Summit Industrial Income REIT

TSX:SMU.UN

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to the Summit REIT Fourth Quarter and Year-end 2017 Results Conference Call. Please be advised that this call is being recorded on Wednesday, February 21, 2018. I would now like to turn the meeting over to Mr. Paul Dykeman, Chief Executive Officer. Please go ahead, Mr. Dykeman.

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

Thank you. Good morning, and thanks 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 actual results to differ materially from those disclosed or implied. I direct you to our earnings release, MD&A, and other securities filings for additional information about these assumptions, risks, and uncertainties. 2017 was a year of accelerated growth for Summit as we significantly increased the size and scale of our property portfolio, diversified into a new high yield asset class, and increased our presence in our target geographic markets. These strategic investments drove record results for the year. During 2017, we acquired a total of 31 properties, 30 light industrial properties, and one datacenter, for a total acquisition cost of just under $410 million, generating a very strong overall 6.2 cap rate. The acquisition added 3.6 million square feet to our portfolio, increasing the total asset base to 84 properties at year-end, totaling 8.9 million square feet of GLA and total assets at December 31 grew to just over $1 billion, which is a significant milestone for us. Our growth during the year was funded primarily by 3 successful bought deal offerings, raising gross proceeds of $218.5 million and $209 million of new debt financing at an average of 3.35% locking in very close to a 300 basis point spread between the financing and the cap rate.Our focus on greater Toronto and Montreal markets continued with our property purchase in 2017, today approximately 60% of our portfolio is well located in the GTA with another 22% in the Montreal region. This focus allows us to capitalize on very strong fundamentals in these markets. Both are experiencing low availability and vacancy rates with absorption outpacing new supply as well as we're capturing increasing operating efficiencies and economies of scale.In late December, we furthered strengthened and diversified our asset base with the establishment of a joint venture relationship with Urbacon, Canada's most experienced developer and manager of high yield data center properties in Canada. We now have exclusive rights to participate in all of Urbacon Canadian datacenter projects in the future.We completed our first transaction with Urbacon in December with the purchase of 50% interest in a brand new, purpose built, 10-megawatt datacenter in GTA and we also provided a mezzanine loan to Urbacon relating to a recently completed datacenter in downtown Montreal and we have the option to convert this loan at cost into a 50% interest in the property once it's stabilized.We also extended our working capital loan to Urbacon to begin construction of additional datacenters primarily in the GTA and there's 4 more sites that they have an ability to grow in Toronto.We are very excited about entering this high yielding and fast growing market. Demand for datacenters continues to grow, driven by accelerated use of smartphones, digital entertainment, and migration of business and personal communications, and system to cloud based internet networks. These new transactions are also another example of how, with the significant increase in the size and scale of our asset base, we're now able to do more highly accretive, value add investing for the benefit of our unit holders.This accelerate growth in our portfolio during 2017 resulted in a year of record operating and financial performance. Revenues were up 30% compared to the prior year driven by our acquisitions and near full occupancies and rising monthly rents. NOI was up 34.1% for the year and FFO was up over 37% for the year.As Ross will explain, our per unit numbers and payout ratio were impacted by the 3 equity offerings during the year, which increased the weighted average number of units outstanding by 48% and the time it took to invest the proceeds and the purchase of income producing properties. We estimate the impact on FFO on a per unit basis for the time it took to fully invest the funds were approximately $0.05 per unit. It’s also worth noting a large percent of our portfolio growth occurred in the third and fourth quarters so we'll see the full benefit of that growth in 2018. In summary, it was a very strong year for Summit. We look forward to even better results in 2018. I'll now turn things over to Ross to discuss the operating results in more detail. Go ahead, Ross.

[Ross Drake, Chief Financial Officer]

