Summit Industrial Income REIT

TSX:SMU.UN

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Summit Industrial Income REIT Fourth Quarter and Year-end 2020 Results Conference Call. [Operator Instructions]I would now like to hand the conference over to your speaker today, Paul Dykeman. Thank you. Please go ahead.

[Paul Malcolm Dykeman, CEO, President & Trustee]

All right. Thank you, operator. Good morning, everyone. Welcome to the Summit Industrial Income REIT Fourth Quarter and Year-end Conference Call.Before we begin, let me remind everyone that during the call, we may make statements containing forward-looking information. This forward-looking information is based on a number of assumptions, is subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from those disclosed or implied. We'll direct you to our earnings release, MD&A, other security filings for additional information about these assumptions, risks and uncertainties.Joining me on the call this morning is Ross Drake, our Chief Financial Officer; and Dayna Gibbs, our Chief Operating Officer.Let me begin. Despite the ongoing impacts of COVID-19 pandemic on the Canadian economy, we continue to achieve our goals of expanding our property portfolio, generating strong financial and operating performance and delivering value to our unitholders. We're very proud of the resiliency and dedication of our entire staff at Summit, and on behalf of our Board of Trustees and all unitholders, I'd like to thank our team for their hard work and commitment over the last year. Their contribution to our continued success is a testament to their experience, the strength of our property portfolio, tenant base and the resilience of the Canadian light industrial sector.Let me begin with a few key highlights for 2020, as shown on Slide 4. The REIT generated record results in 2020 despite the pandemic. All of our key performance benchmarks were up significantly compared to 2019, with the fourth quarter of 2020 being particularly strong. We added 1.7 million square feet to the portfolio during 2020 and moved the first 2 developments from our development pipeline into income-producing properties in the fourth quarter. Importantly, we ended the year with record liquidity, providing us with the funds and flexibilities to act and grow opportunities going forward. We're also very pleased to have received an investment-grade credit rating during the year, allowing us to access the unsecured debt market.Turning to Slide 5. You can see that we had another strong quarter. Occupancy remained high and stable. With our portfolio growth during the year, total revenue rose 24%, also driven by increasing rents. With the increase of revenue, NOI was up 24%; FFO rising 32%, but most importantly, this growth continues to be highly accretive as FFO per unit in the quarter was up 10% despite the equity offering and a 19% increase in total units outstanding. Same-property NOI was strong at over 5%, and we expect to see this continue in the quarters ahead.On the annual basis, 2020 was another record year for Summit. As you can see on Slide 6, total revenue was up 34%, driven by portfolio growth, continued strong occupancy and increasing monthly rents. This growth resulted in a 36% increase in net rental income and a 41% increase in FFO.Same-property NOI increased 3.8%, strong performance, given the fact that we did include some provisions for tenant receivables and the CECRA tenant assistant abatements. Again, our growth continues to be very accretive as our FFO per unit was up 12% despite the 26% increase in our total units outstanding for the year.As shown on Slide 7, we acquired interest in a total of 23 properties last year, adding 1.7 million square feet to the REIT's portfolio for a cost of approximately $345 million and an average overall going-in cap rate of 4.7%. Included in the purchase was the remaining 50% ownership of 11 properties from a joint venture in Montreal and 2 properties from a joint venture with our development partner in Guelph. As a result of the Montreal acquisition, we now internally manage 100% of our property portfolio. We also sold 2 noncore properties for $7.8 million as well as our GTA data center, generating a sizable gain of $21 million. The REIT's property portfolio saw more than a $90 million increase in fair value to our real estate, which the majority, $71 million, was in the fourth quarter.I'll now turn things over to Dayna to talk about the operating performance.

[Dayna M. Gibbs, Chief Operating Officer]

Thanks, Paul. So turning to Slide 9. Our key target markets of the GTA and Montreal continue to demonstrate very strong fundamentals, characteristics that we believe will continue to drive organic growth going forward.The GTA, representing over 40% of our GLA, remains the strongest industrial market in the country. High occupancy and limited new supply are driving record low availability rates and record increases in average monthly rates. The same fundamentals can be seen in Montreal, our second largest target market, encompassing approximately 20% of our portfolio by GLA. Both markets have demonstrated many years of consecutive quarterly rental rate growth, a track record that we are confident will continue well into the future.Turning to our regional overview. You can see on Slide 10 that Ontario continues to perform extremely well and why the GTA remains a strategic focus for the REIT's growth going forward. Our leasing programs continue to drive meaningful increases in cash flow. In 2020, we generated a solid 98% retention ratio on renewals, with a 26% increase over in-place rents. As mentioned, with current embedded rents of $7.04 a square foot in the province and $7.16 per square foot in the GTA, we are confident we'll see further upside as leases are renewed going forward.Slide 11 demonstrates that our Québec portfolio also continues to generate solid and stable performance. We believe that there continues to be attractive opportunities to be found in this market and are actively focusing on Montreal, in addition to the GTA. Our leasing programs here are also generating solid increases in cash flow, with a 98% retention ratio in Québec last year, generating a 23% increase in rents. Again, with current in-place rents below market, we expect further upside in rental rates in the future.Slide 12 highlights our Alberta portfolio. This portfolio has been stable overall, with occupancy outperforming the broader Alberta market and continuing to improve since our acquisition of these assets. We have been strategically identifying select Alberta properties for disposition where value can be maximized at the appropriate time. We plan to reduce our current overweight portfolio allocation in this market to achieve our desired geographic weighting of 20% or less through select dispositions and growth in other markets. Alberta represented approximately 27% of our total portfolio GLA at year-end.On the leasing front, as outlined on Slide 13, we continue to proactively manage our lease renewals. We are pleased that our liquidity position has been strengthened by our ability to collect the vast majority of our rents through the pandemic. Through the second half of 2020, rent collections returned to more normal pre pandemic level. We are achieving solid increases in rent on renewals, with an average of 24% overall increase last year and with a much higher 27% increase in the GTA market. Tenant retention was a very strong 82% in the year, and keeping tenants in place is a key component of our strategy, and we're very pleased with our current activity.Turning to Slide 14. 9% of our leases will renew in 2021 with another 11% in the following year. As mentioned earlier, with our current embedded rents well below market, we believe we can continue to generate solid increases in cash flow as leases mature going forward. Overall, our portfolio is well diversified by tenant days and a listing of our top 10 tenants is included in the appendix of this presentation.Since the start of the pandemic, we've worked closely with our tenants to implement rent relief programs where needed. As can be seen on Slide 15, the REIT had just over $3 million in deferred rent outstanding at year-end, with most due to be repaid by mid-2021. Since year-end, a further $1.3 million has already been repaid on schedule, and we're encouraged by the strength of our tenant base and our relationships, having already collected more than half of the amounts owed and all on schedule.Approximately $1.8 million in free rent was granted in exchange for early lease renewals with extended terms at higher monthly rents. We are encouraged that this strategy will continue to support certain tenants as they work through the temporary economic strain caused by the pandemic and keep them in place over the longer term.Turning to Slide 16. This details our strong development pipeline, the majority of which is located in our target GTA market. At year-end, we had 2 properties in Guelph under construction and expect to get shovels in the ground on another 2 projects in the first quarter, one in Mississauga and another in Burlington, both of which are located on land owned by Summit.We are pleased with the progress of our pre-leasing activity relating to our development pipeline, which is another testament to the strength of market demand. Development and value-add opportunities have become an increased focus for the REIT, and we're excited to be actively looking to expand in this area in proportion with our income-producing property portfolio.I'll now pass things over to Ross for his financial review.

