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Summit Industrial Income REIT Announces Strong Performance Through First Nine Months of 2019

TORONTO , Nov. 13, 2019 /CNW/ - Summit Industrial Income REIT ("Summit II" or the "REIT") (SMU-UN.TO) announced today very strong operating and financial performance for the three and nine months ended September 30, 2019 .

Nine Months 2019 Highlights:

  • Revenues up 54.5% on portfolio growth, high stable occupancies and rent increases.
  • Industrial occupancy strong at 99.5% with average lease term of 5.8 years and contractual rent steps of 1.5% per year.
  • Total net rental income up 59.0% on revenue increase, organic growth and strong operating performance.
  • Same property net operating income ("NOI")1 increased 5.5% with Toronto , Montreal and Alberta contributing 6.1%, 2.3%, and 14.3% respectively.
  • Funds from operations ("FFO")1 increased 54.6% to $47.8 million .
  • Monthly cash distributions increased 4.7% to $0.045 per unit or $0.54 annualized.
  • Completed internalization of property and asset management functions to eliminate fees, reduce costs and enhance ability to make more accretive acquisitions.
  • Completed successful $149.5 million bought-deal equity offering June 12, 2019 .
  • Sold 50% interest in the data centre property for total proceeds of $107.5 million and realized gain of $41.5 million or $0.35 per Unit to fund growth in target markets.
  • Declared special distribution of $0.070 per Unit applicable to Unitholders of record on September 19, 2019 and paid on October 2, 2019 .
  • Proactively completed 1,399,215 sq. ft. of 2019 renewals with a strong retention rate of 99.2%. Only 0.2% of the total portfolio remains to be renewed in 2019.
  • 2019 renewals, early renewals and lease expansions generate 11.1% increase in rents (17.8% in GTA).
  • Acquired two new light industrial properties in newly-created industrial park in Guelph , part of the GTA region, totaling 431,930 sq. ft. for $57.0 million
  • Acquired 50% interest in 49 acres of development land in same Guelph industrial park for $13.8 million , entered into 50/50 joint venture to develop estimated 774,000 sq. ft. of Class A space.
  • Included in TSX30, recognizing the REIT as one of the thirty top-performing issuers on Toronto Stock Exchange over the last three years.


Subsequent Events:

  • Completed successful $230.1 million bought-deal equity offering October 17, 2019 .
  • Insider ownership after the October 17, 2019 offering is 10%.
  • Acquired 37 light industrial properties in Alberta totaling over 3.3 million square feet of GLA for a purchase price of approximately $588.0 million at a 5.5% cap rate.
  • Established a new $382.0 million bridge credit facility to acquire the Alberta industrial portfolio.
  • Announced the acquisition of a new light industrial property in Alberta totaling 121,456 square feet of GLA for a purchase price of approximately $15.9 million at a 6.25% cap rate and expected closing date of December 2, 2019 .
  • Announced the acquisition of a Class A property in the GTA totaling 128,235 square feet of GLA for a purchase price of $25.5 million with an expected closing date in November 2019 .


"Including the acquisitions to be completed subsequent to the end of the quarter, this year we will have acquired a total of 42 light industrial properties and one property under development, adding approximately 4.2 million square feet to the portfolio for a total cost of approximately $730 million and increasing our portfolio asset value to over $2.5 billion ," commented Paul Dykeman , Chief Executive Officer. "These quality acquisitions strengthen our presence in our target markets, enhance the diversification of our asset base, and drive reduced costs through economies of scale and operating synergies going forward. We look for another record year in 2019 and further growth and strong operating performance in the years ahead."

"We were also pleased to generate approximately $145.0 million in capital from the sale of our data centres and the repaying of associated loans, demonstrating how we are opportunistic in our capital deployment and recycling strategies. The funds will be accretively deployed in our growth and development initiatives primarily in our core GTA industrial business," Mr. Dykeman continued. "The Special Distribution resulting from the realized gain on the sale is another example of our commitment to enhancing long-term value for our Unitholders."

