Invest in Industrial and Logistics Space through Skyline Industrial REIT

December 18, 2023

Watch: Invest in Industrial and Logistics Space through Skyline Industrial REIT

Jump to:

Transcript

Christian Langman: [00:00:02]

So, good afternoon, everybody, and thank you for joining our webinar today focusing on Skyline Industrial REIT (Real Estate Investment Trust). For those who are new to Skyline, Skyline Group of Companies is a vertically integrated organization offering institutional-quality real estate to investment advisors and portfolio managers through our recently launched Class F offering. The Fund’s inception was 1999, and we currently have just under about $9 billion in AUM (Assets Under Management).

Christian Langman: [00:00:25]

Here at Skyline Group, we offer four pure play mandates: multi-res through our Apartment REIT, open-air retail through our Retail REIT, renewable infrastructure through our Clean Energy Fund, and lastly, logistics and warehousing with today’s feature, [Skyline] Industrial REIT. The two defining pillars of our mandates are asset quality and debt management. Through these pillars, we’ve been able to deliver historically tax-efficient distributions with unit value growth over time.

Christian Langman: [00:00:51]

Mike Bonneveld has been at Skyline since 2009 and has nearly 30 years of Canadian real estate experience, in addition to working at several Canadian investment banks in the field of real estate, corporate finance, and property brokerage. He has also worked in acquisitions for public real estate company Allied REIT. Prior to managing the Industrial REIT, Mike was head of acquisitions for the Apartment REIT and Retail REITs. Mike, thank you for joining us today. The floor is yours.

Mike Bonneveld: [00:01:19]

Great. Thanks, Christian, and thanks everybody for joining. So, I think just format-wise, as Christian said, I’m, going to provide a bit of an overview of the entity overall. I’m going to do a little bit of where we’ve been over the last couple of years, because there’s been some fairly strategic decisions made and how we’ve changed the direction of the portfolio, and then do a bit of a look forward as we look into 2024 and what that means for the Industrial REIT.

Mike Bonneveld: [00:02:05]

So, quick 10,000-foot view on the Industrial REIT. So, as we sit today, we’re about 49 assets in the portfolio, 172 tenants, just over 9.3 million square feet of warehousing/ logistics space across Canada. We’re in five provinces, from Alberta to Quebec, and we currently have 11 development projects totaling about 3.2 million square feet within the portfolio. We’ve recently added since the end of Q3 two additional properties which take us to that 3.2 million square feet: an asset in Mascouche [Quebec], which we co-developed with one of our development partners, and another one in Woodstock, Ontario.

Mike Bonneveld: [00:03:01]

We are, as you know -and I’ll chat a bit about this in a minute- but as probably most of you know, the industrial market within Canada, and really globally, is very strong. Our portfolio currently sits at just under 99% occupancy, which is essentially full. Just given rollover and when we’re vacating tenants, before we bring in replacement tenants. And another big highlight, really, when I look at where we are: we’re about 30% to 35% under market in terms of where the existing rents are in the portfolio, relative to market rent in each of those respective nodes. So, current rent, as you may have seen on average, is about $8.20. And again, that’s relative to market rent within specific cities and/or nodes.

Mike Bonneveld: [00:04:07]

So, one of the things that I think is really relevant, just as we talk about the Industrial REIT itself is, as I mentioned, the industrial market as a whole, especially in Canada, is very, very strong. As a lot of you know, over the last two, three, four years, the Canadian industrial segment has really changed quite dramatically in terms of the type of assets that are being built, the format in terms of how they’re being used, and really from a demand standpoint and that demand impact on rental rates within specific markets.

Mike Bonneveld: [00:04:52]

If we look back in markets like the GTA (Greater Toronto Area) five, six, seven years ago, class A rent – if you’re driving along the 401, in and out of Toronto – class A rent was probably in the $7.00 range. As we sit today, class A brand new space rents for $18 to $22, depending on what and where. So, a really dramatic increase in achievable rent on that top-level space.

