Subjects: ERN, DIV
Summit Industrial Income REIT Announces Strong Growth in Third Quarter 2017
TORONTO, Nov. 7, 2017 /CNW/ - Summit Industrial Income REIT ("Summit II" or the "REIT") (TSX: SMU.UN) announced today strong growth and solid operating performance for the three and nine months ended September 30, 2017.
Recent Highlights:
- Revenue from income producing properties up 29.4% from acquisitions and strong operating performance.
- Occupancy strong at 99.2% with a 6.1 year average lease term, and 1.6% annual contractual rent steps.
- Net income rises to $31.7 million ($0.702 per Unit) due to acquisitions, strong operating performance, and fair value gains on the property portfolio.
- Funds from operations ("FFO")1 up 35.6% for nine months ended September 30, 2017.
- Acquired ten income-producing properties totaling 2.0 million sq. ft. for $179.2 million at 6.10% average cap rate.
- Completed $72.7 million in new mortgage financings for five-year terms at a 3.21% average interest rate.
- Completed two successful bought-deal equity offerings for gross proceeds of $115.0 million.
- Acquisition capacity at $134.0 million at September 30, 2017.
- Monthly cash distributions increased by 2.4% in May 2017 to $0.043 per Unit or $0.516 annualized.
- Only 0.7% of 2017 lease expiries remain as at September 30, 2017.
- The interest of the Manager and other insiders remains strongly aligned with Unitholders through 10.2% ownership of REIT Units outstanding.
Subsequent Events Highlights:
- On October 18, 2017 waived conditions on a 50% interest in a 70,000 sq. ft. Montreal property for $3.1 million.
- On October 31, 2017 waived conditions on a 158,831 sq. ft. Ontario property for $14.3 million.
- Completed two new mortgage financings for a total of $25.7 million for five-year terms at average interest rate of 3.5%.
"Our strong portfolio growth over the last twelve months has made a significant and growing contribution to our results in the third quarter and first nine months of 2017," commented Paul Dykeman, Chief Executive Officer. "Looking ahead, we continue to evaluate additional acquisition and joint-venture development opportunities that we are confident will contribute to another record year in 2017 and maintain our track record of strong accretive growth well into the future."
STRONG OPERATING AND FINANCIAL RESULTS
Revenue from income producing properties rose 29.1% and 29.4% for the three and nine months ended September 30, 2017, respectively, compared to the same periods last year due primarily to the acquisition of ten income producing properties completed over the last twelve months, continuing strong occupancies and increased monthly rents. Occupancy remained essentially full at 99.2% as at September 30, 2017, consistent with the prior year.
Net income for the three and nine months ended September 30, 2017 increased to $13.2 million and $31.7 million, respectively, compared to $6.4 million and $14.5 million, respectively, for the same periods in 2016. The increases were due to accretive acquisitions completed over the prior twelve months, and fair value gains for the three and nine months ended September 30, 2017 of $6.0 million and $12.7 million, respectively, compared to fair value gains of $1.1 million and $1.2 million, respectively, for the same periods in 2016.
Net operating income ("NOI")1 for the three and nine months ended September 30, 2017 increased 31.3% and 31.5%, respectively, compared to the same periods in 2016 due to higher rental rates, contractual steps in rent and accretive acquisitions completed over the last twelve months.
For the three and nine months ended September 30, 2017, FFO was $7.2 million ($0.138 per Unit1) and $19.2 million ($0.425 per Unit), respectively, compared to $5.3 million ($0.153 per Unit) and $14.1 million ($0.452 per Unit), respectively, in the same prior year periods. The increase in FFO in 2017 is due primarily to acquisitions completed over the prior twelve months. A reconciliation of FFO to Net Income can be found in the REIT's MD&A for the three and nine months ended September 30, 2017. Per Unit amounts in 2017 were impacted by the 50.7% and 44.4% increase in the weighted average number of Units outstanding for the three and nine months ended September 30, 2017, respectively, compared to the same periods last year due to two successful equity offerings in January and June 2017.
The REIT's FFO payout ratio1 through the third quarter of 2017 was 93.8% (81.4% including the benefit of the REIT's distribution reinvestment plan ("DRIP") program) compared to 82.2% (69.8% including the benefit of the REIT's DRIP program) during the same period in 2016. The REIT's FFO payout ratio through the nine months ended September 30, 2017, was 90.2% (76.5% including the benefit of the REIT's DRIP program) compared to 83.6% (69.7% including the benefit of the REIT's DRIP program) during the same period in 2016.
FFO payout ratios in 2017 were impacted by a one-time bad debt including NOI downtime associated with a tenant failure in the second quarter of 2017. On June 1, 2017 this space was leased to a new tenant with leasing costs of $259,000 and a 4.2% increase in the rental rate. During the third quarter of 2017, FFO was impacted by approximately $0.018 per Unit (approximately 11% of the payout ratio) as the June 30, 2017 equity offering proceeds are not expected to be fully invested until midway through the fourth quarter of 2017.
