Summit Industrial Income REIT

TSX:SMU.UN

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Summit Industrial Income REIT Second Quarter 2020 Results Conference Call. [Operator Instructions] I would now like to turn the call over to your speaker today, Mr. Paul Dykeman. Please go ahead.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Thank you, operator, and good morning, everyone. 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 actual results to differ materially from those disclosed or implied. We direct you to our earnings release, MD&A and other security filings for additional information about these assumptions, risks and uncertainties. Joining me, as usual, on the call this morning is Ross Drake, our Chief Financial Officer. It was another solid quarter for Summit as our programs aimed at mitigating the impact of COVID-19 pandemic have proven successful. As you will see rent collections improve sequentially through the quarter and economies as our -- as the economies in our markets reopen. We are confident we will return to our track record of growth and delivering unitholders' solid and stable increased value. I want again to thank all of our tenants for their support and everyone, in particular, on the Summit team for their hard work and commitment. It is there's still an experience that is getting us through this challenging time and will help us emerge stronger than ever. Our objective since early March have been to ensure the health and safety of our team, our tenants and the communities in which we operate, to preserve capital and maintain our strong and conservative and flexible financial position, to mitigate risk to our business and our properties and to generate the best operating results possible in this new environment, leveraging the significant experience and knowledge of our team. I believe we have made solid progress on all these objectives. As you can see on Slide 7 (sic) [ Slide 4 ], we have generated a very strong track record since our inception in 2012. As we look forward, we're confident we can resume this pattern of growth as the economies reopen in our markets. Slide 6 (sic) [ Slide 5 ] details our strong performance in the second quarter of 2020, including a solid and stable portfolio occupancy of 98.8%, up from 98.4% at March 31. Revenues were up almost 36% as the result of our portfolio growth over the last 12 months, a full quarter's contribution from the acquisitions made in the first quarter and increasing rents and near full occupancies. The increase in revenues generated a 42% increase in NOI and a 47% rise in FFO. And particularly important, our FFO per unit in the quarter was the highest in our history, despite the onetime provisions of approximately $800,000 taken in this quarter. Same-property NOI was impacted by approximately $500,000 of onetime provisions for tenant receivables, including a 25% reduction in rent for those tenants approved for the government CECRA program, and we'll have more to say on that later. Not including these onetime provisions, same-store NOI would have risen by 3.9% in the quarter. You can also see, we have collected a solid 92.3% of rents in the quarter or 97.6% including the deferrals in place. As you've seen, July collections were even better, and we're on pace again in August. Turning to Slide -- I guess it's Slide 7. The results for the 6 months. Sorry, just looking. Got it. I'll call them here.

[Ross Drake, Chief Financial Officer]

It is Slide 6, Paul.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Okay. Slide 6, okay. First 6 months. Sorry, I just -- revenues were up 37% due to our portfolio growth. Yes. Now it seems like I've already said this stuff. So -- oh, this is 6 months. Sorry. Same-property NOI was again impact by onetime provisions, which was $600,000 for the 6 months. So not including those provisions, same-store NOI was 4.2%. Our growth was also accretive to FFO per unit, which was up 7.6% for the 6 months despite a 33% increase in units outstanding. Importantly, with the internalization of our management team last year, our G&A expenses are now amongst the lowest ratios in our industry, which we think is a real advantage as we work to meet our ultimate goal of building value for unitholders. Slide 7 details the portfolio acquisitions we made in the first quarter of the year. These new properties made a full contribution to our results in the second quarter and will generate further operating synergies and economy scales over the long time. Overall, we acquired 9 properties for 747,000 square feet, all within the strong GTA market for cost of $176 million. Overall going-in cap rate was 4.4%, which also included purchase of excess land, which we can build 200,000 square feet of future space at a higher yield. On Slide 8 provides the detail on the sale of our interest in the DC2 data center at Richmond Hill, Ontario. With the closing of this transaction in May, we received payment of our outstanding mezz loans, including accrued interest of 5.5%. These funds enhanced our liquidity position. We also realized a gain of $21 million or $0.15 per unit on the sale. The proceeds of the realized gain will be received in stages over the next 15 months as that construction is completed. With this transaction, we'll only have 1 remaining mezzanine loan for data centers outstanding for $22 million. Now let's quickly review the results in our 3 target markets, starting with Ontario. Slide 10 shows why Ontario remains our key focus going forward. As of June 30, the Ontario portfolio represented 53% of our GLA. Same-property NOI rose 3.5% for the first 6 months of the year, again, impacted by the onetime provisions we took in the quarter end. Our leasing programs are driving strong increases in cash flows. During the quarter, we generated a 99.7% retention ratio on renewals with an average 22% increase over in-place rents. You can also see that rent collection in Ontario has remained very stable and is improving with the embedded rents of $6.76 per foot, but just $6.40 in the GTA. We're confident we'll see further lifts in rents as we renew leases going forward. Slide 11 demonstrates that the Montreal region portfolio continues to generate solid and stable performance. At June 30, the Quebec portfolio represented just under 20% of our portfolio, 18.5%. Our leasing programs also generated solid increases in cash flow with a 98.4% retention ratio. And the Quebec portfolio generated 4.8 -- 4.9% increase in rents. Again, with current in-place rents below market, we expect further rental lifts in the future. Rent collection in Quebec also remain the strongest in our portfolio. Slide 12 outlines the performance in Alberta through the first 6 months of the year. As you know, we completed a major acquisition of properties in both Edmonton and Calgary late last year. Alberta represents approximately 28.7% of our GLA at quarter end. The purchase last year, to remind everyone, had a 5.5% going-in cap rate. We've maintained this cap rate through the pandemic with increases now coming as we lease-up the acquired vacant space. Same-property NOI was impacted by the say, onetime provisions taken during the quarter, including the 25% rental abatement on the CECRA program. We also have 1 property in Edmonton that was vacated during the quarter for 107,000 square feet, but it was quickly re-leased with only 30 days of downtime. Our in-place in Alberta for 4.3 million square feet of distribution warehouse space, was $7.26 at quarter end. The in-place rent for the entire portfolio is higher when you look at the other properties, such as Cross-Dock and land rental arrangements. We are confident in our Alberta portfolio. We continue to perform well during this pandemic due to our strong fundamentals on Slide 13. The portfolio is predominantly made up of high-quality Class A buildings with the remaining 31% in Class B. It's important to note that there's no heavy weighting in base rent or -- sorry, it's important to note, there's a heavy weighting in base rent from a very diversified, creditworthy International and national group of tenants. In warehousing and distributions, we believe this will benefit from the trends towards e-commerce. You also see that oil and gas only accounts for 5% of our total base rent. In the appendix as last quarter, we concluded a detailed top 25 -- our top 20 tenant list. Ross, I'll turn things over to you to go through the financials.

