Summit Industrial Income REIT (OTC:SMMCF) Q3 2020 Earnings Conference Call November 10, 2020 8:30 AM ET

Company Participants

Paul Dykeman – CEO

Dayna Gibbs – COO

Ross Drake – CFO

Conference Call Participants

Chris Couprie – CIBC

Himanshu Gupta – Scotiabank

Matt Logan – RBC Capital Markets

Joanne Chen – BMO Capital Markets

Matt Kornack – National Bank

Alex Leon – Desjardins Securities

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Summit Industrial Income REIT Third Quarter 2020 Results Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

I would like to now hand the conference over to your speaker today, Paul Dykeman, CEO. Thank you. Please go ahead, sir.

Paul Dykeman

Thank you, operator, and good morning, everyone. Welcome to Summit Industrial Income REIT Q3 conference call. Before we begin, let me remind everyone that during this call we may make statements containing forward-looking information. This forward-looking information is based on a number of assumptions 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. We direct you to our earnings release, MD&A, other security filings for additional information about these assumptions, risks and uncertainty.

Joining me on the call this morning is Ross Drake, our Chief Financial Officer; and Dayna Gibbs, our new Chief Operating Officer. Dayna has recently transitioned from our Board of Trustees. We are very excited with the addition of her role on our executive team. Dana brings a wealth of real estate capital market experience, ESG and tech experience to Summit. She has hit the ground running and we’re excited about that contribution she will make going forward as Summit continues to grow.

Dayna Gibbs

Thanks so much for the warm introduction, Paul, and good morning to everyone. I’m very excited to be part of such a wonderful organization and have lots of ideas to contribute towards our next stage of growth. I’ve had the opportunity already to connect with many analysts, bankers and investors individually, and I look forward to chatting more in the future.

Paul Dykeman

I’d like to start by taking this moment to thank all our tenants for their support through this difficult period as well as everyone at the Summit team for their hard work and commitment during these unprecedented times. It is their skill and experience that is the driving force during this challenging period that we continue to navigate.

We remain steadfast in our view that the strength of these relationships, both internally and externally, is what sets Summit apart from its competitors. And I don’t use the word proud very often, but I’m definitely very impressed with what we’ve been able to accomplish through this pandemic so far.

Turning to our formal presentation. Q3 was another period of strong growth in operating performance for Summit. Our programs to mitigate the impact of COVID pandemic are proving highly successful, and while there’s still much uncertainty in the market broadly, we are pleased that we have now returned to more normal operations from an acquisition and financing perspective.

All our key performance metrics are positive year-to-date, revenues, NOI, FFO, and we continue to successfully collect or make arrangements for rent collections, which were over 99% during the third quarter. We’re optimistic that we should see another record year for Summit.

In terms of our specific results, Slide 4 outlines our strong performance in Q3, including solid and stable portfolio occupancy at 98.7%. Notwithstanding the COVID pandemic, the industrial sector continues to perform extremely well and the strength of our portfolio has kept our occupancy levels effectively unchanged at close to full occupancy.

Revenues were up 41%, the result of our portfolio growth over the last 12 months, increasing rents and consistent high occupancies. Active leasing strategies and acquisition programs combined with strong governance and responsible capital management are the backbone of our consistent revenue growth.

The quarter’s revenue — increase in revenue, in turn, generated a 41% increase in NOI and a 47% rise in FFO. Importantly, our growth continues to be highly accretive on an FFO per unit for the quarter, was up almost 22%. Same-property NOI was a very strong 4.3% despite some provisions for tenant receivables due to COVID pandemic and rent abatements taken under the CECRA program.

Looking further ahead, we expect cash flows to continue to improve as rent relief programs wind down and the economies open up in our target markets.

Our strong performance for the 9-month — first 9 months of 2020 are detailed on Slide 5, show here we are managing well during the pandemic and we’re on track to deliver another record year. Revenues were up 38% due to portfolio growth, continuing strong occupancy and increasing monthly rents. This growth resulted in 41% increase in net rental income and a 44% rise in FFO. Same-property NOI was 3.2% despite the provisions for tenant receivables and the CECRA abatements.

Again, our growth continues to be accretive on an FFO per unit and was up 12% despite a 28% increase in the units outstanding. And we continue — our G&A expenses remain consistently very low, which is a real advantage as we meet our ultimate goal of building value to unitholders.

And Slide 6 is a detailed snapshot of the REIT. We reached many key milestones. We are very pleased that we’re now past the $2 billion market cap and $3 billion enterprise value. And size alone is not the key thing. It’s really building an operating business, creating that critical mass, operating efficiencies. We now have full managed offices — property management offices, including Montreal. We’re now set up to be able to effectively build out a great development program. We have access to unsecured debt, which is cheaper and more flexible. And now we can start to look at some dispositions as well. So it’s right at a real key pivotal point than– we’re excited about that opportunity.

Turning to Page 7 — or Slide 7, details of some of our completed acquisitions year-to-date. In the first part of the year, pre-pandemic, were all in the GTA. These new properties are making a strong contribution to our results and generate operating synergies and economies of scales, as I mentioned.

So far this year, we’ve acquired 9 properties totaling 747,000 square feet all in the GTA area at a cost of approximately $176 million with a very good accretive cap rate of 4.4%. As you’re aware, we paused our acquisition and development programs for 6 months from April to September due to the pandemic.

As operations and cash receipts returned to normal and we saw increased leasing and demand from our tenants, improved liquidity from both an equity and debt standpoint, we are again confident in actively resuming our growth activities.

On Slide 8, we highlight some of the more recent activity. Again, just to note, all of these were off market deals. Subsequent to quarter end, we acquired the remaining 50% of 11 properties in Montreal from our joint venture partner for $88 million, and as part of this transaction, we also sold a 50% interest in — there was one office building in that portfolio. These properties were bought at a very accretive cap rate of 5%. And the result now of that transaction, we internally property manage all our properties in Montreal.

We also acquired 245,000 Class A logistics center on a sale-leaseback in the GTA for $47.3 million. That’s a 15-year lease with annual steps. Again, a very attractive cap rate of 4.5% and below replacement cost.

