Summit Industrial Income REIT Unit SMMCF

RBC

[retiredcf]

Also have a $25.00 target. GLTA

May 10, 2022

Summit Industrial Income REIT
Q1 in line; sizeable FV marks & distribution +3%

Impact: Neutral
Our view: A steady start to the year, with an in-line Q1. While headline SP NOI growth seemed low, underlying growth was sound after stripping out prior year noise. The QoQ slip in occupancy seems temporary, with >50% of portfolio vacancy committed. Frankly, vacancy is welcome given robust, double-digit leasing spreads. The development pipeline expanded to ~$290MM, while SMU also booked another round of sizeable fair value gains, lifting its IFRS NAV +8% QoQ. The 3% distribution hike was also a bit ahead of our +2%. C/C May 11 (9 a.m. ET; 1-888-330-2446, ID 7589769).

First impression

• SMU reported Q1/22 FFOPU of $0.18 vs. RBC/consensus of $0.18E/ $0.18E, and $0.17 last year (+9% YoY).

• Distribution hiked 3% to $0.581/unit annualized, effective May 2022

• IFRS BVPU (pre-tax): $19.17 (+8% QoQ, +59% YoY). IFRS cap rate 3.80% (-4 bps QoQ, -113 bps YoY) vs. our 3.8% NAV cap rate and 3.8% implied.

• Same-property NOI growth: +1.8% YoY

• Occupancy: 98.2% (-100 bps QoQ, flat YoY). The QoQ drop was mainly

  due to temporary downtime in ON (re-leased in Q2) and a decline in AB.

• Renewal spreads: 34% (49% excluding contractual renewals)

• Debt-to-GBV: 28.1% (-40 bps QoQ, -740 bps YoY); $1.2B liquidity

  Results in line; substantial fair value mark-up on portfolio. Variances to our forecast were minor, with NOI slightly higher, offset by higher G&A. In Q1, SMU recorded $210MM ($1.18/unit) of portfolio fair value gains, adding to the $1B of gains ($6.05/unit) booked last year. The increases were primarily in the Greater Toronto and Montreal areas from higher rents on leasing, rising market rents, slightly lower cap rates, and improving conditions in Alberta.

  Stripping out the noise, organic growth remains sound. Headline SP NOI was +1.8% YoY (vs. 4.8% in 2021), with Ontario at +4.8%, Quebec at +0.1%, Alberta at -1.9%, and Other at -1%. However, excluding the reversal of bad debts ($0.1MM in Q1/22 and $0.7MM in Q1/21), Q1 SP NOI was +3.5% YoY, including Ontario at +6.7% and Quebec at +2%, with growth mainly driven by higher rents. The drop in Alberta was due to a bad debt reversal in Q1/21 and lower occupancy (-0.6% YoY excl. bad debt reversal). Renewal leasing spreads were solid at +34%, with blended spreads even stronger at +42% (+62% ON, +45% QC, +5% AB) on 1.1MM sf of leasing and 64% retention.

  Active start to the year on capital deployment. In Q1, SMU competed $112MM of income-producing acquisitions in Montreal, QC and Guelph, ON at a ~4.6% cap rate. In April, it acquired a 76K sf property in Vaughan, ON for $25MM ($330/sf). On developments, the REIT (and JV partners) acquired 72 acres of land in Burlington ($28MM), Kitchener ($11MM), and Guelph, ON ($77MM) to develop 1.3MM sf over time. With respect to the ATM, SMU issued $45MM of equity in Q1 (2MM units @ $22.37/unit).