[Ross Drake, Chief Financial Officer]

Thanks, Dayna. Turning to Slide 18. We continue to build liquidity in 2020 with a meaningful increase in the size of our value -- and value of our portfolio of unencumbered properties, our new $300 million unsecured credit line, 2 successful bought deal equity offerings of REIT units raising $368 million and new and up-financed mortgages at reduced interest rates.We have been successful in capitalizing on today's low interest rate environment, having reduced the REIT's exposure to floating rate interest to only 0.5% of total debt, down from 36% at the end of 2019. Through proactive financing strategies, the REIT ended 2020 with one of the strongest liquidity positions in its history, well positioned to navigate potential market volatility and to capitalize on growth opportunities as they arise.As shown on Slide 19, including our cash on hand, the full availability of our unsecured credit facility and the financing potential of a portion of our unencumbered portfolio, total available liquidity stood at a significant $600 million at year-end. While we have no intention of accessing all these sources of liquidity at once, for illustration purposes, if we fully utilize our leverage ratio, we'd still remain at conservative 48%.A pivotal moment in Summit's history occurred in 2020, with the REIT's investment-grade credit rating from DBRS. As we -- as can be seen on Slide 20, with this rating, we were able to complete 2 successful offerings of unsecured debentures, 1 in September and the second in December, raising a total of $450 million of proceeds. The unsecured debt markets remain an attractive source of capital and we -- as we continue to grow the REIT.In addition to our increased liquidity position at year-end, our balance sheet also remains strong with conservative debt metrics, as shown on Slide 21. Our leverage ratio was a conservative 37.4% with improved debt coverage ratios. As mentioned, we continue to capitalize on the current low interest rate environment, having reduced our average effective interest rate to 3.61%.Slide 22 details our staggered debt maturity profile with only 2% of total debt coming due this year and 9% in 2022. Our $1.2 billion of total debt carries a weighted average interest rate of just over 3%, with significantly lower fixed rate on our unsecured debentures of between 1.82% and 2.15%. In addition, the average interest rate for our maturing mortgage is approximately 3.7% over the next 2 years, representing an opportunity to generate significant savings on these maturities as they come due. As mentioned earlier, we've seen a shift in our balance sheet for primarily secured debt to 40% of total debt being unsecured at year-end.Slide 23 illustrates an important year-over-year trend. For the past 3 years, the REIT has been successful at reducing its overall leverage while also significantly increasing FFO per unit. We are confident this trend will continue going forward as we build value for our unitholders and aim to continue to increase overall leverage.I'll now turn things back to Dayna to touch on some of our ESG initiatives.

[Dayna M. Gibbs, Chief Operating Officer]