Mike Bonneveld: [00:05:27]

Similarly, in Montreal, a city that saw very, very little change in supply and/or rent, again, a class A building was $5.50-$6.00. Right now, in some of the developments we’re doing for best-in-class space, that rent can be anywhere from $15 to $17.50 for top-end. So, again, a really, really dramatic change in achievable rental rates. And that’s really all just driven off of change in inventory policies and overall significant increase in tenant demand.

Mike Bonneveld: [00:06:06]

And I think something important to touch on within the industrial space is one of the things – and I’ve mentioned this at a number of the investor events we’ve held and discussions with other Class F shareholders and at our Class A events – there was this really systemic change that was occurring pre-COVID, and then COVID really put it in hyperdrive. So, what that was, is – as most of you know from being in business school or doing a business course – when you are analyzing a company, whether you’re a manufacturer or a wholesaler or a retailer, the way you improve overall business financial productivity is from an inventory standpoint. You’re trying to get that amount of inventory and the days in inventory as small as possible. So, really a “just in time” inventory policy, which was really a North American phenomenon for decades in terms of how businesses ran.

Mike Bonneveld: [00:07:22]

What COVID – and this was changing slowly through the Amazons of the world and the Wayfairs, and a lot of the online retailing that was going on – but COVID really put this on speed. And so, because as you know, for the time period when everyone went home, and also, as we all read about and saw, the ability to actually get goods into our houses through that period was challenged. Right? The transport model was broken. If stuff was coming from Asia, or from Europe, you know, or even from southern US and Mexico, that supply chain was broken in terms of getting stuff through. It was difficult. Transport regulations were were changing, wait times in terms of factories being shut down.

Mike Bonneveld: [00:08:21]

So, what businesses found out is that if I don’t have the product or the part for what my end product is to my customer or consumer, I can’t sell it. And so, we’ve really gone from this “just in time” model to a “just in case” model. And so, the demand in terms of inventory requirements from a majority of businesses has drastically increased. And again, you see it as you drive through different nodes and different cities, and even with the amount of space that’s been created – and I believe in 2023, the projected new supply for Canada is about 44 million square feet – even at that level, where the overall availability across the country is still in the mid-twos.

Mike Bonneveld: [00:09:15]

And just from a frame of reference, what I would call a stabilized market level of availability in any given market generally is going to be in that 4.5% to 6% range. And that’s really where rents are stable, but tenants have options. Whereas the market we’re in right now at that 2%- 2.5%, tenants really have very, very few options. So, it’s really very much a landlord’s market. All that sets the stage for why we’ve seen over the past number of years such dramatic rent growth and demand, and also development across Canada.

Mike Bonneveld: [00:10:00]

So, why don’t I go into some of the, I would say, more material changes as part of the strategic direction we went down a couple of years ago that’s really brought the REIT to where we are today. So, as most of you will know, the REIT was formed in 2012. And over the course of that first eight, nine years, [we were] growing the portfolio slowly through individual asset acquisitions, some larger single acquisitions, but the bulk of that really being GTA-based. So, really growing that portfolio in our backyard, but also initially focusing more on small-bay, multi-bay product within Ontario, specifically southwestern Ontario and the GTA.

Mike Bonneveld: [00:11:02]

Back in 2020, Mike Mackenzie, who was the previous President of the REIT, and I, decided to undergo a strategic review where we looked at changing the composition of the portfolio. And what we’re really doing is high-grading. Our view was to high-grade the portfolio to something much more institutional-quality in terms of both tenant base and asset class, as opposed to where the portfolio was sitting back at that time. And so, as we’ve come out the other side, I think [it was] a very, very good decision in terms of where we sit from not only a portfolio standpoint, but also from a net balance sheet standpoint.

