[ Skyline ]
“We realized that it would be much more efficient to own and manage a single apartment building with multiple units, rather than multiple properties with individual units.” – Jason Castellan, Chief Executive Officer and Co-founder
Nearly 20 years ago, the founders of the Skyline Group of Companies bought their first property, a student rental house in Guelph, Ontario. This year, the company’s portfolio of apartment properties surpassed 10,000 suites and $1 billion in value. Officially launched in 2006, Skyline Apartment REIT is currently the seventh largest owner and manager of multi-residential properties in Canada. Over the years of acquiring and managing properties, the Skyline Group has overcome numerous challenges, surpassed every goal it has set for itself, and learned many lessons about what it takes to succeed in the real estate industry. In the early 1990s, Jason and Martin Castellan moved in with their father while they attended the University of Guelph. During their first semester, they found and purchased a student rental house near the school. They lived in the basement while renting out the rest of the house to other students, which allowed them to earn an income and live rent-free while attending school. Shortly thereafter, they met Roy Jason Ashdown, who was also subsidizing his university experience by doing maintenance and property management work in the building in which he lived.
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The partners found that they enjoyed owning rental properties, and decided to make a business out of it. With financial help from family and friends, they bought a nearby student rental, and then another; after eight years, their investment portfolio consisted of 52 properties in the Guelph area. Despite the regular cash flow being generated by the rental properties, the partners determined that their business model was inefficient. “Our student rentals were spread all over Guelph, which meant that we had to deal with 52 different properties with different needs and issues,” said Jason Castellan, Chief Executive Officer and Co-founder, Skyline Group of Companies. “We realized that it would be much more efficient to own and manage a single apartment building with multiple units, rather than multiple properties with individual units.” Taking the next steps In 1999, the partners founded the Skyline Group, and decided to adopt a syndication agreement to operate their new business venture. They created a holding company to purchase multi-residential buildings (mostly smaller properties with 15-30 units), and invited shareholders to
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invest. Under the syndication model, Skyline and its investors provided the equity to purchase the property, and Skyline would participate in 20% of the cash flow once investors were completely reimbursed for their initial equity.
to ensure the investors’ engagement in the discussions. The company had to establish a legal agreement to share performance and income with the REIT on a pro rata basis, based on the equity provided.
“This model laid the foundation for our investment philosophy, which involves looking after our investors first,” said Martin Castellan, Chief Administrative Officer and Co-founder, Skyline Group of Companies. “We extended this approach to how we treat our tenants, which also ensures that our investments—the buildings—increase in value, since satisfied tenants stay longer and keep paying rent.”
“To get everyone to agree on the value of their respective properties, we used a scorecard approach where we graded each property on a number of factors, including location, amenities, and building age and condition,” said Wayne. “The resulting grades determined an implied cap rate for the building and resulting value for its investors, which enabled us to transfer investors’ respective shares into new shares in the newly amalgamated entity.”
Skyline operated under the syndication model from 1999 to 2005, which resulted in 16 different corporations that owned and managed various multi-residential properties, introducing a new layer of inefficiency at the organizational level. In 2005, the Skyline partners asked Wayne Byrd, now Chief Financial Officer of the Skyline Group of Companies, to join them. Wayne, who had known Jason, Martin and Roy since 1999, was instrumental in transforming the company’s syndication structure into a real estate investment trust (REIT).
In June 2006, the Skyline Apartment REIT officially launched, and began acquiring properties and engaging new investors. Its first offering memorandum enabled the REIT to privately raise $20 million in just four months (to compare, under its previous syndication arrangement, it took Skyline almost seven years to raise more than $14 million). Five years later, Skyline Group pursued another opportunity for growth with the creation of a second REIT—Skyline Commercial REIT—which officially launched in 2012.
Over the next 14 months, Skyline went through the process of combining its syndicates to establish a launch platform for the new Skyline Apartment REIT. To amalgamate the 16 corporations (27 properties) under one umbrella, the company obtained unanimous approval from 80 separate shareholders that made up the different syndications, which involved holding numerous shareholder meetings
“The creation of a new investment product gave the choice back to our investors,” said Jason. “They now have the option of buying shares in a REIT that focuses on a specific asset class: either multi-residential rental buildings or commercial properties. We took our experience from launching the first REIT to help make the development and creation of the second REIT run more smoothly.”