Thanks, Ross. Since inception, Summit's culture has always been one of accountability and high standards relating to all of its business activities. Having a positive impact throughout our business lines as well as the broader environment in which we operate is a fundamental strategic principle at all levels of REIT operations.We've outlined some of our early successes in sustainability, ESG and corporate responsibility on Slide 25. From simple things such as completing lighting upgrades to motion-sensored LED lighting, low-flow toilet installations, the collection of rainwater, using recycled flooring, increasing the R rating for roof replacements to being active in philanthropic efforts in our communities, we are mindful of our daily activities to achieve ever greater positive impact.Given the REIT's increased focus on development, LEED building standards are also a priority for us. We continue to work towards providing greater market communication and transparency of our ESG initiatives while augmenting targets for the future.I'll now pass things over to Paul to wrap up.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Great. Thanks, Dayna. Looking ahead, we feel very confident in the outlook for the REIT and our ability to generate continued growth and enhanced unitholder value. Given the managerial bench strength; deep and long-standing industry relationships; significant liquidity, as Ross mentioned; and ongoing access to various sources of attractive capital, we are well positioned to continue to successfully execute the REIT strategy going forward.In summary, our operations and portfolio remain strong and stable. We have a competitive advantage with the quality of our properties and our strong tenant relationships. At the core of our operations, we continue to see high stable occupancy, essentially unchanged versus pre pandemic levels. Industrial properties are very highly defensive asset class in today's market. Our portfolio requires minimal CapEx expenditures. And we are focused on markets with very limited new supply. In addition to strong fundamentals, we are actively managing our G&A, keeping our overhead lean and efficient as well. We believe ongoing trends in the Canadian industrial markets will continue to benefit the REIT, such as e-commerce and shift in supply chain.In conclusion, as you can see on Slide 28, we have delivered -- it's a very busy slide, delivered on our growth objectives since we began the second Summit in 2012. Looking ahead, we plan to continue to grow the REIT through strategic acquisitions and expanding development program while optimizing returns. As Dayna mentioned, ESG initiatives will become a larger priority for the REIT -- all of the REIT's activities, and we believe that sustainability and corporate responsibility are key drivers to long-term business success.In summary, we're very pleased with our performance in 2020 and very bullish looking forward to another record year in 2021.Thank you for your time and attention this morning, and we'd now be pleased to answer any questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from the line of Mark Rothschild with Canaccord.

[Mark Rothschild, MD & Real Estate Analyst]

You had really good leasing spreads last year. Can you maybe talk a little bit about what the outlook is for that? Should we expect the pace of that to continue? And then on that point, are you seeing any difference in the types of properties you have, whether it be the smaller ones or larger, more single tenant-type properties? Is the rent growth changing by type of asset?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. So the spread growth, I think, if anything, is accelerating. We'll talk about the limited availability, particularly in Toronto and Montreal. At that 2%, it's very much a landlord's market. As much as we try to bring on new supply, that's not happening. So we're seeing a pretty long runway for spreads.So when I look forward, I think we'll continue to see similar and, if not, some better spreads. In particular, I think, Montreal, which we would have said is 1 year or 2 behind, Toronto in terms of that availability rate going down, so we're starting -- we're definitely starting to see an acceleration of rental growth in Montreal that we saw 2 years ago in Toronto. So similar, if better.West, that market is kind of more of a flat market, but it's not a bad market. I mean there's still a lot of the e-commerce demand out there. We have tenants that are bursting at the seams and trying to expand. We're ready to do a new lease deal at above $10 rent on a 50,000 square foot space on a shorter-term basis. So we're quite optimistic about the direction of spread.Now there are a few leases that we don't do anymore, but would have some fixed price renewal options. So there's 1 in other Ontario this year for a couple of hundred thousand square feet that had fixed price renewal, like a 3% bump. So there'll be some outliers by that -- like that. But in terms of rental rate growth, it's changing every 6 months, and we'll see that in the leasing of our new developments. You're going to start to see new rates that some has not seen before.

[Mark Rothschild, MD & Real Estate Analyst]

Okay. Great. And you mentioned Western Canada and Dayna mentioned in the comments about reducing exposure to Alberta, which is something that haven't been spoken of previously. Has there been any change in the view towards the exposure to Alberta over the past few months as some of the other markets remain strong and, as you mentioned, seeing further acceleration in rent growth?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. I mean we're still very happy with that portfolio. We bought it at a 5.5% yield. We've improved that yield to about 5.8%. But when we look at it, and we've gone through the pandemic, we do have 1 property listed for sale, $10 million to $15 million asset. We've got some small bay product listed for sale in Ottawa. So probably dispositions of hopefully in the first half of the year about $60 million.But it's really focused on that small bay product, which kind of answers your second question. The real focus is on these larger distribution tenants that are bursting at the seams and they're not as sensitive to the rent. But saying that, small bay works well. It's just that Summit I, we had the majority of our portfolio with that. And it's just -- there's a lot of turnover. There's a lot of leasing costs. So it's just a different segment of the industrial. But we're happier to be focused on the larger tenants. And when we talk about the development, we're seeing exactly what we saw in Summit I, taking tenants from our existing base and moving into our new properties. So that reduces your leasing risk.

[Operator]

And your next question comes from the line of Himanshu Gupta with Scotiabank.

[Himanshu Gupta, Analyst]

So just staying on Alberta. Occupancy declined slightly in Q4 versus last quarter. And I know you have previously mentioned about a large 100,000 square feet lease expiring in Edmonton. How is the lease going on that space? And apart from that, are there any major leases coming up for renewal in Calgary or Edmonton markets?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Sure. And we talked about -- so the good news, and I keep saying surprising news, we haven't had any business failures in Alberta. So the only 2 we talked about, and that's why our occupancy dipped in the GTA, which we're happy with there. So out West, it was just a couple of tenants that didn't renew. So clearly, their business had changed. So they either were downsizing or looking for different space. There's different reasons to do that.But as I mentioned, just because it's Alberta, everyone thinks oil and gas, it's not that bad. So Calgary is extremely active. There's a very limited supply of larger space in Calgary as those e-commerce tenants try to do that. We had a lease expiring in the fourth quarter. We've done a very creative thing there by putting a tenant in that needed some temporary space knowing -- so we got -- we essentially let them test drive the space for about -- a little over 100,000 square feet. We just found out yesterday that their Board has approved the deal, so we're going to be putting them in that space for -- on a 15-year lease.So there's lots of activity. As I mentioned, we've got a short-term deal on about 50,000 square feet, one of the vacancies that the rent -- net rent is over $10. It's an 18-month lease. So it's a different strategy than Toronto. So you're plugging holes, you're keeping income in place. We don't need to grow the rents the same to still have a very good yield because we're already.