[Ross Drake, Chief Financial Officer]

Thanks, Paul. Turning to Slide 15. We continue to build liquidity through the second quarter with total availability of approximately $220 million at June 30, including cash, available borrowing capacity and potential new financing on our unencumbered properties. Our new $300 million 3-year unsecured credit line secured in March also provides us with increased flexibility. With over 47% of our total debt now incurring floating rate interest, we are capitalizing on a low rate environment, currently around 2.2%, creating significant savings compared to fixed rate debt. Importantly, the mortgage market remains strong and deep for us. As an example, during the quarter, we up-financed and extended a mortgage on one of our growth properties, increasing to $40 million from $21 million at a blended average interest rate of 3.45% with 3.05% on the new debt for an 8-year terms. The proceeds of the up-financing further enhanced our liquidity position. And our balance sheet continues to remain strong and flexible, as shown on Slide 16. Our leverage ratio remains conservative at 46.2% at June 30 with improved coverage ratios. We continue to capitalize on a low interest rate environment, reducing our average effective interest rate and extending average term for the mortgage portfolio to 5.8 years. At June 30, we have approximately $86 million in cash and availability on our unsecured credit line, up from $59 million at the end of the first quarter. As you know, we have a $351 million bridge loan coming due this November. We are evaluating 4 possible strategies to deal with this loan as outlined on Slide 17. And we're looking at extending it for 6 months or longer, replacing it with regular property mortgages, issuing unsecured bonds or negotiating new unsecured term loans. We continue to monitor the debt markets and do not expect any issues in repaying this bridge loan. On a positive note, interest rates are very favorable today, and we don't see any major uptick in the near term. Slide 18, our mortgage portfolio matures by year, showing that we only have 1.4% of mortgages coming due through the remainder of 2020, which is just regular monthly principal repayments on those mortgages. And only 7.6% in 2021. As a result, we believe we're not overly exposed to any credit risk. You will also notice that the average interest rate for our maturing mortgages is approximately 3.7% over the next few years, representing a solid opportunity to generate significant savings on maturities going forward in the current low interest rate environment. On the leasing front, as outlined on Slide 19, we continue to make solid progress on our renewals. Fortunately, we only have a small number of leases remaining to renew this year with the majority coming due in the fourth quarter. We are also seeing solid increases in rents on our renewals with an average 14% overall increase and a much higher 22% increase in our key GTA market. Tenant retention for our 2020 renewals was 88% to date. As Paul mentioned, the reduction in our retention rate is due to 1 tenant vacating in Edmonton, and that space has already been re-leased after only less than 30 days of downtime. As you can see on Slide 20, we only have 2% of leases remaining to renew this year and only 9% in 2021. We believe with our low embedded rents that are below market, we continue to generate solid increases in cash flows as leases to mature in the years ahead. I'll turn things back to Paul to wrap up.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Thanks, Ross. I'd like to spend a few minutes now updating on our progress during this COVID-19 pandemic. As I stated earlier, we believe we've made real progress in meeting our objectives to generate the best possible results during these very challenging times. Turning to Slide 22. Our acquisition program has essentially been on hold since April 1. As mentioned, we did complete the 9 accretive property acquisitions in the first quarter for 747,000 square feet at $176 million. As the economies reopened in our markets, we are now starting to see more deal flow and we're evaluating potential new property growth on a selective basis coming our way. Effective July 1, we're also resuming selective development projects after deferring some construction since the pandemic began, on Page 23, details are strong development pipeline with approximately 387,000 square feet at brand-new space that will be delivered and complete this year. Approximately 89% of that new space has already been leased at very good rates with strong tenants under long-term leases. And we expect to acquire 100%, but right now we own 50% of those properties. We expect to acquire the other 50% once the construction is complete and they're fully leased. More details on our development projects can be found in the appendix to this presentation. Turning to rent collections on Slide 24, you can see we continue to make strong progress. Not including deferral arrangements, we collected over 96% of our July rents, which was up from 91% in June. For August rents, we are tracking being in line with the July collections. And as of yesterday, we have already collected 94% of August rents and -- or 97%, including deferral arrangements in place. Taking into account tenants, which we had the rent deferral programs in place, 98.8% of July rents have been collected or arrangements have been made. Looking ahead, we expect cash flows to further improve as our rent deferral and free rent programs in lieu of term extensions at higher monthly rents as those wind down as our economies open up. Overall, the majority of our tenants were significantly impacted by the pandemic. And as the economies open up, it was business as usual for them, as you can see on Page 25. As of June 30 we had agreed to rent deferrals for a total of $2 million. As I mentioned, we also did some free rent. These tenants, on average, extended their term for 3 years. And then finally, approximately 38 tenants were also eligible for the Canadian Emergency Commercial Rent Assistance program. That's a multiple. For the months of April through June, qualifying applications representing $1.4 million in monthly rents, which we made a reserve of $350,000, representing the 25% abatement of the program. And to date, we've already collected over 90% of the amount that's due from the CECRA program and expect to get the balance shortly. The government has extended that program into July and August. We've submitted applications and collect it -- as I mentioned, most of the money for July, we put the same 38 tenants in for July. And then in August, we're going to do a smaller group that we're evaluating now, but it will likely be less than 1/3 of those tenants we'll put into the August program. Looking ahead, we're confident we will continue to perform well over the short-term and emerge even stronger rise economies in our market reopen. Our portfolio remains strong and stable, as you can see on page -- Slide 27. Most of our NOIs derived from high-quality Class A and Class B properties. Our diversified tenant base has a heavy weighting to business that we are confident will remain solid and prosper over the long term, the majority, including warehouse and distribution. Most importantly, we continue to see high stable occupancy at 98.8%, which is up from -- at June from our 98.4% at March 31. As detailed on Slide 28 with the strong fundamentals, including our low overheads, strong liquidity, well positioned and diversified portfolio, the experience of our team. We are confident we'll return to a track record of growth, strong operating performance as the economies reopen. Our confidence is also based on the solid fundamentals in the Canadian light industrial sector. That's detailed on Slide 29. Looking ahead on Slide 30, we believe the industrial markets will prosper as we emerge from the current pandemic due primarily to the growth in e-commerce and other factors that -- emerging in the Canadian business as we battle this new environment. Longer term, we will return to our track record of growth by employing the same strategies that have generated such superior returns to our unitholders. In summary, we're pleased with our performance for the first 6 months of 2020, and we expect further improvements as the economies and markets reopen. Thank you again for your time and attention this morning, and we are now pleased to answer any of your questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from the line of Himanshu Gupta with Scotiabank.

