Given the limited supply and huge demand from tenants, last mile distribution facilities in densely populated urban markets can offer investors outsized rent increases and yields. As a result, these assets are popular with all types of buyers, including institutional investors.
But for institutional investors who need to place large sums of capital, acquiring these assets once is difficult. Individually, they represent small bids for buildings that are often 50 years old and are only 50,000 square feet or less.
Faropoint, a real estate investment management company focused on last-mile real estate in high-growth markets, solves this challenge by aggregating many small industrial last-mile assets into larger portfolios, thereby providing institutional investors with efficient access to this asset class . The company’s overall strategy is to institutionalize these assets in portfolios, undertake capital improvements and match rents to market rates for eventual resale.
Faropoint was founded in Israel 10 years ago and now has US headquarters in Hoboken, NJ. The company recently announced that it has secured $1.57 billion in financing through multiple credit facilities over the past 14 months and plans to expand into growing markets in the Southeast and Texas.
This new funding, provided by KeyBank, JP Morgan and Citizens Bank along with a consortium of 11 other participating banks, will enable Faropoint to immediately draw down funds to facilitate new business and benefit from greater transaction security.
WMRE recently spoke with Faropoint Founder and CEO, Adir Levitas, and CFO, Idan Tzur, to discuss the company’s strategy, investor base and recent financing transactions.
These questions and answers have been edited for length, style, and clarity.
WMRE: How does Fairpoint raise equity?
Adir Levitas: Today we work with discretionary funds, closed-end funds in our industrial strategy of the last mile. And the funds we’ve raised through this vehicle have come from institutional investors and high net worth individuals.
WMRE: Who is your company’s core investment base?
Adir Levitas: The anchor investors of our funds are usually Israeli institutions, life insurance companies and pension funds. They have supported us, and over the years investors from all over the world have joined. But we started in Israel, Tel Aviv.
WMRE: How has the profile of the typical Faropoint investor changed over the years?
Adir Levitas: We started with friends and family 10 years ago and it’s grown into even more friends—some highly talented individuals. The Israeli tech scene has created a lot of wealth within the young generation. We gained access to family office investors through wealthy private individuals and to institutional investors through family offices.
But, as I said, the Israeli tech scene has made a new generation wealthy and has brought a greater amount of real estate opportunity. And that really helped us to penetrate sources of capital and created the opportunity to enter family offices. After having a track record of success with family offices and high net worth individuals, an insurance company anchored our first institutional fund. We’ve built a track record of success from friends and family to institutions, one at a time.
That has changed over the years, but today I would like to say that about 80 percent of our investments come from institutions. That’s likely to rise to over 90 percent, not because we don’t have growth in high net worth investors, but because the institutional portion is growing faster. From a growth perspective, institutions simply take bigger tickets and represent a larger share as we grow.
WMRE: What types of returns does Faropoint seek from its investments?
Adir Levitas: Typically all of our funds are value-add funds, meaning they generate higher returns than your core class vehicles and typically target high teens in real life gross (IRL). Although our initial performance was higher, between 20 and 30 percent on deals sold and funds closed, our goal when launching a fund is for a high IRL in the teens. The fact that we have outperformed in the past does not mean that we will continue to do so in the future and as such our funds still target high teens.
WMRE: How are deals structured?
Idan Zur: In general, our strategy is to group together a large amount of relatively small buildings. For example, in Fund I we had 115 buildings with a total cost of $350 million, so the average transaction size at the time was between $3 million and $5 million. So we have free funds again, we have pre-committed equity and pre-committed debt. We have the dry powder and resources up and running early in the fund so we can close deals very quickly where everything is under the same vehicle. Since there is no co-investment, we can act very quickly.
As we try to aggregate many deals on an annual basis, between 150 and 200 deals, this is a pretty quick strategy so you need to be very efficient.
