Summit Industrial Income REIT (OTC:SMMCF) Q2 2022 Results Conference Call August 10, 2022 10:00 AM ET
Company Participants
Paul Dykeman – Chief Executive Officer
Ross Drake – Chief Financial Officer
Dayna Gibbs – Chief Operating Officer
Conference Call Participants
Mark Rothschild – Canaccord Genuity Capital Markets
Sam Damiani – TD Securities
Kyle Stanley – Desjardins Securities
Brad Sturges – Raymond James
Matt Kornack – National Bank Financial
Himanshu Gupta – Scotiabank
Sumayya Syed – CIBC World Markets
Pammi Bir – RBC Capital Markets
Operator
Good morning. My name is Julian and I will be your conference operator today. At this time, I would like to welcome everyone to the Summit Industrial Income REIT Second Quarter 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]
Mr. Paul Dykeman, you may begin your conference.
Paul Dykeman
Thank you, operator. Good morning. As a reminder, during this call, we will make statements that contain forward-looking information, which is based on a number of assumptions and are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those disclosed or implied. We would direct you to our earnings release, MD&A, other security filings and additional information about these assumptions, risks and uncertainties.
Joining me as usual on the call this morning is Ross Drake, our Chief Financial Officer; and Dayna Gibbs, our Chief Operating Officer.
Since inception, the REIT is growth and track record of consistent operating performance has been driven by a focused and proven set of strategies, a disciplined approach to growing our portfolio through new acquisitions and accretive development projects, prudent capital management and achieving organic growth through our strategic leasing and management of our assets.
Through the lens of decades of experience in industrial real estate, the current market themes of industrial remain strong. As seen on Slide 4, there is multiple demand drivers such as increasing tenant inventories, lack of sufficient new supply continued e-commerce demand, population growth for all are a few ongoing themes that our asset class.
Development is not keeping up with demand and as such continuing rental rate growth is being seen, proven by stability to valuations, and offsetting any potential cap rate expansion in nascent flesh inflationary times that we are seeing. The ability to continue to achieve meaningful rental rate growth and attractively lease terms, fuels and attractive development environment, even despite these rising interest rates.
We have completed a lot so far this year as you can see on Slide 5, we have deployed over $275 million in income producing and development property acquisitions in our core markets. While continuing to strengthen our balance sheet enhance the REIT is overall liquidity.
We have raised close to 645 million in new debt and equity capital in the first six months of the year. With over 1.6 million square feet of lease renewals and new leasing deals completed, the REIT has demonstrated over 46% rental rate increases so far this year, with an achievement of over 100% on some deals in both Ontario and Quebec.
Importantly, a key indicator of our continued strength in Canadian industrial sector, as well as the track record of this management team, our portfolio occupancy remains near full since the re-conception, almost 10-years ago now. We have maintained occupancy between 98% and 100% and are confident that the stability will continue going forward.
Turning to Slide 6, our track record and growth and solid performance continued in the second quarter, with strong metrics across all our key performance benchmarks. For the three months ending June 30th, the REIT demonstrated a 14% increase in revenue, same property NOI increasing 7.7%, including 13% in Ontario.
FFO per unit was up almost 24%. Another very strong quarter and FFO payout ratio remained a conservative 75%. And that is a decrease compared to Q2 last year, despite the increase in cash distributions that we have made both last year and this year.
Turning to Slide 7, you can see we have consistently delivered portfolio growth through many different market conditions and environments since the REITs inception. With our growth currently focused on development projects, the existing portfolio, we have the ability to successfully continue to drive overall performance value through internal sources.
Of the $45 million fair market gains that were recognized in the quarter significant majority of 34 million was contributed by our properties in our development program that are nearing completion, with the balance being delivered by top line revenue growth.
I will now turn things over to Ross to discuss our financial results in more detail.
Ross Drake
Thanks, Paul. Slide 9 highlights the solid performance that the REIT delivered through the first six months of the year. Revenue was up over 13%, the same property NOI increasing 4.8% year-to-date. FFO rose 27% with FFO per unit up a very creative 16%, despite an increase in the overall units outstanding while decreasing our FFO payout ratio from this time last year.
Slide 10 illustrates our track record of consistently delivering in growth in FFO per unit quarter-over-quarter. Looking ahead, we see this track record of performance continuing as our sector fundamentals remain exceptionally strong in all our target markets.
Turning to Slide 11, we have been very active so far this year, opportunistically raising attractive leave priced capital and continuing to enhance our liquidity profile, we increase the size of our unserved credit facilities by a total of $200 million, entered into two new 10-year fixed rate secured mortgages for a total of $169 million. A significant portion of which is interest only, and raised equity through our successful bond deal and ATM equity offerings for a total of $279 million.
With our current record levels of available liquidity, the REIT is extremely well capitalized to manage operations and to take advantage of select market growth opportunities. With the completion of our strategic debt refinancing that we completed in 2022, the REIT currently has an extremely strong balance sheet, a critical tool in today’s market environment.
As shown on Slide 16, the REITs overall average was a very conservative 26.7% at the end of Q2, with a weighted average interest rate of 2.74% and a term to maturity of 5.1 years. Additionally, our coverage ratios continue to strengthen.
On Slide 13, we can see that our unencumbered properties now represent 64% of our total assets, which equates to $3.3 billion. Our proportion of unsecured debt rose to 66% of total debt at quarter end up from 54% this time last year. And given the current interest rate environment that we are operating in, you can see that we have very little debt returning for the remainder of this year and into 2022, 2023 and 2024.
Slide 14 illustrates the REIT’s $1.4 billion of potential available liquidity at the end of Q2, including cash on hand, availability under our credit facilities and potential financing capacity on unencumbered asset pool. The liquidity level is a key competitive strength that we have worked hard to achieve over the past many quarters.
I will now turn things over to Dayna.
Dayna Gibbs
Thanks, Ross. As Paul mentioned earlier, we are pleased that the strong underlying market fundamentals continue to support our property performance in all of our key target markets. From a national perspective, the Canadian industrial market remains strong and robust.