And finally, as I commented before, we did agree to buy out our 2 properties from our partner in Guelph for a total of $33.9 million. Importantly, we owned half of that project at cost and we bought the other half at market, and the blended cap rate is an amazing 5.6% and $174 a square foot.

Clearly, our growth programs are accelerating and we look forward to announcing more of those in the future. Dayna will go through some of the details of the development program and how it looks for 2021. Dayna, I’ll now turn things over to review our property portfolio.

Dayna Gibbs

Great. Thanks again, Paul. So I’m going to discuss Summit’s real estate portfolio performance and start by focusing our strong market fundamentals that we see in Canada in the industrial sector.

So starting on Slide 10, we outline our portfolio distribution by geography. We’re the only publicly traded industrial REIT with 100% Canadian properties and currently over 71% of our portfolio by square footage is located in strong eastern Canadian markets.

We’re pleased to have grown our portfolio to over 150 high-quality assets that we’ve maintained consistently close to 100% occupancy. We continue to be opportunistic with our acquisition and disposition programs and have targets to bring our Ontario allocation closer to 60%, while bringing our Alberta allocation to at or below 20% on a square footage basis over time.

I’ll be discussing each of our 3 key target markets in more detail, starting with Ontario on Slide 11. Slide 11 highlights the strength of our Ontario portfolio and really why Ontario and the GTA, in particular, continued to be an area of focus for the REIT. The GTA market continues to see supply constraints with availability rates near all-time lows, and we believe that the outlook for the GTA remains strong and will continue to be the dominant market in Canada.

Same-property NOI rose 4.2% through the first 9 months of the year, and our leasing programs are driving strong increases in cash flows. During 2020, we generated a solid 99.3% retention ratio on renewals, with a 25.3% increase in rents over in-place or almost 27% in our GTA target market. With current embedded rents of $6.79 per square foot or $6.66 if you’re looking just at the GTA, we’re confident we will see further lifts as leases are renewed going forward.

Slide 7 demonstrates that our Quebec portfolio continues to generate solid and stable performance. As quarter end, the portfolio represented approximately 18.4% of our total portfolio GLA. We believe that there are attractive opportunities to be found in this market and we’re actively focusing in Montreal in addition to our GTA focus.

Our leasing programs are also generating solid increases in cash flows with a 98.4% retention ratio for our Quebec portfolio so far this year and generating a 4.9% increase in rents. Again, with current in-place rents below market, we expect further rent lifts in the future.

Turning to Slide 13. We show the metrics of our Alberta portfolio. Our Alberta portfolio has been considerably stable overall, and in fact, our occupancy is not only well outperforming the market, but has continued to improve since our acquisition of these assets. We actively manage these properties and have been strategically identifying select properties for disposition, where value can be maximized at the appropriate time. We plan to grow out of our overweight allocation in this market over time to achieve our desired geographic weighting of 20% or less.

Alberta represented approximately 28.7% of our total portfolio GLA at quarter end and was subsequently reduced to 27%, if you take into account our subsequent event acquisitions.

Same-property NOI was impacted by the provisions taken during the quarter, including the 25% rent abatement for the CECRA program. Our in-place rents for Alberta for the 4.3 million square feet of distribution and warehouse space was $7.74 per square foot at quarter end. The in-place rent for the entire Alberta portfolio was much higher when you include the properties with very low site coverage.

On the leasing front, as outlined on our Slide 14, we continue to proactively manage our lease renewals. We are pleased that our liquidity position has been strengthened by our ability to collect a vast majority of our rents through the pandemic. In fact, our rent collection has been relatively unaffected. We’re generating solid increases in rents on our renewals with an average 19% overall increase so far this year and a much higher 27% increase in our key GTA market.

Tenant retention for our 2020 renewals was a very strong 88% to date. Keeping tenants in place is a key strategy at Summit and we’re very pleased with our progress. A few examples of our leasing success are a lease buyout in Montreal, where we were able to re-lease space at a 40% increase in rent as well as a lease term extension in the GTA for 5 years with steps for an overall increase of 50%. And I might note it was a 250,000 square foot space. These are impressive results.

Our leasing team continues to deliver as a result of strong relationships with tenants and our creative and proactive leasing strategies truly set us apart from our competitors.

As you can see on Slide 15, we only have 1.4% of leases remaining to renew this year with manageable and staggered lease maturities over the coming several years. We believe with our low embedded rents below market, we can continue to generate solid increases in cash flows as leases mature in the years ahead. Overall, our portfolio is well diversified by tenant base, and further information can be found in our appendix listing our top 10 tenants by base rent.

As Paul touched on earlier, Slide 16 details our strong development pipeline over the next 2 years. Of note, all the projects listed are in the attractive GTA market. We expect to acquire the remaining 50% interest in the first 2 Guelph properties before year-end, adding approximately 388,000 square feet of brand-new space to our portfolio. 100% of this new space has already been leased or committed at attractive rates with strong tenants under long-term leases.

Based on the leasing success, we are starting to clear dirt on the next 2 buildings in Guelph and are excited to be starting construction in the spring. The 2 development projects on Summit-owned land will both begin in 2021 on spec based on our confidence in market demand and leasing rates.

Development and value-add opportunities are an increasing focus for the REIT and we’re excited to be actively looking to expand in this area in proportion with our income-producing property growth.

I’ll now turn things over to Ross for his financial review.

Ross Drake

Thank you, Dayna, and welcome to your inaugural quarterly conference call. Turning to Slide 18. We continue to maintain ample liquidity through the quarter with $430 million available at September 30, including cash, available borrowing capacity and potential new financing on our unencumbered properties. Of note, our liquidity position has materially improved since Q2, where we had $220 million available as a comparison.

Our new $300 million 3-year unsecured credit line arranged in March provides us with balance sheet flexibility as does our ability to access the unsecured debt markets with our DBRS investment-grade credit rating.

