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Edited Transcript of SMU.UN.TO earnings conference call or presentation 8-Aug-19 12:30pm GMT

Q2 2019 Summit Industrial Income REIT Earnings Call

Calgary Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Summit Industrial Income REIT earnings conference call or presentation Thursday, August 8, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Paul Malcolm Dykeman

Summit Industrial Income REIT - CEO, President & Trustee

* Ross Drake

Summit Industrial Income REIT - CFO

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Conference Call Participants

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* Bradley Sturges

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

* Chris Couprie

CIBC World Markets Corp. - Analyst

* Mark Rothschild

Canaccord Genuity Corp., Research Division - MD & Real Estate Analyst

* Matt Kornack

National Bank Financial, Inc., Research Division - Analyst

* Matt Logan

RBC Capital Markets, LLC, Research Division - Senior Associate

* Michael Markidis

Desjardins Securities Inc., Research Division - Real Estate Analyst

* Troy Raymond MacLean

BMO Capital Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Summit REIT's Second Quarter 2019 Results Conference Call. I would now like to turn the meeting over to the meeting over to Mr. Paul Dykeman, Chief Executive Officer. Please go ahead, Mr. Dykeman.

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [2]

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Thank you, and good morning, everyone, for joining me. As usual, Ross is on the call. We had a little technical glitch so sorry for keeping you waiting.

Before we begin, let me remind everyone that during this conference call, we may make statements containing forward-looking information. This forward-looking information is based on a number of assumptions and is subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from those disclosed or implied. I direct you to our earnings release, MD&A and other security filings for additional information about these assumptions, risks and uncertainties.

Our growth and strong financial results continued in the second quarter in the first 6 months of 2019, driven by portfolio growth over the last 12 months, and very strong operating performance. Revenues for the 6 months ending June 30, were up 61%, with FFO rising 63%. Our organic growth also continued with overall same-property NOI, up 4.8%, on the back of a strong 5.5% increase to the GTA properties, 2.1% in Montreal and 9.2% in our Western Canadian market as we leased vacant properties over the last year. Our main accomplishment in the second quarter was the full internalization of the management team in May which was approved overwhelmingly by our unitholders at the Annual Meeting on May 8. This is an important initiative as it eliminates all external fees that were established when the REIT was much smaller. And now that we've achieved the appropriate size and scale, the REIT has acquired a proven management team that has resulted in increased NOI and FFO going forward.

The internalization also allows us to make more accretive acquisitions at a significantly lower cap rate than being external. The internalization also fully aligns the interest of management with all unitholders as inside ownership rose to 11.4% at quarter end. We believe this is a highly positive and accretive transaction. And I can assure you that everyone at Summit remains committed to the future, enhancing unitholder value in the years ahead.

We're also very pleased to increase the monthly cash distribution by 4.7% in June to $0.54 on an annualized basis. This increase reflects our confidence in the future and our commitment to enhancing unitholder value over the long term.

Our successful and proactive leasing activities continued in the second quarter and through the first 6 months of 2019. Occupancy rose effectively to a full level of 99.5% at June 30, up from 98.6% last year. To date, this year, we have completed almost all of our 2019 lease renewals with a very strong 99.2% retention ratio, which is a key objective at Summit. With lease renewals agreed but not signed at quarter end, we only have another 38,000 square feet to complete, which is only about 0.3% of our total portfolio. We remain confident we'll retain the majority of these tenants and we renew them at higher monthly rents, particularly in GTA and the Montreal market.

We've also completed some early renewals on 2020 leases which results in just a modest 6.7% of the portfolio now set to expire next year. As well, we also did a large 300,000 square foot lease that was due to expire in 2020.

In addition to the strengthening and the stability and the predictability of our long-term cash flow, our leasing activities also generated significant increases in our monthly rent, demonstrating the strength of our target markets and how the ongoing demand is driving increases in our revenues and NOI. Overall, 2019 renewals have generated a 10.6% increase in monthly rents over the expiring rents with a significant 14.7% average increase in the GTA.

Looking ahead, we will continue to leverage our proven property management and development expertise to increase cash flows and drive value. We are currently expanding our property in Kitchener, which will -- we estimate will generate an 8% return on investment and we will continue to develop the 2 buildings that we have in the GTA for approximately another 230,000 square feet will be completed in the late 2020 or early 2021.

In the coming years, we will continue to expand our development program, both on land that we own, land that we'll acquire and a new JV and partnership opportunities, which we think will enhance the overall returns of our industrial properties.

In summary, it was another good quarter for Summit, and we look forward to this growth and strong operating performance to continue. I will now turn things over to Ross to discuss our operating results in more detail. Go ahead, Ross.

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Ross Drake, Summit Industrial Income REIT - CFO [3]

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Thanks, Paul. As Paul mentioned, our portfolio growth has had a very positive impact on our results through the first 6 months of 2019. Over the last 12 months, we've completed the acquisition of 20 properties, adding 4.1 million square feet to the portfolio for costs of approximately $464.1 million. We funded the property purchases through 2 bought-deal equity offerings, the latest $149.5 million offering that closed in mid-June, as well as new and assumed mortgages of $327 million with the balance using our credit lines.

