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Edited Transcript of SMU.UN.TO earnings conference call or presentation 14-Nov-19 2:00pm GMT

Q3 2019 Summit Industrial Income REIT Earnings Call

Calgary Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Summit Industrial Income REIT earnings conference call or presentation Thursday, November 14, 2019 at 2:00:00pm 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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* Alex Leon

Desjardins Securities Inc., Research Division - Associate

* Bradley Sturges

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

* Chris Couprie

CIBC World Markets Corp. - Analyst

* Matt Logan

RBC Capital Markets, Research Division - Analyst

* Sairam Srinivas

BMO Capital Markets Equity Research - Associate

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Summit REIT Third Quarter 2019 Results Conference Call. Please be advised that this call is being recorded.

I would now like to turn 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. Good morning, and thank you for joining us today. As usual, Ross Drake, our Chief Financial Officer is here with me.

Before we begin, let me remind everyone that during the 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.

As you are aware, this has been a very busy and productive time for Summit through the subsequent -- to the end of the third quarter. We significantly expanded and diversified our property portfolio, returning our focus exclusively on our core industrial property segment, grew our pipeline of highly accretive development opportunities.

We were also pleased to have issued a $0.07 special distribution to our unitholders in October, resulting from the realized gain on the sale of data center properties. To date and including acquisitions announced subsequent to the end of the third quarter, so far in 2019, we have agreed to acquire interests in a total of 42 light industrial properties, well located in our 3 target markets, adding approximately 4.2 million square feet to the portfolio for a total cost of approximately $730 million. Once completed, these transactions will increase our asset base to 149 light industrial properties totaling 17.7 million square feet of GLA with a book value of approximately $2.5 billion.

In addition to generating significant growth in our cash flows, going forward, these transactions strengthen our presence in our 3 target markets, enhance the diversification of our asset base and drive reduced costs through economies of scale and operating synergies over the long term.

The largest acquisition so far with this Summit II was the purchase of 37 light industrial properties in Alberta, totaling 3.3 million square feet of GLA at the end of October. 22 of the properties are in Edmonton, 14 are in Calgary with one in Grand Prairie. We also acquired a 53-acre fully leased parcel of land in Edmonton. We paid $588 million for the portfolio. It was funded by a $230 million bought-deal equity offering and cash. As I will outline, we're pleased to have quickly invested some of the proceeds from the gain of our data center properties into this accretive transaction, which will generate an overall going-in cap rate of 5.5%. The portfolio contains a mix of single and multi-tenant properties with approximately 67% of the portfolio consisting of modern Class A space. This feature significantly enhances the quality of our property portfolio with almost 60% of the total space consisting of highly functional logistics building properties that will remain in high demand in the market.

Currently, the occupancy stands at 91.7% on this portfolio. And with this vacancy is only in -- primarily in 9 multi-tenant buildings, with -- which feature highly functional leasable space. We are confident we can enhance our going-in yield as we lease-up this vacancy. The tenant base is made up of primarily transportation, warehouse, light manufacturing firms. Only 17% of the space is occupied companies that are in the oil and gas business and many of those are on long-term leases.

So the significant transaction brings a number of benefits to the unitholders. Most importantly, it's significantly and immediately accretive to our FFO per unit. It increases the size and scale of the portfolio a significant 32% from the end of last year. It expands our presence in one of our 3 core target markets. We are confident with this increased presence in Western Canada, we'll generate strong and grow our returns for our unitholders, while the diversified nature of our tenant base will shield us from possible downturns in any one economic sector in Western Canadian markets.

We will also have the opportunity to grow cash flows through the lease-up of the vacant space, development opportunities on vacant land and redevelopment potential based on tenant expansion. These opportunities are real and will generate solid growth in the years to come.

In another major transaction during the third quarter, we turned our focus exclusively to our core industrial markets. In early September, we completed the sale of our interest in the data centers. Proceeds from the sale were approximately $178 million, generating a realized gain of $42 million or $0.35 per unit on the sale. We also had our working capital mezzanine loans repaid for another $62 million.

With the solid realized gain on the sale of the noncore properties, we are pleased to issue a special $0.07 per unit distribution in October, which is consistent with our policy to return a 20% of any realized gain to our unitholders. And this is the third special distribution that we've made on the sale of properties.