Thanks, Paul. Paul mentioned the over 69% increase in the size of our property portfolio had a significant and very positive impact on our results for the year. Revenues were up 32.5% and 30.3% for the 3 months and year ended December 31, 2017. Industrial occupancies remain nearly full at 98.4% at year-end and our current 1.5% annual contractual rent increases will contribute to our organic revenue growth going forward. With this growth and our continuing focus on efficient property management, NOI was up 41.1% and 34.1% respectively in the fourth quarter and year ended December 31, 2017.FFO rose a very strong 37.3% to $27 million for the year ended December 31, up from $19.6 million in the prior year. With the majority of our portfolio growth in the third and fourth quarters, FFO was up 42% in the fourth quarter. As Paul mentioned, for the full year's contribution from our acquisitions in 2018, we expect another very strong year.With 3 equity offerings during the year, our per unit amounts and payout ratios were impacted by the increasing units outstanding and the time it took to fully invest the funds in purchasing income producing properties. Our MD&A breaks down the impact for each quarter. Looking ahead, we expect we will return to our track record of solid accretive growth and much improved payout ratios as our 2017 acquisitions contribute a full year to our results going forward.Also impacting our FFO per unit was a onetime bad debt and the resulting NOI downtime due to a tenant failure in the second quarter, a rare occurrence in our business. We released this space in early June to a tenant with a 4.2% increase in rental rate. As well, there was approximately $130,000 of failed transaction costs on deals that we dropped mainly due to environmental issues that was included in our G&A.Our proactive and successful leasing programs continued in 2017 as we completed over 385,000 square feet of lease renewals and almost 131,000 square feet of new lease deals for a total of 516,000 square feet. Our lease renewals start on average of 3.28% higher than the expiring rent. We also completed early renewals on 50,000 square feet set to expire in 2018 and 189,000 square feet expiring in 2019. As of December 31, there was 4.8% of lease expirees in 2018. So far this year, we have renewed 102,000 square feet for a 12-year term and we are in active negotiations for the remaining 3.6% of the portfolio remaining to be renewed this year. We expect to complete the majority of these renewals early in the year.With these strong leasing activities, our renewals have resulted in a very strong 84% retention rate in 2017, a key objective at Summit. Our balance sheet and liquidity position remains strong at year-end with a 51.3% leverage ratio. The average leverage ratio through the fourth quarter was 49.6% compared with 54.4% last year. Acquisition capacity was approximately $133 million at December 31, 2017. Our weighted average effective interest rate was 3.5% at year-end with a weighted average term to maturity of 4 years. Debt service and interest coverage ratios also remain strong and stable at December 31.Total assets rose to just over $1 billion in 2017, the result of our accelerate growth during the year, and $36.2 million in fair value gains on our properties, mainly in the GTA properties due to increasing market values in the region.During the year, 2 properties with a lending value totaling approximately $18 million were added as security on our revolving credit facility. As of December 31, 2017, there was $42 million of an available $57.4 million drawn on the revolving operating facilities as well and all are of $90 million drawn on a temporary nonrevolving bridge credit facility put in place to fund acquisitions in December until long-term financing was secured.Including this temporary bridge and financing, and the assumption of $25 million of construction debt on our 50% acquisition of the downtown -- of the GTA datacenter -- our exposure to floating rate debt was approximately 31.2% of a total as of December 31, 2017. All in all, another great year for Summit. Thanks for your time this morning. I'll turn things back to Paul to wrap up.

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

Thanks, Ross. So looking ahead, we believe the significant increase in our size and scale will bring increasing benefits to our unit holders over the long term. First, the accelerated pace of our growth, particularly through the last half of 2017 will generate very strong and accretive growth in 2018 as we realize a full year's contribution from these new acquisitions.We also expect to continue the pace of accelerated growth going forward. Our pipeline of potential acquisitions remains strong. We are always evaluating a number of new opportunities that will add to our cash flows in the coming quarters. We are also very pleased to have established the new partnership with Urbacon to develop, own, and operate high yielding datacenters in Canada. Our initial investments in the space are performing very well. We look forward to transitioning our mezzanine loan into ownership of the downtown facility once it is stabilized, which happens at about 50% to occupancy.Our working capital loan to Urbacon will contribute to the further growth as they are getting the Barker Business Digital Campus ready in Richmond Hill to build additional datacenters. We have seen significant growth coming from the property developments in the coming years. We also believe our organic growth will continue as we capitalize on the very strong fundamentals in the GTA light industrial sector. Our properties are essentially fully occupied and we have 1.5% annual escalations in monthly rents that will add to the stability of sustainability of our cash flows going forward.Finally, we will continue to leverage our network of joint venture partners to acquire new properties as well as additional development and redevelopment approaches, as we believe we will see more of those innovative growth programs in the quarters ahead. In summary, 2017 was a record year for Summit and we look forward for even a better year in 2018. With continued strong industry fundamentals, best in class properties, and a proven management team with decades of experience, we believe we are well positioned to deliver increasing value to our unit holders over time. Thank you for your time and attention this morning and we are now pleased to take any questions you may have. Operator?

[Operator]

[Operator Instructions] The first question is from Brad Sturges from Industrial Alliance.

[Bradley Sturges, Equity Research Analyst]

Starting from a leasing perspective, at the start of Q4, I think there was a couple vacancies, one in Edmonton, another one -- a small one in B.C. Just looking for an update on what the status of those 2 assets are?

