Summit Industrial Income REIT experienced a record year in 2018 by acquiring 24 properties totalling 4.8 million square feet and valued at $578.3 million.
Summit (SMU-UN-T) experienced solid growth in all key performance benchmarks as it expanded its portfolio by 56 per cent and enhanced its ability to generate operating efficiencies and economies of scale. This was achieved while issuing stable monthly cash distributions to unitholders and maintaining a conservative balance sheet that will provide resources and flexibility to fund future growth.
“Our focus on the vibrant GTA (Greater Toronto Area) and Montreal markets continues, allowing us to capitalize on their very strong fundamentals,” Summit chief executive officer Paul Dykeman said during a Feb. 21 investor conference call. “Both are experiencing all-time-low availability and vacancy rates, with absorption outpacing new supply.”
Summit’s GTA and Montreal holdings represented 76 per cent of its portfolio of 108 Canadian properties, totalling around 13.3 million square feet and valued at $1.77 billion, at the end of 2018. The same property net operating income growth was 4.5 per cent in the GTA and 4.7 per cent in Montreal.
“The strong fundamentals in these two geographic markets, as well as the increasing value from the full leasing up of our DC1 data centre in Toronto, contributed to a $144-million fair market gain in our portfolio in 2018, which was an impressive $1.85 per unit,” said Dykeman.
Summit’s net income rose to $180.4 million ($2.32 per unit) in 2018. Net operating income increased by 59.8 per cent year-over-year to $64.8 million.
Summit’s acquisition strategy
“We will prudently and profitably acquire properties in our target markets, purchasing newer, well-maintained assets at below replacement cost and with rents that are below-market,” said Dykeman.
The two main factors in replacement cost are land value and development charges, which are both rising quickly in the GTA. While Dykeman believes replacement cost will hit $200 per square foot in the GTA in the not too distant future, he wants to keep Summit as highly concentrated as possible there. He said the REIT will buy everything it can in the region if it can get it at the right price per square foot.
After last year’s record-breaking acquisition total, and the purchase of $409.5 million in assets in 2017, Dykeman thinks $300 million in acquisitions is achievable for Summit this year.
“It’s very competitive on the acquisition side, where users are saying that they can buy buildings for cheaper than having them built,” he said.
Summit plans to organically grow its cash flow by capitalizing on the continued strong fundamentals in the light industrial property sector, building on its annual contractual rental increases and generating increased operating synergies and reducing costs through the size and concentration of its portfolios.
Leasing success reduced vacancies
Summit did very well on the leasing front in 2018, resulting in an industrial portfolio occupancy rate of 99.4 per cent and an average lease term of 6.2 years. It completed all of its 2018 lease renewals, with 92.5 per cent retention and a 9.5 per cent increase in rents. The increase in the GTA was 12.7 per cent. Only 2.3 per cent of the total portfolio remains to be renewed in 2019.
The largest year-end vacancy was a 44,672-square-foot unit in the GTA which has a lease commitment in place subject to a zoning variance to add four loading doors. The variance is expected to be granted in this quarter.
There’s also a vacant 6,500-square-foot unit which will be leased next month. The remaining empty 30,646 square feet is at two properties in Ottawa which were acquired in December.
Summit is looking at more development
While development will continue to be opportunity-driven, Dykeman anticipates five to 10 per cent of Summit’s investments will be dedicated to new builds.
“We’re building into the market at a really good price per square foot. Hopefully, we’ll get the best yield we can from that first lease. But, it’s really about building really good-quality inventory in the right place.”
Summit bought two development properties in 2018 and plans to develop 250,000 square feet in the GTA in addition to an existing 65,000 square feet under construction.
Dykeman said several buildings in the portfolio could be expanded by 30,000 to 50,000 square feet, combining for a total of 500,000 to 700,000 square feet. Those expansions will be tenant-driven and aren’t in the current pipeline.
“There could be 40 million to 50 million square feet of demand to build in the GTA, and there’s nowhere near that amount of land,” said Dykeman.
“That’s why land prices are accelerating at unbelievable clips. It’s a remarkable phenomenon that I haven’t seen in my 30 years of doing this.”
Activity in Montreal and other markets
Montreal has more access to industrial land than the GTA. While Montreal prices are creeping up, they’re still in the range of $600,000 to $700,000 per acre, as opposed to between $1 million and $2 million per acre in the GTA. Development charges are also much lower in Montreal, and Summit is open to working with a development partner there before eventually building on its own.
The Montreal market remains tight, however, and Dykeman said a healthy growth in rents in the city is comparable to the GTA.
Summit announced the acquisition of a 236,134-square-foot light industrial property in Montreal for $23 million earlier this year. The deal is expected to close in early March.
Toronto-based Summit is setting up three-person offices in Montreal, Calgary and Ottawa so it can have a presence in the markets where it’s looking to grow.
While Calgary has an industrial vacancy rate of around eight per cent and Edmonton’s is a couple of points lower than that, Summit managed to fully occupy all 12 of its Alberta properties in the two cities by the end of 2018.
Summit sold a 75 per cent interest in four properties in May for total proceeds of $46.4 million and a realized gain of approximately $7.2 million to fund more creative growth opportunities.
Summit has two British Columbia warehouses, totalling a combined 21,700 square feet, which it’s looking to sell. Aside from those, Dykeman said there are no other planned dispositions from the portfolio.