Dream Industrial Real Estate Investment Trust

TSX:DIR.UN

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to the Dream Industrial REIT third quarter conference call for Wednesday, November 4, 2020.During this call, management of Dream Industrial REIT may make statements containing forward-looking information with the meaning of applicable securities legislation. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Dream Industrial REIT's control that could cause the actual results to differ materially from those that are disclosed in or implied by such forward-looking information.Additional information about these assumptions and risks and uncertainties is contained in Dream Industrial REIT's filings with securities regulators, including its latest annual information form and MD&A. These filings are also available on Dream Industrial REIT's website at www.dreamindustrialreit.ca. [Operator Instructions]Your host for today will be Mr. Brian Pauls, CEO of Dream Industrial REIT. Mr. Pauls, please go ahead.

[Brian D. Pauls, CEO & Trustee]

Thank you. Good morning, everyone. Thank you for joining us today for Dream Industrial REIT's 2020 Third Quarter Conference Call. Speaking with me today is Lenis Quan, our Chief Financial Officer; and Alex Sannikov, our Chief Operating Officer.2020 remains a uniquely challenging year and the COVID-19 pandemic continues to result in widespread uncertainty. However, our business has been firing on all cylinders and we continue to make progress on a number of strategic fronts.Our FFO per unit is trending upwards compared to the first half of the year, in line with our expectations. Our operations are strong and we are building both our near-term and long-term organic growth profile through leasing and redevelopment initiatives. We continue to deploy our excess liquidity into high-quality assets.The strength of our balance sheet and business has been endorsed by DBRS with a BBB credit rating and we started executing on our euro debt strategy with the goal of significantly reducing our overall cost of borrowing over time.Starting with our operations, our fundamentals remain robust with strong rent growth collections and over 1 million square feet of leasing completed since last quarter at healthy spreads. These operational successes will help build the organic growth profile of the company for 2021 and beyond.Our ample balance sheet capacity and global acquisition platform allows us to access high-quality acquisition opportunities in North America and Europe. During the third quarter, we acquired 4 assets totaling $86 million across the GTA, Montreal, Germany, and the Netherlands, and we have over $100 million of additional assets under contract or in exclusivity across Canada, Germany, and the Netherlands.Following these acquisitions, we will have acquired or contracted more than $600 million of high-quality industrial product in 2020, adding over 5.5 million square feet of well-located GLA to our portfolio. All of these assets fit nicely within our focused investment strategy of acquiring high quality mid to large-bay distribution and urban logistics facilities in strong industrial markets.Over the past 3 years, we have significantly reduced leverage, growing our unencumbered asset pool and improved balance sheet flexibility, while improving overall portfolio quality. Last month we received a BBB mid rating from DBRS, which is a strong reflection of our strategic initiatives as well as our superior tenant and geographic diversification. The investment-grade credit rating allows us to execute our debt strategy more efficiently and further improve balance sheet flexibility. With a strong and flexible balance sheet and favorable fundamentals, we are increasing our focus on our development program.We are equally focused on ground-up development and accessing the growth opportunities within our portfolio where we have a significant urban land position. In Las Vegas, we are finalizing the planning and permitting process with a target construction commencement date in 2021. We expect to build a 36-foot clear class A 460,000 foot distribution facility that will be a great addition to the portfolio.We are forecasting a development yield of 6%, which is 100 to 150 basis points higher than comparable stabilized product in the market.Turning to our income-producing portfolio. We have identified over 20 sites with about 70 acres of access land that can support over 1.5 million square feet of additional GLA as well as a handful of redevelopment opportunities where we could roughly double the existing density to just under 1 million square feet. These sites are located mainly in the GTA, Montreal and the Randstad in the Netherlands, where availability rates are low and newer high-quality space would be in strong demand.In some cases, we can access the intensification and redevelopment opportunities gradually as leases roll. In others, such as our site in Richmond Hill, we can pursue the expansion in the next 12 to 18 months. Overall, we expect that our land bank will be a meaningful driver of organic NAV growth over time.With strong and well covered distributions, flexible balance sheet and improved organic growth outlook, we believe DIR is well positioned to deliver superior total returns to its unitholders.I'll turn it over to Alex to talk about our operations.