In September, we successfully completed our inaugural unsecured debenture offering of $250 million at 2.15%. Our access to attractively priced capital has been extremely strong through the COVID-19 pandemic, as evidenced by our oversubscribed $172 million block deal equity offering in August. Importantly, the secured mortgage markets remain strong and deep for the REIT. During the quarter, we up-financed the mortgage on one of our recently acquired Guelph properties to $40 million for 8 years at a rate of 3.05% and secured a new $30 million 10-year mortgage in October at 2.9%.

Turning to Slide 19. As I mentioned, we’re pleased to announce our investment-grade credit rating from DBRS in September. We believe the rating is a direct reflection of the consistent and ongoing stability of our business and provides us with additional financial flexibility in the unsecured debt markets as we continue to grow.

We’ve completed our inaugural unsecured debenture offering. Our $250 million series A debentures have a 5-year maturity and a 2.15% annual coupon rate, which is an improvement of 5 basis points on a repay floating rate debt. Demand for the offering was exceptionally strong, with over $1.5 billion across a large cross-section of the institutional debt investor needs.

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We are pleased to have the ability to access the unsecured debt market as another potential source of capital as we continue to grow the REIT. The shift in the REIT capital stack from a purely secured debt profile to balance sheet with both secured and unsecured debt financing is a key turning point in the next stage of Summit.

Our balance sheet at quarter end continues to remain strong, shown on Slide 20. Our leverage ratio remains a conservative 39.8% at September 30, and we continue to improve our debt coverage ratios. We continue to capitalize on the low interest rate environment, reducing our average effective interest rate. Of note, our current unencumbered pool of properties sits at approximately $1.1 million at quarter end.

Slide 21 details our total debt maturities by year, showing that we have a staggered debt maturity schedule with only 0.6% of total debt coming due to the remainder of 2020 and 13.9% in 2021, which includes the $100 million outstanding on our bridge loan. Our $1.1 billion debt profile carries a weighted average interest rate of 3.2%, with significantly lower rates on our unsecured debentures and secured and unsecured credit facilities of between 2.15% and 2.2%.

In addition, the average interest rate for our maturing mortgages is approximately 3.7% over the next 2 years, representing a solid opportunity to generate significant savings on these maturities going forward in the current low interest rate environment. We also negotiated an extension of our nonrevolving bridge loan to receive a 1-year extension for the remaining $100 million balance on the facility to November 2021 on the same terms.

Turning to Slide 20. Rent collections are back to normal levels. October, our rent collections were a little over 99% and November is tracking in the same. Also, we are in the early stages of repayments of rent deferrals that started in October, November.

As we’ve discussed, with the start of the pandemic, we worked closely with our tenants to implement a number of relief programs where needed, including deferral agreements, early lease renewals at higher monthly rents in exchange for free rent and the government of Canada’s CECRA program. As shown on Slide 22, to date, we have entered into deferral agreements for approximately 3 million square feet of GLA, with a total of $3.4 million to be paid over the next 12 to 18 months, with the majority of it being repaid by May 2021.

Approximately $1.8 million in free rent has been granted in exchange for early lease renewals and extended terms at higher future monthly rents. We believe this program will help certain tenants work through the economic hardship created by the pandemic and keep them in place over the long term.

Finally, we applied to the CECRA program for qualifying tenants for rents due from April through September for a total of $1.8 million under this program. We provided 25% rent reduction with the tenants paying 25% and the government paying up 50%. As of September 30, we have collected 83% of the government funding.

I’ll turn things back over to Paul to wrap up.

Paul Dykeman

Thanks, Ross. Looking ahead, we feel confident in our outlook and our ability to continue to successfully navigate the current and yet unknown challenges of COVID-19. Given our managerial bend strength, deep and long-standing industry relationships, the liquidity, attractive assets, access to various sources of capital, we believe we are well positioned to not only navigate the potential new COVID challenges, but it might present some opportunities for us in our growth strategies going forward.

In summary, our operations and portfolio remain strong and stable. We have a competitive advantage with the quality of our properties and strong tenant relationships. We continue to see high stable occupancy, essentially unchanged versus pre-pandemic levels. Industrial properties are — we see as a highly defensive asset class. And our portfolio requires very small amounts of CapEx and are located in markets with very limited new supply.

In addition to these strong fundamentals, we again actively manage our G&A to keep a very lean and efficient operation. We also believe the trends in industrial estate will continue to benefit the REIT such as online e-commerce and supply chain shifts.

We are very pleased with this trajectory, as you can see on Slide 28. Lots of detail, wasn’t meant to be read. In the short term, we will continue to focus growth on the REIT through strategic acquisitions and development by optimizing returns in our geographic distribution.

Liquidity is always in the back of our minds, but we have been fortunate that this has not has been a concern even during the pandemic. Longer-term objectives include expanding our development pipeline, as Dayna mentioned, continuing to improve our debt coverage ratios while decreasing the overall leverage, improving communication to the market about our ongoing programs and increasing ESG initiatives.

We believe that sustainability is a chief driver to long-term business success and environmental, social and governance considerations should be a priority in all REIT activities.

In summary, I know we’ve taken a little bit longer this morning, but we have lots of good stuff to talk about. We do believe this is another record year for Summit for 2020. Now I’d be happy to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chris Couprie from CIBC.

Chris Couprie

Congrats on the quarter. I just want to maybe touch on the acquisition and disposition activity. I guess on the former question, just kind of what’s the pipeline looking like? And then on the latter, beyond what’s kind of in the held-for-sale bucket right now, are there other assets that you guys are targeting for disposition candidates?

Paul Dykeman

Okay. Sure. And it’s an interesting market. I mean it was very quiet at the beginning of September, but a lot of stuff has started to hit the market. There’s been some actively marketed deals. So again, still kind of looking and focusing primarily on those off-market or under the radar type deals both in Toronto and Montreal.

I’ll definitely give you the example of the transaction we’re just bidding on in Montreal. It’s a significant property, over $70 million in value, good quality tenant with a 10-year lease with one rental step after 5 years. Had 10 institutional bidders. We were one of those 10 going into the second round. Guidance was kind of 4.5%, but unknown because of the pandemic. Ends up — this went sub 4%. This went to 3.75%, probably $215 a square foot, which we believe is over replacement cost. So clearly, that wasn’t one we were going to pursue. But it does show the appetite for industrial.

