiatives and green financing framework as we strive to achieve maximum efficiencies and minimize the environmental impact of our newly built buildings.The third pillar of our growth strategy is to continue to execute on our track record of organic growth as we capitalize on the strong demand in our target markets.As you can see on Slide 26, over the next 4 years, we have approximately 9.6 million square feet of lease renewals coming due with meaningful rental rate mark-to-market upside potential. Ontario and Quebec specifically continue to be a landlord's market, which will provide the REIT with further flexibility in lease negotiations. 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 continue to drive unitholder value over the long term. We continue to execute our disciplined acquisition program with emphasis on price per square foot compared to replacement cost. And while acquisitions remain 1 element of our growth strategy, our expanding development pipeline, as Dayna mentioned, will contribute attractively yield on cost returns and new environmentally efficient real estate to our portfolio. Continued depreciation and land values in our target markets will continue to drive NAV growth. Organic growth will continue as we renew leases in Eastern Canada at market rents, which are considerably higher than our in-place rents. And finally, our strong liquidity position and access to attractively priced debt and equity capital will allow us to execute on this growth strategy going forward. I thank you for your time this morning, and now we'd be pleased to take any questions you may have. Operator?
[Operator Instructions]Your first question comes from the line of Brad Sturges from Raymond James.
In terms of your in-place leases as it relates to the contractual steps, that's been trending higher obviously, aided by some of the leasing activity done. But I'm curious to know is mainly what's in place today. Is that based on fixed steps or would there be a CPI, a meaningful CPI component within some of the leases?
Virtually no CPI. So it's all contractual based and as more and more of our portfolio trends over, our standard leases is annual steps. So when you buy a property, sometimes there's a bit of a mixed bag and some every 3 or 5 years, but our standard lease is contractual. So that will make it a little bit more predictive of you can get that 1.9% every single year. And a lot of it's been driven by increasing our annual steps in our GTA portfolio in particular. So what was 2% or 2.5% is now 3%, 3.5% or sometimes even higher.
Right. And given what you're seeing in Alberta in terms of the demand as distribution hub, and you did a good job of highlighting, I guess, the differential between Vancouver. I guess, does that change your view at all right now in terms of the amount of exposure you want to have in Alberta? Is it just, if anything, it puts strength on opportunity to do a little bit more capital recycling given, perhaps, a little bit better liquidity in the market?
Yes. I think both. We've mentioned that, that market has changed dramatically even over the past 9 months. So we're still going to use the word selective, but the market has definitely turned a corner specifically Calgary. So we continue to monitor it. I mean there's obviously more and more interest now that it has turned the corner. So it's becoming more competitive.So we're very happy with our Amazon acquisition that we just did, and we'll continue to sort of manage that allocation. We're still keeping that portfolio target of 20-ish percent, but if we find things that make sense on sort of an individual acquisition basis, we'll certainly do that or if there's opportunities for us to expand some of our existing properties in that market. We'll do it as well. We've got very little site coverage there, which, again, has positioned us well for where we sit today in that market.
If you're looking at capital recycling today as the pipeline fits, like how large the program would it be? Is it still fairly opportunistic and small? Or do you see kind of expanding versus previous commentary?
No. It's, again, primarily or almost entirely focused in Western Canada because we bought a large portfolio 2 years ago. So still weeding out the couple of properties that we have listed on our balance sheet for properties under $7.1 million, $3.3 million if you take a 40,000 square foot or 30,000. So we're trying to build up our average tenants on it. So those smaller bay or the smaller single buildings or any a multi-base that we have left. It's still in that $50 million to $100 million kind of range. So I don't think it's anything bigger than that.
Okay. And the last question, just acquisitions in general and just thinking more as it relates to capital allocation, obviously, you've been ramping up the development program. How is the acquisition pipeline looking today? And where are you seeing the better opportunities?
Yes. The acquisition pipeline is -- it's actually fairly tight with these low cap rates. It's -- you're seeing a fairly regular number of offerings. Looking at the sheet year-to-date, we've underwritten $4.4 billion, and we talked about buying just under $400 million, so a little under 10% hit rate. but particularly, it's now being driven more by IRR buyers that are looking at what that rent -- that rent -- mark-to-market rent is going to be. So we're seeing cap rates that are migrating well down below 3, 2.2, 2.6 in GTA.But more importantly, what stops us from even entertaining those is the price per square foot. So we saw with the Artis deal halfway through the year, that was about $300 per square foot. We just lost out at another 1 that's not public yet around that $300 million in total, but it's at least $330 per square foot in the GTA, may be higher.So once that -- so it's tight there. But again, we're looking at everything like this Amazon, you have to remember, that wasn't a marketed deal. So we went directly to the owner. And so when we can try to find those unique opportunities, we'll try to do that.But you're competing in Toronto, you're going to have 10 or 15 bidders easily. You're going to have 5 or 8 bidders in Montreal. And now we're starting to see a few more bidders in Alberta. And there was another offering brand-new real estate after this Amazon it traded at 4.04%. So I think even cap rates are going to start to move down in Calgary as well, which will help benefit our existing portfolio.
