Fast-growing Skyline Apartment REIT has bumped the price of its units from $11.00 to $13.25, a reflection of the growing value of the REIT’s portfolio.
“Units have been $11 for a couple years now and we just did a new net pricing model and established the $13.25 unit price,” said Jason Castellan, Skyline Apartment REIT’s Co-founder and Chief Executive Officer.
“It was a fairly large jump but we knew that the value of the real estate had moved,” he added. “The value of the real estate moves because of the fruits of your labour and that takes time. You put cost-savings strategies in place and you drive revenue organically and all that stuff and it lags.”
The Guelph, ON-based company determined its new unit value first by evaluating the REIT’s portfolio of assets at its December 2012 year end. From that, all outstanding debts in the form of mortgages were subtracted to uncover the REIT’s total equity. Finally, that total equity was divided by the number of outstanding units to create a fair value for the REIT units.
Shrewd purchases and operational discipline within the portfolio account for some of that increase along with market forces. “Some of that appreciation comes from cap rate compression as well. We can’t take credit for all of it. But I think overall our portfolio is the healthiest it has ever been and that reflects in increased values.”
Busy 2013 for acquisitions
Skyline Apartment REIT added approximately $100-million in new real estate in the last year and the REIT expects to easily surpass that figure this year. “We have got tentatively another 1200 units in the pipe,” said Castellan. “If everything were to come to fruition that we are working on, we would be adding about another $100 million in real estate.” That represents six different potential deals which are all currently in the due diligence process.
“Some bigger ones, some smaller ones,” said the Skyline Apartment REIT CEO. “It is going to be another big year for us.”
The REIT currently consists of 8,459 units within 112 buildings (in 42 different B and C market communities across Ontario). It also includes 720,000 square feet of commercial real estate. As of the end of 2012, the REIT held $820 million in assets.
“There is still lots of real estate in Ontario, it is the highest concentration of multi-residential real estate (in the country), so we will continue. Why go beyond your own backyard when you don’t have to?”
Skyline Apartment REIT has had success adding to its portfolio despite operating in what participants agree is a tough, seller’s market for multi-res buildings. The REIT’s secret seems to be its “no deal too small” approach.
“We will buy buildings one at a time,” said Castellan. “We will buy 60, 80, 100-unit apartment buildings. From moms and pops, one at a time and it takes lots of work but when you consolidate that real estate, that is when we question our IFRS (International Financial Reporting Standards) valuations of $820-million. Would we sell for that? We certainly wouldn’t. We think there is a portfolio premium for us from all our work from consolidating and acquiring the fragmented ownership of apartments.”
A secondary market focus
Perhaps it’s a result of coming out of Guelph, but Skyline Apartment’s strategy of concentrating on B and C markets in Ontario has paid off. “With the secondary and tertiary markets that we are in, the rental stock has not kept up with the population in 90% of the communities that we buy in,” explained the REIT’s CEO.
With no new rental stock coming on stream in most of the province’s smaller cities and populations growing faster than the building of single family homes, the REIT finds itself in a position to make significant rent increases.
“We are seeing organic opportunities to improve dramatically the quality of the buildings, where we can get some major rent increases, because people are crying for it, they are willing to rent and ready to pay good money for it.”
He gives the example of a building in Hamilton where average rents are rising $300 per month from a base of $850 after capital improvements. “You have to spend money, but it is still a great internal return. Doing that to your building is better than buying a new one.”
Skyline Apartment’s portfolio currently has a 50-50 debt to equity ratio, at the low end of its range considering the REIT can go up to 70% loan to value for its portfolio. “We get as much debt as we can from the lenders but they are really the bottleneck on how much we can borrow.”
Castellan would like to increase the leverage for the REIT’s overall portfolio. “As much as being over-levered is an issue, when you are trying to distribute strong cash flows to your investors, under-leverage is just as much a problem.”
Mechanics of a unit price increase
As an open-ended, private REIT, Skyline Apartment REIT is in the position to set its unit price, unlike public REITs where the market sets the price, for good or ill.
Any increases in unit value have to be more popular with existing unitholders than those investors looking to buy units for the first time or add to an existing position. What doesn’t change with the unit price increase is the REIT’s distribution of 99 cents, which works out to a 7.5% yield.
“That is still a premium to our peers in the public market,” said Castellan. “We are approaching a $1-billion REIT value, have a stable group of properties, a stable portfolio, so for an investor to get that and get a 7.5% yield, they just can’t get that in the public markets.”
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