OTCPK:SMMCF - Post Discussion
Post by
retiredcf on May 12, 2022 1:21pm
TD 2
Now have a $24.00 target. GLTA
Summit Industrial Income REIT
(SMU.UN-T) C$18.69
Market Strength Not Reflected in Current Trading Valuation
Event
Post-Q1/22 update (initial views: link).
Impact: MIXED (including the impact of higher financing costs)
The Q1/22 vacancy is temporary. Of the 220,000sf of new vacancy in Q1/22, over 80% is due to the previously-known departure of Kubota at 5900 14th Avenue, Markham (acquired in 2020 for $217/sf). Summit is commencing a 61,600sf expansion to create a new, 246,000sf building (estimated all-in cost: $200/sf), which the new tenant is taking in its entirety at a 42% higher rent (close to $13/sf, we estimate). That said, in response to strong market demand, management is guiding to above-average tenant turnover for the remainder of 2022 to increasingly prioritize tenant quality and optimize rental rates. As a result, we may no longer see 99%-plus occupancy levels as frequently, which we view as appropriate "yield management" in today's market.
Insights provided regarding Amazon's fulfilment overcapacity issues support our view that Summit's portfolio is relatively well-shielded. CBRE representatives shared views with Summit's management team that Amazon's likely response would likely be limited to placing some U.S. buildings on the sub- lease market for limited terms (e.g., up to three years). Amazon's capacity growth in Canada is behind that of the U.S., and therefore is seen to not be facing the same issues. Summit continues to see strong demand from 3PLs and other prospective e-commerce/fulfilment tenants.
Development remains the priority capital allocation. Projects under construction and in permitting/planning now total 2.3mmsf of potential GLA (almost entirely in the GTA/outer GTA), including 1.3mmsf from YTD land acquisitions. The three under construction are all now 100% pre-leased.
Our favourable outlook is unchanged and includes ~5% SPNOI growth potential and continued NAV growth supported by market conditions expected to remain extremely tight for the foreseeable future. Higher interest rates have pulled our FFO estimates slightly lower, and could cause higher cap rates (although no evidence has appeared yet). Our NAV/unit estimate is +3% to $18.90 and our forecast reflects a 7% two-year AFFO/unit CAGR.
TD Investment Conclusion
We reiterate our BUY rating.
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