The next question comes from the line of Joanne Chen from BMO Capital Markets.
I guess, just thinking on the -- sticking with the acquisition, just kind of given the current pricing environment and -- how are you thinking about the balance between the acquisitions of income-producing properties versus continuing to grow your development pipeline, particularly? Now with the current inflationary environment, has your thinking around all the development side changed?
No. I mean clearly, that's where our focus is because we know no matter what crazy price for land is that you're looking at, we bought the South Service Road at $2.1 million. We've got some other land, we're in due diligence on that even above that number, we're going West, whether it's wealth, Kitchener to try to find some less expensive land.Even at today's rental rate, the yield on cost is significantly better than the acquisition cap rates. So that's the best way for us to go. It's more accretive. You're upgrading the portfolio, you're hitting our ESG targets as well. So we've got a couple more pieces of land. We're still trying to target land that's ready to go, which is kind of 3 years or less. We did have some land tied up in Milton. That was more of a 5-year vintage. And the 5 years could have ended up moving to 7, 8 or 9 if certain things didn't happen in servicing and zoning wasn't fleeted.So I think we're still focused on -- I would say, smaller parcels, but more in that ready-to-go category in and around where our existing portfolio is. But again, we'll -- if the acquisitions make sense, we'll do them. So we're not shy to know when to stretch and when to be competitive on acquisitions. So I'd like to think that $150 million or $200 million a year would be a normal run rate on development and gradually increase that a little bit, but that's kind of the target for the next couple of years.
Okay. And I just wanted to clarify, so I might have missed this earlier, but are you seeing the development spreads still kind of around that 100 to 150 basis points over acquisition cap rates?
Yes. And if anything, they're wider, just because acquisition cap rates continue to go down to really low levels. There is the Cartera portfolio. which was brand new real estate. There was an Amazon in there, that traded max 3 or slightly below. There are some properties in the East part of Trio. So we're seeing yield on cost of, say, 4.5% to 5% and stuff and potentially sometimes higher on existing land that we're already on.
Okay. And I guess on some of the recent land purchases, obviously, headline a lot on the inflation environment right now, but would you think about perhaps pushing back some of the developments on some of the recently acquired land? Or are you still looking to try to break ground as early as possible?
There's nothing wrong with waiting. So either strategy, it's really dictated by the municipalities. And so we have actually have to try to wait because you're forced to wait. So on South Service Road, we have to get site plan approval, which will take 4 to 6 months. The problem is, do you wait until the site plan approval is done before you order your steel, which has a 9- to 12-month lead time. So again, if you're comfortable that you're going to get your planning approval. But yes, so -- and again, even South Service Road, I think market asking rents even in the last 6 months is probably up at least $1 from where we would have pro formed. So -- and we've got our development on surveyor, which is a spec developments just under 100,000 square feet. I think our recent asking rent is over $14 now. So we just keep bumping the asking rate every 6 months or so. So yes, so there's nothing wrong with waiting, but -- so we're just trying to find land that we're ready to go. But at the same one, we have tenants that are asking us for space. So some of this is to accommodate our existing tenants' ability to expand or have another location as well.
Right. That's good to hear. And just sort of going back to the contractual rent step-ups. Where are they like now in Ontario versus Quebec?
We haven't had a lot of -- sorry, we haven't had a lot of renewals in Quebec. So again, we're just continuing to stretch and try to buy. And it's a balancing act because in Toronto, do you think you're moving the market from 6 to whatever the number is, 10, 11, 12, is that too much of a jump? So where a tenant maybe can't handle all of the mark-to-market to date, that's where you can push, okay, we're giving you a deal because we're not pushing it up that extra $0.50 or $1 today, but we want higher than average going forward. That's where get into the for or higher on the renewals, but Montreal, we thought was about 2 to 3 years behind Toronto and there's more and more evidence that's correct. So I think you're going to start to see some acceleration. So rental rates are clearly going up. And then once it's more of that landlord's market, we'll be able to push the rental steps as well.
Right. Okay. Maybe just switching gears, I guess, back on the balance sheet side of things. Congrats on the green line of credit. It's good to see. But can you maybe comment on how -- what kind of pricing you're seeing now in the unsecured market, particularly as you do have a positive trend on your credit rating? Has this largely been baked in? And what kind of you're seeing financing for on the unsecured side over the near term?
