Watch the Industrial REIT – Fund President Q1 2024 Update
Transcript
[00:00:55] Ray Punn:
Welcome, and I’m pleased to provide you with Skyline Industrial REIT‘s update for quarter one 2024. I’m joined today by Mike Bonneveld. He is the President of Skyline Industrial REIT. Mike, thanks for joining.
[00:01:07] Mike Bonneveld:
Thanks, Ray.
[00:01:07] Ray Punn:
Let’s get right into it. Mike, you just finished up your trustee meetings. Let’s talk about Q1. What did that look like for you?
[00:01:13] Mike Bonneveld:
Sure. Q1 very much on track from budget, NOI slightly ahead, occupancy staying very strong as expected, and especially within the strong industrial market that we continue to have in Canada. No significant dispositions occurred within the quarter, and no third-party acquisitions, really internally focused.
The only two acquisitions we did complete were Rosefellow Developments. One was the asset on Victor Davis; 260,000 square foot, brand new, gorgeous building, two tenants, Sleep Country and Steve Madden. The second building on Notre Dame in Montreal, just to the east of downtown. Single tenant, 97,500 square feet, long-term lease. So, really good additions, on budget, and strong assets and acquisitions into the REIT. So, a good quarter overall, but not a ton of moving parts.
[00:02:17] Ray Punn:
Thanks for sharing that, Mike. I’m going to pitch you two questions, Mike, and one of them is specifically coming from investors. I’d like to ask you that directly and that question very specifically is, talk to us about the performance of the Fund. And so, I want you to talk about that but then the other part I’d like for you to talk about is, with interest rates at the peak, and we’re assuming that we could start to see rate drops in the next quarter or so, what impact would that have on the Fund and specifically with cap rates?
[00:02:47] Mike Bonneveld:
Sure. Let me deal with the first question, Ray. In terms of performance, operationally the REIT’s been performing really, really well. As I mentioned, our occupancy is strong. The overall markets, while I would say it’s not the fury we were eight months ago where vacancy rates across the country were 1%, which is not a sustainable thing, but we’re still in a very, very strong overall availability level in most major markets and as a whole in Canada.
And our portfolio is doing, as I said, doing very well. You kind of tie this to our average rent in place of $8.37. I’ve mentioned this before: we’ve got about a 30-35% mark to market when those tenants roll, and we’re seeing this progression happen through ’24. We’re already looking at stuff in ’25 in terms of tenants that are looking to renew and trying to lock in their expenses and their commitments, right?
So operationally, very, very strong, and I think that really rolls into the second part of your question, which is, what are we looking at, and what are we seeing from a REIT level and a performance level? And how does that tie into a perceived softening in rates as we go into Q2, Q3, Q4 of ’24? And the hopefully short answer here on that is that when we’re rolling tenants over as those rents are going up.
[00:04:34] Mike Bonneveld:
So, your bottom line in these assets increases and if we’re in a neutral to downward trending interest rate market, you are going to start to see, and it’s not right away, but you will see a downward, slight trend in where cap rates go. And so lower cap rates obviously result in higher asset values.
That said, because of the way we value our portfolio using third-party appraisers, and we do them quarterly so that every asset gets valued within the year, appraisers are backward-looking in terms of how they do stuff. Right? And so, if there, and I’ll just make something up if there’s a rate cut in June, transactions start to occur where pricing gets slightly more aggressive because of that rate cut, those transactions will take three, four, or five months to occur. So, the transactions won’t happen until Q4. The appraisers then use those transactions to value assets that they are looking at for groups like us.
[00:05:42] Mike Bonneveld:
So, you have a six to nine-month trailing effect of where you’re going to see those valuation changes. And we think that’s coming. As you see, and some of the feedback coming out of the Bank of Canada over the last couple of days, the hope is we see a rate cut in June or July. It may be September.
When you combine that, hopefully lower rates, with then the implied effect of lower, slightly lower, cap rates and we’re not talking drastic, but slightly lower cap rates and then multiply that with the increasing rents within the portfolio, that has direct asset level value implications and then, for an investor standpoint, NAV (Net Asset Value) implications. We are for sure trending in the right direction on values.
Real estate doesn’t move really rapidly, that’s the beauty of investing in real estate. It is nice and slow and steady and secure under most circumstances. But we look at this trend line and what we’re seeing and so as we go into the end of ’24 and into ’25, that net impact for investors hopefully will be quite positive.
[00:07:02] Ray Punn:
Mike, thanks for sharing that update for Q1. And I guess we’ll do this again in a few months for Q2.
[00:07:07] Mike Bonneveld:
Absolutely Ray. We’ll see you in a quarter.
[00:07:08] Ray Punn:
Right. Skyline Industrial REIT is currently open for new investment. If you have any questions, please contact Skyline Wealth Management. Thanks for watching.