Watch Investing in Warehousing and Logistics Real Estate with Skyline Industrial REIT
Transcript
Ray Punn:
Earlier this year, Skyline Industrial REIT (real estate investment trust) was approved at your firm and is available through FundServ. Today, we’re going to talk through Skyline Industrial REIT offering. The history of the REIT goes back to 2012 and [the REIT] is anchored with 100% Canadian industrial assets.
I’ve asked Mike Bonneveld, the President of Skyline Industrial REIT, to join me today. I’m going to have Mike answer some questions and provide you with some insight on the fund directly from the asset manager. So, Mike, thanks for joining me today.
Mike Bonneveld:
Yeah, no worries, Ray. Good to be here.
Ray Punn:
Mike, let’s get right into it. So, let’s provide an overview of the fund for the advisors and portfolio managers that have joined our call today.
Mike Bonneveld:
Yeah, no problem. So, quick chronology on the last 12 years of the Industrial REIT. The REIT was formed in 2012, seeded with a number of assets, and, as you can see from the timeline on the screen, really grew through acquisitions to roughly about $1 billion worth of real estate in 2020.
And, for those of you familiar with the Canadian industrial market, 2019 to 2020 was where we really started to see a ramp up, from a rental rate standpoint, across the country, and also as part of that, a ramp-up in terms of asset values. And in that 2020-2021 time period is when we were looking at the portfolio. We were roughly about $7.6 million in square feet in the portfolio. But a lot of the portfolio that had been acquired and was being managed was more smaller bay, a little bit older product. And the asset management team at that point decided to undertake a bit of a repositioning of the portfolio.
So, what we did over the next three years was really sell the bulk of the smaller, older product. In total, we ended up selling about $550 million worth of real estate. We did it over the course of about 17 different transactions, and then took all of that capital and the profit associated with those transactions and rolled it into more institutional, newer, higher-grade assets given that critical mass and size that we had reached.
And so, at the end of that three-year period, so really by middle/end of 2023, we’ve gone from 160-ish assets in the portfolio down to 51; [from] 600-plus tenants down to about 180, where we’re sitting around today; realized, as I said, about $150 million of gain out of those dispositions, and [we’re] at about that 10 million square-foot level.
So, [we] really transformed the format of that portfolio from a private investor standpoint to that institutional-grade portfolio that we’re sitting at today.
Ray Punn:
So, Mike, you’ve alluded to the high grading of the portfolio in 2021. Interestingly, that’s around the same time that you came in as a president to this fund as well: 2020 or 2021, around there. So, some of the dispositions have taken place–or actually, all the dispositions have taken place. There was some acquisition and then there was quite a bit of development with those proceeds. Mike, can you provide a little bit more on what’s happening with the development pipeline with the fund?
Mike Bonneveld:
Sure. Yeah. One of the things we decided to do – and we were a bit of an early adopter, from that standpoint – was, beginning/mid-2020, we started to put together a couple of joint venture partnerships. We did a one-off development deal in Calgary, and then a bigger partnership with a group out of Montreal. The name of the group is Rosefellow. That was a newly formed company in 2019 from two individuals that had long careers at two standing large developers in Montreal, two very well-known families. And these two individuals decided to go out on their own. And so, after a lengthy due diligence period, we co-invested with them and with another private equity firm on a couple of one-off land parcels for development.
Those two developments are now completed: we bought out the partners, [buildings are] fully leased. And they are two assets within our existing portfolio. And based on the success of those two developments, we co-invested in a development fund, again with that same partnership group, to develop additional assets primarily in the city of Montreal, and we also had two sites in Ottawa.
And fast-forward that to where we are today, where we’ve now substantially completed the construction on all of the projects. By December of 2024, all of the projects under construction will have completed construction. We’re between 40-50% leased in the remaining assets. We’ve developed, completed, and acquired out our partners on five projects, which are all 100% leased at this point.
We’ve sold off two other projects: one at the land stage, just realizing a large profit on that site. That offer was too good to pass up. And the second we just recently sold to one of the other private equity partners, on one of the developments, pre-completion of the leasing, realized the nice gain, took that capital, [and] put it back into the balance sheet.
And so, we’re really through the lion’s share of the construction process. And now, over the course of the next 12 to 24 months, [we’re] looking to finish the lease-up and completion of those developments and acquire those from our partners.
And one of the unique things that we always do when we’re entering in these JV (joint venture) partnerships, Ray, is we always require a right of first refusal on every asset or development, so that gives us an option, not an obligation, at the end. So, if we, for whatever reason, decide it’s not an asset or development that we want to own at the end of the day, it gets sold into the open market. The other partners do not have rights of first refusal. We are the only one. The other two partners are really in it for the capital appreciation and gain on the development.