With this portfolio growth, revenues were up just under 61%, also driven by our effectively full occupancy and continued increases in monthly rents, partially offset by the sale of the 75% interest in 4 properties in May 2018. Occupancy was 99.5% on June 30, 2019, up from 98.6% at the same time last year. Second quarter revenues rose 63.3% to $34.1 million. With this revenue growth and our continuing focus on efficient property management, NOI was up over 66% for the 6 months ended June 30, 2019, with Q2 NOI rising 68.2% to $24.4 million.

As Paul mentioned, we were pleased to once again generate solid increases in our same-property NOI. For the 6 months ended June 30, 2019, total organic growth was 4.8%, driven by the strong gains Paul outlined in our key target markets in the GTA, Montreal and Western Canada. Looking ahead, we are confident the 1.5% contractual annual rent increases in our leases, combined with the strong increases we are achieving on our lease renewals, will continue to drive further organic growth in the quarters ahead. With this growth in our revenue and NOI, FFO rose almost 63% to $31.4 million for the 6 months ended June 30, 2019, or $0.302 per unit.

Second quarter FFO increased 65% to $15.8 million or $0.148 per unit. Importantly, our growth remains accretive as FFO per unit was up 7.5% for the 6 months of 2019, despite the 51% increase in weighted average number of units outstanding compared to the first 6 months of last year. Our balance sheet and liquidity position remained strong with leverage ratios of only 40.6%, providing an immediate $355 million in acquisition capacity to bring the ratio up to our general target of 50%. We continue to make solid progress on the financing front, capitalizing on current low interest rates and extending the average term for the mortgage portfolio, thus helping us to mitigate the impact of rising interest rates going forward.

As an example, our financing activities through the first 6 months of 2019 included locking in long-term mortgages which added nearly a full year of average term to maturity, rising to 5.7 years compared to 4.8 years at the end of 2018. Subsequent to the end of the quarter, new 10-year mortgages of $30.5 million were arranged with a weighted average interest rate of 3.39%. Proceeds from our $91 million and $62 million in mortgage financing earlier this year were used to repay the temporary nonrevolving credit facilities put in place to acquire properties in December 2018. We also increased our revolving operating facility to $150 million in the second quarter, enhancing our acquisition capacity. Currently, we have security registered to draw up to $124.9 million on the facility.

In early June, we completed a $149.5 million bought-deal equity offering using the proceeds to repay $119.5 million of the credit facility, and the majority of the balance was used to repay several mortgages that were set to mature. As of June 30, 2019, there is no amount drawn on the available $124.9 million operating facility. Our exposure to floating rate debt was only 0.7% of the total debt at quarter end.

In summary, another strong quarter, and we look for our growth and strong operating performance to continue. Thanks for your time, and I'll turn things back to Paul to wrap up.

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [4]

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Thanks, Ross. So looking ahead, we'll continue to execute the same value-enhancing strategies that we've successfully done in the past. We will prudently and profitably acquire quality properties in our target markets, purchasing newer well-maintained assets. And the key is at below replacement cost on a price per square foot, and ideally with rents where we believe we can generate increased rental growth through our proven management programs.

Our cash flows will grow organically as we capitalize on the continued improving strong fundamentals in the light industrial sector built on our contractual rent increases. We are even seeing an accelerated rental growth in the GTA and I'll spend more time on the [G&A] in that. And Montreal continues to see its vacancy rate go down. So the rental rate increases in Montreal are still -- starting to accelerate as well.

And then there's additional energy -- synergies and reduced costs through the increased size and scale of our portfolio as a result of being internalized. We will leverage our proven expertise to development -- develop an estimated 230,000 square feet on parcels of land that we own, all within the GTA. That's in addition to the 65,000 that's currently under construction. And as I mentioned, we'll continue to expand our development program, either through direct land purchases or in partnership with experienced developers.

Most importantly, we'll maintain our proven track record of delivering stable, sustainable and growing monthly cash distributions to our unitholders. We recognize in today's uncertain economic times, our investors look to Summit to provide stable and predictable income as we will maintain that focus in everything we do.

In summary, we're very pleased with our growth and performance. We look forward for continued progress in the years ahead. With the very strong industry fundamentals, best-in-class properties, the proven management team with decades of experience, we are well positioned to deliver stable, sustainable and increasing value for unitholders over the long term.

Thank you for your time today and attention. We'll now be pleased to answer any questions you may have. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Chris Couprie from CIBC.

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Chris Couprie, CIBC World Markets Corp. - Analyst [2]

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I just wanted to key in on the acquisition outlook, kind of what are your thoughts for the balance of the year, what type of markets you're looking at? How would you rank opportunities by market, say, [Calgary]

(technical difficulty)

Some markets you were looking at. Obviously, GTA is the preferred market, but maybe opportunities.

(technical difficulty)

Give us some color.

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [3]

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Sure. And in the second quarter, unfortunately, there's about a $200,000 charge that went through the G&A for some failed transactions. So we're looking at both some land and smaller opportunities in the GTA. As we mentioned, the GTA is ideally our market we like to grow the most in, but we're not seeing the deal flow as we'd like. I think, as I mentioned in the last call, we're hoping to supplement how we grow in the GTA by either buying more land or creating some development partnerships. And so we're working away on that, and we'll have more to talk about that in the months to come. The pipeline today, we're either have some stuff under contract or in advanced negotiations on it with $150 million, a significant amount of that is in the GTA, some out in Calgary. And we've got offers out another $100 million or so.