PORTFOLIO GROWTH AND STRONG OPERATING PEFORMANCE CONTINUES
Revenue from income producing properties for the three and nine-month periods ended September 30, 2019 , rose 43.4% and 54.5% to $33.1 million and $101.0 million , respectively, compared to the same periods in 2018.  The increases are due primarily to acquisitions completed over the prior twelve months, continuing strong occupancies and increased rents.

Net rental income for the three and nine-month periods ended September 30, 2019 increased 46.2% and 59.0% to $24.7 million and $73.4 million , respectively, compared to the same periods in 2018. The growth in net rental income is due to a strong increase in same property NOI, higher overall rental rates on leasing activities, contractual steps in rent, and accretive acquisitions over the prior twelve months.    

For properties acquired prior to January 1, 2018 and owned during both nine-month periods, same property NOI rose 6.0% and 5.5% for the three and nine months ended September 30, 2019 , respectively, compared to the prior year periods. For the REIT's target GTA, Montreal and Alberta portfolios, same property NOI for the first nine months of 2019 rose 6.1%, 2.3% and 14.3%, respectively, compared to last year. Same property NOI represented approximately 55.3% of total NOI and 59.7% of total GLA for the nine months ended September 30, 2019 .

For the three and nine-month periods ended September 30, 2019 , Funds from Operations ("FFO") were $16.5 million ( $0.138 per Unit) and $47.8 million ( $0.439 per Unit), respectively, compared to $11.7 million ( $0.138 per Unit) and $30.9 million ( $0.418 per Unit), respectively, in the same prior year periods. The increase in FFO is due primarily to acquisitions completed over the prior twelve months, partially offset by the sale of a 75% interest in four properties in May 2018 .

The REIT's FFO payout ratio through the first nine months of 2019 was 90.5% (80.2% including the benefit of the REIT's DRIP program) compared to 92.7% (80.1% including the benefit of the REIT's DRIP program) during the same period in 2018. As a result of the equity offering in June and the sale of the data centres in September, the REIT has operated at lower leverage than targeted. As the impact of the acquisitions already announced for the fourth quarter are completed, the expectation is the FFO per Unit will increase and FFO payout ratio will decrease over the next two quarters. Including the net realized gain and total distributions on the sale of the REIT's 50% interest in its data centre properties in September, and the resulting special distribution, the REIT's payout ratio was 57.0% for the nine months ended September 30, 2019 .

PROACTIVE LEASING PROGRAM
Occupancy in the industrial portfolio was 99.5% at September 30, 2019 with a weighted average lease term of approximately 5.8 years. The REIT continues to be proactive in addressing lease expiries well in advance of the expiry date.

To date in 2019, the REIT completed 1,399,125 square feet of its 2019 renewals with a very strong retention rate of 99.2%. Overall, the 2019 renewals generated an average 11.1% increase in monthly rents from the expiring rent with a significant 17.8% increase over expiring rents in the REIT's GTA target market. As at September 30, 2019 , only 0.2% of the portfolio remains to be renewed through the balance of 2019.

Also, to date in 2019, the REIT has completed renewals of 840,662 square feet that were set to expire in 2020. This reduces the 2020 lease expiries to 5.0% of the total portfolio. Overall, the 2020 renewals generated an average 9.2% increase in monthly rents from the expiring rent with a significant 17.4% increase over expiring rents in the GTA market. The REIT has also completed an early renewal of 322,187 square feet that was set to expire in 2022.

SOLID BALANCE SHEET AND LIQUIDITY POSITION
Total assets increased to $1.95 billion at September 30, 2019 , up from $1.77 billion as at December 31, 2018 . Total debt was $735.1 million at September 30, 2019 compared to $834.2 million at December 31, 2018 . Financing activities through the first nine months of 2019 included locking in longer-term mortgages which added a full year of average term to maturity which is now 5.9 years compared to 4.8 years at the prior year end.

