C2C Industrial Properties Inc.’s recent acquisition of a property in London, Ont., its first since it’s listing on the TSX Venture Exchange in May (CCH: TSX-V), provides something of a blueprint for future acquisitions.
The Toronto-based real estate company recently announced it had completed a $4.57-million acquisition of a 5.6 acre property near the London, Ontario airport. Housing defence contractor General Dynamics is a sole tenant, occupying a one-storey, 77,877 square foot, building on the property.
C2C Industrial was created by asset manager Strathallen Capital Corp. to first manage two million square feet of industrial property for the parent company, but secondly to grow holdings of this property class.
Strathallen was established in 2003 by the former principals of Caber Capital and has since then acquired retail, office and industrial properties across Canada. The largest industrial property in Strathallen’s portfolio is the Brant Trade & Industrial Park in Brantford, Ont. The site, according to the firm’s website, features 1.4 million sq. ft. of leased industrial buildings and 90 acres of industrial/retail land for development.
“[The London property] was our second purchase, it came a few days after the initial close (on the TSX in May)… and we are out working hard trying to grow the portfolio,” said Christopher Ross, president of the industrial real estate company.
To bankroll future purchases, C2C will return to the equity markets for funding. “[It] is a little bit of a different approach than Strathallen does on the retail side, where we have money funded in our pooled investment vehicles,” said Ross.
Strathallen is acting as the asset manager of C2C Industrial, providing all executive management, acquisition services and asset property management for the company nation-wide.
C2C Industrial aims to convert to a real estate investment trust over time, joining Pure Industrial REIT as just the second such REIT in Canada after Pure Industrial Real Estate Trust (PIRET). “There clearly is space for that kind of company in the market and we are hoping to capitalize on that,” said Ross.
Where the commercial real estate market is increasingly competitive and consolidated, the market for industrial properties is extremely fragmented and provides opportunities for companies like C2C Industrial, explained Ross. “There is 1.8 billion square feet of industrial space in the 10 big markets. When you take that kind of volume of space and you take a fragmented market, it just naturally creates more opportunities.
“I don’t want to say that it is easy, because it is not, but I would suggest that there are more opportunities that make sense for a company like C2C on the industrial side than we are seeing in retail.”
When it comes to industrial property investment trusts, Canada is underfunded compared to the U.S. The market capitalization of pure play industrial REITs in Canada is only about $200 million, compared to about $14 billion south of the border.
“Three percent of the industrial, of that 1.8 billion sq. ft. I was talking about is owned by public market companies,” said Ross. “So where is it? That is our job to go and identify it.”
Much of that industrial property is owned by private individuals, many of whom facing tax or estate issues and are looking to sell, he said. “So there is an opportunity to go out there and start consolidating that fragmented market and that is really the core of what we are trying to do at C2C.”
Strong, second-tier markets will be a focus for C2C Industrial going forward, he said. “I think that there are markets in the country that get a little bit overlooked and are strong on a space fundamental perspective,” added Ross. “ So low vacancies, consistent rents are really what drives that, like a Winnipeg as an example is a very strong market on a space fundamental basis, because there are less institutions going there to both buy and develop.”
The recent London acquisition fits the mould somewhat, although the south western Ontario city represents a weaker market on a space fundamentals basis than a city such as Winnipeg.
That makes proper site selection a critical consideration. “When you are going into a market like London, what is extremely important is where the building is located,” he said. “ You probably want to be close to the airport or close to the highway, a lot of industrial in London is neither of those two and you need a strong covenant.”
“We as a company are willing to go to some of the smaller markets for sure. We think there is a lot of potential ability to find some good acquisitions there and by good I mean accretive to our eventual distribution yields and at sufficient spreads to the mortgage rate,” he said. “In London, General Dynamics, this is a great company, multinational company, lots of revenue, it is public, you can look at their financial statements (and) understand what it is that they are doing.”
“So if you are going to go to a weaker market where the fundamentals are a little bit weaker like London, make sure you have a good building and make sure that you have a great tenant.”
The $4,57-million London purchase was funded by a first mortgage in the principal amount of $2,640,000 at a rate of 4.36% per year for 5 years with the rest of the purchase in cash. The property is 100% leased for 4.5 years from closing on a net basis of $4.90 per square foot, per annum to General Dynamics.
Ross joined Strathallen last year to head up the industrial property company. Prior to that he was on the national investment team at CB Richard Ellis working on investment sales, where he worked for six years and prior to that was in capital markets with Merrill Lynch.