Summit Industrial Income REIT

TSX:SMU.UN

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to the Summit REIT First Quarter 2019 Results Conference Call. 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]

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.Following another year of record performance in 2018, our growth and strong operating results continued in the first quarter of 2019, as Ross will shortly discuss. Our portfolio growth over the last year has had a significant and positive impact on our results in the quarter. Operating revenues were up 58%, driving a 60% increase in our FFO. And we're also very pleased to see strong organic growth, with same -- overall same property NOI up 4.9%.We've achieved a number of significant accomplishments. Over the last 2 years, we purchased 56 properties, adding 8.4 million square feet to our asset base for a total cost of just over $1 billion. All of these properties were well located in our 3 target markets and all were purchased well below replacement cost. Most importantly, these acquisitions have significantly increased the size and the scale of our total portfolio, generating operating synergies that will contribute to increased cash flows in the years ahead.To finance our growth, we completed 2 bought-deal offerings in 2018, raising over $255 million. We raised another $410 million in new mortgage financings and assumed $47 million in mortgages on our acquired properties, and all at a very attractive interest rate, while increasing the term of the maturity of our mortgage portfolio.Early in 2019, we also refinanced our temporary bridge loans used to complete our December acquisitions by doing 10-year new debt, further extending the term to maturity. And then more recently, we just did another 5-year mortgage at a 3.68% interest rate.We leveraged our leasing expertise to proactively renew tenant leases, retaining 92% of our tenants in 2018, and we're already at 99.8% in 2019 renewals. We're also seeing continued strong growth in our leasing program, with a 9.5% increasing monthly rent over expiring rents on our renewals in 2018, including a very strong 12.7% in the GTA. And we've continued to see that progress and 2019 renewals have already generated 11.7% increase in overall rents, with a strong 14.5% increase in the GTA renewals.Looking ahead, we only have 1.5% of the portfolio remaining to re-lease through the balance of 2019. We remain confident that we'll retain the majority of these tenants and we'll renew them at higher rents, particularly in the GTA and Montreal markets, which are very good conditions.Another key strength of Summit is our proven property development expertise. We are expanding one property today which will generate a fixed return of 8% on investment, and we'll continue to develop the 2 buildings that I mentioned last time. In the coming years, we also believe there's some intensification of up to a little over 500,000 square feet of new properties on land that we already own and those will again generate very attractive returns.We have 2 mezzanine loans outstanding relating to 2 data center development projects and expanding our presence in this relatively new and very attractive space.Later this morning, we'll be asking -- the unitholders will be asked to approve the internalization of the management team, which will eliminate all the external fees which were established when the REIT was much smaller. Now that we've achieved the appropriate size and scale, the REIT will acquire the same management team, an initiative that will increase NOI and FFO and fully align the interest of management with all unitholders. Post internalization, insiders will own 13% of the float.We believe this is a highly positive and accretive transaction, and I can assure you that everyone at Summit remains committed to further enhancing unitholder value in the years ahead. Importantly, with this internalization, our cost to capital is reduced and gives us a benefit of about 75 basis points and cap rate to achieve the same assertiveness with both the elimination of the fees and improved unit value.In summary, it was another good quarter for Summit. We look forward to growth and strong operating performance to continue.I'll turn things over to Ross to review the operating details in more -- operating results in more detail.

[Ross Drake, Chief Financial Officer]