But ranking all 3 target markets that we're looking at, we're definitely seeing a significant increase in activity in Montreal. Currently, there's a portfolio that's over $200 million that we're in the bidding process. And the rumor has it that as of last week, that went under contract at about a 4 cap. So on our IFRS valuation, I think we have Montreal at a 5.8, 5.9 cap. So there's been another acquisition last year that was in the 4 cap. So Montreal clearly is, because of the unavailability of product in the GTA, people are turning their attention to other markets, and so there does seem to be an increased volume. But at that kind of cap rate, we definitely with cost of capital, we can make a very low cap rate work. But it's always going to go to that fundamental of price per square foot. At that kind of value, we just kind of gave up and passed on the opportunity at that point.

I think there is more opportunities in Calgary and Edmonton and I think that's just because I think people are still a little nervous of those markets. We're very comfortable with Alberta. We believe, Calgary is in full recovery mode. There's still -- there's even a 6% or 7% vacancy in Calgary. We're seeing a lot of development. We're seeing very strong rental rates in and around that $10 number which justifies new development.

So -- but we're still not giving up on the GTA. So we're going to look and spread the geographic circle around the GTA a little bit wider but as much as possible, we'd like to do that. But I think right now, we're seeing most opportunities in Montreal, probably #2 we'll be seeing stuff out west, but like I said, we're not giving up in Toronto. And I think the reason is people are seeing the rental growth in Toronto and are just saying, I'd rather wait a year or 2 and see if my lands go from high 6, up to 7, 8 or whatever, and then I'll be able to sell at a much higher value.

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Operator [4]

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The next question is from Matt Logan from RBC Capital Markets.

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Matt Logan, RBC Capital Markets, LLC, Research Division - Senior Associate [5]

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You guys have been having a lot of success on the leasing front. In terms of the accelerating rent growth in the GTA, can you talk a little bit about how your spreads and renewals for 2020 are coming along? And what the outlook is for the remaining 900,000 square feet next year?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [6]

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Sure. I'd like to -- I'll talk anecdotally about a few things, and then I'll talk about specifics of some things that we're looking at. And it's always hard to predict the future, but I'll give it a crack. But in the GTA, there's a couple of landlords, one that's been more aggressive at pushing rental rates. They were now asking $10 on an empty building which we believe they achieved or even exceeded $10 a square foot. And our average in-place rent in GTA is $6, and you have to look at property-by-property basis. And then I would -- I saw a flier yesterday for a 220,000 square-foot building which was being marketed by one of the more conservative landlords of GTA asking $9.75 for just an everyday [24 8 foot clear] property. So we're really starting to see everyone catching on that rental rates need to improve. Saying that, tenants can only absorb a certain amount of increase at a time so we're calling it the -- we highlight one lease [of the] quarter. So there's a 2020, early 2020, renewal we did on 126,000 square feet where the rent's going from $4.50 to $5.75, it's a 28% increase and then we have like 2.5% increases annually for the 5-year lease deal. But at $5.75, we do believe that in the future, there'll be even additional upside. So we've consciously started to slow down how quickly -- in the past, it was always let's get as many renewals as you can done as early as you can. And we're kind of taking the reverse strategy now. Let's wait 2 or 3 months prior to the renewal [other than] a lot of the tenants are approaching us saying, we really want to do this, we need to expand or we need this or that because we do think we can push. At 99.5%, we really think we can -- particularly in very specific locations in the GTA, be very brutal so if you're paying -- one tenant is paying $6.30, we're going to say it's $8 rent. We're confident that if that tenant left, we probably would be able to get somewhere between $8 and $9. So it's just how much of that game do you want play where -- 165,000 square foot tenant, you're going to let them walk away because then you think you'll have a couple of months downtime, but we're very, very confident that we're going to lease it up. So we're not talking to tenants as early as possible.

And then in Montreal, we're seeing lots of positive signs. The last stat I saw overall is less than a 3% vacancy. And I think when you get into true available of similar kind of space as us, I think that is a very, very tight market. I'm surprised there's not more development going on in Montreal. But we're going to do that. So we're really going to -- and unfortunately, it takes forever to get building permits today and plan approvals. But on the 2 properties we're doing, we pro forma-ed $8, $8.50. By the time they're built a year from now, I'd be very disappointed if we're not exceeding $10 a square foot on a brand-new -- on a brand-new build.

So again, the problem in GTA is there's just not a lot of land to build. So we're not seeing the demand change in Montreal. And, like I said, in Alberta, Calgary, everything is fine there. Edmonton is probably a little bit behind but we don't have very much expiry showing there.

And then in 2020, we have another one with -- they had a fixed renewal with 300,000 square feet down in Kitchener. And they went from a whopping $3.25 a square foot to $3.50 so it's an 8% increase but it was fixed in the lease. So again, that's still going to be great long-term value. I think we've bought that property at $70 a square foot. But it has this locked in very, very low rent. It's going to take at least another 5 years before we can start to benefit from that.