This efficiency has a few components. Debt and equity must be pre-committed, unsecured and simple. Technology provides the data that enables us to make quick decisions. And it’s the local presence in 10 offices that do relationship-based deals. So when all four components – the local offices, the debt, the equity and the technology – are in place, it creates high efficiencies, goes through a streamlined process and gets to a point where you close a deal almost every business day.
WMRE: What is your average holding period?
Idan Zur: Fund I had a holding period of around four years and for Fund II the holding period was expected to be up to eight years. That’s the life of the fund, but the idea is to hopefully sell the properties as a portfolio to a buyer. So our strategy is to pool a large number of relatively small deals and sell them in a portfolio.
Adir Levitas: What needs to be understood is the foundation of our strategy – the reason we are a last mile real estate aggregator. When we say last mile, we mean 50,000 square feet. Properties on average that can reach an average of 750,000 people within 20 minutes by car. We think what we do is special because these are such small assets in smaller markets within large markets, which means there are over 200,000 of these warehouses [in that market]. So the opportunity is so great, but the inefficiency of buying deals one deal at a time is so awkward that institutional investors can’t do it alone. We fundamentally provide institutional investors with access to an asset class that has institutional fundamentals but is too granular for those institutions to aggregate themselves.
WMRE: What does your company do with the property after acquisition?
Adir Levitas: First of all, it is important to understand what the profile of our property is. We buy urban warehouses in densely populated areas where it is very rare to find new building land. That’s why we hardly see any new buildings. About 0.6 to 0.7 percent of all inventory for this type of property in the US is built annually, so there’s basically no new construction. The construction of existing buildings usually took place sometime in the early 1980s.
Therefore, the opportunity today is not in new construction due to lack of land and high construction costs, but in access to this type of property in terms of ability to source the acquisitions. And the added value is in the institutionalization of management, meaning these assets were mostly owned by individuals, family offices, small businesses, and small retail investors. Buying say 30 of them in Philadelphia offers an opportunity to bring them up to market rents while investing capital in the property to make it look nicer to attract tenants with better rental or credit profiles.
So basically, the possibility is to institutionalize these assets and the rents. Most of what we do is buy existing properties, invest some capital – put lipstick on – to make it look nice, and get the rent back on the market. But 10 percent of the time, we take a value-added approach, which consists of buying a vacant property, upgrading it, and then listing it. Or it could be buying a property with a short-term lease made with the previous owner. Many of these properties involve an owner-user. Sometimes the occupier doesn’t want the building on their balance sheet so they sell it to us – we’re a capital solution and rent it back to the occupier. And these types of opportunities allow you to enter into a new contract that could reflect market rents.
WMRE: Can you share your company’s experience in securing this latest $1.6 billion round of bank financing? And what were the terms of these transactions?
Idan Zur: I think our secret ingredient is a good relationship with the banks that we have in our operations. It starts with the key bank. She is the lead arranger of credit facilities for all three of our funds. The amount of debt, the total debt required, naturally varied from one fund to another. Average exposure has increased from an average of about $30-40 million to about $80 million per participating bank in the last facility.
I’m not sure how much we can go into the terms themselves, but I can say I think it was attractive from both a lender and borrower perspective. It is competitive terms as it is our third facility in a proven strategy over the past five years. And so the lenders who ran the facility are happy with the diversification of assets, tenants, and geography. It’s definitely competitive conditions, but that’s not how it started. We have worked our way up through relationship building and demonstrated our ability to operate in an institutional manner that banks are comfortable with.
WMRE: What types of deals does your company plan to do with this money?
Adir Levitas: We seek to construct a portfolio for each fund that has the right exposure to gateway markets, high growth primary markets and high value, ie upfront cash flow, markets. Chicago, for example, has a lot of upfront cash flow, as does Philadelphia and Baltimore, compared to markets that have a lot of potential but little cash flow, like Miami and Northern New Jersey. The composition is therefore intended to achieve the targeted IRL return with the lowest possible risk.
We’ve grown into this market (Northern New Jersey) over the past several years, so we will grow in all of these regions. We now look at Nashville, the Carolinas and Austin. These are the markets we want to expand into.