“To get everyone to agree on the value of their respective properties, we used a scorecard approach where we graded each property on a number of factors, including location, amenities, and building age and condition.” – Wayne Byrd, Chief Financial Officer
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“Specialization has enabled us to lower the cost of raising capital, which translates into higher returns for the REITs.” – Martin Castellan, Chief Administrative Officer and Co-founder
Supporting growth from within From the beginning, Skyline’s founders believed in the integration of all levels of management servicing the REITs. When they created the Skyline Apartment REIT (and later the Skyline Commercial REIT), they decided to separate the property management, asset management and wealth management functions into independent business units, each of which would share the responsibility of providing the necessary services to the REITs while aligning their interests with the REITs. Together, these service companies make up the Skyline Group. Skyline Asset Management Inc. (SAMI) is responsible for purchasing properties for the REITs. It conducts due diligence prior to purchase, arranges financing for purchases and existing assets, engages in asset management, negotiates contracts and creates capital upgrade plans for properties. SAMI’s management takes a high-level approach to asset management, using its portfolio strength to obtain better pricing on services and financing. It also develops strategies for laddering mortgages and determining which properties to buy and sell.
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Skyline Management Inc. (SMI) manages the properties on behalf of the Skyline Apartment REIT, as well as some third-party properties. It provides comprehensive property management services, including tenant recruitment, maintenance, service contract negotiation, marketing, rent collection, financial reporting, accounting services and insurance placement. Skyline Commercial Management Inc. (SCMI) provides property management services for the properties in the Skyline Commercial REIT, which require different strategies and approaches than those in the Skyline Apartment REIT. Skyline Wealth Management Inc. (SWMI) is responsible for investor relations, securities law compliance, marketing, and communications for the REITs and the Skyline Group. It raises capital when required through a confidential offering memorandum, and runs advertising and information sessions to keep investors informed and engaged. SWMI also serves as an intermediary between the REITs and investors, and communicates with them on issues such as growth, sales, distributions and reporting.
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This year, Skyline brought its mortgage financing in-house with the launch of Skyline Mortgage Financing Inc. (SMFI). The new service company enables Skyline to integrate its mortgages into SAMI’s laddering program. It also makes the organization more responsible for managing its debt and getting the best financing rates, while eliminating the requirement to have to deal with multiple mortgage brokers. “We began by doing everything ourselves, including buying, financing and maintaining the properties, so we understand the
areas to create benefits through consolidation of properties. Although the REIT has grown substantially over the years, it has focused on finding value opportunities and distributing stable, consistent returns to investors, rather than purchasing solely for the sake of growth. Liquidity is a key benefit for Skyline’s REIT investors: they can sell their investments as early as four months after purchasing shares in the REIT without penalty (securities law mandates an initial fourmonth hold). Skyline Apartment REIT owns and manages properties that are profitable and generate a regular income. It has a $30 million
“Owners and upper management have grown through the business, and understand what is required from those front-line roles, so we know what resources and training are necessary to do the job.” – Matthew Organ, President, Skyline Management Inc.
value that it brings,” said Jason. “We do almost everything in-house, which includes employing in-house legal and accounting specialists to handle those duties. Simply put, this strategy makes us more efficient, since we can respond to issues and requests for information much more quickly.” Creating attractive investment vehicles The Skyline Apartment REIT includes 125 properties, with more than 10,000 units and a value in excess of $1 billion. The REIT has grown by purchasing multi-residential rental properties in secondary and tertiary markets throughout Ontario, and expanding its holdings within those
line of credit, regularly pays off and refinances existing mortgages, and consistently attracts new investors. It is thus provided with sufficient funding to make new acquisitions, make capital upgrades to create efficiencies, and budget for whole or partial redemptions to investors. “We facilitate redemptions on a monthly basis, and investors can redeem wholly or partially at 100% market value of their investment without penalties or discounts,” said Wayne. “We’ve budgeted about $750,000 per month in redemptions for 2014, and we are generating enough capital and using our leverage appropriately to remain sufficiently liquid for investors who want to redeem their units.” continued on page 23