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Matt Logan, RBC Capital Markets, LLC, Research Division - Senior Associate [7]

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That's great color. And maybe just changing gears on your Montreal data center, has there been any update there in terms of leasing?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [8]

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No, we're still looking at the different strategies. Our preferred strategy is to lease it out as a wholesale data center. So we've entertained lots of interest, leasing out a half floor or half a megawatt. We really don't want to get into that kind of, I'll call it, the retail data center business where you're dealing with 10 or 15 tenants in the building. We're really looking for someone to either buy or -- lease or buy the entire property. So we're still hanging on and on DC2 in Toronto, we're getting very close to completing the powered shell. So we added some more money to our mezz loans there. But Montreal, no, we're still in that hold mode.

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Matt Logan, RBC Capital Markets, LLC, Research Division - Senior Associate [9]

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And last question for me, maybe just on the impact of the lower 10-year bond yields. Have you seen anything on pricing or on your renewals in terms of refinancing spreads that might indicate kind of downward trends?

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Ross Drake, Summit Industrial Income REIT - CFO [10]

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I mean, there...

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [11]

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Go ahead, Ross.

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Ross Drake, Summit Industrial Income REIT - CFO [12]

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Sorry. Yes. So yes, actually -- so we did a 10-year deal in early in Q1, and it was around 3.9% and we just completed 10-year mortgages at 3.39%. So the spread on the recently completed 10-year deal was 170 points over the government of Canada rate. So very strong in that, so. Go ahead, Paul.

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [13]

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Yes. It's indicative that -- that's [indicative] that you probably do 10-year debt at a little bit sub-3% today. So we don't have a lot of debt that's still coming due this year, but we still have all of our acquisitions and almost entirely everything that we're looking at will be free and clear. So we'll be able to put new debt on that. And I mean, I think I saw yesterday between the 5 and the 10 years, 1 basis point. So the spread might be 5 or 10 basis points tighter on the 5-year, but old school thinking for me is still 10 years that in and around that 3% is a pretty darn smart thing to do.

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Operator [14]

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The next question is from Brad Sturges from IA Securities. Please go ahead.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [15]

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I guess, just with the 2 GTA development sites planned. Just -- can you remind me where you are in the process? Is it still in the design phase? Or have you gone and achieved approval yet for the zoning.

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [16]

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Yes. So well the zoning is there so it's -- you just need the site plan approval and then you go to building permit. But the one in Mississauga on Surveyor Road, that one's a little bit more advanced. We've got the drawings done and we've just got to go in for the site plan approval. The process in the GTA is, I won't say the word ridiculous but that's pretty much what it is. If -- the time you kind of go in for a prequalify needing to make sure that there's -- everything has been -- every box has been ticked. So hopefully that one we'll get in the next 2 or 3 months, and then we still have to get the building permit. So it might push the start of that project until the spring. The one down in Burlington is a little bit behind that schedule. But again, I would like to be able to expect to break ground next year, either in the spring or might be more in the summertime. So hopefully, we get going with it.

The one vacancy that we had on that Etobicoke building, just to give you an explanation. So we are getting pretty close to 24 months to -- and that was an existing property with 45,000 square feet of vacancy that we want to put 4 loading docks in the front of the property and we've been dealing back and forth with the city on an unbelievable amount of things. The last one is we need to put 52 trees and they're telling us this type of tree, that type of tree and stuff. So it's unfortunate that it's taking this long. And I think it's even worse on the multifamily side. So that's what's causing the difficulty in bringing enough product to the market. And that's why we're not seeing the change in the supply-demand equation, and it's only going to get worse in our mind.

So we're looking at some other opportunities, which would be able to accelerate that because one of the -- our transactions we had to drop was a 26-acre piece of land that had some environmental issues on it. But you're almost looking 1.5 years before you can put a shovel in the ground. So we're going to try to look at some opportunities that are a little farther advanced down the curve. So maybe we can get going and ramp up the development program a little bit quicker if we do it in partnership with some of the developers that are already in the progress of doing some things, both in Toronto and in Calgary.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [17]

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And what would be the land costs right now for -- to develop a land zoned for industrial?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [18]

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That's a good question. The one we were looking at was about -- around $1 million, which we really felt was a [bit of a] bargain. But I mean, we've talked to other people that are looking for $2 million an acre or more. So it doesn't work really well at $2 million an acre, so especially given the level of development charges. So if you can get anything in that $1.5 million an acre, you're probably in pretty good standing. It obviously depends exactly where it is and the configuration and how much of the site was usable and then a bunch of other factors like that. But if -- and it's just becoming scarcer and scarcer, so you're pushing a little bit farther out to the east in Pickering and Whitby trying to find little slots of land here and there. Or the same thing going west, to whether it's Milton or farther.