Yes. No, it's interesting. So we're at -- we've got sort of a divergence here. We've got record low credit spread pricing right now, really sort of across 5, 7 and 10 years, I'd say. But with the bonds moving away from us, it's more expensive. Since we've been in the market, it's really sort of the highest all-in compound rate. So 5 years is probably around 2.6%, 7's are probably just under 3%, and we've actually had hit interest for our name in the 10-year space, which is great. So it's an interesting environment where our credit spread is continuing to come in. We expect and hope that, that will continue. But to your point about the change in outlook that really a lot of very astute debt investors out there that, for the most part, is already sort of priced into the market and really didn't see a whole lot of movement there. So record low credit spreads, but all-in rates are creeping away from us because of what's happening with bonds.
Well, yields came back down a little bit today, so hopefully, that'll be good. But -- okay. That's it from me. I'll leave it there.
The next question comes from the line of Sam Damiani from TD Securities.
First question, just on the acquisition market. It continues to be very interesting. And I guess you've underwritten $4 billion plus and close on less than 10% of that. Are we getting to the point with pricing, Paul, where it starts to make sense to let some assets go where maybe another buyer might have a different view of value than Summit.
Yes. That's always a tricky one, right? Right now, in Toronto and Montreal, we just think the upside is so significant that we're going to hold on to everything we have. And for the most part, this portfolio built up different than Summit one. It was really about 1 or 2 buildings or built 1 or 2 buildings at a time. So most of our properties in Toronto and Montreal are larger buildings with larger tenant sizes. So they kind of fit the criteria. There's a few. Like we had 1 in Ontario, which would be that small base. So we've entertained and looked at that. So yes, someone would pay us a sub-3 cap, we might look at that. But it goes into -- we want to make sure we can reinvest those proceeds in something accretive. So right now, we're focused on more the noncore, which would actually it be -- in the West would be more of a higher cap rate. So you have -- it's a little bit of a dilutive exercise. So we haven't really looked at whether -- But like we have a small interest in a property in Edmonton, we're just renewing the tenant there, we'll look at that. So it's really more strategic in terms of what we're trying to disclose that.
Okay. That's helpful. And then -- and just on the occupancy, it's great to see it back above 99%. That's pretty full. I mean, what -- where do you think the source of variability is, I guess, over the next few quarters. And just by region. Just curious what you're thinking in terms of over the next few quarters.
Yes. And again, you'll notice one of the items that we're always very aware of with the retention ratio, and we always want it to be 90% or 95%, and that number started to go down. And so we're doing selective nonrenewals, let's say. So if a tenant doesn't have an option to renew, we don't like their use, so we don't think maybe they can pay that -- afford to pay the highest rent. So anything we're going to do there is going to have minimal downtime because you're going to -- in Toronto or Montreal literally, there's a lineup even the property that we call Kubota, it's a leaseback. We're going to do a 60,000 square foot expansion. We've got 3 people bidding on that. So it's really that -- it's a landlord market we've never even seen before. So you're kind of auctioning the space.Clearly, we're happy with what's going on in Alberta. I do think there's going to be some movement there. But we're budgeting or thinking about occupancy around this number going forward through all of 2022. So there might be a month here or there that there's going to be a little bit of downtime and then some releasing, but nothing structurally different than that.And again, -- Like I said, the retention numbers, we're not striving to achieve a higher number. We're just -- we'll take our chances on a few renewals that we won't do to allow the market to dictate what that new price should be on the rent.
That's great. And last one for me is just on the Quebec region be with the same property NOI growth, fairly flat in Q3 and certainly well below Ontario's pace for the year-to-date, but the market as strong as it is, what is the prospect? Or I guess, can you explain the low growth in the third quarter? And how quickly you expect that to sort of ramp up over the next couple of quarters?
The same property NOI, there's always -- there's these onetime items that in the prior year that can impact that overall in Montreal. We haven't had a lot of lease expiries, we will in 2022. But -- so there's been some contractual steps, but then the timing of those depend they're not -- these are inherited leases, so they're not annual ones and that. So there's some bit onetime items in the prior year, and that -- it's kind of flattened out. Looking ahead, we're going to see that step up in the rents, and we have a significant rental spread that we're showing in our MD&A in Quebec right now, and that's taking effect in -- I think in the fourth quarter, and that was when the actual expiry takes place. So it will start to move upwards going forward. But somewhere between -- somewhere a little under what the GTA is doing.
Yes. We're very optimistic about the Quebec and particularly the Montreal marketplace. I'd be really happy if we can continue to grow our portfolio there through other acquisitions or development or there's opportunity for a lot of redevelopment there because I do think the outlook is not that far behind GTA. So I think you're going to start -- you're seeing that in land prices finally with 1% availability, there should be a lot more development, and it's been very sluggish. But when you only start to look for land, we've seen those numbers up 30% or 40% now in the last year. So I think it's only a matter of time before that's going to start to hit their memory rate. And again, you're a large tenant over even 50,000 square feet. You have virtually no place to go. So it is becoming that same thing the landlord market. So there's an education process just like we saw in GTA. It didn't happen overnight, it's an acceleration. It's an education of both the brokers and the tenants. And I think that's beginning. And a year from now, I suspect we'll be seeing a lot more positive things at to Montreal.