Looking ahead, we continue to be involved in the development of 2 data centers, one in Richmond Hill and one in Downtown Montreal, through new mezzanine loans to new joint venture owners of the properties. They will be partnering with a major institutional investor to complete these 2 buildings. And with these mezzanine loans, we will participate in the potential gains of value-add once the properties are completed and fully leased.

As this transaction demonstrates, we remain very opportunistic in our capital deployment and recycling strategies. By monetizing the significant gains on the data center properties, reducing our mezzanine loan and working capital loans, we freed up that $145 million in capital, and we're very quickly to reinvest it in the light core industrial markets through the Alberta acquisitions, along with the acquisitions in Guelph. We believe this is an excellent example of how we move quickly and accretively to build long-term value for our unitholders.

Now turning to our development pipeline. We continue to expand one property and develop 4 new buildings, all in the GTA region. We've just recently finished the expansion of our Kitchener property, adding 65,000 square feet based on that tenant demand, and the cost of this expansion was $6.6 million, and we generated an 8% return on this incremental cost.

We'll be starting construction in early 2020 on a brand-new 87,000 square-foot building, on excess land we own in Mississauga and another 146 -- [140,000] square feet on 7.5 acres of excess land in Burlington. These projects will be started in 2020 and completed either in late 2020 or early 2021.

In conjunction with the acquisition of 2 brand-new properties and a recently established industrial park in Guelph, Ontario, we acquired a 50% interest in 49 acres of development land and have entered into a joint venture with Cooper Construction to fully develop that park. Once completed, these development projects will add an estimated 774,000 square feet of new space. There are currently 2 of these buildings under construction in the park; when completed, will add a total of 387,000 square feet. And Summit then has the option to acquire the remaining 50% balance once they're completed and leased.

So in total, we currently have approximately 685,000 of square feet of new space under development, all in the very strong GTA regional market, with significant future growth opportunities on other owned property land and expansions. We expect these initiatives will provide very strong and very accretive returns for our unitholders in the years to come.

Finally, we are proud to be named as one of the best -- 30 best-performing issuers on the Toronto Stock Exchange over the last 3 years. Being the only real estate issuer included in the TSX 30 is a measure of our growth, strong operating performance and our commitment to unitholder value. Over a 3-year period, from June 2016 to July 2019, Summit generated 160% overall return on a distribution adjusted unit price. In summary, this was another very strong quarter for Summit. We look forward to the growth and strong operating performance to continue.

I'll now turn over things to Ross to discuss the operating results in more detail.

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

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Thanks, Paul. Our strong portfolio growth so far this year and through the fourth quarter of 2018 has had a very positive impact on our results through the first 9 months of 2019. Revenues were up almost 55% to $101 million for the 9 months ended September 30, also driven by our effectively full occupancy and continuing increases in monthly rent. Third quarter revenues rose 43%.

With this revenue growth and our continuing focus on efficient property management, net rental income was up 59% for the first 9 months of 2019 to $47.8 million, with Q3 net rental income rising 46.2%. We were pleased to once again generate solid increases in our same-property NOI for the 9 months ended September 30. Total organic growth was 5.5%, driven by strong gains in our key target markets, 6.1% in the GTA, 2.3% in Montreal and 4.3% -- 14.3% in Western Canada.

Looking ahead, we are confident the current 1.5% contractual rent increases in our leases, combined with the strong increases we are achieving on our lease renewals, we will continue to drive further organic growth in the quarters ahead.

With this growth in our revenue and NOI, FFO rose almost 55% to $47.8 million for the 9 months ended September 30 or $0.439 per unit. Third quarter FFO increased 41.3% to $16.5 million or $0.138 per unit. Importantly, our growth remains accretive as FFO per unit was up 5% for the first 9 months of 2019 despite the 47% increase in the weighted number of units outstanding compared to the first 9 months of last year.

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 rates going forward. As an example, our financing activities through the first 9 months of 2019 included locking in long-term mortgages, which added more than a full year of average term to maturity rising to just under 6 years compared to 4.8 years at the end of 2018.

During the second quarter, we increased our revolving operating facility to $150 million. As of September 30, there was nothing drawn on this facility. Our exposure to floating rate debt as of September 30 was only 0.9% of the total debt at quarter end.

In late October, we completed a $230 million bought-deal equity offering using the proceeds to partially fund the large acquisition Paul outlined. The subscription receipt issued for this offering, contingent on the completion of the Alberta acquisition, were then converted to REIT units on a one-for-one basis on November 1.