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

Sure, I'll talk about that. So they're still vacant. The Edmonton market, it's been improving. It's a slow and gradual improvement but vacancy rates are somewhere in that 8% to 10% range. We're having tours at the property. We're probably going to do a little bit of lighting upgrades or something on the property, just make it a little bit more attractive. It was really built as a purpose built for people in the oil and gas business. So the way the loading and that kind of works. So we're looking for a specific type of tenant for that building. So I think it's going to be another 3 to 6 months before that one potentially is going to get leased. The B.C., it's only 8,200 square feet but it's in Cranbrook. So it was one of the original properties that when we took over Pro Venture that they owned. So that one is going to be out there a little bit longer. The positive news, there's 2 vacancies that we bought in the GTA, one at the Humberline property. We're into the city to get a variance to be able to knock some loading doors in the side of the vacancy. But we've already had many, many tours and I'm sure once we get the variance in the loading doors, there won't be any downtime. So we expect that to be another 4 months getting the approval from the city and that's 44,000 square feet. So that one should be leased up after that happens. And then in the investor's group, we picked up 28,000 square feet of vacancy and that's more in flex building so they were asking $16 rents. We've lowered that to $12.50 but as is. So I'm sure we'll spend some money there and the rates will go up. But we're having about 2 tours a week on that one. So both the GTA vacancies will get leased up. The Montreal party that's in a joint venture, 50-50. The majority of that space has been leased up in the middle of January, was it, Ross? Yes, middle of January. I think there's only about 12,000 square feet of that vacancy and we expect that tenant to grow into that space. So we're going to be a little bit longer on that B.C. and Edmonton properties. There is another Edmonton expiree coming up in January. That tenant is going to over hold to, I believe now to the end of June, and we've got a new tenant going in, in August. So we're going to only have about 30 days of downtime. So I think those 2 western assets in those markets aren't quite as strong as the GTA. There will be a little bit of vacancy but other than that, we should be close to 100% occupancy at some point during the year.

[Bradley Sturges, Equity Research Analyst]

And with the Edmonton asset, have you had to change your expectations from a rental rate perspective or the amount of capital you need to put into it? Or is it just a function of it's waiting for the right tenant to come along to take that space.

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

It's probably yes, we're going to spend a little bit of money on a lighting upgrade and market rents have gone down from what was in place but they're still a lot healthier than they are in Toronto. So rental rates are going down but they're still in that $8 to $9 range. They're just coming off of numbers that were like $12. So yes, you're going backwards a little bit but it's not much square footage. That's why clearly we see Toronto, and that's where the bulk of our portfolio is, and where the growth in the rental rates is going to happen.

[Bradley Sturges, Equity Research Analyst]

I guess this year you’ve already done 102,000 square feet renewal for 12-year term. Where is that and what was the leasing spread done on year 1, I guess?

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

That was a property that we didn't want to have vacant because it's in Peterborough so there's a tenant that has specific use there. So we just basically wanted to tie that tenant up. So the rental rate growth I think, Ross, over the whole 12 years, averages about -- it's about 3% for the whole term. But the rents in there are still in the $4 going to $5 by the end of the lease. So the rental growth wasn't the key there. It was just not getting that property back. And then the other major consideration is the tenant is responsible and committed to do a roof replacement, which is going to be about $1.5 million they're going to spend there. So that stabilized. We're going to look at that property and a few other properties that are not in GTA of potentially selling or selling down an interest in selective properties to do some capital recycling. So that will be one now that's been stabilized to look at reducing our exposure to that particular market.

[Bradley Sturges, Equity Research Analyst]

And from the disposition perspective, is there a quantum or have you done initial estimates of what the proceeds of that could be if…

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

It's probably in the magnitude of $60 million to $80 million. There's some [ air over ] could be a little bit higher, but somewhere in that kind of range.

[Bradley Sturges, Equity Research Analyst]

And lastly, just in terms of lease expirees this year, it sounds like you’ve made some pretty quick progress and should see some renewals -- more renewals in Q1. Just expectations for leasing spreads on average for 2018?

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

So Kim Hill runs our property management group and I've never seen her as excited as she is right now because it's finally, clearly a landlord market. So a lot of tenants that do have options are trying to exercise those but the rents will go to market. We've had tenants sitting on the fence. They've been offered we'll renew you at $5.50, which is an 8% to 10% increase and they wait 6 months, and we go, okay, well, now it's $5.75. So clearly, the power is going to us. We're not giving options to new tenants unless they pay for that in the rent. And probably, there's a tipping point that we're starting to see. We have 3 tenants with real demand to add about 50,000 square feet. So we're either going to try to accommodate them in our building but clearly, it's going to be -- we're going to be having to be able to auction those spaces off to the highest bidder. So again, when you're renewing tenants, we're usually not as aggressive on getting the rental rate bumps. But I still think 5%, 8% on average but when we're doing leasing of vacant space, we're seeing closer to 15% increase in rents. So when I look forward, we bought some new smaller bay stuff in Scarborough and all of those tenants are wanting to stay, most of them are wanting to expand, and we're probably seeing 15% to 20% increases on those small bay. And those are under 10,000 square foot so they're going from the 4 something to $6 rent. So there's definitely -- and we bought that at basically $100 a square foot. It was because the in place rents were significantly below where market is going to be. So even though you're buying at a $5.4 cap, once those are leased up, you'll be achieving a much higher yield. So it's a very good time to be in the GTA real estate market and it's just going to be we don't have space to accommodate all this expansion. If we could ever find vacant buildings or land that we could build on, we'll be doing that.

[Operator]

The next question is from Stephane Boire from Echelon Wealth Partners.

[Stephane Boire, Real Estate Analyst]

I think you mentioned the occupancy for the datacenter, you mentioned 50%. Is it for the one in Montreal or the one in Richmond?

