Summit Industrial Income REIT

TSX:SMU.UN

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to the Summit REIT Fourth Quarter and Yearend Results Conference Call. Please be advised that this call is being recorded on Thursday, February 21, 2019. I would now like to turn the meeting over to Mr. Paul Dykeman, Chief Executive Officer. Please go ahead, Mr. Dykeman.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Thank you. Good morning, and thank you for joining us today. As usual, Ross Drake, our Chief Financial Officer is here with me. Before we begin, let me remind everyone that during this conference call, we may make statements containing forward-looking information. This forward-looking information is based on a number of assumptions and is subject to a number of known and unknown risks and uncertainties that could cause the actual results to differ materially from those disclosed or implied. I direct you to our earnings release, MD&A and other securities filings for additional information about these assumptions, risks and uncertainties. As you can see, 2018 was another record year of growth and performance for Summit. We expanded our presence in our key target markets, increasing the size of the portfolio by 56% and with this increase in size, further enhanced our ability to generate operating efficiencies and economies of scale. We capitalized on the proven experience of our team to generate strong operating and leasing performance resulting in solid growth in all our key performance benchmarks. At the same time, we maintained a highly conservative balance sheet and financial position, providing the resources and flexibility to fund our future growth. Most importantly, we continued our track record of proving to unitholders with solid, stable and sustainable monthly cash distributions. With the recent economic uncertainty and volatility in the capital markets, our ability to deliver income to our investors on a consistent and regular basis remains one of our key strengths. Before Ross provides the financial review of our results, let me make a few highlights. In 2018 we acquired a total of 24 properties totaling 4.8 million square feet at a cost of $578 million. The purchases were funded by 2 successful block deal offerings and new and assumed mortgages. The acquisitions were in all our key target markets of Toronto, Montreal, Calgary and Edmonton. The average going-in cap rate on our 2018 acquisitions was a very strong 5.4%. We were pleased to utilize our units to partially fund 2 other acquisitions last year. The fact that vendors took back a total of 4.3 million in Class B LP units is a real testament to our promising future. We also sold the 75% interest in 4 noncore properties during the year, generated $46.4 million in funds and that has been recycled into more accretive growth opportunities. Those sales resulted in a $7.2 million or $0.10 per unit realized gain, of which $.018 per unit was issued as a special distribution, another example of our commitment to deliver value to our unitholders. At yearend, the total portfolio consisted of 108 properties totaling 13.3 million square feet of gross leasable area and the total assets are approximately $1.8 billion. Our focus on the vibrant GTA and Montreal market continues, allowing us to capitalize on their very strong fundamentals. Both are experiencing all-time low availability in vacancy rates, with absorption outpacing new supply as well as capturing increasing operating efficiencies and economies of scale as our portfolio continues to grow in this concentrated way. As a result, our same-property NOI growth in the GTA and Montreal was very strong in 2018, with the GTA up 4.5% and Montreal rising 4.7%. The GTA and Montreal portfolios combined represent 76% of the total portfolio at yearend. The strong fundamentals in these 2 geographic markets, as well as our increasing value from the full leasing up of our DC1 Data Center in Toronto, contributed to a $144 million fair market value gain on our portfolio in 2018 which was an impressive $1.85 per unit. 2018 was also another year which the experience of our leasing team has proven excellent results. Occupancy at yearend, virtually 100% occupied at 99.4%, which goes to the stability of our cash flow. The 6-year -- we have a 6-year weighted average term to maturity with annual contractual rental increases that also support our long-term sustainability of our cash distributions. We completed all of our 2018 expiring lease renewals during the year with a remarkable 92.5% retention ratio. Overall, the renewals resulted in an average 9.5% increase in rents over the expiring rents with a very significant 12.7% in the GTA. Again, demonstrating the strength of our key target markets. We've also made significant progress in proactively completing lease renewals for space expiring in 2019 and some early renewals and expansions of leases expiring in later years. With these other transactions, only 2.3% of our portfolio is remaining to be expiring and renewed in 2019. The 2019 renewals continue to have positive results, averaging 11.9% increase in rents over the expiring rents, and a particularly very strong 16.1% in the GTA property renewals. Importantly, at December 31st, all the vacancies in our Western Canada portfolio are now fully leased, and that impacted our same store NOI during all of 2018. We are also pleased that 100% of our DC1 Data Center in Mississauga was leased during the year. The existing tenant exercised their option to expand into the balance of the building which was completed at the end of September which generated a very high yield on cost of more than 10% and significantly increased the value of that property. In summary, 2018 was another record year and we look forward to a track record of stable and sustainable growth to continue for the years to come. Now I'll turn it over to Ross to go through the operating results in a bit more detail.

[Ross Drake, Chief Financial Officer]

Thanks, Paul. As Paul mentioned, our growth and strong operating performance in 2018 had a very positive impact on our results for the year. Revenues were up 57% for the year, the result of the contribution from our acquisitions, continuing near-full occupancy and higher monthly rents partially offset by the sale of the 75% interest in 4 properties in May. Looking ahead, our current 1.3% annual contractual rent increases will contribute to our organic growth going forward. With this revenue growth and our continuing focus on efficient property management, NOI was up just under 60% for the year to $64.8 million. We were also pleased to once again generate solid increases in our same property NOI. For the year ended December 31, 2018, total organic growth was 1.4%, with the GTA up 4.5% and Montreal rising 4.7%. Again, demonstrating the growth of our 2 key target markets. With the increase in revenues and NOI, our FFO rose a very strong 62% to $43.6 million for the year. FFO in the fourth quarter increased 61% to $12.6 million. Our per-unit amounts and payout ratios in 2018 were impacted by the amount and timing of the equity offerings used to finance our growth. In total, our equity offerings in 2018, including the 4.3 million Class B exchangeable units issued for 2 of our property acquisitions, have resulted in a 63% increase in the weighted average number of units outstanding at yearend. We look to return to accretive growth in FFO and more conservative payout ratios in the coming quarters, as the funds from our recent equity offering are fully invested. Our balance sheet and liquidity position remain strong with leverage ratios of only 47.4%, providing an immediate $100 million in acquisition capacity if we bring the ratio up to our general target of 50%. We have made significant growth on the financing front in 2018, capitalizing on current low interest rates and extending the average term for the mortgage portfolio, thus helping us to mitigate the impact of rising interest rates going forward. We completed $210 million in new financing in 2018 with an average interest rate of 4% and an 8.3-year term to maturity. We assumed $47.6 million of mortgages on our acquisitions with a 3.3% interest and 4.3-year term to maturity. As you know, we arranged $153 million 2 bridge loans to complete the acquisitions in December. Subsequent to yearend, we refinanced these 2 bridge loans with new 10-year mortgages, $91 million at an interest rate of 3.93% and another $62 million at 3.86%. Importantly, once the new financings are in place, our term to maturity for the total mortgage portfolio will increase to 5.9 years from 4.8 years at December 31st. Thank you for your time this morning. And I'll turn things back to Paul to wrap up.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Thanks, Ross. So looking ahead, we continue to execute the same value enhancing strategies that have been so successful over the past few years. We will prudently and profitably acquire quality properties in our target markets, purchasing newer, well maintained assets at below replacement cost and with rents that are below market, which we can believe will generate value through our proven leasing programs. Our cash flows will grow organically as we capitalize on the continuous strong fundamentals in the light industrial property sector, build on our contractual annual rental increases, and generate increased operating synergies and reduced costs through the size and concentration of our portfolios. We will leverage our proven expertise to start developing some properties, 250,000 square feet on parcels of land that we own, all within the vibrant GTA. This is in addition to an existing 65,000 square foot expansion that's currently under construction. Most importantly, we will maintain our proven track record of delivering stable, sustainable and growing monthly cash flows to our unit holders. We recognize in today's uncertain economic times, our investors look to Summit to provide stable and predictable income, and we will maintain this focus in all that we do. In summary, we are very pleased with our growth and performance in 2018. We look forward for continued progress in the years ahead. With the strong industry fundamentals, our best-in-class properties and proven management team with the decades and decades, it keeps getting longer, of experience, are well positioned to deliver stable, sustainable, increasing value to our unitholders over the long term. Thank you for your time this morning. And we'd be happy to answer your questions. Operator?

