Toronto-based commercial real estate investor and asset manager Slate Properties Inc. hopes to raise $50 million through the initial public offering of its Slate U.S. Opportunity Realty Trust.
Expected to close on April 20, the Trust will acquire, own and lease a portfolio of commercial real estate properties in the U.S. with a focus on anchored retail properties.
According to its final prospectus, Slate states that the current retail property market in the U.S., with near 25-year high vacancy rates due to decreased consumer spending, has created an opportunity to buy “well-located retail assets, specifically anchored retail properties, at a significant discount to peak market value and replacement cost.”
Despite bankruptcy filings for the likes of Bed, Bath & Beyond, Linens N’ Things, Borders and Circuit City, Slate believes anchored retail offering “daily-need products” is more insulated from any economic downturn.
The Slate Trust strategy would build on purchase of six U.S. grocery-anchored retail properties in the second quarter of 2011. That portfolio is contained in Slate’s first U.S. Fund, U.S. Grocery-Anchored Retail (1A), (1B) and (1C) Limited Partnerships, made up of six shopping plazas in Ohio, Wisconsin, and Pennsylvania totalling 790,000 square feet with a total transaction value of U.S. $44.8 million.
Secondary Is Slate’s First Choice
Given that the company does not expect the real estate market to turn around quickly, Slate plans to seek and buy properties located in secondary markets within the Eastern U.S.
The real estate company said it will utilize three criteria to identify and buy property:
1) Secondary Markets vs. Primary Markets. Primary U.S. markets such as New York, Los Angeles and Washington, currently get the most attention from investors. Slate will target secondary U.S. cities like Pittsburgh, Columbus and Charlotte “where there is typically less competition for quality assets.” Secondary U.S. markets have the benefit of being much larger
than primary Canadian markets, eg. Buffalo-Niagara, New York, the 50th most populous Metropolitan Statistical Area (MSA) in the U.S. with a population of 1.12 million is roughly equal to Edmonton, (1.18 million) which is the sixth largest Census Metropolitan Area (CMA) in Canada. In terms of commercial real estate inventory, the 52 U.S. MSAs make up 15.5 billion square feet of inventory and the 31 MSAs in the Eastern U.S. comprise approximately 8.5 billion square feet of inventory compared to 1.9 billion square feet in the six Canadian markets.
2) Transaction Size. Slate states there is an opportunity exists to acquire high-quality assets priced between $2 million and $20 million (including the impact of leverage). Each such transaction would be expected to require approximately $1 million to $7 million of equity investment. Slate contends that assets in this price range are generally too small to attract large institutional investors and too large for private investors.
3) Asset Quality. Demand remains strong for A quality trophy commercial real estate throughout the U.S. and bidding in this class remains extremely competitive. Slate believes an opportunity exists in the A and B quality markets where the pool of buyers is smaller and not as well capitalized.
Since it was formed, Slate has acquired 36 commercial real estate assets across North America with a total value over C$900 million. The company said “extensive relationships” with brokers, managers and other market
participants have resulted in a significant number of the acquisitions occurring on an “off market” or discount basis, a strategy it intends to use again.
B Markets Will Hold A Assets, It is Hoped
While REITs have been focused on buying in “large gateway U.S. cities and trophy assets in an effort to reduce perceived risk” prices are rising and those REITs will eventually look to secondary markets with stable cash flows. At that time the Trust expects to be a seller. “Slate has significant experience assembling individual real estate assets into portfolios, maximizing property cash flows and selling to institutional investors,” it states in its prospectus.
Slate and the Slate Trust are headed by two brothers, Blair and Brady Welch, who will act as chief executive officer and chief financial officer respectively.
The prospectus states that both have more than 16 years of experience in the real estate industry. Before co-founding Slate in 2004, Blair. Welch worked with First National Financial Corporation from 2002 until 2005 and prior to that was a consultant to General Motors Acceptance Corporation Commercial Mortgage, a Vice-President and original member of New York-based Fortress Investment Group, and in the corporate finance group of Bankers Trust in New York and Toronto.
Brady Welch, who also has more than 16 years of experience in the real estate industry, spent the majority of his career managing real estate portfolios for large U.S. private equity firms before co-founding Slate. He held senior roles with Fortress Investment Group and before that managed the joint venture investments of Truscan (the former real estate arm of Canada Trust) in Class A office towers in Canada’s five major urban markets. He started with Brazos Advisors (now Lonestar).
The two men also come from a real estate background. Their father Norbert Welch created his own company and spent 40 years in the real estate development business.