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

The one in Richmond Hill. So it's a 50% occupied to a major cloud provider that we can't name for a 15-year term. That particular tenant has an option to expand into the balance of the space, which the option would expire in May. We're having discussions with that tenant. So we're pretty optimistic that they're going to take the balance of the space. Because of the complicated outfit of the space, that occupancy into the 100% probably would be in the third quarter, somewhere around October would be the target date. But these are very unique and specialized spaces and they take anywhere from 4 to 6 months to fit up from the time the tenant says we're ready to go. Because you build them in increments. You don't put all of the infrastructure in place until the tenant says go ahead. In Montreal, that building is vacant so we have a mezz loan. As I mentioned earlier, the rents that you achieve on these datacenters are significantly higher than anything else we'd see. So once you're at about 50% occupancy, it basically covers that and your yield is enough to be able to convert your mezzanine into ownership. So we're having discussions or partner with a number of tenants. And the way we would describe Montreal right now, it's called a power shell. So the power is there but the fit out of all of the 9 floors are not complete. So we do that on purpose because a tenant that has its own particular uses might not need all of the redundancy and the backup requirements of other types of tenants. So each floor can be configured differently depending on the demand or what's required from the tenants. So there's some very unique tenants that we're talking to, some that are high tech companies that do AI and all kinds of very exciting things. So the Montreal, we would give ourselves 24 months to be able to fully fit that up, but we're also talking to a tenant that potentially is interested in the entire building. So we're on standby hoping for some very exciting news there but clearly, the main advantage we have is our buildings are built and ready to go. So once these companies make a decision, we have anywhere from a 6 to 12 month head start on any other competing kind of spaces because we're kind of ready to go. Like I said, it's a 3 to 6 month lead-time to be able to outfit the space specifically for that particular tenant. I'll add the last one. So nice we're on the DC one in Toronto, we believe that that tenant is going to be expanding into the balance of the building. So we really don't have any space in the GTA. So Urbacon has already done significant work bringing the power into DC2. So I would think fairly shortly, Summit would extend another mezzanine loan to start the construction of DC2 once the ground starts to thaw. And again, we can build it in phases. So we'd start by just building the shell and getting that ready and then we'd be able to accommodate other -- the tenant in DC1 might want further space. And we can build up to 5 properties on the campus and that's the trend, and there's a lot of operating synergies and efficiencies by having multiple datacenters because they're centrally controlled. In DC1 there's the control center built into that building that will control ultimately all the 5 datacenters and monitoring all the systems that are there. So DC2 is like 40,000 square feet smaller than DC1, but still able to produce the same 10 megawatts of power. So it's a very fascinating business and we're excited to see the contribution it's going to make to Summit. Because the yields, once fully leased, are significantly greater than industrial and they're in double digits.

[Operator]

The next question is from Troy MacLean from Bank of Montreal.

[Troy Raymond MacLean, Analyst]

Just wanted to circle back on your comment about rent growth and getting more aggressive. From what you're seeing in the market, in the GTA are you seeing other landlords getting more aggressive on rent increases versus last year?

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

Absolutely, and I think the one -- when we hear it anecdotally and we've got a fairly good relationship with the largest owner of industrial, Orlando. They own 40 million square feet and last we heard, they had 58,000 square feet of vacancy. So when you're in that position and you have tenants that their businesses are growing, the landlord -- and Orlando has never been the leader in terms of getting rental growth and they are now consistently seeing anywhere from 5% to 10% increases in their renewal rates. There's one thing we're doing, which we're going to adopt as well, which is getting tenants to pay for options. So right now, you want the flexibility to be able to kick tenants out because you want to put the tenant in there that's going to pay the highest amount of rent. So you want to have as much flexibility. So if a tenant wants an option, you basically say that's going to be another $0.10 or $0.15 a square foot to give you that flexibility. So it's going to be very interesting times going forward in terms of how to do that. But again, we've done this math. It's always better to renew tenants because if you have 3 months of downtime, you get an extra $0.10 or $0.15 you're still not ahead. So it's always better to continue. So you just can't push the rents in those negotiations. You're building a long-term relationship with these tenants. So if you get vacancy that's when you really get to test the market and so Kim was saying, if I had that vacant I'd be putting a market rent of $6.50 on that but we're probably talking to the tenant at $5.75 or $5.80 or something like that. So that's kind of the difference between renewals and new leasing on vacant space.

[Troy Raymond MacLean, Analyst]

Speaking of vacancy, you mentioned this earlier about if you can find vacancy you'd look to buy it. Do you think you'd be able to buy anything in the GTA that has some vacancy that you can lease up? Or is that getting -- do vendors want value for that as well?