Thanks, Paul. As Paul mentioned, our portfolio growth has had a very positive impact on our results for the first quarter of 2019. Revenues were up 58% as a result of the contribution from our acquisitions, continuing near full occupancy and higher monthly rents, partially offset by the sale of the 75% interest in 4 properties in May 2018. Occupancy was 99.4% at March 31, up from 98.5% at the same time last year.With this revenue growth and our continuing focus on efficient property management, NOI was up almost 65% for the year to $24.3 million. We were also pleased to once again generate solid increases in our same property NOI. For the 3 months ended March 31, 2019, total organic growth was 4.9%, with the GTA up 5.4% and Montreal rising 2.4%, all due to our contractual annual rent increases and the strong increases we are achieving on our lease renewals. The leasing of the Western Canada vacancies during 2018 resulted in our Alberta portfolio same property NOI rising 11.4%.With this increase in revenue and NOI, our FFO rose a very strong 60% to $15.6 million for the quarter or $0.155 per unit. As mentioned on our last call, we were pleased to return to accretive growth as FFO per unit was up 6.2% despite the almost 50% increase in the weighted average number of units outstanding this quarter compared to last year.Our balance sheet and liquidity position remains strong with a leverage ratio of only 47.9%, providing an immediate $100 million in acquisition capacity if we bring the ratio up to our general target of 50%.We continued to make solid progress on the financing front, capitalizing on current low interest rates, and extending the average term for the mortgage portfolio that's helping to mitigate the impact of rising rates going forward.During the quarter, we refinanced the 2 bridge loans we had set up at year-end to complete some acquisitions, with new 10-year mortgages, $91 million, at an interest rate of 3.93% and another $62 million at 3.86%. Importantly, with these new financings are place term to maturity for the total mortgage portfolio increased to 5.7 years at quarter end from 4.9 years at December 31.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're going to continue with the same value-enhancing strategies that have been so successful in the last 6 years. We will prudently and profitability acquire quality properties in our target markets, when possible purchasing newer well-maintained assets with the key it will be at the lower replacement cost and with rents that are below market that we believe we can generate value through the management program.Our cash flows will grow organically as we capitalize on the continued strong fundamentals in the industrial sector, build on our contractual rent increases and generate increasing operating synergies and reduce cost through the increasing size and scale of our property portfolio.We will leverage our proven expertise to develop 250,000 square feet on property that we already own all within the GTA market, and that's in addition to the 65,000 that we're currently expanding the business. And we're going to continue to look for more opportunities to increase the amount of development both in the GTA and the other 2 markets that we're operating in.Most importantly, we'll maintain our proven track record of delivering stable, sustainable growing monthly cash distributions to our unitholders. We're recognizing in today's uncertain economic times, our investors look to Summit to provide stable and predictable income. And we will maintain the focus in everything that we do.And with that growth and continued record performance, we are very pleased to announce today a 4.7% increase in our monthly cash distribution to an annualized $0.54 cents per unit effective with the May payment. This increase reflects our confidence in the future and our ability to deliver strong, sustainable and growing cash flows to the unitholders.In summary, we're very pleased with our growth and performance. We look forward for continued growth in the years ahead. With the very strong industrial -- industry fundamentals, best-in-class properties, the proven and experienced management team with decades of experience, we are well positioned to deliver stable, sustainable increasing value to our unitholder over the long term.Thank you for your time today and attention this morning. And now we'll be happy to answer any questions you may have. Operator?

[Operator]

[Operator Instructions] Our first question is from Mike Markidis from Desjardins.

[Michael Markidis, Real Estate Analyst]

Congrats on a strong start to the year. Obviously, you guys have had great success in locking down your 2019 renewals or your expired program this year, and you've noted that there was almost a 12% average increase in monthly rents from the expiring rent. Is it possible to gauge how much of that 1.2 million square feet has already taken effect in terms of the new rent and what's left on the table in terms of coming onstream in the future quarters?

[Paul Malcolm Dykeman, CEO, President & Trustee]

That's a pretty detailed question, so Ross might be able to answer. But I would have to say that the renewals were -- the expiries were scattered throughout the year. So I think it's going to be a fairly slow take-up of that because we -- as you can imagine, in this tight market, tenants whether they're approaching us, we're talking to them, they're very anxious to try to get the rates locked down before they think they're even going to go up further. So -- right.

[Michael Markidis, Real Estate Analyst]

Okay. So stated alternatively, when you lock down renewal, the new rent doesn't take effect immediately. It will just -- it will be scattered...

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, just whenever the normal expire would be.

[Ross Drake, Chief Financial Officer]

There's about 800,000 square feet left and it's spread out. It's mainly in the second and third quarter. There's a couple in the fourth quarter in that. So yes -- so it's probably fairly evenly spread about 800,000 square feet.

[Michael Markidis, Real Estate Analyst]

Okay. And while you have that file open, Ross, maybe I can bug you for what the -- I mean, you've given the percentage increase, but what would be the average expiring rent on the affected space on that 1.24?

[Ross Drake, Chief Financial Officer]

Yes, I'll give you. The aspiring rent the average was 522 and the growth is 583.

[Paul Malcolm Dykeman, CEO, President & Trustee]

That's pretty good that you know Ross' spreadsheet that well.

[Michael Markidis, Real Estate Analyst]

He only shares it infrequently.

[Ross Drake, Chief Financial Officer]

We did mention is -- Montreal has the same very strong growth as the GTA and the growth in their rents on the renewals on those deals was around 14%.

[Michael Markidis, Real Estate Analyst]

As well? Okay.

[Ross Drake, Chief Financial Officer]

That's right. Yes, yes.

[Michael Markidis, Real Estate Analyst]

Okay. So what's dragging down to the 12? I mean dragging sounds like...

[Ross Drake, Chief Financial Officer]

A couple of other markets. There's just some flat deals in that, so...

