TORONTO, Feb. 20, 2019 /CNW/ – Summit Industrial Income REIT (“Summit II” or the “REIT”) (TSX: SMU.UN) announced today a significant increase in its operating and financial results for the three months and year ended December 31, 2018.
2018 Highlights:
- Acquired 24 properties totalling 4.8 million sq. ft. for $578.3 million at overall cap rate1 of 5.4%.
- Acquisitions financed by two bought-deal equity offerings for gross proceeds of $255.0 million.
- Completed $210 million in new debt financing at 4.0% average fixed interest rate with 8.25 years term to maturity, increasing overall debt term to maturity to 4.8 years.
- Industrial occupancy strong at 99.4% with average lease term of 6.2 years.
- Completed all 2018 lease renewals with strong 92.5% retention and 9.5% increase in rents (12.7% increase in GTA).
- Successfully leased all Western Canada vacancies by year end.
- Proactively completed 851,868 sq. ft. of 2019 renewals â only 2.3% of total portfolio remains to be renewed in 2019.
- 2019 renewals, early renewals and lease expansions generate 11.9% increase in rents (16.1% increase in GTA).
- Fully leased the GTA data centre property, commencing October 2018, resulting in an accretive yield over 10%.
- Same property net operating income (“NOI”)1 increased 1.4% with Toronto and Montreal contributing 4.5% and 4.7%, respectively.
- Net income rose to $180.4 million ($2.319 per Unit) due to acquisitions, strong operating performance, and fair value gains on the property portfolio.
- Fair value gain in the property portfolio of $143.8 million or $1.85 per Unit.
- Total NOI up 59.8% on revenue increase, organic growth and strong operating performance.
- Sold 75% interest in four properties in May 2018 for total proceeds of $46.4 million and realized gain of approximately $7.2 million or $0.10 per Unit to fund growth in target markets.
- Paid special cash distribution of $0.018 per Unit applicable to Unitholders on May 31, 2018 related to realized gain from property sales.
- Manager and Insiders fully aligned with 6.8% interest in REIT Units outstanding.
Subsequent events
- Obtained $153 million of mortgage financing for 10-year term at an average interest rate of 3.9% to repay the temporary bridge facilities put in place to complete the December 2018 acquisitions. Improves debt portfolio term to maturity to 5.9 years.
- Announced acquisition of Montreal property aggregating 236,134 sq. ft. for $23.0 million expected to close in early March.
“2018 was another record year for Summit as we continued to meet our goal of delivering value through focused, profitable growth and generating stable, sustainable income for our Unitholders. We significantly expanded the size and scale of our property portfolio, capitalized on our proven experience to produce strong growth in all our key performance benchmarks, all while maintaining a highly conservative balance sheet and financial position,” commented Paul Dykeman, Chief Executive Officer. “Looking ahead, we will continue to build on our past success for the long-term benefit of our Unitholders.”
PORTFOLIO GROWTH GENERATES STRONG OPERATING AND FINANCIAL RESULTS
Revenue from income producing properties rose 57.3% to $92.2 million for the year ended December 31, 2018 compared to last year. For the three months ended December 31, 2018 revenues rose 58.3% to $26.8 million. The increases were due to the significant growth in the REIT’s property portfolio in 2018, continuing high stable occupancies and increased rents, partially offset by the sale of a 75% interest in four properties in May 2018. Occupancy was 99.4% at December 31, 2018.
Net operating income (“NOI”)1 for the year ended December 31, 2018 increased 59.8% to $64.8 million compared to last year due to the contribution from acquisitions, strong occupancies, higher rental rates and contractual steps in rent, partially offset by the sale of a 75% interest in four properties in May 2018. For the three months ended December 31, 2018, NOI rose 58.9% to $18.7 million. For properties acquired prior to January 1, 2017 and owned during both years, same property NOI rose 1.4% for the year ended December 31, 2018 compared to the prior year. For the REIT’s target GTA and Montreal portfolios, same property NOI rose 4.5% and 4.7%, respectively, compared to last year. The REIT’s target GTA and Montreal markets represent approximately 76% of its total portfolio. Overall same property NOI was impacted by vacancies in certain properties in Western Canada which were fully leased by year end.