ACTIVE LEASING PROGRAM
The portfolio occupancy at September 30, 2017 was essentially full at 99.2%. The weighted average lease term for the portfolio increased to approximately 6.1 years at September 30, 2017 with leases containing contractual steps in rent of approximately 1.6% per year over this term. The REIT continues to be proactive in addressing lease expiries well in advance of their expiry date. During the first nine months of 2017 approximately 178,352 square feet of lease renewals were completed, as well as 92,560 square feet of new leases, for a total of 270,912 square feet compared to 583,572 square feet in the first nine months of 2016. As a result, only 0.7% of the 2017 lease expiries remain as at September 30, 2017, and 7.2% of lease expiries remain in 2018, contributing to the stability of the REIT's cash distributions. In addition, the REIT proactively completed an early renewal on 163,000 square feet set to expire in 2019.
Leasing costs for the three and nine months ended September 30, 2017, were $281,000 and $1.8 million, respectively, compared to $62,000 and $1.9 million for the same periods last year. For the three and nine months ended September 30, 2017, straight lining of rents was $359,000 and $979,000, respectively, compared to $292,000 and $798,000, respectively, in the same prior year periods.
STRONG PORTFOLIO GROWTH
During the first nine months of 2017 the REIT acquired ten light industrial properties in its targeted Greater Toronto Area, Quebec and Calgary markets totaling over 2.0 million square feet of gross leasable area for a total purchase price of $179.2 million generating an average capitalization rate of 6.1%. Subsequent to the quarter end the REIT announced it would acquire a 50% interest in a 70,000 square foot light industrial property in Laval, Quebec and 100% of a 158,831 square foot property in Pickering, Ontario. With the completion of these acquisitions, the REIT's total portfolio as at November 7, 2017 will have grown to interests in 65 income producing properties totaling 7.4 million square feet of gross leasable area.
SOLID BALANCE SHEET AND LIQUIDITY POSITION
Total assets increased to $705.7 million at September 30, 2017, up from $500.8 million at December 31, 2016 due to the acquisitions of interests in ten income producing properties during the first nine months of 2017 as well as fair value gains of $12.7 million mainly attributable to increasing market values of the REIT's properties in the Greater Toronto Area.
Total debt was $344.4 million at September 30, 2017 compared to $270.6 million at December 31, 2016. As of September 30, 2017, approximately $30.1 million was drawn on the REIT's $48.7 million revolving operating facility. The REIT's exposure to floating rate debt was 9.8% of total debt as at September 30, 2017. During the third quarter of 2017, $29.0 million in mortgage financing was obtained on the REIT's Pointe Claire, Quebec property at a variable interest of monthly BA-CDOR plus 1.40% with a term to maturity of seven years. The interest rate was effectively fixed at 3.79% by entering into a seven-year interest rate swap agreement at the same time.
On June 30, 2017, the REIT completed a public offering of 9,763,000 Units at a price of $7.07 per Unit for gross proceeds of $69.0 million. On January 31, 2017, it completed a public offering of 7,423,250 Units at a price of $6.20 per Unit for gross proceeds of $46.0 million.
As of September 30, 2017, the REIT's debt leverage ratio1 was 48.8% compared to 54.0% at December 31, 2016. Average leverage during the third quarter of 2017 was 46.5% compared to 53.0% for the same period in 2016. Acquisition capacity was approximately $134.0 million as at September 30, 2017. The weighted average effective interest rate on the REIT's mortgage portfolio was 3.38% at September 30, 2017, down from 3.43% at the prior year end, with a weighted average term to maturity of 4.3 years, compared to 4.5 at the prior year end. Debt service1 and interest coverage1 ratios were 1.89 times and 3.27 times, respectively, compared to 1.80 times and 3.05 times respectively, at December 31, 2016.
DISTRIBUTION INCREASE
On May 9, 2017, the Board of Trustees approved a 2.4% increase in monthly cash distributions to $0.043 per Unit, or $0.516 per Unit on an annualized basis. The increase applied to unitholders of record on May 31, 2017.
SUBSEQUENT EVENTS
In October 2017, the REIT obtained new mortgages on two Greater Toronto Area properties, one with a five-year term for $10.0 million at an interest rate of 3.51% and a second with a five-year term for $15.7 million at an interest rate of 3.52%.
On October 18, 2017, the REIT waived conditions on a 50% interest in a 70,000 square foot light industrial property located in Laval, Quebec for $3.1 million. The REIT is purchasing the property with its Quebec joint venture partner. The acquisition will be satisfied by a new mortgage of $2.0 million with a term of two years and an expected interest rate of 3.3% and the balance from the REIT's operating facility, generating a capitalization rate of approximately 6.42%. Closing is expected on or before November 16, 2017.