[Himanshu Gupta, Analyst]

And then if I look at the overall same-property NOI growth, which was 5% in the quarter, and I think, Paul, you mentioned in your remarks that you expect to continue to see that kind of growth in the quarters ahead. How much are you baking in for Alberta? And are you expecting much stronger growth for the other 2 markets, Montreal and Toronto?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. I think for the year, I mean, I think Alberta is roughly flat, I'm looking at Ross, because he's got all the details of the budget numbers. But Toronto just continues to surprise on the upside. So we're -- there's a tenant that we're going to let go out of the portfolio, just under 50,000 square feet. They are currently paying under $5 and we list that space for $10. That's almost impossible to do on a renewal. So it's a different strategy, but this particular tenant, we weren't happy with them for other reasons. So that's going to be a doubling of the rent in that one space. It's 50,000 square feet, but it all adds up.The one area that we're pleasantly surprised, and we thought this was going to happen, but we're actually now seeing the fact, is Montreal. So we just did -- in the fourth quarter, we did -- used to be a 400,000 square foot tenant, we downsized them. But we signed them on to a new long-term lease. That rent went up 23% on the renewal. And we've got them locked in for 10 years. We've backfilled their space with some other tenants at 20% bump in the rents as well there. So Montreal is definitely continue -- starting to accelerate the rental growth there.As our portfolio gets bigger, I think same-store NOI becomes more and more important as more of our portfolio, but it still can be impacted by onetime events and stuff. But yes, so that's kind of how that blends out. We don't give guidance on same-store NOI for the whole year, but we're very bullish is the answer.

[Himanshu Gupta, Analyst]

Absolutely. And then on the rental leasing spreads, I mean just a follow-up there. I mean if I look at GTA, the tenant retention ratio was almost 98%, I mean call it 100%, and yet, the increases are like 20%, 25% plus. So the question is, I mean, do you think the existing tenants are able to afford -- I mean all the existing tenants are able to afford that kind of higher rents? And do you have a sense of what absolute rent on a dollar per foot basis would be too much for the tenants? I mean where is the upper ceiling on the bats?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. So we have lots of discussions around that. And clearly, we haven't hit the high part because rents continue to go up. These are not easy discussions. I'm looking at her -- or she here for the 250,000 went from $5.20 to almost $8, a 50% increase on a very large space. But they also signed on for another 5 years, so they're going to be there for 10 years. So it all depends on the industry and the tenant type. Some of them are just desperate to have the space. And there's a growing trend in terms of running a business, it's really labor and access to labor. And I think when it comes to rent, tenants need to be in certain places which are closer to their labor story or market.But the -- what we're seeing, though, is we have some tenants, and that's why I think Guelph development is doing so well. We probably have a $3 per square foot advantage. If you want to go to Guelph, you can get a brand-new building and you're going to be paying less than you would in Brampton, Mississauga, Oakville. So we're seeing the migration for some of those tenants that are having trouble meeting the top line rent. But the off-line rents are going to continue to accelerate.When we talk about replacement cost and limited supply, there's now a new high watermark of a piece of land in Toronto trading at $3.5 million an acre. And with development charges, you're probably $160 a square foot land cost before you put a shovel on the ground. So that means replacement cost in Toronto is not $200 anymore. It's not $250 anymore. It's north of that. And I wouldn't be surprised on that particular development. You see a number that we would have thought it was crazy a couple of years ago, close to $300 a square foot, which implies a 5% yield, if that's what you need today, maybe it's less, somewhere in that $14 or $15 per square foot.So that's going to be an outlier. But that's the new bell weather and then everything trickles down after that. Some of the deals that we've been looking at are north of $10 for our existing space and stuff, which is still that gap between in-place of roughly $7 to up to $10. But it's really where is the $10 going, where is that $15 going over the next few years, which is going to be interesting to watch. But in my mind, there's not enough land, and it's not easy to bring on that's going to fill that supply side of the equation.

[Himanshu Gupta, Analyst]

Got it. So really, the land price is deciding the upper limit for the rents, I think that makes sense. And then just turning on the IFRS fair value gains, I mean, $70 million in the quarter. Was it mostly GTA or Montreal or combination of the 2? And anything related to the Guelph development asset, which is, I think, now in the producer?

[Ross Drake, Chief Financial Officer]

Yes. So a significant portion of that $70-odd million was GTA. But about 70% of it was the GTA. And then the balance would have been in Montreal with a small, relatively flat in Alberta in that. And as far as the development that moved into income producing, there was the -- the overall being on that as part of the GTA gain is around -- increase is around $7 million. So about a 20%, 25%, 30% increase in the value of that on our 50%.

[Paul Malcolm Dykeman, CEO, President & Trustee]

The IRR on that development was about 45% or 50%. So that's definitely still decent developments. But interestingly, in our presentation on the auditors, they have a nice and fancy software program and they line up based on all kinds of inputs where our valuations are in. Montreal is the one that's really changing quickly. There's been a number of sales that are sub-4 cap. I think our cap rate came down quite a bit. But still, I think the average they're using for our Montreal portfolio is 4.6. And a lot of our valuations are not pushing the outlook.So I think there's still some more room for cap rate compression particularly in Montreal. And then obviously, as we continue to expand the rental income, you're going to see some value pick-up there. And we're going to do some more work going forward, talking about our mark-to-market on our development program. Because when you look at where it is today our pre-leasing, what we expect the yield on cost to be, there's a pretty significant development spread there. So we've got a nice opportunity to pick up some any of the...

