2024 AGM

Watch the Skyline Retail REIT Discussion

[00:00:20] 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 Retail REIT portfolio and its strategies. Since its inception in late 2013, Skyline Retail REIT has continued to demonstrate strength and stability amidst economic shifts, challenges, and turbulent times. I’m joined today by Gord Driedger, retiring President of Skyline Retail REIT, and incumbent President Craig Leslie. They’re here today to get their perspective on some highlights from 2023 and Skyline Retail REIT’s strategy moving forward. Thanks for joining me, Gord and Craig.

[00:01:01] Craig Leslie:

Thanks, Wayne.

[00:01:02] Wayne Byrd:

Gord, let’s kick things off with you. Looking back at 2023, let’s talk about how Skyline Retail REIT fared last year and touch upon really what makes the Retail REIT unique in the industry segment.

[00:01:15] Gordon Driedger:

Thanks, Wayne. We had a very good year last year. And I’ll just describe some of the things that made it a good year and Craig will add some things later on. Since the inception of the REIT in 2013, as you mentioned, we’ve been kind of handpicking and curating a portfolio that is essential-based and the initial reason for that was to ensure that it was e-commerce resistant. E-commerce ten years ago was just starting out and we saw that as a reason to ensure that we kept our fashion exposure very low, that the make-up of our tenants was essentials-based. So, what does that mean? It means pharmacy. It means food stores. It means quick service restaurants, financial institutions, doctors’ offices. These are things that people need to use and access, no matter what part of the economic cycle that they’re in. So, over the last ten years, we’ve handpicked assets that fit a very specific criteria for investment. What we’ve been left with, which is why we’re starting to and continue to reap the benefits of of the investments, we’re left with a portfolio that is very unified, very homogenous in terms of its essentials focus, which, taking 2023 as an example, we have high occupancy, the tenants are doing exceptionally well. We know that the food stores in our in our country are doing exceptionally well, as are the quick service restaurants, the banks.

[00:02:57] Gordon Driedger:

So, they’re able to pay rents. We ensure that we operate the best in a trade area, the best shopping center. So, there’s never any question that when they want to renew, they want to renew their premises in our shopping center. That is good for us in the sense that we’re growing rents and we’re really growing rents at a rate that’s higher than we’ve really seen for a very long time in our industry. The other aspect of our approach, and our philosophy and our strategy, was to really focus on the secondary markets. Not necessarily smaller markets, but secondary markets. That means that we can own the dominant asset in those markets, we can attract the best retailers. And what’s happening of late, we know the immigration in Canada is exploding, those secondary markets are growing as fast now as some of the primary markets. And the primary markets in Canada really are Montreal, Vancouver, Toronto, of course. So, in the secondary markets, there’s really good growth from an immigration perspective, all really supporting high occupancy, good rents, great traffic in our sector.

[00:04:17] Wayne Byrd:

Yeah. Thanks, Gordon. When you kind of talked about the hand picking and the creation of it since the inception, being really looking at insuring against e-commerce, I think, I know, our investors have really heard us talk about this, predominantly in the last 3 to 4 years. Is it proven itself on how pandemic resilient and resistant it was, which is quite impressive as well, when we then realize and we like to really talk about essentials-based. And that is, again, the unique piece that has proven that it isn’t just about e-commerce, but it’s then these other economic shifts or health concerns and scares that have hit us and how we’ve performed through. Incredible.

[00:04:58] Wayne Byrd:

So, Craig, can you speak a little more to the benefits of our assets being in these communities and how that will impact the Fund?

[00:05:05] Craig Leslie:

Yeah, certainly. So, I think the benefits really are twofold. These these secondary communities, they do tend to be a little smaller. So, first and foremost, we typically have the best asset in that particular market. So, when you have that best asset you tend to control it. So, that’s a major advantage for us. I think the second element there is in those smaller markets, you may have a town that has a population increase because of this population boom of 2 or 3000 people. Now, is that material to the town? It is. Is it material to the retailers? Absolutely. It’ll drive their sales. and if they have increased sales, they’ll be able to pay more rent. But that 2000-3000 people, that’s not sufficient to warrant building a new shopping center. So, there’s that degree of insulation around our asset, which, it’s a real bonus. And that that all feeds through to what we have in general, and that’s whether we’re in the secondary markets or the primary markets. Over recent years, we’ve really seen an under-delivery of new construction of retail space, whereas we’ve seen that population boom. So, we’ve got demand ultimately outstripping supply. So, that allows us again, that’s whichever market you’re in.

[00:06:22] Craig Leslie:

But for us, certainly we control the market and where there’s excess demand and not enough space, we can use that to drive on rent and we’ll see rental growth. So, what we need to understand, in terms of rental growth, is our tenants, certainly in recent years and over the last 18 months, definitely, we’ve seen rents accelerate for new space. So, where there’s been a vacant or where space has come up for renewal, landlords have been able across the board to be able to ask for much, much higher rents. It’s effectively that hedge against inflation that we get with real estate. So, we’ve had elevated inflation for a number of years now and those rents are catching up. But I think the key thing for people to understand is that we will get that growth incrementally over several years, because our tenants sign multi-year tenancies with us and it’s only once that tenant comes to an end of its lease that we then will get that growth in, in rent. So, it’s not immediate, it’ll be incremental over several years, but that does mean that the outlook moving forward is pretty positive in terms of rental growth.

[00:07:34] Wayne Byrd:

Great, so it’s a matter of either through immigration or through organic de-urbanization that our investors can grab, hold and see that there’s strength in the growth of these markets.