[Alexander Sannikov, Chief Operating Officer]

Thank you, Brian. Good morning. Our portfolio has proven to be resilient as we continue to address the transitory vacancies and increased rents. Leasing volume has increased significantly in all our markets and we completed more than 1 million square feet of leasing since the end of the second quarter. We are achieving rental rates that are outperforming even our pre-pandemic expectations.Our 300,000 square foot Louisville property is receiving strong interest from prospective occupiers. We're currently in discussions with a Fortune 500 tenant for the space and we expect to have a lease finalized by year-end 2020 with lease commencement in early 2021.Our recent leasing activity has addressed over 20% of our vacancies. And we're in discussions with another third of our vacancies, including Louisville, leading to significantly improved organic growth outlook next year.We're currently forecasting mid-single digit organic NOI growth in 2021. Many of our new leases are commencing in 2021. For the fourth quarter, we expect that our in-place occupancy will moderately track upwards compared to Q3, leading to directionally improving same-property NOI growth.At the onset of the pandemic, perhaps there was a perception that our portfolio had a significant rating towards smaller tenants and would, hence, struggle during the disruption. In our Q3 MD&A, we provided additional information on our tenant base. Over 75% of our revenues derived from 288 tenants with an average size of approximately 70,000 square feet. These tenants are from a diverse set of industries with no industry accounting for more than 12% of total revenue.The resiliency of our portfolio is evidenced in our rent collection status. Our rent collections for Q2 was increased over the course of the quarter to over 99% adjusted for rent deferrals and CECRA. In Q3, we have collected over 98% of rents adjusted for CECRA and we have not signed any material deferrals for the third quarter. In fact, we have already collected the majority of the deferred rents from the second quarter.Our CECRA participation also declined by 25% in August and September compared to Q2 in July. Lastly, our collection so far for October are at approximately 97% without any rent deferrals or the impact of CECRA, which is in line with pre-COVID collection rates.During the quarter, the value of our portfolio increased by over $65 million, reflecting the robust demand for industrial assets in our markets, strong leasing activity, and rental growth. The outlook for rental growth remains strong and we look forward to engaging in value-add initiatives to increase returns and serve as additional value from our portfolio.I will now turn it over to Lenis, who will provide our financial update.

[Lenis W. Quan, Chief Financial Officer]

Thank you, Alex. Q3 was an exciting quarter for us as we made significant progress in improving the quality and stability of our balance sheet and executing on our announced debt strategy. Our financial results for the third quarter were in line with our expectations.Diluted funds from operations was $0.18 per unit for the quarter. FFO per unit was modestly lower compared to the prior-year comparative quarter, primarily due to dilution from the timing of deployment of our ample acquisition capacity. Other items impacting FFO per unit for the third quarter totaled $0.05 and related to COVID-19 related adjustments and provisions.Our balance sheet continues to be robust with ample liquidity and significant acquisition capacity. We ended the quarter with net debt to assets at just under 30%, net debt to EBITDA at 5.8x and $272 million in liquidity between cash on hand and undrawn capacity on our unsecured credit facility.During the quarter, we commenced the execution of our strategy to transition our borrowings to euros in order to lower our average cost of borrowing. At quarter end, we had $82 million of borrowing swapped to euros with an effective interest rate of 1.1%. And the average interest rate on our total outstanding debt declined by 7% year-over-year.Subsequent to the quarter, we closed on a $150 million 3-year unsecured term loan, which after swapping to euros is expected to bear interest at approximately 90 basis points, which is 250 basis points lower than our current average in-place interest rate on debt, providing a meaningful driver of FFO per unit growth. The proceeds are expected to be utilized towards future acquisitions and repaying existing debt.Pro forma the acquisitions that we have under contract or in exclusivity, our leverage will increase to approximately 32% with our unencumbered assets totaling $1.4 billion or 44% of our investment properties value. We could acquire about $275 million of additional properties with our available liquidity, which would bring our leverage to a high 30% range. As we deploy this capacity over the balance of 2020 and early 2021, continue to access additional euro denominated debt and our comparative properties NOI increases from our recent leasing momentum, we expect our FFO per unit run rate to be stronger in 2021.For the fourth quarter of 2020, we expect our FFO per unit to be higher than Q3 2020 in the low single percentage range.I will turn it back to Brian to wrap up.