[Operator]

[Operator Instructions] Our first question is from Chris Couprie from CIBC. Please go ahead, your line is now open.

[Chris Couprie, Analyst]

Good morning.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Hi, Chris, we can't hear you very well.

[Chris Couprie, Analyst]

Can you hear me better now? just wanted to maybe touch on the developments that you highlighted in the MD&A. The 2 properties that are not expansions, the new developments, are they being built on spec? And could you provide any more economics on these developments? And just when you look across the rest of your portfolio, what do you think the ultimate development potential could be on your existing land?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Your speaker -- I think I got it all, but it was a little hard to hear you. So the 2 existing development properties which we bought last year, one in Mississauga on Surveyor Road, we've got the building designed now, it's 90,000 square feet that we can tuck in there. That building, the tenant -- there's still ability to expand this building, but the tenant hasn't made the decision to do that, for which we'd add 35,000 square feet. But all in all, we're allocated at the time of purchase just under $1 million, roughly $950,000 an acre. When you look at development charges, they are in that $20 to $25. When you add up, it's going to vary a little bit by -- we think that kind of building is going to be a single tenant building and not have demising walls, so your cost per square foot will change. But all in, including the land development charges, hard and soft costs, you're probably at a low end would be $155 a square foot. But could easily see that number going up to $170, $175 depending on the particular tenant that you're getting in there. The second one now is in Burlington, we call it our Voortman Cookies building. There was 7.5 acres next to that, so part of that has exposure to the QEW. We're just a little bit farther away, trying to get the design. It ties into talking to the tenant, moving different parking around, but we think we can build about another around 150,000 square feet or thereabout down there. So we're doing that. We screen through our portfolio, there's a lot of properties we have that you can expand the building by 30,000, 50,000 square feet, but it's much more tenant specific. So you would only do that, as we're doing in the case with this 65,000 square feet, this tenant needs this additional expansion. In that case, the lease provided that we would give them an allowance and we're giving them $95 a square foot and it stipulates that we get an 8% return on that. So it's an excellent value added return where the land cost is already there. So the other properties where we have -- and it probably adds up to somewhere around 500,000 to 700,000 square feet across the entire portfolio, it's not ready to be built kind of land. It's at the end of the lease, if the tenant needs to expand or if that tenant leaves, then we can make a decision to expand that. Or sometimes it's just a property where there's only 20% or 30% site coverage and you could push it up more to 45% to 50% in some cases. But we are actively looking for land, so in this tight acquisition market where virtually everything in Toronto is now trading well below 5-cap and I'm sure we'll see the odd 3-cap property trade in Toronto, our focus on acquisitions is always in that price per square foot. So even as short ago as 15 months ago, we were buying properties at $99 a square foot in GTA which looked really, really good. Now last year we were buying more in the $110, $120 a square foot, but we're still in my mind very far -- there's a big margin away from where true replacement cost is and everything we're seeing right now, the 2 main drivers of replacement cost which are the land values and the development charges, are going up exceptionally fast in both those cases. So land is precious. There's probably only 10 million to 12 million square feet in the pipeline in all of GTA which isn't really scratching the surface. And land prices are anywhere from $1 million to $2 million an acre. I heard anecdotally yesterday that development charges in Bahn are now over $40 per buildable square foot. So I don't see the end in sight in terms of where the drivers to push replacement cost is. That $150, $160, $170 is going to keep going up. I keep saying this, but at some point, it's going to hit $200 in the not distant future.

[Chris Couprie, Analyst]

So what type of -- and just so I heard you correctly on the Voortman site on Surveyor Road, these are also going to be related to an existing tenant?

[Paul Malcolm Dykeman, CEO, President & Trustee]

No. Sorry, so we are going to build those on spec. In the old Summit, when things were as tight as they are and we're at there's less than 1% availability and we don't have any vacancy, what we used to call it is we called it building inventory. It is a slight difference because we actually have tenants in many of our properties that are saying, do you know anywhere we can get 50,000 or 75,000 square feet? I think the best strategy in building right now is actually to wait until you're much farther along in the building process. Because we only see rents going up in the next 12 to 24 months, so I think the longer you hold off to potentially leasing it out, I think you're going to get a better result on the investment. So that's the only unknown, so we have a very comfortable idea that it will get leased, the lease up time, it's just what's going to be the final rental rate. We've seen there's lots of buildings that are coming out now in the market that are asking $8.50, $8.75. We've heard there's a lease from another entity that's going to come out and ask a $10 asking price. Which I don't think they'll get, but it's starting to enter people's mind where 2 years ago, $5.00, $6.50 was what was being discussed. So there's a very rapid acceleration of the rental rates.

[Chris Couprie, Analyst]

So kind of an $8.50-ish rent is in your mind what you would --

[Paul Malcolm Dykeman, CEO, President & Trustee]

We don't know -- you run some sensitivity, you would run it from $8.00 to $9.00 and look at what happens at $9.00. You're going to look at all the different scenarios. So that's what we're expecting. But in the end, we're still very comfortable that we're going to outperform what you would do in terms of buying existing stock today, but what you're doing is you're upgrading modernizing your portfolio. So we'd like to start to increase that. So we are looking at additional land buys that would be strictly for building additional inventory as quickly as we could. So we've got our eye on that, because again, it's just very competitive on the acquisition side because end users are looking at saying we can buy buildings cheaper than we can have them built.