For the year ended December 31, 2018, Funds from Operations (“FFO”)1 were $43.6 million ($0.560 per Unit) compared to $27.0 million ($0.564 per Unit) last year. For the three months ended December 31, 2018, FFO was $12.6 million ($0.141 per Unit) compared to $7.8 million ($0.140 per Unit) last year. The increase in FFO is due primarily to the acquisitions completed in 2018 and strong operating performance. Per Unit amounts were impacted by the 62.9% increase in the weighted average number of Units outstanding for the year ended December 31, 2018 due to two successful bought-deal equity offerings during the year and the issuance of Class B shares related to a 2018 acquisition. There were no Class B shares outstanding in 2017.
The REIT’s regular FFO payout ratio1 for the year ended December 31, 2018 was 92.1% (79.1% including the benefit of the REIT’s DRIP program) compared to 90.7% (76.0% including the benefit of the REIT’s DRIP program) last year. The REIT’s payout ratio for the year ended December 31, 2018 was impacted by the increase in the weighted average number of Units outstanding compared to the prior year.
Net income for the year ended December 31, 2018 was $180.4 million compared to $62.9 million in 2017. The increase is due to the REIT’s significant portfolio growth in 2017, as well as fair value gains for the year ended December 31, 2018 of $143.8 million.
PROACTIVE LEASING PROGRAM
Occupancy in the industrial portfolio remained strong at 99.4% at December 31, 2018. The weighted average lease term for the portfolio is approximately 6.2 years. The REIT is proactive in addressing lease expiries well in advance of the expiry date.
The REIT completed 178,192 square feet of new deal leasing in 2018. In the fourth quarter, the REIT successfully leased 167,778 square feet of the vacancies in place at September 30, 2018. The vacancies in the Western Canada portfolio were all leased in the fourth quarter.
Part of the vacancy leased includes vacancies at two properties acquired in 2018. The REIT acquired a property in Calgary with 25,500 square feet of vacancy which was leased as of December 31, 2018. The increased revenue from this lease will improve the going in yield for the initial cost of the acquisition from 5.86% to 6.90%. The REIT acquired a property in the GTA with 27,945 square feet of vacancy in two units which were leased as of December 31, 2018. The increased revenue from the two lease deals will improve the going in yield on cost of the acquisition from 6.2% to 7.5%.
The vacancy at December 31, 2018 is comprised of one 44,672 square foot unit that has a lease commitment in place subject to obtaining a zoning variance which is expected to be granted in the first quarter of 2019, a 6,500 square foot unit that is leased as of March 2019 and the remaining 30,646 square feet is at two properties in Ottawa that were acquired in December 2018.
The REIT completed 398,492 square feet of its 2018 renewals with a very strong 92.5% retention rate. Overall, the 2018 renewals generated an average 9.5% increase in monthly rents from the expiring rent with a significant 12.7% increase over expiring rents in the REIT’s Greater Toronto Area (“GTA”) target market.
The REIT has also made significant progress, proactively completing renewals for 851,868 square feet of space expiring in 2019, an early renewal of 53,253 square feet of expiring in 2023, and expansion of 49,719 square feet of adjacent space which expires in 2019. This lease renewal and expansion includes a 20% increase in monthly rent for the total 102,972 square feet beginning in November 2019. The tenant vacating the 49,719 square feet noted above is relocating and expanding into 57,017 square feet. This expansion includes a 36% increase in the monthly rent. The 2019 renewals, early renewals and expansions have resulted in a 11.9% increase in rents with a very strong 16.1% increase for the GTA properties. The 851,868 square feet of 2019 renewals already completed leaves only 301,399 square feet or 2.3% of the total portfolio to be addressed during the balance of 2019. The REIT also renewed 349,183 square feet that was set to expire beyond 2019.
