Summit Industrial Income REIT

TSX:SMU.UN

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to the Summit REIT First Quarter 2018 Results Conference Call. Please be advised that this call is being recorded on Wednesday, May 9, 2018.I would now like to turn the meeting over to Mr. Paul Dykeman, Chief Executive Officer. Please go ahead, Mr. Dykeman.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Thank you. Good morning, and thank you for joining us today. Joining me as usual is Ross Drake, our Chief Financial Officer.Before we begin, let me remind everyone that during this conference call, we may make statements containing forward-looking information. This forward-looking information is based on a number of assumptions and is subject to a number of known and unknown risks and uncertainties that could cause the actual results to differ materially from those disclosed or implied. I direct you to our earnings release, MD&A, and other securities filings for additional information about these assumptions, risks, and uncertainties.2017 was a year of accelerated growth for Summit as significantly increased the size and scale of our property portfolio, diversified into a new high-yielding asset class and increased our presence in our target geographic markets. These strategic investments drove record results for the year.Our growth last year has contributed to another period of record performance in the first quarter of 2018 as we benefited from the full period's contribution of our acquisitions made in 2017, and all of our key performance benchmarks were up significantly. And Ross will shortly provide more details on our very strong Q1 results.In 2017, just to remind people, we acquired a total of 31 properties for a total purchase price of CAD 410 million at a very strong overall cap rate of 6.2%. Our growth last year was funded by 3 equity offerings for gross proceeds of CAD 218.5 million and CAD 209 million of new debt financings. And, most importantly, total assets have now grown to over CAD 1 billion, which was a significant milestone for Summit, too.Our focus on the vibrant GTA and Greater Montreal markets continues and today approximately 60% of our portfolios is well located in the GTA, with another 22% in the Montreal region. This focus allows us to capitalize on the very strong fundamentals in both these markets. Both are experiencing low availability and vacancy rates, with absorption outpacing new supply. And we will capture increased operating efficiencies and economies of scale as we continue to build those 2 portfolios.As Ross will discuss, our same-property NOI, which we're now recording in these 2 markets, is very strong. The GTA was up 5.9% and Montreal 8.2% year-over-year. In addition, our lease renewals so far this year in the GTA are showing great results and we have rents that are 19% higher than over the expiring rents. And we believe these solid rents will continue going forward.In late December last year we further strengthened and diversified our asset base with the establishment of a joint venture relationship with Urbacon, Canada's most experienced developer and manager of high-yield data center properties. We now have exclusive rights to participate in all Canadian data center programs going forward with Urbacon.We completed our first transaction with Urbacon in December with the purchase of 50% interest in a brand new, purpose-built 10-megawatt center in the GTA and in the provision of a mezzanine loan to Urbacon relating to a recently completed data center in downtown Montreal. And we have an option to convert this loan into a 50% ownership once the property is stabilized.We also extend working capital loans as they begin to do the development work to get the additional data centers up and running in the Richmond Hill Park. And looking ahead, we expect this data center program will represent about 10% to 15% of Summit's balance sheet over the midterm.Despite our significant growth in 2017 we continue to maintain a strong and conservative balance sheet. We recently took another step to strengthen our financial position. Yesterday we announced a sale of a 75% interest in 4 properties, mostly outside our target geographic markets. The sale will generate CAD 46.4 million in net proceeds, which we'll recycle back into future acquisitions in our key target markets.The property sales generated a CAD 6.8 million realized gain and as a result we declared a CAD 0.018 per unit special distribution payable to unitholders on May 31, 2018. And this is the second special distribution that we've done, which is another example of our commitment to enhancing unitholder value over the long term.In summary, following our record year in 2017, our strong performance continued in the first quarter, and we look forward to growing through the balance of the year.I'll turn things over to Ross to go through the details.

[Ross Drake, Chief Financial Officer]

