A large REIT recently listed a 13 property portfolio located on the east coast. It will likely trade at like a 4.5% cap, with one property sub 3.5% cap.
How does one even underwrite something like this? Debt is unlikely to be accretive if you borrow at a 25 year AM. Leases are somewhat below market, but not meaningfully so. I'm struggling to understand how this makes financial sense for anyone to buy.
lol welcome to the party. There's an embedded growth / safety assumption in that 4.5 cap. Debt capital markets are good for industrial, you can finance with positive leverage at a 4.5 cap still. It works if you think cap rates on industrial will stay low and you get growth, which I think on balance most investors do.
No one is borrowing with 25 yr amort for that prologis portfolio. I haven't seen 25 year amorts on industrial in decent markets since 2010. There will likely be atleast 5 years of IO at 60-65% from lifeco's on that deal.
As for the overall pricing, that's just life in industrial now, especially with portfolios of any size.
Life Companies are lending full term interest-only in low to mid 2%s. A large funds can borrow even cheaper money on an unsecured line of credit. Leverage is definitely accretive. Plus if you buy at a 4.5%, there is likely contractual annual rent bumps and market rent growth on upcoming lease expirations that drive up the return on cost to north of a 5.0% return on cost in mid / later years. I haven't run the math but I'd bet that pencils high single digit / low double digit leveraged IRR.
I haven't seen the portfolio, but you need to think through past the initial cap rate. I've bought plenty of lower 4 cap deals - but the question is what is the cap rate in 3-5 years - what is the lease term. If it's a 4.0% cap rate but the lease term is 3 years, and you can than mark rents to market, it might become a 5.75% cap which you can than sell for a 5% cap, so you just made some good money. Depending on who the buyer is, it may not even be leveraged. Many core funds and life co's use minimal, if no, leverage.
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