Mike Bonneveld: [00:11:56]

And again, I would say this lots of times, and Christian’s heard me say this a lot, is it’s better to be lucky than smart on this. No one saw what was coming over the previous two years in terms of such significant interest rate hikes, but I think it’s put the REIT in very good stead in terms of where we’ve ended up versus the starting position. And so, a bit of a highlight on what that evolution has been.

Mike Bonneveld: [00:12:27]

So, since mid-2020/end-2020 up until about Q3 of 2023, we sold just under 3 million square feet of space, So, about a third of the portfolio. That equated to a gross asset sale value of about $540 million. And that was done over the course of 19 individual transactions, which sounds like a lot of work. And it was. But the reason being is that a portfolio sale was not going to maximize proceeds for the REIT. There were lots of individual assets that, in our view – and it ended up being true – a one-off asset sale was going to achieve significantly better pricing than if we packaged it all together.

Mike Bonneveld: [00:13:18]

So, fairly material change, as you can imagine, in that scope of what the overall portfolio is, again, bringing it much more into a more modern portfolio in terms of age of asset class and institutional base.

Mike Bonneveld: [00:13:33]

The other thing that changing from small-bay to large-bay did is from a property management and asset management standpoint, it really made it a, I would say, simpler, cleaner portfolio in terms of looking after. We went from roughly 650 tenants – and that’s not the right number, but it’s approximate – down to 172 tenants. We went from about 145 buildings down to 49. And again, within that scope, it’s a larger portfolio. Increased NOI (Net Operating Income) over that period as well. So, a really high grading [with] what that portfolio looks like as we go forward.

Mike Bonneveld: [00:14:26]

And I think what it’s also done, as I said, it’s put us in a very, very good financial position as we’ve gone through and are in the middle of – and I think we’ll find out quickly that we’re already in – a recession. But we’re about 47% debt to IFRS (International Financial Reporting Standards) value, so really financially in a defensible place, but gives us a lot of capacity to take advantage of opportunities that we have seen over the past 6 to 8 months, and also that I continue to expect to see going into 2024 and into 2025.

Mike Bonneveld: [00:15:08]

But I think one of the material things that I touched on for the REIT going forward, is back in 2020 and 2021, we made a strategic decision to invest capital into our development pipeline. And so, at that time, we’d done one project in Calgary with a local partner there, which turned out very well. And we got introduced to a group called Rosefellow out of Montreal. So, Rosefellow is two individuals: one person from Montoni, which is a large Montreal developer, the other one from Broccolini. These two guys, who were really business development guys for those funds on the industrial side, decided to form their own company. They got tired of making money for somebody else. We partnered with them on two individual parcels, both of which have now been fully built out, fully leased, and we have now acquired the properties – if anybody’s got the [Industrial REIT] website (SkylineIndustrialREIT.ca) handy, [the properties are] Marien and Reverchon. And based on what trends we were seeing in the Montreal market from a demand rent growth standpoint, and also our appetite to invest further in that market, we put money into a fund with a Montreal-based PE (private equity) company with Rosefellow.

Mike Bonneveld: [00:16:48]

Roll forward roughly three years, we have 11 different projects that are at different stages of development right now. We’ve had a third project, which I mentioned, Mascouche, which we built with Rosefellow, where we’ve now acquired out their minority interest, and it’s within the portfolio. We’ve got two additional assets within the fund that are fully leased, complete, and we’ll be acquiring out our partners in Q1 of 2024. That’ll equate to about 350,000 square feet – again, class A, modern clear height. The one building, the Victor Davis building, has two tenants, Sleep Country and Steve Madden. The other one has a large logistics firm in 100% of the building.

Mike Bonneveld: [00:17:46]

And then as I look a little further into 2024, we have two additional projects in Candiac, which is a suburb of the south shore in Montreal – two projects there of about 600,000 square feet, which should both be completed by the end of Q2 [2024]. Our leasing is progressing very well there. And [we have] a third project which we only started at the end of Q3 of 2022: a large project in Kirkland, which is 570,000 square feet. Three buildings. And we are already 40% pre-leased, with final completion not slated on that project until mid-2024.

