With the purchase of a 60-property package of light industrial and office space in Ontario markets in a two-part, $242-million deal, the Guelph-based Skyline Group of Cos. has pushed its holdings beyond the $1-billion threshold for the first time in its 13-year history.
The acquisition, from a private real estate investment fund based in Toronto, is comprised of an initial $120-million for a portfolio centered upon the Greater Toronto Area with the second phase made up of properties in the city of Ottawa.
Beyond being the biggest single deal is Skyline’s history, it is first major acquisition for the Skyline Commercial REIT , which was launched in January. It represents a huge bet on the continued economic recovery of Ontario and, by extension, the United States.
“The economy is we think on the rebound and on the recovery, albeit slowly,” said Jason Castellan, who is CEO and Co-Founder of the Skyline Commercial REIT and the Skyline Group. “We think this is a good time for us to be stepping in and really ramping up the commercial portfolio.”
Following the acquisition, the commercial REIT will have over 430 individual tenants, mostly light industrial and office space. No single tenant will represent more than 1.8% of the REIT’s gross revenue, again, which is part of its “multi-tenant diversification and stability model.”
Skyline is comfortable with having many and varied tenants, Castellan said, given the experience it has gained over the years with its much larger apartment REIT.
Older, But Profitable
The GTA is characterized by having plenty of older light industrial space, and that is precisely what Skyline has purchased in this transaction. And once again, Skyline leans on its apartment experience to explain how it makes sense.
“Our apartments are older stock, we buy those on discounts to replacement costs, and this is what a lot of this real estate is,” said the Skyline CEO, who adds he is quite comfortable owning a portfolio that operates at a discount to market rents.
“We feel in an economy that people are starting up (businesses) and companies are growing, they are going to be looking for value. We are going to be offering that value, that rent level. Tenants are going to have to take older stock, but buildings can be retrofit, they can be improved upon, and that is what we are going to do.”
In the GTA, much of the new portfolio is capturing rent in the $5 to $6 square foot range, he said.
There is one key difference compared with the multi-residential business that Skyline is happy with. “Your base rent is your base rent. More of the volatile hydro, utilities and taxes are passed on to the tenants,” when it comes to the commercial portfolio.
Scattered Across the GTA, Not So In Ottawa
While the phase one GTA portfolio is scattered from Mississauga to Vaughan, Brampton and beyond, Skyline’s new holdings in the capital are “right inside Ottawa” with 32 properties. “What is nice about being inside the greenbelt where we are is there is only a finite amount of land that you can develop,” said Castellan. It doesn’t hurt that the end customer for most of his new tenants is the government of Canada.
The Skyline CEO notes that the pickings are much more numerous in the commercial space than with apartments, which means its newer REIT could grow at a faster pace. “For every apartment that we come across, we can see 10 deals of similar size” in industrial properties that are up for sale. “We are seeing lots of things under $10 million. That is what we are going to do once we get this wrapped up, we are going to expand the commercial REIT indefinitely open-ended like the apartment REIT when accretive opportunities present themselves.”
Castellan sees no need to look beyond its growing Ontario base with its newer REIT. “The Mississauga-GTA market is the largest industrial, light-industrial market in Canada. So we don’t have to wander far for deals.”
Skyline worked with Primecorp Commercial Realty’s Principal, Aik Aliferis, on its latest deal. “He brings us a lot of business in the apartment REIT and he knew that we were launching the commercial REIT and kudos to him for putting us together with the seller to do this deal,” Castellan said of the broker.
Aliferis, for his part, describes Skyline as “very careful and diligent buyers” that “are able to see opportunities and execute on those opportunities greatly enhancing their portfolios.”
The industrial deal is in fact the second time that buyer and seller have agreed on a price, the Skyline CEO said. His apartment REIT made one of its largest multi-residential purchases in 2008 with the unnamed Toronto investment fund.
Skyline, which also closed on a $9-million apartment buy this week in North Bay, is approaching $800 million in assets in its Skyline Apartment REIT and will have about $270-million worth of commercial assets in its smaller REIT once the latest deal closes.
“The REITs are very independent of each other, but it is full steam ahead on both fronts.”