Investment Strategy and Industrial Real Estate 101 - Stephen Simpson - Ep.2

On this episode Stephen provides a deeper dive into Focus Developments' investment strategy, Industrial Real Estate 101, and why we do what we do. 

About Stephen:

Stephen Simpson is the Founder and Principal of Focus Developments – a Real Estate company investing in quality industrial properties throughout Ontario. Focus provides Accredited Investors an opportunity to invest passively in industrial assets for long term growth and diversification. Stephen has over 20 years of experience in real estate, financial analysis, construction, and engineering. He has led teams delivering Commercial Real Estate and Infrastructure projects worth over $100M during his career. Stephen is a licensed Professional Engineer, an experienced Project Manager, and has a Diploma in Urban Land Economics from the Sauder School of Business at UBC. As Principal of Focus Developments, Stephen executes strategy, investment analysis, and oversees acquisitions and asset management.

Connect with Stephen:

Web: focuscapital.ca
LinkedIn: linkedin.com/in/stephenrsimpson/

Transcript

0:01

Mhm. Mhm. Mhm. Hey guys, Stephen Simpson here. Welcome to Focus Capital Podcast number two. So this is going to be a little bit more of a deep dive into you know, the background on myself and Focus Developments and Focus Capital. And a little bit more about industrial real estate, why we like it as an asset class, our investment thesis, and just going through some of the details that you know, that make up who who we are. So whenever I'm out at networking events or business meetings or really just meeting new people, I really get a lot of these questions about, you know, why are you doing what you're doing? What's, you know, how did you start the business? You know, what. What sort of gave you the idea to do this, you know, what was the transition like leaving you know, leaving your previous job and, and starting this business. So my goal here is to really try to answer a lot of those questions and hopefully this is a resource that you know, People can refer back to for a bit more of an intro on on focus capital. So a little bit more about me. I'm a professional engineer by trade. I spent about 20 years in the corporate world working in consulting engineering and various roles. I was fortunate enough to manage a lot of very large projects in the infrastructure and engineering world. You know, I was involved with different teams, basically working on big big assets and big construction projects for, for systems engineering. So what that enabled me to do is really getting a lot of experience in, in managing big projects hundreds of millions of dollars worth of worth of projects for, for other clients. And really got to see the inner workings of commercial real estate. But a couple of years ago, I was really getting to the point where I I was stressed out working demanding job. I was a demanding career and I really wanted more control over, you know, my time, my lifestyle, my investments. And I had been investing in real estate for about 20 years and doing a lot of you know, deals on smaller deals on the residential side. But I wanted to focus more on the commercial side because I knew there was opportunity there. And I knew that there was an opportunity to start a business and create some value and really build a portfolio of assets for the future. So I made the decision to start focused developments two years ago and focus in on investing and acquiring industrial real estate. So we'll get into a bit more of the benefits of industrial real estate here in a couple of minutes. But that was our target. And the goal for me really was to not only invest in these assets, industrial real estate, but also make the benefits of those assets accessible to other people. And for those people who maybe aren't. engineers or haven't worked in a lot of commercial buildings or really, you know, have been exposed to other asset classes or other alternative investments. Things like industrial real estate really are a foreign concept. So I wanted to make the benefits of investing in, in real estate. You know, industrial real estate accessible to not only myself, I'm invested heavily into it, but but also help it to benefit other people as well. And so so yeah, so the decision was made to you know, to move forward a couple of years ago and you know, focus developments was really designed to be not only an asset You know, holder, but also a company that was able to, you know, syndicate deals to let other people come on board with our deals and we would act as a general partner and operator. And so what that means essentially is that You know, in the process of acquiring deals, we are letting limited partners come on board our deals. They can invest passively into our deals and we will act as a general partner and manage all aspects of, of the real estate in order to provide them the benefits without actually having to be active in the real estate itself. So that gives you know accredited investors who would invest in our deal, you know, the opportunity. In these types of asset classes that they wouldn't otherwise have if you know, if they were just going out and doing straight real estate investing themselves. So a bit about where we invest and, and, you know, one of the, some of the things that we like about industrial real estate specifically, so we're investing here in Ontario. So the fundamentals of Ontario you know, as as a market here in Canada are, are pretty attractive. So we've got a good rate of population growth, you know, estimates would say that there's probably upwards of 40 percent of all of the population in Canada ends up here you know, in Ontario and, and a bulk of that here in Southern Ontario. Primarily so, you know, we've got a strong amount of demand coming into the