Summit Industrial Income REIT Accelerates Growth in 2017, Generates Record Results

TORONTO, Feb. 20, 2018 /CNW/ - Summit Industrial Income REIT ("Summit II" or the "REIT") (TSX: SMU.UN) announced today accelerated growth and strong operating and financial results for the three months and year ended December 31, 2017.

Highlights:

• Acquired interests in 30 light industrial properties and one data centre totaling 3.6 million sq. ft. for acquisition costs of $409.5 million at overall cap rate¹ of 6.2%.
• Acquisitions financed by three bought-deal equity offerings for gross proceeds of $218.5 million and $209.1 million in new debt financings at 3.35% average fixed interest rate with five-year term to maturity.
• Strengthened and diversified portfolio with entry into high-yield data centre market through new joint venture partnership with Urbacon, Canada's most experienced developer and manager of data centre properties.
• Acquisitions program highly successful, increasing portfolio size by 69.2%.
• Increased presence in key target markets with GTA and GMA representing 60% and 22%, respectively of total portfolio.
• Revenues up 30.3% on acquisitions, solid organic growth.
• Industrial occupancy strong at 98.4% with a 5.8 year weighted average lease term and 1.5% annual contractual rent increases.
• Funds from operations ("FFO") ¹ up 37.3% driven by revenue growth and strong operating performance.
• Cash distributions increased 2.4% in May 2017 to $0.516 per Unit on an annualized basis.
• 100% of 2017 distributions tax deferred as a return of capital.
• Manager and Insiders fully aligned with 8.3% interest in REIT Units outstanding.

"2017 was another year of record financial and operating performance as we significantly increased the size and scale of our property portfolio while leveraging the proven experience of our management team to generate solid organic growth," commented Paul Dykeman, Chief Executive Officer. "Looking ahead, we are confident we have the assets and the people to capitalize on continuing strong market fundamentals to further accelerate our growth for the long-term benefit of our Unitholders."

PORTFOLIO GROWTH & DIVERSIFICATION
For the year ended December 31, 2017 the REIT acquired interests in 30 light industrial properties and one data centre property primarily located in its targeted Greater Toronto Area ("GTA") and Greater Montreal Area ("GMA") markets totaling over 3.6 million square feet of gross leasable area for a total acquisition costs of $409.5 million generating an average capitalization rate of 6.2%. With the completion of these acquisitions, at December 31, 2017 the REIT owned interests in 84 income producing properties totaling 8.9 million square feet of gross leasable area. Approximately 60% and 22% of the portfolio's total square feet are located in the GTA and the GMA, respectively. Total assets as at December 31, 2017 were $1.0 billion.

On December 22, 2017 the REIT further strengthened and diversified its property portfolio by entering into a joint venture partnership with Urbacon Montreal Limited Partnership ("Urbacon") to develop, own and operate high-yielding digital data centres in key markets across Canada. Summit has exclusive rights to participate in Urbacon's future data centre projects in Canada. Urbacon is Canada's most experienced developer, and manager of data centre properties.

GROWTH GENERATES STRONG OPERATING AND FINANCIAL RESULTS
Revenue from income producing properties rose 32.5% and 30.3% for the three months and year ended December 31, 2017, respectively, compared to the same periods last year due primarily to the strong portfolio growth in 2017, continuing strong occupancies, and increased rents. Occupancy remained essentially full at 98.4% as at December 31, 2017.

Net operating income ("NOI")¹ for the three and nine months ended December 31, 2017 increased 41.1% and 34.1%, respectively, compared to the same periods in 2016 due to higher rental rates, contractual steps in rent and accretive acquisitions completed through the year.

For the three months and year ended December 31, 2017, FFO was $7.8 million ($0.140 per Unit¹) and $27.0 million ($0.564 per Unit), respectively, compared to $5.5 million ($0.157 per Unit) and $19.6 million ($0.610 per Unit), respectively, in the same prior year periods. The increase in FFO in 2017 is due primarily to acquisitions completed during the year and strong operating performance. A reconciliation of FFO to Net Income can be found in the REIT's MD&A for the three months and year ended December 31, 2017. The REIT's FFO payout ratio¹ for the year ended December 31, 2017, was 90.7% (76.0% including the benefit of the REIT's DRIP program) compared to 82.6% (69.1% including the benefit of the REIT's DRIP program) in 2016.