On October 31, 2017, the REIT waived conditions on and will acquire 100% of a 158,831 square foot industrial warehouse on a 7.8 acre site located in Pickering, Ontario. The REIT will pay approximately $14.3 million for the property, financed by the operating credit facility, generating a going-in capitalization rate of approximately 6.07%. Closing of the acquisition is expected on or before November 15, 2017.
On October 2, 2017, the REIT reserved an additional 2,628,604 Units for future issuance under the Distribution Reinvestment Plan.
INVESTOR CONFERENCE CALL
A conference call will be hosted by Summit II's management team on Wednesday, November 8, 2017 at 9:00 am ET. The telephone numbers to participate in the conference call are North America Toll Free: (866) 225-0198 and Local Toronto / International: (416) 340-2218. 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 4025209#. 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 Q3 2017 Management's Discussion and Analysis for the three and nine month periods ended September 30, 2017 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) | ||||||||
|
(except per Unit amounts) |
Three months ended September 30 |
Nine months ended September 30 | ||||||
|
2017 |
2016 |
2017 |
2016 | |||||
|
Portfolio Performance |
||||||||
|
Occupancy (%) |
99.2% |
99.2% |
99.2% |
99.2% | ||||
|
Revenue from income properties |
$ |
14,863 |
$ |
11,516 |
$ |
41,652 |
$ |
32,184 |
|
Property operating expenses |
4,389 |
3,482 |
12,843 |
10,268 | ||||
|
Net operating income (1) |
10,474 |
8,034 |
28,809 |
21,916 | ||||
|
Interest expense (finance costs) |
2,755 |
2,306 |
8,016 |
6,561 | ||||
|
Net income |
13,169 |
6,392 |
31,663 |
14,546 | ||||
|
Operating Performance |
||||||||
|
FFO (1) |
7,220 |
5,338 |
19,166 |
14,134 | ||||
|
Net income per unit - basic and diluted |
0.251 |
0.184 |
0.702 |
0.465 | ||||
|
FFO per Unit (1)(2) |
0.138 |
0.153 |
0.425 |
0.452 | ||||
|
Regular Distributions per Unit declared to Unitholders |
0.129 |
0.126 |
0.383 |
0.378 | ||||
|
Regular FFO payout ratio without DRIP benefit (1) |
93.8% |
82.2% |
90.2% |
83.6% | ||||
|
Regular FFO payout ratio with DRIP benefit (1) |
81.4% |
69.8% |
76.5% |
69.7% | ||||
|
Total Distributions per Unit declared to Unitholders |
0.129 |
0.126 |
0.383 |
0.378 | ||||
|
Weighted average Units outstanding(2) |
52,508 |
34,821 |
45,124 |
31,252 | ||||
|
Liquidity and Leverage |
||||||||
|
Total assets |
705,654 |
493,645 |
705,654 |
493,645 | ||||
|
Total debt (loans and borrowings) |
344,416 |
269,359 |
344,416 |
269,359 | ||||
|
Weighted average effective mortgage interest rate |
3.38% |
3.43% |
3.38% |
3.43% | ||||
|
Weighted average mortgage term (years) |
4.25 |
4.75 |
4.25 |
4.75 | ||||
|
Leverage ratio (1) |
48.8% |
54.6% |
48.8% |
54.6% | ||||
|
Interest coverage (times) (1) |
3.49 |
3.19 |
3.27 |
3.03 | ||||
|
Debt service coverage (times) (1) |
1.96 |
1.87 |
1.89 |
1.80 | ||||
|
Other |
||||||||
|
Properties acquired |
3 |
3 |
10 |
8 | ||||
|
Non-core properties disposed |
- |
- |
- |
- | ||||
|
(1) |
Non-GAAP measure. Refer to the "Non-GAAP Measures" section of this document and "Section II - Key Performance Indicators - Financial Indicators" of the MD&A for the three and nine month periods ended September 30, 2017 for further information (including definitions and measures). |
|
(2) |
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 June 17, 2016, approximately 5,650,000 Units were issued on completion of a public offering. FFO per Unit amounts were temporarily impacted by approximately $0.015 per Unit due to the January 31, 2017 equity offering and the fact that the funds from the offering were not fully invested until April 7, 2017. During the third quarter of 2017, FFO has been impacted by approximately $0.018 per Unit as the June 30, 2017 equity offering funds are not expected to be fully invested until midway through the fourth quarter. |
Summit II's Interim Consolidated Financial Statements and MD&A for the three and nine months ended September 30, 2017 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 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 month periods ended September 30, 2017 dated November 7, 2017 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 month periods ended September 30, 2017.
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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