And we're also looking at a smaller piece of land in Montreal as well. Because I'm really surprised given where the vacancy is and where the strength of the rental market is in Montreal that you're not seeing more spec development happening there. So -- because they don't have the same burden as -- the same -- well, they don't have the same land cost, and they don't have the same burden in the development charges. So you're probably at least 30% less development cost in Montreal, but roughly the same rental rates that you can achieve in Toronto today.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [19]

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Your partner Montoni, I think in the last calls you talked about not being as active on the industrial development side. Is that still the case with Montoni?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [20]

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Yes, that's the case. We'd love for him to do some stuff with us and that's a thing, but he's definitely doing -- he's very active and he's got lots of balls in the air. But I think he's seeing higher returns in other types of development. So he's more attracted to that. So we're going to start that -- we don't have any commitment to him. We're very happy with the kind of stuff that he builds, love to do more stuff with him. But in the absence of doing that. I think we'll either look for other partners or potentially even start to do it directly. Because we're getting big enough now where we can start to bring in-house some of these development skills that we need.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [21]

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And I guess with this portfolio trading at, you just mentioned at, potentially a 4 cap, would that -- would you think that helps pick up some more activity in the back half of the year in Montreal, if you see pricing being reset, [was that the truth?]

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [22]

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Yes, but then the problem is now that everyone thinks their properties in Montreal are worth 4 cap and we don't believe that, so. So there is another portfolio that was just waiting for this one to clear, it's coming out, they would have said back 3 months ago, 5.25, 5.5 cap something like that. And now it's, oh no, it's a mid-4 cap or something. And it's probably inferior, a little bit more office component than the one that just went under contract. So again, it all goes down to the price per square foot with the cost of debt we just talked about at sub-3 where cost of equity is. The good news is being internalized now, we have people in Montreal, Ottawa, Calgary. So to do incremental buying in every one of those cities now is extremely accretive to the bottom line because for the next 3 or 4 million square feet, we don't need to really add any additional personnel. And the same thing, we have excess capacity in the Toronto office as well.

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Operator [23]

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Thank you. The next question is from Mike Markidis from Desjardins.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [24]

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I think when everybody thinks about Summit, they're certainly focused on the supply-demand imbalance in the GTA and Montreal and the long-term story that's there and that's undeniable at this juncture. Just thinking a little bit more short term, however, in looking at your 2Q sort of versus your 1Q results. If I think about this and I just want to reconcile it with you to make sure I'm not missing anything, you did have the equity offering in mid-June which would have marginally or fractionally taken a little bit off your FFO per unit and it sounds like, forgive me if I missed this, but it sounds like you had $200,000 of costs related to a failed transaction that hit your G&A? Okay, but you're still down sort of 4% sequentially and then offsetting those 2 negative factors to the -- the good would have been the fact that you had a property close at the end of March that should have been -- you would get a full quarter contribution from. And then you should have had a half quarter positive impact from the internalization. So I'm just trying to juggle all those balls and then reconcile why your FFO per unit would have been down 4% sequentially.

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [25]

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Yes. I mean, I think you asked Ross some of those questions and they get down into detail. Some of the impact of internalizing won't be fully felt until the next quarter, as I mentioned. What we -- we bought a lot of properties in Montreal and other places late December, we had third-party property managers and also the nonjoint venture properties in Montreal with Montoni. We've now, as of today, everything is now being properly managed internally. So we're going through that transition. So those properties are going to show higher NOI in the quarter ahead. Yes, I think, Ross, it's probably better for you to provide a bit more detail that could maybe answer the questions. But again, for us big picture this quarter was a bit noisy with the internalization, the equity offering, everything else that we're doing. So we're definitely underlevered where we want to be. We thought we'd have a few more acquisitions to announce, but some of those didn't come through, but we're still seeing a pretty good pipeline.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [26]

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Okay. I mean, this is a high level thought. But I mean, if we were to say you closed your internalization mid-quarter. So if I hear you correctly, you didn't get a half quarter impact of your expected savings. There's more to come in terms of the benefit as we progress through 2Q to 3Q -- sorry, 3Q.

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [27]

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Yes, that's correct. And just -- I mean, because I know some of the things we said back in March and I just want to -- if I can reconfirm a couple of things other than the onetime charge. I'm highly confident that our annualized run rate on G&A is $5.1 million. So that's what we told the market. After everything is done, said and done, and all the dust has settled, that's a very comfortable number for us. So that's around, depending on book value or market value of the real estate, it's still down around that 25 basis points. So very, very low number. Of the NOI improvement, again, which we didn't capture as much of it this quarter, we'll start to see that in quarters ahead. What were -- of the $3.5 million, about $500,000 is external fees and that will be showing up in other income instead of NOL. So we still think we're going to be on track on an annualized basis. And then the real juice from internalization comes, as I mentioned, once you start to do acquisitions because the next $300 million, $600 million of acquisitions are likely to be able to be done without even adding a single person. So what normally would be a very healthy profit margin on property management will be almost an entirely flow-through from the bottom line on any new acquisitions.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [28]

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Okay. Last one for me is just looking at your 2020 renewals. I think you said you're 10.6% on your average lift on your 2019 program. I'm not sure if you gave a number, but for the stuff that you've done so far for 2020, what would the average lift be?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [29]

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Yes. We don't have that number exactly but the one that's going to influence it to take it down is the one I mentioned in Kitchener which went from $3.25 to $3.50 so that was an 8% lift. So that one is going to drag down the average. The other one I mentioned was the 126,000 square feet, that went up 28%. So Ross, I don't know if we have that calculation at hand...

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Ross Drake, Summit Industrial Income REIT - CFO [30]

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It actually averages -- it actually averages out to right around 9% because of -- there's another deal...