Thanks, Paul.As Paul mentioned, a significant increase in the size of our property portfolio over the last 12 months had a very positive impact on our results for the first quarter of 2018. Revenues were up almost 65% for the 3 months ended March 31, the result of the contribution from our 2017 acquisitions, continuing near-full occupancies and higher monthly rents.Looking ahead, our current 1.4% annual contractual rent increases will contribute to our organic revenue growth going forward. With this growth and our continuing focus on efficient property management, NOI was up 74% in the quarter to CAD 14.8 million.We were also pleased to have generated solid growth in our same-property NOI in the quarter compared to last year's first quarter overall same-property NOI was up 2.7%, driven by very strong growth in the GTA of 5.9% and 8.2% in Montreal, both due to increased occupancy and higher contractual increases in rent. These were offset by decreases in Edmonton and Cranbrook, B.C. due to a vacancy in 2018 in each of those markets.With the growth in revenues and NOI our FFO rose a very strong 75.7% to CAD 9.7 million, up from CAD 5.5 million from last year's first quarter.As Paul mentioned, with the 3 equity offerings last year our per-unit amounts and payout ratios were impacted through 2017 by the increase in units outstanding and the time it took to fully invest the funds in purchasing income-producing properties. However, in the first quarter of 2018 we returned to our track record of accretive growth as FFO per unit was up 5.8% compared to last year's Q1, despite the almost 68% increase in the weighted average number of units outstanding. Our payout ratio also strengthened to 89.1% from 91.1% from last year's first quarter.Our proactive and successful leasing program continued through the first quarter as we completed over 180,000 square feet of lease renewals and approximately 41,000 square feet of new leases, for a total of just over 221,000 square feet compared to 42,463 square feet in last year's first quarter. Our lease renewals start on average 8.1% higher than the expiring rent.Looking at our key GTA market, where approximately 60% of our portfolio is located, renewals were 19.1% higher than the expiring rent. We have stated in the past that the GTA would see higher rents due to strong demand and low supply, and we believe these renewals are just the beginning of this trend. With the strong leasing activity last year through the first quarter of this year, our renewals have resulted in a very strong 84% retention rate, a key objective of Summit.Our balance sheet and liquidity position remained strong at quarter-end, with a 50.3% leverage ratio. The average leverage ratio through the first quarter was 51.3% compared with 50.5% last year. Acquisition capacity was approximately CAD 161 million at March 31, which would bring the portfolio average to approximately 57%.Our weighted average effective interest rate was 3.62% at March 31, with a weighted average term to maturity of 4.9 years. Debt service and interest coverage ratios also remained strong and stable at March 31.Total assets rose to just over CAD 1 billion at March 31, the result of our accelerated growth and a CAD 16.9 million fair value gain recognized in the quarter, primarily the GTA properties due to increasing market values through the region.During the quarter new mortgage financings of CAD 88 million was obtained, with a 10-year term and an interest rate of 4.1%. Proceeds of the new mortgage financing and the balance from our revolving operating facility were used to repay the CAD 90 million nonrevolving bridge credit facility obtained to acquire the properties last December. Importantly, the new 10-year financing increased the weighted average term to maturity from our mortgage portfolio by a full year, further enhancing the stability and predictability of our cash flows.Thanks for your time this morning. I'll turn things back to Paul to wrap up.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Thanks, Ross.So looking ahead we believe the significant increase in the size and scale will bring significant and lasting benefits to our unitholders over the long term. First, the accelerated pace of growth that we saw last year will continue to generate very strong growth and accretive growth through the balance of 2018 as we realize the full year's contribution from those new acquisitions.We also expect to continue our pace of accelerated growth. Our pipeline of potential acquisitions remains strong and we're evaluating a number of new opportunities and will add to our cash flows in the coming quarters. And some of those opportunities that we're looking at in the GTA come with excess land, so it will be Summit's intention once we close on those particular properties to do some on-balance-sheet development in the GTA.We were also very pleased to establish our new partnership with Urbacon. Our initial investments in the space are performing very well. We look forward to transitioning our mezz loan into ownership of the downtown Montreal facility once it's stabilized. And we've also issued a working capital loan to Urbacon to contribute to further growth of their GTA campus where our first property investment has been made. And as I said earlier, we're looking and talking to Urbacon now about additional data center development opportunities.We believe our organic growth will continue as we capitalize on the strong fundamentals in the light industrial sector in our key markets. Our properties are essentially occupied and we have built-in contractual steps of 1.4% that will add to the stability and sustainability of our cash flows going forward.As Ross mentioned, our same-store NOI growth has been exceptionally strong in both GTA and Montreal, and we believe these vibrant markets, where vacancies are at an all-time low that we haven't seen in over 40 years, will continue to see escalating rental rates for the foreseeable future.Finally, we'll continue to leverage our network, our joint venture partners both in Toronto and Montreal, to acquire new properties as well as additional development and redevelopment projects. And we believe we will see more of these innovative growth programs in the quarters ahead.In summary, we look forward for another record year in 2018. With continued strong industry fundamentals, best-in-class properties and a proven management team with decades of experience, we believe we are well positioned to deliver increasing value to our unitholders over time.Thank you for your time today. Operator, I'm now prepared to -- we'll take questions, please.

[Operator]

(Operator Instructions) The first question is from Brad Sturges with Industrial Alliance Securities.

[Bradley Sturges, Equity Research Analyst]

Thanks for putting in the same-property disclosure. And I guess my question first relates to that in terms of guidance. I think historically you've talked about 2% to 3% same-property NOI, and obviously Q1 was at the top end of that range. Given what you're seeing from a rent growth perspective, particularly in the GTA, do you have any thoughts on what that growth could look like for 2018?