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

The 2 that we bought are interesting. I'll go through them. So the one in Humberline, and I think the guy made enough money on the building, but it was kind of I won't say silly the way he did it, but he leased the space leaving 40,000 square feet of vacancy on the end of the building that has no access and loading doors. So we're going to the city to be able to move around some landscaping and reconfigure the parking to be able to put in 2 or 3 loading doors. We're going to be able to lease that at probably $5 net and we already bought that building, I think, Ross, just under a 6-cap or something. So once that vacancy kicks in that property will be about a 6.5% yield. The properties that we bought from investors grew -- we bought at a 5.9 cap with that 28,000 square feet of vacancy. We're going to lease that out at double-digits like $12 so that's going to push up into the 6.5. So we're finding them but they're very, very rare. So the interesting thing that we're doing now, we have 3 properties under LOI. Two of those properties are coming with excess land and we've done that on purpose. So there's anywhere between 5 to 7 acres. So not big sites but we're definitely doing that to look at either expanding those particular buildings or building new standalone buildings. So I think we think there's probably about a couple hundred thousand square feet of building that we might be able to start and now, we have a great partner in Urbacon. They probably won't joint venture with us. We'll probably do this on -- because of the size -- we'll probably do them on Summit's balance sheet but they're also a very good builder and contractor and they've got lots of engineers and planners. So they're going to help us with the build-out of those couple properties. So we'll do that. The yields on cost are still not going to be great but the idea is you're accommodating your tenants. You're still getting brand new properties, improving the quality of your portfolio by doing that activity. The rents need to be $7.50, $8 or more to start making what we would call reasonable development yields. But we'll get what we can and we're still building good quality properties.

[Troy Raymond MacLean, Analyst]

So Urbacon would build but they wouldn’t be datacenters. They'd be typical industrial.

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

Yes, these are just going to be -- they're right in clusters where we already own -- we're buying -- one of the properties in the GTA, it's a 200,000 square feet building with 7 acres next to it. So we would just build more industrial on that site. These won't be datacenters. The datacenters all have to be integrated into a plan where you're bringing in significant power and that's why the datacenters, putting 5 in one place is good because you're bringing in massive amounts of power and utility. And it's much more efficient if you're doing that and ultimately going to be building out 5 buildings in the exact same location. So there's a lot of sites in Toronto, but to be able to make them datacenter ready, the infrastructure to do that would be too significant.

[Troy Raymond MacLean, Analyst]

And then what would be a development yield you'd target for something like that?

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

Well, I guess we really need to press the envelope on where we think rents are going to be. But we're still not seeing -- I would think it's going to be 5.5% to 6%. You might get lucky and you get a tenant that really needs a particular space and you can push them on rents. Now we say that. If you can get 5.5% to 6%, most properties in the GTA you're selling 5 or sub-5 cap rates now. So I think there's still a 100-basis point potentially spread or the one that Caterra sold actually was a 3.8 cap. But the kind of sized buildings that we're talking about are going to be 100,000 to 200,00 square foot buildings. But they'd still be well sought after if people could get their hands on them.

[Troy Raymond MacLean, Analyst]

And then just curious about the pricing. You mentioned you have a couple properties under agreement. Since Blackstone has entered the Canadian industrial market, have you seen vendors, especially in the GTA, wanting even more for their properties? Just curious that rates are going up but we're seeing new people coming in the market. What are you seeing in cap rates and do you think we're at a low or do you think there's more room for cap rates to compress given the supply and demand?

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

Vendors absolutely think that the cap rates have the ability to go down. There's a portfolio, one of Summit's former portfolios that it was owned by [ Common Era ]. It's now back out on the market with Slate. We've looked at several times up around American Drive near the airport. I think their expectation is a 5 or sub-5 cap for that and it's more of a flex space and so we bought the properties, which I would say virtually are the same as these from the investor's group at a 5.9 cap. And now, the current vendor believes that it's going to be a 5 or sub-5 cap, which we won't bid on because we just don't -- in that case you're not getting low embedded rents but rents are significantly higher. So you're definitely in the mid to low 5 caps. I think what Blackstone with PIRET, there's clearly an element of a portfolio premium. But it really goes back to our long held idea of replacement costs. So yield is less important today. It's about replacement costs. So the stuff we bought from Morguard was a lower cap rate than Investor's Group, 5.4, but clearly, much more upside on the rental rates. We're buying at $100 a square foot. I know and we've had end users and to her people come along saying we'd pay you $130 a square foot. So we'd have a 30% pop in our sale if we thought. But we'd rather move those rents up and maximize the value down the road. So it's an interesting time but with the datacenters and the accretiveness that they're going to be able to bring to Summit, we believe we're still going to be very competitive in the GTA and that's where we're going to continue to focus. We're always looking at Montreal. We'll keep looking at Alberta to a lesser extent, but GTA is really where we want to have our concentration. So 2 of our properties that we're looking at right now are in the GTA with the excess land and then one is just outside of the GTA in Ontario.

[Troy Raymond MacLean, Analyst]

Would you look at -- because the Montreal market, it seems like it's firming up quite a bit as well. Would you buy vacancy there as a way to add value or is that a market you probably wouldn't want to do that at this point?

