Summit Industrial Income REIT has sold its interest in a second Toronto-area data centre and continues to increase its portfolio in Canada’s largest urban area, the trust reported this week.
The combination helped lead the REIT to strong Q1 2020 revenue growth.
After Summit (SMU-UN-T) announced the sale of its share of the still-under-construction DC2 data centre in suburban Richmond Hill (part of an ongoing partnership with Urbacon), Summit CEO Paul Dykeman told analysts on the trust’s conference call it realized a $21-million gain on the sale.
Summit did not release the sale price.
“What we were able to do with our partner here is effectively sell this property before the development is complete,” Dykeman said Wednesday morning. “We had it built, up to the power shell, which is the cheapest part of the data centre.
“The more expensive part is to now retrofit it to become a Tier IV data centre, the same as DC1. The ultimate purchaser and owner of this is taking over that work.”
Summit’s second data centre transaction
The gain is in line with a previous transaction in the fall of 2019, when Summit sold its interest in two other data centre facilities, DC1 in Richmond Hill and a Montreal data centre.
In that instance, the REIT said the sale price was $178 million and it realized a $42-million gain on its investment.
Summit remains an investment partner with Urbacon for potential future developments at the Richmond Hill site, which is to host as many as five data centres at full build-out.
Dykeman is also bullish on the sector as a whole, maintaining an interest in another data centre project in Montreal.
“We’ve resisted the temptation to lease that out bit by bit,” Dykeman said. “We think the trend of where data centres are going are these wholesale large players. That’s what we are doing. We are getting paid to wait, so we are being patient.
“In the meantime, there’s lots of people knocking on the door. From this pandemic, (from) everything I’ve read, data centre REITs in the U.S., they are seeing upticks and I wouldn’t be surprised to see something happen there.”
Summit Industrial financial performance
Dykeman said Summit continued to build on “record growth and operating performance in 2019” during Q1 2020. The trust added nine properties (about 747,000 square feet) in the Greater Toronto area for $180.4 million during the quarter.
On a year-over-year basis, Summit grew its portfolio from 109 to 154 properties (excluding four properties held for sale), comprising about 18.2 million square feet of GLA.
Its revenue from rental properties rose from $33.8 to $46.5 million and its net income from $10.9 million to $42.9 million. FFO rose from $15.6 to $21.4 million, while FFO per unit was steady at $0.155.
The total portfolio value jumped from about $1.8 billion to $2.8 billion.
While its total debt grew to $1.4 billion, Summit’s debt ratio declined 120 bps to 46.7 per cent. About 47 per cent of that is at a floating interest rate due to current lending conditions, which CFO Ross Drake said is generating a one to 1.5 per cent interest rate savings.
Minimal impact from COVID-19 pandemic
The REIT has also not been significantly affected by the COVID-19 pandemic through May, although Dykeman confirmed new acquisitions are on hold, at least temporarily, to preserve capital.
About 96 per cent of April rents were collected and as of May 12, 87 per cent of May rents were in hand. The REIT has negotiated deferrals and/or lease extensions with an additional eight per cent of its tenants and is in talks with the remaining five per cent.
“Our key markets entered the pandemic in one of the strongest positions ever,” Dykeman said, noting the trust continues to work with tenants and staff to deal with the pandemic fallout.
“We are also confident with the solid fundamentals of the Canadian light industrial sector,” Dykeman said.
“In summary, we are pleased with our results in the first quarter, but recognize this pandemic will impact our businesses in the months ahead.”
Summit Industrial regional performance
Dykeman also discussed the trust’s regional breakdown, noting despite challenges in the Alberta economy, Summit is holding its own in the province.
It owns 48 properties comprising 5.2 million square feet in Alberta and realized year-over-year, same-property NOI increases of 4.4 per cent during Q1.
“Alberta is where we would be concerned, but we are doing a fantastic job of keeping the buildings filled,” Dykeman said, noting Summit has the advantage of a portfolio mainly tenanted with larger companies with strong covenants.
It has limited exposure to smaller, local tenants although some of these properties are in Alberta. Only about five per cent of its Alberta tenants are in the oil and gas sector, but Dykeman does not expect to emerge unscathed.
Summit does not forecast a significant increase in industrial vacancies nationwide, but “we fully expect to see our vacancy number go up in Alberta.” The REIT entered Q2 with a 98.4 per cent occupancy rate across its full portfolio.
“Even if you forecast a two to three per cent vacancy (increase) from now to the end of the year, then our overall yearly results are still fine,” Dykeman said.
In Ontario, which contains the bulk of Summit’s portfolio with 77 properties and 9.6 million square feet of GLA, the trust saw a 7.3 per cent increase in Q1 same-property NOI and a 22 per cent increase in renewal rents.
Quebec’s numbers were hit by two one-time expenses, which kept the same-property NOI increase to 0.8 per cent. Renewals from in-place rents generated a 5.4 per cent increase.