province. We've got people that need real estate, whether that's residential real estate or commercial properties or industrial properties to run their businesses. So there's a good influx of people coming into this province and what that's going to let you do is have a, you know, a healthy amount of demand for for your properties. There's a good amount of transportation infrastructure, whether it's bridges and highways and transit and all sorts of good things happening in the transportation space, which are adding to the you know, the flow of goods and the accessibility of different markets here in Ontario. So that's another key metric that we like and also. You know, low vacancy. So if you look at the vacancy and availability rates here in Ontario there's some of the lowest in Canada. You know, most markets here in Ontario are sub 5 percent in terms of those rates. And what that means essentially is that, you know, there is a healthy amount of demand for those properties. If you've got assets, if you've got units to lease out to to business tenants in the industrial space there's a, there's a good amount of demand for them. So, what we specifically focus in on within Ontario here are light industrial properties. So, we call them flex spaces, we call them warehouses there's a couple different names in the industry. But essentially these are not heavy manufacturing properties. Properties. These are light industrial properties that are flexible. They can be oriented for storage, for office, for different sets, setups that, you know, a business might require to, you know, to operate their, their business. And the flexibility of these spaces is, you know, one of the attractive things that you can get into. So we'd like that aspect of the, of the real estate. In the industrial space that there's just a good amount of flexibility of it. We look at mid market properties. So what that means is 2 million to 10 million in price range. And we're very strategic about this because we don't want to be at the bottom end of the market, which is very crowded with a lot of owner operators and you know, just more competition. And then at the top end of the market, you know, 10, 20, 30 million plus deals. There's a lot of institutional buyers, investors involved in that segment of the market. And you know, that's not where we want to operate. So this, the mid market segment is where we choose to play. And we find there's a lot of opportunity there for. You know, investment companies such as ourselves to to acquire and you know, leverage a lot of value out of these properties. We look for multi unit properties. So, multi unit to spread the risk. Smaller units are easier to lease, generally speaking. There's a lot of demand for units sort of, you know, 3, 000 to 5, 000, or sorry, 3, 000 to 5, 000 square foot in size. Thanks. And, you know, our units range anywhere from about 2, 000 square feet all the way up to about 9, 000 square feet. So we like those size of units because they provide a lot of flexibility and they they're in demand, generally speaking, in the market. So I'll just roll through some of the kind of top five advantages that we like in the industrial space. The first off being the commercial release structure. So for. Those of you not familiar with commercial real estate what we're typically doing when we're acquiring a new property is setting up what's called a triple net lease. So triple net lease is very different than what you would see in the residential space. Triple net lease essentially is a pass through or carefree lease, which. It allows for a landlord, asset managers such as ourselves, to charge a base rent and then also charge an additional rent that would cover everything from property taxes to insurance to maintenance costs to property management. And what this lets you do is have a lot more control over the property itself, your cash flow, and you're able to charge everything back to your tenants. That has to do with maintenance and ongoing management of the property. The second advantage would be the opportunity to force the appreciation of these industrial properties. So as I mentioned, the lease structure allows you to you know, have a lot of pass through of your expenses and costs. But the other thing that you're able to do in industrial real estate, and more broadly speaking in commercial real estate, is you're able to force the appreciate appreciation of the property up by increasing what's called the net operating income. So, if you're able to, Either increase your lease rates or decrease your expenses on the property. The property is going to be valued higher because of the way that the net operating income affects the value of the property. Commercial properties and industrial properties are valued on the amount of net operating income. So again, if you're able to increase the revenue, increase the lease rates or decrease the expenses, you're able to force that appreciation up just naturally speaking through increasing net operating income. The third advantage would be the tenant profile. So You know, I get this question a lot when I deal with people coming from the residential side of real estate investing. The tenant profile, obviously, in industrial real estate is our businesses. So we're dealing with, typically speaking, small businesses although we do have some larger ones who have branch offices that we deal with But the tenant profile is, is, is a business. And so what you're able to do is have a relationship with your tenants, much different than what you would have in the commercial, in the residential space. So it's a business to business you know, transaction that you're dealing with. It's a business to business conversation when you're dealing with your tenants. And things just tend to be a lot more straightforward. A lot of the emotion gets removed from. Discussions