The next question comes from the line of Himanshu Gupta from Scotiabank.
Just sticking to Montreal, the Montreal IFRS cap rate was reduced this quarter to something like 3.6%. Was this in response to recent portfolio transaction? Or generally, you're seeing transactions at 3% Cap rates?
It's a result of the answers. -- some transactions as well as just the overall market is tightening up in that. So yes. So that's basically -- yes, we're seeing a continuing decrease in the cap rates on our transactions or not.
Okay. And we had about a large portfolio sale in Montreal by a Qubec-based public REIT to pave equity. Any idea on the pricing there? Or any read across for your Montreal portfolio?
Yes. I think we all know what we're talking about the 13 million square foot portfolio. So it's a landlord with a significant component in Quebec City. There is no public information. So any information I have on pricing has usually come from you guys guessing at it. So I heard anywhere from 4% to 4.5% cap again, with the allocation to Quebec City, that would dictate a higher cap rate because of the smaller market. There's a significant amount of small bay property in that portfolio. So if and when this transaction closes, we're familiar with the buyer, and they did this in Toronto 3 or 4 years ago. So again, that's why that's part of my belief that Montreal is going to look a lot better from a rent rate perspective a year from now once that portfolio closes and you get a little bit more aggressive landlord in terms of trying to move those market rents.
Got it. That's helpful. And then just shifting gears to Alberta, and I'm looking at the Calgary Logistics acquisition, 10-year lease with Amazon. What is the annual rent escalator on that please?
It's -- I thought somewhere like 1.3% or 1.5%. It's fairly modest. The good news is there, we're buying this at $175 a square foot, which means your rents are fairly low today. So we're pretty comfortable that even with modest 1.3%, 1.5% rental growth per year over the 10 years. At the end of that lease, you're still going to have a rent that's not very high compared to what we're seeing in other markets today.
Got it. And then looking at the same transaction Calgary 1, the cap rate, I think, was 4.3%. My question is, is the capital differential enough, the GTA Montreal to offset the higher rent growth potential which you can find in the market. I mean the question is really how attractive and what capital spread in Calgary more attractive equally as attractive at on Montreal?
Yes. So again, it's not really cap rate driven to the most part. So right now, that last portfolio that hasn't been announced yet, that $300 a square foot. That's going to be about a 2.5% cap. So that's almost 200 basis points different. That would be for 25-year-old properties in Toronto. So yes, you -- over the next 3 to 5 years, you can move those rents in Toronto, but to get to the same or you've got to get significant growth to hit a 4.3% that we did in Alberta and then it's going to be upgrading and continuing to upgrade the quality of the portfolio. So we've owned this real estate a long time and if you get 25-year-old properties or they haven't been as well-maintained, you've got roof replacements. You've got a lot of CapEx involved in those.So our preference is to buy newer quality properties. So that's where we're prepared to build lower cap rates in GTA if the quality is higher. But -- so we're very, very comfortable with this recent acquisition, and I suspect we'll be able to do some more selective acquisitions out there as well.So -- but it's more of a price per square foot. It's more of a quality issue and it's more how does it fit into our portfolio. So again, we'll -- every time we're going to get stuck in Toronto, not on cap rate and potential to move the rents, it's going to be on a price per square foot. So $330 square foot, we can still buy land in Toronto and build it for less than that. So if we can do that, why would I buy a 25-year-old real estate just because it has a good rental upside. So that's where we stop. Now the question is, pull up the $330 going to be in 2 years, 3 years or 5 years. And clearly, the buyer in that situation has to believe that replacement costs are going to continue to be on that same trajectory and $350, $400 a square foot is not far away. And from land prices that we've seen happen in GTA have now gone into the 3.5 million acres, we've started to -- or some on the market right now that are north of 4, comfortably north of 4, that's going to start to drive that replacement cost number closer and closer to $400 a square foot. And I remember having this discussion last year is saying, I think we're going to hit $300 square foot replacement cost. So it is moving very, very quickly.
All right. That's very helpful, Paul. And then sticking to GTA, obviously, it's been an eventful story. Have you guys done any tenant affordability analysis? I sense for to go to, let's say, $15 per foot from $10, let's say, are they in a position to fully absorb that? Any kind of study there?