In May 2018, the tenant at the data centre property exercised its option to expand, commencing October 2018, into the remaining 59,000 square feet of the 118,000 square foot building on the same terms and conditions under its existing lease, generating a highly accretive yield above 10%.
SOLID BALANCE SHEET AND LIQUIDITY POSITION
Total assets increased to $1.8 billion at December 31, 2018, up from $1.0 billion as at December 31, 2017. Total debt was $834.2 million at December 31, 2018 compared to $515.0 million at December 31, 2017. During 2018 new mortgage financings of $209.7 million were obtained with an average 8.25 year term and an average interest rate of 4.05%. As at December 31, 2018, there was $63.6 million drawn from the available $71.5 million revolving operating facility. Also, as of December 31, 2018, there was $153.0 million of an available $153.0 million drawn on two temporary non-revolving bridge credit facilities put in place to fund acquisitions in December 2018. Subsequent to the year-end these bridge loans were refinanced with long-term ten-year mortgages (see “Subsequent Events” below).
As at December 31, 2018 the REIT’s debt leverage ratio1 was 47.0% compared to 51.3% at the end of 2017. Acquisition capacity to bring leverage to the target 50% was approximately $100 million as at December 31, 2018. Financing activities included locking in longer-term mortgages that increased the weighted average term to maturity to 4.8 years from 4.0 years last year. The weighted average effective interest rate on the REIT’s mortgage portfolio was 3.72% at December 31, 2018 compared to 3.50% last year. Debt service1 and interest coverage1 ratios were 1.79 times and 2.96 times, respectively, compared to 1.89 times and 3.24 times respectively, last year.
SUBSEQUENT EVENTS
On February 5, 2019, the REIT announced it will acquire a light industrial property in Montreal, Quebec, aggregating 236,134 square feet of GLA for $23.0 million. The acquisition will be satisfied with proceeds from the revolving operating facility.
In January and February 2019, the Trust obtained ten-year mortgages, effective March 1, 2019, for $91.0 million and $62.0 million at an interest rate of 3.93% and 3.86%, respectively. The proceeds will be used to repay the $91.0 million and $62.0 million temporary non-revolving bridge facilities put in place to acquire properties in December 2018. With the new financings the weighted average term to maturity for the total mortgage portfolio increased from 4.8 years at December 31, 2018 to 5.9 years.
INVESTOR CONFERENCE CALL
A conference call will be hosted by Summit II’s management team on Thursday, February 21, 2019 at 10:00 am EST. The telephone numbers to participate in the conference call are North America Toll Free: (800) 273-9672 and Local Toronto / International: (416) 340-2216. The live audio conference call will also be available as a webcast. To access the audio webcast please access the link on the Investor Information page on our web site at www.summitIIreit.com. The telephone numbers to listen to the call after it is completed (Instant Replay) are North American Toll Free (800) 408-3053 or Local Toronto / International (905) 694-9451. The Passcode for the Instant Replay is 3689476#. A webcast of the call will also be archived on the REIT’s web site at www.summitIIreit.com.