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Apartment REIT
Skyline Apartment REIT is an open-ended private Canadian Real Estate Investment Trust (REIT). It is the seventh largest owner and manager of multi-residential properties in Canada, and one of the fastest growing private multi-residential real estate entities in the country. Highlights include: t (FPHSBQIJDBM EJWFSTJmDBUJPO ͳF QPSUGPMJP JT DPNQSJTFE PG QSPQFSUJFT JO DPNNVOJUJFT BDSPTT four provinces. t #BMBODFE QPSUGPMJP ͳF 3&*5 DPOTJTUT PG NVMUJ SFTJEFOUJBM BOE DPNNFSDJBM QSPQFSUJFT t %JWFSTJmFE QSPEVDU PĉFSJOHT ͳF QPSUGPMJP JT OPU PWFSMZ FYQPTFE UP BOZ POF EFNPHSBQIJD JODPNF bracket, age group or industry. t 1SPGFTTJPOBMMZ NBOBHFE QSPQFSUJFT 4LZMJOF BOE JUT HSPVQ PG DPNQBOJFT FĉFDUJWFMZ EJSFDU BMM PQFSBUJPOT BOE OFX CVJMEJOH QVSDIBTFT GPS UIF 3&*5 JO IPVTF XIJDI QSPWJEFT JOWFTUPST XJUI UIF CFOFmUT PG owning rental properties without the hassles of being a landlord. t 'PDVT PO TFDPOEBSZ BOE UFSUJBSZ NBSLFUT 4VQQMZ JT mYFE EVF UP UIF IJHI DPTU PG CVJMEJOH OFX apartments, which keeps demand and vacancy stable. t 1SJWBUF JOWFTUNFOU *OWFTUNFOUT JO SFOUBM SFBM FTUBUF BSF OPU DPSSFMBUFE UP UIF TUPDL NBSLFU
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Skyline Apartment REIT has been able to benefit from the growth in real estate value (especially rental properties) over the last 20 years. Because real estate is a tangible asset that people can see and touch, many Skyline investors prefer it as an investment option over less tangible assets (such as stocks). Investors can also see when Skyline makes physical improvements to a building after purchase, and how these improvements add value to the building and the investment. The Skyline Group is continually learning and improving its business strategies and policies, including its underwriting, purchasing and property management. Skyline owners’ (and staff’s) years of experience have enabled them to mitigate risks associated with utilities, taxes, interest rates and vacancies. This collective knowledge and experience has given them control over the process, and has helped them to improve with each new acquisition. “As our underwriting process has evolved over the years, we have been able to make improvements on our acquisitions,” said Jason. “We’ve established a solid foundation in real estate that enables us to better evaluate future purchases, and understand ratios in things like utility costs, which puts the control back in our court. The end result is more room to provide value to our investors.”
People drive the engine of growth Skyline Apartment REIT has learned that customer service is essential to its growth, as high-quality, happy tenants are necessary for increasing the value of its buildings. Being flexible enables it to service tenants in different cities, towns and areas with different demographics. Property managers learn how to accommodate tenants that might have different needs, such as seniors and students. The organization understands that proper training of property managers is essential to its success, as they are the first line of communication in the business. Skyline employs a hands-on approach, maintaining one of the lowest ratios of field managers to resident managers in the industry. It requires that property managers visit their respective properties as often as possible to deal with issues in an expedient manner. Skyline holds group education sessions at each of its buildings, focusing on training to ensure that its staff provides exceptional service to tenants. “We have buildings spread over wide geographic areas, so when you have 10,000 units with more than 25,000 tenants, a lot continued on page 25
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Skyline Apartment REIT: Frequently Asked Questions (Answers provided by Jason Castellan, CEO) Q: How has the Skyline Apartment REIT been able to maintain positive returns for investors since inception?
Q: What key reason can you provide for investing in the Skyline Apartment REIT over other investment options?
A: It’s all about the buy. We aim to make the right acquisition for the REIT by ensuring that we have the numbers and knowledge to back it up. With FWFSZ QVSDIBTF PVS FYQFDUBUJPO JT UP CF HFOFSBUJOH cash flow from day one. We’ve developed an ability to use leverage properly in purchasing properties so that we get the funding we need. We’ll then ensure that any equity we get from investors is eventually returned to them by way of cash flow and growth from the property. We also manage all aspects of the business in-house, which helps to JODSFBTF FĊDJFODJFT
A: Our investors have access to every member of our wealth management team, as well as anyone FMTF EJSFDUMZ DPOOFDUFE UP UIF JOWFTUNFOU ÍłFSF are no “middle menâ€?; we only promote our PXO 3&*5T CFDBVTF XF BSF UIF FYQFSUT PO PVS products. We also provide many opportunities for investors to meet with our wealth management team, operations team and management to learn what we are doing, and provide suggestions and MFBET GPS OFX BDRVJTJUJPOT ÍłJT HJWFT PVS JOWFTUPST DPOmEFODF BOE DPNGPSU JO XIP JT MPPLJOH BGUFS their investment, and allows them to be engaged and informed.