So I always say that Toronto’s cap rates should be or could be a little bit lower than Montreal. So if that’s an example, those same kind of cap rates for good quality A properties. And so as a result of that, we try to do these sale leasebacks which are kind of off-market or unique deals, value-add deals. But that’s why we’re going to shift gears and really start to — the only way to get those kind of quality properties, in our mind, is to build them yourself. So we’re going to continue to look for more partners in Montreal. Now that we’re no longer affiliated or involved with Montoni, so we’re kind of a free agent there. So we’ll try to expand that program.

And on the disposition side, there’s — it really, again, wasn’t our core focus, but through some larger transaction we picked up the small bay industrial, which is the ones that did the worst during the pandemic. We have stabilized those. We’ve improved occupancy since we bought them. But there’s a couple of properties in Ottawa there that we’re going to list shortly. The one that we have listed and we were getting off just before the pandemic struck, we’re going to relist that one into Edmonton.

So we’re still in the range of $60 million, $70 million. But there’s a few properties in the west that are smaller that we’re for leasing it out. We’re letting the market know if you do have an end user that’s preferring to buy it rather than lease it, we’re happy to entertain that as well. So we’ll continue to chip away around the margin in the west.

Chris Couprie

And then could I just get a clarification on the Guelph development project that you’re acquiring the remaining 50% of. So what is your — the 5.6% stabilized cap rate, I’m assuming, is that relative to the entire cost? Or is that just on the incremental $34 million? Or just can you maybe remind me how — what the total cost is and the growing yield is on the development?

Paul Dykeman

Yes. So I’m not going to tell you, but I’ll tell you what — that’s the blended cap rate. So we are still building 2 more buildings and we want to stay competitive in that market. So we won’t tell you what we paid our partner in terms of market and we won’t tell you what the cost of building is. But the blend of all of that is 5.6%, very attractive.

And if you look at where cap rates are trading in the GTA for good quality buildings, you’re down to 4% or sub 4% for sure. So that’s still 160 basis point spread over our all-in cost. It’s far over 200 basis points spread on our cost piece. And it works out to $175 a square foot. So still extremely attractive, where I would say every average building in Toronto is now at least worth 200 and in some areas you’re seeing 220 to 240 of the replacement cost number.

Chris Couprie

Okay. And last quick one from me just regarding the promissory note with respect to DC2. You said that you guys hit a milestone in October. Just what does this mean with respect to the — collecting the proceeds on that promissory note?

Paul Dykeman

Yes, there was 2 key stages there. The first payment will be due in January and $7 million or $8 million of that comes. Then the second certification happens in March. And then the final payment and rounding out, hopefully, will happen in June throughout the summer next year. But the good news is, yes, everything is on track. The first half of the power has been delivered to the building and the tenants in there are using that.

Operator

Your next question comes from the line of Himanshu Gupta from Scotiabank.

Himanshu Gupta

Just to follow up in terms of your acquisition strategy. So cost of debt has come down. I mean, you got 2.15% for 5-year unsecured debentures. With that kind of cost of debt, can you be even more aggressive in the acquisition market? I mean can you now compete on the Montreal type acquisition or the transaction which you mentioned which went for sub 4%?

Paul Dykeman

Yes, we can always compete. And when you’re looking at a program — we always look at the entire program. So we bought $88 million at a 5% cap. We bought $33 million at a 5.6% cap. We bought another $47 million at 4.5% cap. Which means if we want to do one property that was neutral to FFO or even slightly dilutive, we absolutely compete.

The golden rule, and we’ve been saying this for over 20 years now, it’s replacement cost, and not just where replacement cost is today, but where do we think it’s going in the future. So where — in Montreal, we could have competed for that one and we like the asset, we like the tenant, there wasn’t a value creation because the rents were going to be kind of locked in for 10 years. But at a price for $215 a square foot, it’s like — we’ll just be a little more patient.

And one of our properties there, we’re looking at doing 120,000 to 140,000 square foot expansion. So it will be knock down a small building and build out there. So — and we can build far less on a price per square foot than that price.

So always go back to replacement cost. But yes, in terms of our cost of capital and being accretive, we can be competitive on anything that we want to be. But when we’re looking and going into those low cap rates, we really want to have something compelling. So every one of our GTA acquisitions usually has a bit of a story. There’s an upside, there’s some excess land or there’s embedded rents that we think we can significantly improve, and whether that’s 2 or 3 years when that lease rolls or we can get rents up to market.

Himanshu Gupta

Absolutely. So on the acquisition, that $47 million you did in Vaughan, that 4.5%. So what was the story there? And — I mean, how does the property compare to the replacement cost there?

Paul Dykeman

That one was $193 a square foot in Vaughan. That land is probably closer to $2 million an acre. You’re probably looking minimum of like $240 a square foot there. And so that’s why they try and — and again, when we say replacement cost — and we’ve seen it go up almost by 50% over the last 3 or 4 years in the GTA, we don’t see that subsiding because just the amount of land that’s available is decreasing. Those development charges that I have mentioned, they continue to go up.

Even the developments we’re building on balance sheet when we first modeled those when we bought those land 2 years ago, we would have been in the 160, 170. As we get — we’re tendering now, we’re probably more into the 180, 185. So we’re still — we’re averaging into the market because we’ve owned that land for a few years. But if you have to go up and buy new land — and that’s why — the $1.5 million, $2 million acre land, you have to have a special situation where you can get the tenant to pay that much rent. And that’s why it’s kind of pushed us a little bit east, a little bit west. So we are looking for additional land with our partner and ourselves, whether it’s, again, in Guelph, Kitchener, west of the city or in the east down in Pickering and Oshawa.

So it’s hard to find land that’s ready to build, that makes sense. And the rental rates are catching up. We’re seeing lots of rents achieved now that are north of $10 a square foot and in some unique situations $12, $13 a square foot. So it’s catching up, but not fast enough to cover off a decent development yield on a $2 million an acre piece of land.

Himanshu Gupta

Got it. And it sounds like the land prices have been going up. So — and acquisition market is pretty competitive as well. So what could be the size of your development program? I mean I know you have [Indiscernible]. But as you look into 2021, do you have any like internal targets in terms of how much development pipeline do you need to have?