We also established a $382 million bridge facility in November for the Alberta acquisition. Our successful and proactive leasing activity continued through first 9 months of 2019. Occupancy rose to effectively full levels of 99.5% at September 30, up from 98.4% last year.

To date this year, we've completed almost all of our 2019 lease renewals with a very strong 99.2% retention rate, a key objective at Summit. We now have only 0.2% of the portfolio remaining to be renewed in 2019. We are confident we will continue to retain the majority of our tenants, renewing them at the higher monthly rents, particularly in our core markets of the GTA and Montreal. We also completed early renewals of some 2020 leases, resulting in a modest 5% of the portfolio now expiring next year as well as a large 322,000 square foot lease set to expire in 2022.

In addition to strengthening the stability and predictability of our long-term cash flows, our leasing activities are generating significant increases in monthly rents, demonstrating the strength of our target markets and how ongoing demand is driving increases in our revenues and NOI. Overall, our 2019 renewals have generated an 11.1% increase in monthly rents from expiring rents with a significant 17.8% increase in GTA.

In addition, our 2020 renewals generated an average 9.2% increase in monthly rents over the expiring rents with a much higher 17.4% increase in our GTA market. In summary, another strong quarter, and we look for our growth and strong operating performance to continue. Thank you for your time this morning.

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 continue to execute the same value-enhancing strategies that we have so successfully done in the past. We will prudently and profitably acquire quality properties in our target markets, purchasing newer, well-maintained assets at below replacement cost with rents below market where we believe we can generate value through our proven management programs.

Our cash flows will grow organically as we capitalize on the continuing strong fundamentals in the light industrial sector, build on our contractual annual rental increases, generating increased operating synergies and reduce costs through the increased size and scale of our property portfolio.

We will leverage our proven expertise to develop an estimated 700,000 square feet on land parcels we own, primarily all within the GTA -- vibrant GTA market. These investments, we anticipate, will be highly accretive to our unitholders.

More importantly, we will maintain our proven track record of delivering stable, sustainable and growing monthly cash distributions to unitholders. We recognize that in today's uncertain economic times, our investors look at Summit for stable and predictable income. 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 strong industrial fundamentals, best-in-class properties, a proven management team with decades of experience, we are well positioned to continue to deliver the stable, sustainable and increased value to our unitholders over the long term. I'd like to thank you for your time and attention this morning.

And now we will be pleased to answer any questions. 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 Brad Sturges from IA Securities.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [2]

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Just with the Kitchener expansion, when was that completed? And when did the rents kick in?

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

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It was completed and the rents kicked in September 1.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [4]

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September 1. And with the new Guelph developments of Cooper Construction, I think the time line for completion was mid-2020. Is that correct? And when would you think that project -- those projects get stabilized?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [5]

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They'll be completed and they're doing them in stages. So the first one will get done early spring; the second one will get done later summer. There's lots of already lease inquiries. So I'm not anticipating a very long lease-up period other than if we want to hold out and try to get the highest rent possible. So I'd like to think that would be -- the first one could be as early as the middle of 2020; probably the second one, later of 2020.

And then there's 2 additional buildings we can build there. So once we have any kind of momentum on the first 2 buildings, we'll immediately start the process on buildings 3 and 4 down there.

We definitely have a price advantage over GTA rent -- asking rental rates. We've looked around at some of the development that's being done on the spec, whether it's in the east end or in Toronto, asking rents are $9.25, I've seen $9.75, I've even seen above $10, down there because of the land prices. We can still get the same kind of development yields at rents that are in the mid-$6s, $7 type of thing. So we have that pricing power.

So essentially the Guelph land, which we've driven out there are about 10 to 15 minutes past Milton, and it's like 2 or 3 minutes off the 401, so great access to the transportation hub. So it's really just that continuing growth and push out there.

One of the 2 buildings that we bought, one of the tenants in there was a tenant that we had in the east end of the city and he was trying to expand and this was the only place he was able to find that worked for him at the right kind of rent. So he has a second location down in Guelph now.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [6]

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Okay. In terms of lease expiries for next year, 700,000 square feet at September 30. Is that balanced throughout the year? Or is it front-end, back-end loaded? And then I assume that's mostly -- a good proportion of that is still in Toronto. So is it -- pays to kind of wait at this point if it is -- given the rent growth?

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Ross Drake, Summit Industrial Income REIT - CFO [7]

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Looking at the larger tenancies, it's mainly back-end loaded to the second half of the year.