Mike Bonneveld: [00:18:36]

So, a lot in that pipeline. And really what that means is, it’s not just the opportunity to acquire partners, but from an investment standpoint, we have equity invested in all of these developments right now. And as you can imagine, equity invested in a development that isn’t yet earning a return – so, from our standpoint, [isn’t earning] a return for the investors. So, it’s really, call it, dead capital for the moment, until the project is built, fully leased, and income producing. So, as we look at the NOI in the portfolio right now, as we roll these development projects into the fund, even if we didn’t buy out our partners, there is the immediate impact of revenue generation on income that’s been deployed, that hasn’t been earning anything as it’s under that development auspices. And then when we buy out our partner as well, then being able to leverage up that equity return and achieve an even better return overall on that asset.

Mike Bonneveld: [00:19:48]

So, those are the larger projects or the big projects that are coming on stream within 2024. We have an equal amount of development assets within the Rosefellow fund that will be coming on in 2025. So, obviously we’re staggering projects. So, it’s a bit of a pig through the python in the next couple of years. But [we’re] really trying to take advantage of the point in the cycle where we are, but good growth, again, from that same perspective, in 2025.

Mike Bonneveld: [00:20:21]

And worth mentioning, too, while as part of the disposition program we sold out of all the small-bay assets we had in Ottawa, we have two development sites in Ottawa right now: one up in Kanata, and the other one down on Dealership Drive and more in the south of Ottawa near the Costco. We’re putting foundations in as we speak right now in Kanata. We have very good interest on the leasing side, so really, really positive about that. The Dealership Drive development, I would say, is a little slower from a city planning perspective, but that one should be more an end of 2025, early 2026 completion. So, again, when we look at just that embedded growth in terms of not only the the NOI, but that portfolio and pipeline of opportunity, really optimistic.

Mike Bonneveld: [00:21:26]

And so, a couple of other things in terms of looking at the portfolio and enhancing value. A lot of what we’ve been doing in the last 12-18 months, on top of the development side and acquisitions, is really looking at the assets that we retain within the portfolio outside the strategic disposition program and really trying to add value to that, whether it’s through expansion, through upgrading, looking at opportunities, re-leasing or high-grading that tenant as they roll. We’ve done a couple of expansions over the last couple of years, a notable one in Windsor where TRW [Automotive], a very large, well-capitalized automotive parts assembly in a newer building there, [we] expanded that and extended the the lease out, which is now over ten years. So, we added about 50,000 square feet there. I think from a direction standpoint, that’s [what I see] when I look at 2024, 2025.

Mike Bonneveld: [00:22:35]

Hopefully that gives everybody a good overview of where we grew up, how we switched gears a little bit in terms of asset class, but also what the expectation is, at least from my perspective, for 2024 and 2025. And maybe I’ll open it up to Christian for any questions that you may have, or anybody that’s logged in might have.

Christian Langman: [00:23:05]

I had a couple of questions here that I wanted to ask on the call. Firstly, you speak about the strategic disposition process, high-grading the portfolio. Can you maybe speak to the differences in leases between traditional class B and class A, and some of the advantages to being a landlord of a class A building, step-up leases and things like that.

Mike Bonneveld: [00:23:26]

Sure, that’s a good idea. All of the leases we have within the portfolio are essentially triple net. And what that means is, is that the tenants pay for virtually all of the expenses, and there’s always nuances in individual leases that are negotiated. But essentially, as taxes go up, the tenant pays more tax. It’s not a slippage on the fund unless the space is vacant.

Mike Bonneveld: [00:23:57]

The downside – and this is where we’re always constantly managing – the controllable expenses, but also, things like taxes where we’re appealing taxes on behalf of the tenants, because at the end of the day, the tenant only cares about the gross amount they pay. They don’t care who gets it, they just know they have to pay it. So, if the additional cost – be it operating or be it taxes – goes up, then eventually when that lease rolls, the tenant will be able to afford less rent theoretically. So, we work with the tenants to try and mitigate those expenses as much as we can.