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

Absolutely. We did one of those properties 18 months ago with Montoni in a 50-50. That was the [ Sipiod ]. We had a good -- I forget the ultimate yield on cost was close to 8% I think once it was fully leased up. So absolutely, for the right kind of property and we've got Montoni who is working with us to try to identify those. Again, there is some vacancy in Montreal but a lot of it is not the kind of quality that we want. But if you can find the right quality in vacancy, we absolutely would buy that. And because of our size, doing a couple smaller developments in the GTA, taking on the datacenter program, buying some of these vacant buildings in Montreal, those are all things that we think are natural add-on value add activities that's almost going to start to increase the amount of those kind of deals. And in Toronto, you just can't find the opportunities. But we could buy vacancy all day long here because there's so much demand.

[Operator]

[Operator Instructions] The next question is from Chris Couprie from the Canadian Imperial Bank of Commerce.

[Chris Couprie, Analyst]

Question just on the datacenter, Urbacon. How long does it typically take to build and stabilize an asset?

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

So we have a monthly meeting with our partners. That one happened to be yesterday so we're still in a little bit of a learning phase but these guys have been doing it forever. So kind of walk you through those steps. So essentially, we're getting ready to go on DC2, but even to get to talking about breaking ground, you've already spent close to $2 million on engineering drawings for these properties. They're so sophisticated and they have to be so precise. So you have to preload a lot of costs up front to get the designs and stuff. So we're bringing power in. We already have power into obviously DC1 is up and running, but that same power line, DC2, is right next door. So we don't have to do the extra work there. So this one is going to start as soon as the ground thaws and it's somewhere about 4 to 6 months to build what we would call the power shell. So that's the base building. You're bringing all your power conduits in, everything that's required to get that up and running. And at 80,000 square feet the way it's build, there's 4 particular pods there so you can actually have up to 4 tenants in this facility if you want. I think ideally, the way they work the best is going to be for a single tenant, but they're actually designed in 4 pods. So once the tenant takes 1, 2, 3, 4 pods then the next phase is somewhere between a 4 to 6 month up-fit for that particular tenant. So you don't make that commitment in terms of the extra cost until that tenant has signed on. So once they say we're going to sign on for 50%, or 25%, or 100% of the building then you're going to order all the sub-generation statements, the UPS battery backups, the big massive generators and all of those things. And they're all custom designed. Our DC1 is built to a Tier 4, which is the highest standard. So there's much more equipment and redundancy built into that. Other tenants may say, okay, we don't need quite to that standard. We want to pay less rent. We'll do it to a Tier 2 standard or that sort of thing. So once you have that worked out, but to order that equipment, get it delivered because it's probably still not even built with the manufacturer, it's like I said, the quickest would be 3 to 4 months but it's probably likely a 6 month process. So all in all, that's about a 12 month. But what we see the advantage is building the power shell takes you 6 months. Then when those tenants make those decisions, which can happen very, very quickly in their world, we're now within 4 to 6 months of delivering that product to them. Whereas if someone hasn't started building a building, they're talking about 12 months. So we're trying to get that competitive edge of building those power shells and being ready. Because the pro formas are so powerful, you really only need to get to -- Summit will protect itself by doing a mezz loan structure so we're recording interest during the development phase. So it doesn’t impact our yield but virtually, the way the pro formas work, once 50% of the property is build, just like it is in DC1, the yield is already high enough to convert our mezz loan into ownership of the property and then the balance of the building is all bonus after that.

[Chris Couprie, Analyst]

So essentially, the power shell is built on spec and then you start canvassing the tenants?

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

Yes, we're constantly talking to all of these particular users and we're really targeting what's called the wholesale user. So that's where we believe the future is, rather than what would be a retail where you're dealing with a bunch of individual clients. That could happen in one of the floors in Montreal where you're just leasing out so many racks on a floor. But ideally, we want to do it to the big guys, at least the ones that are going to sign long-term leases are going to have the big covenants, and then they're going to be the major cloud providers in the future. So that's kind of what we're targeting. And they like the campus idea because they may end up having one or more of these buildings. But all of the people and the infrastructure that they have to put in -- the example -- the rule of thumb on these datacenters, even though they're significantly expensive for us to do what we're doing, the tenant is putting somewhere between 5x to 10x the amount of money into the space after we deliver it. So that's how much money is going in, in terms of the very high tech servers and stuff. So these things, they're probably more secure than prisons in terms of all of the security procedures in place to protect that investment. So in DC1, pick a number. Could be $400 million to $800 million of equipment that that particular tenant is going to end up having in that space long-term.

[Chris Couprie, Analyst]

In terms of thinking about the datacenter aspect to your portfolio, would you consider datacenters outside of the Urbacon relationship?

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

No. They're too complicated and you need that operating expertise. Urbacon is building these and they've been building them for end users so the design and building part is so sophisticated you'd have to get comfortable with that relationship. Canada is a much different environment than the U.S. Virtually, the majority of datacenters in the U.S. are owned by either datacenter REITs or other people and they're leased, whereas in Canada, a lot of the big tech companies and telcos are owning most of their own datacenters. So we're creating a unique opportunity here where some of these big U.S. players can come up and lease spaces from us. But you want to build them -- a lot of datacenters that exists today didn't start out as datacenters and I think there's a couple here in Toronto where old buildings are being converted. You're bringing in power. You're jury-rigging the system. Here, if you ever get an opportunity to tour these things, they're spectacularly built and it gives the tenants a lot of confidence. And they're involved in that configuration phase along the way. So they not only tick off the box that your power shell is in great condition, it meets all the specs. But then they're very much a partner with you as you build out all of their unique requirements and they're very exacting. And the good news is once you're on their list of accepted vendors of this space, they don't want to then go down the road. So once you have these key relationships you're going to be able to continue to expand that relationship, and not just to GTA, but potentially other cities in Canada like Montreal and Vancouver.