[Himanshu Gupta, Analyst]

Got it. And maybe just last question for me. I mean since you talked about development in Montreal, I think you added another development property in Montreal this quarter. I can see 130,000 square feet for redevelopment. So what's the plan there? What's the upside?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. We're very excited. So that was part of the downsizing of that large tenant that I just mentioned. They had an outbuilding, it's about a 20,000 square foot footprint. Probably 40 years old, 2-story office, little building. We're going to knock that down and build 130,000 square feet. We're going to test the market. Might -- I will not be surprised that this will be the highest rent of an industrial that we have seen again in the Summit portfolio. So because it's on land that we own, you're going to have a very, very attractive development yield there.So we're very bullish. And if anything, we'd love to expand, at least double the development pipeline across Summit. I wouldn't -- if we can even make it bigger, I'd be happy to do that. But we really want to start to get some development around in Montreal, because that market, they don't do spec development. And so there is -- last time I checked, there's about 2 million to 3 million square feet in Montreal being developed, which is very, very small. But 80% of that was pre-leased.So we're more than that. We don't use the word spec internally. We call it building inventory because we're 100% occupied. We have the tenants that are saying we're bursting at the seams. And if -- so we'll get to test the market. It's tricky to test the market rents on renewals because you have that relationship with the tenant. But when you're starting with a vacancy or an empty building, you really get to test the market, and there's lots of demand there.

[Operator]

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

[Matt Kornack, Analyst]

Just a follow-up to Himanshu's questioning there on Montreal and development. I think you said in the past, and there's been even an acceleration in the price per square foot on existing assets in the Montreal market, that you could actually develop for less than where assets are trading at this point. Has there been a big move in the value of land? I mean we've seen it in Toronto. Presumably it will follow in Montreal as well. I'm just wondering on your thoughts there.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. So we're looking for land sites. And clearly, it's growing and accelerating. So it's happening. And it's something where in Montreal we're seeing a picture that we saw a couple of years ago in Toronto. So it's not in the words I use, it's not in the crazy zone yet, but it's accelerating. So you're going to see that -- you're going to see either high single-digit or low double-digit expansion of replacement costs I think started to happen in Montreal. So the quicker we can get into the ground, and the way we think of development is we're averaging in.So the quicker we can get in, lock in our land prices, lock in our -- and construction prices, we haven't talked about that. I was on a panel or presentation. PCL was talking about construction costs all across Canada. There's a lot of things in the construction side that are growing above inflation as well. So I think, overall, you'd have to say construction costs are increasing at least 5% on average given all the components. And then still the major drivers are land and in Toronto, their development costs.So yes, so we'd love to expand. So we're looking at on-balance sheet developments now that we were -- we don't have a joint venture partner in Montreal, that opens it up to talking to various local developers. We're happy to replicate a JV program that we have with Cooper in Southern Ontario so -- in Montreal. So we'll do it either way, but we definitely want to expand. And I think there's an exciting opportunity in Montreal.

[Matt Kornack, Analyst]

And then on the acquisition front, I mean, you've been able to acquire -- in your commentary in the MD&A, I think you mentioned that there has been more activity as vendors are looking to crystallize some gains. But just want to get your sense, I mean, you've got a great cost of capital, but does it scare you a bit the pricing on some of these assets? And how are you thinking about expanding through acquisitions?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Sure. And we had a really good discussion at our Board meeting yesterday. And I think the word patience and discipline kept getting spoken about. And if anything, we've been or been active looking at and didn't succeed on about $500 million of real estate over the last 3 or 4 months, some of those bigger ones were in Montreal. And again, we just keep hitting that ceiling in our underwriting that says we won't go above replacement cost. And even if you're in Toronto, you can say, I won't go below it. That replacement cost is going to be in 12 months from now. So we're willing to stretch that factor. But in Montreal, the numbers for existing income in producing is creating a price per square foot.But I think it's tricky right now. I mean, I think some vendors we're talking to -- so we [ invested ] another $300 million. So there's a reasonable amount of activity. Again, we're being very disciplined. But it also logistically is a little more difficult to sell properties. So this time of the year, winter time in Canada is not easy. But with all of the COVID restrictions and travel restrictions, I think a lot of vendors potentially are going to wait until the spring, see how the vaccination program goes. Because if you can't get out and be able to comfortably do a lot of touring of buildings. Now we have people on the ground that can see it, but the people we'd like to see it, it's not easy for them to do that.So I would think we'll see increased activity as the year proceeds and as the vaccination program proceeds. So we'll continue to use those words of patience and discipline. But we are also optimistic. And a lot of our time is now -- probably half of our time is also looking for land opportunities so with Cooper or on our own. So we bid on lots of land. We've lost out on some -- it's -- we think buying existing properties are difficult. Buying land is another level again, because you get not only the vendor, you're dealing with municipalities, all the issues around zoning and permitting and trying to get your head around all of that. So the good news is the more we do that, the more we understand the value of our existing portfolio is going up because how difficult it is to bring on this new supply.

[Matt Kornack, Analyst]

Makes sense. A quick sort of technical, I guess, for Ross, but also just a view on where these things are right now. On the technical front, just for same-property NOI growth, what is the impact, if anything, from free rent? And I think the $400,000 in the quarter that would have been provisioning for bad debt, is that in that number?And then secondary to that, I mean, I think some of the deferrals and free rent that you were granting were related to the height of the shutdowns during COVID. But presumably given the market strength, you're not -- you're not continuing those programs at this point. Is that a fair comment?