[Brian D. Pauls, CEO & Trustee]

Thank you, Lenis. We continue to take significant steps in positioning DIR as the premier industrial REIT in Canada and delivering attractive overall returns to our unitholders.We will now open it up for questions.

[Operator]

[Operator Instructions] And our first question comes from Chris Couprie from CIBC.

[Chris Couprie, Research Analyst]

Just wanted to touch on the new development disclosure. With respect to the portfolio review, have you essentially, at this point, gone over every asset and the amount of development opportunity that you have, that's basically all that would exist on the current portfolio? And just when you think about development, how are you thinking about yields or returns?

[Brian D. Pauls, CEO & Trustee]

Let me start and then I'll ask Alex to follow-up. But obviously we've got 460,000 feet of greenfield new development starting in the city of North Las Vegas. That's near term. We've reviewed the whole portfolio and found a lot of opportunities to expand buildings and not only enhance density, but also redevelopment opportunities. So we think there's probably 100,000 to 300,000 square feet of relatively near-term opportunities to either add construction or add density to our properties. And when I say in the near term, call it in the next couple of years. There's much more of that beyond that in the portfolio. We've got a team that consistently looks at opportunities in ways that we can create value and add quality to the portfolio that we have.Alex, why don't you comment on just what we -- the exercise we've done to go through the whole portfolio and the opportunity that it represents?

[Alexander Sannikov, Chief Operating Officer]

Thanks, Brian. So the land bank that we would quantify in our disclosure is first cut. These are very kind of tangible opportunities. There are additional opportunities that we're not including in this land bank right now. They are primarily in Western Canada. There is quite a bit of excess plans in that portfolio as well. But until the market is becoming more robust, we didn't include those opportunities. However, they're there.From the yield on cost perspective, the advantage of developing excess land is, in many cases, the land is already embedded in IFRS value. And if you look at the, as an example, of a project like in Richmond Hill, we can be building to a yield on cost of well over 8% and that's yield on construction cost because that land really cannot be sold as a stand-alone asset, but it has value to the owner of the existing income-producing property. And there are many more examples like this in the land bank that we've quantified.

[Chris Couprie, Research Analyst]

So is there a minimum return that you're looking for before you would kick off a development project?

[Brian D. Pauls, CEO & Trustee]

Well, I think what Alex is saying, Chris, is that on the expansion on the existing portfolio, the land is already embedded in there, so you're getting the land basically for free. The new construction cost, the yield is much higher than if you were starting from scratch. So it's quite accretive when you can add -- when you've got underutilized land, expanding an existing building is almost always going to be accretive. So in Richmond Hill, for example, it's -- call it a 110,000 foot building, we're adding 40,000 feet to it and getting a yield on the new cost of 8%. So it enhances the yield of the overall asset.

[Chris Couprie, Research Analyst]

In terms of the acquisitions going forward, will you be looking at assets that have -- looking more at assets that have this development -- future development or redevelopment potential?

[Brian D. Pauls, CEO & Trustee]

We certainly take that into consideration when we're reviewing the attributes of an acquisition. You can see in Europe, we've bought some properties that have some expansion potential. However, they yield really well in the short term. So that's kind of the perfect bull's eye for us. If they have expansion ability, then we -- our expansion land, then we find that attractive because we've got the ability to create that value in-house. We can underwrite it in-house and we can execute on that with our team.

[Operator]

And our next question comes from Himanshu Gupta from Scotiabank.

[Himanshu Gupta, Analyst]

So on the region activity, you're getting 40% and 50% higher than same GTA on recent [indiscernible] and whether some of these properties are 50,000 square feet or higher in size. So just wondering if the regional demand is so strong for only certain tenant types or size of properties in the GTA? Or is it across all categories?

[Alexander Sannikov, Chief Operating Officer]

Himanshu, I'm having a hard time hearing your question. I know it's around GTA leasing, but I couldn't hear the specifics of it. I'm sorry.

[Himanshu Gupta, Analyst]

Sorry, Alex. The question was, the demand is strong, you're getting 40% to 50% higher rents. Is it only for certain property types or property sizes or is it across the categories?