Mike Bonneveld: [00:24:32]

One of the nuances in the last 2-3 years -and this has been a national phenomenon – is where you used to sign a lease, say it was a 10-year lease. The lease structure from rent would be five years at one rent and then five years at another rent, probably 10% to 15% higher than the starting rent. And that was very typical because the landlord wants to see some growth in that rent profile. If we can say there’s [been any] benefit to inflation over the last couple of years, it’s what inflation has done on the industrial side. For the majority of new leases we do, whether it’s existing tenants or on the new-build side, we now get annual escalations in every one of those leases. And that annual escalation, where it may have previously been tied to what CPI (Consumer Price Index) is, it’s now a set number.

Mike Bonneveld: [00:25:33]

And so, in Montreal, I would say the average we’re seeing on a new lease is, if the starting rent is $15, we’ll get an annual escalation over the life of that lease of 3% – and that ranges depending on market. We’ve got as high as 4% on some leases. Which again, doesn’t sound like a huge number. But when you start doing that math, as that percentage of the portfolio where we’re on that, call it, newly formed lease versus the previous one, as that increases, it becomes a contractual material increase as we look over the next five, ten years within the portfolio.

Christian Langman: [00:26:15]

Fantastic. I mean, Mike, the topic of a lot of conversation is interest rates and rising rates, and maybe just speak to how you’ve been able to mitigate the increase in interest rates based on your debt maturities, and also maybe [speak to] some of the propensity for banks or for lenders to provide debt on industrial assets versus office or apartment.

Mike Bonneveld: [00:26:40]

Yeah, sure. As I mentioned before, the dramatic increase especially over the last 12-18 months has affected the overall real estate investment market – and obviously driven by what’s happened with inflation. You know, generally what we do within the portfolio is we try and ladder out the maturities. So, as I mentioned before, we’re about 47% debt to IFRS value. We try, in a regular market, to limit that to no more than 15% to 20% in any one year. As I look to 2024, we are under 10% rolling, which is a good thing. And the majority of what is rolling, isn’t rolling until the back half of 2024, when I’m hoping we’re going to get a little bit of reprieve in terms of where rates are and where the bond market goes.

Mike Bonneveld: [00:27:46]

It’s a little lumpier in 2025; that was really driven by debt that was put on at the time of acquisition, primarily from a large deal we did in Q3 of 2022, [when] we acquired about 2.2 million square feet in Alberta from Hospitals of Ontario pension fund, who was in, I would say need – and [received] strategic advice from their Board to sell a bit of real estate to rebalance their portfolio. So, we took advantage of being well capitalized at that point in time and being able to take down, as I said, a very institutional-class portfolio, where we bought the portfolio at an average in-place rent of about $7.57-$7.75. And now, for the majority of leases we’re rolling in that portfolio, we’re doing in the $10, $11, $12 range.

Mike Bonneveld: [00:28:52]

So, again, I think in 2024, especially the first half, we’re going to be in a very similar position, Christian, that we are right now in terms of rates. I’m again hopeful that as we go through later in 2024 and 2025, that looks a little better. We’re not going back to, call it, the free money we had two years ago, but if we get to what another one of the economists says, or a couple of the economists have said, to go from 5% down to somewhere in that 3% range, I think we’re going to be in really good shape.

Mike Bonneveld: [00:29:29]

And one of the other things, as you questioned, Christian, is that industrial overall, as I mentioned, is is really in high demand not only from an investor standpoint, but a lender standpoint. So, as we’re refinancing assets now, or some of the recent acquisitions, the depth of lender availability is very strong. The core five banks and the life companies would be our primary lenders for, call it, 95% of the debt we do. And so, when we’re financing right now – we just got a quote in on a refinancing. We had six lenders come to the table within different spread range and different LTV (Loan to Value) range, but really, really good access to debt capital from those tier-one lenders.