[Ross Drake, Chief Financial Officer]

So on the same-property NOI, free rent is not impacted in that. It's treated as part of our leasing cost. As far as the $400,000 of allowance in the quarter, a little less than half of that would have been on the same properties. The balance of it is on properties outside of that.With regards to deferrals, there have been no new deferrals granted or asked for since that April, May, June period. And so we're now seeing the collection of those, which is very pleased to see that 100% of what has been required to be repaid up to now has been repaid on time as part of the monthly rent collections on that. So that we've got -- we've had 50% of the total amount that was deferred collected in that. And about -- over 80% of it will be collected by the end of May, with just a small amount that will be for the balance of the year in that. But it will be -- by May, it will be just an insignificant number.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. And that in our DNA is a very conservative nature of our RCA trading. So the allowance that we have overall is a general allowance. And to be honest, we haven't seen -- and I talked about the business data that we thought was going to happen, some of these small entertainment-type tenants and stuff like that, they just keep battling away and there's a new government program, they're tapping that. They're trying to find ways to do that. So if we go through the next 3 to 6 months, there's probably even an opportunity there to reverse some of the allowances that we've made. So we haven't had to use them. We've made them to be conservative.So there's just the 2 tenants that actually declared bankruptcy, luckily they're both in Toronto. We've already leased one of the spaces at 60% higher than the tenant failed at. So if they fail in the right places, we're happy. So -- but otherwise, yes, I used the word pleasantly surprised or shocked that some of these tenants are hanging on. But big picture, it's a very, very healthy environment for us.

[Matt Kornack, Analyst]

Fair enough. You guys are lucky to be in the industry you're in. It's nice to have some good, new stories. Take care.

[Operator]

Your next question comes from the line of Joanne Chen with BMO Capital Markets.

[J. Chen, Director of Equity Research]

Maybe just a follow-up on that question. In terms of what should we be thinking in terms of a run rates where, I guess, the leasing costs went for 2021? Do you think it would be kind of similar to what we saw in 2020?

[Ross Drake, Chief Financial Officer]

Well, we have around 1.6 million square feet of expiries and then we have some vacancies to fill on that. And typically, on renewals, it's $2 to $3 a foot. And on new deals, it's between $4 and $5 a foot is your typical sell. The number, I don't want to give too much guidance on the total leasing cost, but it will be similar, but a little lower this year than 2020.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. We use some of the -- and we use some leasing costs to -- instead of deferring rent, we gave some free rent in lease extensions. So there was $1.8 million as anomaly. But in the backdrop of this market, in you're in Toronto, like you should be happy to be in this space. So we really don't need to spend as much for me, again Ross saying typically, those are the averages long term. But in today's marketplace, unless we're doing something from an ESG standpoint, upgrading lighting or doing something that we think is enhancing the building, we're not spending a lot of capital.So it really -- the only time we're spending capital is we're enhancing the building, but the tenant is going to then pay for that in an increased amortized rent over. So whenever we do spend leasing, it's to enhance whatever -- so if we're able to get $8.50 or $9, if they want something, then that $8.50 or $9 is going to go up to include an amortization.

[J. Chen, Director of Equity Research]

Right. That makes sense. Maybe just to think back on the development side of things with respect to some of your upcoming development completions in late 2020, 2021, what's sort of yield do you think we should be expecting from some of those projects?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Very good yields. But a bit -- the spread is going to be at least 150 basis points, potentially 200 in some cases, depending on where your exit cap rate is, but comfortably into the 5s, could get to 5.5, some of them possibly even higher. So very, very healthy. And again, it's just a lot of these, all the development is land that we've bought just 2 or 3 years ago. And so we have a lower cost base which is helping us. As I mentioned, replacement cost numbers on the construction are going up. But our pro forma, as we were looking back when we bought some of this land, pro forming $6.50 to $7. And now we're thinking $10 or higher on some of those new spaces. And Guelph, it's a little bit less, but we're definitely -- everywhere we look, we're both outperforming in terms of rental rates on development which more than makes up and enhances the yield.But the other thing about development is timing. I mean these things are moving quickly. The 2 in Guelph, they're able to construct through the winter. We've got pre-leasing on the first building, 130,000 of the 190,000 is pretty much dealt with. The next building, 250,000, we've got an existing tenant that's likely to move into that building. The only question is are they going to keep their existing space or not. So this shows the program that Summit did in the first Summit. We see it happening again as you cultivate these relationships with the tenants. So when you're starting to build, it's really not taking a huge amount of development risk. Once you own the land, pretty much everything else in terms of the development fees and construction costs, you understand. So it's just a matter how quickly will you lease and what the rental rate is. And so we're outperforming both on speed and rental rate.So everything is good now. That's why it's a race to -- if we -- this number adds up to 870,000. I love for this number to be 2 million square feet and having a bigger element in Toronto. The one in Mississauga, we've got offers on -- at the highest rent that we would have seen in the Summit portfolio to date. The one down in Burlington, we have the first -- there's 2 buildings there, the first one, 90,000 square feet, that's already leased. So it's just a matter of working as quickly as we can with the municipalities to get the final approvals on those. The one in Mississauga, we've got all the permits. And so that one's going into the ground as quickly as possible.And the expansion, the 60,000 square feet, the problem with that tenant is yet he's consolidating the space and moving into a new building. So until he indicates he's leaving, so we're just getting all the planning and everything ready, so once they let us know they're finally leaving the building. So that one might slip into 2022 because their new building is not ready for them yet.

[J. Chen, Director of Equity Research]

Okay. Got it. Maybe just one last one for me, shifting to the balance sheet. Given how attractive the unsecured market is right now and you have very low refinancing needs really for the remainder of this year, do you see the opportunity for the potential to early refi some of your 2022, 2023 maturities just given that the weighted average cost is so much lower now than what's outstanding?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Absolutely. Yes, that was there. We're taking a very serious look at that. So very pleased by the outcome of being in the unsecured market. Spreads continue to tighten, but particularly for industrial REITs and ourselves and others that are -- there's 2 other industrial REITs that are rated. We're all performing well in the secondary markets. Bonds have moved a little bit, but overall, financing costs are very, very attractive. So we're looking at that.And there might be some unique opportunities because a number of -- a lot of our debt we did over the last 3 or 4 years, we actually did debt with floating rate debt and then we used swaps to fix the rate. So there might be a way to unwind some of these things. That is more attractive than just repaying debt early. So hopefully, we'll have some good news on that in the next quarter.

