Summit Industrial Income REIT Unit T.SMU.UN

BMO analyst update

[CanSiamCyp]

More E-Commerce and Inventory Space Please; Increasing Target to $25

Bottom Line:

Following a solid Q3/21, we maintain our Outperform rating on Summit. We expect the strong demand for industrial space in Canada will persist, which when combined with record low availabilities, should continue to place upward pressure on rents and occupancy. Furthermore, we expect ongoing long term value creation via SMU.UN's development pipeline. We believe SMU.UN's solid balance sheet and healthy access to favorable unsecured financing will further support its growth initiatives. We have increased our NAV estimate to $19.50 and our target price to $25.00.

Key Points

Solid and in-line Q3/21. SMU.UN reported Q3/21 FFO/unit of $0.086. Excluding the impact of non-recurring mortgage prepayment cost of $16.1M ($0.095/unit), FFO/unit would have been $0.18, in line with our estimate of $0.18 (see flash).

Strong demand for industrial assets in Canada likely here to stay. The supply chain disruption brought on by the pandemic has led to many operators wanting to maintain a higher level of inventory. This has translated to higher demand for industrial space in order to house the extra inventory. Management believes this is a long term structural trend. Furthermore, there has also been an increase in warehouse space needs from new players, thereby further fueling the demand. We'd also highlight that this increase in demand is also against the backdrop of ongoing higher e-commerce penetration.

And the strong demand continues to push up valuations. SMU.UN registered $239.8M in fair value gains in Q3/21. We'd note this follows the significant gain of $588.8M in Q2/21, thereby bringing year to date FV gains to $933.4M. The weighted average cap rate of SMU.UN's portfolio is now 3.88%, -12bps q/q and -143bps y/y.

Enhancing value through expansion on developments. Despite the current inflationary environment, management believes the REIT can continue to deliver significant value creation over the long term via its development pipeline. Management estimates SMU.UN can achieve development returns that are ~100-150bps over current market acquisition cap rates. Furthermore, SMU.UN possesses several expansion opportunities within the REIT's existing properties and land bank, which we expect could generate even higher yields.

Valuation. We have revised our NAV estimate upward to $19.50 based on slightly higher NOI and a lower utilized cap rate. We continue to apply ~28% premium to our NAV estimate to arrive at our target price of $25.00.