2024 AGM

Watch the Skyline Apartment REIT Discussion

[00:00:19] Wayne Byrd:

Hello and welcome valued Skyline Investors. Thank you for your continued support of our investment objectives and for tuning in today to get a quick update on Skyline Apartment REIT, its portfolio, and its strategies.

Our oldest investment fund, created in 2006, Skyline Apartment REIT has had an incredible history of stability, resilience, strength, and growth. I’m joined today by Matt Organ, President of Skyline Apartment REIT, to get his perspective on some highlights from 2023, and then the REIT’s strategy going forward.

Thanks very much, Matt, for joining.

[00:00:52] Matthew Organ:

Yeah, glad to be here.

[00:00:53] Wayne Byrd:

Well, let’s jump right into it. Matt, I’d like to start with getting a brief summary of the 2023 performance and how the Apartment REIT performed.

[00:01:01] Matthew Organ:

Yes, 2023 was a busy year for the Apartment REIT. We did roughly about $277 million worth of acquisitions, which consisted of some old stock and a bunch of development properties that were brought online. In addition to that, we sold roughly about 900 suites as well.

So, strategy around that, obviously, is to to turn over some of the older stock, better use of capital into some new properties that don’t require Capex going forward. In addition to that, we also continued our strategic plan to divest of non-core assets, such as things that are not residential. So, we continued on and sold one of our largest non-res assets, which was 136,000 square feet in one of the Co-operators properties, as that lease was coming due and no longer renewing.

[00:01:51] Wayne Byrd:

All right. Hot topic 2023-2024: interest rates. So, over the past year, specifically, how has your fund dealt with the interest rates and how have they managed them? And what’s been the strategy?

[00:02:04] Matthew Organ:

Yeah, interest rates, as you mentioned, are a hot topic and have been for the last couple of years. I think the Apartment REIT strategy has always been, even pre-Covid and all the way through since inception, has been the laddering of mortgages. So, our strategy obviously is to make sure that we smooth out the peaks and valleys in the mortgage cycle and the interest rate exposure to try to give us an overall weighted average mortgage rate that remains smooth and nothing that, upon renewal, is going to make a significant difference in our distributable income one way or the other.

So, obviously we do that. We will take short-term debt where it makes sense. We’ll take long-term debt where it makes sense. But the biggest part of it is looking at that mortgage schedule when we’re either acquiring something or renewing something and trying to plot those mortgages specifically in a year that allows that even flow.

To give you an example of that, I believe in 2024, we have roughly about 8% of our mortgages coming due. I think in ’25 it’s about 12%, and around 9% or so in the following year. So, in the next three years, we average about 30% of our mortgages coming due, which again, about 10% roughly each year, and kind of evens that out for us.

[00:03:18] Wayne Byrd:

So, you’ve talked about waterfalling, cascading the maturity dates of the mortgages. Let’s get into it a little bit deeper and talk about your interest rate sensitivity and what bearing, and impact does that have on the Fund overall?

[00:03:31] Matthew Organ:

So, every year when we’re forecasting a look ahead for the next year, we basically do a five-year interest rate sensitivity study or chart. And what we look at is we look at our weighted average mortgage rate within each of the given years, and we look at where mortgage rates are currently. And obviously, this chart adjusts as time moves on.

What we’re really looking for is to see what the impact is of mortgage renewals at a given rate, at the point in time, and what overall impact they will have on our weighted average rate, and really what the interest rate, the incremental interest rate cost is going to be to the REIT, because obviously, if you’re renewing at a higher rate, any of the mortgages are outgoing versus incoming, you’re going to have incremental interest costs.

And then what we look at on the other side of it is, what is our income growth? What do we have to offset those interest rate increases? So, at this point in time, which really hasn’t changed much over the last few years, we still maintain about an average of $250 capture rate on our suite turns. And we’re still obtaining about a 20% suite turn per year on average.

So, when we look at that in 2024, I use as an example. We have an incremental interest cost, sort of worst case scenario, pegged at about $3.5 million of extra costs as those mortgages renew. What we have on the other side of it is about $13 million worth of income growth, simply by operating the business that we have without adding any property, just operating the existing portfolio, turning over those suites as they come due, and capturing that mark-to-market gap, or that income growth upon suite turn.

[00:05:09] Wayne Byrd:

Great. A lot of financial data in there, which I love, I’m sure is tough to kind of grasp over this messaging, but it really comes down to; each year on turnover, the increase in rent is at least matching, or further outpacing, the incremental interest cost, which is pretty significant and is a good safety net for investors to understand.

So, Matt, you’ve demonstrated that portfolio management is more than just acquiring for the sake of acquiring. Active management is not only acquiring but developing and also selling. What’s the asset management team been up to this year and what’s been the strategy behind all the moves?