Paul Dykeman

Well — I mean what we’ve shown in the presentation, we have another 730,000 square feet, close to $200 a round number, that’s almost $150 million. I think the majority of that’s going to be built. Maybe the expansion might roll over into 2022. But all of that’s going to get into the ground and won’t become income-producing probably more towards the end of the year.

But clearly, we wanted to see that bigger. So there’s not a maximum amount that I don’t think we’d look at in the GTA. It’s just that much active. One of the properties down in — on our Burlington asset, we haven’t even listed it yet and we’ve got multiple inquiries on one of the build. We’re building 2 buildings down there. So at a very attractive rental rate.

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So we have no concerns that we can build on spec because we — at least in the old Summit, we used to call it building inventory. We’re at 99.3% vacancy. There’s lots of tenants, including our own, looking for additional space.

Himanshu Gupta

Got it. And maybe just a last question from me on the Alberta portfolio. So your occupancy is actually up year-to-date despite the pandemic. What led to your outperformance versus the broad market? And then we notice that the tenant retention ratio in Alberta was 40% compared to, I think, over 95% in the other geographies.

Paul Dykeman

Yes.

Himanshu Gupta

Is it by design there?

Paul Dykeman

No, no, it’s just that — that was just one — one tenant left. And Ross has the details. But we re-leased that and…

Ross Drake

Less than 30 days.

Paul Dykeman

Yes, less than 30…

Ross Drake

100,000 square feet and it was re-leased in the very near term. That’s what — didn’t impact the occupancy for very long, but obviously impacted retention.

Paul Dykeman

Yes. And going to the other — I mean we’ve talked about this before. That market, the fundamentals aren’t as strong, so rental rates aren’t going up. So we’re just trying to maximize occupancy. You have to be flexible, doing short-term deals. We — you’re not trying to push renewals in terms of rent on new deals. You’re getting some free rent and stuff like that. So you just do what you need to do. You make sure you are competitive in the market.

But people are — the thing I think they keep missing about Alberta. They just think Alberta is oil, and it’s not. It’s still predominantly — that’s a big industry out there, but they’ve been diversifying for quite some time. So all the same drivers that you have in terms of e-commerce, supply chain, they exist out in Alberta and Calgary and Edmonton as well. I mean, there’s other drivers with the oil and gas business. But all those same drivers that are wanting to expand in Toronto and Montreal, some of those users are needing to expand in Alberta as well. So there’s still activity.

We have one large lease expiry over 100,000 square feet in Edmonton and that tenant is going to leave, and we’ve got 2 people that we’re talking to in a very serious way about taking that space in 2021.

So we do anticipate there’s going to be a little bit of a — some bumps in our occupancy. So we think there’s — that’s somewhere between 1% to 1.5% of turnover and re-leasing that’s likely to happen.

Operator

Your next question comes from the line of Matt Logan. Please state your company name?

Paul Dykeman

From RBC if you didn’t know.

Matt Logan

Yes, that’s from RBC. To date, we’ve seen minimal fallout from tenants in Alberta as well as the nontraditional users across your portfolio. Can you talk a little bit about if you’re still expecting some tenant churn as we move through the next 12 months? Or if you think that is likely behind us?

Paul Dykeman

No, there’s definitely going to be turn. So I can announce that we do have 2 bankruptcies that happened post quarter end. The good news is they’re both in Toronto. So the first one was a 39,000 square feet in October, which we’ve already refilled. So another tenant in the same group of properties went from 22,000 to 39,000 square feet. We’re going to get an average of 7% rental step over the — annualized rental step over that term. And then we backfilled that 22,000 square feet with another user, the rent 60% higher than that. So that’s turned into a win for us even though there’s going to be a little bit of costs involved in those re-leasing. Second bankruptcy in another GTA property.

The first one was an events planning organization, so they were hit by the pandemic pretty hard. But again, I would tell you, most of the tenants that are not going to make it had some issues, were weaker. The second one is 110,000 square foot. It was a printing company. So that industry has been slowly dying from online content. It’s going to take a little while to get all the printing materials and stuff out. They were paying $5.25. So we’ve already re-leased the first bay there of 20,000 square feet at 835. So that’s a 60% increase.

Now I don’t think we’re going to — if we lease it in bulk, we probably won’t get those kind of rents. But we’re definitely expecting 20% to 30% increases in the rent. So again, you’ll see occupancy impacted for 1, 3 months, but they will get leased up. And in these cases, it will be at improved rent.

In Alberta, yes, we’re — surprisingly, some of these tenants like the rock climbing walls, like there they are finding a way. And I think if they can hang in there long enough to get a vaccine and something a little bit more permanent, hopefully, the majority of them will make it.

I still have my skepticism. So I still — as I mentioned, we’re allowing for somewhere between 1% and 1.5% so in our allowances. It is if we’re operating the portfolio at 1% to 1.5% lower economically because we’ve already allowed for that much income in our monthly numbers.

So we’ll see what happens. But like literally — and again, CECRA definitely helped them. There’s some new government programs that some of these small tenants are going to do themselves, so we don’t have to be involved and do the 25%. So hopefully, that will get them — but there’s clearly — a group of those tenants are not operating at pre-pandemic revenue levels. So they’ve had to cut overheads, find other sources of capital to survive. So there’s definitely going to be some of that.

But as much as having that kind of tenancy impacted, the demand increase all over the board both in terms of short-term requirements and long term, whether it’s from increased inventory, supply chain, storage of PPEs and items like that or e-commerce, clearly are dying for more space. And so we’ve got tons of incoming calls.

Like I said, just in Burlington, we haven’t even listed it to the broker yet and we got an unsolicited offer on the first building down there at very attractive rates. So when you find that tenant that absolutely needs a space or — I won’t say is desperate — they really — the rent — the negotiation goes pretty easily because it’s more important for them to get in and be able to expand their business than not find a home.

Matt Logan

That’s great color. Maybe just [Indiscernible] into my next question. With all of the demand that you’ve seen even on a post-pandemic basis, can you give us a sense for where market rents are trending? But just have you seen any increases in Toronto either sequentially or at the start of the pandemic?