[Ross Drake, Chief Financial Officer]

So those rental increases, the impact of those really will be mostly felt in 2019. Because a lot of those renewals that are down there will take effect in Q2, Q3 in that. I had a look at it and it will stay in that 2.0% to 2.5% range for the balance of the year on that, for those same-property NOI. And I'll point out again that we're only talking about, like, 60% of the portfolio really makes up that number. But it's a good indicator of how things are going, but it doesn't really register the full impact of the growth in our portfolio [ mat ] year-over-year. But between that 2.0%, 2.5% for that group of properties on that is what we're looking at for the balance of the year.

[Bradley Sturges, Equity Research Analyst]

And the leases that haven't taken effect yet, I guess that kind of hits on a balance effect over the next 2 to 3 quarters.

[Ross Drake, Chief Financial Officer]

I'm sorry?

[Paul Malcolm Dykeman, CEO, President & Trustee]

The renewals that we've done have...

[Bradley Sturges, Equity Research Analyst]

The renewals that you've done that haven't actually -- weren't effective in Q1, how does that -- when do they become effective, essentially, in the balance of the year?

[Ross Drake, Chief Financial Officer]

I think late Q2 and early -- and Q3 is the majority of them in that.

[Bradley Sturges, Equity Research Analyst]

Okay.

[Ross Drake, Chief Financial Officer]

So you'll see some of that pop from those as well, but over the year it's going to have a 4- to 6-month impact on the same property NOI. Yes.

[Bradley Sturges, Equity Research Analyst]

And with the 2 small vacancies out west, any update there?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. The one at Edmonton's really hard to lease, the 39,000. We've done some work to make it look a little -- painted the outside cladding. We've fixed up the yard, which is a gravel lot. We've put incentive programs in place. And Edmonton's still a little bit behind Calgary. Calgary market is definitely stabilized. We're seeing positive absorption. Edmonton has just been a bit slower. Sigma is now taking over the property management for Alberta in house, so we've hired a person just in the last 30 days. So as I mentioned last quarter, our VP of Asset Management is telling me we're going to be 100% at some point later this year. So we'll get there. And the one in B.C. we've had a few different offers. It's very small. It's 8,200 square feet. And we're also -- once we've leased or stabilized those we'll be trying to sell those as well, the ones in B.C.

[Bradley Sturges, Equity Research Analyst]

Okay. I guess switching gears, you touched on the acquisition pipeline a little bit and the opportunity potentially in the GTA. Just wanted to try and get a little bit more color as to what the opportunities are in the market, how you're finding pricing. And as you talked about, there's some development opportunities. So just trying to get a little bit more context as to what -- how that could look like.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. And no question after the Blackstone privatization bit of up here industrial vendors were -- already had high expectations. I would say there's continuing to be pressure on prices and lowering of cap rates in the GTA. We've got a couple properties under contract we're doing due diligence on now, which I mentioned have some excess land, which would be in that CAD 900,000 to CAD 1 million an acre. We could do some small developments there. And those 2 were off, kind of off-market deals. But we've lost out on a couple options. There's a few more properties coming to the market shortly. But the strategy is going to continue to try to maintain, if not increase, that 60% in the GTA. And in order to do that we need to have some accretiveness, either from Montreal, Alberta or the data center program. Because in order to be competitive in the GTA, the ingoing yields will not be accretive for Summit on its own. But we'll look at the most important criteria to figure out what we're going to do in terms of overall return, so replacement cost. I've mentioned it before, there's been a significant acceleration of replacement costs going up by over 10% a year. And we're still seeing that additional pressure. So if we can buy properties -- and the number keeps going up. We bought the Morguard ones for about CAD 98 a square foot and we could sell those for probably close to CAD 150 a square foot today. And new replacement cost numbers are probably pushing CAD 150 a square foot. But we've heard other examples where people are doing some industrial condominiums and getting CAD 250 a square foot from end users on small space. So the market has definitely heated up and we're finally -- the mystery of what's going to happen to rental rates. They need to push up. We're finally starting to see that in our own portfolio. So we have lots of tenants in our portfolio that need expansion space. Basically there's nowhere to go. So it's a very, very tight market, though we don't see a major explosion of new development because of the lack of land and the cost of land and development charges. So we think this tight market is going to continue for the foreseeable future.

[Operator]

The next question is from Mark Rothschild with Canaccord Genuity.