[Michael Markidis, Real Estate Analyst]

Okay. On the new leases that you've been getting in the GTA and Montreal, have you changed the annual escalator at all? And what are you guys -- what are you generally securing at this juncture?

[Ross Drake, Chief Financial Officer]

So current -- in this set of leases, the growth has been about 2%.

[Michael Markidis, Real Estate Analyst]

2% average? Okay.

[Ross Drake, Chief Financial Officer]

Yes.

[Michael Markidis, Real Estate Analyst]

Perfect. Okay. That's great. Just on the internalization. How are you guys feeling? Have you gotten any indications on where the votes are scattered about so far?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. I mean, we'll find that out in a couple of hours. But we -- the response has been overwhelmingly positive, to the extent we've had any feedback, it has been 100% positive. So we've not had any concern whatsoever. So we expect a very, very high vote count and a very, very high approval of that transaction.

[Michael Markidis, Real Estate Analyst]

Okay. And then just from an external growth perspective -- and this will be my last question before I turn it back. Just given the internalization and maybe that negotiation and now I guess the announcement and the lag between the announcement and the voting date, has that sort of put a stall in your external growth pipeline at all? Or has it been sort of full aboard?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Not really. Yes, just -- this is always the lag time of year. January to March is probably the worst time in Canada to buy real estate, particularly industrial when there's snow on the roofs and that sort of thing. So it's a quiet quarter. But we've been on a few things. We've launched then a few things. We're chasing things. But just like we see every year, it's that springtime. So we're expecting now over the next 30, 60, 90 days to start to see a significant increase in property flow. But we're also pursuing a number of off-market deals through different relationships, whether that's just pure acquisitions or possibly some joint ventures on development opportunities as well.

[Operator]

Our following question is from Mark Rothschild from Canaccord.

[Mark Rothschild, MD & Real Estate Analyst]

Maybe just following up on Mike's last question. Paul, on your comments you stated very clearly that you're going to buy accretively and below replacement cost. To what extent are you seeing or expecting to see a decent amount of product available to actually buy accretively this year at prices that you're comfortable with? Obviously, the market is pretty strong and there are new buyers looking to get into the industrial market.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. I mean, we always -- we start -- I start the year with the same kind of mentality that I say, "We can do 1s and 2s to the point where we should be able to buy between $300 million and $350 million." Obviously, in the last 2 years we've outperformed that because we're in the right place at the right time and a portfolio comes up that we want to pursue.But the -- I mentioned it in my script, but the -- our cost to capital has really come down significantly since November since we started the discussion on internalization, trading at $9. We're trading close to $12. Cost to debt is probably down 40 basis points. And then once you strip out the external management cost, as I mentioned, 75 basis points or more in terms of accretiveness in terms of cap rates. So we can actually go pretty low now in terms of a cap rate and be accretive to our existing AFFO.But that's just one guide. We still -- our mantra for the entire year is always below replacement cost. But anything in the GTA that we can buy at a decent price per square foot that's well located and we like the properties, we'll pursue. Because in our portfolio the embedded rents are around $6. We're starting to achieve $7.50, $7.75. There's a number of new developments that are coming out with some merchant developers, they're starting to ask $9.50, $9.75. We've heard a rumor that there's a vacancy coming up that the landlord in that property is asking $10.So through the development program, we're seeing replacement cost move up very aggressively, and we don't see that changing. We're looking at land and land prices are just racing. So I think all of those factors -- I think there's a really, really good runway particularly in the GTA.So again, I think lots of people see that. But with our cost to capital, I now think we can buy very smart, good properties on a good price per square foot. But because our cap rate to make things accretive, I think we can even still go low on a cap rate basis in the current yield and make that accretive as well.So yes, we're pretty optimistic we're going to be able to grow. But right now, we still are seeing lots of opportunities in Montreal. We continue to pursue and want to expand our portfolio in Calgary. Again, both -- in all 3 markets, we're looking at both acquisitions and -- whether it's development that we can do ourselves on balance sheet or in partnership with other developers.

[Mark Rothschild, MD & Real Estate Analyst]

Okay. Great. And maybe just -- the one market that had some softness was the other Ontario properties. Can you speak -- give a little more detail on some of the vacancies that you had there and what's achievable and what we should expect?