As you can see on Slide 16, availability remained at its record lows of only 1.6% despite over six million square feet of new supply having been delivered in Q2. Notwithstanding the limited space available, leasing activity remained healthy with over seven million square feet of positive net absorption in the quarter.
In response to strong demand, construction levels grew in Canada to a new record of 43.9 million square feet, but still only represents 2.3% of total inventory with 64% of new supply already been pre-leased.
As shown on Slide 17, with the ongoing strength in demand, rental rates continue to accelerate across Canada in Q2. The national average net asking rental rate rose another $1.02 to a new record high of $12.25 a foot. This is almost a doubling of industrial rents compared to only five-years ago when the national average was below $7.
Turning to the REIT’s portfolio more specifically, Slide 18 shows our focus densely populated high growth markets and the attractive metrics in these regions. Our target markets are typically key urban centers with strong labor pools and population growth that have good access to major highway and transportation links.
In our Eastern Canadian target markets within Ontario and Quebec, which make up close to 80% of our portfolio value, we continue to see supply and demand imbalances contributing to our ability to achieve meaningful rental rate increases, rising annual escalators and providing the REIT with other leverage in our leasing activities.
Slide 19 shows the REIT’s overall portfolio occupancy at the end of Q2. And as you can see, occupancy remains strong at close to 100%. As Paul mentioned earlier, the REIT has consistently operated above 98% occupancy since its inception, where lower levels for the most part have typically been a result of minimal short-term downtime due to tenant turnover.
Turning to our individual key target markets. Slide 20 illustrates the positive impact of strong market fundamentals in the GTA. The GTA’s track record of strength continued through Q2. Availability in Canada’s leading industrial market saw net rents rise to a new high of $15.09 a foot, marking 21 consecutive quarters of rental rate growth. Availability held steady at the record low of 0.8% followed this within the backdrop of record levels of construction activity in the quarter with over 14 million square feet under development.
Turning to Slide 21, Montreal, Canada’s second largest channel market has also been extremely strong. With its availability rate hovering around one percent the Greater Montréal area’s average net rental rate continued to rise to all time highs of $13.47 per square foot in Q2. Land prices have continued to increase in this region, marking a record year-over-year increase of 20% to $1.7 million an ACRE.
Slide 22 outlines some details of our Alberta portfolio. In Calgary, vacancy and availability rates are near historic lows and Q2 rental rate statistics printed the largest quarterly increase recorded to date at 6.7%.
Momentum and demand continues in this market with approximately two million square feet of net positive absorption in Calgary for the quarter, marking the sixth consecutive quarter of at least 1.5 million square feet. Despite the 1.1 million square feet of new supply that was delivered.
The Edmonton market continues to accelerate as well. As availability rates and vacancy rates continue to fall in light of close to 800,000 square feet of new supply added in the quarter of the existing vacancy in our Alberta portfolio we currently have commitments on 50% of the space.
Looking ahead, the REIT’s focus will continue to be driven by our proven growth strategy. Slide 24 outlines our three verticals of growth, expanding the size and scale of our portfolio through selective accretive acquisitions. Proactive development and expansion and capitalizing on strong market fundamentals to maximize organic growth within our existing portfolio, all while focusing on ESG and environmental accountability.
Turning to Slide 25, while our acquisition program is currently quieter than normal, given broader market considerations, we stayed on-track with a strong acquisition program for the year. We completed the purchase of four income producing properties for a total of 137 million, generating a solid going in cap rate of 4.5%.
The REIT also acquire the remaining 50% interest in a development property in Guelph, Ontario, that is nearing completion, as well as two additional income producing industrial properties in the GTA subsequent to quarter ends, totaling 175,000 square feet for $59 million.
We have also closed on three development sites expanding our presence in a very strong Guelph, Kitchener market, providing the REIT with the potential to add another 1.3 million square feet of green buildings to our portfolio in the future.
Turning to our development pipeline on Slide 26, we currently have over 2.3 million square feet under development in various stages of planning or construction, including the three new sites we acquired this year.
Currently, 41% of our development program is on balance sheet with the remainder three joint venture partnerships. As well, we continue to pursue three wild expansion projects on existing REIT owned plan. Approximately 330,000 square feet is expected to become income producing by the end of Q3 of this year.
Importantly, our development projects continue to align with our ESG initiatives and green financing framework. And we have completed our inaugural green bond allocation report and are pleased to have reported not only green building initiatives, but also energy efficiency improvements, storm water reclamation, waste diversion and biodiversity and conservation allocations.
The third pillar of our growth strategy is to continue our track record of strong organic growth through our existing portfolio. Meaningful embedded growth exists within the REITs existing portfolio of real estate.
Slide 27 illustrates on a province by province basis, the spread between average market and in place rental rates for our portfolio as a whole. Significant upside exists as the REITs expiring leases come due, as well as for our development projects that have yet to be leased in Eastern Canada.
As you can see on Slide 28, over the next five years, we have nearly 10 million square feet of leases coming due with meaningful mark-to-market upside potential with over half of our lease maturities in the high growth Ontario market. In addition, we continue to have ongoing discussions to identify further potential expansion opportunities within our existing tenant base.
Slide 29 details some of the specific results that we are achieving through our proactive leasing programs. So far in 2022, we have completed over 1.6 million square feet of lease renewals and new lease deals, generating a very significant 46.5% increase in rental rates.
Drilling down further to eastern Canada. Rental rate growth was even higher with a 76% increase in Ontario and 74% in Quebec. With record low availability and high demand, we are confident rental rates will continue to grow and all of our key target markets for the foreseeable future.
And I will now turn things back over to Paul for some closing remarks.
Paul Dykeman
Thanks, Dayna. So in summary, we continue to have a lot of confidence in the strength of our team and the real estate in our key target markets, as they are the backbone of our operation. And while our acquisition program is a bit quieter than typical, we will continue to leverage our development program and deliver attractive yield on cost returns with brand new, environmentally efficient real estate to our portfolio. And as Dayna mentioned, organic growth will continue to renew our leases at market rents, which are considerably higher than our in place rents.
