Summit Industrial Income REIT Announces Strong Performance in Second Quarter 2019
Summit Industrial Income REIT ("Summit II" or the "REIT") (TSX:SMU-UN.TO) announced today very strong operating and financial performance for the three and six months ended June 30, 2019.
Six Months 2019 Highlights:
-- Revenues up 60.5% on portfolio growth, high stable occupancies and rent increases. -- Industrial occupancy strong at 99.5% with average lease term of 6.0 years and contractual rent steps of 1.5% per year. -- Total net operating income ("NOI")(1) up 66.4% on revenue increase, organic growth and strong operating performance. -- Same property NOI increased 4.8% with Toronto, Montreal and Western Canada contributing 5.5%, 2.1%, and 9.2% respectively. -- Funds from operations ("FFO")(1) increased 63.7% to $31.4 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. -- Increased revolving operating facility availability to $150.0 million. -- Obtained $25.5 million of mortgage financing for 5-year term at average interest rate of 3.48%. -- Proactively completed 1,351,924 sq. ft. of 2019 renewals with a strong retention rate of 99.2%. Only 0.7% of the total portfolio remains to be renewed in 2019. -- 2019 renewals, early renewals and lease expansions generate 10.6% increase in rents (14.7% in GTA). -- Insider ownership rises to 11.4% fully aligning management with all Unitholders.
-- Refinanced $18.5 million of maturing debt, obtaining $30.5 million in mortgage financing at an interest rate of 3.39% with a ten-year term to maturity.
"Our growth and strong operating performance continued in the second quarter, driven by near-full occupancies, increasing rents, and strong increases in same property NOI across the majority of our property portfolio," commented Paul Dykeman, Chief Executive Officer. "We were also pleased to have completed the internalization of our property and asset management functions in May that will drive reduced operating costs, increased NOI and FFO, and an enhanced ability to make even more accretive acquisitions going forward."
"Finally, we were very pleased to announce a 4.7% increase in monthly cash distributions to $0.045 per Unit, or $0.54 per Unit on an annualized basis, a reflection of our confidence in the future and our commitment to enhancing Unitholder value over the long term," Mr. Dykeman concluded.
PORTFOLIO GROWTH AND STRONG OPERATING PEFORMANCE CONTINUESRevenue from income producing properties for the three and six-month periods ended June 30, 2019, rose 63.3% and 60.5% to $34.1 million and $67.9 million, respectively, compared to $20.8 million and $42.3 million, respectively, for 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 operating income for the three and six-month periods ended June 30, 2019 increased 68.2% and 66.4% to $24.4 million and $48.7 million, respectively, compared to $14.5 million and $29.3 million, respectively, for the same periods in 2018. The growth in NOI is due to a strong 4.8% 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 six-month periods, same property NOI rose 4.8% for the six months ended June 30, 2019 compared to the prior year. For the REIT's target GTA and Montreal portfolios, same property NOI rose 5.5% and 2.1%, respectively, compared to last year. The leasing of vacancies in the REIT's Western Canadian properties through 2018 resulted in same property NOI rising 9.2% in this portfolio. Same property NOI represented approximately 55.9% of total NOI and 62.5% of total GLA.
For the three and six-month periods ended June 30, 2019, Funds from Operations ("FFO") was $15.8 million ($0.148 per Unit) and $31.4 million ($0.302 per Unit), respectively, compared to $9.5 million ($0.136 per Unit) and $19.3 million ($0.281 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 six months of 2019 was 86.6% (74.8% including the benefit of the REIT's DRIP program) compared to 91.9% (78.7% including the benefit of the REIT's DRIP program) during the same period in 2018. The FFO payout ratio was impacted by equity offerings completed over the prior twelve months and the timing of fully investing the resulting funds.
Net loss for the three and six-month periods ended June 30, 2019 was $38.1 million and $27.2 million, respectively, compared to net income of $80.6 million and $107.2 million, respectively, for the same periods in 2018. The decrease in net income was driven primarily by the property and asset management internalization costs of $96.6 million. Removing this non-recurring event, net income for the three and six-month periods ended June 30, 2019, would have been $58.5 million and $69.4 million, respectively.
PROACTIVE LEASING PROGRAMOccupancy in the industrial portfolio increased to 99.5% at June 30, 2019 from 98.6% at the same time last year. The weighted average lease term for the portfolio was approximately 6.0 years, up from 4.9 years last year. The REIT continues to be proactive in addressing lease expiries well in advance of the expiry date.
To date in 2019 the REIT has completed 1.4 million square feet of its 2019 renewals with a very strong retention rate of 99.2%. Overall, the 2019 renewals generated an average 10.6% increase in monthly rents from the expiring rent with a significant 14.7% increase over expiring rents in the REIT's Greater Toronto Area target market. As at June 30, 2019 only 0.7% of the portfolio remains to be renewed through the balance of 2019. Lease renewals have been agreed to for an additional 51,011 square feet, further reducing the 2019 expiries to 37,542 square feet or 0.3%.
The REIT has also completed renewals of 639,216 square feet set to expire in 2020. This reduces the 2020 lease expiries to 6.7% of the total portfolio. In addition, the REIT has completed an early renewal of 322,187 square feet that was set to expire in 2022.