[Himanshu Gupta, Analyst]

On the transaction market, Paul, I think you mentioned that you're starting to see more deal flow. So just wondering, are you seeing any COVID discounts or changes in cap rates or perhaps any change in underwriting assumptions with respect to [indiscernible] expectations due to COVID?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Those are all good questions. We're not seeing -- I mean, again, it's still very early days. So I don't think we're seeing dramatic changes in our underwriting assumptions. I mean I think what we've learned from this pandemic, it was already -- Summit's business strategy is to focus on the right markets. And for us, that's Toronto, number one. Number two, Montreal. Right now, we're overweight in Alberta. So we won't be looking there. Fundamentals in both those markets are very strong. So the underwriting of rents and occupancy levels, we don't think have been impacted. I'd like to believe that there's going to be less capital chasing, so we'll have less people to compete against. But it's still a little too early to tell about that. But our focus is going to be, like I said, primarily GTA. And again, we're not talking about massive swell. But we're starting to hear that as things open up, people that might have wanted to consider selling last year, early this year, are seeing a window, okay, well, maybe we should -- so I think there's a lot of people getting geared up once the summer is over and Labor Day, to start to list some properties or at least start to bring them out to the market.

[Himanshu Gupta, Analyst]

Got it. Okay. And then just turning to rent collection. So $1.8 million in free rent, how many tenants or what size of [indiscernible] GLA were offered free rent? And then on average, for how many months? And what kind of lease adjustments have you done in exchange for giving free rent?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. There wasn't a lot of sense, and there was spread evenly between Ontario, Québec and Alberta. It was not a lot of tenants. Somewhat 6 tenants were in that category. And essentially, it was somewhere between 2 to 3 months of free rent, and we were getting about 3.5 years of rental extensions. In some cases, we're -- in Ontario where there's maybe 2 years left on lease, we were able to lift the rents. In other cases where it might have been 5 years, we moved that to a 8- or 9-year lease. In other markets, we're just getting healthy steps in the rent of 2.5% or 3%. So yes. So we just felt it was a good strategy for high-quality tenants that we know their businesses, they've been with us a long time because we are putting too much into this rent deferral bucket if I lack of a better word. So we were able to get some advantage in terms of lease term and rental rate increases as a result of that rather than just adding it to a rent deferral program.

[Himanshu Gupta, Analyst]

Got it. And then on the [indiscernible] CECRA program, it's been extended to August as well. So what are your thoughts? And do you think some of your tenant would still need help? And are you looking to participate in August as well?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. So as I mentioned, I got a list in front of me. So 38 was in there for the first 4 months. We put everyone that was eligible for April to June. We put them in for July, but we're more selective in August. So that number is down to 11. And it really goes back to the same tenants that were kind of shut out right from the beginning, and we call them our entertainment tenants. So they're definitely non-traditional industrial tenants. So a lot of sports club, soccer club, trampoline place, rock climbing wall, yoga studios, golf, simulators and stuff like that. So those are the kind of tents that just have not been able to open. They are opening now, but they're still struggling because they can't get the same volume of business in a socially distanced way. So the expectation for me personally, is I think we're going to see some impact on some of these smaller tenants, and there will be some turnover. And we'll look for an opportunity to move this space from this category of entertainment, in certain cases, back to traditional industrial space in the market. So my expectation is there's going to be some business there. But because of the CECRA program, that's pushed that out. So I don't think you're going to see us evicting or tenants going under until late third quarter into the fourth quarter, you'll see some dips in occupancy, which hopefully we can mitigate by re-leasing the space.