Paul Dykeman

Yes. So I would say in the — when we shut down our acquisition program, everyone was being a little defensive, not knowing what was going to happen. So we were probably kinder on some of our renewals in terms of still getting 35%, 40% increases, but weren’t kind of pushing that envelope.

You really start to see it on new leases. So Orlando has got some buildings out there. They just did a lease deal very effectively. It’s going to be over $11 on newbuild. And so, yes, there’s absolutely stronger and stronger rental growth. The pro forma were 10% to 15% ahead of our rental targets in the Guelph properties. So again — just because tenants in the GTA couldn’t find space.

So because of our cost of land, we have about a $3 to $4 per square foot pricing advantage. But it’s again — so tenant — one of our big tenants that went down to Guelph came from an Oakville property. So they’re just like: “We can’t operate in our space, so we need to expand.” And they couldn’t find it close to where they were. So they had to go a little bit further out. But as a result, we were able to get very attractive rental rates there.

So I can’t — I don’t like to pin a number, but it’s — for new space, it’s definitely north of 10. We’ll get to test that on our Surveyor Road property in Mississauga, which is about 95,000 square feet. So we’re just ready to list that. We’ve got all the building permits. So that will be starting in the spring, but we’ll start to do the marketing there. I have no question that there’ll be multiple tenants interested in that space. So we’ll get to test and let you know somewhere in the next 6 months what that rental market is. But I’m hoping for a very good outcome there.

Matt Logan

And would it be fair to say the trend is flat to incrementally positive in Montreal and Alberta as well?

Paul Dykeman

Yes. Alberta is flat, for sure. And I think the main thing we’re seeing there is just increase — primarily free rent, but — I was going to say incentives. But most of it in the form of free rent. So to maintain your rents, you have to give a bit more free rent. Whereas in Toronto, we don’t give anything, and the same thing in Montreal.

Montreal is a very interesting market because they’ve been trending down. We think they’re only 2 or 3 years behind where Toronto is in terms of their supply-demand mix is and their availability is below 3%. So that’s why we’re looking at this one development on land that we own, but we’re also exploring possibility of some JVs in Montreal because I definitely think there’s an opportunity for development. And that’s because we think rental rates are getting poised to start to accelerate there.

So they’re very comfortably in that $7, $8, $8.50 range for good quality property. But I think that number is going to start to move up because there’s just not good quality space. And in Montreal, you really have an inventory where there’s a lot of old product that might be $5 or $6 space. But tenants that want the good quality space are going to be willing to pay for it and they’ll pay $8, $9, $10 to get in the right location with the right quality properties.

Matt Logan

And in terms of your development in Montreal, would it be fair to use your JV with a group for construction as a benchmark, but maybe a little bit more in Montreal proper?

Paul Dykeman

Well, because we own the land, we’re going to have a very low cost base there. So we haven’t got far enough along the path to get preliminary costing. But yes, I would think — that’s why when we saw that number go north of 200 for that asset there, it’s like — I know we can build for — whether it’s 175, 185, like it’s somewhere in that kind of range, I would think. So we’ll see where it goes.

But land is definitely creeping up and — but the strange thing, if you look at CBRE stats, almost — I think there’s a couple of million square feet maybe under development in Montreal and I think 85% of that is pre-leased. So the development community there doesn’t build spec. So — whereas in Summit, we’re perfectly happy to build inventory, is the way I call it.

Operator

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

Joanne Chen

I’m glad I made it on the call. I’m having some technical difficulties. But glad I’ve made it on today. But just maybe just really quickly high level in terms of kind of given all these projections on the growth in your core markets, how should we think about organic growth trending, I guess, in 2021?

Paul Dykeman

That’s a tough question.

Joanne Chen

Not at all. Okay, it was a hard one.

Paul Dykeman

Like I said, I don’t see — like we — I’d say there was a 6-month pause in the GTA, but all of the same accelerations and our in-place rents going from 6 something — again, we’re not a brand-new product, but we’re going to the 8 — we’re starting to get 850. Like we’re definitely getting the same levels of bumps, which this year we’ve averaged 25%. But there were some fixed bumps in there.

Montreal, we just haven’t had a lot of lease expiry. So that one — just because of the volume is going to be lower. And then as I mentioned, the strategy on Alberta is really just to keep occupancy up. And we’re not expecting growth there, because we bought that portfolio at a 5.5 yield. We pushed it up to about 5.8. And our goal over the next couple of years, definitely given the backdrop of the pandemic, is just maintain that portfolio of occupancy as high as we can to keep that yield as high as we can until that market finally starts to recover a little more firmly.

So — and again, the idea is most of our growth is happening in Toronto and Montreal. So that Alberta piece, as Dayna mentioned, short-term target. We think within $500 million or $600 million of new growth from acquisitions or development, that Alberta number will hit 20%. And we could accelerate that if we are able to complete a couple of these dispositions that I mentioned.

Joanne Chen

All right. So just I guess with — and we touched upon the acquisitions quite a bit, but just in terms of how should we expect the balance of, I guess, the growth coming from organic versus acquisitions over the next year? Would it be…

Paul Dykeman

Yes, good model questions. That’s what — that’s right. And we don’t provide, I mean, guidance. I mean, like we can definitely buy accretively. We definitely can build highly accretively. I think we can get equal contributions from internal growth, from external growth would be my gut feeling here.

But again, we’re very optimistic. And I’ve been at this a long time and I always don’t like being optimistic because it scares me. But things are looking very good. We definitely — I’m just going to be — I describe it as driving a standard car and we’ve got the foot on the gas and the brake. So we’re kind of letting go of the brake a little bit here and pushing the gas. But we’re still aware that there’s going to be a second wave and, hopefully, there’s a vaccine. And there’s definitely some economic hurt that’s still out there.

But the industries are changing. So as much as retail and some companies are going to fail like our printing company, there’s lots of other companies that are desperately in need of expanding, and those businesses are growing and are very profitable. So it’s just a — it’s a rejigging of uses, I guess.