Christian Langman: [00:30:23]

Fantastic. And Mike, just looking at the geographical breakdown of the fund, we’ve got about a third in Alberta, a third in Ontario, southwest Ontario focus, and a third in the Montreal-Ottawa area. It differs to the existing REITs. The majority of the REITs that we have on offer focus on southwestern Ontario. Maybe speak to why the Industrial REIT is different with its geographical breakdown. And then maybe where you see the geographical breakdown going in the next five years based on growth potential.

Mike Bonneveld: [00:30:50]

No. Absolutely. Yeah, the portfolio is never going to be perfect. I’d be a third Alberta, a third Ontario, and a third Quebec, primarily in Montreal. And then looking at stuff out on the East Coast, probably. Right now we’re about 50% Alberta. And the reason for that overweighting, again, was really opportunity driven, where, as I mentioned before, a lot of the small-bay stuff that we sold off in 2021, 2022 was primarily Ontario-based. So, that really reduced the weighting we had there. And then the opportunity in terms of where we saw the best value-add at that point in time was Alberta. And I think that market review and our understanding has really borne out well, as we’re seeing that 30%-40% increase on the rents that we acquired as part of that, and as I look in 2024 and 2025, we have this pipeline of development assets primarily in Quebec and Montreal.

Mike Bonneveld: [00:32:08]

So, we’re going to see that overall weighting increase, which will balance it out a little bit. And then as my team looks selectively at other opportunities over the next 12, 18 months, we’re going to focus more in Ontario, especially the GTA West region. We’re seeing lots of opportunities there. So, trying to be selective, but again, it’s never going to be perfect. But that’s where we would see that general direction adding over time.

Christian Langman: [00:32:47]

And Mike, you didn’t mention BC (British Columbia). I’m wondering, every time I look at a new Colliers report, BC has the #1 rent growth in the industrial market. Maybe you can speak to the reasons why we don’t invest in BC and maybe some of the advantages to the Alberta assets that we have based on that expensive BC market or Vancouver specifically.

Mike Bonneveld: [00:33:07]

Yeah, no, for sure. So, you’re absolutely right, Christian. And this goes really across all asset classes. BC, specifically Vancouver, is always a high-demand, city for people to invest in. But what has always been the case – and again, it doesn’t matter if you’re buying, you know, retail, multi-family, hotel, or industrial – everything is more expensive in BC and in Vancouver. That’s primarily attributed to the significant international investor primarily coming out of Asia and Southeast Asia. On top of that, it’s a much smaller universe of assets that are available. And so, you end up with the pension funds, which are trying to balance. And so, they buy footholds in Vancouver and Victoria. You have the offshore guys. But from a REIT perspective. And so, really any yield-producing vehicle where you’re getting, call it, same asset quality, same tenant quality, but it’s just 50 to 100 basis points more expensive. But your cost of debt is the same. It’s really hard to make that yield math work.

Mike Bonneveld: [00:34:30]

And so, all other things being equal, if there wasn’t that premium in terms of buying there, it doesn’t mean we don’t look, because we do. But because of that premium, and because of the negative impact that has from a distribution standpoint for a REIT and for our investors, it’s really hard for us to find that opportunity.

Mike Bonneveld: [00:34:55]

But one of the other things that I think you were alluding to, Christian, from an industrial perspective specifically, is what you’re seeing really over the last three, four years is that Calgary has really become that shipping logistics hub for Western Canada. And again, that’s due to price. It’s the cost of rent in Vancouver, it’s the cost to build, and it’s the availability of space, because the city of Vancouver and a lot of the surrounding suburbs don’t really want a lot of industrial because they want more residential in terms of the population demands there. And so, what’s happening is Calgary, and specifically the north part of Calgary by the airport and out in Balzac, has has ballooned in terms of the tenant demand, and especially big warehousing style, you know, the 500,000, 1 million square foot facilities.

