Royal Oak Realty Trust leverages strategy and steady growth to expand portfolio

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At first glance, it would be easy to assume Royal Oak Realty Trust experienced a bit of a growth slowdown in 2023.

After ambitious portfolio expansion over the previous two years – 18 property acquisitions in 2021, followed by a dozen in 2022 – the private real estate investment trust added just five properties last year.

But in reality, the actions, or relative lack thereof, were part of a well-calculated strategy meant to ensure Royal Oak was in a position to pounce when the right deals came along.

Which explains the purchase of four industrial properties totaling 747,014 square feet within just six weeks between March and late April.

“We had a very successful 2023 raising new investment equity from new stockholders, and we had a very focused strategy to look to deploy that in 2024 some key markets,” Royal Oak CEO Dan Goldstein said.

“I guess you could say we had dry powder, we made sure our key relationships knew we were looking to find the right deals in the right markets, and then we were able to move quickly to secure them and close them.”

Royal Oak has been all about steady growth. Having just celebrated its 10^th anniversary, the portfolio of the Rochester-based Real Estate Investment Trust (REIT) contains 70 distinct investments in 23 states, with a total portfolio capitalization of $816 million.

And while those recent acquisitions all hit in a very short period of time, the due diligence had begun months earlier.

“2023 was a year where we were still doing some price discovery, trying to see where pricing in the market for acquisitions would land,” Goldstein said. “What we decided to do was be very, very patient and not force any transactions.

“But all the data that we viewed and the sources that we network with indicated that in 2024 there would be opportunities to buy some really good buildings at better pricing that we expect over time will get even better. So, we can buy it at a little lower of a price and then follow that appreciation that we expect over time.”

Clearly Royal Oak remains bullish on the commercial real estate industry, in large part because the firm’s focus is, and always has been, the industrial sector. That game plan has allowed the REIT to consistently hit dividend targets for its 1,000 investors.

“Since inception, we’ve remained narrowly focused on industrial,” Royal Oak president Mark Allen said. “Despite what you may read in the news with office exposures in big cities and retail tenants that have gone dark, our sector is very attractive, both with the fundamentals and the outlook.

“We’re an industrial-focused real estate company and we’ll maintain that, if not tighten that further, going forward.”

Not just any industrial facility will be attractive to Royal Oak, however. The acquisitions team targets single-tenant, net-lease spaces in active mid- to large-sized markets rented by companies that pay their bills.

“Good tenants with good credit in good buildings in growing markets,” Goldstein said.

The springtime spree began on March 18, when Royal Oak closed on the purchase of 111,309 square feet of property leased by ValenDrawers in Lexington, N.C., near Greensboro.

They closed on a 175,275-square-foot building in Raleigh, N.C., on April 3 that is leased by SMT, Inc.

A deal on the second-largest property in the portfolio — the 347,205 square foot Riddell Sports Group Inc. facility in suburban Cleveland — was finalized on April 16, followed by purchase of a 113,225-square-foot building near Louisville leased by L&D Mail Masters, Inc. closed on April 29.

The recent acquisitions were attractive because Raleigh-Durham, Cleveland, Louisville and Greensboro have shown strong recent industrial growth and demand.

“It’s a little bit of a misnomer when people think real estate is in a tough cycle,” Goldstein said. “Some of it is, but when you look at what we do, we buy large buildings that are focused on good industrial tenants, many of them American manufacturers, and the cost of those buildings to replace them has grown so materially in recent years that as people try to build new buildings, the rent just gets ridiculously high.

“There’s a substantial amount of demand for users that want their own facility, but it’s too expensive to build it or rent a new one.”

Royal Oak owns a significant amount of property in the Rochester area, but the majority of the portfolio is in 22 other states. Thanks to work done by Hank Wedow, director of acquisitions, and Bruce Bender, chief investment officer, brokers know the firm.

That’s how they’ve seamlessly expanded beyond New York into the Mid-Atlantic, Midwest and West.

“We have a robust network that we have built, of capital market brokers and other market participants,” Wedow said. “When you start closing more deals and getting a little more recognition in the marketplace, it helps during volatile market conditions like we’re seeing today. Having that strong reputation to be able to close and stay true to what you said you were going to do.”

Said Goldstein: “They have spent the last five years aggressively building new relationships in key markets, to make sure they knew who Royal Oak was. And credibility is everything. Just tying up a deal and then failing to close is not what a broker or a seller wants to see. They want to see a history of a company that honors its commitments, that follows through on closing transactions.”

Many transactions end up being a leaseback, which is common practice for REITs. The company sells its facility, then leases it from the buyer. That’s because a company would prefer to not tie up capital in real estate when it can be used for business growth.

But not always.

“It’s up to us to do our due diligence to understand why they’re monetizing their real estate,” Goldstein said. “In previous generations, many owners felt they absolutely had to own their own real estate.

“But in today’s model, that’s not always the case; so, we interview them, we look at their financials, we walk the building with them. We do a lot of work to validate why they’re monetizing, and we need it to be for the right reasons.”

Royal Oak, which has 20 employees at its East Avenue office, expects the industrial sector to remain robust.

“Vacancy rates remain well below historical averages and industrial rents continue to grow,” Wedow said, “so that, coupled with the fact that industrial construction starts are down considerably, sector long-term fundamentals are expected to remain strong.”

Which is why investments certainly won’t be ending, even after a busy spring.

“Will we see this type of volume over the next 30 to 60 days? Likely not,” Allen said. “But Hank and Bruce and our acquisitions team consistently underwrite a lot of deal flow. I would expect Royal Oak to continue to grow in 2024, but it’s also a matter of the financial modeling of the transaction, the underwriting of the credit, the market.

“We’re eager to grow our portfolio. We find ourselves in a good spot. Will it be at this pace and this scale? Likely no, but each day we’re scrubbing the deals that come our way and make sure we’re selecting the right one.”

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