Again this volatile market, like this, our balance sheet strengths and the management team experience are paramount, are strong in place liquidity allows us to strategically allocate capital and execute on selective growth opportunities as they present themselves.
I thank everyone for their time this morning, and we would now be pleased to take any questions you may have operated. Operator.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Mark Rothschild with Canaccord. Your line is open.
Mark Rothschild
Thanks and good morning, everyone. Maybe just following up on some of the last comments from Dayna, it sounds like you are still pretty bullish on the outlook for rental rates continue to grow. At what point does the amount of space under development have a more material impact on that and slowed down brand growth or maybe even negatively impact that and do rising development costs play into that as well?
Dayna Gibbs
Hi, good morning. Thanks for the question. That I think is a million dollar question. And frankly, you know, we chat about it with our board, we chat about it at the management level, we chat about it with our investors. Right now, what we are seeing in terms of our development program and our conversations with our tenants, certainly we think it will continue to rise.
And again, there is specifics in each of our individual markets, certainly talking about Calgary is quite different than the GTA, but places like the GTA, the market just – the stats are so tight, that we expect growth to continue. I think the sense is that the trajectory of that growth or the velocity of the growth, certainly will temper and the questions are you going to, you know, $20 rate show quickly are you getting to certain points, and that clearly has a direct impact on our underwriting over development projects that, have a longer time horizon.
So, you know, all that to say, I don’t know that we have a concrete answer in terms of what that decrease in trajectory will look like, but we do definitely anticipate growth to continue in rental rates, and the offsetting factor, if you think about a place like Calgary, that momentum is just starting to pick up, not withstanding, you know, that is a very development friendly environment.
And so, you know, product is much easier to come online. If you think about the building that is happening out there, whether it is Amazon or some other behemoth projects, that market still continues to plug along and show strength, even with new construction at very, very high levels.
So, we expect the growth to continue, but perhaps at a slightly slower pace, not only just because of new construction, but you know, some of the broader economic challenges that that we are seeing out there.
Paul Dykeman
Sorry I just want to add. It really drives to – and we have said this for 10-years now, replacement cost is really the driver of rental rates. And we are still not seeing any slowing down. There might be somewhat they are calling transitional insulation factors in some of the hard costs of construction. So those are – those might start to moderate down in terms of their percentage growth. But we haven’t seen that in land yet or development charges.
So, those are the two big pieces that make up the replacement cost. So we are – I still stick by inside the Greenbelt, $350 a square foot is probably what it is costing today. But we see that migrating closer to $400 a square foot over the next year or two.
Dayna Gibbs
I think also the time horizon, like if you think about how long it takes for new supply to come online even with the construction levels that we are at, this is certainly not something that is going to have an impact on as tight of the market as we are in right now overnight. So it would be something really that you would likely see further down the road or expectations of what is to come down the road?
Mark Rothschild
Okay, great. And just one more from me. Maybe looking at the retention rates from tenants, it is not that high. Is that somewhat reflective of existing tenants just not being able to maybe pay their rent or is it they are needing more space or what is it and obviously, you are full, so it is not like there isn’t demand.
Paul Dykeman
Yes, so it is a combination of things. There is several large tenants that if you recall, a couple of years ago, we bought a building, we called the Kubota building 184,000 square feet. We knew that tenant wasn’t going to renew because they were building their own a new building. So that tenant left and that space was released with one month of downtime and at a 42% increase in rent.
There is another tenant 148,000 square feet in the GTA. They have been subletting their space for several years. And so, we knew they weren’t going to renew and then we really said space with zero downtime and 117% increase in the rent. There is a tenant in Montreal, a little over 100,000 square feet. We couldn’t accommodate their growth, and we are aware of that in law and advance and we released that space with 109% increase in the rents.
So the beauty of the largest space is that when the tenants – you are having these conversations well in advance of their maturities. And so, you are able to know well in advance and limit the downtime on those spaces. So it is a combination of tenants, new work on a renewal and tenants which is going to accommodate the growth. But overall, there is no major issue other than that.
Mark Rothschild
Okay, great. Thanks so much.
Operator
Your next question comes from the line of Sam Damiani with TD Securities. Your line is open.
Sam Damiani
Thanks and good morning everyone. Just on the outlook for the sector in light of the potential for an economic slowdown, just given this REIT is history, the First Summit is history everyone’s experience. I mean, how do you think about the impact of a recession on the Canadian industrial market and specifically some of its portfolio after years where demand has exceeded supply and the vacancy rates are so unsustainably low. I’m just curious how you are thinking about how a slowdown would be different this time if at all and perhaps by region?
Paul Dykeman
Yes. Sam and I’m glad to have that question now. I remember when COVID hit two-years ago. I have no clue. So we have seen this cycle before and it really – it starts from – in a similar place where we were, when the COVID disruption happened, the fundamentals are that solid.
So, with the availability rate, at sub 1%, you know, pretty much everywhere. We see that it has to be a pretty long and prolonged recession to move that number in a big way. Dayna talked about the 43 million square feet, the significant amount of that is already pre-leased.
So in order – you would have to start having business failures. So in our portfolio, which we have built, kind of building by building, a lot of international multinational tenants, good quality, companies, they are not going to go bankrupt, they might look at their knees and say, do we need to downsize? But again, we are still booked behind, places like the U.S. in terms of e-commerce penetration I think COVID helped push that along.
So if anything there might be a bit of a pause, but just anecdotally, in our portfolio in Toronto, and Montreal, we are talking to five or six tenants about expanding their buildings by 50,000, 70,000 square feet, they are bursting at the scenes, we are looking at taking a mezzanine office, mezzanine and other buildings to try to accommodate the extra space that are required, because those buildings can’t be done.
We are excited about Alberta, because we finally after three years of answering the question, what all the scary things. You are seeing availability rate, and I have always said 5% is kind of imbalance in my mind. And once you get below 3%, it is significantly a landlord.