Mike Bonneveld: [00:35:56]

And the logistical reasons, as one of the 3PL guys that I talk to explained to me, is that when you are shipping something from Asia or Southeast Asia, you pay how long it’s on the boat for. And so, what a lot of groups are doing is they’re shipping into Prince Rupert or Northern BC instead of Vancouver. It’s actually from Shanghai. It’s a day closer to go into Prince Rupert than Vancouver. On top of that, when the boat gets there, the wait time for a cargo ship in Vancouver can be significantly longer because of cruise ships, because of other port activity in Prince Rupert. The delay time is much shorter. It’s about a day once the cargo’s unloaded up in Prince Rupert for that direct line, whether it be via rail or by a truck to come straight down into Calgary. And so, from a time standpoint, it’s quicker to get into Calgary. It’s about a third of the cost to warehouse that product in Calgary. And then they ship it back into Vancouver if that’s where that product destination is. So, they get it into Vancouver by doing this securities route. They get it there quicker. They get it there cheaper. And then they’re also fulfilling the rest of their Western Canadian distribution requirements.

Mike Bonneveld: [00:37:25]

So, it’s one of those things when this guy’s explained it to me, to begin with, you’re trying to wrap your head around it and say, I don’t understand how this big long route and sending it back makes more sense. But at the end of the day, these big logistics providers and groups that are pulling a lot of product in from overseas, they run their algorithms on where their primary location is to hub this out of, and then have a smaller facility in Vancouver, a smaller one in Winnipeg, and a smaller one in the northwestern US.

Christian Langman: [00:38:05]

Fantastic. Thank you for that, Mike. And, maybe just a few closing thoughts. You’ve spoken a bit about the development, you’ve spoken about the growth opportunities, the geographical breakdown. Maybe can you just quickly speak to where you think the fund is going to go in the next three years in terms of continuing the tenant profiles, continuing to upgrade the portfolio, and where do we see more class A properties coming to the portfolio? I know you’ve had some recent acquisitions through the general market instead of development. Maybe speak to the Woodstock acquisition that we made recently?

Mike Bonneveld: [00:38:41]

Yeah, sure. Yeah, definitely, Christian, as I said, right, the growth into the entity over the next 12, 24 months, the primary role will be through that development pipeline, which is obviously best-in-class. And we’re looking at 32 foot clear, 40 foot clear warehousing logistics assets. And from a tenant standpoint the benefit of being, call it the co-developer in that situation, is we get to pick who the tenant is based on those parties interested. So, really looking at credit quality in terms of who they are, their ability to pay. But my leasing team is involved in every single lease that gets signed, as opposed to when you buy an asset that somebody else has done the leasing, you don’t get all the clauses that you want from an operator standpoint.

Mike Bonneveld: [00:39:45]

But yeah, from an overall credit standpoint, if I look at a couple of the assets, as I mentioned, that we’ve developed in Montreal: the Reverchon asset, which is a 325,000 square foot, single-tenant building, 32 foot clear, we have Nestle Canada in there for ten years with that annual escalating rent that I talked about. Victor Davis, which is an asset that we’re going to be acquiring in Q1. As I mentioned, Sleep Country, and Steve Madden. And then the asset in Woodstock that you mentioned, which we did buy from a third-party developer, is 150,000 square feet, right off the 401, 15-year lease with IPEX. So, a really good, coveted logistics provider there. That’s really the direction that we’re going to see most of the assets coming in. It doesn’t mean that every asset we buy will be a 1,2, 10 asset. But from a target standpoint, that’s really where we’re focusing our time and energies.

Christian Langman: [00:41:01]

And Mike, just before we go, we didn’t really touch on this much, but you just mentioned it. You have the leasing team, the financials, the tenants who are re-leasing. You also have in-house asset management. Can you maybe speak to the advantages of that vertical integration you spoke to? I think it was 19 different assets that we sold over 2021-2022 – maybe [speak to] some of the costs that we’ve saved with legal, having that vertical integration?