[Brian D. Pauls, CEO & Trustee]

Go ahead, Alex. Go ahead.

[Alexander Sannikov, Chief Operating Officer]

Thanks, Brian. Thanks, Himanshu. We are seeing strong demand in the GTA across the board. And we're seeing rents strengthening, I would say, across the board. What we are seeing in terms of relative demand is it is a little bit stronger in the larger sort of snack brackets of 50,000 square feet upwards. The demand is stronger, but it's pretty robust across the board. An interesting trend we're also seeing is that there is stronger demand and higher rents for vacancy. So if you have an asset that is physically vacant, you're just getting much more robust activity on it than if you are marketing something for occupancy 2 to 3 months out. So it's just an interesting phenomenon we are seeing right now in the GTA.

[Himanshu Gupta, Analyst]

Sure. And just a follow-up there. And if you look at the contractual annual rent growth on these leases, it's anywhere from 3% to 3.5%. Is this something higher, I mean, compared to some of the legal deals you have done in the last 2 years? And also do you think if there was no COVID, you could have achieved even higher rents than 40% to 50%?

[Alexander Sannikov, Chief Operating Officer]

Himanshu, I didn't catch everything, but I think your question was around contractual growth and where we think rents are trending. So on the contractual rental growth side, we are seeing the range between 3% to 4.5% in the GTA. And it is trending towards kind of the upper end of that range in the recent leasing activity. All of the leases we've signed in the GTA or virtually all of them have contractual rent steps in that mid 3% mark. We are also seeing that market rents are trending upwards and we continue to have that outlook for not only Toronto, but also the so-called broader GTA markets like Cambridge, markets like Kitchener are also seeing rental growth and there's wide expectation that that rental growth is going to continue.

[Himanshu Gupta, Analyst]

Sure. Thank you, Alex. And maybe final question from my side on the acquisition. In the Netherlands, you completed a 300,000 square feet property in Breda. So what was the cap rate on that property and how does the cap rate compare to the best portfolio which we acquired -- was acquired before COVID? [indiscernible] has the CapEx moved since then?

[Alexander Sannikov, Chief Operating Officer]

Himanshu, again, a little bit distant, but I think your question is around Breda acquisition. So Breda is a high-quality distribution asset, was substantially renovated and modernized over the last 2 years. It really caters to modern distribution and logistics users and hence the tenants we have in there and kind of the attributes of the building was a clear height, speak for themselves. The cap rate is higher because we secured the asset early on in the pandemic and took advantage of that process. It was tied up previously by another group that didn't -- as soon as the pandemic hit, decided not to proceed. And we had the opportunity to jump in and get the asset at a pretty attractive valuation. Based on the demand we're seeing in the Netherlands and Europe as a whole for these kinds of assets, that yield wouldn't be achievable today if we were just starting on that process.

[Operator]

And our next question comes from Liyan Chen from IA Securities.

[Liyan Chen]

Just a quick a FYI, I work with [indiscernible] at IA Securities. So just 2 quick questions from me. I think you might have answered the first one, but I missed the answer, so I apologize if you have to briefly reiterate. You mentioned the 6% expected yield on the Las Vegas project and as well as the 8% expected deal on the Richmond Hill project. So should we -- so I was wondering if we should consider that 8% to be indicative of what we should expect on other developments. And secondly, how would you characterize the trends on those yields today versus pre-COVID?

[Brian D. Pauls, CEO & Trustee]

Sure. Let me start and I'll also have Alex chime in as well. But the 6% is on a greenfield new development that's on the 460,000 feet that we're building in city of North Las Vegas. The 8% by contrast is an expansion of a building and that's the yield on the new cost to grow that building. So the land is already embedded in the existing asset and the new construction cost will return 8% on that new cost. So it's not necessarily apples-to-apples in those 2 examples you gave. We would expect returns on expansion properties to be similar to the Richmond Hill example. And the development yields will vary depending on which market we're in on a ground-up development.Alex, what would you add to that?