[00:05:47] Matthew Organ:

So, over the past year, as time goes on, we redevelop and shift our asset management plan. So, when I look back years and years ago when the REIT was formed back in 2006, we started by buying single assets in a lot of different locations, a lot of different cities, and different towns throughout Ontario, and then expanded outside into different provinces and kind of did the same thing.

It was kind of like a shotgun effect, right? We would buy things all over the place, buy one asset, and then put infill around it and try to acquire a number of other assets within a given geographical region in order to form a good region that made sense from a management efficiency standpoint. A lot of those properties that we bought back in the early years were built back in the 1970s, right? The majority of the housing built in Ontario was built back in the 70s and at that time it was sort of 30 years old.

Well, now it’s 55-plus years old and aging. We’ve had great success with some of those assets, obviously by injecting capital into them, turning over suites, capturing good gains. And that’s really what’s driven our unit value over the years, is that mark-to-market gap that we always talk about. And it’s been it’s been hugely successful. What we’re looking at this point. Because things are shifting in the marketplace, right?

[00:07:02] Matthew Organ:

You’ve got baby boomers at the age that they are at. A lot of these people are looking to sell homes; they’re looking to either purchase a condo or, in a lot of cases, they’re happy to go into a rental if you can provide them with the type of rental that they’re looking for. And those are not the 1970s buildings.

So, what we’ve been concentrating on over the last few years, including this year and including next year and looking forward, is acquiring, or developing new build assets, right? And these new build assets offer the amenities that a lot of these baby boomers are looking for. They’ve got insuite laundry, granite countertops, a good social room, amenities, maybe pickleball courts, a lot of things that really fit the lifestyle of that demographic. And it’s been a great market for us, it’s a high uptake on it. We have a lot of success leasing to that demographic. And they make great tenants, right? They’re the type of tenants that we want and it’s something that we’re going to continue to pursue.

So, we’ve really concentrated on pruning some of our older assets and being very strategic geographically where those are. We’re getting out of some of the little places in Northern Ontario where we once were and mainly from a management efficiency standpoint, right? We’re based out of Guelph, obviously.

[00:08:13] Matthew Organ:

We like the 401 corridor, we like things up around Lake Huron and Georgian Bay, and it’s a lot easier if we have staffing issues or for any management issue at all to replace somebody or have somebody infill if we were to have a vacant position come up if we’ve got things a little closer to home.

So, we’re going to continue to do that, we’ll continue to prune old assets, we’ll continue to develop new assets and more institutional quality is really what it boils down to. And I’ll give you an example of that:

So, this past year, we traded off a bunch of old assets, and we bought a new asset in downtown Cambridge, or Hespeler I guess it is, 49 Queen Street, and it’s probably the flagship of our portfolio right now. It’s a beautiful building, right on the river, large suites and a great demographic that comes with that type of asset. And again, it just strengthens the overall portfolio as a whole. If we were looking to ever sell something, a large thing to institutional buyer, these are the types of things that they’re after, right?

So, it just makes it more liquid if we ever needed that option but it’s also something that there’s great rent potential in and great growth for our investors.

[00:09:23] Wayne Byrd:

Thanks for that recap, Matt. That demonstrated the importance of active portfolio management and how it really sets forth this investment, this fund for great position in the future. So, let’s talk about the future. What would you like to leave our investors with today?

[00:09:40] Matthew Organ:

I think the biggest thing for our investors, and myself as an investor, that excite me the most is our mark-to market gap, right? It’s the future income growth potential that we’re unlocking with every suite turn we do, each and every month, and watching that go forward.

Obviously, as everyone’s aware, interest rates went up, we increased, our cap rate went up last year, and we kind of had a bit of an absorption of some of our growth, which we did, we absorbed it. We took it in there, our share price didn’t fluctuate at all. It was all about stability last year. And we’re back. We’ve sort of went through that stability piece and in 2024 it’s going to be about growth.

So, we’ve got really good mark-to-market again, about $380 a suite across the board on average. So, again our capture rate on that is around $250 per suite, per month is what we’ve been averaging. And when we model that out throughout the year, there’s a lot of income growth there, and a lot of that income growth should translate into unit value growth. So, that’s the exciting piece that I’m looking forward to, and we look forward to the balance of the year.

[00:10:41] Wayne Byrd:

Fantastic. Incredible insight. Great outlook.

Investors, thank you for all joining us today. You can reach out to your Skyline Wealth Advisor, or anyone for that matter on the Wealth Management team, and as always, we appreciate your continued support of our investment strategies and mandates. Thank you.

[00:10:59] Matthew Organ:

Thank you.

[00:11:10] Matthew Organ:

In conclusion, I would like to share some exciting news with you. As we’ve moved through the first five months of 2024, our income growth has been tremendous. We will be moving our unit value upwards by 2.7%, from $27.75 a unit to $28.50 a unit. As we look to the balance of the year our income growth should remain strong. We will continue to monitor that, and I look forward to sharing any future changes with you. Thank you.

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