[Mark Rothschild, MD & Real Estate Analyst]

Maybe in regard to your comments about Toronto, it sounds like it's hard to find properties that are attractive going-in cap rates. Maybe you could explain just in a little more detail why you still want to maintain that 60%. Is it because you're still buying at a good price per square foot or [indiscernible]

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, it's all about price per square foot. So if we can buy at numbers that are below replacement cost and we have to put up with a couple years before we can start to roll over the rents -- we're seeing now close to 20% bumps in some of our renewal rents, which is usually harder to get. I think on new developments, how few there are out there, they're really going to start to set some rental rates that we haven't seen here in a long time. So I think on new developments, to start seeing rents at CAD 8 and above is not going to shock me, when we're starting to see mid-6s on older product and that sort of thing. So, yes -- no, we do think everything about land prices here and development charges is just going to keep forcing that accelerated growth of replacement cost number. So wouldn't shock me that replacement cost number in 5 years is CAD 175 or something.

[Mark Rothschild, MD & Real Estate Analyst]

So it's fair to say you're willing to sacrifice a couple years of no accretion or maybe even minor dilution from Toronto because long term this is where you're going to get the rent growth.

[Paul Malcolm Dykeman, CEO, President & Trustee]

You're going to get the rent growth and you're creating that platform with industrial. And talk about this over the years. Right now we're going to buy a couple properties with some excess land. We can build probably 160,000 square feet in one location, about 90,000 in the other. We have tenants in our portfolio who are saying, "I need 50,000; I need 60,000 square feet." So that's the program. The more you can build up that critical mass you have that built-in growth within your own tenant base. So, yes. So the short answer is, yes, we're prepared to do that. Now, we want to make sure the REIT overall is still working in an accretive way overall and that's why we want to balance that out, which we've done over the last 5 years of buying some in Montreal with higher cap rates, buying a little bit in Alberta. And now we have the data center program adding more accretive type of deals.

[Mark Rothschild, MD & Real Estate Analyst]

Thanks. My only other question is just in regards to asset sales. Can you give a little more color on motivation for divesting those assets that you sold -- that you announced?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Sure. This is the third time we've done it. It's the same partner that we sold down a 75% interest in the past. So we're building out that partnership. The ones outside of the GTA were the ones that we were wanting to sell down in order to kind of make that package work. We included one property in the GTA here to do that. There's 3 other properties that we've -- 2 of them in the West and another one in Ontario that we're continuing to look at. The total of those is probably about another CAD 10 million. So I think we've done most of the capital recycling. But when you own a property in a Brockville, we're not going to continue to build up any properties or portfolio there. So we wanted to sell down our exposure to those geographic locations.

[Operator]

The next question is from Troy MacLean with BMO Capital Markets.

[Troy Raymond MacLean, Analyst]

I just wanted to circle back on rent growth. Very solid in the GTA in Q1. I'm just trying to understand what was different in Q1 versus last year. Like, are you seeing the other landlords in the GTA getting more aggressive on rent growth?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Well, I think it's -- yes. The answer is you're starting -- it's taken a while to pull the tenant -- the brokers to say, "CAD 5.50 rent is not market anymore." And it's not CAD 5.75. It's CAD 6.25. It's CAD 6.50. And basically we played hardball. Ross and I went out and met with all of our staff. Their job is to keep tenants happy, keep them in place, keep occupancy at 100%. And we're kind of saying, "It's okay to ruffle the feathers. Use Ross and I as the bad cop here. But really need to push them." And particular, a couple of these renewals, they weren't sure if they wanted to do 5 years. We just said, "Here's what it is, 3 years as is." And they went away for 3 months, looked around, realized they didn't have a whole lot of options, came back and said, "Okay, I'll do the deal." So that's kind of -- that's going to give you some more confidence to push that next tenant, that next tenant. And another example we have today is 2 tenants -- 1 needs to expand by 50,000 square feet. Another tenant who desperately doesn't have an option to stay, but is in 50,000 square feet and we're saying, "Make us an offer," and we'll take the highest of the 2. But when you talk to them their existing rents are, say, CAD 5.25, they go, "Okay, well, I could pay CAD 5.50." And we're saying, like, "No, no. You have to start, like, at CAD 6.25 or CAD 6.50 for us to even consider it." So it's still taking time, but all of the signs -- when you send a tenant and say, "It's this or go and try to find space," it's a real eye-opener for them when they go out. And they go, "Really by the time we find a space, it's not quite right. Maybe the rent -- the savings, the cost of moving -- all those are compelling reasons for them to come back. So we're ruffling a little bit of feathers here but I think it's time. And then if we do it, Orlando's doing it, a few other landlords, all of a sudden the brokers are kind of the ones that are using brokers to help with renewals or finding space, they're just saying, "This is what you need to do." So the tenants that really need to expand their business, they're profitable, they're just going to have to cough up for the new rent. That's why we want to do some development. Because I think from the people that we're talking to, you wouldn't even set a rent. You would just basically let the market decide and who's ever going to pay us the most rent that's who we're going to lease it to. So we're excited to get a few small developments underway to really test the market, because I think that's when you'll get the maximum rent, when that brand new space for a tenant that has been looking around for a year and they can't find anything.