[Himanshu Gupta, Analyst]

Got it. And maybe my final question was also in continuation there on the leasing activity. I mean have you done any renewal or new leases in the last 4 months? And how have been the discussions with the tenants, especially with regard to rental increases?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Oh, yes. No, in -- and each market's a little bit different. So no, with leasing, we've done quite a bit of leasing during COVID. So -- and the rental rates are still very strong. We're bumping rental rates. We've got a lease -- a vacancy over at Humberline, where at the end, we had 2 tenants competing for 45,000 square feet. This was a space we had to put 4 loading doors and it took us 2 years to get the city to approve it. When we were looking at the rates 2 years ago, we were talking to tenant at $5.50 rent. We're going to be in the mid-8s, and that lease will start in hopefully, in September. So yes, so there's definitely some positive momentum. And there's lots of demand in -- particularly in the GTA. So I'm saying it's -- there's going to be some bumps. So there's going to be tenants that were either weak not just in our portfolio, other tenants. So we do expect to see some turnover. But I think the demand -- on the demand side is so strong. You're not going to see a dramatic increase in availability, which right now is not having any impact on rental rates. And if anything, rental rates continue to move up, and we've seen that in our new developments in Guelph as well. So we're confident.

[Operator]

Your next question comes from the line of Matt Logan with RBC Capital Markets.

[Matt Logan, Analyst]

When we think about your bad debt charges during the quarter, were they concentrated in any particular region or tenant type? And looking ahead, are there any tenants who are currently paying rent that you see at risk over the next 12 months?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. So there is a category of tenant and it's the small bay tenant. So it's really -- this is really penalized, the small bay tenant. And the small bay tenant is typically occupied by whatever term you want to do use like local [ monpa ] or whatever. So if someone's starting a business. It doesn't have a deep balance sheet. This is their only location. This is where they're operating, whether it's a small restaurant or an entertainment-type tenants. So that's the category of tenants. All the larger tenants have either national, international, regional, all of those tenants, we believe, are going to be fine. They did look for some deferrals. So when we talked last quarter about automotive tenants where the plant, the Honda and the Ford plant shut. So our automotive people had this supply chain interruption, some of our retail distribution tenants when the malls posed, their warehouses were full. So those are the tenants that we did the rent deferral. So again, we believe those are a good substance. So the focus is going to be on these small bay tenants. And like I said on the last answer is, I do expect to see some turnover in this space. So I think our occupancy is just around 99%. So hopefully, we can keep that to like 1%. But 1% to 2% is kind of the amount of space that I think we're going to see. But again, it's not large tenants. And right now some of the small bay stuff, it's in Ottawa, it's in Alberta, and there's a few smaller bay things in GTA. Montreal is the only market where we don't have this small bay product. So we've had very good success in rental collections and stability in that particular market.

[Matt Logan, Analyst]

Great color. And maybe just taking a more nuanced approach to Himanshu's question. When you think about your strategy going forward, the high level plans won't change, but on a more nuanced basis. Is there any change here thinking with regards to the cadence of development, maybe submarkets within the GTA or Montreal or perhaps a preference for new buildings versus old buildings.

[Paul Malcolm Dykeman, CEO, President & Trustee]

We're very bullish on development right now in GTA. If you can find sites -- or in the acquisition program we bought 1 property from Kubota on a short-term sale leaseback. It's in the appendix. There's 60,000 square feet of expansion. It's much more economical do expansions than new development. The rental rates are so strong and the limited availability. So I think it's just we can get probably slightly -- we can get better yields developing, and at the same time, you're upgrading the quality of your portfolio. So I think we're at that stage where we got to in Summit I around $3 billion enterprise value where more and more of our growth going forward, we prefer it to be through development. Now, it's not easy, and we had some discussions at the Board yesterday, the GTA market, everyone wants to develop, but it's very difficult to find land. It's a very expensive land, development charges are high. I'm surprised there's not as much development going on in Montreal because I think that market is extremely tight. And we have an example of a tenant that wanted to get out of their lease and they end up having to -- we've got a lease termination payment of 1-year gross free rent or gross rent from them. And then we backfilled it with a new tenant that's now paying 54% higher rent. So there's some -- we've done this in the past. So there's some strategy there. But we really like development. But geographically, all of the dynamics going into the pandemic behind the GTA and Montreal have not changed. And I think we're seeing some acceleration. Like there's lots of demand within our tenant base. Some of it is short term. So people just need some swing space for 6 months, 2 years. A lot of landlords don't want to do that kind of leasing. But again, I think we're open and flexible with our tenants because we just see a steady improvement in the rental rate market in Toronto. So -- but there's going to be some bumps. There's definitely tenants that are going to fail. But if anything, like we saw in Montreal, I think that's an opportunity to reset the rents closer to market.

[Matt Logan, Analyst]

Just one last question here for me. In terms of your $350 million bridge loan, has there been any change in indicative rates? And maybe just perhaps a quick update on where that stands?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Sure. Ross, do you want to take that one?