and decisions that are made just because of the nature of the nature of, of you know, the tenant profile that you're dealing with. I'd say the fourth, fourth advantage of industrial real estate is really the long term focus. So I mentioned leases and, you know, by default we're dealing with typically speaking a five year minimum lease. And typically it's what's called a five plus five. So a five year lease term with a tenant with an option to renew for another five years. So. When you're acquiring properties, when you're investing, when you're looking at you know managing your properties and making decisions for your properties, you've got this long term focus. You're not worried about necessarily speaking what's going to happen next week or next month or next quarter. You're more concerned about the long term impacts of your decisions, the tenants you bring on. The leases you sign and, you know, the overall sort of management of the property. So that long term focus really lets you set yourself up for success in the future. And it's a, it's a key advantage. And I would say the, you know, the fifth advantage would be, and I mentioned this earlier, just some of the decreased competition that you're going to find in this segment of the market, in industrial and specifically in the mid market segment. You know, there's, there's value to be, to be had here. There's, there's not a lot of owner operators in this segment of the market and the institutional players are, it's generally not operating in the mid market because of Because of the size of those deals, they're just too small. And so there seems to be a bit of a sweet spot here in the mid market in light industrial properties that we deal with that you know, that provides us an opportunity to have decreased competition when we're going after deals. And so just talking a little bit more about advantages of industrial real estate and some of the, the business tenants that we deal with, the past few years have really given us a good example of why the industrial real estate asset class is healthy and why I think it's got a lot of you know, upside in the future as well. So the nature of the tenants that we're dealing with are for the most part. essential businesses and service providers to a local economy. So it's everything from your contractors to, you know, tradespeople to equipment dealers, to service technicians to storage and warehouse and distribution and logistics. And those are business tenants which serve a growing population. And. They're essential in what we do. And we saw that over the past few years through the pandemic. If you look at the asset classes, which remained very strong through the last couple of years You know, industrial was leading the charge, because even if you couldn't go to the grocery store, even if office buildings were closed down, even if other parts of the economy you know, were were disrupted, a lot of the economy still had to run through industrial buildings. You know, products needed to be shipped, products needed to be stored. Tradespeople still needed to service buildings and infrastructure. You know equipment still need to be serviced. And so the inherent nature of the businesses that we're dealing with. are very recession resistant. And so that's really one of the other key advantages of dealing with this asset class and specifically the types of tenants that we do. And so I think that is a huge advantage of dealing in industrial real estate is that tenant base that you're dealing with are really, really needed in the economy. And they're providing a service or they're providing products that that are essentially, you know, a key part of, of moving the economy forward in, you know, Any type of a market cycle that you might happen to be in. So that was another aspect that that I wanted to cover. And I think generally speaking, you know, the other advantage that I see and our experiences has shown is, is these buildings are just. Very simple, very straightforward and generally low maintenance buildings. We're not dealing with luxury items. We're not dealing with high end finishes. Most of our tenants are very straightforward. You know, small business people and giving them a quality space with ample parking. And you know, clean quality spaces where there's, you know, enough room for storage and for setting up offices and good lighting and good you know, transportation access is is, is really the basics of, of, of what these businesses need. And so, you know, You know, you look at these, these industrial spaces that these businesses use, and it's, it's a key function of, of how they operate their business. They can't send people home. You know, unlike some other asset classes like office where knowledge workers will be sent home and, you know, they can work from home and take their laptop and do their thing there, you know, industrial spaces are really a key, essential part of the nature of those businesses. And so, you know, Trucks need to be parked. Equipment needs to be serviced. Products need to be distributed. And so that's all essential and, you know, part of the nature of, of these businesses and how they're tied into to the industrial space. So I would say those are two other you know, advantages and, and sort of things that we like about the industrial space and that we're seeing going forward as, as part of the the market here. So, hope you got some value out of this podcast episode. I invite you to like and subscribe to the podcast, leave a review, leave a comment. Let us know what you think. And for any other information about us, what we're doing and the types of investments we're into, please visit focuscapital. ca, focuscapital. ca. And on there, you can find a ton of information, additional podcasts and a lot of free resources. So that's it for this podcast episode. Bye for now. next time.