[Troy Raymond MacLean, Analyst]

So it sounds like you can get more aggressive on pushing rents, but it shouldn't impact your retention ratio because the tenants really don't have any other option.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Exactly. And in some cases we're confident if you do lose the tenant -- in the past I've had that discussion, well if you lose the tenant and then you have some downtime for 3 months or 4 months and you're only picking up an extra CAD 0.05 or CAD 0.10, the math doesn't work out that well. But I think right now if a tenant's in there at CAD 5.25, we're saying, "If they're gone we'll start asking CAD 6.75 or CAD 7.00 rent." So I think there's more upside if we do lose the tenant. But we made 86%, 84% retention -- it's still going to be a big number. Because, like I said, tenants desperately want to keep their space, let alone the ones that are looking at expanding. And same thing in Montreal, we've had tenants coming to us that need expansion space. So we're also talking to our partner Montoni there, looking at 2 situations where tenants are -- might do some build-to-suits. Luckily, in Montreal we have access -- or Montoni has more land and we have more options to be able to build. But in Toronto those are very, very limited.

[Troy Raymond MacLean, Analyst]

Does Montoni have much that you think you'd be able to from this year, outside of those build-to-suit that you just mentioned?

[Paul Malcolm Dykeman, CEO, President & Trustee]

We're working with them. We bid on a competitive package. We didn't -- we came in third on something with him. He's got some other properties that he owns on his own balance sheet or with other partners that we're trying to pry away. So I'd like to think that we can do something. But right at this moment I time we don't have visibility. But there's great momentum in the Montreal marketplace. And as you can see, the same-store NOI is even higher there. Rental rates are already much higher than they are in Toronto. So lots of positives there.

[Troy Raymond MacLean, Analyst]

And I know in the past you've looked at early-renewing some expirees. And 2019 is a big year. Are you probably more disposed to right now letting the 2019s -- letting the rents rise before you attack the 2019s? Or could you do some early renewals?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Well, we're being selective. So I think the one -- there's a couple in Montreal that we would be more interested to try to nail those ones down earlier. And I'd have to say -- I don't know if I want to say this on the call, but I will. But the tenants that have options, we're not contacting them. So it's better in our case where a tenant wouldn't exercise that option. Then we have control over the space. So, yes, so we're not being -- and some tenants are saying, "We don't know what we want to do." We're just saying, "Okay, well, we'll renew you for 2 years." Because we're more than comfortable that in 2 years the rents are going to be even that much firmer, so.

[Ross Drake, Chief Financial Officer]

And all those options are at market --

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes.

[Ross Drake, Chief Financial Officer]

-- not at fixed rents, so.

[Troy Raymond MacLean, Analyst]

Oh, so you have no fixed rent renewal options for the tenant.

[Paul Malcolm Dykeman, CEO, President & Trustee]

No, not anywhere in the portfolio. Yes. So when tenants -- in one of our renewals that's remaining this year, the tenant has exercised his option to renew, but we're having that dialog now on what the rental rate is going to be. And, again, it's a lot of work and education to -- where the tenant wants to be and where we believe, if you ever went to an arbitration where rents would be determined [ indiscernible ].

[Operator]

The next question is from Chris Couprie with CIBC.

[Chris Couprie, Analyst]

When you think about your potential on balance sheet development, how much of the balance sheet could you envision Summit having? And when you're looking at these acquisitions with land, what are some of your underwriting assumptions in development right now?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Okay. So I mean, these 2 together would be about 250,000 square feet. So you're probably CAD 25 million to CAD 30 million all in. As I mentioned, when we are evaluating this we're allocating about CAD 850,000, CAD 950,000 an acre, which in today's pricing is a deal out there. Development charges, depending if you can get any grandfathering, are going to be CAD 25 a buildable square foot. So we think you're -- and it's very selective in terms how big the bay sides are going to be, how much demising walls you're going to put in. But your all-in price per square foot will probably be a minimum of CAD 130, but could be as high as CAD 145 a square foot. The rents is the unknown. So I think we would have said CAD 6.50 or CAD 7.00 when we were thinking about it 6 months ago. And now I'm thinking much higher. But we don't know. I think we want to test the market. The yield on cost is still not going to be something that you're going to go, "Wow, that's fabulous." If you get to 5 3/4% or 6% yield on cost you might say, "Okay, I'm pretty happy." Doesn't sound like a REIT development spread. But I'm also confident we could turn around and sell those properties probably at 4 to 4.5 cap. So the development spread is there, even though the yields on cost. But you're upgrading your portfolio. You're building exactly what you need. You're accommodating your tenants. So there's lots of things. And we'll be using Urbacon as the contractor. They won't be an equity participant in these developments but they're a very, very good builder that we've used in the past. So we have that benefit from the joint venture that we have with -- on the data centers.