Joanne Chen

Right. And I guess you touched upon the development pipeline a little bit in terms of building on spec. Would it — going forward, do you think it will be a combination of building on spec, but also a significant portion being pre-leased before construction?

Paul Dykeman

In this market, it’s better to not pre-lease because lease rates are changing that quickly. So we joke when we say we’re building inventory. But our biggest threat to our portfolio right now is we don’t have space to accommodate tenants, right? So the bigger we can build our land bank and build buildings — we have lots of tenants that are saying, “Okay, I need a” — “I just got another contract to store PPEs or some other critical supply chain thing. I need another 50,000 square feet or maybe 100,000 square feet.” So we need to build that space. Or at some point that tenant is going to say, “Okay, I have to go out here to another place or another development.”

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That’s — so that’s why development becomes critical for our growth at this standpoint. So it’s not only because you can upgrade the quality of your portfolio, you can get a higher-than-average return. It’s a necessity, you need that. And that’s why if you look at Orlando as the top industrial owner in Canada, that’s how they grew their business. Like 90% of it has come through their own tenants expanding and development programs. So Summit wants to keep increasing that ability.

So — and it’s very difficult. In the GTA, I mean, when you’re out looking at land, it’s like 15 acres here, it’s 22 acres there, it’s 50 acres here. Like it’s not even big, big parcels. So that’s why it’s so difficult to say, “If GTA needs another 30 million or 50 million square feet, oh, let’s just build it.” Like the land does not exist.

And if you’re going out a meter, you’re starting to go very far east and north and west to be able to accommodate that. So like — so we have one property in Barrie with some excess land. Well, demand in that area is even increasing. So it’s increasing everywhere. And that announcement that the reopening — Ford is reopening the plant in Oshawa, we had already seeing a big increase in demand on the east end of the city. And if anything, that’s just going to accelerate now. So very optimistic as you can tell about the GTA.

Joanne Chen

For sure. And maybe just one last one for me. With regards to your access to the unsecured market, congrats on the inaugural bond issue. But just wanted to see what your thinking is about the balance between the unsecured and secured mix going forward? And with the BBB loan rating now, does the leverage have to be maintained kind of around that 8 to 8.5x mark?

Paul Dykeman

Yes. I mean, that’s — what we’re seeing — the BBB rating and some of those metrics are one factor in doing deals. I think when the — the investors really were looking at the underlying business. They felt underexposed to industrials. So I think those bond investors appreciated our business. So I think we’re seeing favorable things.

But of course, any improvements you can make in your financial metrics — we’ve seen Granite, even Dream Industrial now are BBB. So we kind of know where their metrics are. So I think we’re — the next part of Summit is trying to phase into what are the steps and requirements to get to BBB so we can even improve our cost of debt further.

So if the — if we can get the cost of debt where we got this and continue to have good access, I think one thing, hopefully, we can grow into is longer term. So we like a term to maturity of — we’re at 5.5 years now. So we can’t keep doing 5-year unsecured, if we’re going to keep that. That’s why we did a little bit of 8 and 10-year secured mortgages. So that’s really right now the only time we would use the secured mortgages just to go out for a little further term.

But I think as we grow and get more experience in the unsecured area — we’ve seen lots of our other competitors have started to do the 8 — the 7, 8 and 10-year bonds as well. So over time — we think we’ve got a great start in terms of unencumbered pool. So we’re off to a pretty fast start. So we have the $100 million bridge. And as we continue to buy properties, we think there’ll be another opportunity to answer your question and see sometime in 2021 is there a good opportunity to do a second unsecured or whether we go for the — this year. But the good news is they’re both very deep markets right now. So that’s our option.

Operator

[Operator Instructions] Your next question comes from the line of Matt Kornack from National Bank.

Matt Kornack

I’m just asking the 2021 same-property NOI growth question in a little bit of a different form. But should we expect that the rent spreads that you’ve achieved in 2020 that you’d get that type of rent spread in ’21? And then maybe on top of it, if you could comment — I know you present your lease maturities net of commitments. So if you could comment on what you’ve committed to date in 2021, that would be great.

Paul Dykeman

Yes. So these are all questions that we clearly don’t like providing guidance. Listen, if anything, we’re seeing increased strengthening of the GTA market. So talking about that one. So I would think — and again, it’s educating the brokers, it’s educating the tenants. I mean, Dayna mentioned the one that we bumped the rent on a — it was just a rental reset on a 10-year lease from market — or sorry, setting the rent from market — sorry, it’s a existing rent to market, and we were able to negotiate 50%. That was not easy. That took 6 months to convince them that the rent actually had gone up that much.

It was supposed to be just a onetime fixed increase and we were able to get annual steps. And they go, “Well, we don’t want to do this again.” So they added another 5-year term to the end of the thing. And we have ongoing — I think we averaged about 2.5% steps for the remainder of the 10 years.

So yes, absolutely, it takes time, but I think there’s been an acceleration. So tenants like that, you cannot — they can’t move their business. It’s not easy. I think we’re going to be able to see at least that much kind of rental growth. And some of our rental growth, it’s a little bit hidden here. So we had a couple of tenants that they had fixed the options. It went from — one of our tenants down in Cambridge is here, 300,000 square feet, went from $3.25 to $3.50. So they’re still way below market.

So it’s hard to put an exact number. Like I said, I think Montreal, the rental growth we’re starting to see an acceleration there. And again, in the west, we have low expectations in terms of — we’re not going to be pushing rents there. Our whole idea is to maintain rent and maintain occupancy out there.

Sorry, you had a second question and I didn’t write it down.

Matt Kornack

Just in terms of the lease maturity profile, I think you have 1.6 million square feet that is maturing according to the MD&A. But I know that’s usually net of commitments. And so I don’t know if you have commitments for 2021 at this point?

Ross Drake

We haven’t done much so far in 2021. Yes. We were just…

Paul Dykeman

Yes.

Ross Drake

So it’s a very small number and it’s already been done in 2021.