[Chris Couprie, Analyst]

And just sticking with development, in 2018 you had $24 million of CapEx related to properties that are in development and that's relating to the Data Center. Is that DC1 or --

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, that's DC1. That was our 50% of DC1. So they are very capital intensive, but again, essentially in that case, the tenant doubled the rent but the operating costs won't be double. So there's a lot of efficiencies in that second phase of that development. But we have started -- we've given our partner a mezzanine loan to start the development of DC2. So the steel is out of the ground, so the power shell, the beginning phase of that, will be complete by the summer and then we're just in the lease up phase after that.

[Chris Couprie, Analyst]

Okay, but in terms of what's actually sitting on the balance sheet right now, there isn't anything like -- there is no value for properties under development at the moment?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, so the only 2 are those 2 pieces of land. So it would be like $12.5 million. One is $5 million, one is probably $7 million. The city right now, and that's part of the development issue here, everything is taking much longer to do with the city than it used to in the past. That's adding to the overall time and cost of doing development.

[Chris Couprie, Analyst]

And DC2, any updates since you brought it up?

[Paul Malcolm Dykeman, CEO, President & Trustee]

We are working, not rushing through the winter, but all the footings, the steel is up. So it will be enclosed when the weather gets a little bit nicer and it will be a completed power shell which will be done just subject to tenant fit out. So when I talked about that last year, so to get the land, to get all the zoning, to do the building of this power shell to have the power ready to go, it gives you about an 18-month head start on anyone that's trying to compete on a data center. Then once you have a tenant, then you'll upfit the property to their specification. In case of DC1, it's a Tier 4 Datacenter, but it can be different and then we'll do the tenant fit out. But we'll only spend that additional capital once we have a tenant. So you just build the power shell first which is the relatively least expensive part of the process, but it gives you a competitive advantage. If the business of our tenant in DC1 continues the way we anticipate, it's a very logical group that would take a look at DC2 at the right time.

[Operator]

Our next question is from Troy MacLean from BMO Capital Markets. Please go ahead, your line is now open.

[Troy Raymond MacLean, Analyst]

I'm not sure if you meant -- just circling back on the development, I didn't quite catch that, but did you -- I think on the last call you mentioned targeting a development yield in the mid 5s. Is that still the case for these 2 projects?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. You know, we fine-tune the pencil as we're getting closer to submitting the applications for the building permits. Probably a few more costs than we thought. So it really depends on the rental rate. So I think it's hopefully the lowest you would see. I don't think there's any more surprises that we're going to see on the cost side. I think the lowest is going to be 5 and then it's just a matter where it gets very sensitive, that yield is very sensitive to rents, the final rental rate. So I think it's -- it could be 5, 5.5, could even be better if it takes -- like I said, in the first -- if you go through the permitting process and if that takes 6 months, 8 months, you're not going to try to lease it. You wait and start building, it takes 6 months to build. I would be well into construction before I would be trying to nail down a tenant. But in the meantime, you'll have tenants crawling all over you. But you're just trying to find that tenant that's the most desperate. And what we're finding with some of our tenants is that where the rent is a very small portion of their operating costs in their business, lite manufacturing and that sort of thing, they are less sensitive to rental rates. It's more of the third-party logistic companies that already have forward contracts for 2 or 3 years where they are very tight margins, a little more sensitive. So it's a matter of trying to find the right kind of tenants that you can push those rental rates. But as I said, there's 10 million or 12 million square feet that's being built out there and I think they are really starting to test the market on rental rates. So we're seeing new projects coming out that started asking $8.75. So we'll see. And some of those were for bigger footprints than what we're building. So with the 90,000 square foot building or 150,000, that could be subdivided into 2 or 3 spaces, we think we'll be on the higher end of rental rates.

[Troy Raymond MacLean, Analyst]

You mentioned buying land to continue to develop. As you look out, is kind of 5% your minimum, like your hurdle rate for development? Or it's all just you're looking at the development yield versus what -- or sorry, development spread versus what they're trading at?

[Paul Malcolm Dykeman, CEO, President & Trustee]

That's a really good question, Troy. To be honest, my gut feeling is I would love to keep building as long as I think we're going to be building and it's going to look good relative to replacement cost 2 and 3 years out. So if we can build and I'm less sensitive to that going in yield, then am I building at $175 when I think there's a strong argument that replacement cost in 24 months is going to be $190 or $200. So I think we're just building into the market at a really good price per square foot. Hopefully we'll get the best yield we can from that first lease, but it's really just building really good quality inventory in the right place that's going to be, on a price per square foot. I was talking to someone not too long ago, there was a big property in Brampton, 900,000 square feet 3 years ago that sold at a 3.8 cap, paid a remarkable crazy price per square foot of $175 a square foot. And 3 years later that doesn't look that crazy anymore. We're always price per square foot sensitive. So you do your best you can on yield and right now interest rates are cooperating, so we can still finance very attractive and lever that yield. But yes, it should be 5 and above, but right now if you're trying to sell properties in the GTA brand new, I'm sure you could sell them at 4 or less. So there is that development spread so I think you're going to achieve that one way or another. But we're more sensitive to the price per square foot.

[Troy Raymond MacLean, Analyst]

In a perfect world, looking a couple of years out, the original Summit was a big builder. How big would development and expansion be as a percentage of your overall investment pie? Like is this something where 25% of your investment dollars are going to go towards development? Or just all opportunity driven?

[Paul Malcolm Dykeman, CEO, President & Trustee]

It's going to be opportunity driven, but 25% sounds originally a little rich. But in that 5% to 10%. But it could be a combination. So I would put it into different risk buckets. So if we continue to do some joint ventures with some partners, either in Montreal or Alberta, if we could do that through Mezz loan structures where there's a little bit less risk there and you're kind of sharing the development profits. But when you get strictly on balance sheet, I think somewhere between 5% to 10%. But right now, I just think it's -- we saw this phase last time in Summit 1, like 2004, we just said all of a sudden it doesn't make much sense to buy properties when it's more effective on a price per square foot to build them. But the challenge, and it's a big, big challenge, is the lack of land and ability to build. I've said I think there could be 40 million or 50 million square feet of demand out there to build in GTA and there's nowhere near that amount of land and that's why land prices are accelerating at unbelievable clips. So it's a remarkable phenomenon. I haven't seen it in my 30 years of doing this.