Proceeds of the $91.0 million and $62.0 million in mortgage financing completed during March 2019 were used to repay the temporary non-revolving credit facilities put in place to acquire properties in December 2018 . During the first quarter of 2019, the revolving operating facility was increased to $115.0 million , subject to requisite borrowing base security. During the second quarter of 2019, the revolving operating facility was subsequently increased to $150.0 million , subject to requisite borrowing base security. There is currently registered security in place to draw up to $124.9 million . Proceeds from the June 2019 offering were used to repay $119.5 million on the revolving operating facility. As at September 30, 2019 , there was no amount ( December 31, 2018 - $63.6 million ) of an available $124.9 million ( December 31, 2018 - $71.5 million ) was drawn from the revolving operating facility.  The Trust's exposure to floating rate debt is approximately 0.9% of total debt as at September 30, 2019 ( December 31, 2018 – 33.5%). In November 2019 , the Trust established a new $382.0 million bridge credit facility in connection with acquisitions completed that month (See Subsequent Events below).

As at September 30, 2019 the REIT's debt leverage ratio was 37.8% compared to 47.0% at the end of 2018. Acquisition capacity to bring leverage to the target 50% was approximately $475.0 million as at September 30, 2019 . The weighted average effective interest rate on the REIT's mortgage portfolio was 3.69% at September 30, 2019 compared to 3.72% at December 31, 2018 . Debt service and interest coverage ratios were 1.77 times and 2.81 times, respectively, compared to 1.77 times and 2.86 times respectively, at December 31, 2018 .

DISTRIBUTION INCREASE
On May 7, 2019 the REIT announced a 4.7% increase in monthly cash distributions to $0.045 per Unit ( $0.54 per Unit annualized).

SPECIAL DISTRIBUTION
As a result of the net realized gain of $41.5 million or $0.35 per Unit created on the sale of the Trust's 50% interest in the data centre in September 2019 , the Trustees approved a special distribution of $0.070 per Unit payable to shareholders of record September 19, 2019 paid on October 2, 2019 . The total amount of this special distribution was $8.3 million or $7.7 million net of DRIP participation.

SUBSEQUENT EVENTS
On September 9, 2019 , the REIT announced it will acquire 100% of a brand-new light industrial property in Alberta totaling 121,456 square feet of GLA for a purchase price of $15.9 million utilizing funds from the revolving operating facility. Closing is anticipated on December 2, 2019 .

On October 7, 2019 , the REIT announced it entered into a binding purchase and sale agreement to acquire 100% of a portfolio of 37 light industrial properties in Alberta totaling over 3.3 million square feet of GLA (the "Acquisitions"). Of the 37 properties acquired, 22 of the properties (1.8 million square feet of GLA) are in Edmonton , 14 properties (1.4 million square feet of GLA) are in Calgary , and one property is in Grand Prairie. The purchase also includes one parcel of land in Edmonton , which is currently leased. The REIT will pay approximately $588.0 million for the portfolio, and will finance the Acquisitions by a combination of gross proceeds raised from a public offering as described below, $332.2 million from a new bridge credit facility established in connection with the Acquisitions and the balance from proceeds generated by the recent sale of its data centre property. The closing of the Acquisitions occurred on November 1, 2019 .

On October 17, 2019 , the REIT announced it completed a public offering of 17,836,500 at a price of $12.90 per subscription receipt for total gross proceeds of approximately $230.1 million . The offering incurred costs of $9.8 million for net proceeds of approximately $230.1 million . The net proceeds from the offering are to fund, in part, the above noted acquisitions. 

On October 28, 2019 , 357,408 Class B exchangeable units were exchanged, at the option of the holder, into Units of the REIT on a one-for-one basis. The liability in an amount equal to the fair value of units at the time of exchange will be transferred to unit value in equity.

On October 31 the REIT announced it had waived conditions and would be acquiring a 128,235 square foot Class A light industrial property in the GTA for a purchase price of $25.5 million funded by the assumption of a $10.6 million mortgage and cash from its revolving credit facility. Closing is anticipated in November 2019 .