[Ross Drake, Chief Financial Officer]

I'm not -- the only other -- the other Ontario -- there's a bit of vacancy in Ottawa in that and those are the newly acquired properties.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, they're all under 10,000 square feet. It's like 6 or -- 6 spaces there. But the Ottawa market is very buoyant as well. So yes. Now in terms of the vacancy we have today -- I mean, we haven't mentioned it -- but our one biggest vacancy, which is just the 45,000 square feet in Humberline, we finally did get the city approval to do the variant so we can put loading doors in the front.So we've got a tenant already signed up. We just have to go through some more hoops with the city. So hopefully, in the next 3 to 6 months we'll have that tenant in place. I did the calculation yesterday, because the cost of putting loading doors is fairly modest. The return on that particular lease is over 25% in terms of the capital that's going to be invested. But once that's leased up, we'll have less than 30,000 square feet of vacancy in our portfolio.

[Operator]

Our following question is from Brad Sturges from IA Securities.

[Bradley Sturges, Equity Research Analyst]

Maybe just first off on the distribution increase and landing at the $0.54 level. Just would like to understand if you have any color as to how that level was decided upon and what that could translate into I guess maybe as a percentage of -- a target percentage of FFO or AFFO that you would like to maintain from a distribution point of view?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Sure then. And you're going to laugh at the real-- so between Lou and I, we had this discussion, but we tend to like round numbers. So we're looking at raising the distribution between 3% and 4% or -- sorry, 3% and 5%, and the $0.54 was a nice round number. But it's all based on that -- those target AFFO and the FFO payout ratio. So we want to be in the low to mid 80s on an FFO basis, but we think that translates into around 90% AFFO target. So that's where we believe in our head things are going.But we're just very optimistic about the stability of our portfolio. So we're virtually 100% occupied. We virtually have every lease that's expiring this year done. We're looking forward to, but we're not rushing to rush to the 2020 because rental rates continue to firm up every 3 months. So we'll probably try to wait to later in the year or early in 2020 to start to try to do those kind of renewals. So yes, we're very bullish about the runway. And as I mentioned before, I think these rental rates are just going to continue to drive because the replacement cost numbers continue to drive. But that's kind of the -- the rule of thumb is to have a very comfortable payout ratio. Given where our debt levels are, we think that's very, very a comfortable number.

[Bradley Sturges, Equity Research Analyst]

As you know, your cost of equity capital has improved significantly. Just when you think of that in the context of leverage, has there been any change of thoughts of where you like to be from a leverage point of view? Or you're still comfortable closer to the 50% range?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, it's -- we're going to -- that's one thing that we're going to continue to manage as we're looking at distribution increases. And I really think it's going to be driven by the amount of development that we start to do. So if we increase that development pipeline, in particular the stuff that we're doing on balance sheet, so if not through a mezzanine loan program, we'll start to hold back a little bit of our leverage to be able to accomplish that program. So yes. So we'll keep trying to migrate it down. But right now, high 40s, around 50. But we don't need to go above 50 anymore, and if anything, that will migrate down as we continue to grow.

[Bradley Sturges, Equity Research Analyst]

Right. And within the disclosures, there was a note about seeing pretty strong leasing demand for the Montreal data center. Just looking for I guess a little bit of an update there.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, it -- we're learning and we're not the operating partner here. So our partner, Urbacon. There's lots of interest in data centers in Canada. It's a big picture. There's significant players coming up from the U.S. trying to grow. In Montreal, we have -- it's a different setup than Toronto because it's 9 floors and you can actually lease it on a floor by floor basis. We're still trying to hold out a little bit to try to get the bigger cloud provider type data center. So we really are trying to stay away from the -- call it more the retail type of data center users that we -- you end up managing a significant amount of those kind of tenants.But in terms of overall demand, we're very comfortable with that. We have one of our projects on the east end that has a lot of power and we've got data centers knocking on the door there as well. And that's -- and our building is not even a data center. They just can't -- they can't find places where there's good power. So it's a unique thing to have in Canada, but particularly Montreal because the energy scene is green and friendly. So we're comfortable. We're very comfortable with that asset. We're exploring earning a yield on the way through. And then we have an ability to convert that loan at cost into equity once it stabilizes, so.

[Bradley Sturges, Equity Research Analyst]

And I guess once you have a better sense of what that user will be, then you'll have a sense of what the capital -- additional capital requirements could be for the asset.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. And right now, you could actually -- there are particular people knocking on the door that said we'll take it as is, which is a power shell. And essentially, they'll do a headlease for the whole building, and then they'll do what we're kind of reluctant to do, to start to lease it out. And there's a margin in that business. So you can lease it out on a wholesale, base it at one rate. But if you do it the other way, then that tenant would be responsible for putting all the additional capital into the project.So that's the flexibility with this. And you did mention about DC2. That will be -- we'll have the power shell complete by about July and August. I have a strong expectation over time that the tenant in DC1 is going to continue to expand and grow their business. So they're a very logical person to set up next door into that one. So we like what we've seen and it's a good segment of the market right now.