[Troy Raymond MacLean, Analyst]

Then just on the -- you've done most of the 2019 renewals, just looking out to 2020, what kind of rent lift are you targeting in the GTA?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Lots. I always like not answering that question, Troy, because I'll tell you, it's really tenant by tenant driven. We moved our average in-place rent in the entire GTA portfolio from I think $5.30, we're just at slightly over $6.00 right now. We're doing lots of leases in the $7.00, $7.25. I'm comfortable that we're still going to see somewhere in that 15%, possibly as high as 20% in the GTA. In the odd tenant where that might hurt their business a little bit more, I've talked about some in the past, we'll give them a break and maybe only increase it 12%, but then we'll have 3% to 4% growth. So you're trying to capture that rental growth over a little bit longer time to give them reflection. But over a 5-year term, 20%, 25%. And in some cases, we'll outperform that on a specific place here and there. And that's in the GTA. The one that we haven't really focused on a lot is Montreal. And we're not seeing a whole lot different in Montreal even though there's a little bit more access to land, you don't have the same constraints on development and development charges, land prices. That market is very, very tight and we actually are seeing similar rental rate growth over our renewals. Like we bought a couple of properties 2 or 3 years ago, $55 a square foot, the in-place rents were around $4.00 and those rents are going to go to $5.00 or $5.25. So the percentage increase is still going to be substantial on some of that. So both in Montreal -- I see very similar growth rates in both Montreal and Toronto, although it's just more obvious to everybody here in Toronto, but our experience is we're still seeing very, very strong bumps in the rent in Montreal.

[Troy Raymond MacLean, Analyst]

Any color on how aggressive other landlords are being in the GTA with pushing rents? I know it seems like there's been kind of a sea change in the last year. But are landlords getting even more aggressive now versus than like a few quarters ago?

[Paul Malcolm Dykeman, CEO, President & Trustee]

There's one in particular that made a big splash last year, you can figure out who it is, has been ultra-aggressive. And we're applauding them every step of the way. So they are the one that I mentioned that has a 400,000 square vacancy. I'm not naming them, but they are asking $10.00. And they have taken a very, very hard line. If they do a deal at $8.00 in the building, they won't ever do a deal that's under $8.00, so even if the next tenant space is a little bit rougher, needs a bit more work, they're just kind of like that's the bench price. So they are prepared to withstand a little bit of vacancy and push that. We're not a believer in that aggressive kind of tactics, but we applaud it because it helps with us in our leasing. Some of the bigger landlords who happens to be our investor, they are 40 million plus square feet, they are 100% occupied, and I think they are getting strong rental growth. But I don't think they are going to be the ones that are going to be the leaders in pushing rents. But there's just no vacancy. Literally, they -- that company is building 4 million or 5 million square feet a year, most of it on spec, and they're not even putting shovels in the ground before it's all leased. But again, they have different yield and investment return parameters than other companies like ourselves.

[Operator]

Our next question is from Bradley Sturges with Industrial Alliance. Please go ahead, your line is now open.

[Bradley Sturges, Equity Research Analyst]

Hi, there. Just in terms of I guess following up on Troy's line of questioning there at the end, given that you've been able to push the contractual list on an annual basis a little bit, where would the average be today for contractual list? Is it still in the 1.5% range or is that now trending more towards --

[Paul Malcolm Dykeman, CEO, President & Trustee]

Well, some of that is already converted over in some of the portfolios we bought, so it's probably a little softer right now. Just because the volume of that is more influenced by the properties that we just bought in December. So it's probably like 1.3%, 1.4%. But on the deals that we're doing that are live in Toronto, if it's 20,000 square feet, 3% to 4% is not going to -- it's not pushing that big number above our whole portfolio a whole lot. So it takes a lot to move the needle on the bigger portfolio.

[Bradley Sturges, Equity Research Analyst]

Right, okay. Then in terms of the expansion project that's under construction right now, what's the timeline for completion there?

[Paul Malcolm Dykeman, CEO, President & Trustee]

I'm going to say July of this year. They've been in the ground. It's something like July. It's an allowance, so they're actually doing the whole construction and fit up, so if it ends up costing more, that's not our issue. So we're contributing $95 a square foot for that tenant and we earn an 8% yield on it so it was pretty straightforward for us.

[Bradley Sturges, Equity Research Analyst]

Maybe switching gears a little bit, just in terms of the acquisition market now, obviously it's quite competitive, particularly in the Toronto market and you're looking for land where you can. Maybe give a sense of what you're seeing today in terms of potential opportunities and I guess from a competitive standpoint, I assume there's a lot of players whether domestically or foreign right now?

[Paul Malcolm Dykeman, CEO, President & Trustee]

This same sequence of events kind of happens year after year. It's actually a repeat of last year. The fall sales kind of get stacked up, try to get things closed by yearend, which we did. The first quarter people are kind of assimilating what they did, there's snow covering all of the industrial properties. Not a great time to tour and try to sell and show your properties off the best. So more people are starting to queue things up. So I think what we'll see is in March and April, that's when the bigger kind of deals. But there's the odd deals here and there, there's some sale leasebacks, but same kind of aggressive cap rates. We've also done a deal in Milton which had some expansion in a sale leaseback. We were trying to buy it with an in-place yield of like 4.8% that we thought would grow to like a 5.4% after the expansion was done. We believe it traded down around a 4% yield to go to like a 4.7% yield. So it's competitive, yes. That's why I think we're going to lean more and more to the development. So it's a bit of a longer game, but like I said, I still think there's lots of great opportunities in Montreal. We're still looking at lots of good opportunities in Calgary, there's lots of development going on in Calgary. Surprisingly, the area that we're surprised at is in Montreal where there could be development. There's developers that own land are not being very aggressive and there's almost a nonexistent spec market in Montreal. So were trying to, if we can find some stuff with our partner to do there, we'll do that. But if not, I could see us even looking at possibly doing some development in Montreal. Because I think -- I don't think, I know the demand is there as well. We start the year, Brad, and everyone says, well what are you going to do? I would have said the same thing last year. We think that a $300 million acquisition number is achievable if nothing out of the ordinary happens. So $30 million here, you do a sale leaseback here, last year we did couple of sales and they took units. So we can cobble together $300 million to $350 million and then like we've done in the last couple of years, if everything lines up in the right place at the right time and you can get some bigger portfolios. Bigger in Canada right now is still only $50 million to $100 million, but if you can pick up some of those. So I think the numbers of the last couple of years is, this last year was our record year, like $580 million of acquisitions, the year before that was $450 million, Ross, something like that? So I always like to under promise and over perform. But you would think with the environment that we're in you might see a few more funds coming out. We've heard that pension funds are trying to invest a little bit more outside of Canada, so maybe they're going to lighten up on their Canadian portfolios and invest that money abroad.

[Operator]

Our next question is from Matt Logan from RBC Capital Markets. Please go ahead, your line is open.

