Summit Industrial Income REIT Unit T.SMU.UN

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Industrial REITs: Europe Exposure Appears Excessively Discounted

The focus of this report is the relative unit price underperformance by Dream Industrial REIT (DIR) and Granite REIT (GRT) — with their exposure to Europe (Exhibit 1) — vs. Canadian pure-play Summit Industrial Income REIT (SMU). Unit prices of DIR and GRT have been weighed down by the depreciation of the euro (down ~15% vs. the Canadian dollar since early 2021) and recent heightened concerns regarding the impacts of the war in Ukraine, including rapidly escalating prices and reduced supply of energy/heating resources. This has resulted in the unit prices of DIR and GRT underperforming SMU by over 50% since early 2021 (Exhibit 5) and pushing their trading valuation discounts relative to SMU to levels never seen before (exhibits 2 and 3). Of this 50%-plus underperformance, only ~5% can be directly attributed to the weakened euro currency (the FFO impact from euro vs. Canadian dollar fluctuations is about one-third of the change in the currency on average for DIR and GRT, while the NAV impact on both is more muted).

• Discounted Valuations: DIR and GRT are currently trading at a 76% average P/ NAV vs. SMU at 97%. On forward P/AFFO, DIR and GRT are currently trading at 16.4x on average vs. SMU at 27.4x. On implied cap rate, DIR and GRT are currently trading at 5.7% on average vs. SMU at 4.1%.

• Historically Wide Relative Valuation Discount: On a P/NAV and P/AFFO basis, the current trading valuations for DIR and GRT are on average 31% lower than those for SMU — compared with the 10% historical average relative discount. Therefore, valuations for DIR and GRT relative to SMU are on average 23% lower than the historical average (12% on P/NAV and 34% on P/AFFO).

• This 23% relative equity valuation discount represents 15% at the asset level. If the discount is largely related to European exposure, then today's trading valuations would be discounting DIR & GRT's European industrial/warehouse asset values by ~50%. This translates into a discount of $72/sf (or €590/sqm). Even with today's macro concerns specific to Europe, we see no justification for the market undervaluing European real estate anywhere near this degree.

• Upside on Reversion to Historical Averages: Unit prices of both DIR and GRT could rise by more than 30% relative to SMU if the relative valuations revert to their historical average (Exhibit 4).

  On the next page, we highlight several key attractive attributes of the European industrial property market and the portfolios owned by DIR and GRT.

  Despite the macro concerns in Europe, we believe today's historically high relative valuation discounts of DIR and GRT vs. SMU are likely excessive and represent compelling buying opportunities for investors willing to look beyond the current uncertainty.