[Ross Drake, Chief Financial Officer]

On the bridge loan itself, it's priced at BAs plus 170. So the BAs haven't moved very much in that regard. So that -- so right now, we're paying about 2.2% on that. What was the balance of your question on that, though? I think you had...

[Matt Logan, Analyst]

Mortgage in terms of the indicative rate on potential replacement debt and if you've had any change in terms of that process?

[Ross Drake, Chief Financial Officer]

So on mortgage financing, we're seeing 5 years at 2.6% and 10 years at 2.8%. So we're very -- we've gone out, and we're in the process of doing some financings in that. So that's kind of the rates we're seeing on that. In the bonds, the spread over Government of Canada have tightened up significantly. So now I think for 5 years, we'll be -- we would be well below 3% closer to 2.5%, 2.8%.

[Paul Malcolm Dykeman, CEO, President & Trustee]

So yes, I think we're very bullish. I mean, again, we're comfortable that we can extend that bridge per year. But we -- as Ross mentioned, we're testing the market now. But I think financing continues to look very available and very attractive on various paths for us. So we're just evaluating those.

[Operator]

Our next question comes from the line of Troy MacLean with BMO Capital Markets.

[Troy Raymond MacLean, Analyst]

Paul, on development, in the past, you've said you'd want to do spec development because rents are rising. Is that still the case? Or would you want to do pre-leasing before you started any new development?

[Paul Malcolm Dykeman, CEO, President & Trustee]

And the answer to this question has probably changed even in the last 4 to 6 weeks. So we were getting more and more comfortable with development. We're kind of signaling, let's talk to some tenants and figure it out. I'm completely back to being bullish that we should just build. So we're with Cooper down in Guelph. There's 2 more buildings that are in the getting permitting process. We did some tendering on one of our on-balance sheet developments in the GTA and which is a bad time to tender because of the pandemic because costs were inflated. So again, we're probably going to push that one into early 2021. But yes, we have a pipeline of roughly 750,000 square feet that I think should be in the ground and under construction in 2021. And we don't need to have any pre-leasing. So the market rents, we're seeing -- even the east part of the city Pickering and Ajax, Oshawa that would be the rental rates there are now high 8s, $9. Like in 3 or 5 years ago, you would have thought that's nowhere where you want it to be, but that market is becoming very, very interesting. So we're there. And as I mentioned, Montreal is a hidden market because we don't see it every day as much, but it's still very tight, and for good quality real estate. So I think the key in Montreal, there might be some vacancy. But it's inferior products. So I think if you're -- again, I think there's an opportunity, maybe not to the same level in the GTA, but definitely Montreal could handle some spec development as well.

[Troy Raymond MacLean, Analyst]

Is that something you'd undertake on your own? Or would that be with Montoni?

[Paul Malcolm Dykeman, CEO, President & Trustee]

We'll look at various partners, I think we don't have an exclusivity with Montoni. So wherever we can get it. Again, we looked at land to buy on balance sheet. But in this version of Summit, and it's in a very difficult development environment, we're happy to buy buildings and expand them ourselves. We're happy to have partnerships where we have options to buy at the end. So however, we can get our hands on that pipeline of good quality development program. We'll do it, whatever way makes the most sense.

[Troy Raymond MacLean, Analyst]

And then just my final question on development. Is construction financing harder to come by now than versus pre-pandemic? Or is it kind of more back to normal?

[Paul Malcolm Dykeman, CEO, President & Trustee]

I haven't really -- we haven't tested it, but everything else on financing. And right now Summit is seen as a very high-quality covenant. And Troy, even when Ross was testing the mortgage market, there's a strong appetite for industrial from lenders. They just see it as a bit of a safe haven in today's environment because of the fundamentals and the increasing demand. So I think lenders are comfortable. So if you're building a -- doing developments in Toronto or Montreal, you're not going to have any problem doing construction financing.

[Troy Raymond MacLean, Analyst]

And then just in Toronto or Montreal, before the pandemic, there was a lot of other landlords that were -- very large landlords were very aggressive on pushing rents. Is that still largely the case where landlords still have the same amount of pricing power as they had before and the large guys have not slowed down at all?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Well, slow down. We did hear, not unlike us, Orlando, they put a bit of a pause on their spec development program for 4 months. But guess what, they're saying the same thing that I'm saying today, well, okay, let's get back at it. So I think this was a bit more of a pause. And I'm not saying it's [ more ] like there will be tenants that fail in the GTA, but some of the tenants have embedded rents that are in the $4 or 5s and 6s. If anything, that's going to be an opportunity to look at those kind of assets where you can maybe attend a failing, get a lease buyout is a good business plan rather than having a long-term lease. So -- yes. No, I think the landlords, they were maybe a little quieter by the sense of like $0.25 doing some lease renewals and stuff. We're still getting 40% bumps. We have a lease in Toronto that does a reset after 5 years of a 10-year lease. That rent is going to go up by over 40% on 250,000 square feet. And it actually could have gone up higher, but one of the trade-offs the tenant was willing to look at as they've extended their 5-year lease into a new 10-year lease and then having very healthy 2.5%, 3% steps in the out years. Yes. So things are very, very positive. And they're still pointing -- its replacement costs like there's nothing that's changed that's going to cause replacement cost to be impacted. But maybe the level of rate of increase of a replacement cost was quiet for the last 6 months, but I think it's going to jump back and start to continue. And the only other impact that we can't really quantify yet is the level of immigration into Canada. It's gone quiet, but when is that going to pick up again and get back to our pre-COVID levels. So if anything, there's a bit of a pause or a bit of a moment here, but nothing fundamentally has changed.