Mike Bonneveld: [00:41:25]

Sure. Yeah. And that’s really for some of the people listening that maybe aren’t as familiar with Skyline is – it’s really across all the funds – it’s really vertically integrated, and having internal resources to do all that. And so, as Christian mentioned, we have in-house legal. So, we have six, seven lawyers that provide work for acquisitions, dispositions, re-financings, lease reviews. So, we’re not paying hourly on some of this stuff. We’ve got in-house construction, which is – having been on a public company running acquisitions – having that skill set internally, being able to send your own team out to look at existing assets or working on some of the development stuff, having that double-check on the contractors that we’ve engaged to make sure that all the deficiencies are looked after, that what you signed up to build and acquire is actually what you’re getting. That’s really key. And being able to just get up from your desk and go and have that discussion as opposed to trying to get your consultant on the phone and get them to prioritize your project versus somebody else’s.

Mike Bonneveld: [00:42:53]

We obviously still use third-party consultants for components of the business where it makes sense, i.e. on acquisition or development, we’ll hire third-party environmental and structural work because we always want that third-party review as well. But lenders always want an independent third-party for both of those components. That said, I have an in-house environmental engineer that reviews everything in our portfolio. She has every tenant categorized in terms of use, what they’re doing in the space. So, we can monitor and make sure that from an environmental standpoint and that building and what’s going on, that the REIT and its investors are protected.

Christian Langman: [00:43:42]

Mike, I meant to ask this question earlier, just maybe speak quickly to the valuation policy of the fund. It does differ to our existing REITs. Maybe you can just dive into how you derive that NAV (Net Asset Value).

Mike Bonneveld: [00:43:54]

Yeah, sure. And similarly to, I would say, the majority of public companies and virtually all institutions, we value 100% of our portfolio by third parties every single year. Our policy is that every quarter, we do 25% of the portfolio in terms of hiring third-party external appraisers, such as the Altus [Group], Colliers, Cushman & Wakefield, Jones Lang Lasalle (JLL). We use them, we mix them up for different assets and different locations, so that every year, every asset has that third-party independent view. And that’s what gets reviewed by the Board when we’re looking at unit price and NAV. We also, as part of that, with each quarter, with 25% being reviewed by third parties – and I have an AIC (Appraisal Institute of Canada member) on my team – we go through the other 75% every quarter and look at whether there has been something significant from a leasing standpoint that would change the valuation? Has something changed that we should be amending that other asset that wasn’t third-party?

Mike Bonneveld: [00:45:15]

So, even though I do think it’s a bit overkill because real estate doesn’t move that quickly generally, it’s really trying to have best practices in terms of valuing the real estate, and making sure that we’re having that independent view. I would say we generally do have that institutional mentality in terms of making sure that we are somewhat conservative in what the underwriting is, because the last thing we ever want to do is try and value to a spike in a moment in time, and then three months later, something changes, like the government of Canada does a 75 basis point rate increase and then you have to retrench a little bit. So, it’s a fairly time-consuming, comprehensive method. But I think given the markets we’re in right now, it’s important to do so.

Christian Langman: [00:46:18]

Fantastic. Well, Mike, we don’t have any questions here through Teams. So, I think we can close it off. For anyone who’s interested in investing in the fund, the next trade date for the Industrial REIT is actually January 8th next year [2024]. And the [Fundserv] code is SKY2012. If you have any additional questions, please feel free to reach out to myself or Mike, and we’ll be able to answer them as soon as possible. Currently, the distribution for the mandate is sitting around 4.4%, and it pays out monthly. It also offers monthly liquidity after an initial four month hold. So, we appreciate the time you’ve spent with us to hear the Industrial REIT’s story and some of the growth potential going forward. And for anyone that’s interested, feel free to reach out at your convenience.

Mike Bonneveld: [00:47:04]

Great. Thanks, Christian.

Christian Langman: [00:47:05]

Thank you Mike, have a great day.

Mike Bonneveld: [00:47:07]

Thanks for joining, everybody.