And that is where you start to see rents moving up, which is the phenomenon we are seeing in Calgary now, if you ever go below 1%, then it is highly unusual and a great market to be in because, we are doubling rents or getting 3% to 4% escalators and tenants are going. They have no other place to go.
So it really goes to the length and the severity of potentially a slowdown. So I think the only thing we are seeing right now, our tenants are saying, okay. Instead of that 100,000 square foot, expansion that I’m trying to talk about, let’s just put that on hold, and see how things flush out over the next three or four-months before we sign on the paper.
Dayna, do you want to add?
Dayna Gibbs
No, I think I just add in those questions, sometimes I think, assume we are smarter than we are thinking about what is going to happen, and the broader perspective of the Canadian economy, but if you compare it to something like the GFC, as Paul touched on the market is certainly has much stronger footing right now. And I think even you can draw that analogy to the broader market.
So, unless there is really a long, sustained recession and again I think the view could also be argued that you will experience perhaps, maybe not a technical recession, by the definition of the term, but perhaps some sectors of the economy dipping down into recessionary areas.
Barring something that is quite prolonged and deep. Going into this the consumer is much more, or much better capitalized, if you think about the potential impact on our tenant base, if you have got a shift from goods spending to service spending.
And some of that sort of stress testing we saw through COVID. So, we think there is a lot more resiliency on the consumer side or not expecting, a long prolonged deep recession. And we have a diverse tenant base.
So, we have got some exposure to e-commerce, we think that obviously, has the growth in that market and slowed down a little bit, but there is still continued growth, and we are well diversified across all different types of tenants. So you think that there is strong footing going into this with pent up demand. So, again, it is a timeline that you need to match the two pieces.
So if you think there is going to be economic weakness, how much and for how long and how does that offset by all these offsetting demand factors, things like pent up demand, population growth, and continued but slower growth in e-commerce.
Paul Dykeman
Yes. I think that results finally, what has been mentioned earlier was, maybe rental rates don’t go up by the 10% or 15% or 20% per year. So that starts to moderate a little bit. But even if you get any rental growth, over where the market rents are today compared to where in place rents are, we still have significant upside there, so.
Sam Damiani
Yes, no, that is a great answer, and a tough one for sure. Thank you. Just for my follow-up, allocating capital today, I guess it is an easier call to put some acquisitions on hold. And it is probably a relatively easier call to shift capital more in favor of development. But how do you think about returns on development relative to your current cost of capital? Are you more inclined to initiate spec development today versus six-months ago?
Paul Dykeman
And again, I will keep correcting, we build inventory without the demand in our portfolio. So I’m going to get you to say that building inventory at some point. Now in fact, we found the least risky way to build right now is new spec or building inventory.
Because have you tried to pre-lease, there is so many variables in delivering buildings, whether it is the site plan approval process, which is very much outside your control. But even once you get site plan approval, preordering steel, and precast can be eight to 12-months, through COVID, and strikes and stuff like that, we are easily you can have three to six months, late delivery of building.
So we found is, basically, the point where we start to put steel in the ground, is when will start to activate the leasing process. And given the tightness in the market, we are fine, but every pro-forma that we have put together, Sam, in terms of where buying land, we put some buffers in there in terms of growth in terms of the hard costs. But every single time the rental growth has been exceeded in our forecast and it is more than made up.
So if anything, we are seeing slightly better yield on costs that were – and so you are still preserving, a very healthy, call it 150 basis point yields spread, which equates to $75 a buildable square foot. And so we have got roughly 2.3 million square feet, but we have got some other land that should come on line later in the year that will push the development program closer to three million square feet.
So we are happy to keep growing that. And in a staggered, kind of, I won’t say equally, but over the next two to three-years, so it is we, the ones we have under construction. Now, they are all pre-leased, they will come on income producing between now and the end of the year. And then we are starting to get site plan approval and steel order for our construction that we will start in the spring of next year.
Dayna Gibbs
Yes, I just too if you think about sort of the proportion of development. As a percent of our overall portfolio, you while we haven’t a stated target, we are still in what we would consider, the build out or the growth stage of our development platform.
So, barring any type of relief, financial shock, which as Paul mentioned, you know, we are not seeing you certainly, even without the disruption in the broader markets, we would be continuing to grow our development platform.
And the optimism which I’m sure you are hearing from other peers in the market for the first time in a very long time, you know, in a positive inflation print out of the U.S. today, but we are starting to see some of the inflationary pressures easing on hard costs in our development pipeline and availability of labor and trades improving as well.
So those are all positive signs that we are seeing. And we are in the fortunate position that these are all still making sense for us and we are now just really trying to push the envelope as far as possible to make these as energy efficient as possible.
So really having some buffer there to do that extra green spend, whether it is lead or net zero or net zero already for the project. So a good position to be in and nice to start to see some of these hard costs or the inflation on the hard cost side easing off a little bit.
Sam Damiani
That is great. Thank you. I will turn it back.
Operator
Your next question comes from the line of Kyle Stanley of Desjardins Securities. Your line is open.
Kyle Stanley
Thanks. Good morning, everyone. We have heard some anecdotes of maybe some developers typically hitting the pause button in the GTA, just given certain – uncertainty related to exit cap rates and IRRs. I’m just wondering, is this something you have seen to-date or believe could be occurring? And I’m just thinking of it from we have been talking about the supply response, and if you were to start to see supply potentially slow down the positive attributes that would have to market rent growth.
Paul Dykeman
Sure. I will start and then Dayna can finish. So again, you have to look at the group of developers and there is a broad spectrum of developers. So if I’m a developer that is a merchant developer and I have to have an exit to create my IRR and my promotes and stuff like that, you are going to be maybe a little bit more cautious or careful in what you are doing. If you are in Orlando that has a land bank and you have tenant demand you are just going to keep the machine going there.
For us, if we look at our pro forma, I think if we pause our developments maybe the return would be that much higher in a year. So the way we are looking at is building out and kind of averaging averaging in. So you are never going to be perfect.