[Operator]

[Operator Instructions] Your next question comes from the line of Mike Markidis with Desjardins.

[Michael Markidis, Real Estate Analyst]

Okay. Paul, I think your enthusiasm is quite evident. I am curious though. I think early or, let's say, 1 to 2 years ago, you would have been very proactive in locking down leases ahead of time. And then with the benefit on insight as the market continues to strengthen, you might have communicated a little bit of -- I don't want you disappointed, but you thought maybe you've left some money on the table. Are we back to that let's wait as long as possible environment from a leasing perspective? Or do you think it warrants being more proactive than getting things done ahead of time right now?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Well, it's a market -- just the whole thing about being upbeat right now. This is only new. So it was kind of like 4 or 5 weeks ago and really starts from the rental collections and you're going, okay, like the world is not falling off the edge. We need to -- big picture, industrial is going to perform well over the next 3 to 5 years. So we need to get off our hands and start taking advantage of it. But on the leasing front, Calgary and Edmonton, we're going to take the most defensive approach. We bought that portfolio at a very high yield. We've improved that yield. But the fundamentals are not as strong in Western Canada. There's still lots of activity. So like people keep underestimating Alberta and they think oil and gas and occupancies are going to go down by 20%. But that's not the case. There's still leasing going on. There's new tenants coming in, but we're going to take a defensive stance. So we're looking out 24 months, anything we can lockdown in Calgary and Edmonton, we're going to do that. Toronto, it's now slipping back to -- and that's -- it's going to start with the development. So that I'm saying we're comfortable to spec development, and we're not in a rush to try to lease it up because if we build a 100,000 square foot in primary in Mississauga. We would have -- when we bought that property, we were doing pro formas at $8 when we started to actually launch the -- launched that building, we did some tendering, costs came in higher than budget, but our expectations were high $9 to $10. And the discussion we had yesterday, we wouldn't be shocked if this would end up being $11 or $12 rents. So yes. So I think waiting is going to help you on GTA. But it's a space-by-space places. So some of our existing spaces, you're going, oh, if I get that back, I've got to do a lot of renovations. It's kind of set up, particularly for that tenant. So you take that into consideration. So it's a case-by-case basis. But generally, yes, we're quite bullish on the Toronto market to wait. And Montreal is very stable. It's through the whole pandemic. It's been probably the most stable segment of our portfolio.

[Michael Markidis, Real Estate Analyst]

Okay. And then on balance, I realize it's space by space. But when you look at your portfolio, is Montreal as strong as Toronto, or would you say it's a little -- it's less strong? I guess, would be...

[Paul Malcolm Dykeman, CEO, President & Trustee]

Well, it's -- when you look at the statistics, and I've heard the availability in Toronto is like $1 or -- move it up a little bit to like $1.5. Montreal is under $3. So both those markets are extremely tight. And what we've seen in Montreal, is a -- tenants can't find, especially larger spaces. So this tenant we were able to get, it went from like $4.40 up to closer to $7 rent on that 150,000 square feet. But it's just hard to get in, hard to find space of decent quality. So I do think the rental rates in Montreal have that same opportunity of going up. So for whatever reason, Montreal is under building to meet their demand. So if that trend continues, you could see it being as tight as Toronto in the next 2 or 3 years. And at that point, you could even see a further progression of improving rents in Montreal. But for now, it's a very healthy market. And again, directionally, everything is pointing that it's going to continue to improve.

[Michael Markidis, Real Estate Analyst]

Okay. A couple of technical questions here. Did you guys have any CECRA applications or CECRA's that you been collected in Montreal? Or was it all, Ontario and others?

[Paul Malcolm Dykeman, CEO, President & Trustee]

We have -- well, I don't have the 30 -- it was at 11.1. This one is 3 in Calgary, 4 in Edmonton, 3 in Ottawa and 1 in Brampton. So no, none in Montreal. And again, because we don't have that small bay product in Montreal. So it really was those local tenants. These tenants range from 1,300 square feet up to -- the largest one is like 30,000 square feet. So they are really more of the small bay and local players.

[Michael Markidis, Real Estate Analyst]

Yes. I can appreciate that. It's just the wrinkle with the 12.5% and the 25% differential in different accounting methods we've seen. So just trying to make sure we're all comparative on how we're looking at that. And then on the free rent that you guys granted, so I suspect you wouldn't have I mean there's no receivable. It's a free rent. But I guess if you were to give somebody an abatement, it's different. I'm just trying to get a sense on the accounting treatment. Was there a credit loss associated with that? Or no, it would be -- you would be able to confiscate or...

[Paul Malcolm Dykeman, CEO, President & Trustee]

No. No, just a regular lease extension. And again, we're just trying to find a way to not just keep getting their phone number bigger and bigger/. People like you and me out that is hard collectively. But the kind of tenants that we've done the deferrals with, like I said, they're pretty substantive companies international with Canadian subsidiaries or national with 10 or 12 locations across Canada. So we're confident that we're going to get the majority of that. It's really a smaller bay where we may -- the CECRA ones are obvious, but then we've made some allowances for some other tenants. And again, that -- well, I think those allowances are kind of across the board except Montreal. So I think it's Ontario and Alberta, where we -- so for particular tenants, yes.

[Ross Drake, Chief Financial Officer]

And the free rent you're talking about is included in our leasing costs that we talked in our MD&A.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. Yes.