Some rare study, and we've actually had these discussions at the Board level, but it's more from anecdotal talking to our tenants. And I'm pretty -- think significantly higher inflation numbers in Canada because of what we're doing with the rents, like we're literally going to be starting to double some rents of tenants and they're kind of go and thank you, like I'm happy having the place so they don't have a right to -- an option to renew, they're worried, they'll be out of business and can't even operate. And then I think when you think about -- so we studied it from an e-commerce perspective, rent makes up a very small percentage, somewhere in that 4% to 6% of their G&A. It's mostly transportation and labor that's driving their major costs. So it's kind of, I won't say a rounding error for them, but not -- but then it's the next layer of tenants that are more sensitive to price.We're starting to see them move out outside the green belt, and that's where we're in the path of that in Guelph for Kitchener at Cambridge. You're starting to see lots of acquisitions down in Hamilton, Bradford all of those places where land can still be a bit more affordable, but you have all the offsetting so during a cheaper rent, but logistically, you've got -- not all the tenants who go out there. So if the tenants that want to and need to be close to that population base. They have no problem with affordability. So it's the other tenants that don't necessarily need to be in a Mississauga or Brent and the both side of the green belt.
Got it. That's very helpful. And maybe just a final question. Obviously, your cost of capital has improved dramatically. I mean, are there things you can do now versus you could not do like 2, 3 years back? I mean any change in approach maybe getting more aggressive on transactions?
Sorry. No. We're -- I think the word we keep which discipline and patience, and it's worked for us now and sometimes it can be referred to as boring. But -- It's a great formula. And as I said, the real move here is into development, and we think we're going to do a combination of on-balance sheet because the carry is not very significant with this rental rate market. And then we're also to expand that development pipeline, doing joint ventures. And we're talking to new potential partners in other markets as well. So that's really where we're going. And then I guess, we're seeing it on -- or delevering the portfolio. So that's another use of capital. So we're making it a bit more conservative. And the idea is, as we get more U.S. investors, we're starting -- we're trying and striving to be a bit more comparable to our U.S. REIT peers is what we're doing as well. So just being a bit more conservative and a bit more bulletproof.
The next question comes from the line of Matt Logan from RBC Capital Markets.
Wondering if maybe we could take a bit of a step back and think about the bigger picture. We've had a lot of supply chain disruption over the last 6 to 12 months. What are you hearing from your tenants in terms of their thoughts on space? Are they taking up more for kind of the same amount of sales? Is that a trend that you're seeing in your business? Maybe just any color there would be great.
Yes. I mean I guess just some of the same themes we've been talking about in prior quarters where people want to have more control over their inventory. And so because of some of the timing uncertainties that, obviously, requires more and more space. So it's just sort of a common theme. They're looking for more space. They want to hold on to the space that they do have. They're worried about what's coming down the road. So trying to perhaps look a little bit further ahead and not get caught off guard.So really just keeping more inventory on hand versus being stuck because their business will be put on hold if there are supply chain disruptions or ongoing supply chain disruptions.
So a little bit of a follow-up on we're also a bit -- so there's definitely, call it, new entrants, but call it the vaccine-makers, the PPE suppliers. There's a lot of entrant -- new players coming there where it's kind of new demand and it's not short term. So like the vaccine people are looking for warehouse space production and they're looking at 10-year leases.So I think we're all hoping this pandemic is over, but I think there's a preparedness, which ties into what Dayna was talking about regular tenants, but there's also a full due new user out there that's expanding their requirements.
And I think it's to anticipate expansion requirements, whereas perhaps it would have been more real time or just in time, they're thinking, if the market is so tight, where are we going to be perhaps further down the road because we don't want to be in this conundrum in 2 years' time.
Absolutely. So I guess, really, the supply chain disruptions are a tailwind for Summit. And do you guys see any change to those supply chain, what challenges getting resolved over the next 6 to 12 months? Or is this something that we could see structurally for the next year or two?
Yes. You hear all the smarter brains and the economists talking about it's transitory. That's not my personal view. I think there's absolutely structural changes that are going to happen as a result of this. So I think the -- this evil is going to happen. I mean you'll hopefully be able to order cars or renovate your kitchen a little bit easier. But I think bigger picture, you're going to see structural changes that are going to require 3, 5 years or longer. So I think we're with this full issue for a while, which drive me to the concern about inflation. So I'm a big believer that we're going to see some ongoing inflation even if some of these short-term supply chain issues are fixed, which then we're starting to see that in the bond market where interest rates are starting to respond to that potential big thing in inflation. But when you think about industrial, think about what we're doing inflationary tailwinds are not really a bad thing for us either. So as long as we could try to -- it's good for our existing portfolio, it makes it harder and harder all the time to justify the land prices to build new.
And maybe just changing gears. I'm not sure if Ross, you may have mentioned this in your comments, but can you remind us what you're carrying the GTA industrial portfolio at in terms of the price per square foot?
GTA Industrial on its own, we just showed Ontario, but GTA is around $230, $240 a foot.
Yes, at a 3.4% cap. And again, when you look at that last transaction that traded at 2.6% and $330, clearly, IFRS valuations are a trailing indicator. We caught up a lot we're trying to manage that. I think we're looking at our peers and I think we're all wrestling with the same idea that these valuations are moving so quickly. Every quarter, there's more comps to look at and to justify more movements in farm market value.So I don't think we're done yet. So I don't know what the number will be going forward. But clearly, part of that is driven by absolute rental rate increases. And Ross was doing an exercise where a lot of our properties in 2015 and '16 now are double from what they were 5 years ago. So the NOI.