As long as we are making a proper development spread, significantly better than buying income producing or getting brand new real estate, we will keep plugging up. But then you have pension funds. Again, they are not going to be impacted in a big way.
So the only place that we haven’t seen evidence of it yet, do land prices start to moderate and break out good luck trying to find land. But if you can, we haven’t we haven’t seen a lot of land trade in the last three or four-months.
So that would be the only place where you would start to see maybe saying, okay, I’m not going to pay $3 million an acre maybe I will try to pay $2.5 million or whatever. But again, there is no evidence that land prices have moderated, but that is where you would probably see it first.
Dayna Gibbs
Yes, I mean, I don’t have too much to add. I would just say, it is a broad question, but if you think about perhaps some other asset classes, things like condo development, certainly there would be pausing in that type of activity.
They don’t have that same type of profile, where we have the ability really to, as Paul mentioned earlier, wage to lease the space to sort of the absolute last moment to capture all of that upside in market rental rates.
So again, assuming that, we have got inflation and hard costs slowing down a little bit and we are still able to move rental rates between now and the end of completion of a project. And again, the big assumption that people are not overpaying for land, you certainly have no concern in that regard.
Kyle Stanley
Okay, great. And then maybe just for my last question, moving over to the leasing environment in Alberta. I mean, you discussed it kind of at length so far. I’m just wondering what are your expectations with regard to leasing spreads on maybe the balance of space expiring in 2022. I think according to disclosure, the in place rate looks relatively low compared to market. So just some general thoughts on that your leasing activity in Alberta?
Paul Dykeman
I will start and then Ross can give you all the facts and figures. But again, the strategy definitely has shifted in Alberta from the last call it to two-years where it is just like, let’s keep our buildings occupied, let’s do month to month tenants, let’s be creative. Let’s try to hold market rents to, okay, let’s take our selective shots, and you have to look at each individual asset and tenant and decide what you want to do.
So we decided to do that this year, we have a 94,000 square foot space, off a $5 rent. The tenant didn’t want to go-to-market which was closer to $8. So, they are going to overhaul to the end of the year at a higher rent, and then we will put a new tenant in next year. And I think across that numbers of 40% to 45%, or 50%, bump in the rent there.
That is a one off, so it is hard to kind of pick and choose. But overall, we are going to start to see our rents move up in the market, but we will do it on a selective basis. So every property, every tenant situation is not the same.
But Ross, do you have any more flavor than the one I’m thinking about?
Ross Drake
Yes. When we are quoting Alberta, there has been an increase in rents in Calgary, and then it is a little flatter in the in Edmonton. And they are continuing to see improved rents, and as well, the improved steps in the rent and so on in.
And so far, there is been a little bit of in Calgary year-to-date, we have seen an 8% increase in our rents, that is being offset by a slight decline in Edmonton, but Edmonton, we still focusing on getting the occupancy up a bit. But we are seeing healthy steps in the rents going forward on that as well.
Dayna Gibbs
I would say that, they are going to go. I was going to say his or even as recently as a quarter ago or call it six months ago. We would have seen a larger gap in what we were able to achieve in those annual escalators. And it is really closing in closer to what we are able to push in the GTA.
Again, it is some sort of test market, seeing what the market can withstand, and we are really quite happy with what we are able to achieve, so that is encouraging. Notwithstanding, as I mentioned earlier, all of the new construction that is happening there. So of all that in light of a lot of new supply coming into the market, it is still moving in a positive direction.
Kyle Stanley
Okay great. That is it for me. I will turn it back. Thanks.
Paul Dykeman
Great. Thank you.
Operator
Your next question comes from the line of Brad Sturges with Raymond James. Your line is open.
Brad Sturges
Hi there. Just to go back to the development pipeline every second, I think you said pro forma, you are expecting the pipeline to be three million square feet. Does that include some of the expansion or intensification discussions you are having or is that excluding those potential opportunities?
Paul Dykeman
So you can stop my risk, because there is a piece of land that I know we are likely to acquire, which hasn’t been announced yet. It just needs to go through some severance that will allow us to deliver another 500,000 square feet of new. So that is primarily where the difference between the 2.35 and the three million square foot.
Although, Brad, we are actively proactively going through our portfolio, starting with where we have the bigger expansion. So Ross had mentioned earlier that Kubota building, we put the new tenant in there, we are doing a 60,000 square foot expansion, yield on cost on a three wall expansion is higher, that one is going to be north of 7%.
We have another one that is, under contract or are signed up in Barry for 70,000 square foot expansion. We are talking to at least three other tenants couple in Montreal, and one other in Ontario, that could add up to another 200,000 to 300,000 square feet, but that is not in my $3 million number.
So we usually only count the expansions once they are signed up and ready to go. So the only two we are counting right now are the 70,000 and the 80,000 square foot, or sorry, 60,000 and 70,000 square foot expansion.
Brad Sturges
Okay, that makes sense. I guess you are about to complete about 300,000 square feet, as you noted, just based on where you are from planning and permitting perspective, how much could you commence construction on in the short-term and potentially deliver by the end of next year?
Dayna Gibbs
No, I just think they just give sort of a quantum of that 2.3, call it 850,000, we are expecting for 2023. And then again, you know, as we get further out, some of the timing is a little less certain, but you know, call it another 360,000 square feet for 2024. And then the balance after that.
Paul Dykeman
But in terms of actual project, just to give you, because I know, we are we just got the permit to clear, clear the dirt down and so service road in Burlington. We had ordered this deal 10-months ago, so it is getting delivered this month.
So the construction will actually start this fall. But the total number for that one, Ross, you remember, they get the 260,000 square feet. So the last project in wealth was last protecting wealth is around 200,000 square feet. That is well underway in terms of construction. So that will get delivered in 2022.
We have got some pre-leasing and about half of the building there now. So between now and the spring that will get complete and fully leased up. Those are the two major ones, you know, the rest of it probably won’t get delivered in 2023. But, a lot of that will be underway, and we will have some updates as we go.