[Michael Markidis, Real Estate Analyst]

Got you. But I think your straight-line rent sequentially actually went down. I have to go back, but that we didn't really see the uptick. Is that something that's going to -- we're going to see more of in the third quarter or just 2Q a good run rate?

[Ross Drake, Chief Financial Officer]

I don't see much change in the straight-lining of rent. There's only a few deals that we did where we extended the term. So really, the impact long-term is not going to be that dramatic for those increases on those out years and that. So yes. The problem...

[Michael Markidis, Real Estate Analyst]

This last -- sorry, go ahead. I was just going to say, just a last 1 for me before I turn it back. The collection numbers you have ex deferrals and agreements. I just want to confirm that, that would include the government receivable on the CECRA program?

[Ross Drake, Chief Financial Officer]

So as of that -- as of the -- as of June 30, we hadn't collected any of that CECRA money. So we're still sitting in receivables. So we're just starting to see that money come in, in the last couple of weeks on that. Yes, so it...

[Michael Markidis, Real Estate Analyst]

What I heard was -- we've heard

[Paul Malcolm Dykeman, CEO, President & Trustee]

We've got 90% of the CECRA money in, and it's primarily the stuff for July and then obviously, whatever we decide to do for the August tenants that will come in. But again, all the ones for July, those tenants are already preapproved. And so we're at 0 concern. We're going to get that money back.

[Michael Markidis, Real Estate Analyst]

Yes. But I guess, the 92.4%, I think it was that you guys stated your collection rate before arrangements, that would include [ if I could ] count the government receivable as collected? I am just trying to...

[Paul Malcolm Dykeman, CEO, President & Trustee]

No.

[Michael Markidis, Real Estate Analyst]

You don't.

[Paul Malcolm Dykeman, CEO, President & Trustee]

We haven't. No, we have not. Yes. And August at 94%. We're on track to at least meet where we were in July at 96%. Hopefully, we'll do a little bit better. But the real month is going to be September because the majority of any deferral agreements or free rent agreements only went -- they went down each month and August is pretty much the last month where you're going to see that. So September, you're going to get more of a clean tenants how they pay and the percentage has gone up or they didn't pay, so that would be interesting.

[Operator]

Your next question comes from the line of Matt Kornack with National Bank Financial.

[Matt Kornack, Analyst]

On the 1% to 2% of space that you may potentially get back, what portion of that would you say you want to get back? And at this point, have you done any sort of preemptive leasing on space that may be tenanted by tenants that you think are going to fail? Or will you wait until they ultimately fail?

[Paul Malcolm Dykeman, CEO, President & Trustee]

We won't wait. And interesting enough, I'm looking at the schedule here, and some of the tenants in Calgary we had brokers and they know this market well. They go, these are the ones out by the airport, and they're going -- we have some tenets that, if any of that space comes back, would be interested to be closer to the airport. So yes, we won't wait for a tenant to fail and get into arrears. We'll be proactive. And in some cases, you feel bad because these people they are going, we ask them like, do you want to hand back the keys because we're happy to take back the keys. And they're going, no, no, it's just my [indiscernible] and we're going to try to make it work. And they've got the CECRA, they're trying to borrow from family and friends. And so but they will -- just mathematically, some of them will not make it. So we'll be proactive. But there's other ones like rock climbing facilities. And again, some of these operations have a few locations, so they're a bigger operation. They were paying rent. They went -- they said we're eligible for CECRA. So we put it in there. To help them give them that extra boost, but they're now starting to ramp up again. So I think the companies that are well run and can make a goal of it are going to do that. But I just -- I'm just trying to get people a heads up. My personal expectation is our occupancy will dip a little bit. I know our asset management people on the phone are going to go. No, it's not because we're going to fix it up. So we've always done a very good job of backfilling, but there will be some turnover in the small bay tenants. And to be honest, absolutely to part of your question, if we can get this space back and convert it back into true industrial, it's just -- it's better for us because it's just more logical. And some of that space is very easy to convert back. There's not a lot of work to be required to -- some of them are soccer club or trampoline club, they just take out their equipment and they're back to a base building. So yes, we'll do that. It's going to be an interesting time over the next 3 to 6 months, I would think.

[Matt Kornack, Analyst]

Fair enough. And then on the CapEx front, I mean you're -- and I guess the way you reported, it's kind of a catch-all, but your additions to properties went up. I'd assume a portion of that would have been free rent. But how do you see CapEx ultimately playing out over the next little while as we deal with this may be elevated turnover?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. It's going to -- yes, it should increase a little bit. I don't have a particular guidance that I can provide. But clearly, we isolated the free rent, the $1.8 million. So that's definitely an anomaly that we normally -- that wouldn't have happened if we didn't have this. We had that 1 -- only 1 tenant in Edmonton in that 100,000 square feet that left, but we were able to backfill within the -- less than 30 days and it's a new tenured lease. So yes. It's just hard to give you like a good run rate there. But in Toronto and Montreal, we're still seeing -- every tenant has nowhere to go. So they're trying to stay. So we're not going to see a lot of turnover in any of the bigger spaces. So I think this -- I think we're down to -- I'm looking at the sheet, I'd say, 1% of our tenant base is going to turnover. So it's a couple of hundred thousand square feet. And it depends on the exact space, but $4 a square foot, something like that could be what you're going to incur. But it's not huge dollars. The value could be a little bit higher.

[Matt Kornack, Analyst]

And longer term, I guess, your views on maintenance CapEx and the portfolio really haven't changed. It's...