[Chris Couprie, Analyst]

Then one last question just turning to financing. Your floating rate debt ticked up in the quarter on the back of these acquisitions. Plans to fix that?

[Ross Drake, Chief Financial Officer]

Definitely. We're already out. So the main one that popped up our floating rate debt was that $90 million bridge loan to close those 2 acquisitions and we received quotes from at least 3 lenders and hope to take that out within -- if not by the end of the quarter, early in the second quarter in that. So yes, we'll get back to normalized floating rate debt levels at that point. So we've had strong interest in those and looking at 5, 7, and 10-year debt. And the interesting thing is the spreads between 5 and 10-year debt is fairly narrow these days, so we're learning towards more 7 and 10-year terms on those loans. But it will be done in very short order.

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

The indicative rates today, your rates are probably in that 3.7% for the 5 years and a little over 4% year for the 10 years and the 7 years. So we're just looking at our debt maturity ladder and trying to -- we can pick and choose how much of each one of those terms we're going to look at. And right now, 2023, we don't have any expirees, which would be the 5 years. But because the spread is pretty narrow, we're probably going to lean to the longer end of the scale in terms of term.

[Operator]

The last question is from Matt Kornack from National Bank Financial.

[Matt Kornack, Analyst]

Just quickly wanted to follow-up on that last question with regards to permanent financing on the datacenter properties. I assume you'd wait until stabilization but what does the debt market from a mortgage standpoint look like on those type of assets?

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

Very interesting. So we are exploring it. Because in DC1, once that tenant formalizes their expression to expand it, there's nothing stopping us in my mind to looking for a permanent financing solution. So because it's a unique financing, it's not going to probably be your typical lender. So we've already been in contact with a couple unique sources out of the U.S. that do this datacenter. So you can either do it on a building-by-building basis or some of them are more of I'll call it a program basis. So you're looking at essentially all of your future datacenters being under an umbrella type of -- call it more of an operating loan. You could have a term of 5 years on it and you can use strategies to fix your interest rates, but it's more based on the cash flow of the tenants and stuff. So we're searching through that but it's going to be interesting and there's some options to do interest only. We will reach out to some of our contacts that we have. So Urbacon has been working on it and now, we're helping them with our contacts in the datacenter financing. So hopefully, in the next couple months we'll find the right type of lending solution for DC1 and it could be for the whole program. But in the meantime, we have the construction loan, which still has another couple years left on the term. So we're not in a huge rush to do that.

[Ross Drake, Chief Financial Officer]

And we have sufficient capacity on the construction loan on DC1 to do the expansion as well.

[Matt Kornack, Analyst]

Would you anticipate the interest rate on the takeout financing to be inside? I think it was a bit higher on the construction loan. It's around 5%.

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

Well, it could be. If you go to more of a traditional type of financing, we think you can maybe go inside of that. I think there's other solutions on the operating that would be in the same kind of interest rate range but would give you much more flexibility in terms of loan amounts and interest only payments. So we'll weigh all of those things. Because these things are yielding what they're yielding, you're not trying to necessarily worry about locking in a spread. You want potentially other flexibilities around the financing that you're looking for. So this is something definitely we're excited about looking into and we probably have 6 months now to figure out the best option there. So once we've got it figured out, we'll let you know. But there's definitely lots of these kind of lenders. Most of them are in the U.S. So we'll be talking to a lot of those.

[Matt Kornack, Analyst]

On the CapEx outlay for the remainder of the 50%, if it is in fact leased up or taken by the existing entity, is there a significant incremental cost there? And then can you more broadly speak to where you think the CapEx will be on this portfolio more generally and then as well where you see this going as a percentage of your overall portfolio?