[Chris Couprie, Analyst]

There was a fairly large portfolio in Montreal that transacted 900,000-plus square feet. Did you guys take a look at that?

[Paul Malcolm Dykeman, CEO, President & Trustee]

No.

[Operator]

The next question is from Mike Markidis with Desjardins.

[Michael Markidis, Real Estate Analyst]

I'll apologize ahead of time because I did miss your opening comments, unfortunately. But a couple more granular comments if you're able to provide the disclosure would be great. Fourth quarter -- or sorry, first quarter -- are you able to provide the NOI contribution from DC1?

[Ross Drake, Chief Financial Officer]

We've provided segmented information in our financial statements.

[Michael Markidis, Real Estate Analyst]

You did. Okay, my apologies. I missed that. Thank you.

[Ross Drake, Chief Financial Officer]

So I don't have the number right here in front of me.

[Michael Markidis, Real Estate Analyst]

No, that's great.

[Ross Drake, Chief Financial Officer]

But it's right there in the financials. There's segmented information there.

[Michael Markidis, Real Estate Analyst]

That's great. I'll dig into that then. And then, secondly, just with the package of assets that -- the 75% interest that you're showing, did you happen to identify exactly what properties those were? I mean, Brockville…

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes.

[Michael Markidis, Real Estate Analyst]

We can get to and…

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. I mean, yes, it's the one in Brockville, the one that we just picked up in the Morguard portfolio, which was in Ottawa.

[Ross Drake, Chief Financial Officer]

Canotek, yes.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. There's Canotek. And then there's a property in Laval. And then there's one in the GTA. But did we [ identify ] the GTA property? I don't think we did.

[Ross Drake, Chief Financial Officer]

No, we didn't put the addresses. Yes, but it will become...

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. So it's the one in Oakville that Ford is the tenant in.

[Michael Markidis, Real Estate Analyst]

Okay, great. And the square footage that you identified, was that at the 75% interest? Or was that at 100%?

[Paul Malcolm Dykeman, CEO, President & Trustee]

That's at the 75%.

[Michael Markidis, Real Estate Analyst]

At 75%, okay. And then just in terms of valuation metrics, did you guys disclose what the cap rate was on the sale?

[Ross Drake, Chief Financial Officer]

No, we did not.

[Michael Markidis, Real Estate Analyst]

No. Okay.

[Paul Malcolm Dykeman, CEO, President & Trustee]

No. But it is interesting to note -- and this is part of the $16 million bump up in the IFRS value -- so this was a realized gain, a net gain, of CAD 6.8 million. And that was about 15% above what the IFRS would have been at December. So we booked that as part of that CAD 16 million fair market value adjustment. It really goes to we've been having these discussions on how you value and what's our true underlying NAV. We've gotten a significant amount of our properties appraised last year. But appraisals are still lagging where transactions are happening. So this was another good example of a real life -- a buyer that's only buying a 75% interest, which is you're not going to get top dollar for that.

[Michael Markidis, Real Estate Analyst]

Sure.

[Paul Malcolm Dykeman, CEO, President & Trustee]

You're still showing 15% above the average IFRS value that we had it on the books.

[Michael Markidis, Real Estate Analyst]

Okay. And the CAD 6.8 million, the realized gain, just to make sure I'm clear, when you say realized gain, that's over the historical cost, correct?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Correct. Yes. It's also the IFRS value. But because we -- because of IFRS -- so this is the gain that we think of that we've made. Then we -- when you'll see the quarter results next quarter, you're not going to see a gain, because it's been reflected as part of that CAD 16.9 million [indiscernible]

[Ross Drake, Chief Financial Officer]

On the financial statements, you won't see a realized gain on the sale. It's already reflected in the IFRS fair value increases. But the CAD 6.8 million is, correct, based on the historical cost.

[Michael Markidis, Real Estate Analyst]

The historical, not the carrying value at 1Q.

[Ross Drake, Chief Financial Officer]

That's correct. The historical...

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. Most -- yes, it's historical but when we bump up the IFRS value on these, it's CAD 8-plus-million dollars on the whole thing. But CAD 6.8 million is still the -- it's roughly the same amount above the IFRS as well.

[Michael Markidis, Real Estate Analyst]

Right. And the CAD 8 million is embedded in the CAD 16 million.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. Correct.

[Michael Markidis, Real Estate Analyst]

Okay, great. And then just lastly, in terms of assumed debt, I'm just trying to get a sense of what that sale will do for your liquidity. Are you able to provide a bit of additional color on that?

[Ross Drake, Chief Financial Officer]

It would be in the mid-40s after these sales of that.

[Paul Malcolm Dykeman, CEO, President & Trustee]

We've got one property that we've announced, which is the Samsonite acquisition. As I mentioned, we've got 3 other properties that we're doing due diligence on which add up to about just around CAD 100 million. So yes -- so we're going to try to operate where the target would be in that 50% to 55% range.

