August 12, 2022
Summit Industrial Income REIT The right set of tires
Our view: Post Q2 results that were a bit above our call, we believe SMU has the right tires on to navigate a potentially bumpy road ahead. Indeed, we think the portfolio’s concentration in markets where fundamentals remain exceptionally tight, coupled with a sizeable mark-to-market opportunity on in-place rents should continue to render organic growth in the mid-single digits. As well, the pipeline of value-add opportunities seem set to expand. In short, we see valuation as well-supported. Sector Perform, $21.50 PT.
Key points:
No signs of weakness yet, but in good shape regardless. SP NOI rose a strong 7.7% YoY (+4.8% YTD), with ON (+13% YoY) leading from higher rents and other revenue (lease termination and miscellaneous). Leasing velocity remains solid, with 28% renewal spreads, occupancy rising to >99%, and commitments on half of the remaining vacancy. While signs of demand weakness have yet to really surface in SMU’s portfolio, a decelerating economy could certainly slow the robust growth in market rents and create challenges, particularly for smaller tenants and secondary markets. That said, SMU’s major market focus, rising replacement costs, and a ~57% gap between market and in-place rents should provide good insulation. All said, our 2022E-23E reflect mid-single digit percentage SP NOI growth.
Capital mostly aimed at developments, as deal volume slows. SMU has had a fairly active 2022, including $196MM (4.6% cap rate) of income producing acquisitions and $116MM (at 100% share) of development investments. That said, with private markets in “price-discovery” mode, management expects the development program to garner more attention. Importantly, despite rising costs, SMU’s ~5-7% target unlevered yields remain attractive as market rents have materially risen. The current pipeline totals $331MM, with three projects comprising 333K sf teed up for completion in Q3. As well, the pipeline looks set to grow, with talks in progress on tenant expansions and land acquisitions.
Growth ranks well. Our 2022E-23E FFOPU are $0.76 (+$0.02) and $0.82 (+$0.01), with our inaugural 2024E at $0.86 (+6% YoY). Revisions reflect higher organic NOI growth, partly offset by lower acquisitions. Our 2021A-23E CAGR is a strong 8% (ex debt prepay charges), in line with its peers (8%) and above our universe (4%). Our NAV rose to $18 (+$0.50), with our 1YR FWD NAV rising to $19.50 (+$0.50), implying 8% YoY growth.
Sector Perform, $21.50 PT intact, with the uptick in our forward NAV offset by a slightly lower target multiple (10% premium to forward NAV vs. prior ~13%), as reduced macro visibility continues to weigh on sector valuations. SMU is trading at 7% above NAV (3.8% implied cap/27x 2023E AFFO), ahead of the 11% NAV discount of its industrial peers and the sector. From our vantage point, valuation is well-supported by the portfolio’s concentration in stronger performing industrial markets, a solid growth outlook, strong balance sheet, and a growing pipeline of value-add projects.