Brad Sturges
Okay. That is helpful. I will turn it back.
Paul Dykeman
Okay, thanks.
Operator
Your next question comes from the line of Matt Kornack with National Bank Financial. Your line is open.
Matt Kornack
Hey guys. Just maybe first off employment, if you could provide a bit more detail going forward in your disclosure as to the timing of deliveries plus the outlay of CapEx, on the development side, that would be quite helpful from a modeling standpoint. But with regards to questions, just on your ability to deploy, you have excess liquidity at this point, even taking into account your acquisition post quarter. Should we assume that that liquidity is maintained and just deployed into development or should we expect some incremental acquisition activity through the balance of the year?
Ross Drake
Yes, so Matt that I don’t know the answer. We are monitoring the market, there is quite a few transactions in the market. There is never talked about this yet. But it still seems to be quite a depth in the bitter, it is a property-by-property activity.
We just see development as a logical, you can’t fail at that because it is bringing on higher quality higher yielding, more ESG friendly property. So we will continue to put that as priority number one in terms of external growth, finding more land or opportunities.
But as you know, we do lots off market type deals. So we are talking to people that we might be able to pick up a property here or there. We do have the one forward purchase in Montréal, the debt zero property at 39 million.
But there is a few things in the market just to give you a sense of some stuff that is out there. There is one that the rent is at $17 and expected price per square foot of that sale is going to be over $400 a square foot and that is in the GTA. So we are not going to bid on something like that, where we can build below that.
And again, we are seeing activity both in Calgary, Edmonton, lots in Ontario, but Montreal has been a pretty quiet. But so we are – I can’t come up with a number for you. But it really just depends on – if we see something, maybe it is a little bit of a direct or an opportunity.
Dayna Gibbs
Yes. I can just add to the source of capital for any potential acquisition. So, not only what is happening in the investment market, which we are obviously being extremely selective, but have been very successful in off market deals.
But just looking at what is happening with our unit price, which we obviously think is undervalued at the moment, anything we would do with that liquidity right now would be have debt component certainly. And while we are comfortable with where our leverage is now, think of it in terms of some type of temporary increase in leverage if we were to do something meaningful.
So again, there could be sort of smaller one off deals, but to focus on a larger transaction that would be more meaningful to the REIT. We have to take into account obviously the cost of our equity capital right now, which to us is clearly below NAV.
Matt Kornack
Fair enough.
Ross Drake
And the only thing I would add to that Matt is, we have $117 million of cash that we have allocated to that subsequent event acquisition that is in the notes. And we have a forward purchase on a property in Montreal that is being developed was part of the acquisition that we did in the first quarter on that.
So some of the cash would get used up, but then we will just add to our unencumbered assets and have no change in our liquidity, our leverage because we are just trading assets for cash for assets in that.
Matt Kornack
Okay. Fair enough. I forgot about the Montreal forward purchase, but I will incorporate that. With regards to the ability to buy sort of similar type yields to what you have been able to get, but with I guess higher or closer to market rents. How should we think about the availability of opportunities like that going forward versus kind of lower cap rates but below market rents? And then secondarily just quickly, the Montreal rent growth has been kind of job dropping and it doesn’t seem like there is too much in the way of new development there. Is there just no land? What is going on, why is nobody building in Montreal?
Paul Dykeman
So another interesting question and a phenomenon. So the Montreal marketplace has less developers, they tend to be a bit more conservative. You do a lot more build to suit there. So I think as a percentage of inventory, it has the lowest amount of construction going on and whatever is under construction. I think the pre leasing number is up in the 70% or 80%.
I think it is just happened so quick Matt that – so there is land. We are only trying to build one building there, not having much fun with the government there in terms of getting our site plan approval, so learning that market. But literally, we seem to have skipped the rents going from 9% to 10% to 11% to 12%. We went from 9% and now we are doing deals at 14%.
So I think that is just happened in such a quick period of time, that we saw that Brent wanting to start to move up, even ourselves didn’t anticipate that it would move up at the rate ahead. So, so that is definitely, but, when we are looking at, I have got a sheet in front of me, probably close to a billion dollars.
So opportunities that are out in the market right now mentioned the one in Toronto, over 400. But there is a bunch of other ones there that, we are kind of putting numbers on their sub three cap, whether it is $320 to $330, a square foot, there is like four or five of them there.
So, again, if we can get everything at the right price per square foot, we will do it. But again, when you get up into 330 to 350, we are more comfortable to build at that price, and not take all the risk on a 25-year old asset. We got to move their rent from here to here.
So, and there is been a few deals in Montreal, but again, not quite the quality that we would like, but definitely a little bit higher cap rates in but still suck for in Montreal in terms of cap rates. And we will take surprisingly, but people are becoming more bullish, because the fundamentals are improving in Alberta.
So there is a few properties that aren’t announced yet, but Calgary, Edmonton portfolio that included some land in Edmonton, that is over $300 million. That is under contract, and a few properties in Calgary that will be low for cap rate stuff. So there is lots of stuff going on. And I think the word from the brokers are some sorry, post Labor Day, they expect to see some more listings come out. So that is kind of a landscape.
Matt Kornack
Awesome. I appreciate the color. It sounds like some units is a best buy out there.
Paul Dykeman
I think so.
Operator
Your next question comes from the line of Himanshu Gupta with Scotiabank. Your line is open.
Himanshu Gupta
Thank you and good morning. So just building on the discussion on the acquisition market here. So while you mentioned almost a billion dollar product in the market. Just wondering how competitive is the market for sub-three or sub-four product now. Have you seen a lot of some players out of the market, which we realized six-months back?
Paul Dykeman
Yes. I mean, is, again, there is not a lot of data points yet. So a lot of it is anecdotal a lot of it is in the market right now. But we do know, there is multiple bidders, and it really comes down to it, asset by asset selection.