[Alexander Sannikov, Chief Operating Officer]

Just to add on the redevelopment front, so a component of our land bank is the redevelopment assets. So these are standing assets that have density potential. And from just fiscal year perspective, it's going to be difficult or not very functional to expand these buildings. So the projects that we're working on are to demolish the existing structures and rebuild these assets. So the yield on costs there are going to be lower than the Richmond Hill example because there's obviously a cost of the asset embedded in the calculation. But they are still representing healthy 125 basis point spread to what we could acquire comparable assets in the market today. And lastly, in terms of yield on cost, new lands, obviously the 6% and maybe perhaps even lower in the GTA, is what we're seeing based on where the land is trading. So we'll look -- we're underwriting a few land opportunities across the GTA and some cases in Montreal. And obviously land prices have been increasing for high-quality industrial land, and that is a contributing factor to when you're looking at new land. And as Brian said, we don't have that factored to the same extent in our expansion opportunities.

[Operator]

And our next question comes from Alex Leon from Desjardins Capital.

[Alex Leon, Associate]

I have a few questions relating to the collection figures, specifically relating to collections from tenants who qualified for CECRA. So I was wondering what you guys were seeing in terms of the collections from the 25% responsible from the tenant? And how much of your remaining rent that's currently outstanding would be attributable to this group?

[Alexander Sannikov, Chief Operating Officer]

Again, the line isn't clear. Are you referring to CECRA tenant?

[Alex Leon, Associate]

Yes, that's right.

[Alexander Sannikov, Chief Operating Officer]

Okay. So with respect to CECRA tenant, there's no meaningful outstanding amount from our CECRA tenants. So the CECRA tenants have contributed what they -- the majority of them or the vast majority of them has contributed what they were meant to contribute pursuant to the program. And there are limited amounts outstanding from these tenants. And we are, in general, on the collections, if you look at our, for example, Q2 statistics for the second quarter, we were at roughly 98% adjusting for deferrals, adjusting for CECRA at the time of publishing our Q2 results. And today we are at over 99%. So what we're generally seeing in collections is, it's not a matter of if we get collect -- if the rents get collected, it's more a matter of when. So sometimes it takes a little bit longer for tenants to contribute. And we're working with tenants on that.And lastly, I just want to emphasize that CECRA program is over. We managed to reduce the participation in the program throughout the third quarter by conducting a tenant outreach and asking our tenants whether they would still like the program and roughly 25% of them declined that program in August. And also you perhaps know that there's a new program that had been announced that is directed at tenants. No details are available yet, but it's going to be incrementally helpful for some of our tenants or just generally the occupiers in the market.

[Alex Leon, Associate]

I appreciate that. And you kind of led on to my next question, the Canada Emergency Rent Subsidy program. How are you thinking about maybe the tenants who qualified for CECRA and the trends you're seeing there relating to this new program?

[Alexander Sannikov, Chief Operating Officer]

We only had a very small universe of our tenants who qualified for CECRA and needed CECRA, just over 100 tenants. It's a relatively small sample size. And then, as we said, some of them didn't need it halfway through the program. There are no meaningful details available yet on the new program. We are monitoring it very closely. We are in touch with various government agencies to be on top of it. We've advised all of our tenants that there is -- there's additional support that is available. So they're aware of it. But so far, we don't have any statistics to comment on.

[Operator]

And our next question comes from Sam Damiani from TD Securities.

[Sam Damiani, Director, Institutional Equity Research]

Three quick questions. First on the occupancy. When we look at the U.S. portfolio sitting at around 92%, what do you see is the stabilized occupancy for that region? And when do you think you'll get there?

[Alexander Sannikov, Chief Operating Officer]

Thank you, Sam. Every property in our U.S. portfolio, and I believe you've seen that many of the assets, are high-quality functional assets. There is no structural vacancy in these properties. Louisville is obviously the most meaningful contributor and we are in discussions with the tenant and in negotiations of the lease, and we expect that lease to be finalized this year. So that's going to meaningfully increase our occupancy.Our second largest pocket of vacancy is in Columbus. And we've seen very robust touring activity and there's quite a bit of prospects for the vacancy buckets there. So as that gets leased, we don't see any reason why the portfolio cannot be running in the high 90s occupancy over the medium term.