Q: What are the ultimate goals for Skyline Apartment REIT’s growth?
Q: What type of liquidity do you oer investors?
" ͳF LFZ JT UP CF SFBEZ UP BDU PO UIF OFYU BWBJMBCMF EFBM 'PS FYBNQMF JG B QPSUGPMJP PG SFOUBM CVJMEJOHT ever becomes available, and we believe that there is value, then we’ll buy it after doing the appropriate EVF EJMJHFODF 8F IBWF UIF BCJMJUZ UP EP GSPN NJMMJPO UP NJMMJPO JO EFBMT JO BOZ HJWFO ZFBS depending on the economic environment. We have no control over when someone is ready to TFMM o XF KVTU QMBO UP CF SFBEZ XIFO JU IBQQFOT BOE XJMM NBLF BO PĉFS XIFO JU NBLFT TFOTF
" 8F PĉFS GVMM MJRVJEJUZ GSPN EBZ POF BT PVS JOWFTUPST DBO FYJU UIF JOWFTUNFOU BU BOZ UJNF BGUFS UIF mSTU GPVS NPOUI NJOJNVN IPME QFSJPE XIJDI is a securities mandated law). With such a large QPSUGPMJP XF BSF FYUSFNFMZ MJRVJE BT XF IBWF BDDFTT UP DBTI nPXT MJOFT PG DSFEJU SFmOBODJOH BOE OFX JOWFTUPST 8F PĉFS GVMM SFEFNQUJPO XJUIPVU GFFT penalties or discounts.
Q: What strategies do you use to deliver consistent, reliable growth?
" 8IJMF QVCMJD NBSLFUT BSF FĉFDUJWF GPS FOTVSJOH liquidity and raising capital, they provide more volatility than we care for. We want to de-correlate from public markets to avoid volatility. We’ve been able to raise funds at a fraction of the cost of public markets and have used our marketing FYQFSUJTF UP SBJTF JOWFTUPS JOUFSFTU BOE FRVJUZ 8F IBWF OP QMBOT UP HP QVCMJD CVU JU JT B WJBCMF FYJU TUSBUFHZ 4P TIPVME XF FWFS HFU UIF SJHIU PĉFS from the right buyer, and our investors approve, then we would go public.
A: It begins with taking care of our properties and servicing our tenants. When you take care of the fundamental aspects of this business, which includes both our buildings and the people who live in them, then the properties will generate QSPmUT GPS PVS JOWFTUPST
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Q: Does the Skyline Apartment REIT ever plan to go public?
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of issues appear on a daily basis,” said Matthew Organ, President, Skyline Management Inc. “Owners and upper management have grown through the business, and understand what is required from those front-line roles, so we know what resources and training are necessary to do the job.” Since each department in the Skyline Group is aligned to achieve the common goal of servicing the REITs and ensuring their success, management and staff have made customer-focused processes and practices a priority. Management meetings often involve discussions of different problems and strategies that affect both individual departments and the organization as a whole. Skyline staff does not focus on the finances of individual departments, but rather on how it can benefit the company, its investors and its tenants. As the Skyline Group has grown, its founders have learned that hiring specialists who focus on specific tasks provides greater efficiencies and opportunities for growth. For example, Skyline created SCMI to focus on the needs of the properties in the Skyline Commercial REIT, which has enabled it to find greater efficiencies and provide a more customized level of service to its commercial tenants (and better returns to investors).