[Operator]

Our following question is from Stephan Boire from Echelon Wealth Partners.

[Stephan Boire, Analyst]

Congrats on the results.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Thank you.

[Stephan Boire, Analyst]

Okay, so I had just a few quick questions. First, from a modeling perspective and given the potential internalization, can you give us a good run rate for the G&A going forward?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. We actually have that in the press release. We put -- it was $5.1 million, $5.2 million, one of those 2 numbers.

[Stephan Boire, Analyst]

Okay, okay. Sorry I missed it. And in terms of the same store NOI growth for the year, can you share maybe some color on that, what do you expect?

[Paul Malcolm Dykeman, CEO, President & Trustee]

We typically don't give guidance. Ross was going to -- he'll generally say something that's a bit more conservative. But we're comfortable that nothing is going to change and we're going to see roughly all the same positive momentum that we have now.

[Ross Drake, Chief Financial Officer]

We don't expect any vacancies to come up and we're going to see the continued growth in rents. And Paul mentioned that one vacancy because of the needing some variances from the city, it will be leased up. So...

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, that will pop -- yes, the third or fourth quarter we could even see a little bit of...

[Ross Drake, Chief Financial Officer]

You'll see some modest increases because of the rental rate growth and then a further growth when that lease kicks in that. So what you're seeing in the first quarter is very positive and it will continue to grow.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. And particularly the GTA at 5.4%, that's just based purely on rental growth. There's no occupancy improvement in that number. So that's just on renewing rents and contractual rental bumps and the lease.

[Stephan Boire, Analyst]

Okay. Okay, that's good. That's helpful. All right. And now in terms of the external growth, I know it was mentioned a little bit earlier, but I want to push a little further. Can you quantify what your acquisition pipeline looks like at the moment maybe for this year?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Like I said, we are constantly analyzing anywhere from $300 million to $600 million of possibilities. We know of some portfolios that are coming down the pipeline. We are talking to lots of people about properties that aren't listed that they might want to just consider selling to us or creating a joint venture whether it's a combination of buying buildings and some lands due to some developments. So it's going to be a bit of a mixture this year and it's going to be across all 3 cities that we're looking at.So we're happy to grow in each. Clearly, we think the best opportunity is still in the GTA. But some say -- and $300 million to $350 million is a conservative number if we're fortunate to get some of these acquisitions. Last year, we did almost $600 million. That would be a target that we'd also like to continue to repeat. But where our cost to capital is -- and we're comfortable that we're going to be very competitive. Whether it's a Blackstone, pension funds, whoever else is out there, I think we can compete with any of those buyers.

[Stephan Boire, Analyst]

Right. Okay, it makes sense. Thanks. And finally, regarding the Montreal data center. Obviously, knowing that you're not the operator here. But is the strategy to lease floor by floor to different tenants or to diversify the risk or -- and to diversify the risk or are you looking for one single tenant for the entire building?

[Paul Malcolm Dykeman, CEO, President & Trustee]

I mean, we would prefer to have either 1 or 2 tenants for the entire building. I mean, with DC1, we have a major cloud provider there for 15-year leases. It's a better way in our mind to do the data center programs. If you start to get into the floor by floor, you're going to have a constant rollover of tenants that are there for 3 or 5 years. And we like the stability. If we're going to make that capital investment, we're going to get long-term leases. But you're going to get high, high-quality AAA covenants when you do that as well. So we're having those discussions. At some point, we might switch the strategy if the right opportunity -- but we think the biggest and the best upside for us is to be able to lease it out to a single major cloud provider.

[Operator]

The following question is from Chris Couprie from CIBC.

[Chris Couprie, Analyst]

Just following on the line of questioning on the acquisition pipeline. How would you characterize the mix from your perspective, sort of these JV land plus development versus just more of the traditional stabilized properties?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Well, as I mentioned, my internal goal would be to try to start to ramp up the development program whether that's directly or with partnership so that we start the year saying, "Okay, we're going to do $300 million to $400 million." I'd like to think that 25% or 30% of that's going to come through development. But the development lead time particularly in the GTA is absolutely brutal. So just getting that variance on that one property took us 15 months.So we have 2 properties that we're actively going to develop now, so about 250,000 square feet. We might not even be able to break ground by the end of the year. Like the city's process is just onerous, and from when we were doing this 10 years ago, a lot has changed, not just the development charges, but the time it takes to get the city to move and the amount of hoops that they put you through to get that done.So I'm being cautious on how I'm trying to explain it. But strategically we want to ramp this up to -- 30% of our growth would come through development, whether that's directly us doing it -- where I see most of that happening is the GTA. But we're talking to different partners in all 3 markets that either have development land or working on developments that -- we're more than happy to JV as well. So whatever we can -- we look at upgrading the portfolio with brand new properties. We think that's a good thing to do. So 2019 is going to be -- just because of timing, is going to be more heavily weighted to just pure acquisitions. But we'll start the leg work now, and then the -- with the ramping of that program, we'll start to see more of a full impact of that in 2020.