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

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Yes. And some of the bigger ones -- there's one big one in Montreal but some of the bigger ones are in Toronto.

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Ross Drake, Summit Industrial Income REIT - CFO [9]

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Yes.

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [10]

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So it's going to be very interesting. And again, as I mentioned in the last call, we've definitely started to -- and it's partly because we're working on the 2020, but tenants are really starting to pay attention that they don't have many options. So we have tenants coming to us a lot earlier than possible. But we're in no rush to try to negotiate those because time is on our side in the renewal negotiations.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [11]

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And with the new Alberta portfolio, how much lease expiries would you have for next year? And I know you've only had it for a couple of weeks but any initial expectations?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [12]

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Brad, I have a piece of paper that has that answer on it. So I was going to say, yes, we've owned this portfolio for 12 days, but our team has already been out there a number of times. As part of this portfolio, which you may or may not be aware of, we picked up the employees that are currently managing this. So we have 8 employees, including some accounting staff in Calgary and Edmonton, so they're very familiar with the assets. There was a couple of deals that were being worked on. So the vacancy, like 276,000 square feet, there's about 100,000 of that is in Calgary. We have one deal, 21,000, that's done starting at a rent of around $9. There's another 51,000 that we're having some just early discussions on in Calgary.

So we're more comfortable in the Calgary market than Edmonton in terms of the overall environment. But still in Edmonton, about 175,000 square feet of vacancy. We have one deal. We're very close to on 33,000 square feet. We've done a month-to-month deal, which goes to May to 2020 on 44,000 square feet. So definitely expect the occupancy to improve quarter-over-quarter. Ross, do you have the expiries on…

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Ross Drake, Summit Industrial Income REIT - CFO [13]

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I can...

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [14]

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Yes, it's not substantial, Brad.

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Ross Drake, Summit Industrial Income REIT - CFO [15]

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It's like 300,000 to 400,000.

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

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Like 300,000 or 400,000 each of the next 2 years. And the strategy and the philosophy is Calgary, we think, is a very tight and imbalanced market. We have contractual rents in this portfolio of 1.3%. So we could probably be a little bit more aggressive with tenants there, trying to push for either rental increases or good steps in the rent.

Edmonton, the strategy is going to be a little bit different, which is there's more options in vacancy. We believe Edmonton has stabilized, but it's still within that full recovery mode. So tenants coming up, they have options to move. So we have -- definitely in this environment, we'll be very proactive, starting to deal with the expiries in the next 24 months right away. So the more we can lock that down, trying to keep in that case, the strategy will be keep rent kind of where it is on those expiries. And if we have to give some minor rent adjustments, we'll do that.

But overall, between leasing up of the vacancy, the contractual rental increases, what we think we can do in Calgary, we still anticipate that the NOI for the entire Alberta portfolio has a good chance of moving up over the next couple of years.

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Operator [17]

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

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Matt Logan, RBC Capital Markets, Research Division - Analyst [18]

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Can you guys just talk a little bit about some of the fair value marks in the quarter? Your MD&A highlighted the GTA and Montreal, but maybe you can just give us a sense for the split between the geographies and if there are any specific transactions that supported your thinking?

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Ross Drake, Summit Industrial Income REIT - CFO [19]

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Well, we -- overall, we've reduced the cap -- the average cap rate on the -- our GTA portfolio. It's now right around 4.65%. And our Montreal portfolio is 5%, went from about 5.8%, 5.9% down to 5%. We've -- that represents the majority of the fair value increases in our portfolio on that.

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

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Yes. And there's been a couple larger Montreal transactions that are definitely pushing that. We've felt we were behind a bit on lowering cap rates there, but there's now been a couple, both last year and just recently, new deals there. The latest one was like a 3.9% cap. So we're still well above those kind of numbers I think just because people are starting to anticipate higher rental growth in Montreal as well.

And the GTA, we just bought a property. We're looking at another one. They're right around that same number, like a high 3%, a low 4% cap. So -- and I think it's going to be increasingly difficult to find any properties in the GTA that are stabilized over 4% cap, it's going to be tough.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [21]

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So I guess, the change this quarter was principally driven by Montreal with maybe a little bit in Toronto?

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Ross Drake, Summit Industrial Income REIT - CFO [22]

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Yes, Paul.