“Specialization has enabled us to lower the cost of raising capital, which translates into higher returns for the REITs,” said Martin. “At the same time, we’ve ensured that our specialists are aligned with our overreaching goal: to satisfy our tenants and our investors.” Skyline also ensures that every new hire knows the Skyline story: the purchase of the first property, the key experiences along the way and valuable lessons learned. The point of sharing the company’s history with new hires is to create an understanding of how Skyline staff and owners work toward a common goal, and how new employees will contribute to the overall corporate strategy. “We’re fortunate to live and work in an area like Guelph where people have a strong work ethic, and they are willing to roll up their sleeves to get the job done, which is essential in the real estate business,” said Jason. “You need passion and hard work to be successful, and management leads the way in both areas to ensure that our employees follow.” Efficiency leads to growth Very early on, the Skyline Group owners developed a scalable approach to managing properties. They created a platform of operating
Congratulations on all your success and achievements in such a short time. We don’t want to give away all your trade secrets. Continued success!
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Rental Housing Business 25
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procedures that was implemented with each new property, and taught to each new hire. The platform teaches how and when to deal with different situations in the dayto-day business of property management. This platform has been crucial to Skyline’s success in acquiring and prospering from new buildings in multiple geographical regions. “This scalable platform enables Skyline to drive growth and ensure profitability whenever we take over a building,” said Roy Jason Ashdown, Chief Operating Officer and Co-founder, Skyline Group of Companies. “In many cases, we can manage buildings more efficiently than the previous owner, simply because of our experience and economies of scale. Each new building presents a great opportunity to improve profitability through operations; when we improve efficiencies and deliver better service to tenants, we are able to drive revenues and surface value.”
“Each new building presents a great opportunity to improve profitability through operations; when we improve efficiencies and deliver better service to tenants, we are able to drive revenues and surface value.” – Roy Jason Ashdown, Chief Operating Officer
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When Skyline is presented with a buying opportunity, it employs its own analytics (in addition to the numbers provided by the seller) to determine the cost of different elements (e.g., hydro, gas, garbage collection, water), and where it can realize savings. Rent increases are capped, but there are no caps on utilities and energy savings, so finding ways to compress those costs (like investing in new boilers or lighting) increases building value. Skyline has also found that changing tenants’ consumption behaviour can also help reduce its carbon footprint and increase building value. Skyline educates its tenants through newsletters, signage and mailers, and also through leading by example with the implementation of numerous efficiency upgrades to its properties. The organization has found that tenants have responded to its efficiency programs and have bought into its efforts once they have realized what Skyline is doing in the properties to improve energy efficiency. “People just need to be reminded as to how a small change in routine can have a substantial effect on the environment,”
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said Roy. “If we are able to achieve just a 1% reduction in energy consumption by changing our residents’ behaviour, this can translate into $150,000 in energy savings per year. At the end of the day, we improve tenant comfort and building value, and our tenants feel good about our combined efforts. This can be a crucial difference for consideration when tenants compare a Skyline building to a neighbouring property.” The future of Skyline Because they are not looking to grow simply for the sake of growth, the Skyline Group’s ownership and management no longer intend to set growth goals for either REIT. Each member of the Skyline team is motivated to drive his or her individual component of the organization, which helps to create positive pressures on other parts of the business. While the Skyline Apartment REIT is currently focused on purchasing in Ontario, management might consider looking outside the province for new opportunities. It has determined that the deals are not there yet, and has continued to expand into new Ontario markets, such as northern Ontario, while intensifying holdings in
existing markets. The Skyline Commercial REIT is currently providing numerous opportunities to add value, and management foresees further growth opportunities in 2014. Skyline is also working on a third investment product, the Skyline Retail REIT, which is expected to launch in the near future. Much like the Skyline Apartment REIT, it will focus on secondary and tertiary markets where there exists a national anchored tenant (e.g., Shoppers Drug Mart, LCBO, Canadian Tire) with long-dated retail leases. Skyline’s ability to identify value and generate relationships will enable it to create another source of passive income for potential investors, and another source of growth for the organization. “In 1999, we would have been happy with hitting our initial goal of 800 units, but we’ve grown and evolved to the point where I will not rule anything out,” said Jason. “Something in our DNA drives us to grow, find more efficiencies and surpass expectations. We will continue to benefit from the expertise of our specialists who continuously find better ways to do things. We know that we can always do better while continuing to grow.” RHB
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“In 1999, we would have been happy with hitting our initial where I will not rule anything out. Something in our DNA drive We will continue to benefit from the expertise of our specialist we can always do better while continuing to grow.�
[ Skyline ]
goal of 800 units, but we’ve grown and evolved to the point es us to grow, find more efficiencies and surpass expectations. ts who continuously find better ways to do things. We know that – Jason Castellan, Chief Executive Officer and Co-founder