[Matt Logan, Senior Associate]

Just on your development pipeline, would it be fair to say the only excess land you have is at the 2 greenfield sites you've identified?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Those are the ones that we can -- I won't say readily, but we still have to work with the tenant because you have to move around parking and loading and there's, during the construction phase, we have to make sure the existing buildings are going to be able to operate properly. But those have distinct parcels of land that you can put distinct buildings on and not interfere with the use of the existing tenancies. So the 90,000 square feet, 140,000, 150,000 on the other one. But as I said, in our portfolio, just like this 65,000 square foot expansion, we have other properties, a couple that come to mind. Our property up in Berry, the one down in London. I think the one in London can be expanded up to 80,000 square feet. The one up in London is like -- or sorry, the one up in Berry is 50,000 square feet. So we have items like that, but those are going to be tenant driven. The reason there's excess land there, a lot of the time it's even a right in the lease that they have some control for some period of time in the lease. But the worst thing you can do with industrial tenants is they outgrow your space. So in those cases, you would just do development when the tenant comes and says I need to expand. But if you do that, you build on the end of the building and put another tenant in there, you risk losing that tenant. So we've added up all of those opportunities, those are probably a couple of the bigger ones, and there's probably another half a million square feet of development. But it's not something you can just say, okay, I'm going to tack on another 50,000 square feet on a building today. But if the tenant leaves, then you can redevelop that building and add that on. So it's not something I would say that's in the current pipeline, but it's a nice thing to have over time where you're just getting a yield on just the cost and you already have the land in your, on your books today.

[Matt Logan, Senior Associate]

Makes sense, so a lot of expansion opportunities over time but these would really be the 2 primary greenfield sites?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Exactly. And like I said, we've been bidding on land, we're talking to people. There's nothing big out there, but it's 5 acres, 10 acres. So it's just little bits and pieces of land. We're not going to go to start buying massive land tracks and that sort of thing. But like I said, there's examples of land that's $1.5 million to $2 million an acre which I don't think you can come close to justifying for an industrial development.

[Matt Logan, Senior Associate]

How would land pricing translate in Montreal compared to the GTA?

[Paul Malcolm Dykeman, CEO, President & Trustee]

It's creeping up. Like I said, we've got a couple that we think -- I think $1 million is a number that's long gone in the GTA, so it's $1 million plus depending on lots of different factors. In Montreal, I still think you can -- it's going up there too, but it's still probably $600,000, $700,000 an acre. It's creeping up. So it's a little bit behind, but the big difference in Montreal right now is they don't have these crazy, crazy numbers for development charges. So the ones we're looking at are in that $20 to $25 a square foot. In Montreal it's a minor number that's going to be under $5 for that same land item. Like I said, in Bahn, we just heard of this number that was over $40 a square foot for development charges. Those 2 drivers, land prices and development charges, are what's making replacement go up by I would say 10% a year. It's gone up 10% a year definitely over the last 2 to 3 years, but I don't see that changing. That's where the rental pressure is going to come from because you can't build new stuff and make any kind of decent return. Developers need to push those rental rates.

[Matt Logan, Senior Associate]

With rents picking up in Montreal, would you ever develop on your own balance sheet?

[Paul Malcolm Dykeman, CEO, President & Trustee]

We're starting to look at that. I mean that's not our backyard. Right now, with the size of our portfolio, we are expanding our operating platform, so we're setting up a small 3-person office in each of 3 cities. Montreal, Calgary and Ottawa. So we're going to have more boots on the ground. But before we usually like to do development on our balance sheet, we'd rather partner with the local partner in Montreal would be our first preference. But at some point, we're getting big enough where I have no problems at all adding a development pipeline. That's why we're starting to explain it a bit more, talk it through and we'll use some of these small ones to kind of get back into that business and get up to speed. We are ten years out of the development business and things have changed quite a bit. The biggest one is the city is just brutal to get through. And it's not their fault, they're just backlogged with the demands and requests from every type of developer in the city. So the timeline -- we have one vacancy in our portfolio in the GTA and we've been trying to get a variance from the city to put 4 loading doors in the front of the property because this vacancy is trapped with no doors. And I think we're on the docket for March. So we've had 3 people compete for the space, we have a signed lease, it's just subject to getting this city approval, which we believe we'll get, but it's just taking -- you have to do traffic studies, you have to do this and that. So that's just a small example of how hard it is to get a small thing done which would seem pretty easy to put 4 loading docks in the front of a building.

[Matt Logan, Senior Associate]

Well we appreciate the incremental color in the MD&A. Shifting gears I guess to the leasing market, you made an interesting comment on your lite manufacturing tenants where rents are really a small portion of their operating costs. What percentage of your tenants would be in a similar position to that?

[Paul Malcolm Dykeman, CEO, President & Trustee]

You know what, that's probably one area that we don't have the stats at hand. So it's going to be, whatever I say right now is going to be anecdotal. I know in our first Summit, we took the 64 stats and sub industries and we had all our tenants broken down when we had over 3,000 tenants. So I'll undertake to do a bit more work, but just anecdotally, I would think probably closer to half of our portfolio is in that kind of category of business. We don't have as many just pure third-party logistics type of tenants. So there's going to be that kind of mix. We have one tenant that's out in Oshawa that's not even -- he's paying $4.75, but he's a tire distributor, so he's got a big contract with the major tire companies and he's kind of contracted those out 2 to 3 years in advance. So he's going to be more sensitive to a $0.50 or $0.75 rental increase. Whereas these tenants, and my best example this last year I used, this 50,000 square foot tenant who didn't have an option to renew, we tried to kick him out. We did. We gave his space away to someone that was willing to pay 20% more. He was paying $5.00, he thought paying $5.50 was a big jump. And in June, he's going to go into a space that's 60,000 square feet and he's going to pay $7.25. And he's happy because he couldn't find that space anywhere else. So that's the kind of stuff that's going on. It's really fine-tuning that strategy and it's not necessarily targeting, but just being opportunistic. And that's why I think when we do these developments, it's those the tenants you're searching out for. You're not looking for that low cost provider that has a very tight margin and he's trying to operate. So something that's more, whether it's capital intensive, people intensive types of activity where rent is not one of their biggest operating costs. And Prologis has done a lot of work on that in the US, so we're trying to learn from some of the stuff they've done.

[Matt Logan, Senior Associate]

So I guess along those lines, are you starting to see any sort of a ceiling in rents? Or kind of how should we think about where the upper end of the market could be or is going?