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [31]

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Oh, the big one, that was 300,000 square feet that only went up 8%. That was a fixed one and it's still a very low end. Okay. But I'm optimistic on those the last renewals that, particularly the ones in the GTA. I really do think, given where we're seeing asking rents [of -- at] $9.75, $10. We have a tenant -- 1-year tenant that went from $5 to $6.30 last year on a 1-year deal that's coming up in January, 165,000 square feet. We think it should be like $8. But I think if they were gone, we'll probably exceed that $8. So we're going to look at those finesses and those strategies and how tough we want to be on certain types of tenants in terms of the lift that we're going to try to achieve.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [32]

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Okay. So it looks like the average of -- if it is 9% for 2020, you expect that number is going to increase as you progress?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [33]

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Yes, we feel comfortable on that. Yes.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [34]

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Okay. And just a technical question to make sure I'm modeling this correctly. So when you guys do your 2020 renewals, is all that stuff sort of it's a commitment and the increase doesn't take effect until next year? Or is that being brought forward in terms of...

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [35]

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That doesn't take effect until when the lease would expire. So like I mentioned, the $126,000, that was the early part of 2020, yes. So it kicks in. We're just trying to give you some guidance and some (inaudible) in terms of what we're seeing. And it's all very, very good news. And it's that -- it's just pure supply and demand. So on our developments we're looking at, all in, $170, $175 a square foot. If I was looking at a piece of land today, like, it's going to be closer to $200 a square foot it's just -- it's that hard and that means you need in my mind to get at least a $10 rent or more. And even on the existing developments that we're building out, the one in Mississauga in particular, like I said I'd be disappointed if we don't get something that's 10-plus. There's leasing people on the phone, so there's your [challenge.]

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [36]

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And I guess the challenge is just trying to lock down your costs on those things once you move forward, too.

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Ross Drake, Summit Industrial Income REIT - CFO [37]

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Yes. To take that leasing question back to 2019, there's probably 700,000 square feet of the renewals that are done that still have not -- the bumps in rent still haven't been impacted on our results, will hit the second half of the year. And so there's...

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Operator [38]

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The next question is from Troy MacLean from BMO Capital Markets.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [39]

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Just wanted to circle back on Montreal. You mentioned the low 4 cap rate on that transaction, do you expect in the next 12 to 24 months that kind of the discount that Montreal used to trade at versus Toronto is going to disappear?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [40]

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No, I think what the -- I think what the brokers will grab on to and say, well, if Montreal is 4 cap so Toronto should be 3.5 cap. So who knows where these cap rates are going to go. But it's hard to generalize but we still think there's a 50 basis point differential in cap rate so I'd hate to think that this is the new benchmark for Montreal but if 10-year bonds are 1.25%, who knows, but we really look through that and try to say, are we happy that, that price per square foot is below replacement cost and not -- at this 4 cap, I would have a hard time saying we couldn't build that same real estate. Now, it will take so many years and [do that sort of thing.] But we've just always been using price per square foot as our guide. And it's not just what price per square foot is today, it's what do we think it's going to be. And in Montreal there's not the same drivers to the replacement cost equation in terms of land and development charges. So I think replacement cost in Montreal is going to continue to migrate up but not at the same pace as Toronto. So I feel -- I don't know exactly what the price per square foot, but it's probably north of $150 for that portfolio which is definitely going to be above where you could build in Montreal.

But in Toronto, in Toronto, kind of the price per square foot, if it's $175 today, we're seeing visibility of that going to $200. We'll buy it. Anything that we can get that is going to beat replacement cost that we think it's going to be in a couple of years. So we're prepared to go lower yield in Toronto if the price per square foot is good. So I hope that -- because I like to buy things that between 5 and 6 cap are much better than [in these 4s.]

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [41]

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The -- and just -- and again, on that low cap -- that transaction with the low cap rate, are you seeing a lot of like new money go to Montreal looking for industrial properties that maybe weren't there this time last year?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [42]

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Most of these are the, from what we understand, are all your traditional kinds of buyers, whether it's pension fund, pension [fund] advisers, the other regular groups. There's a bit bigger for private, so it's mostly institutional. But I think it was more just -- it's all the same people, there just happen to be more of them. So I do think there was a lineup of over 10 people that were taking a serious look, 4 or 5 of us were in the second round of bidding. And at the end of the day, we just actually didn't even bid in the second round because we just -- we didn't think we wanted to stretch where the guidance was -- was telling us. So we were more in the mid-4 cap, and that's a pretty big gap. So we just stood down.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [43]

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I know this is probably hard to answer, but how would you compare your in-place rents in the GTA and Montreal to market. Do you have any idea like what the gap would be?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [44]

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Well, I mean, and we've done a little bit more homework on that. I always hate to peg it because it's really a tenant by tenant, space by space exercise, but our in-place rents in Toronto are in that $6.10, $6.20 range, which has gone up from $5.20 in only -- less than 2 years ago. But with these new rents that are being easily achieved in the 8s, 9s and 10s, I think the gap in Toronto is significant. And I think the gap in Montreal is growing. So it's just really tough to pick a number, but the rents in absolute dollar terms are not much different than Toronto or Montreal right now. So you're still seeing $7 and $8 rents in Montreal and you're seeing $7 and $8 rents in Toronto. So going from $6 to $8, that's not an unreasonable expectation. It's just more where is the $8 going to go. And that's blended, obviously, if you have new property, you have something that's very desirable. And when I say desirable, it's just a big space. If you have a 200,000 to 400,000 square-foot building, they don't exist vacant. So you're either going to have end users come or someone's willing to speculate and buy it vacant on the hopes of leasing it up at a very aggressive rent.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [45]

