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REA
January 10, 2018  

Clarion Strikes Deal for Warehouse Portfolio

Clarion Partners has agreed to buy a portfolio of high-quality distribution warehouses from Pauls Corp. for about $345 million.

Denver-based Pauls marketed the 3.7 million-square-foot package via CBRE in two sub-portfolios: one encompassing stabilized properties with below-market rents in the Denver area, the other consisting of recently completed warehouses still in their initial lease-up phase, in the Las Vegas, Dallas and Atlanta markets.

The offering attracted strong interest. Clarion’s bid to take down all 21 properties eclipsed the portfolio’s projected valuation of about $330 million. Clarion, a New York investment manager and major player in the industrial sector, will reap an initial annual yield of roughly 3.5% at the $93/sf price tag. The skimpy initial return reflects investor faith that rents and leasing demand will continue to grow at relatively new industrial buildings in strong markets.

Indeed, Clarion and other bidders — including a strong line-up of domestic institutional investors — didn’t blink at the 52.8% occupancy rate in the sub-portfolio still being leased up. That sub-portfolio consists of seven buildings completed last year that generate $3.2 million of net operating income, according to marketing materials. The pitch was that a buyer could nearly double the income within a year by filling vacant space.

The sub-portfolio has seven tenants with a weighted average remaining lease term of 6.7 years. Less than 6% of that space rolls over before 2020. Marketing materials project a 219% increase in net operating income over the next decade.

The sub-portfolio contains two buildings in Las Vegas (698,000 sf, 91.7% leased), three in Dallas (645,000 sf, 49.9%) and two vacant Atlanta buildings totaling 479,000 sf. Also included are Atlanta parcels suitable for 1.1 million sf of development.

The other sub-portfolio was touted as a rare opportunity for a large-scale acquisition in Denver’s burgeoning industrial market. Only one warehouse transaction in the market has topped $100 million since Real Estate Alert’s Deal Database began tracking deals in 2001.

The 14 Denver properties, in the Airport submarket, are 95.6% leased and generate $8.8 million of annual net operating income. The submarket has 80 million sf that was 95.7% leased at midyear. Average rents jumped 11% in the 12 months through June.

The Denver properties were built from 1995 to 2015 and have an average age of 16 years. The buildings have ceiling heights of up to 32 feet and modern sprinkler systems. The 44 tenants have a weighted average remaining lease term of 3.7 years. Net operating income is projected to grow 11.9% within two years, driven by contractual rent bumps, the leasing of vacant space and rent increases upon rollover. In-place rents are 16.7% below the average market asking rate.