[Chris Couprie, Analyst]

Got it. And then just on the renewals that you've completed for 2020 and beyond, what type of spreads have you been generating there?

[Paul Malcolm Dykeman, CEO, President & Trustee]

There's one big one in 2020 which the tenant came to us, and unfortunately they had a fixed renewal for 5 years and it's at 7.8%. But the rent went from [ $3.25 ] to [ $3.50 ]. So I would say you're almost 70% under market on that property. So unfortunately, we're going to have to wait another 5 years before we have an opportunity to cash in on that one. So that was a couple hundred thousand square feet, Ross?

[Ross Drake, Chief Financial Officer]

Yes.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, like 250,000 square feet. So it was a big tenant. And it was a property we just bought recently. Last year, we were -- if the tenant left, we would have been happier, but they -- it was fixed price. So that's why -- sometimes you -- and then there's an odd property here and there that we're seeing -- we wouldn't want to kind of get that particular property back because there's attributes about it that would either make it a little bit more difficult to re-lease or whatever. But the GTA, if you're just looking at a very straightforward industrial box, the rents there are just very, very strong, so.

[Chris Couprie, Analyst]

So for the -- outside of that lease -- so are you getting double-digit type of spreads on the further-dated leases?

[Paul Malcolm Dykeman, CEO, President & Trustee]

So that one was the biggest one. So that was 7.8%. But the other ones, Ross, I -- they're -- there's a bit of a mixture, but it's in and around the same kind of level. So 8% to 10%. If it's a GTA one, we tend to be more aggressive. But right now, we have tenants from 2020 who are coming to talk to us, and were saying like, "Just wait, just wait." Because there's a tenant we renewed for 1 year last year -- I think I had mentioned this before. They're now trying to talk 3- to 5-year leases. And we went from $5 to $6.20 and now we'll be probably talking $7.50 to $8 when they come up because they just have a very good size, kind of 150,000 square foot space. So it's very, very project-specific, but the trend is rents are moving up very, very quickly.

[Chris Couprie, Analyst]

Okay. Great. And then just lastly on the data center. The net rental income sequentially had a pretty nice jump. Is this kind of -- are we feeling more comfortable that this is the run rate? Or was there anything kind of in the quarter that was unusual?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Well, I think the tenant did their expansion and were fully in the building -- or paying rent in October. There's a fairly stringent --- call it -- what's the word? -- process that they have to go through before they go up and live in all of the different parts their doing. So there was some onetime cost late in last year. They were going to spend a significant amount of time on the operating -- operations there. So they've got a very, very tight control over the whole budget. So I think we're getting closer. There shouldn't be any more noise in the numbers. So I think we're getting closer, but we'll -- it's easier to make that after a few more quarters that comment.

[Operator]

The following question is from Matt Logan from RBC Capital Markets.

[Matt Logan, Senior Associate]

As you guys look to increase your development initiatives, can you talk a little bit about how you're thinking about replacement cost given where land prices are trending, development charges and construction cost?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Sure. I can give you pretty accurate information because we've done pro formas now on the 2 properties. So we were buying our properties. We allocated in and around $1 million an acre. The development charges are -- we're seeing somewhere between 20 and 25 on the projects that we're looking at. Hard costs have crept up a little bit. So it's like $160, but potentially up to $180. And it really depends on is it going to be single-tenant, multi-tenant buildings.Now our projects are 100,000-150,000 square feet. So if you build 300,000 to 500,000 square feet, there's probably $5 or $6 a square foot that you can save. And then there are -- there's things that we're looking at in terms of -- as we embark on this whole development program, kind of what do we want our Summit buildings to look like. And so one of the questions in there is LEED. So LEED certification adds $5 a square foot. So do we want to do that or do we just want to have very energy efficient building? So we're examining that.So a ballpark number, a round number, I'd say like $175 a square foot. But we're talking to landowners and the expectation of land is -- there is one partner which we -- he said, "Like I was offered $2.5 million an acre for this property." We're going, "Well, you should have sold it," because there's no way we could do an industrial development at that kind of price per acre. So it's just -- like there is no big tracts of land, so you have people going farther west. And we're even seeing quite a bit of development in the east. So Whitby, Oshawa, out in those places there -- wherever there's a little piece of land, there's a lot of development going on at their end. Rents are in the 7s out in the east end, but the price per acre is probably still in that $700,000, $800,000 an acre.