And I guess that brings me to my last question here, guys. I mean Ross, Paul, you talked about development costs reaching potentially $400 a square foot at $4 million of cost per acre for land. What would that be today based on kind of what you see as the market value of land in the Toronto and Montreal like what would those development costs be today?
Well, I mean, I can talk real numbers, but South Service Road, we bought land for $2.1 million an acre. We're going to probably be all in somewhere in that $275. But again, we're originally thinking it was going to be $11 or $12 rent, and we already know that it's going to be north of that. So again, the market rents are keeping up with the replacement cost number. So Montreal is lower. So it's now above $200 a square foot. But we're seeing -- like I said, we're seeing that acceleration start to take off. So I think that in 1 or 2 years, being $250 or higher in Montreal is not going to be a surprising thing.And again, municipalities, they're sneaky. You have the development charges, which are $20, $30 a square foot. You don't have that in Montreal, but they're putting on requirements that are a bit more onerous. So in Montreal, we're looking at historical things and what products you can put on your building versus others, what kind of greenery you're putting, whether it's on your roofs or stuff like that. So there's a lot of challenges that are sinking into there.And again, generally, we're trying to build to a lead certification, ideally lead silver or better. So all of that is adding a bit of cost. But tenants are -- that's where the market is going. So we believe that tenants are going to start to demand or want to have buildings that are as energy efficient as possible. So it's moving up. I probably -- it's frightening how high it is and where it's going to go. But that's why we'll buy -- it will be some select development inside the green belt, which I still think will make sense for us. I think we're still more comfortable with land prices, but even outside of green belt are going north of $1 million an acre. So -- but it still sounds -- it makes more sense to us to develop out there where you can build under $300 square foot. So [indiscernible], you have to look inside and outside the green belt because they're very to different numbers.
Your next question comes from the line of Matt Kornack from National Bank.
I'm not sure if I'm reading the disclosure correctly here, but just if you could correct me if I'm wrong, but it seems like you've got about $700,000 or so square feet of your maybe 2022 maturities done, but that leaves $1 million plus. You seem pretty confident that you're going to be retaining or at least maintaining 99% occupancy. So can you speak to kind of whether the leasing spreads that you've achieved to date? I mean it seems like Ontario accelerated in the quarter. Quebec, that 41% takes place in Q4, like where those are trending?I mean I know you provide market rents in your MD&A, but I think those are CBRE stats, which just like everything else, there's stale, today they're printed.
Yes. They're not real. So I'll give you the 1 that we're currently in negotiations going from $6 to $12.55. So it's 107% improvement in rents in the GTA. And interesting enough, in that it's 120,000 square feet in automotive-related tenant. The building is almost 30 years old, 20-foot clear. It's just your -- it's a great location, but just to run a mill. I mean it's well maintained assets, but the location is driving rent in that particular property. So yes, and then like I said, in Montreal, it's going to be a little bit hit massive. There's a couple of tenants that still have some historical automatic rental steps. We have 1 in Montreal, but it's a 2-year step, but they really want to have a 5-year lease. So we're going to navigate through that. But again, we'd be happy to do short-term leases in Montreal because I'm very confident in 2 or 3 years, you're going to see a more meaningful increase in the rental rates there. But as I mentioned, on Surveyor road, that asking rent is now over $14 for 100,000 square feet. And the stuff on South Service Road, I wouldn't be surprised it's going to be in that kind of vein as well. And anecdotally, you'll hear what a deal that's done at $15 or something like that. So -- but again, these numbers would have scared us 3 years ago, we said like, Oh no, who can afford to do that. And now it's like they're happy to get the space. And I think of the 13 million square feet that might -- is under construction. My number is somewhere in that 80% is already spoken for. So there's very little availability in the next 12 months that's even coming online that -- So we've got a couple that we still haven't leased and we're not in hurry to do it.
And then on Alberta, I mean, it seems like, at least from a Calgary standpoint, you've seen some pretty quick absorption of space there. Rent spreads were negative this year, but is the anticipation now that you're -- in the broader market are kind of getting to high 90s occupancy that rents will start to move accordingly?