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [23]

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Yes. And the process we go through, we get a certain number of appraisals, we'll do some more in the fourth quarter. But we've also now started to engage an appraisal firm to help us with that valuation. So management's always a little bit more timid or reserved in how we look at these things. So we're doing it with the help of this third-party group. And they're able to kind of be a little bit more certain in terms of where the caps have been. And clearly, there's rental growth in here as well that they're capping and anticipating because all these bumps that we're saying we're getting in the GTA, some of them haven't been reflected in our quarterly statements, but they're in the rent rolls and the appraisers can look at those and cap them at the appropriate cap rate.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [24]

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We're certainly starting to see rents pick up in Montreal. And maybe to that end, how is -- how do you find the leasing market there? Do you see an accelerating number of leads compared to, say, the GTA or where Montreal was a couple of years ago?

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

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Well, the Montreal market, yes, it's definitely stronger. We haven't been -- had to be as active because our portfolio has been very stabilized. So we've had much less expiries in Montreal. So we haven't had as much firsthand experience. But from everything we're seeing and hearing, it's a very tight market.

Again, you really have to look at the market and the type of properties that you have. Because the rental growth on high-quality, well-located properties is definitely growing at a higher clip than inferior properties in inferior locations. So it's hard to be general in Montreal. You really have to look at the individual property.

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Ross Drake, Summit Industrial Income REIT - CFO [26]

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Our 2019 renewals were done at 10.8% increase, taking the rents up by about $0.50 a foot.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [27]

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That's still pretty healthy. I mean, not quite at the GTA, but certainly seems to be up over prior years.

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Ross Drake, Summit Industrial Income REIT - CFO [28]

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Nobody's the GTA.

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

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Yes.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [30]

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Maybe just changing gears a little bit. On your contractual rent steps, you mentioned they were 3% for Alberta. Where would they sit today for the overall...

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

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I said 1.3%. We just inherited, yes. I wish it was 3%, but it's 1.3%.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [32]

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Sorry, I misspoke there. For the portfolio overall, how would that 1.3% compare to your portfolio overall?

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

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Ours was 1.5%. It's kind of blending out. It really didn't change it materially. So we -- again, some of the marketing materials we've seen from some of the other GTA landlords, the good news is both Ontario and Quebec, the tenants and the landlords here are very in tune with annual rental increases. So we're seeing some other landlords asking for a decent bump in the rent and 3% escalation. So we're going to try to continue to push our program that way to try to build up the contractual rental increase.

Unfortunately, in Alberta, there's still a little bit more program to the flat leases and stuff or bumping them every 3 years or every 5 years. So we'll continue to try to execute the Summit leases and strategy out there, but we're finding it's not as easy in that market, one, because it's not as tight, but two, it's just historically, that hasn't been the pattern of rental bumps there.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [34]

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And lastly for me, just on your same-property growth, how should we think about maybe some moderation in Alberta combined with some of these healthy rent steps you've gotten kicking in over the next 12 months?

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

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Well, I guess the Alberta portfolio is not going to be in the same-store NOI.

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Ross Drake, Summit Industrial Income REIT - CFO [36]

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This new stuff won't be in the same and our existing stuff (inaudible).

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Matt Logan, RBC Capital Markets, Research Division - Analyst [37]

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No. But you had pretty healthy increases on your existing portfolio.

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Ross Drake, Summit Industrial Income REIT - CFO [38]

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Our existing (inaudible) had a pop because of occupancy. So that'll level off closer to the -- but it's such a small part of the overall and that. So that what you're seeing this year, we expect that trend to continue in that 4% to 5% range.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [39]

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4% to 5%.

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Ross Drake, Summit Industrial Income REIT - CFO [40]

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(inaudible) property.

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Operator [41]

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The next question is from Chris Couprie from CIBC.

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Chris Couprie, CIBC World Markets Corp. - Analyst [42]

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Just 2 quick ones for me. Just with respect to the data center disposition. Can you just maybe remind us what kind of led to that sale? And what the rationale would -- is to kind of still have mezz loan in that asset class. And what type of return you might be looking at on that investment?

And then secondly, just with respect to the Alberta exposure. I know you guys have communicated that you wanted to add to that market. Just maybe going forward, how would you think about reweighting in the portfolio?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [43]

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Sure. Okay. I'll start with the data center. And it's -- as is usual, it's not a straightforward answer. In this case, we have a partner. It's a great, I think, asset class, great opportunities but it's very, very different from industrial. We're building the powered shell and the second data center where -- or that was mostly finished, which you're doing at a relatively small cost. But then if you get the tenant in there and have to fit it up, you're talking about like $100 million capital commitment. So it's very lumpy.