[Matt Logan, Senior Associate]

And in terms of potential JVs, would that be something more with Montoni in Montreal or could that be potential JVs in Alberta or Toronto?

[Paul Malcolm Dykeman, CEO, President & Trustee]

The last 2 things you say. Yes, so -- I mean, we have a good relationship with Montoni. He's very busy in other aspects of his business. He's building a data center for Amazon and some other stuff. So we continue to talk to them, see if there's opportunities on the industrial side. I think Montreal is really prime to be doing more development. There's not a lot of spec development going on in Montreal right now. But 2 groups that we're talking to, one is in Calgary and one is in the GTA, both doing a JV. So like I said, we'll do it whichever we can. We just want to build up the development pipeline. We're more than happy to do it with partners. Whether that's direct equity or through a mezzanine loan program, we're quite flexible on how we're going to approach it.

[Matt Logan, Senior Associate]

And with all of your 2019 maturities effectively complete, would that be really the top priority for the balance of the year?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. Right now, it's just growth, like step on the gas pedal and let's go. But again, to get those developments and the lead time -- I said all our groundwork we'll be working on now to the end of the year. We'll start to see some of that come together. So the balance of 2019 it's going to be primarily through acquisitions. But hopefully, each quarter we can announce a little bit more what we're doing on the development side, whether it's JVs or direct, and start to give better outlooks for 2020 and beyond what that pipeline might start to look like.And I did mentioned, one of the exercise we're going through is our existing portfolio. We have a property in Barrie, one in London. All of them have 3 or 4 extra acres. So we've started to kind of look at our existing portfolio. And there's at least 500,000 square feet. If you look at just site coverage, we can probably even push that up to 700,000 square feet. But it's very tenant-specific type of development. But we're going to spend some time and resources to really dissect our existing portfolio and see if we can incrementally intensify some of those buildings as well.

[Matt Logan, Senior Associate]

I appreciate the color. And last question from me, just a small housekeeping item. Can you tell us if DC1 was included in the same property NOI growth this quarter?

[Ross Drake, Chief Financial Officer]

No, it was not. We're strictly commenting on the industrial same property NOI growth. So yes -- no, it's not.

[Operator]

Our following question is from Sairam Srinivas from BMO Capital Markets.

[Sairam Srinivas, Associate]

Congratulations on the strong quarter. My only question would be on the data centers and the loans to book. And I think it probably accounted for about 9.5% of the assets for Q1 '19. Going ahead, what would you think would be the target for the segment?

[Paul Malcolm Dykeman, CEO, President & Trustee]

But I don't think it's that...

[Ross Drake, Chief Financial Officer]

It's more like 3.5%, 4%.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Like $60 million, so, yes, it's like 3%. So we...

[Sairam Srinivas, Associate]

Okay.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, yes. So -- I mean, it's really tenant specific. So the power shell will be completed. So there's probably another $10 million to $15 million that we would spend on DC2, but some of that we can do through construction financing. So all of what we put in today is our mezz loan and Urbacon's equity. We haven't put any construction debt on that one. So we can finish the building of that using construction debt.So it's really just then if there's a lease up phase of either DC2 or Montreal, where there will be additional loans and capital outstanding. So it is -- yes, so it's not going to move materially. And again, once we lease, then we'll go through the process of converting those loans into equity ownership anyway. So when the leasing happens, that will be the next trigger. So that loan will come out of the mezz loan program and we convert that to equity at that point.

[Operator]

[Operator Instructions] Our following question is from Matt Kornack from National Bank Financial.

[Matt Kornack, Analyst]