[Michael Markidis, Real Estate Analyst]

On the leverage side.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes.

[Ross Drake, Chief Financial Officer]

Yes. So the goal is to close those in the second quarter and then our leverage would be back in the low 50s after that.

[Paul Malcolm Dykeman, CEO, President & Trustee]

And some of these properties were used as security on the line. So we're going to have to replace that. And one of the decisions we've made, we're going to look at increasing our lines of credit, now that we do larger offerings. And I think our existing line of credit was about CAD 65 million. We'll look to push that up to closer to about CAD 90 million or CAD 100 million on a go-forward basis, just to give us that additional flexibility for buying properties. Because right now the more competitive you can be on conditions when you're buying just gives you that other advantage. So if you get comfortable with the environmental and physical, but if you don't have any financing conditions that's just an added benefit.

[Michael Markidis, Real Estate Analyst]

Makes sense. And then just last one before I turn it back, and if you don't have it at the tip of your fingers you can always just follow up. But do you happen to know the amount of assumed debt? I realize a couple of the properties have security on the line, but what the assumed debt would have been on the CAD 46 million?

[Ross Drake, Chief Financial Officer]

They're all free and clear. It's one small loan that we've paid out.

[Michael Markidis, Real Estate Analyst]

Okay.

[Ross Drake, Chief Financial Officer]

No assumed debt.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes.

[Michael Markidis, Real Estate Analyst]

So it's all free and clear. Okay.

[Ross Drake, Chief Financial Officer]

There's a $5 million mortgage on one property that's -- it's paid off. Yes.

[Operator]

[Operator Instructions] The next question is from Matt Kornack with National Bank Financial.

[Matt Kornack, Analyst]

Just quickly, I'm interested in the GTA is it possible to get a bit of a higher cap rate on assets with longer-term leases or even a sale/leaseback? Or is the euphoria to a point that people are paying cap rates on long-term leases as well? Or low cap rates, I should say.

[Paul Malcolm Dykeman, CEO, President & Trustee]

They're paying low cap rates on everything. But we try to look through that and try to see where the value is. Some of these properties where they have excess land, [ both ] said we can do brand new buildings. But some of the -- one of the buildings we can expand by about 40,000 square feet. So you're just looking at every possible way to try to come up with a little bit of a value-add edge. But what's really pushing some of the numbers in terms of cap rate has nothing to do with cap rate. It has to do with those end users. Those end users that we're talking about in our portfolio that need 50,000 or 100,000 square feet, they'll just turn around and try to buy a building at a number. Could be 150,000 at CAD 60 a square foot, whatever it is. They're not looking at it as what the rent is. They'll go finance it 75%. And they're able to secure the space that way. So when we look at it and say, okay, if we thought a rent would be CAD 6.50 on that, we'd say, "Well, that's a 4.2 cap rate," or something. So those are the ones, the one-offs that are definitely a disruptor in the chain here. So there's just pressure everywhere you look. So looking at sale/leasebacks, looking at properties where maybe we can convince the vendor taking back Summit stock might be a good thing. So we're looking at every angle that we can to try to be competitive.

[Matt Kornack, Analyst]

Okay, interesting. And then not a ton of maturing space this year, but a little bit more next year. Would you say the rent dynamics in terms of what you were speaking to in terms of upside and leasing -- and I don't know where exactly those properties that aren't maturing would be, but similar type dynamics where you're going to start to see some pretty positive numbers there?

[Paul Malcolm Dykeman, CEO, President & Trustee]

It's kind of [ 2 paths ]. So a lot of it's going to be the similar dynamics. But there's 3 kind of outliers. One of them is in [ Derry ]. That's probably the one we were talking about doing a shorter-term lease until that building can be expanded by about 80,000 square feet. But we're working with the tenant whether that building is going to be able to accommodate them or [ reset ], do a build-to-suit. So we might do a shorter-term deal and give them a bit of a break or a way to move from that property to another build-to-suit. And then there's 2 in Montreal, where the rents, or better rents, are sub-5. So they're very low. So those ones are probably the tougher ones to tell today where we're going to get, because they're not in the GTA. And they're kind of particular users there. But the GTA stuff is -- it's a fun time to be a landlord in a GTA environment. So, like I said, we're not telling -- if they have options we're waiting. It's usually 6 months prior to the expiry that they need to exercise the option. If they don't then it puts us more in the driver's seat and you don't have to get into this negotiation and debate on what everyone thinks market rent is.

[Matt Kornack, Analyst]

And it sounds like, at least from conferences that we've attended, that Montreal there's been a fair bit of cap rate compression there as well. Rents are starting to depart from their 20-year, CAD 5 level.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, but...