[Sam Damiani, Director, Institutional Equity Research]

And just on the Q4 guidance, which I think the comment was a modest positive change in in-place occupancy, I think, is what was said. Is there a particular region that will drive most of that gain? Or is it pretty evenly spread throughout the regions in the fourth quarter?

[Alexander Sannikov, Chief Operating Officer]

Relatively evenly spread, Sam. But as we said, the fourth quarter is going to be modestly trending upwards. The meaningful contribution will be in 2021.

[Sam Damiani, Director, Institutional Equity Research]

Yes. That makes sense with all the leasing that's set to take effect. And my final question is just on the market rents. Between the last night's announcement and the news release from a couple of weeks ago, the leasing seems to be achieving rents perhaps in excess of the market rents that you quote in the MD&A. I'm just wondering if it's possible that those market rent estimates maybe don't fully capture the change in markets in the last sort of 9 months. Just wondering if there's a possibility there that those market rents might be a little bit understated given recent dynamics.

[Brian D. Pauls, CEO & Trustee]

Sorry, Alex, I was just going to say it's a good observation, Sam, because rents are moving quickly. There's certainly no real significant new supply in the areas that we are announcing these leases being done. So I think rent is moving fast. We're certainly leading the rent growth charge in areas in Oakville and around the GTA. We've got significant spreads to expiry and we're trying to find where market is, but it's certainly a lot higher than where it has been and continues to move. Usually, when we're reporting market rents, those are backward-looking metrics and those are, over a time period, that's already passed. The new leasing announcements that we make are real-time. So I think it does continue to continue to move. We see certainly more and more runway for rents to continue to go upward as demand increases and as the supply demand imbalance continues to grow.Alex, do you want to comment further on kind of where you see market rents going?

[Alexander Sannikov, Chief Operating Officer]

Yes, thanks Brian. So as you said, some of our leasing activity that we've announced has been fourth quarter. So the movements in rents have not been reflected in our MD&A yet. And generally, as we commented also early on the call, the rents that we're seeing in the GTA in Montreal have exceeded our expectation that we set at the beginning of the year. And that's generally a trend that we're seeing, and our expectations and also our estimates of the market rents at the time. There's some of that definitely happening.

[Sam Damiani, Director, Institutional Equity Research]

And maybe I'll squeeze in one quick one. Just on leverage, Lenis, you talked about the capacity for another -- I think it was $275 million of acquisitions. It would take leverage up into the high 30s. Can you talk about what the current target leverage is on a sort of steady state for the REIT, let's say, 6 to 12 months from now?

[Lenis W. Quan, Chief Financial Officer]

Sure, Sam. I mean, as I had mentioned, we've got acquisition capacity of about $275 million. That brings leverage to the high 30% range. It's going to balance up and around at that -- ideally it'd be in that mid to high 30% range. We've got the capacity to get there about that in the 37%, 38% range. It will depend on acquisition opportunities as they present themselves. We'll obviously take advantage of good acquisition opportunities and [indiscernible] bring. And then we're also monitoring our debt levels and net debt to EBITDA, but certainly within that high 30% range. We're well within our parameters in what the BBB rating would allow for.

[Operator]

And our next question comes from [indiscernible] Bank.

[Unknown Analyst]

I wanted to ask a question about Western Canada. Could you provide more details about the trends you've seen and the occupancy increase? And how do you think the expected and possible property price increase next year could [indiscernible] regional spread, given that there's a sizeable [indiscernible] through the next year?

[Brian D. Pauls, CEO & Trustee]

We have been quite active on the leasing front in the West. We've completed well over 200,000 square feet of renewals at rents that are in line with what we're quoting in MD&A. Since the second quarter was completed, over 50,000 square feet of new leases. Those are the leases that have transacted. And we are generally encouraged by the leasing activity. What we're seeing is the rents are generally holding and are in line with our estimates. And we are outperforming the market on average in terms of occupancy. Just by [indiscernible] because of the nature of our portfolio, our portfolio is urban and these assets tend to stay full. We, as a company, have a very long operating history with these assets that dates well prior to the IPO of Dream Industrial REIT. And these assets have always stayed in force for many, many cycles and we continue to see that in -- throughout this disruption. We're not seeing the same rental growth that we're seeing in the GTA or Montreal, but the leasing activity is robust and there is demand for space and we are doing deals. So we are encouraged by that.

