Target Asset Profile
• Sub-Institutional Deal Size: $5-$25 million
• 1980’s vintage or newer, Class B
• No metal, concrete tilt or masonry
• Multi-Tenant with WALT of 2-4.5 years
• Dock-high and grade-level loading
Leverage
•Positive leverage day one
•50-60% LTV (moderate leverage)
•5-7 year loan terms
•Regional Bank, LifeCo or Credit Union
•Prepayment flexibility (Year 3 or sooner)
Geography
•Primary and Secondary MSA’s across the Southwest US (population 2mil+)
•Southwest focus, preference for major Texas markets & Phoenix
Preferred Metrics
•ROC 7.50%+ by Year 5
•Existing Cash Flow + Upside
•20’+ clear height, 1.5+/1,000 SF parking
•Excess Land
Sourcing
•Brokered and non-broadly marketed
•Private, non-institutional Sellers
•Direct Sourced
•Buyer Broker Finders Fee
Property Types
•Shallow-bay industrial
•Flex/R&D
•Manufacturing / Production
•Light Distribution / Light Assembly
•Single-Story Office with conversion potential
•Low-rise, low coverage office sites with redevelopment potential
Target Returns
•13%-15% Net IRR
•1.6x-1.8x Net MOIC
•Avg. C-o-C of 6%+
•Development
•20-25% Net IRR, 1.5x-1.75x Net MOIC, Stabilized Untrended ROC of 7.00%+ (targeting ~150+ bps of ROC spread)
Exit Strategy
•5-7 year anticipated hold period
•Aggregate 500k-1mil SF portfolio per market, thoughtful portfolio construction
•Operational scale and efficiency, residual scale for an institutional exit
•Diversified tenant credit and industry exposure, lease roll risk, and geographical and market industry drivers
OUR THESIS
We strive to generate alpha by capitalizing on inefficiencies within the lower middle-market that arise from special situations or unique circumstances where assets are mispriced. We have a preference to buy from Private non-institutional Sellers who are often occupancy driven to the detriment of maximizing income potential and asset value and creating operational upside. We avoid full broadly marketed processes which drive significant competition and in turn drive valuations and materially reduces risk premiums. We look for aligned incentives with entrepreneurial broker intermediaries and motivated Sellers that results in achieving attractive risk-adjusted opportunities.
There is an inherent barrier to entry for new shallow-bay and light industrial construction given rapidly rising construction costs and economies of scale which has resulted in very limited availability and outsized rent growth. This has led to an ability to acquire functional infill assets at valuations well below replacement cost with significant income growth potential. Many fundamental secular shifts are underway including the onshoring and nearshoring of goods, evolving inventory management practices and same-day delivery consumer demands which has led to robust fundamental tailwinds that continue to drive compelling user demand for infill industrial. There is substantial institutional appetite for this sector and asset profile, yet it is very difficult for them to access and very inefficient for them to deploy capital at this scale, providing an aggregation opportunity for a larger middle-market institutional exit that will result in cost of capital arbitrage and the capacity for yield compression.
Limited Supply
• High barriers to entry, replacement costs for this product profile in target markets often exceed $200+ PSF
• New supply concentrated in larger bulk product, 250k+ SF = 65% of U/C, while <100k SF = 5%), limited new shallow-bay supply with only ~100mil SF added since 2020.
• Industrial <100k SF represents 42.5% of inventory with a vacancy rate of just 3.8% (compared to 6.4% overall)
Outsized Demand
• Bldgs. 100k SF & under = 35% of total leasing activity for 2024 YTD, 300k SF & under = 65%
• Target markets disproportionate 2024 YTD absorbed SF (DFW 9.7m, PHX 12.6m, HTX 6.7m, SLC 5.5m, ATX 4.4m)
• Vast majority of user demand in target markets remains in the smaller 20k-50k SF range
Fundamental Tailwinds
• Onshoring/nearshoring and the resurgence of domestic high-tech manufacturing driven by global geopolitical risk, the CHIPS act, and improper IP regulation and enforcement in China
• Evolving inventory management practices driven by the growth in e-commerce, last mile and omnichannel distribution, and same-day consumer delivery demands
Limited Competition
• Less deal exposure leads to thinner bid sheets and less competition
• Smaller transactions equate to same amount of work but less gross $’s
• Less investor focus and competition for non-pure logistics light industrial product
Outsized Rent Appreciation
• CBRE reports the light-industrial space (70k SF and under) has the lowest avg availability, the highest average rents, and the greatest rent growth over the previous 5 yrs
• Rapid rise in interest rates curtailed new construction, infill land costs & scale inefficiencies to construct smaller shallow-bay product has led to supply constraints that continue to drive outsized rent growth
Inefficient Space
• Private, non-institutional Sellers
• Intermediaries with shallower capital market networks and less efficient marketing processes
• Assets that are unloved and undercapitalized; and not institutionally managed and maintained
• Inefficiencies lead to higher likelihood of sourcing assets that can be acquired below inherent value and generate alpha
Ride /rīd/ - verb. “Be carried or supported by (something with a great deal of momentum).”
R.I.D.E
THE FUNDAMENTAL MOMENTUM
R
REAL ESTATE
- Historical and projected Rent Growth
- Construction / inventory and absorption
- Historical and projected Vacancy
- Comparable asset sales and leasing
- Transaction volume and liquidity
- Barriers to Entry, land and construction costs
I
INFRASTRUCTURE
- Airport and rail infrastructure
- Proximity and access to gateway and port markets
- Interstate & highway infrastructure, accessibility and travel times
- Public transportation and rail infrastructure
- Institutions + universities, research centers
- Entertainment + Arts, leisure and tourism, drive quality of life
D
DEMOGRAPHIC
- Historical and projected population growth
- Median Age, millennial movement (18-hour cities)
- STEM occupation density
- Median Household income and Wage Growth
- Average Household education attainment level
E
ECONOMIC
- Projected GDP Growth
- Historical and Projected Job Growth
- Corporate Relocations
- Manufacturing Hubs (e.g. Intel, TSMC, TI, Samsung, Northrop Grumman)
- Low SALT States/Municipalities