[Paul Malcolm Dykeman, CEO, President & Trustee]

No one knows. It's a crystal ball. I'm excited about it because everything that goes to me, it's replacement cost. So I always start with that and the more comfortable I get that right now we've got hard and fast numbers that's going $160, $170 and I'm looking at the land prices going, we're not going to be able to replicate those land prices anymore. So there's a lot of pressure on that number. And it's just a matter of what development yield in this interest rate environment people are willing to accept. So I think the asking of $8.75, I do see a $10.00 rent coming, I just don't know when, and that's going to be not for every space. And then there's smaller spaces when you get into the tenants -- we're doing deals like in this this little small based stuff we did in Ottawa, we're getting $10.00 and $12.00 rents on small based rates. So it's really a function of the kinds of space you have and how module they are and those kinds of things. But it's really hard to say. The rental rates you hear are the big developers are trying to build 300,000, 500,000, 700,000 square foot buildings, that's where you're still hearing the rents that are going to $7.00, $7.50. So I think you're starting to build product that is going to be able to be sub dividable into 30,000 to 50,000 square feet. I think that's where you're going to see the rents higher. In Calgary where vacancy is 5%, which is kind of in balance, we leased up our last vacancy up there starting at $8.90 going to $9.40 with that tenant. So like rents are almost $10.00 in Calgary in a market that isn't anywhere near as tight as Toronto. So it's just a matter of getting -- there's so many what's the word, fractured ownership and getting people together to say hey, you don't have to accept $7.00 anymore. And you'll see it, it all starts with the developers. So Pantone is out the, Prologis, Hope -- there's just a whole handful of developers that are out there building buildings and they are going to start to see what the true market rents that are going to be able to happen. It's good times.

[Matt Logan, Senior Associate]

On same property NOI growth, all of this leasing activity, you've had great back half of the year, how does that translate I guess in 2019 in terms of organic growth?

[Paul Malcolm Dykeman, CEO, President & Trustee]

I think you kind of have a pretty good hint in what we're disclosing. I think 2018 obviously wasn't a great year in terms of the amount of properties that we had in the whole calculation of same store NOI. But I think you get a pretty good idea where it potentially can go when you look at the Toronto and Montreal same store NOI numbers. The real big drag that we had through all of 2018 was our western property, both in terms of primarily because of vacancy and then rental rate. But now that you're starting the year at 100% occupied, I'd like to think that same store sale trend is going to continue.

[Operator]

Our next question is from Matt Kornack from National Bank Financial. Please go ahead, your line is now open.

[Matt Kornack, Analyst]

Good morning, guys. Just quickly wanted to follow-up on that comment with regards to same property NOI growth. Do you at least for your forecast, are you anticipating 100% occupancy throughout 2019? Or is there some vacancy slippage?

[Paul Malcolm Dykeman, CEO, President & Trustee]

It's not 100%, but it's pretty darn close to 100%. What I'll say is, of the 300,000 square feet that were left to renewal, there's 2 tenants that make up 150,000 of that. We're in discussion with both of those. Now that we have some of the smaller base stuff, that makes up a certain portion of it. I know we'll renew quite a bit of that. That one GTA vacancy which is 44,000 square feet of our 84,000, I'd love to think that's going to be leased in the next few months. The Montreal one, we already have a commitment, that tenant start. So the only true vacancy we have is in these new properties that we just bought in Ottawa. So I really think the occupancy is going to be really, really close to 100% most of the year. If you used a number between 99.5% and 100% for modeling, you're probably going to be pretty close. The only thing that could impact this is going to be a tenant failure which in these markets, that's not even that scary of a thing because you can just replace the tenant.

[Matt Kornack, Analyst]

You guys have been very good at putting in short term tenancies even while looking for longer-term tenancies.

[Paul Malcolm Dykeman, CEO, President & Trustee]

It's great. And right now, there's just some anecdotal really fun stuff happening which we've just taken a slightly different tact than some other landlords. Last year, 165,000 square foot tenant out of the US, not quite sure what we're going to do, they are paying $5.00 rent, and they go, we just want a one-year renewal. Okay, $6.00, no costs, so 20%. That lease hasn't started yet for one year and they come and say, maybe we want 3. And we're happy, because every six months that space, if we listed it, we'd probably list it at $7.50, right? So we're willing to take some risk on that. But then there's others -- that's why I'm saying rent on our space is tenant specific. So there's a tenant out in Scarboro and we're going to go -- he was our lowest bump in rent last year which was 10% or 12%. And then we got better steps out there because he wasn't going to be able to do it. It was one of those tenants that we really didn't want to get that space back, because we'd have to spend a bunch of money to fix it up, demise it. So we're willing to accept that. So that's why when you look at our properties, it's a space by space. But a great space, 165,000 square feet, we could lease that in a blink. So he had no negotiating power because he goes, all right, I don't like the $7,00 or I don't like whatever. Then you go okay, just leave, right?

[Matt Kornack, Analyst]

Interesting. So you've got the occupancy uptick you've got the rent uptick, and then DC1, is that going to be in the same property portfolio as well in 2019 at some point? Or how are you treating that?

[Ross Drake, Chief Financial Officer]

We've been showing that same property just for industrial.

[Paul Malcolm Dykeman, CEO, President & Trustee]

We'd have to look at it. What we're learning with that property, so the tenant pays a gross rent and pays power costs and then we pick up all the other costs. So we're, us and our partner, that business is still, we're still kind of perfecting the operating and getting used to this business. So there's a little bit more bumpiness to the margins there, but they are extremely healthy. I think that's going to, through 2019, I think we're going to get to a better run rate on what's going on in the data center. Because during the expansion, there was a lot of extra one-time costs of trying to let the tenant operate in the 50% when we're fitting out the balance of the property.

[Ross Drake, Chief Financial Officer]

But if you look at our segmented information, compare Q4 to Q3, you can see the uptick. Because we have a full quarter of Q4 of the increased occupancy on DC1. So you can get a very good sense of --

[Matt Kornack, Analyst]

I guess until DC2 or the Montreal one is up and running, really, it's the same property.

[Ross Drake, Chief Financial Officer]

Exactly, yes.

[Matt Kornack, Analyst]

Okay, that's fair. Just with regards to DC2 and the Montreal property and the Mezz lending program, just wondering from a modeling standpoint how we should think of additional Mezz lending versus I don't know if there's long term financing that at some point comes in and takes out some of that Mezz lending. Because it's been a pretty good return.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Right now, we've been taking a while, probably the last 4 months, Ross and our partner have been looking at permanent financing for DC1. So when we procure permanent financing there, there will be additional capital that's going to come out that will likely pay down some of our working capital loans with Erbakan and that sort of thing. Right now, I think to the extent of the program, we're happy with what we have. So I think we wouldn't do anything that's not either preleased at this point. So I think having the 2 Mezz loans, one in Montreal and one for DC2, is where we're comfortable and then I think if DC2 were to get leased or even half leased, then it's already yielding higher than what the Mezz loan would be at 50% occupancy. And again, these tenants and this business, it's very different than industrial and we're still learning it, but how they predict their growth is not clear. But what we know is they can go along and not tell you anything and then pick up the phone and say I need to be in in 3 months. Which is practically impossible and we say what about 6 months? So we're trying to get ahead of that demand by building DC2 and having it ready to go.

[Matt Kornack, Analyst]

And in terms of building the power shell, is the cost of that roughly equivalent to the amount of capital you would get back from permanent financing on DC1? Or should we expect the total Mezz financing to go down a little bit this year?