[Unknown Analyst]

Do you offer promotions on the kind of free rent on new deals?

[Alexander Sannikov, Chief Operating Officer]

Free rent? I didn't quite catch. I think your question was around free rent. Is that correct?

[Unknown Analyst]

Yes.

[Alexander Sannikov, Chief Operating Officer]

Yes. We are seeing some free rent in new leases. It has become more customary in markets like Calgary and Edmonton and Regina. So we're seeing some, but it's not significant. It would be a few months for a 5-year term. That would be kind of what we -- what has become customary in the market.

[Unknown Analyst]

Should we expect some maybe capital recycling in that geographic region in near term?

[Alexander Sannikov, Chief Operating Officer]

Again, we've commented on that earlier in the year. We do intend to recycle some capital in Western Canada. And it wouldn't only include things like outright sales. In some cases, we're talking to users who are looking to buy buildings. In some cases, we're looking at converting some of our smaller bay assets to industrial condos that are still commanding much higher valuations and are in demand compared to an income-producing asset. So we're looking at a variety of [indiscernible] strategies to surface value and recycle some capital.

[Unknown Analyst]

On the possible property tax increase in Calgary next year, would it be possible to pass that to tenants? Or would you have to share that?

[Brian D. Pauls, CEO & Trustee]

Yes. Alex, I can take it. Our leases are all triple net leases. So the property taxes are borne by the tenants. So that would pass through the tenants and certainly have an impact on what the tenants pay, but it would not impact the net rents.

[Unknown Analyst]

Okay. Do you have any news from the Spectra building that you're expecting to get back?

[Alexander Sannikov, Chief Operating Officer]

On the Spectra building, I just want to clarify, we're not necessarily expecting it to get back. Obviously, the news have been public that there was a filing for CCAA. Spectra has been paying rent throughout the -- following the announcement and there have been no issues. We know that the tenant has invested significant amount of capital already since the announcement in the larger Boucherville asset, which is an encouraging trend that they are committed to the asset and committed to the operations in the asset. We understand that their operations in our second facility with them in Laval are also robust and there's quite a bit of activity. So, so far, there hasn't been any indication that they would be giving back these buildings and everything points to them continuing to invest in their operations in these assets.

[Unknown Analyst]

Okay, thank you. And my last question. So the increase in vacancy in Canada, was it driven by some of the CECRA tenants finally moving out and vacating the building? Or was it driven by something else, maybe tenants have not agreed to rent increase that you proposed to them?

[Alexander Sannikov, Chief Operating Officer]

The line was breaking. Would you mind repeating the question?

[Brian D. Pauls, CEO & Trustee]

Alex, I think the question was, what's the nature of our increase in vacancy? Was that related to tenants moving out because the rents are going up or CECRA tenants not necessarily making it? I'll let you go ahead, Alex.

[Alexander Sannikov, Chief Operating Officer]

Okay. Thanks for clarifying. So what we're seeing in the GTA, it is a function of us prioritizing rental growth over occupancy. So we have had some opportunities to part with tenants who were paying significantly below market rents. Our Oakville asset is a great example of that. And we've then managed to re-lease that asset at 50% spread. There is -- we've had a few 1 or 2 smaller unexpected vacancies in the U.S. There was one tenant that gave back space. But it wasn't a significant tenant, but because the portfolio is relatively small compared to the total, every 50,000 square feet shows up in the occupancy numbers. With respect to CECRA tenants, we haven't seen any CECRA tenants giving back space in any meaningful way. That hasn't been that trend. And, yes, as far as -- and generally, there's normal rollover as a multitenant portfolio would have. So there's a few factors, but as hopefully our announcements suggest, we're making significant progress on leasing our vacant space at well over prior rents, which will be contributing to our overall performance over time.

[Operator]

[Operator Instructions] And we have no further questions. I'll turn the call over to Mr. Brian Pauls for final remarks.

[Brian D. Pauls, CEO & Trustee]

Thank you, everyone, for your time today. We look forward to speaking again soon. And in the meantime, please stay healthy and stay safe. Take care.

[Operator]

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.