Paul Dykeman

Yes, I think, Ross — and we looked at the — the lower half of our lease rollover is GTA next year. So again, we’ve been taking the position. We’re in no rush because we think in March — I just got some good news on an e-mail. So I think — on one of our rentals. That was timely. So it’s — yes, it’s — we’re not nervous. So again, it’s the exact same strategy as this year. We’re going to push rents as hard as we can in GTA. I think there’s increasing ability to increase in Montreal, although you still got to be aware of each situation. But not a lot of rollover in Montreal.

And in the west, we’re just being very proactive. So most of those tenants we’re starting to talk to. But in the west, it’s not big blocks of space. So it’s 20,000, 30,000, 50,000 square feet. So the expiries are pretty spread out. So yes — no, so we’re pretty optimistic that what you saw in 2020 is going to continue and hopefully accelerate.

Matt Kornack

And I know it’s a modest difference, but I think it speaks to what you’re doing on the leasing side. But your organic, I guess, rent steps increased from 1.6% to 1.7%. Is the goal to get 2% to 3% in terms of annual lease steps? Or is it case by case?

Paul Dykeman

Absolutely. And I know our leasing people are on the line listening. But there’s been a couple of landlords that have taken — and the annual steps have only been a new phenomenon in the last 10 years. We were doing it quite a bit in the first Summit. Normally, it was a 10-year lease. You’d have one step after 5 years and it would go up 15% or 20%.

These annual steps make a lot of sense. And the largest landlord in the GTA is requiring that tenants pay a 3%. And there are some others that are 3% to 3.5%. So I think there’s opportunities in GTA to push that number harder. As Ross keeps reminding me, every time we increase some rents or have some steps going to 2% to 2.5%, some of the other ones are burning off. So that’s a hard number to move, but clearly we’ve made some progress and I like to think that we’re going to be able to push that up to 2% to 3%. It would be a long shot. I can’t picture that we’d get that high.

But like I said, we’re trying to get a minimum of 2.5% to 3% as kind of the internal target. So — and as that happens, that number will gradually move up. But it’s a slow moving number.

Matt Kornack

That makes sense. And then last one for me. So I think there were $700,000 in COVID-related provisions and abatements. Do you know what portion of that would have been in the same-property portfolio, just to get a sense of what the same-property NOI growth would have been excluding the impact of COVID?

Ross Drake

Yes, I can get you the exact number, but it’s around the — $400,000 to $500,000 of that was directly in the same-property NOI bucket in that.

Paul Dykeman

Yes.

Matt Kornack

I thought you — Ross, I thought you said it was like 0.5%? Was it…

Ross Drake

Yes.

Paul Dykeman

Impact, Matt, was like roughly about 0.5%, the impact on same-store NOI.

Ross Drake

Yes.

Operator

Your next question comes from the line of Alex Leon. Please state your company name?

Alex Leon

I’m with Desjardins. But Matt just asked my questions on the 2021 leasing program. So I’ll turn it back.

Operator

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

Himanshu Gupta

I just have a couple of follow-ups. So first of all, thanks for disclosing the list of top 10 tenants in the slide deck. And some of them appear to be well capitalized large tenants. So just wondering, are any of the top tenants or large leases coming up for renewal next year? And do you think any large tenants are in a position to push back on rent growth?

Paul Dykeman

Yes. So the average lease maturing of those top 10 tenants is about 5.5 years. I think the earliest one is somewhere in that 2 to 3 year range. And we did put — I don’t see that in my sheet — but a little asterisk. So some of these top tenants have multiple locations and some of them are actually in multiple provinces. So it’s going to come up in a staggered way. But [Que & AGL], our largest tenant, is both in Alberta and Montreal. So their leases come up at different times.

So yes, that’s — we’ll see. So it’s — I know one of the tenants on here is one of the ones that we did a lease extension, so their lease is out to 10 years now. So yes, we’ll — we won’t know for a couple of years, but — and the interesting thing — I was looking to Ross to produce the top 20 tenants and decide whether we should do that. The interesting thing — and this happened with the old Summit. This was kind of ranging between 2% to 3%. Once you get past number — tenant 20, you’re almost at less than 1%.

So the goal for Summit — and I — again, if you look at these companies, some of them are subsidiaries of large American companies, like Impact Auto and stuff like that. So it might not be a public company or they might be out of the U.S. But it’s really the space that they’re in and what other uses we can do it. So we’re comfortable that these tenants are in great quality buildings.

The Maple Leaf Foods, they’ve got various options that’s cold refrigerated. They are never going to be moving from there. And they have a — and again, it goes back to that issue: the reason you lose tenants is you can expand them. So in some of these properties like that Maple Leaf Foods, they have ability to expand by about 150,000 square feet. So that would be your biggest threat to why they want to leave.

Himanshu Gupta

Awesome. And then just one philosophical question. I mean, in terms of conversion from retail to industrial, I mean, is this a possibility? And have you heard any nonperforming retail mall or shopping center being — supposed to be converted? And especially given your development background and your knowledge of land pricing, how practical is it and what are the challenges?

Paul Dykeman

Yes. So I mean, I’ve been on a couple of panels with some of my other industrial colleagues, and this has come up several times. It’s just not going to be a big impact. And you’ve got some zoning issues in terms of truck courts and trucks going through these retail centers. They definitely can be converted to do some of that last-mile fulfillment that you see like in — as a section of the Whole foods and stuff like that. But you’re not getting conversion into bigger use distribution night type centers.

So yes, we’re — there’s nothing really in our portfolio that would fit that category and it’s just not something that we think is necessary for us to seek out. So on the edge of everything, I’m sure there’s going to be some of this. But if anything, some of these sites probably make more sense as multifamily. Particularly, in the GTA, there’s such a shortage of housing and affordable housing. So I would think highest and best use might be to put more residential as a lot of those retail REITs are doing. So it might have some impact, but it’s going to be insignificant in the overall picture.

Operator

There are no further questions at this time. I will now turn the call back over to Mr. Paul Dykeman.

Paul Dykeman

Well, thank you, operator. And as I said, our presentation went on a little farther — or a little longer than usual because we had lots of good information. So thank you, again, for participating today and we look forward to talking to you again in February for the year-end results. Thanks a lot. Bye.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thanks for participating. You may now disconnect.



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