Per Unit amounts and the REIT's FFO payout ratio in 2017 were impacted by the 48.4% increase in the weighted average number of Units outstanding for the year ended December 31, 2017 compared to the prior year due to three successful equity offerings in January, June and December 2017, and the timing of fully investing the net proceeds from these equity offerings. During the year, the impact on FFO per Unit due to the timing of fully investing the offering funds was approximately $0.05 per Unit. Also impacting FFO per Unit in 2017 was a one-time bad debt including NOI downtime ($0.003 per Unit) associated with a tenant failure in the second quarter of 2017. On June 1, 2017 this space was leased to a new tenant.

Net income for the three months and year ended December 31, 2017 was $31.2 million and $62.9 million, respectively, compared to $9.8 million and $24.4 million, respectively, for the same periods in 2016. The increases were due to the REIT's significant portfolio growth in 2017, as well as fair value gains for the three months and year ended December 31, 2017, of $23.5 million and $36.2 million, respectively, compared to fair value gains of $4.4 million and $5.6 million, respectively, for the same periods in 2016.

ACTIVE LEASING PROGRAM
Portfolio occupancy at December 31, 2017 was essentially full at 98.4%. The weighted average lease term for the portfolio was 5.8 years at December 31, 2017 with leases containing contractual steps in rent of approximately 1.5% per year over the term. The REIT continues to be proactive in addressing lease expiries well in advance of their expiry date. During 2017 approximately 385,157 square feet of lease renewals were completed, as well as 130,946 square feet of new leases, for a total of 516,103 square feet. The lease renewals were completed at rental rates that start, on average, 3.28% higher than the expiring rent. In addition, the REIT completed early renewals of 50,053 square feet set to expire in 2018 and 189,000 square feet set to expire in 2019. As a result, the REIT only has 4.8% of the 2018 lease expiries remaining as at December 31, 2017, contributing to the stability of the REIT's cash distributions. Subsequent to year end, a renewal of 101,601 square feet has been completed for a 12-year term with annual contractual steps in the rent. Negotiations are underway with the remaining 3.6% of tenants whose leases expire in 2018 and renewals for several are expected to be completed by the end of the first quarter of 2018.

For year ended December 31, 2017 straight lining of rents $1.4 million compared to $1.1 million in the prior year. Leasing costs for the year ended December 31, 2017 were $2.8 million compared to $1.9 million in 2016. Non-recoverable capital expenditures for the year ended December 31, 2017 were $349,000 compared to $143,000 in 2016.

SOLID BALANCE SHEET AND LIQUIDITY POSITION
Total assets increased to $1.0 billion at December 31, 2017 from $500.8 million at December 31, 2016 due to the significant portfolio growth in 2017 as well as $36.2 million in fair value gains on investment properties mainly attributable to increasing market values of the REIT's properties in the GTA.

Total debt was $515.0 million at December 31, 2017 compared to $270.6 million at December 31, 2016. The increase was primarily due to new mortgages obtained related to the REIT's significant growth in 2017. During the year two properties with a lending value totaling approximately $18.0 million were added as security on the revolving operating facility. As of December 31, 2017, there was $42.0 million, of an available $57.4 million, drawn on the revolving operating facility and $90.0 million, of an available $90.0 million drawn on a temporary non-revolving bridge credit facility put in place to fund acquisitions in December until long term financing was secured. Including this temporary bridge financing, and the assumption of $25 million of construction debt on its 50% acquisition of a data centre facility in Montreal, the Trust's exposure to floating rate debt is approximately 31.2% of total debt as at December 31, 2017.

On December 13, 2017, the REIT completed a public offering of 14.4 million Units at a price of $7.20 per Unit for gross proceeds of $103.5 million. On June 30, 2017 a public offering of 9.8 million units was completed at a price of $7.07 for gross proceeds of $69.0 million. On January 31, 2017 a public offering of 7.4 million Units was completed at a price of $6.20 for gross proceeds of $46.0 million.