[Ross Drake, Chief Financial Officer]

I think it should go down.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, I think it's a combination of Mezz loan and the working capital.

[Matt Kornack, Analyst]

The 2 combined is sort of what I'm thinking of.

[Ross Drake, Chief Financial Officer]

Depending on what happens with Montreal as well, because there are significant capital requirements in Montreal. Excluding Montreal from that equation, it should stay about the same or go down because we should recover some on DC1 and have a little more to do on DC2. But we're not --

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, and when we finish the power shell, we can either fund it through the up financing of DC1 or just a construction loan. So right now it's just our partners' equity and our Mezz loan that's funding the construction right now of DC2. So we haven't put any construction debt on that yet.

[Matt Kornack, Analyst]

That makes sense. On the acquisition market, everybody seems to be buying the dream of rent growth within industrial. Are there any opportunities to buy stuff at market rents already that may have a little bit higher going-in yield? Or is everything being priced at pretty low cap rates regardless of whether there is rent upside?

[Paul Malcolm Dykeman, CEO, President & Trustee]

I have not seen buildings that you would say rent is at market. Because market is changing so rapidly. I think the main driver, Matt, we've been saying this for 20 years, it's all about replacement cost. Clearly, myself and the view of our entire board, we're in a REIT format, and we like to do things and make it accretive. But we really, really strongly believe in the GTA strategy in the market here. Whenever possible, we'll buy everything we can if we can get it at the right price per square foot. And we will sacrifice some short-term dilution, hopefully it's not much, and we can balance that off by doing the data centers or Mezz loans or a little bit higher cap rates in Montreal or Calgary. But I could buy a property at 4.5 if we're getting it at cap rate, if it's at the right price per square foot. Which means obviously it has a lower embedded ramp. But I'm going to be less worried about some of the buyers, they wouldn't do that unless they can convert that rent in the next year or 18 months. I probably have a little bit of a long-term view. I'm willing to wait a little longer to get that. Because you talk about our portfolio rollover, I'm happy that it's going to rollover at 10% a year. Because I think rents are going to go up at whatever percentage they are year after year after year for the next few years unless something big changes in the economy. So I'm happy to just keep getting our very solid rental increases and next year get another crack at it. And that's why we're willing to do some series of in Montreal we're looking at one now that's going to go up probably 25%. They're only going to do a 3-year deal and we're going, okay. Because at the end of 3 years, I'm willing take y changes. Because the embedded rents were just so low to start with.

[Matt Kornack, Analyst]

Do you foresee industrial tenants moving sort of beyond the greenbelt? If it's a distribution guy that doesn't need to be doing same day service, is there any rationale to moving to the I guess Londons or the Kingstons or elsewhere to offset the rent?

[Paul Malcolm Dykeman, CEO, President & Trustee]

They're going to have to. So I don't -- it's just a matter of what percentage of the group. But the ones that have less issues with getting employees, that have smaller workforces that don't need to be close to some of the populations. One area of greater GTA in the last 3 years is the east. A few years ago, if you said let's buy a property at a 5-cap in Widbee, you'd go, are you nuts? But I'm telling you right now, everything out that way is going, so Ajax, Pickering, Widbee, Oshawa. So that's why we've now picked up a couple in Widbee, we have Oshawa and we would continue to buy out there. But we've done deals at $7.50 out there. And you go, well that's a little bit of a stretch. But it's not that far really like geographically, but it's just been a psychological thing, more people have gone west and north and haven't gone east. But east is all of sudden. You still get land out there a little bit cheaper so I think people are scrambling and again, not big parcels, but anywhere you can find 10 or 20 acres of land, you're going to start to see people building on that stuff.

[Matt Kornack, Analyst]

If you had told me 3, 4 years ago that Montreal cap rates were going to be in the 5s, and availability was going to be basically nothing there as well, I wouldn't have believed you, so an interesting market.

[Paul Malcolm Dykeman, CEO, President & Trustee]

I agree. So anyhow, it's a good time to be doing what we're doing.

[Matt Kornack, Analyst]

Last question on my front, with regards to leveraging sort of your scale, your expertise, are you looking at, and then maybe getting some incremental C revenue and depending upon where it would go, but are you looking at partnerships on a JV basis to sort of offload some of this exposure from financial partners where you would be the expertise, not necessarily the other way around?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, I mean we've done that a little bit with our one joint venture partner. I think we are managing $100 million of assets that we own 25%, they own 75%. So we keep doing that but on the fringes. We're looking at geographic exposure, maybe a particular building here or there that we might want to do it. Look, we've got 2 properties in BC that don't even add up to $5 million. Those 2 we're going to look at selling. So we are looking at it, but the whole unloading or disposition could be only like a $20 million or $30 million program. I don't see it in any massive kind of way. The partnerships that we'll look at would be our partnership with Mentone in Montreal. He's a great builder, has land. I'm more than happy to go in and do 50/50 joint ventures with him all the time. And then there's other ones outside of GTA. But right now, I think the strategy of trying to keep the GTA concentration as high as we can is really the primary focus right now. But as you said, Montreal is a lot better than I think people realize and I think they're starting to realize it.

[Matt Kornack, Analyst]

I think they are catching up to you, at least in recognizing it. But it's a good thing for you as well. Appreciate the color.

[Operator]

[Operator Instructions] Our next question comes from Michael Markidis from Desjardins Bank. Please go ahead, your line is now open.

[Michael Markidis, Real Estate Analyst]

Hopefully not too disappointing, but I have a few more granular type questions for you.

[Paul Malcolm Dykeman, CEO, President & Trustee]

That's the kind we like. I'll get Ross to answer you.

[Michael Markidis, Real Estate Analyst]

On the DC1, I think it sounds like you said you had a full quarter and it's a gross rent. So by definition, should the rent have gone up by double for 4Q?

[Ross Drake, Chief Financial Officer]

Should have been, yes.

[Michael Markidis, Real Estate Analyst]

Okay, it looks like it was a bit lighter than that, so I don't know if you can look into that. Maybe there was a prior period adjustment that was impacting that.

[Ross Drake, Chief Financial Officer]

There was a small adjustment in the quarter at the end.

[Michael Markidis, Real Estate Analyst]

So based on that, could give us an idea then what the annualized run rate of the revenue for that building should be now on a go forward?

[Ross Drake, Chief Financial Officer]

I'll have to get back to you on that one.

[Michael Markidis, Real Estate Analyst]

That's fine.

[Paul Malcolm Dykeman, CEO, President & Trustee]

That one, as I said, we're -- I think in year one there is still I don't want to say bugs to work out, but they are very sophisticated buildings, there's very sophisticated operating systems. We're working very closely with the tenant because there is daily checklists of every last piece of equipment that goes on in there. So we're just kind of figuring out the most efficient ways to do things. There's 24/7 security, there's 24/7 technical people. So we're trying to manage people there and workflows and all of that. And then making sure that everything that were doing is in conjunction with the way the tenant wants to see things. And this is a very demanding tenant and they should be. So we're just kind of -- like I said, it's all very strong profit margins, but there is some variability to getting everything right from an operating perspective and getting our costs as tightly controlled as we can. So I think it's going to take 12 months to kind of get us to where we really want to be. It's got a bit of a learning process for us both.