So if you get this brand new 10-year lease, that is going to have $17 rents that are expected. That is going to be appealing to a certain group of investors, and that is probably going to be more of your pension fund type investor. So they probably got to look at that pretty similar the way they did a little while back.
If you have some opportunities, where you are going to be using a bit more leverage to the leverage buyers are going to have to reset some of their underwriting criteria. But if you remember, a lot of bidding process that happened in GTA, you would have eight or 10 bidders, which is more than enough to have a very good process.
So I think your might lose a few bidders, and so it is six or eight, but you still have the ones that are going to pay that price that they really want that particular portfolio or those assets. There is going to be lots of competition.
I would say, we are seeing the same thing in Quebec and if anything, it is a little bit of an increasing interest in Alberta, just because you can get a premium yield compared to Toronto or Montreal.
But again, it all depends on – it is really where you people think the long term bonds are moving. So they were going up, up, up, up and never going to stop going up? And being behold, they come down, right. It is just people trying to again, maybe use that word pause again until they can figure out exactly what that long-term financing is going to look like that might cause somebody to pause a little bit before they roll up their sleeves.
But the background of everything we have talked about, there is pension funds, now they, if they are getting out of retail or office, they want to move into industrial. So those dynamics, there is international money that is looking in Canada and they like the dynamics in Canada, even more than potentially some of the U.S. markets.
Himanshu Gupta
That is fair enough. And then looking at the IFRS cap rate, it was adjusted higher slightly this quarter. Is a reason like once we almost just said 40 basis points versus GTA 20. I mean is that a function of adjusting NOI much higher for Montreal to the GTA, any color there?
Ross Drake
It was pretty well evenly across the board around that 20 to 25 basis points. But as you can see, our valuation has remained relatively flat, there was a small uptick, and because the income were – showing growth and income.
The other thing I commented in that note to the financial statement, that is the cap rate you are using for the market cap method, but we are relying mainly on the discounted cash flow method on our valuation, because that captures the growth in the rents that you are seeing.
So overall, yes, there is been a slight increase in cap rates, but it is been more than made up for the continuing growth in income. And that, so it is very, very positive.
Paul Dykeman
Well, yes, I think the number I continue to focus on and cap rates are a little bit elusive, you know, depending on where, the market rent is on that building, compared to the in place, if you look at the price per square foot. So at the end of the day, I focus less on the cap rate, and more on that price per square foot. So I think in Toronto, GTA was at $250 or $260 a per square foot, Ross?
Ross Drake
$260.
Paul Dykeman
Yes, which we are very, very comfortable that you know, that there is a pretty significant cushion between that and replacement costs, and particularly where replacement cost is going.
Dayna Gibbs
I would just add in general, the feel of our underwriting certainly, obviously, there is no third parties who do work. And we had about 5% of praise this quarter. So lighter than last quarter where we had a chunkier piece because of some of our mortgage financings.
But in general, we have been on the more conservative side in terms of when cap rates were contracting, so a little bit more conservative on the way up, I guess we could say, so there is really sort of some buffer in there, I guess, from our perspective from an overall perspective.
Himanshu Gupta
Okay, thank you. Maybe just a final question. Follow-up on the recession question, Australia as well. So obviously, in a volume action, portfolio, occupancy has been in the range of 90% to 100% since inception, like what happened to the occupancy level, in the past recession or maybe what category of tenants do you think will be more one way in case of a downturn personality?
Paul Dykeman
Yes, so answer the first part, second parts a little harder answer. So in the first one, the recession, what we saw, you would see an overall change in occupancy of the entire industrial market, going let’s just say was at 95, going down to it like a 92.
So there was like a 3% shift and but you had to then look at what type of properties and where, and that is why we designed summit number two. So what we looked at where do you have the biggest dips in secondary markets and it is in smaller type tenants where there is more options for them to move out, we call it, midnight moves 10,000 square feet, that sort of thing.
So we purposely designed this portfolio to eliminate the two biggest concerns there. So one, we are only in Toronto, Montreal and the major market. Average sized tenant is 75,000 square feet and higher in bigger buildings, a lot of them single tenant, which would have gone from 99 down to 98 or 97.5. So there is much less volatility. And as Ross mentioned, we have lots of lead time on when a tenant is going to leave to replace them.
So in our particular portfolio, I do not see occupancy changing that much, because you always have options that just matter, we use the word, how greedy you want to be in terms of your rental rate. But there is clearly enough tenants to keep our portfolio near full occupancy. It is just, if you want to strategically have some vacancy so that you could try to push rents a little bit more.
And I think Dayna mentioned earlier, we have really broad cross section of different type of tenants and different types of industry manufacturing a lot of third-party logistics groups and most of our buildings are bought and thought of as to be very generic.
So you could have a – we have a [Magna] (Ph) doing some auto parts assembly. If they leave tomorrow that same building to be converted into a distribution center. So we don’t feel like we have any major exposure. I think our largest tenant is around 5% and then it very quickly goes down to less than 1% of our income in terms of concentration.
Dayna Gibbs
Yes. I think also, I would come back to the comment we had earlier about pent you demand. So if you think of the data points going through COVID, while not a recession, but certainly a shock to our tenant base. Any situation where we had space come back to us was frankly an opportunity, because there was ample demand to fill that space, which as Paul mentioned, is easily convertible from one tenant used to another.
And if you think about things like e-commerce demand, which again is a balanced piece of our portfolio, there still has been expansion requests coming in. So, you have got a buffer there where even if things were to slow down that pent-up demand is more than offsetting it for the time being.
Himanshu Gupta
Thank you, excellent color and I will turn it back. Thank you guys.
Paul Dykeman
Thank you.
Operator
Your next question comes from the line of Sumayya Syed with CIBC. Your line is open.
Sumayya Syed
Good morning. Just on the upcoming development deliveries. Can you just remind us of the expected yield on the upcoming 300 square feet that are almost complete?
Paul Dykeman
Yes. Let me go to that schedule. So again, I try not to be overly specific here. So a couple of these, I will use a range of a low of probably in the 5% to as high as almost 7%. So we have overachieved it. That is where some of them you have seen that they are leased. We kind of have the pro forma and all the costs, that is why we were able to do that fair market value bump of $33 million was on these particular properties.