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

Okay. So first of all, yes, there's a significant amount of money to do that, because as I mentioned, right now, half of DC1 would be called a power shell. So we have to put all of the components in place, which the dollar value of the components are greater than the value of the power shell. So we don't want to go into the particular numbers at this time because we're still having discussions with that tenant. But there are significant outlays in terms of capital. But as I mentioned, and again we're being vague right now on the yields, but they're comfortably in the double-digit yields. We've talked to lots of -- or a few operators of datacenters that have done it for a long time. The good news is because these are brand new properties, there's an operating cost component, which is 24/7 security. You have maintenance people. Most of all of your equipment is under warranties so you have an operating expense. The tenant actually pays for their own power. So the 10 megawatts, that's a tenant expense. So all of the costs are very predictable in the early years of these properties. The only time -- so the margins, we're going to be in the 70 plus percent range in terms of the margins. It's only when your properties start to mature and that would be probably starting somewhere in that 10 year mark where some of those components are going to require some CapEx, so over time. But if you're building a big program and you're going to have more newer properties as you go-forward, you're not really going to start to see that merge and drop a lot until year 7 and beyond. So the margins on some of the big datacenters in the U.S. I've seen 60%, 65%. I think one of the lower ones is like 55%. So eventually, if you own the buildings a long time and you weren’t building new buildings your margins would start to dip down as you're going to get into a CapEx replacement strategy. But that for these brand new ones won't happen for quite some time. In terms of where it is in the program, each time we build one of these things, we expect them to be -- once they're built we're pro forma-ing that 24 months fit up and stabilization time. So on that kind of cycle, and we're still expecting Summit to be growing significantly in the industrial side. So it's kind of in that 10% range. It might creep up a little bit. If it does creep up, it's only going to be good news in my mind. But we're only going to do it as demand. So we'll build one at a time and as that gets leased up and stabilized then you'll build the next one.

[Matt Kornack, Analyst]

Just switching to the industrial portfolio, from your lease maturity profile, I think you wished you had more coming due in 2018 it sounds like in the GTA. I think actually, we're starting to see the rental brake bumps. I think if someone just happy to lease for a year or 2 years, we're going great because I think it's just going to continue to accelerate. We saw this shipping point in Edmonton 10, 15 years ago when we were buying out there. We started buying properties at $3 and $4 rents, and now they went up as high as $12. Now they're back to $8 or $9 but just because of the size of the GTA and the number of fragmented ownership, we haven't seen it. But these tenants, when you're saying I've got a new line and I've got 50,000 square feet and I need another 50,000 square feet, they are going to end up paying more rent because there's just not a lot of options for them to do that. So I think it's going to be very exciting over the next 3 to 5 years in the GTA. But I think every year, the rents are going to continue to go up. I saw a stat where the replacement cost numbers over the last 2.5 years have gone up 30%, mainly driven by land values and the development charges. But rents have only gone up about 12% in that same time. So they're not keeping up yet with the acceleration on replacement costs. So that's what we're trying to capture and we're not in any rush to do it. The sooner we can get all the rental rate bumps but we know for sure long-term in that 5 to 10 year range, rents are definitely going to be that much higher because there's no stopping I don't think the replacement costs. Every time we think that $1.1 million an acre sounds ridiculous, someone is listing some land down the street at $1.5 million or $1.6 million an acre. So there's not a lot of land and you have to keep going out farther and farther outside of the Green Belt. So it's going to be interesting to watch what happens.

[Matt Kornack, Analyst]

For sure. And just if you look out for the next 3 years for your maturity profile, is it fair to say that the composition of those maturities reflects the overall composition of your portfolio being GTA weighted? Or is there a skewing towards Montreal in the early years or late years?

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

There's a couple in Montreal that we bought last year, but again very low embedded rents -- the Coke building and there's another one I think in the next 2 years. But I think yes, other than those 2 buildings, we can get back to you with the exact answer but I think you're going to see a fair amount of it is going to be in that GTA as well, roughly.

[Ross Drake, Chief Financial Officer]

It will likely reflect.

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

It's going to roughly reflect the 60%.

[Matt Kornack, Analyst]

Makes sense. The last question, on the acquisition front, are there opportunities in Toronto to buy functionally obsolete industrial product that you can redevelop? Or are those also being bid to prices that are prohibitive? And then I guess is all industrial performing equally or are there specific segments that are outperforming from a rent standpoint?

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

There's definitely different rental rates for different things but there's not one piece of industrial real estate that's not performing in the GTA. So even you'd call C-class low ceiling height, it's 100% occupied. There is just no -- not a lot of space. And the functionally obsolete or these 2 properties that we're finding that have 5 to 7 acres, they are rare, rare, rare. Now you can't build -- you'd like to have a bigger site. We know one of our competitors, they outbid us on a property in Scarborough, which they're going to tear down and built out but we were probably $2 million shy on their number. So yes, they're building up and it's all based on this expectation that the rental rates are going to continue to creep up and move that. But if you're just talking about a pure developer, you need to start pro forma-ing like $7 to $8 rents to even start making this make sense. And tenants are still not there psychologically yet. So it's going to take a few more years before you can just start building. But we're definitely going to ramp up that. We're excited to have Urbacon with all their resources to help us look through those kind of opportunities. And so whenever we can get our hands on sites like that can be expanded or re-developed, we're definitely going to do that. Because it's just not big pieces of land that you can go out and buy unless you are like an Orlando that has been land banking for decades.

[Matt Kornack, Analyst]

Sounds like a good problem to have when you have an existing industrial portfolio in the GTA though.

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

Exactly. We're pretty excited about the future here.

[Operator]

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

[Paul Malcolm Dykeman, Chief Executive Officer, President and Trustee]

Thanks, everybody. Look forward to I guess our next call is in May with our AGM, and hopefully we'll have lots more exciting news to talk about then. Thanks for your participation and talk to you next quarter. Thanks.

[Operator]

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