DBRS Morningstar Upgrades Summit Industrial Income Real Estate Investment Trust to BBB, Maintains Positive Trends

DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating and Senior Unsecured Debentures rating on Summit Industrial Income Real Estate Investment Trust (Summit) to BBB from BBB (low) and maintained the Positive trends.

The rating upgrades largely reflect Summit’s (1) transition to a predominately unsecured debt structure with a secured debt-to-total debt ratio below 40% (33.6% at June 30, 2022) and (2) improving financial risk profile commensurate with an investment-grade rating. Summit has an unsecured debt stack and sizable unencumbered asset pool of institutional-quality assets, which was valued at approximately $3.3 billion at June 30, 2022, providing ample coverage of unsecured debt (2.5 times (x) at June 30, 2022). DBRS Morningstar views these factors as materially credit positive.

The Positive trends reflect the expected continued improvement in Summit’s leverage as measured by total debt-to-EBITDA, which DBRS Morningstar expects will be below 8.0x by YE2022 from 8.7x for the last 12 months ended June 30, 2022 (LTM). Summit’s improving leverage will be driven largely by EBITDA growth as a result of recent acquisitions, funded largely with equity as Summit continues to demonstrate balanced treatment of capital providers. The Positive trends also reflect improvements in DBRS Morningstar’s assessment of Summit’s asset quality, lease maturity profile, tenant quality, and portfolio size as Summit continues to grow its portfolio of institutional-quality industrial real estate assets in Canada’s key industrial markets.

The ratings continue to be supported by (1) adequate-quality assets that should provide average cash flow stability; (2) superior property and tenant diversification; (3) a well-laddered lease maturity profile; and (4) strong interest coverage for the ratings as measured by EBITDA interest coverage, which is expected to be in the mid-4x range by YE2023 (from 4.53x LTM). Relative to DBRS Morningstar’s real estate coverage universe, the ratings continue to be constrained by (1) moderate market presence in its trade areas and a below-average portfolio size as measured by EBITDA of $159.9 million LTM, notwithstanding recent improvement and continued robust growth expected in the near to medium term; (2) weak asset-type diversification as a pure play in the light-industrial segment; and (3) below-average tenant quality.

DBRS Morningstar will consider rating upgrades within the next 12 months if Summit can demonstrate a financial risk profile (including total debt-to-EBITDA and secured debt-to-total debt) consistent with DBRS Morningstar’s expectations outlined above, on a sustained basis, all else equal. DBRS Morningstar would consider changing the trends to Stable should Summit’s total debt-to-EBITDA fail to improve as expected or if Summit reverses course on the progress already made with respect to unencumbering its balance sheet vis-à-vis its secured debt-to-total debt ratio.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Entities in the Real Estate Industry (April 20, 2022; https://www.dbrsmorningstar.com/research/395563) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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