And in the beginning, one that is closer to 5.5% cap, we made an error in judgment there. That is when we thought pre leasing was a good thing. We were probably six months later, six to eight months later delivering that than we thought, but we had leased it even before construction began. So we probably left some rental rate on there so that cap rate could have been closer to 6%.
We will get another kick when those five year leases rollover, and we will get to bump the rates there. But very healthy development spreads to the one on our 60,000 square foot expansion that is going to be north of 7%. And that is just a three wall expansion.
And again, the ones that are JV, our yield on costs are typically over six. And when you blend it with the half, we are still comfortably in around that 5% range for our combined yield on cost for ballparks.
Sumayya Syed
Okay, thanks for that. And just to touch on the on the point on fair value gains this quarter was mostly on development. Would you say there is more to come there or have you guys captured the major development milestones on the upcoming deliveries and it is already shown in this quarter’s fair value gains?
Paul Dykeman
Yes. So just the ones that were they are coming into income producing in the balance of 2022. So essentially, we have had these discussions with our auditors, what is the right time to do that. So it is basically, once we have removed the risk elements, so we know the timing, we know the cost down to a pretty close number, and we have leasing information. So once you have all those three things, that is where we make the assumption.
So in our pro-forma, again, these would be the yields on cost that we would be looking at. And therefore we would have that 150 basis point roughly development spread, which equates to about $75 per square foot, but we will start to recognize that until it is least. So it just was 330,000 square feet that is the 30 million came from. So almost $100 a square foot, which is good stuff.
Sumayya Syed
Yes for sure. Okay, that is all for me. Thank you.
Paul Dykeman
Okay, thank you.
Operator
Your next question comes from the line of Pammi Bir with RBC Capital Markets. Your line is open
Pammi Bir
Thanks, good morning. Hopefully, a couple of quick ones on my end. Just any change in terms of maybe how you are thinking about the leasing strategy over the next call it six-months to nine-months, maybe just, again, given the potential for some further softness in the in the economy. Any thoughts on shifting anything from maybe doing early renewals lease, like changes to lease durations, or even the rent bumps into leases?
Paul Dykeman
So not dramatically, we are so I mean, we are very, because we don’t have a big portfolio, we talk about this every Monday, and have a strategy on a tenant-by-tenant basis. So if we thought a tenant needs to be talked to a year in advance, we have already been doing that. And then if there is other tenants that we wait until they miss their option to renew, and then we are in the driver’s seat.
So, I think it is a combination. But clearly with that backdrop of inflation, we have been accelerating our rental bumps, both in GTA and now for the first time in Alberta. But in terms of any real lot of big changes we really haven’t done other than you have seen, we are being in what Ross didn’t mentioned, we have also asked tenants not seeing our building.
So if we don’t like their use, if we don’t like the way that relationship. We have actually asked a few tenants or told them we are not renewing them. So that is why retention number is purposely been a bit lower to have to be able to capture that higher rental bump.
Dayna Gibbs
I just add on that, it is market specific. So the conversations we have in somewhere like Calgary versus the GTA obviously would be quite different. And now more than ever, being in touch with our tenants on a regular basis is extremely important. And as everybody has asked the questions around this call and other industrial calls, we are cognizant of where interest rates have gone and the broader economy, so are looking for any signs of, capitulation on the tenant side.
So those conversations are really, really important. But in the same context, we continue to try to push rates, push escalators. And again, it may be property size specific, it may be tenant business specific, but part of our strategic leasing is trying to find. The tenant types that are least sensitive to rental rate increases, as well, and also, obviously, who align with our ESG initiatives.
So it is real time conversations, and we are constantly looking for areas of concern, and so far really, things are things are holding up, insofar as our portfolio and also try to be in touch with the broader markets, or whether it is leasing agents, seeing what is happening outside of our portfolio as well for signs of potential things, or cause for concern.
Particularly on the development side, places like wealth or areas where you think there is going to be meaningful new products coming online, what that competitive landscape might look like from a leasing perspective so that we can really fine tune our performance for our projects that are in the works.
Pammi Bir
Got it. Yes that is a good color. Just lastly, in terms of capital allocation, you have of course flagged the disconnect between your NAV and the unit price. So I’m just curious whether unit repurchases factor into or under consideration at some point or is it still looking at maybe some better returns from the developments that are coming online over the next or better in planning over the next 12-months to 24-months? So just see any color there?
Paul Dykeman
I have my color, Dayna is going to give you the right answer, but my color is [Lu] (Ph) and I have done this a long time, I think once and maybe some of water, we might have done some buybacks, but we have never thought it was strategically.
So mathematically even if it works, it is nothing that we have ever felt was enough to change the needle, unless you are going to go into the program in a massive way. So we have never been, it is, we think it is more of a psychological indicator to the market. So that is my personal view. And I will let Dayna add her -.
Dayna Gibbs
No, they are both right answers. It is, you see some of the other REITs out, and if you think about, you know, potential select dispositions that we could do, we have got a very short sort of disposition watch list again, and try to hit the market at the right time in this specific example that we are thinking of.
but it is, again, it is really not going to move the needle, and we would like to think that it is a temporary disconnect. And so if there is something for a longer sustained period, again, if you could do something in a meaningful way, perhaps it moves the needle, but it sounds more like a optical and mathematical exercise for the size at which we would be thinking about it and hopefully are – we expect per unit price to come back. So hopefully it is a temporary dip in valuation here in the capital markets.
Pammi Bir
Thanks very much. I will turn it back.
Paul Dykeman
Okay.
Operator
There are no further questions at this time. I will now turn the call back over to Mr. Dykeman for closing remarks.
Paul Dykeman
Okay, well, thanks again everybody for joining us today. And if you have any follow-up questions, be sure to reach out to us. And good discussion today and look forward to the next discussion in November. Thanks a lot.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.
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