On the economics of development, I appreciate the commentary with regards to the cost. But do you have a sense as to what type of yields you can get given prevailing rents on that type of development?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Really, really hard to guess at that. I mean, as you can imagine, how the math works. It's very, very sensitive to that rental rate. And our philosophy is replacement cost is going to go up. So if today we can build at 160, 170 -- we're just going to keep building because we very strongly believe that replacement cost is going to be 200. And that's why the -- so the day 1 yield is not going to be potentially the perfect yield depending on whether we get that rental rate. So I don't -- I'm being evasive a little bit here. But if I had to throw a number on a page, I'd said a 5% development yield would be something that you would be trying to achieve. So then $0.50 more and all of a sudden that's a 5.4% yield. $0.25 less and it could be a 4.7%. But you'd like to be able to think that you're going to achieve 5% or more.But when we start our 2 developments, we're purposely not going to lease them until like -- we'll get the approvals. We'll start to move the ground around. Because I'm very, very convinced -- if it takes 6 months to build the building, in that period we'll find the tenant that's the most desperate to have that kind of space and I think we can get a premium rent, especially because of the size of our building.So we're -- we do some sensitivity analysis around this, so we'd say for one of our buildings we think it's going to be 8.50 to 9. But would it surprise me if it was 10 when we finally have the building built and leased? It wouldn't. And obviously, then, your yield is going to be that much higher.The cost, once we get going on the land that we own today, it's not going to change very much. So that variable is not going to move a whole lot. So it's really dependent on that rental rate. But again, if we -- let's say we get a really good tenant and 8.75 and that's a 5% yield, we go, "Great, and then let's move on." And again, because of the market, we're happy to do like a 5-year lease deal unless we're spending a huge amount of capital specific to that tenant. Because then in 5 years we're more than happy that -- that's rent's going to reset and then you'll get your bump at some point in the cycle.

[Matt Kornack, Analyst]

And is that thought process consistent with what you're doing in the stabilized portfolio as well? Are you going shorter on lease term because you've got the view that rents continue to increase?

[Paul Malcolm Dykeman, CEO, President & Trustee]

We're very flexible and we'll really let the tenant drive the equation. But you can really take a stand: "We're not going to spend any money on your space or anything if" -- "unless it's at least 5 years or more. If there's anything specific that you want to do" -- but we had one tenant last year expand from 50,000 to 100,000 square feet. He wanted to do a 12-year lease because he wanted stability. So get a good bump and a good annual steps. The other tent that was 165,000 square feet, he just wanted to do a 1-year renewal, a U.S.-based company thinking they needed some flexibility. We go "great." And now I think they're waking up and going "we're in trouble." Because they would have done much better to try to lock in a multiyear lease last year. So yes. So we're being very, very flexible and tenant specific driven on how we're going to do that.

[Matt Kornack, Analyst]

I guess it doesn't entirely make a huge difference given how tight the market is, but when you're targeting tenants, is there a specific type of tenant you're trying to get into your asset? And then as you look at rent growth -- obviously, these are pretty significant numbers -- is there an affordability impact on any of the tenants that you're currently working with?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, so -- and I think I mentioned this, but I think Prologis has done a lot of work on this and I think we're getting smarter and understanding the different tenant businesses. So in some cases like that tenant I was just talking about, the 12-year tenant, he's putting so much money and capital into his business on a manufacturing basis and he has personnel costs and stuff like that. The rent is a very, very small thing. So he just took his 20-plus rent and said "fine." Like it wasn't -- then you have some people that sign 2 years, more the logistic firms, that they've got a contract for 2 years. And if the rent goes up, it eats right into their margin. So I think it's trying to get away -- a little bit more away from that logistics business. But again, it's really -- at the end of the day once our portfolio grows, we're going to have a really good cross section of every economic component of GDP that's going on.

[Matt Kornack, Analyst]

It's just a minor thing. I don't know -- I don't think you have disclosed your top tenants for the last 2 quarters. Is that something that you'll continue to disclose going forward? I may have missed it or maybe it's somewhere in your disclosure. It's just helpful to look at from time to time on our side.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Okay. Yes, we haven't been doing that. I mean, as our portfolio grows, obviously the impact of the top 10 tenants continues to go down pretty rapidly. So I think top 10 tenants still represent about 20% of our...

[Ross Drake, Chief Financial Officer]

Yes. 22%, yes.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, 22% of our income. But that's something we'll look at.

[Matt Kornack, Analyst]

Okay. I appreciate it. And then last question. Ross, with regards to IFRS 16, not a huge impact on your numbers. But do you know what the NOI impact would have been of moving the ground lease property -- or the operating lease property?

[Ross Drake, Chief Financial Officer]

On an annual -- in the quarter it's probably about -- I'm going to say 70,000 roughly.

[Matt Kornack, Analyst]

Okay. And then I guess if we're doing, now we should just use the liability that's on the balance sheet and net that out. Is that a fair approach if we're taking that NOI [ out ]?

[Ross Drake, Chief Financial Officer]

Yes, I would...

[Operator]

Thank you. We have 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]

Thank you, operator. And just to remind everyone, this morning at 10:30, we have our AGM at McCarthy Tétrault on the 53rd floor of TD Centre. We hope a number of you guys can make it. Look forward to talking to you next quarter. Thanks very much.

[Operator]

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