From a timing standpoint, we’re really excited about that capital that, as we sit today, there’s still about $80 million of equity invested in those developments. And we should see over the next 12-24 months, as I mentioned, the return on that come to fruition in terms of what that means from a NAV (net asset value) standpoint, but also an increase in NOI (net operating income) across the portfolio.
Ray Punn:
Thanks, Mike. So really, you know, talking about sort of the high grading, the disposition strategy, it changed the landscape of the fund. But I think it’s safe to say that it also changed the profile of the tenants that you’re onboarding. As [part] of the slides we’re going through, we’re starting to see some of who those tenants are. Can you provide a quick synopsis or summary on the types of tenants that we have in the portfolio today?
Mike Bonneveld:
Yeah. And, as I mentioned before, Ray, we’ve really reduced that number of tenants—so, a whole lot less moving parts. But the core group of tenancies in the portfolio are national global companies. Some of the larger tenants would be Canadian Tire, Congebec, which is a cold storage company, Nestlé Canada, Sleep Country Canada, Steve Madden shoes…really a good balance of different types of industries, but also really strong, well-known covenants across the Canadian landscape.
Ray Punn:
Thanks, Mike. So, Mike, we deal with a lot of advisors and portfolio managers in the dealer network, and they buy real estate funds for various reasons, whether it’s for the fixed income sleeve of their portfolio; whether it’s for the equity side; or whether it’s for Canadian exposure. So, there’s various reasons, and [what] I’d like for them to hear directly from the asset manager—you, Mike, here—is how does Skyline fit into these portfolios?
Mike Bonneveld:
Yeah, I think [regarding] the unique features of the Skyline Industrial REIT. . . if I compare us across a broader landscape, really from a public standpoint but also other parts of that investment bucket. . .number one is that we are the largest—and really one of the only true 100% Canadian—industrial REITs in the country. There are a couple of other smaller funds on the industrial side that are private. But we are definitely the largest.
If you compare us to the two largest public industrial REITs, again, we are 100% Canadian. So, if the goal is domestic industrial exposure, we’re really the only true option. The two other large ones have large U.S. exposure in the 20-30% range as well as large European exposure. And nothing wrong with those markets—both very strong, and they’re both very strong companies—but a bit different in terms of what the investment profile is and what the risk profile is, depending on your view.
The other two public companies in the industrial space, while they are a 100% Canadian investment, they are not 100% industrial. They have small positions either in retail or in office, or in both. So, we’re a bit unique that way, Ray.
And I think [when you look at] the performance of the entity, if you compare us to that fixed income bucket, from an alt (alternative) standpoint, the REIT’s performed very well over the past number of years, especially as a result of that strategic disposition program we went through, [and] the high grading of the portfolio, which has resulted in in really nice returns for our investors.
But also, as we come through that the last couple of years within that development pipeline [and] look to see the value creation out of that, as these assets come online, going from development to IP (income producing) and starting to earn a return for our investors. And then also obviously add that value gain going from just equity invested in development, which, from an NAV standpoint, we just keep at book value; it’s the invested capital value. And we see that pop when it transitions from a development asset to an IP asset. Again, the goal is over the next 12 to 24 months to see the fruition of the 2.5 million square feet of development that we’ve got in that pipeline right now, [to see it] get stabilized.
And the other big feature, Ray—and it starts from an NOI standpoint—what translates into value growth as well is that within the portfolio, our average rent is in the mid-nines. We’re about 20 to 25% on average under market when we do an asset-by-asset review within the market context we’re in.
And so, as the leasing and the portfolio rolls as tenants expire, and we roll to market, we expect to see some really nice lifts on average within the portfolio. I believe for 2025, we’ve got about 800,000 square feet rolling. And so, you just do some real simple math of a 20% lift on 800,000 square feet. There’s a really nice lift by the time we get through 2025, in terms of what that NOI looks like on a go-forward basis.
Ray Punn:
Thanks, Mike. You know, Mike, as you and I spend a lot of time on the road, you sometimes get those tongue-in-cheek remarks: “does this fund (which is in the private alternative space) have any intentions of going public?” And I know what our response is, but I think it’s probably timely to share what our thoughts are on that as well.
Mike Bonneveld:
Yeah. From our standpoint, there’s no requirement or need or want to be public. Our availability of capital within the private space is very good. It’s allowed us to grow from that inception 12 years ago to where we are today. And I think from an overall performance standpoint, if we look at the low volatility of the entity over the past 10 years relative to our public peer group, we’ve really been able to provide investors that stability, the comfort of what the investment is, and I think still providing that direct asset value connection and growth.