[Michael Markidis, Real Estate Analyst]

Understood. The $50 million fair value gain this quarter, do you have a rough breakdown of how much of that was DC1 versus the industrial portfolio?

[Ross Drake, Chief Financial Officer]

It was almost all industrial portfolio. In fact, I think it's 100% industrial.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, the DC1's bump was fully put in in the second quarter.

[Michael Markidis, Real Estate Analyst]

I don't know if there's a typographical error, but the last quarter financials had a 6.75 cap for DC1 and this quarter you're at 6.4 in the verbiage. So I don't know if you can explain that or get back to us?

[Paul Malcolm Dykeman, CEO, President & Trustee]

The cap rate hasn't changed. We had it appraised and it was appraised at 6.75, so I'm not sure why the 6.4, where that came from.

[Michael Markidis, Real Estate Analyst]

Okay, that's fair. Just on your leverage, $100 million of capacity to get to your 50% target. But it looks like your liquidity is fairly tight. So just curious what the near-term opportunities are for you guys to finance within the existing portfolio and access under that capacity?

[Ross Drake, Chief Financial Officer]

We're not that tight. We're expanding our line by $30 million in the next, by the end of this week, using some of our existing properties that have some low leverage on them. And then there's a couple of the acquisitions we did, one just in December, that we assumed mortgages at a low loan to value and we're up financing those. And then there's one that's taking a little longer that we acquired back in Q2 that had a low loan to value as well. So we've got -- we're working on some up financings to add to some of that. Plus the mortgages that are spinning off this year, we're renewing them and refinancing at high loan to values. So we're adding some value there.

[Paul Malcolm Dykeman, CEO, President & Trustee]

And the last thing, there's some technical changes within our current line of credit that's going to give us more lending value, but the same security base. So that's another $10 million or $15 million. So yes, we're creating more liquidity there. And again, the main thing that we're trying to talk about here and leverage is 2 or 3 years ago when our asset base was $500 million, $600 million, $700 million, we were operating at 55%, 56% leverage, or that's kind of where the target was. We're basically saying now this size, now that we're starting to do a bit more on Mezz loans, a bit more on balance sheet development, we're going to continue to migrate this down. So we don't have to get to 50%, but that's just kind of our internal run rate number today. But if we don't get there, we don't get there. If we see a great opportunity and we go to 51% or whatever, it's going to be in and around the 50% and as we go forward, we'll keep migrating that down as we play with the 3 levers of that and payout ratio and looking at cash distribution increases from time to time as well.

[Ross Drake, Chief Financial Officer]

And I left out DC1, once we get off the construction financing, there's significant up financing cadence in that a well. So lots of liquidity available and not concerned about that.

[Michael Markidis, Real Estate Analyst]

On DC1, that's something guys have been looking at for a bit of time. Are you closer to a resolution on that?

[Paul Malcolm Dykeman, CEO, President & Trustee]

It's really complicated. So I think we are because we just want to get it over. But there's just --- the options are very wide, so there's operating loans that you can get that are kind of like almost more like the REIT, the US REIT model where it's kind of almost like a floating rate package over a whole portfolio of data centers, based on -- so you can look at something that's more of like an operating kind of company program, or you can go the other way which is doing debt long term and matching and amortizations to lease terms and stuff like at. So we're just trying to figure out which is the best fit for that. So we have options, we just are trying to figure out what the whole program is going to look like now and what it's going to look like in 1 year, 2 years, 3 years. So that's really kind of driving the question. But yes, either way, there's going to be a pretty significant up financing event that will happen.

[Michael Markidis, Real Estate Analyst]

Okay. Last question for me here is just looking at the capital additions to the existing portfolio excluding that -- not focusing on the $24 million or so that you did for DC1. But I guess it was around $15 million of additions to the existing portfolio. I don't think there is any real expansion capital in that number. Maybe you could just give us some color in terms of what that was and how that relates to the leasing activity that you did over the course of 2018?

[Ross Drake, Chief Financial Officer]

A lot of that related to the leasing activity and then that joy or straight lining of rent debt of another $1.5 million in here. And then on some of these properties we acquired during the year, there was some known capital work that needed to be done that we've built into our model and our acquisition price. So we're doing some work on roofs and some other areas as well. So that's mainly the focus.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes, our ongoing CapEx number is actually very modest on our existing portfolio. Because what we've found and model we've chosen this time is, and 75% of your capital number is usually roofs. And even in that portfolio in Montreal, we got a price adjustment of $1.5 million and I think we're doing like $2.5 million worth of roofs on all that Montreal portfolio. We don't want to have a lot of that deferred CapEx built into our buildings, so to do that we can recover more of the parking lots and some of the HVAC through regular operating costs. But nonrecoverable CapEx number we would have said $0.10 to $0.15 a square foot. But we're not even near that in terms of our ongoing portfolio. So the cap on our requirements of existing properties is pretty light, so we're trying to do more of that right upfront when we buy properties. But like I said, it's really almost the majority of that is usually roofs.

[Michael Markidis, Real Estate Analyst]

Okay, and the $0.10 to $0.15, you're talking terms of total or just the nonrecoverable portion?

[Paul Malcolm Dykeman, CEO, President & Trustee]

That would be -- and it's not even that. That's a benchmark we used in the past. In next year's budget, it's not even -- it's below the $0.10 per square foot. But what we're able to do, and I briefly mentioned like these operating synergies, but what we're able to do, because we started to operate our portfolio as like one business park and then you start to order landscaping and snow removal and those kinds of things So we're able to drive down operating costs and what we're able to do in our leases as we convert them to what we call the Summit Standard lease, is start to build in some CapEx reserves and have them funding a pool of money that covers off what have fell into the nonrecoverable stuff. So we're probably recovering $0.10 to $0.15 a square foot from tenants for capital on top of what -- usually it's the roofs they don't like to pay for. So that's how we're managing them. But at the end of the day, they're looking at their gross rent. And as long as that's not going up, if you're kind of saving $0.10 or $0.15 on the normal operations and you're putting in a capital reserve of $0.10 or $0.15, the tenant is paying the exact same rent but we're getting a little bit of a reserve to do some of the asphalt repairs and loading dock doors and the kind of stuff.

[Operator]

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

[Paul Malcolm Dykeman, CEO, President & Trustee]

Thank you very much and look forward to talking to you at the end of the first quarter which we'll also be doing our AGM in May. So thanks a lot for your time today. Talk to you later.

[Operator]

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