Yes. And particularly on our segment that we're focused on the larger base stuff. So even if you look at the availability, which I think I saw about the most recently, it was like 4.5%, and that's come down by almost 60% in 12 months. The large base up would even be lower availability than the 4.5%. And so we're seeing definitely firming up there. And it's not the same kind of rental growth here and there, but it is now rental growth. And so we're not -- We're not in that defensive mode.We're in the -- One of the tenants I was talking about that was on our watchlist. I was convinced because I've been in this space and they would mean survive, and we just renewed their lease in Calgary on 20,000 square feet at a 15% bump in rent. So yes, so we're going to start to grow actually see some rental increases there. Dayna mentioned, we have excess density on our site. So we actually are starting to design and look at expansions of existing buildings, which we do probably more on a build to suit, we won't spec out there at this point. But we're not far away from potentially even building or adding on to some of our properties where we already have the land costs of some cost. So incremental building is not that much.Edmonton is a little bit more of an unknown there, but you've seen oil and gas prices Alberta is continuing to try to diversify their economy. And I think the prospects of population growth in Alberta is good. So there's still some backdrop of more positive than is yet to come.So we that's the 1 that we'll just kind of keep our eye on occupancy, and that will be the main goal. And then as that turns, we'll finally shift to rental rate growth out there. But again, our cost base on all those assets are really good. So we're comfortable if it takes a year or 2 to late.
Okay. Positive. And then, I mean, you're getting juicy rent spreads, you're increasing the annual escalators, but can you kind of speak to what you're doing on the CapEx recoveries front from tenants as well because I think you're in a beneficial position on that front as well?
I just want to be sure you extend the question. So recovery of capital from standard. . . .
yes, yes, we're starting to see more of that and putting in charges for capital programs in that and pushing back more on pushing things back to more towards tenants in that Yes.
So Matt. And we learned this in Summit because we operate our properties as a park. We're able to drive down and use the economies of scale to reduce those costs. And so we're already pushing down a lot of our chargebacks. So the tenants are already paying for things like maintenance staff and things like that, that we would use on our properties. And then yes, the newer trend now is in the leases to start to add allocations for capital replacement costs, whether it's roofs or HVAC or things like that. So yes, we're definitely -- when the lease comes it's not just what's the rental rate, it's -- we're not giving options, unless you pay for it. we're not spending capital unless you amortize it and this sort of thing. So we're -- it's restitution clauses if you leave, you have to put the building back this way and on and on and on in terms of other things you're doing as a landlord.
Okay. And last one for me, and it's a little bit more of a technical one, Ross. I think straight line rents came down sequentially. It was fairly elevated in the beginning of the year. Can you remind us what that would have really. . . ?
Yes. Thanks, Matt. Yes, overall, our net rental income went down slightly in Q3 compared to Q2. There's a onetime adjustment in Q2 on the straight line right. It was a 10-year lease that had a rental reset in -- during the year. So once you -- with the straight lining, right, you have to spread that averaging over the 5 years, so there's a catch-up in the second quarter. So it was a onetime adjustment for 1 tenant in the second quarter in that, which -- so now you're back down to what I consider a normal run rate for straight-lining event, which is little above $3 million a quarter in that.
The next question comes from the line of Sumayya Syed from CIBC.
Just to confirm on the Calgary recent acquisition on this day that's under construction there. What's the completion time line and when you see that becoming stabilized?
Yes. So the building itself is complete. They're in the 10 fixturing phase right now. The lease starts -- or the lease that's in place for 60% starts in February, and we're now actively marketing the balance of the space. And we have some interest from people, but the tenant has a right of first refusal, which I think, and we believe there's a good chance they are going to exercise that as well. So part of the building will be coming in to income producing in February and maybe the balance of the building a few months thereafter. But all of the same kind of market rents that we have in both buildings.
Right. Okay. And then just on the leasing side, I was wondering what kind of term you're getting on average on the new leases? And how that compares to your prior trend before the market got as tight as they have today.
Our new leases, there are at least 5 years that 7 to 10 years is typical on the new deals on renewals Paul has said in the past, we're comfortable with shorter terms, but we're averaging between 4 and 5 years. It's starts from 3-year deals and in a couple of cases, a little longer because the tenant if the tenant wants, has some requirements for some changes to the space a matter that we want us to put some money into the deal that we'll look for longer term. Typically, it's still around 5 years for renewals and 6 to 10 years on new deals.
It has to do with the amount of money we're saying. So beginning a new use, they may say, okay, we want this kind of office space, we want this, we want that and we're saying that's fine. So we're going to amortize it back in your lease. And in order to make that number sound a little more reasonable for them, it's easier for them to pay that off over a longer lease term. So we have a perfect example of this short-term lease strategy. There's a tenant American-based going from 5 to 1 renewal of a year went to 6.50, then they went to 7.70. And now they're back to the table 2 years later, and now we're talking mid-12s and stuff. So that short-term lease strategy pays off as well. So we're trying to be flexible in what the tenant looking for.
And just looking at the stats on our GTA renewals, they're under 5 years, which we're quite comfortable with, given the -- just around 3.5 years at the average on renewals on the GTA, which just gives us another kick at the can on those lease spreads continuing to grow.
Our last question comes from the line of Mike Markidis from Desjardins.
I don't know if there's any meat left on the phone here, but I'll do my best.
