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.
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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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