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And then just given how tough the acquisition markets are in Montreal and Toronto, does Ottawa become a bigger focus? Or is that just -- it's too small a market for where you want to be?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [46]

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It's not something that we're going to focus on. So the other -- where [you're] thinking [we'll] drift is to Alberta. So it's a little bit, I guess, counterintuitive. People are still -- there's still a lot of uncertainty around Alberta and oil and gas and pipeline. Like I said, I think Calgary has clearly gone through the worst of it from an industrial standpoint. [You won't] go downtown Calgary, it's a disaster and it will be for a long time. So some people read that into the entire economy in Calgary, but we're not that believer. Edmonton absolutely is, I think, at the trough, we've seen some positive absorption in numbers there. So I think it might be a pretty interesting entry point to do more in Alberta.

So we're really going to go where the opportunities present themselves. So we'll keep looking at everything that comes up in all those cities. But where we're seeing the pipeline grow is Montreal, definitely some stuff out west. But of that stuff that we have under contract in the GTA, these are off-market deals and then those ones don't go fast and that's why we're a little slower announcing things than we would like. So -- but you're just trying to find that needle in the haystack and find whichever way you can to keep growing the platform.

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Operator [47]

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Thank you. The next question is from Matt Kornack from National Bank.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [48]

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If you had to put a ballpark figure on it and I understand that things will change over time but how much would you expect to transact in the industrial space in Montreal, Toronto and out west over the next 6 months?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [49]

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Over the next 6 months. If I look back at -- I was looking at the MD&A, we only bought one property this year...

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [50]

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But no, not for you, just in terms of the total opportunity.

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [51]

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Oh, okay. Total opportunity? That is a really good question. GTA is absolutely quiet, like there's no sense of any kind of portfolio. So you're finding a one-off, a couple of properties here and there, maybe some development opportunities. So it's really pick and choose on. But Montreal, I could see, including this transaction, you could see $1 billion trade in Montreal. I don't really have as good a sense in Alberta but I do think there's definitely some opportunities out there. But Toronto's a big spot so could just still see $500 million or $800 million, something like that. It's going to be tough but I still -- we always start the year same speech. I think we can do $300 million, $350 million kind of in 1s and 2s. We've exceeded that the last 2 years because we were able to get into some bigger portfolios. As the year progresses, hopefully, we'll be in that position. So I still think $300 million, $350 million is a decent target size. And importantly, as I keep saying over and over again, hopefully over the next 3 to 6 months, we'll be able to then start to talk about a development pipeline of $150 million, $180 million that we can build over -- build out over the next 2 or 3 years. So an increasing amount of our growth going forward in the next 2 or 3 years will start to come from development. So it just then -- just depends on how quickly you can develop that out. And ideally, the majority or a significant portion of that would be in the GTA, because it's just so hard to buy. We'd rather have more control over it and build it.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [52]

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Fair enough. And does the liquidity at least and maybe a bit higher cap rates south of the border tempt you at all, or not at this point in your size?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [53]

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No. We realize what we're good at and what we did in Summit I, the strategy is working out as well, if not even better than we anticipated in terms of focusing on the larger buildings, more single tenant. And then the last piece, which we did in the first Summit and we're now at that perfect size is to start to do more development. So if I'm going to take on more risk for Summit, I'd rather do it in the area that we're the most confident which is developing in those core markets where you have people on the ground. I think there's enough other people that are going down south of the border. So we'll let them do that. We did that in Summit I, and it's not easy. You really have to have a unique strategy, either geographically or product type. I think we're going to stick to our strength.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [54]

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Makes sense. And then just with regards to leverage, I mean, you're sitting at a lower level now. Historically, you've bought assets to bring it back up but given your cost of capital, I would assume you could justify having a bit lower leverage. Is that something that we should think of and obviously, get the multiple bump on a couple of them...

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [55]

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Yes, and we've -- sorry for interrupting you, but, we had a long discussion on our board meeting yesterday. That's absolutely on our radar. And I think it ties in really well to how we're going to start to grow going forward. So an increasing amount of our growth is going to come from that development platform. I think you want to have lower leverage to be able to have the internal capacity to complete those commitments. We still like the ideas, [the] unitholders of distribution increases and then a payout ratio that's 90% of AFFO. So I think with these rental growths that we're going to get, the accretiveness that we can do on -- whether it's development or acquisitions, I think what you're going to do, some combination of distribution increases and lowering leverage. I think that's the way to go in -- big picture, long-term I think that helps to get to a point where you're going to be large enough to be rated, to do unsecured. And if you look, I think some of the successful business models in a few other REITs in Canada, that lower leverage clearly is working well. And particularly, when you're talking to U.S. investors that's their preference. So yes. So I think we're going to migrate down naturally over time.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [56]

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Okay. That makes sense. Last question with regards to -- and we've talked about it a bit on this call, but the Montreal transaction, were there specific attributes to that portfolio that would have necessarily made it more attractive. I mean, shorter lease terms, newer assets or...