One of the key features of how NAV is calculated within the REIT, Ray, as you know, it’s really a bottom-up approach. We value the portfolio similar to most pension funds, on a quarterly basis. 25% [of assets] every quarter are valued by a third-party appraiser. And every quarter a different 25% is valued, so that on a rolling 12-month basis, every asset within the portfolio has been appraised by an independent third party.
So, we take that asset value, roll it up, deduct all the debt and all the liabilities, divide by the number of total units outstanding, and that’s the unit value that’s presented to the board. So, there’s not a lot of technical science behind it. It’s really as much directly correlated to the assets within the portfolio as we possibly can make it.
Ray Punn:
So, Mike, we’ve talked about the inception of the fund until about 2020-2021, where it was multi-tenant assets in the class D space. And then we switched into our high-grade strategy from 2021 to 2023, where we high-graded to more class A, higher ceiling logistic warehousing space, and that’s where we are today. Mike, we’re just at the cusp of 2024 and 2025. Let’s talk about moving forward. What do we have to look forward to in terms of strategy and what’s to come in 2025 and onward?
Mike Bonneveld:
Yeah, I think as we sit here today, the balance sheet’s in a very good position right now. I expect out of the development pipeline, as leasing continues to progress on a number of assets, that 12 months from now, three of the remaining six assets under development will be stabilized from a leasing perspective and we’ll have bought out the partners on those, so crystallizing the amount of equity we’ve got in those developments.
I believe that now with rates starting to come down, there’s a number of opportunities from an acquisition standpoint that we’re starting to see. So, I envision being more active on the third-party acquisition side for 2025.
And again, as a result of a number of those growth factors I was talking about, I’m hopeful of some NAV growth as we sit here today, and also being able to grow that bottom line NOI as a result of improving and refinancing fundamentals, but also in rolling over from existing rents on that 800,000 square feet within the portfolio in 2025 up to market, and crystallizing that down to the investor level.
Ray Punn:
Right. Thanks, Mike. Let’s just get a bit more granular, though, on the fund specifics, Mike. When we’re on the road, some of the most common questions we get specifically on the industrial [REIT are about] what performance looks like, what fees are involved, and about the asset management of the fund itself. Can you just give us some details on that, please?
Mike Bonneveld:
Yeah, sure. And it’s pretty transparent, right? The fee structure is detailed in the offering memorandum. Property management is at market and it’s fully recoverable generally from tenants within the portfolio.
The asset management fee is 2%. A lot of the people listening will be looking at that thinking 2% is actually a relatively low number from an asset management standpoint, relative to what the peer group is. There is a GP (general partnership) interest in there as well. There’s a strong alignment of interest in terms of how that GP payment is received. And it’s really after the investors receive the theoretical equity invested in each asset, whether that’s through distributions or refinancing. Generally, it takes, all things being equal, somewhere around seven or nine years for the GP to see some participation.
And then the other interesting offset, which is a bit unique and very much aligned with the investors, is that if there’s capital required to be invested in an asset, be it a new roof or parking lot, something from a capital nature, is that’s deemed to be new equity, and that will reset that GP back as well.
So, when you combine what that asset manager fee is and the GP, I think it’s still very much an under-market fee, which again, is a direct alignment between us as the asset managers, and the managers, and the investors themselves.
Ray Punn:
Thanks, Mike. So, that’s it for questions from me. Before I close it out, I’m sort of being given the hook here. Is there anything you want to close us out with? Maybe 30 or 60 seconds to close out with anything that you haven’t shared that you want our advisors and portfolio managers to know about the fund?
Mike Bonneveld:
Yeah, the unique part about the REIT is the asset class we’re in. It’s the access to a very institutional class of assets within the portfolio. A lot of the heavy lifting in terms of repositioning has been done over the past number of years, so, from an entry point, I think very interesting. But also, just the timing of where we are in our development cycle, given a lot of the equity capital was put to work in 2021 and 2022. Investors coming in today get to piggyback on that last couple of years and benefit going forward, hopefully from both an NAV standpoint and an NOI standpoint, Ray.
Ray Punn:
Thank you, Mike. So, I really appreciate you joining me today, Mike, and walking through the Skyline Industrial REIT, providing more context to the fundamentals of the fund. This is the first opportunity that we’ve had to do this with this particular firm.
More information is available on the Skyline Industrial REIT website (https://skylineindustrialreit.ca). Or you can go to FundServ, and I believe the code is in your bottom right-hand corner (SKY2012).
Thank you for taking the time for joining us on the webinar today, Mike. Thank you again. I know we chat all the time, but it’s great that we could do this together.