[00:07:45] Gordon Driedger:

One of the things we don’t talk about very much, and it’s worth mentioning, is that from a tenant’s perspective, all they care about is their their total occupancy cost, rent being a big part of it. The operational expenses on a property, whether it’s snow clearing, whether it’s taxes, whether it’s energy consumption, matter to them because they pay for that incrementally and proportionally for the property. We continue to make strides through our internal management, property management company, to drive those costs down, because at the time of renewal, what matters to us is rent. The fact that that’s what drives our income. So, if we can drive down all those other extraneous costs, and if less money flows to the hydro authority or to the to the taxing authority or to the snow clearing contractor, that’s okay, because that’s money that’s available for us to bring into the REIT.

[00:08:44] Wayne Byrd:

Craig, let’s talk about the portfolio of Skyline Retail REIT. And, while there’s not been a lot on the acquisition front, it’s really about what has the asset management team been up to from acquisitions, dispositions and right on through to opportunities with new development projects?

[00:08:59] Craig Leslie:

Well, we’ve certainly not been asleep in 2023. You’re right, the acquisition side has taken a bit of a back seat over 2023, but that’s not really Skyline, that is just what’s happened in the market. I think transaction volumes for grocery-anchored retail over 2023, I think they fell by almost 60% last year. The answer as to why that is, I think it’s really twofold. One, as you mentioned earlier, during Covid, grocery-anchored retail really did prove its worth and that means it’s more of a valued asset for a lot of investors now. So, there’s not as many people looking to sell. And I think the other side of that is really just, we had elevated interest rates last year, and I think institutional capital maybe took a bit of a backseat and just counted 2023 out. So really, I think that’s really what’s led to the transaction volumes being reduced. What hasn’t changed is the private investor market. That has remained really strong, seems to be less sensitive to to borrowing costs.

[00:10:12] Craig Leslie:

And I think from our side in terms of what’s been keeping us busy, I think it’s really been initially looking at the portfolio, we’ve grown substantially over the last couple of years, and just taking a second look in evaluating within that portfolio which assets still fit with our strategy, or potentially, which assets do we think we’ve maximized the revenue and by association, the value? So what we’ve done, I think a number of those assets have kind of fallen into the private investor camp. It’s been below $20 million and really, we’ve executed on a number of those as sales. We’ve taken the capital back and we’ve redeployed it elsewhere in the portfolio where it really we’ve been able to get better returns. It’s not been a huge, uh, disposition, it’s probably been, I don’t know, the bottom 2-3% of the portfolio, so not significant. But really that’s been keeping us busy. And then the other side, I guess, would be the infill development side. So, I don’t know if you want to touch more on that.

[00:11:20] Gordon Driedger:

I think one of the good examples of infill, incremental development, on our existing assets is Elmira. So, Elmira was one of the first assets that I was involved in, early 2016, involved in acquiring. So, we we purchased a very nice grocery-anchored shopping center with surplus density. And again, we bought it on the basis of existing income but it did have some additional additional land. So throughout the last eight years or so, we’ve incrementally, through various activities such as obtaining entitlements for different uses and for additional retail. We built a Rexall pharmacy a couple of years ago. We’ve recently just completed an LCBO and some additional retail. So, now the property is fully built out. It’s a series of kind of long term incremental moves, just like getting access to that increased rent. It’s a series of dozens or hundreds of incremental things along the way that allows us, in the case of Elmira, to take an $11 million asset that we purchased in 2016 to a value of about $23 million. That is a kind of a great news story. We’ve done the same thing, smaller scale and different assets, in Chatham and and Sudbury and Windsor, Hanover, where we’ve added incremental density. And of course, we never start construction without leases being fully binding and in place and the costing, you know, we know construction costs have been a bit of a challenge, we never start construction, never make commitments to construction, until we know what our costs are going to be. So, we have the leases, we know what our revenue is going to be, we know what our costs are, so it’s a very, in relative terms of relative to development, generally, it’s very low risk development that we take on. So, it’s a it’s one of the three pillars of rental growth, you know; leasing vacant spaces, increasing rents and incremental development.

[00:13:29] Wayne Byrd:

Yeah. A common theme that we’re hearing through across our entire group of Skyline Investment Funds really is that active asset management. It’s looking at the portfolio and not just jumping to add more in acquisitions, but making sure that we’re continuing to look after the existing portfolio and maximize in that regard.

[00:13:51] Wayne Byrd:

Thank you both. Well, midway through 2024, I’m sure all of our investors would like to hear a little bit about the future and what to look forward to. Craig,

[00:14:01] Craig Leslie:

I think what we’re going to see in 2024, certainly for the balance of the year, is a continuation of that strong operating performance that we’ve achieved through 2023 and so far this year as well. It’s all driven ultimately by rental growth that we’ve not seen the likes of in decades. So, that’s definitely going to be a huge tailwind for the performance of the fund into 2025. As far as wider trends go, I think the the economy is starting to slow a little bit, but at the same point, that population growth is more than offsetting that. But there’s going to be a focus on those retailers that are really, that dominate our portfolio. It’s going to be a focus on essential retail. It’s going to be a focus on those retailers that offer value. And that’s again, that’s only going to be a bonus for Skyline. Moving forward towards the tail end of the year, we’re going to see, I think interest rates will start to drop and then we’re going to start to really see some exciting opportunities, I think moving forward.

[00:15:08] Wayne Byrd:

Fantastic. Thanks, Gord, thanks, Craig, for incredible insight and and outlook and viewpoint on the Retail REIT. Investors, thank you all for joining us today. Should you have any questions at all, please feel free to reach out to your Skyline Wealth Advisor or anyone for that matter, on the Wealth Management team. As always, we continue to appreciate your support of our investment strategies and our mandates. Thank you very much.

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