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [57]

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Yes. I mean, it was a good portfolio. It was -- no, I'm trying to -- it was relatively new, but when we say relatively new, 10 years, 15 years. The average weighted lease term, I think, was about 5 years. So there's a couple of 10-year leases in there. So good long-term assets. So there wasn't -- nothing in particular other than size, like this is the first time a decent-sized portfolio and even geographically, it wasn't together. So this comes right out in some of the submarkets. But I think it was just the size. And again, virtually, I think it was 100% full, like I said, relatively -- compared to finding one-off with a [pair] on it, like this was a pretty clean portfolio that was well run, well managed. A lot of it was built by this institution over that time. And so it was just good, solid real estate. But when it just comes down to fundamental value, on a price per square foot, we just didn't see the same kind of upside that someone else obviously is anticipating here.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [58]

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And you mentioned submarkets. I mean, is that even a consideration anymore in terms of Toronto and Montreal or are people willing to buy pretty much anywhere within a certain number of kilometers?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [59]

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Yes. I think there's -- as long -- yes. Then we have some different board members that still think of the GTA as very tiny circle. We keep saying you need to broaden that because 10 years ago, Milton, sounds like it was a long way out, and guess what, it's not anymore, and the same thing with -- really surprised by the east end when you talk about Ajax and Pickering, Oshawa and all those places, like that's kind of almost center ice now and you can get really strong rental [rates] out there and stuff like that. And so GTA, it's all driven by that greenbelt, it's going to continue to broaden and broaden.

So yes, no, that's what I'm saying, we're -- our circle keeps getting wider and wider. Because -- we have a tenant in -- where was it, one of our properties on the east end who's now gone out quite far, they needed more space and they actually went to a property in the west quite far away. So but they -- you'll take it where you can get it. Interesting. But the same thing in Montreal. I mean, I don't think there's any exact preferred location. I think if you're in the big cities there's lots of opportunities, lots of liquidity. So that's why we're going to stick to the major market.

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Operator [60]

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(Operator Instructions) The next question is from Mark Rothschild from Canaccord.

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Mark Rothschild, Canaccord Genuity Corp., Research Division - MD & Real Estate Analyst [61]

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In regards to Montreal, you said that you're willing to bid around 4.5 cap rate. Would you say that's around where you put replacement costs? And also, would you say that's a good price that you'd be willing to transact for a portfolio in that market?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [62]

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Well, not any portfolio -- [our] portfolios, at least. And again, the ingoing yields is probably the one we're going to focus on or not -- it's important, but it's not the most critical. So we'll look at the price per square foot, back into them, say, okay, that's the yield. And then where's the opportunity for that yield to grow? And where are the rents compared to -- compared to market and that sort of thing. All I'm saying is that opportunity with that portfolio, we were comfortable in a 4.5 cap range which equated down to, let's say, $130 a square foot or $135 or something like that. So it's really market or property-specific. Are the in-place rents frozen for 7, 8 years? You're not going to get that bump. So there's a lot of things that go into it. But it really starts with price per square foot relative to existing replacement costs and then relative to where you think that replacement costs might go over the next few years.

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Mark Rothschild, Canaccord Genuity Corp., Research Division - MD & Real Estate Analyst [63]

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Okay. And on the Montreal market, you spoke about it quite a bit and it sounds like you expect speculative development to pick up. So if that does happen, and obviously it takes some time to build, but why would you be so optimistic that rents would rise if you expect spec development to accelerate?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [64]

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Well, Montreal is a little better than Toronto but there's still not large quantities of ready-to-build land there. So again, you're going to have to start keep going out farther and -- or redevelop sites that are obsolete and that sort of thing. So it's not -- again, I think the opportunity is there. It's a little easier than Toronto, particularly from a development and a land cost basis. But it's not like you can just start going on building 10 million square feet in Montreal tomorrow. So it's -- and then when you look at the underlying drivers of the economy, Montreal has done really well in terms of competing for new business, in terms of their energy costs, calling -- willingness to incentive new businesses. So there, they have a number of programs to do that. And there's a lot of people migrating into Montreal as well. So the population growth. So we're still convinced that, that market is still going to stay tight for some time. But anywhere under 5% vacancy, I think, is a builder's market. And so Toronto is down at 1% or less, so it's completely a builders and owners market in Toronto. And it's definitely, the pendulum in Montreal, is swinging to builders and owners in Montreal. So but -- I am surprised, if I was in Montreal and I was a developer and I owned land, I'd be building. So. But they have, but they're not -- their mentality there has always been when we get tenants signed up, we'll kind of do a build-to-suit. So there's been a little bit of resistance to do pure spec in Montreal for whatever reason.

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Operator [65]

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Thank you. There are no further questions registered at this time. I will return the meeting back to Mr. Dykeman.

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [66]

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Thank you. And thanks, everyone. Quiet quarter on the acquisition front. Hopefully, we'll have lots of interesting things to talk about next quarter as we roll out our growth program and hopefully you'll see some press releases in the next month or 2. Thanks a lot, talk to you next quarter. Bye-bye.

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Operator [67]

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Thank you. The conference has now ended. Please disconnect your lines at the time. And we thank you for your participation.