Mike, I have an answer. So if you want to ask this question, what's going -- what's going on with your tenants where you have expansion capabilities, that will be a good question. So then I would add answer.We're currently go ahead -- We're currently -- We're currently in discussion with -- just looking, I didn't answer that. 4 tenants now, 2 in Toronto and 2 in Montreal, each 1 in itself is not huge, but 40,000, 50,000 square feet. I think some as low as maybe 30,000 square feet on existing land. And in the past, you would say those kind of expansions are not very economical because you can't spread you or your construction costs over a larger GLA. But where land prices are now where these properties are located and where rental rates are, there's a significant return. So even if you're building at $150 a square foot, the hard cost of your lands are already at some cost, which could be over $100 square foot you're getting significant potential yield. So we have those 4, and I think we're going to start to put more color on that. And then clearly, the program is to go out whether it's Maple Leaf Foods, Volkswagen and the property we just bought in January, there's more and more of those opportunities. And I think as people are looking at their supply chain issues, as we talked earlier, even 40,000 or 50,000 square feet might be the answer for them. So we're starting to hopefully benefit from that program as well a little bit more.
That was a great question, Michael.
Just going to say you guys -- you read my mind, Paul, that's exactly what I was going to ask, thank you for that. all right. I just have maybe 2 quick ones here. I know Alberta is improving. You guys have been driving occupancy there, and I don't want to distract the positive stuff going on, but you still rolling down rents. Is that something that you foresee in your upcoming, let's say, 2022 and '23 maturities, that will start to abate in terms of being offset.
No. So that -- those lower negative rental spreads in the Alberta were -- it's a small sample size, but they were earlier in the year. And there is 1 large deal that was space, we knew the tenant was leaving when we acquired the property, and we didn't want the space back. It's a long-term deal, but the tenant has the option to take the -- do something different with this space, and there's a rental reset with that will bring it back closer back to what the expiry rent was. So a lot of those deals were in the first half of the year where our view on Calgary, in particular, has changed. We've got more positive. The other thing I'd point out is with regard to Edmonton, there's very little lease expiry in 2022. It's like under 100,000 square feet. So we're not going to see much pressure in Edmonton, and we're going to see improved occupancy there. So that's kind of.
Yes. So I think yes, we're kind of past it. So I would say, in the middle of the pandemic just -- you were just trying to reduce your risk exposure in a few situations, and that's what we did there.
Okay. I think there's recent deleasing that happened in 2 of your projects under development in Montreal and 1 in Markham. Did that NOI was that -- did that contribute to NOI at those 2 properties in the third quarter? Or were they all off?
They're off.
Montreal is.
Yes. Montreal is.
Yes. So the Toronto one -- and so that's a great question. So like we haven't answered that one. So the Kubota sale leaseback and they're still in there, and they've done a few extensions because they're building themselves a new location. So they're going to be in there until January or February next year, we can do a 60,000 square foot expansion, which we intend to do. At that point, we thought we were going to have to close down the property. We're going to redo some mezzanine or take out some mezzanine there. So we're going to redevelop the property. We now have 3 offers on the table, and all of them are talking about taking the building as is, to probably 2 months of downtime to kind of get it ready further and then kind of work with them, and they're occupying it while we do the 60,000 square foot expansion, which is different. For the Montreal one, that building is going to be demolished. So there will be no rental income until it's -- but we're taking a 40,000 square foot building and building 140,000. So we're adding 100,000 square foot of GLA there. So it's worth the downtime.
And that was out in the quarter.
Yes, that was and that will be at least for another year.
Okay. So Kubota still in there, Montreal that wasn't in Q3 and is going onwards.
Yes. So in the Kubota one, that's a pretty big building. So if we do it in a way where we're going to expand and then release it, there'll be some shortfall in ramp for a period of time. But the good news is it looks like from the people we're talking to, they're so desperate for space, they're prepared to. We've been a home rental while we're spending the building by 60,000 square feet, at least use the existing building.
Okay. Last one for me. Just with the Montreal compression, the cap rates and the market is starting to heat up there, can you just remind us -- it's probably just a combination, but are you guys using more of a DCF valuation coming out with an overall cap rate? Or is it just adjusting cap rates down? And the reason I ask that question is I'm just curious how your rent growth expectations have changed if you are doing a DCF Montreal.
So yes, the continuation of that Montreal valuation question, that is part of the -- is the rental rate growth is pushing the value and we are -- for particularly the GTA and the Montreal portfolio, more heavily weighted towards the DCF method because that's capturing that rental rate growth on a go-forward basis. So it is the predominant valuation metrics that's being used.
Yes. And the discount rates are starting to potentially change as well as there's more visibility to that rental rate growth.
And that concludes our question-and-answer session. I will now turn the call to Mr. Dykeman. Sir, please go ahead.
Okay. Well, thanks, everyone. Lots of great questions and discussion this morning. We'll talk to you again at the end of the year, so in early February. So thanks again, everyone.
This concludes today's conference call. Thank you for participating. You may now disconnect.