SOLID BALANCE SHEET AND LIQUIDITY POSITIONTotal assets increased to $1.88 billion at June 30, 2019, up from $1.77 billion as at December 31, 2018. Total debt was $763.8 million at June 30, 2019 compared to $834.2 million at December 31, 2018. Financing activities through the first six months of 2019 included locking in longer-term mortgages which added nearly a full year of average term to maturity which is now 5.7 years compared to 4.8 years at the prior year end.
Proceeds of the $91.0 million and $62.0 million in mortgage financings 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 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 bought-deal equity offering were used to repay $119.5 million on the revolving operating facility. As at June 30, 2019, there was no amount (December 31, 2018 - $63.6 million), of an available $124.9 million (December 31, 2018 - $71.5 million) drawn from the revolving operating facility. The Trust's exposure to floating rate debt was approximately 0.7% of total debt as at June 30, 2019.
As at June 30, 2019 the REIT's debt leverage ratio was 40.6% compared to 47.0% at the end of 2018. Acquisition capacity to bring leverage to the target 50% was approximately $355.0 million as at June 30, 2019. The weighted average effective interest rate on the REIT's mortgage portfolio was 3.75% at June 30, 2019 compared to 3.72% at December 31, 2018. Debt service and interest coverage ratios were 1.75 times and 2.74 times, respectively, compared to 1.77 times and 2.86 times respectively, at December 31, 2018.
DISTRIBUTION INCREASEOn May 7, 2019 the REIT announced a 4.7% increase in monthly cash distributions to $0.045 per Unit ($0.54 per Unit annualized) to Unitholders of record on May 31, 2019 paid on June 14, 2019.
SUBSEQUENT EVENTSIn July 2019, the Trust refinanced $18.5 million of maturing debt and obtained $30.5 million in mortgage financing at an interest rate of 3.39% with a term to maturity of ten years.
INVESTOR CONFERENCE CALLA conference call will be hosted by Summit II's management team on Thursday, August 8, 2019 at 8:30 am EST. The telephone numbers to participate in the conference call are North America Toll Free: (800) 478-9326 and Local Toronto / International: (416) 340-2219. 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 9227052#. 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 six month periods ended June 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 June Six months ended June --- --- (except per Unit amounts) 2019 2018 2019 2018 --- --- Portfolio Performance Industrial occupancy (%) 99.5% 98.6% 99.5% 98.6% Revenue from income properties $ 34,082 $ 20,871 $ 67,861 $ 42,279 Property operating expenses 9,718 6,383 19,169 13,016 Net operating income (1) 24,364 14,488 48,692 29,263 Interest expense (finance costs) 8,808 4,944 17,909 9,647 Net (loss) income (2) (38,061) 80,611 (27,200) 107,167 Operating Performance FFO (1) 15,788 9,542 31,357 19,268 Net (loss) income per unit - basic (5) (0.357) 1.150 (0.262) 1.561 FFO per Unit (1)(3)(4)(5) 0.148 0.136 0.302 0.281 Regular Distributions per Unit declared to Unitholders (5) 0.133 0.129 0.262 0.258 Special Distributions per Unit declared to Unitholders (6) - 0.018 0.018 Regular FFO payout ratio without DRIP benefit (1) 89.8% 94.8% 86.6% 91.9% Regular FFO payout ratio with DRIP benefit (1) 75.2% 79.6% 74.8% 78.7% FFO including net realized gains (1)(7) 15,788 16,741 31,357 26,467 FFO per Unit plus net realized gain (1)(7) 0.148 0.239 0.302 0.386 Total Distributions per Unit declared to Unitholders (5) 0.133 0.147 0.262 0.276 FFO plus net realized gain payout ratio without DRIP benefit (1)(7) 89.8% 61.6% 86.6% 71.6% FFO including net realized gain payout ratio with DRIP benefit (1)(7) 75.2% 51.7% 74.8% 61.3% Weighted average Units outstanding(3)(4)(5) 106,644 70,116 103,690 68,645 Liquidity and Leverage Total assets 1,882,661 1,238,894 1,882,661 1,238,894 Total debt (loans and borrowings and lease liability) 763,772 509,583 763,772 509,583 Weighted average effective mortgage interest rate 3.75% 3.63% 3.75% 3.63% Weighted average mortgage term (years) 5.68 4.94 5.68 4.94 Leverage ratio (1) 40.6% 41.1% 40.6% 41.1% Interest coverage (times) (1) 2.74 2.89 2.74 2.93 Debt service coverage (times) (1) 1.70 1.71 1.75 1.76 Debt-to-adjusted EBIDTA (times) (1) 7.92 9.16 7.98 9.14 Other Properties acquired - 5 1 5 Non-core properties disposed - Number of properties 109 89 109 89 Total GLA (in thousands of square feet) 13,631 9,472 13,631 9,472 (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 $96.6 million. (3) On May 17, 2019, approximately 6,666,666 Units were issued on completion of the internalization of management. On June 12, 2019, approximately 11,960,000 Units were issued on completion of a public offering. 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. (4) 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. On April 12, 2019, approximately 3,292,091 Class B exchangeable unites were exchanged into REIT Units. (5) Includes REIT Units and Class B exchangeable Units (collectively, the "Units"). (6) 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 six month periods ended June 30, 2019 are available on the REIT's website at www.summitIIreit.com.
About Summit IISummit 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 MeasuresThe 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 six month periods ended June 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 six month periods ended June 30, 2019.
Caution Regarding Forward Looking InformationThis 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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SOURCE: Summit Industrial Income REIT
Paul Dykeman, CEO at (902) 405-8813, firstname.lastname@example.org