As of December 31, 2017, the REIT's debt leverage ratio¹ was 51.3% compared to 54.0% at December 31, 2016. Average leverage during the fourth quarter of 2017 was 49.6% compared to 54.4% for the same period in 2016. Acquisition capacity was approximately $133.0 million as at December 31, 2017. The weighted average effective interest rate on the REIT's mortgage portfolio was 3.50% at December 31, 2017 compared to 3.43% at the prior year end, with a weighted average term to maturity of 4.0 years, compared to 4.5 years at December 31, 2016. Debt service¹ and interest coverage¹ ratios were 1.89 times and 3.24 times, respectively, compared to 1.81 times and 3.07 times respectively, at December 31, 2016.

INVESTOR CONFERENCE CALL
A conference call will be hosted by Summit II's management team on Wednesday, February 21, 2018 at 9:00 am ET. The telephone numbers to participate in the conference call are North America Toll Free: [phone] and Local Toronto / International: [phone]. 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 [phone] or Local Toronto / International [phone]. The Passcode for the Instant Replay is 1112667#. 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 months and year ended December 31, 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 December 31				Year ended December 31
		2017		2016		2017		2016		2015
Portfolio Performance
Industrial occupancy (%)		98.4%		98.9%		98.4%		98.9%		98.1%
Revenue from income properties	$	16,921	$	12,766	$	58,573	$	44,950	$	38,377
Property operating expenses		5,153		4,429		17,996		14,697		11,865
Net operating income ^(1)		11,768		8,337		40,577		30,253		26,512
Interest expense (finance costs)		3,397		2,382		11,413		8,943		8,100
Net income		31,237		9,830		62,900		24,376		17,935
Operating Performance
FFO ^(1)		7,794		5,501		26,960		19,635		16,980
Net income per unit - basic and diluted		0.562		0.281		1.317		0.758		0.626
FFO per Unit ^(1)(2)		0.140		0.157		0.564		0.610		0.593
Regular Distributions per Unit declared to Unitholders		0.129		0.126		0.512		0.504		0.504
Regular FFO payout ratio without DRIP benefit ^(1)		92.0%		80.0%		90.7%		82.6%		85.0%
Regular FFO payout ratio with DRIP benefit ^(1)		74.9%		67.5%		76.0%		69.1%		71.4%
Total Distributions per Unit declared to Unitholders		0.129		0.126		0.512		0.504		0.520
Weighted average Units outstanding^(2)		55,611		34,934		47,767		32,178		28,628
Liquidity and Leverage
Total assets		1,003,239		500,807		1,003,239		500,807		406,411
Total debt (loans and borrowings)		515,018		270,635		515,018		270,635		218,369
Weighted average effective mortgage interest rate		3.50%		3.43%		3.50%		3.43%		3.52%
Weighted average mortgage term (years)		3.97		4.51		3.97		4.51		4.47
Leverage ratio ^(1)		51.3%		54.0%		51.3%		54.0%		53.7%
Interest coverage (times) ^(1)		3.18		3.18		3.24		3.07		2.94
Debt service coverage (times) ^(1)		1.90		1.84		1.89		1.81		1.77
Other
Properties acquired		21		-		31		8		11

 

⁽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 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. On June 17, 2016, approximately 5,650,000 Units were issued on completion of a public offering. FFO per Unit amounts, and the payout ratio were temporarily impacted during 2017, due to the timing of fully investing funds from the equity offerings completed during the year. The Per Unit FFO during the first quarter was impacted between $0.0125 and $0.015 per Unit due to the January 31, 2017 equity offering funds not being fully invested until April 7, 2017. During the third quarter of 2017, FFO per Unit had been impacted by approximately $0.020 and $0.025 per Unit as the June 30, 2017 equity offering funds were not fully invested until midway through the fourth quarter. During the fourth quarter, the impact on FFO per Unit due to the timing of fully investing the June 30, 2017 and December 13, 2017 offering funds was between $0.0125 and $0.015 per Unit.

Summit II's Consolidated Financial Statements and MD&A for the three months and year ended December 31, 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 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 consolidated 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 months and year ended December 31, 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 months and year ended December 31, 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

Paul Dykeman, CEO at [phone], [email protected]

Related Links

www.summitiireit.com