[Paul Malcolm Dykeman, CEO, President & Trustee]

No. Not at all. And if anything in the tight markets, I mean, really, when our tenants, no matter the size, if it's 200,000 square feet or whatever it's like we're not giving you a $0.01 on a renewal. So that's how the negotiation starts. And the only time we put money into the deal, if it's something that we think improves the buildings by upgrading lighting or improving things, and then we usually add that into the rent as an amortized amount. So yes -- so we're very stingy on that. Again, it will be a different approach in Alberta. If we have to give more free rent or something to entice someone to come into the spaces, we'll do that. But most of our buildings that we bought, we do good strong due diligence and the only nonrecoverable CapEx basically is roofs. So as long as you have a good roofing program and you keep your roofs maintained well, you don't have a big exposure to CapEx that way.

[Matt Kornack, Analyst]

Okay. And then on the financing side, I'd assume it's worth the 50 basis points differential between your variable and fixed rate financing to fixed rates? Or will you keep a higher level of variable rate debt in the stock.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. We're very comfortable to keep the variable rate. Because I don't think the short term -- and as Ross mentioned, we're comfortable we can extend our bridge loan on the same term. So we keep that rate there. What Ross had mentioned, we're looking at doing some secured mortgage financing, the tenure was 2.8%. So that was 60 basis points. The 5 years, it was down around 2.6%. And I think all of the rates are tightening. And so it might not even be that 50 basis points. But no, we'll want to lock it in, but we're not in the rush. That's why we're still -- we'll extend. The bridge loan will be probably the first step. And then if we're evaluating, do we look at doing a combination of unsecured or secured, but we haven't made a final decision on that. But all I'm saying is every period of time, we seem to wait here. Both of those options are continuing to improve for us. So I think we're waiting. And I think it's getting very attractive to do something there. So we'll start to move that forward a little bit more.

[Ross Drake, Chief Financial Officer]

Long term, we'll deal with the $350 million, but the $300 million on the unsecured revolver will stay floating rate. So that...

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, yes. And that will go up and down as we do acquisitions and then refinance from time to time.

[Matt Kornack, Analyst]

And just given those 10 -- I mean, that's incredibly inexpensive financing. Do you think that ultimately funnels down into cap rates? I mean people have to deal with what normalized operations look like, but I think presumably, spreads and to those figures would assume cap rates come down for some product? I don't know your thoughts are?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Well, I mean -- well, I know when we're underwriting, and we look at where our cost of capital is, and we throw in a piece of debt of 2.5% or 2.6% or whatever. Our breakeven cap rate is significantly lower. So we can pay more. We don't want to. So -- but there's arguments you could do that. But I think the stronger argument on cap rates is just the underlying fundamentals. So if these rental growth rates in Toronto and Montreal are continuing to improve and stay strong. There are arguments that cap rates could go down. And obviously, I think in an environment where -- when you look at our average in-place mortgage rate is 3.7%. At 1 point, we never thought there was upside on that as that rolls over. But in our current environment, there's definitely some pickup as those pieces of debt rollover. So yes, I think there's a few reasons. I think low interest rates are going to help, but I think the rental rate potential growth is probably the bigger factor of why cap rates continue. That's why we don't see any risk or pressure where people are saying cap rates are going to go the other way, like in some of the other asset classes.

[Operator]

Your final question comes from the line of Chris Couprie with CIBC.

[Chris Couprie, Research Analyst]

Chris. Just 2 quick ones. Just on the 2021 lease maturities. Just wondering if you can remind us kind of the geographic split there and just maybe some color as to how advanced you are on renewal discussions at this point in the year? And then second question, data center market broadly seems to be doing quite well. I'm just wondering if there's any activity to note at the property in Montreal.

[Paul Malcolm Dykeman, CEO, President & Trustee]

All right. Well, I'll take the second question, and then I'll give Ross a few minutes to see if he could find a piece paper to talk about 2020 or '21. Yes. So I mean Louis is on our Board. He's on the Brookfield Board and sees that whole data center environment from a much more global basis and he's been saying this for years. If it wasn't doing well, it's ready to explode with the advent of 5G. And I think the strategy in Montreal has always been, let's try to not do that. It's 9 stories to piecemeal it out. It's kind of wait for that home run swing where you can lease-up the entire building to one of the big cloud providers. So I think it's just a matter of time when that hits. There's clearly lots of demand. But I think 5G -- and this is the global requirement for secured data, it's going to drive the data center market. So I think there's huge potential for that asset class in Canada. It's not really our core business, but we are still very bullish on it. So nothing definitive on Montreal, but we're still very optimistic that that's likely going to end up in a very attractive outcome at some point. And Ross, I mean we've done a few 2021. We're really starting with focusing, again, on a defensive basis, looking at Calgary and Edmonton and proactively dealing with those and selected. But Ross, do you have the breakdown?

[Ross Drake, Chief Financial Officer]

50% of the 2021 is in the GTA. 25% is in Alberta. And then the other 25% is split between Québec and the other markets in Ontario in that. So just...

[Operator]

This concludes our question-and-answer session. I will now turn the call back over to Paul Dykeman for closing remarks.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Okay. Well, thank you, everyone. This is clearly not a normal quarter for the world, and I think we're -- we have lots of good reasons to be optimistic and hopeful that we're going to continue to operate in a low-COVID environment. We're definitely, as you can tell from the tone, turning the corner on lots of facets of our business. And so we're excited about the opportunities, both short term and long term for Summit. So thanks again, and we'll talk to you again next quarter. Goodbye.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.