The Montreal property, it's been completed for close, I guess, 2 years now. We haven't had traction on trying to do something on the building overall. We've had lots of small interest, but we've been reluctant to do that. So we're looking at the -- just the activity and how it's going to fit in with Summit, especially since we want to start building up the development program.

But we also looked at financing and data center financing, the market is not very deep here. So when we went to finance the first property to stabilize when DC1 was either high or low amortization period of matching the lease of 14 to 15 years, that sort of thing. So when the partner and I, we sat down and he says like, you know what, we think we can get really good value by liquidating that asset now. Then that takes off the issue of the financing, crystallize our game. We produced close to I think it was like 68% IRR over the 1.5 years that we owned it.

And then the reason that we're staying in with mezz loans -- all the initial mezz loans were paid out. The purchaser of the stabilized property is also the largest equity participant in the final 2 developments. The reason we're staying in, because it's very high -- it was very hard to value the final 2 assets because they're not stabilized and leased, so if we just kind of got back our mezz loans, we felt we were leaving some money on the table.

So right now, we've got -- they're smaller mezz loans, so there's less exposure there. We're earning a high single-digit coupon on the mezz loans. And then they're participating. And I'd really like to not put a number on it, but right now, we've got $20-something million, once there's some up financing, that will go down to 10 -- roughly $10 million and then build back up as lease out happens.

I -- if I had to throw a number, whatever amount of mezz loans that we ultimately have on here, we'd be able to earn another 40% or 50% return. So -- but we're not counting on it. I think it will be, in my mind, a bonus. So I see, right now, very little risk in our program with these mezz loans and some upside in bonus. And when that happens, we'll pay out another special distribution.

And the other thing, when I talk to different investors, it's not our core business. So I can only call the partner saying, what's happening, what can we do differently in leasing, where, as we build up the regular development program, there's lots of different things we can do when it comes to building and leasing industrial properties.

Your second question on Alberta. We had lots of discussion at our Board yesterday. So ballpark, 50% are Ontario, 20% Quebec and 30% Alberta. We like it. We hate to pin numbers down. But I mean, if we were trying to say that's -- we still like 50% as a minimum for Ontario. If it ended up being 25%, 25% the other 2 markets, you just have to be opportunistic. I mean we've been in this business a long time. We're really excited about the Alberta portfolio. Basically, when talking to the some of the Board members who are a little more GTA-focused, it's like essentially, just look at it, we did 5 years of buying in Alberta in one transaction.

So we have a great footprint there. We now have operating offices in both those cities. So we're going to be opportunistic. But clearly, the focus is trying to continue and maintain that allocation to Ontario, but primarily GTA, and that's where more of our -- you're seeing our development pipeline is going to be focused there because it's really, really hard to buy properties. We announced one add-on acquisition. And we've got a second one working, so $20 million here, $30 million here, $40 million here. So we're doing a lot of that. We just don't think there's going to be many large portfolios come up in the GTA. So you're really going to have to build it one building at a -- build up the portfolio in GTA one building at a time.

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Operator [44]

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The next question is from Sairam Srinivas from BMO Capital Markets.

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Sairam Srinivas, BMO Capital Markets Equity Research - Associate [45]

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Congratulations on a great quarter.

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

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Thank you.

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Sairam Srinivas, BMO Capital Markets Equity Research - Associate [47]

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My first question essentially is mainly focused towards the west. How should we be thinking of acquisition price versus replacement cost when it comes to Calgary and Edmonton?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [48]

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Yes. So we've done a little bit of that. We posted, for anyone that doesn't know, a PowerPoint presentation on our website, provide a lot more color, photos, details of the portfolio with our top 10 tenants. On one of the pages there, we've tried to come up with a land value. So typical industrial logistic buildings up for o-- are built and have about 45% site coverage. This entire portfolio is closer to 21%, 22% site coverage.

So we essentially tried to do some modeling where we extracted that excess land price and it comes down to $140 a square foot, which is comfortably around or below, up or below replacement costs. But in there, you're still -- there's a mixture of properties because you have some cross-dock facilities, which -- replacement costs for that cross-dock stuff is probably $250 a square foot. So -- but overall, it's around that $140. If you look at just the purchase price and you look at some of these cross-dock facilities on the acquisition price alone, you'd be in that $160 to $170. But once you normalize it for the excess land, you're back down into normal replacement costs.