|
FOOTNOTE |
|
1. Non-GAAP measures refer to the “Non-GAAP Measures” section of this document, and “Section II â Key Performance Indicators â Financial Indicators” in the Management’s Discussion and Analysis for the three months and year ended December 31, 2018 for further information on non-GAAP measures (including definitions and reconciliations of the non-GAAP measures). |
FINANCIAL AND OPERATING HIGHLIGHTS
|
(in thousands of Canadian dollars) |
Three months ended December 31 |
Year ended December 31 |
||||||||
|
(except per Unit amounts) |
2018 |
2017 |
2018 |
2017 |
2016 |
|||||
|
Portfolio Performance |
||||||||||
|
Industrial occupancy (%) |
99.4% |
98.4% |
99.4% |
98.4% |
98.9% |
|||||
|
Revenue from income properties |
$ |
26,790 |
$ |
16,921 |
$ |
92,150 |
$ |
58,573 |
$ |
44,950 |
|
Property operating expenses |
8,087 |
5,153 |
27,310 |
17,996 |
14,697 |
|||||
|
Net operating income (1) |
18,703 |
11,768 |
64,840 |
40,577 |
30,253 |
|||||
|
Interest expense (finance costs) |
7,043 |
3,397 |
22,491 |
11,413 |
8,943 |
|||||
|
Net income |
59,320 |
31,237 |
180,407 |
62,900 |
24,376 |
|||||
|
Operating Performance |
||||||||||
|
FFO (1) |
12,576 |
7,794 |
43,591 |
26,960 |
19,635 |
|||||
|
Net income per unit – basic (4) |
0.667 |
0.562 |
2.319 |
1.317 |
0.758 |
|||||
|
FFO per Unit (1)(2)(3)(4) |
0.141 |
0.140 |
0.560 |
0.564 |
0.610 |
|||||
|
Regular Distributions per Unit declared to Unitholders (4) |
0.129 |
0.129 |
0.516 |
0.512 |
0.504 |
|||||
|
Special Distributions per Unit declared to Unitholders (5) |
– |
– |
0.018 |
– |
– |
|||||
|
Regular FFO payout ratio without DRIP benefit (1) |
91.3% |
92.0% |
92.1% |
90.7% |
82.6% |
|||||
|
Regular FFO payout ratio with DRIP benefit (1) |
77.2% |
74.9% |
79.1% |
76.0% |
69.1% |
|||||
|
FFO including net realized gains (1)(6) |
12,576 |
7,794 |
50,791 |
26,960 |
19,635 |
|||||
|
FFO per Unit plus net realized gain (1)(6) |
0.141 |
0.140 |
0.653 |
0.564 |
0.610 |
|||||
|
Total Distributions per Unit declared to Unitholders (4)(5) |
0.129 |
0.129 |
0.534 |
0.512 |
0.504 |
|||||
|
FFO plus net realized gain payout ratio without DRIP benefit (1)(6) |
91.3% |
92.0% |
81.8% |
90.7% |
82.6% |
|||||
|
FFO including net realized gain payout ratio with DRIP benefit (1)(6) |
77.2% |
74.9% |
70.0% |
76.0% |
69.1% |
|||||
|
Weighted average Units outstanding(2)(3)(4) |
88,959 |
55,611 |
77,803 |
47,767 |
32,178 |
|||||
|
Liquidity and Leverage |
||||||||||
|
Total assets |
1,774,604 |
1,003,239 |
1,774,604 |
1,003,239 |
500,807 |
|||||
|
Total debt (loans and borrowings) |
834,176 |
515,018 |
834,176 |
515,018 |
270,635 |
|||||
|
Weighted average effective mortgage interest rate |
3.72% |
3.50% |
3.72% |
3.50% |
3.43% |
|||||
|
Weighted average mortgage term (years) |
4.80 |
3.97 |
4.80 |
3.97 |
4.51 |
|||||
|
Leverage ratio (1) |
47.0% |
51.3% |
47.0% |
51.3% |
54.0% |
|||||
|
Interest coverage (times) (1) |
2.86 |
3.18 |
2.96 |
3.24 |
3.07 |
|||||
|
Debt service coverage (times) (1) |
1.77 |
1.90 |
1.79 |
1.89 |
1.81 |
|||||
|
Debt-to-adjusted EBIDTA (times) (1) |
11.21 |
11.90 |
13.24 |
13.89 |
9.84 |
|||||
|
Other |
||||||||||
|
Properties acquired |
16 |
21 |
24 |
31 |
8 |
|||||
|
(1) Non-GAAP measure. Refer to “Section II – Key Performance Indicators – Financial Indicators” of the MD&A for further information (including definitions and measures). |
|
(2) On June 15, 2018, approximately 13,299,750 Units were issued on completion of a public offering. On December 10, 2018, approximately 15,055,000 Units were issued on completion of a public offering. On January 31, 2017, approximately 7,423,250 Units were issued on completion of a public offering. On June 30, 2017, approximately 9,763,500 Units were issued on completion of a public offering. On December 13, 2017, approximately 14,375,000 Units were issued on completion of a public offering. |
|
(3) On June 18, 2018, approximately 3,292,091 Class B exchangeable Units were issued toward funding a property acquisition. On August 15, 2018, approximately 1,005,780 Class B exchangeable Units were issued toward funding a property acquisition. |
|
(4) Includes REIT Units and Class B exchangeable Units (collectively, the “Units”). |