[J. Chen, Director of Equity Research]

Okay. Got it. And maybe just -- sorry, I sneak one last one. And you touched upon your ESG initiatives and some of your peers have looked into the green bond market. Would this be something that you guys would consider further down the road?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Dayna, do you want to take a crack at that one?

[Dayna M. Gibbs, Chief Operating Officer]

We've looked very closely at it. And really, I guess, as most people are aware, at this point in Canada, there's very little pricing differential. But for sure, it would be impacted on the demand side, so you open up a broader investor base. So we've gone down and understand what's required for a green bond framework and are really sort of trying to quantify. In terms of the look-back period and then some of the things that we may have upcoming, to the extent that we can have that critical mass to be able to do a green bond is definitely on our radar.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. We bought some LEED-certified buildings, so there's a bit of that look back. A lot of the Montoni JV properties that we bought this year fall into that category. And as we go forward, more and more of our development is going to be LEED certified to a point where -- yes, at some point.So it's definitely on the radar. And I do think, as Dayna mentioned, it's not much of a differential today, but with all of the attention on this area, I think it will be at some point. So we're aligning ourselves up to be able to take advantage of that.

[Operator]

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

[Matt Logan, Analyst]

Just following up on some of the acquisition initiatives with $300 million of bid to outstanding. Would you be able to give us a general sense for the range of volumes in 2021?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Well, it's the same speech I've done for the last 7 years, Matt. So I go, if we don't see anything of a large portfolio -- and the crazy thing is because the price per square foot is going up, you don't have to buy as many square feet to put dollars out. But I always start the year by saying we can do $350 million of acquisitions by doing 1s and 2s. So that's, I would have said in the past 30 million, 40 million, 50 million. Now those are 60 million, 70 million, 80 million. Some sale-leasebacks, some off-market-type deals like that. So I think we can comfortably do that. I think we're now trying to enhance the overall growth program with this 800,000 square feet of development and hopefully growing that so that we can start to -- 1/3 of our growth or more will start to come from the development pipeline and hopefully continue to grow over the years.But last year, we basically put pens down for 6 months of the year. So we did $350 million in 6 months of last year. So the $350 million is, I would think, is a conservative number. But it's competitive. I mean if everyone didn't like industrial before the pandemic, they certainly like it now. Lots of reasons to think cap rates are going to continue to go down.So it's -- we're going to be disciplined, as I mentioned earlier. We're going to be patient. But we also see a good opportunity when we see one, and we can take advantage of that with our current liquidity and I think a continued access to very good cost of capital. So could we grow by $1 billion this year? Absolutely. But do we expect to? No. But we're always on the lookout for that. So that's kind of the answer to that. So it's more of the same. And I think probably over the last 3 years, we've actually averaged closer to $500 million of buying. So my $350 million is underpromise and then outperform.

[Matt Logan, Analyst]

Fair enough. Maybe just changing gears to some of your comments with respect to Himanshu's questions. When you talk about the $300 per square foot, the development cost in Toronto, can you talk about what component of that is land on a per square foot basis or on a per acre basis?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. Yes. So I mean, it was a crazy deal. And finally, my guess it's public because we're hearing this number, it's going to be above $3 million and then all of a sudden, it was above $3.5 million. So $3.5 million, this is Brampton and it's a far large piece of land. So this is like a $150 million purchase by this one group. That translates into $150 a square foot. And you add in development charges, there are probably some grandfathering of development charge credits, so you're probably closer to $150, $160 on land cost. And that's unheard of. In the past, we would have said land and development charges as a component of your overall cost should be 20% or 25%. That's going to peg that at 50%.So that's -- and again, I don't think we want to -- I mean, we had this discussion in the trustee meeting yesterday. It was like, well, let's not just think that this is the brand new normal, but it happened. That's a real example. And I think there's a trickle-down and they're getting tenants up to speed on that. So -- and then, like as I mentioned in the discussions with PCL presentation, labor cost, curtain wall, like there's a lot of construction components that are going above -- going up by steel and fabrication. There's a lot of things that are going above inflation costs. So use a number of over 5% for just hard costs.And then the last one is the staff cost and time line. That's the one that surprised us. We looked at a piece of land, 25 acres in GTA. We thought it was like a 2-year process. And then they threw in we need to do a water conservation study, and that was going to take another 18 months. So it's just very, very difficult in owners to bring on, and that was going to be for 300,000 or 400,000 square feet. So -- and that's -- when you look at the landscape around Toronto, there is probably 15 developers, and there's probably 30 or 40 projects. But all of them are 300,000 here, 500,000. Like it doesn't add up to the 20 million and 30 million square feet that probably needs to be built.And then clearly, one of the big drivers in the short term, and the question is how long will this persist, is Amazon. Like they absorbed, I think, 8 million to 10 million square feet in Canada last year. I think they're going to do the same again in the next year or 2. So they're just sopping up massive amounts of this new building, and they're paying big rents doing long-term leases. So developers are more than happy to put them in their portfolio.So yes. So everything is pointing to this rising replacement cost. We thought there's a bit of a pause last year. It's just continued to accelerate. So that's why lots of people are starting to buy the land positions in Hamilton, next to the airport down there. We've been in looking at Guelph and Kitchener and Waterloo. But everything on East, Pickering, Oshawa, Ajax, all of that stuff out there is becoming very, very popular as well because you can still get land a little more reasonably priced than the $3.5 million an acre. So -- but everywhere land is going up by crazy amounts.And that one deal we passed on was going from next day, he had an offer at $100,000 more an acre for something that's going to take 4 years to have at least. So yes, it's a tough, tough market. But that's why some is not going to try to do it on its own. You really need to twist and turn to try to find your land positions.