So -- and again, this land, some of it is just you could do expansions on buildings, some of it, you'd have to repurpose because there's what -- an element of what we call shop, which is down at like 17% kind of coverage; the cross-dock facilities only have 10% site coverage. So as long as they maintain and continue to be a cross-dock facility for usually the e-commerce, the FedExes and the Purolators of the world, they only have 10% site coverage. But the logistics, which is 60% of the portfolio at 45% site coverage is around $130 a square foot.

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Sairam Srinivas, BMO Capital Markets Equity Research - Associate [49]

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I mean, maybe think in terms of how this is trending going ahead. Like we're seeing a lot of replacement costs going up in like Ontario market. How do you see replacement costs trending out there generally, like overall from a market perspective in Alberta?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [50]

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There's not the same forces that's going to cause it to go up anywhere in the same fashion that's happening in the GTA and Montreal. So I think it's a more moderate kind of inflationary price because there still is lots of land that can be rezoned and put into the inventory. So you're not seeing the pressure on land values. It's a completely different regime when it comes to development charges and that sort of thing. So all the elements of replacement costs are very stable in my mind and so I don't see it changing up.

But like construction, employment cost, now all of this in the west really can change fairly quickly when the sentiment moves in. If and when we get a pipeline, I think that's really going to benefit Edmonton in particular.

Calgary's portfolio, it's much more of a diversified economy. So very little exposure to oil and gas in that particular part, very diversified. There's lots of construction and development going on in Calgary now. You're still getting very, very decent rental rates, both on new and renewal developments in Calgary.

So it's kind of the tale of 2 cities. So Edmonton, I don't see that replacement cost number changing very much. So our approach there, we'll stabilize the vacancy and -- or the occupancy and continue to keep it stabilized until we get more into a recovery mode in Edmonton.

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Sairam Srinivas, BMO Capital Markets Equity Research - Associate [51]

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And just looking at Edmonton, I think they had a -- probably a good quarter when it comes to net absorption in Q3. Do you see this as a good trend going into 2020? Like, do you think absorption is going to pick up in the future for them?

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [52]

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Well, like I said, they went through their downturn. It was flat for a bunch of time. And yes, there's -- so there's positive signs of positive absorption. So it's improving. But we're not seeing it. At this point, I don't think I would say it's accelerating, but it's a steady and slow progression. So we're -- our expectation is not any kind of quick return here. So we're in for the long haul but I think directionally, it's still -- it's improving, and we'll keep an eye on it. But we're going to be defensive in our leasing strategies in Edmonton until we have clearer views to that recovery. But like I said, things can change quickly in Alberta for the better.

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Operator [53]

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(Operator Instructions) We have a question from Alex Leon from Desjardins Capital Markets.

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Alex Leon, Desjardins Securities Inc., Research Division - Associate [54]

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I just have one quick question relating to G&A. So cash G&A ticked up marginally from last quarter, and it was noted last quarter that there was about $200,000 of failed transaction costs. So I'm just wondering if there was any of those failed transaction costs this quarter or any other onetime items hitting G&A.

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Ross Drake, Summit Industrial Income REIT - CFO [55]

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There's a small onetime item of about $50,000. It was a timing on expenses to deal with compliance and that. But mainly, the other tick up has to do with Q2 only had half a quarter of internalization. So then Q3 has a full quarter of the internalization costs that you'll see going forward. So you're close to the run rate now with the -- just a small amount.

And the other thing is, in the quarter, one of the things you have to back off the number is that we have a fair value increase in those deferred units that the trustees receive in that. So that's probably another $20,000, $30,000. But main reason for the uptick has to do with a full quarter of the cost of the asset management on internalization.

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [56]

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Yes. And when we did internalize, we gave a forecast on what our expected G&A is, and we're still very comfortable with that forecast. I think at year-end, we'll even provide a bit more guidance because we think it's just -- it's a positive thing for Summit that we're going to be able to operate at a very low and effective G&A number. So we'll -- at the next quarter, we'll give some guidance for 2020.

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Operator [57]

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

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Paul Malcolm Dykeman, Summit Industrial Income REIT - CEO, President & Trustee [58]

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Okay. Well, thanks, everyone. Very busy quarter with lots of activity. We look forward to the next quarter, again updating everyone to see -- start seeing the full impact of all these positive things that are going on in the marketplace, and thanks again for your time.

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Operator [59]

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