|
(5) On the sale of a 75% interest in four properties, the Trustees approved a special distribution of $0.018 per Unit payable to shareholders of record May 16, 2018 which was paid May 31, 2018. |
|
(6) The realized gain on sale of investment property is calculated as net proceeds on sale less the actual costs incurred to initially acquire the property and the capital and leasing cost incurred since ownership. |
Summit II’s Consolidated Financial Statements and MD&A for the three months and year ended December 31, 2018 are available on the REIT’s website at www.summitIIreit.com.
About Summit II
Summit Industrial Income REIT is an unincorporated open-end trust focused on growing and managing a portfolio of light industrial and other properties across Canada. Summit II’s units are listed on the TSX and trade under the symbol SMU.UN. For more information, please visit our web site at www.summitIIreit.com.
Non-GAAP Measures
The REIT prepares and releases condensed consolidated interim financial statements prepared in accordance with IFRS (GAAP). In this release, the REIT discloses and discusses certain non-GAAP financial measures, including FFO, FFO per Unit, net operating income (NOI), interest coverage ratio, debt service coverage ratio and capitalization rate. The non-GAAP measures are further defined and discussed in the MD&A for the year ended December 31, 2018 and filed on SEDAR, which should be read in conjunction with this release. Since these measures are not determined by IFRS, such measures may not be comparable to similar measures reported by other issuers. The REIT has presented such non-GAAP measures as management believes the measures are a relevant measure of the ability of the REIT to earn and distribute cash returns to Unitholders and to evaluate the REIT’s performance. These non-GAAP measures should not be construed as alternatives to net income (loss) or cash flow from operating activities determined in accordance with GAAP as an indicator of the REIT’s performance. Please refer to “Section II â Key Performance Indicators â Financial Indicators” in the REIT’s MD&A for the year ended December 31, 2018.
Caution Regarding Forward Looking Information
This news release contains forward-looking statements and forward-looking information within the meaning of applicable securities laws. The use of any of the words “expect”, “anticipate”, “continue”, “estimate”, “objective”, “ongoing”, “may”, “will”, “project”, “should”, “believe”, “plans”, “intends”, “goal” and similar expressions are intended to identify forward-looking information or statements. More particularly and without limitation, this news release contains forward looking statements and information concerning the goal to build Summit II’s property portfolio. The forward-looking statements and information are based on certain key expectations and assumptions made by Summit II, including general economic conditions. Although Summit II believes that the expectations and assumptions on which such forward-looking statements and information are based are reasonable, undue reliance should not be placed on the forward-looking statements and information because Summit II can give no assurance that they will prove to be correct. By its nature, such forward-looking information is subject to various risks and uncertainties, which could cause the actual results and expectations to differ materially from the anticipated results or expectations expressed. These risks and uncertainties include, but are not limited to, tenant risks, current economic environment, environmental matters, general insured and uninsured risks and Summit II being unable to obtain any required financing and approvals. Readers are cautioned not to place undue reliance on this forward-looking information, which is given as of the date hereof, and to not use such forward-looking information for anything other than its intended purpose. Summit II undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by law.
SOURCE Summit Industrial Income REIT
View original content: http://www.newswire.ca/en/releases/archive/February2019/20/c5516.html