[Matt Logan, Analyst]

And I guess if we took that same approach in Montreal, would it still be fair to say that development costs are less than replacement? Or has that started to just shift?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Montreal -- again, I'm not sure how much I want to talk about it because I don't want everyone going to Montreal and starting to buy land and develop. They just don't build a lot of spec over there. So we do think there's an opportunity. Land prices are going up not nearly as quickly as Toronto. You don't have the same development reading. So you're going to have your construction costs going up. But I know for sure, I'm very, very confident that rental rates are going to make up for any kind of inflation that we're having on the cost and replacement cost side. So yes, I think the quicker we can get in and build a land bank and start developing in Montreal, we're going to be pleased with the outcome.So yes, anything you do now, in particular in Toronto, whatever you think it's a crazy number or whatever your underwriting said yesterday, you're stretching your stretching, 6 months after you buy it, you're going to -- you go back and go, "Well, that was a good deal, wish I did more of that," right? So I think that same principle is going to happen in Montreal. So again, we're not going to do anything crazy, crazy, but just directionally, we definitely want to expand overall development programs and we definitely want to make Montreal a bigger piece of that development pie.

[Operator]

And Dean, your line is open.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

You're 10x bigger than the last time I looked. Sort of multipart question for me, Paul. When you look at these big gaps that you're getting on the renewals, how much do you think of that is driven by the dynamic of having long-term, 5-, 10-year leases, whatever they may be maturing that didn't have adequate contractual steps in them? And then what would that mean for steps going forward and perhaps the argument for shorter lease terms?

[Paul Malcolm Dykeman, CEO, President & Trustee]

Yes. And yes, good commentary. So steps going forward, we keep moving this benchmark, and there's a couple of leading developers and landowners that are kind of going, it's now 3%. So 3% annual escalations. We've always been a little bit more flexible on our lease escalations because sometimes a tenant will say, "Oh, my God, I can't afford a 50% bump in my rent. Maybe I can squeeze 25%." And then we say, "Okay, well, if you're going to do that, we'll do 25% and then we'll do 5% bumps over the next few years." So we've been kind of a little bit lenient or flexible with our existing tenants.But absolutely -- and if you look back 10 years, annual steps in industrial rents, like as you mentioned, have been almost nonexistent. So typically, if you did a 10-year lease, there was one reset at 5 years, maybe it was a 10% bump or something like that. So yes, so that is definitely a problem. So I think lease structures, in particularly Toronto, most ones we see, the ones we're doing with our new tenants down in Guelph, all have annual steps. And I think it's easier for tenants because they're not having to manage a 40% bump all at once if they're getting this 3% or 3.5%. So steps definitely are higher. They're more easily attainable and stuff.In terms of the lease terms, again, we had some interesting discussions yesterday, one of our tenants that we're going to put into one of the new developments wants to do a 5-year deal. We're spending almost no money on the space, a couple of percent office at the front. And the question was asked, why would you do a 10-year yield? Because we go, we know in 5 years, these rents are going to be higher. So we don't give options. We don't give options or we definitely don't -- we don't give options or we do all of the options now are at market. So we get another kick at the can.And that's the whole thing. We've got a glorious opportunity here. It's just how do you manage and how do you take advantage of it. So these are all the right questions, building steps into the rent. Any tenant in the GTA that's wanting to do shorter-term leases, we're okay with that because we know the market is only going to strengthen and rents are going up. The only time we want these terms is if they start to ask for money. Yes, so if they want that, then we want to amortize that in. We want to make sure we do that. But we're very specific about the type of inducements, and we love when they want to do things that are environmentally friendly. Upgrading lighting is a very popular one, trying to reduce their energy costs and stuff like that.So again, we're talking about we're in a great place at a great time and someone's saying we're lucky, but this is -- it has its own challenges. Like our property management people are talking about, the person I was negotiating with the other day, I said the rent was going to go up 50%, they started to cry, right? It's like this is hard for some businesses to accept these large increases. So it's not as easy as you think now the opportunity where you have vacancy or new developments, then it's just highest bid wins the space.So yes, it's not perfect, but we try to spend less money on leasing costs, try to get more steps in the rent, try to be flexible with tenants. In particular, in the west. Right there, it's all about maximizing occupancy because availability is in that 7%, 8%. There's -- it's tighter than that for certain types of space, particularly in Calgary. But there, it's all about just keep the places full. And so if we do month-to-month tenants, we do year deals, 18-month deals. Again, we're comfortable that, that market is going to continue to improve over time because there won't be a lot of new development going on, although there is -- there are new developments in both Calgary and Edmonton surprisingly.

[Operator]

And there are no further questions. At this time, I would like to turn the call back over to Mr. Dykeman for closing remarks.

[Paul Malcolm Dykeman, CEO, President & Trustee]

Okay. Well, thank you, everyone. It's an incredible year for lots of reasons, some good and some bad, for Summit in 2020. We're trying to be realistic, 2021, again, with pandemic engulfing. Everything we do creates a whole bunch of challenges. I think my takeaway from this year is experienced management is key. And whether you're in a good market, you're in a pandemic market, that's what shines through. So very, very excited about 2021 and the opportunities and look forward to talking to you in the next quarter. Thank you very much.

[Operator]

This concludes today's conference call. You may now disconnect.