[Matt Kornack, Analyst]

But I guess if that's the case, there's some value creation in Montreal, I mean, do you start to look into Calgary as well in a more meaningful way for longer-term secured leases there?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, we're looking in all those markets. So one in -- we have a real live example that we did on a property 2 years ago on an off-market basis. We were debating with the vendor at that time. We were bidding 6.75 to a 7 cap and I think they were looking for 6.5. They ran an auction this year with better information. We got into a second round. We ended up third and the building traded I think at close to 5.75 cap. So with 6 years left on the lease, rents are in the 4s, but I think people are saying, "We're willing to wait 6 years because we think that rent is going to go from CAD 4.70 -- CAD 4.50 to CAD 5.50 or CAD 6.00 and stuff." So they're seeing above-average rental growth. So someone was prepared to make that bet even though it's, like, a 6-year bet. So one of the properties we are in due diligence on is in Calgary. And as I mentioned, we would be more than happy to buy in particularly Calgary, but Calgary and Edmonton, more. But there's just not a lot of product that's trading hands out there. Just it's sitting in very strong hands so the volume of transactions is quite low. But surprisingly -- I was in Calgary last month and there's lots of new building going on. The price per square foot to build out there is much more reasonable. But rents, they're still getting CAD 8 to CAD 10 rents on brand new buildings, which economically give you better development yields than what you would see in either Toronto and Montreal. And Montreal's not bad, because you're getting the same, if not a little bit better, rental rates, but your replacement cost numbers in Montreal are going to be in and around CAD 100, low CAD 100s a square foot. So the Toronto replacement number is the one that's really taken off. And our estimation, to get the market back to 5% vacancy you'd need to be building about 40 million square feet in the GTA. And that's just not going to happen.

[Matt Kornack, Analyst]

Right. So...

[Paul Malcolm Dykeman, CEO, President & Trustee]

Because it's just -- there isn't that much land that you could put into use. And the small pieces of land that you could find here or there, the vendors are just asking exorbitant amounts of money. So you'll see land being offered out at CAD 1.5 million, CAD 1.8 million an acre. So it's a crazy time.

[Matt Kornack, Analyst]

And just for reference what would be a similar price for land in Montreal at this point in nodes that you'd want to be in? And are development costs as big of an issue there as well?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. I mean, in Montreal this one had some excess land. And I think at the end of the day we were bidding somewhere around CAD 550,000 to CAD 600,000 an acre. And development charges, I don't have the exact number, but it's under CAD 10. I was going to say it's somewhere in that CAD 5 to CAD 7 a square foot. So, yes, very different dynamics. Those are the 2 big drivers of what's causing trauma, the tilted over the head. So with CAD 1 million an acre and the CAD 25, you're already CAD 55, CAD 60 a buildable square foot before you put a shovel in the ground there.

[Matt Kornack, Analyst]

Okay. That's very interesting. Last question. With regards to the data center platform, any sort of updates there in terms of expansion potential and leasing, et cetera, in both Toronto and Montreal?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. On Montreal there's lots of interest. It's a 9-story and we can lease them out on a store-by-store basis and customize them. We've been talking to a couple tenants that are looking at the entire building. And so we're kind of putting off doing the smaller leasing to see if we can't land one of the bigger players. So I think we'll continue that strategy for another quarter or 2 before we might open it up to the smaller deals. In Toronto we're very confident that things are going to start to accelerate here pretty good. Our tenant in the DC1 has an option to take the balance of the building and they need to exercise that by the end of May. We haven't seen that done but we're very confident that's a highly likely event, that they will do that. Then it will take about 4 to 6 months to [ outfit ] the balance of the building, so they would be essentially paying rent on 100% towards the end of the year. And we've already -- or our partner's already announced he's broken ground on DC2. And Summit's just trying to work out the structure of how we're going to do the mezz loans to participate in DC2. But we're also working with our tenant in DC1 for some other locations in different parts of Canada as well.

[Matt Kornack, Analyst]

And in terms of those mezz loans, would you be funding those with credit facility availability that you have and then essentially be clipping a spread between the 2? Or would you think the equity fund incremental CapEx…

[Paul Malcolm Dykeman, CEO, President & Trustee]

It's probably a little bit of both. I mean, if we can get some lending value -- we're probably doing some of it through lines of credit and then it's probably a combination of lines of credit and some of equity. Yes.

[Operator]

Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Dykeman.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Great. Once again, thank you for your time today and your interest in Summit. If you have any additional questions contact Ross or myself at any time. And I'd just like to remind you that our 2017 Annual Unitholders Meeting will take place at 10:30 this morning on the 53rd floor of the TD Bank Tower, which is on 66 Wellington Street in downtown Toronto. I hope a number of you will be able to join us there. Thanks again, and goodbye.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.