INVESTOR CONFERENCE CALL
A conference call will be hosted by Summit II's management team on Thursday, November 14, 2019 at 9.00 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#. The Instant Reply will be available until midnight December 14, 2019 . 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 – Key Performance Indicators – Financial Indicators" in the Management's Discussion and Analysis for the three and nine month periods ended September 30, 2019 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 September

Nine months ended September

(except per Unit amounts)

2019

2018

2019

2018






Portfolio Performance





Industrial occupancy (%)

99.5%

98.4%

99.5%

98.4%

Revenue from income properties

$

33,103

$

23,081

$

100,964

$

65,360

Property operating expenses

8,440

6,207

27,609

19,223

Net rental income

24,663

16,874

73,355

46,137

Interest expense (finance costs)

8,276

5,801

26,185

15,448

Net income (2)

108,449

13,920

81,249

121,087






Operating Performance





FFO (1)

16,470

11,660

47,827

30,928

Net income per unit - basic (5)

0.907

0.164

0.745

1.635

FFO per Unit (1)(3)(4)(5)

0.138

0.138

0.439

0.418

Regular Distributions per Unit declared to Unitholders (5)

0.135

0.129

0.397

0.387

Special Distributions per Unit declared to Unitholders (6)

0.070

-

0.070

0.018

Regular FFO payout ratio without DRIP benefit (1)

98.0%

93.7%

90.5%

92.7%

Regular FFO payout ratio with DRIP benefit (1)

90.4%

82.4%

80.2%

80.1%






FFO including net realized gains (1)(7)

57,948

11,312

89,305

37,779

FFO per Unit plus net realized gain (1)(7)

0.485

0.134

0.819

0.510

Total Distributions per Unit declared to Unitholders (5)

0.205

0.129

0.467

0.405

FFO plus net realized gain payout ratio without DRIP benefit (1)(7)

42.3%

96.6%

57.0%

79.4%

FFO including net realized gain payout ratio with DRIP benefit (1)(7)

25.7%

84.9%

43.0%

68.4%






Weighted average Units outstanding(3)(4)(5)

119,594

84,666

109,049

74,044






Liquidity and Leverage





Total assets

1,947,008

1,338,406

1,947,008

1,338,406

Total debt (loans and borrowings and lease liability)

735,130

594,407

735,130

594,407

Weighted average effective mortgage interest rate

3.69%

3.72%

3.69%

3.72%

Weighted average mortgage term (years)

5.98

5.34

5.98

5.34

Leverage ratio (1)

37.8%

44.4%

37.8%

44.4%

Interest coverage (times) (1)

2.95

3.08

2.81

2.98

Debt service coverage (times) (1)

1.79

1.87

1.77

1.80

Debt-to-adjusted EBIDTA (times) (1)

7.55

8.96

7.63

10.03






Other





Properties acquired

2

3

3

8

Non-core properties disposed

1

-

1

-

Number of properties

110

92

110

92

Total GLA (in thousands of square feet)

14,068

10,069

14,068

10,069






(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) Includes non-recurring costs associated with the property and asset management internalization costs of $96.5 million.

(3) On May 17, 2019, 6,666,666 Units were issued on completion of the internalization of management. On June 12, 2019, 11,960,000
Units were issued on completion of a public offering. On June 15, 2018, 13,299,750 Units were issued on completion of a public offering
On December 10, 2018, 15,055,000 Units were issued on completion of a public offering.

(4) On June 18, 2018, 3,292,091 Class B exchangeable Units were issued toward funding a property acquisition. On August 15, 2018,

1,005,780 Class B exchangeable units were issued toward funding a property acquisition. On April 12, 2019, 3,292,091 Class B exchangeable

units were exchanged into REIT Units.

(5) Includes REIT Units and Class B exchangeable units (collectively, the "Units").

(6) On the sale of a 50% interest in it data centre property and repayment of mezzanine loans, the Trustees approved a special distribution of $0.070

per Unit payable to shareholders of record September 19, 2019 which was paid October 2, 2019. 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.

(7) 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 Condensed Consolidated Interim Financial Statements and MD&A for the three and nine months ended September 30, 2019 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 three and nine months ended September 30, 2019 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 – Key Performance Indicators – Financial Indicators" in the REIT's MD&A for the three and nine months ended September 30, 2019 .

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


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