With limited supply and tremendous demand from tenants, last-mile distribution facilities in dense, urban markets can provide investors with out-sized rent growth and returns. As a result, these assets are popular among all types of buyers, including institutional investors.
But it’s difficult for institutional investors, who need to place large sums of capital, to acquire these assets on a one-off basis. Individually they represent small deals for buildings that are often 50 years old and contain just 50,000 sq. ft. of space or less.
Faropoint, a real estate investment management firm focused on last-mile properties in markets with high population growth, solves this challenge by aggregating many small last-mile industrial assets into larger portfolios, enabling institutional investors to efficiently access this asset class. The firm’s overall strategy is to institutionalize these assets into portfolios, make capital improvements and adjust rents to market rates for eventual resale.
Faropoint was launched in Israel 10 years ago and now has a U.S. headquarters in Hoboken, N.J. The firm recently announced that it had secured $1.57 billion in funding over the past 14 months through several credit facilities and has plans to expand into growing markets in the Southeast and Texas.
This new funding, provided by KeyBank, J.P. Morgan and Citizens Bank, along with a syndicate of 11 additional participating banks, allows Faropoint to immediately draw down funds to facilitate new deals and benefit from greater transactional certainty.
WMRE recently spoke with Adir Levitas, founder and CEO of Faropoint, and Idan Tzur, CFO, to discuss the firm’s strategy, investor base and recent financing transactions.
This Q&A has been edited for length, style and clarity.
WMRE: How does Fairpoint raise equity?
Adir Levitas: We are working today through discretionary funds, close ended funds in our industrial last-mile strategy. And the funds we've been raising through this vehicle have been from institutional investors and high-net worth individuals.
WMRE: Who comprises your firm's core investment base?
Adir Levitas: In general, the anchor investors in our funds are Israeli institutions, life insurance companies and pension funds. They have been backing us up, and over the years, investors from all over the world have been joining. But we did start in Israel, Tel Aviv.
WMRE: How has the profile of Faropoint's typical investor change over the years?
Adir Levitas: We started 10 years ago with friends and family and that developed into more friends—some highly talented individuals. The Israeli tech scene has created a lot of wealth within the young generation. Through wealthy individuals we got access to family office investors, and through family offices to institutional investors.
But, as I was saying, the Israeli technology scene did make a new generation wealthy, and brought a larger crowd into real estate opportunities. And so that really did help us to penetrate capital sources and created the ability to go into family offices. After we had a track record with family offices and high-net worth individuals, an insurance company anchored our first institutional fund. We built a track record from friends and family to institutions, one after the other.
So that did change over the years, but today I want to say about 80 percent of our investment is from institutions. That will probably grow to 90 percent plus, not because we don't have growth in high-net worth investors, but because the institutional ratio is growing faster. From a growth perspective, institutions are just taking larger tickets and represent a larger share as we grow.
WMRE: What types of returns does Faropoint target on its investments?
Adir Levitas: Usually all of our funds are value-add, meaning they do look at higher returns than your core class vehicles and usually targeting high teens gross in real life (IRL). Even though our performance inception to date has been higher than that, between 20 and 30 percent on deals sold and funds closed, our target when we start up a fund is high teens IRL. The fact that we have done better in the past doesn't mean it will continue into the future, and so our funds still aim for high teens.
WMRE: How are deals structured?
Idan Tzur: In general, our strategy is to aggregate a large amount of relatively small buildings. So, in Fund I, for example, we had 115 buildings with a total cost of $350 million, so the average deal size back then was somewhere between $3 and $5 million. So, we have, again, discretionary funds, we have pre-committed equity and pre-committed debt. We have the dry powder and the resources up and running at the beginning of the fund, allowing us to close deals very quickly, where everything is under the same vehicle. Because there is no co-investment, we can move very quickly.
Because we're trying to aggregate many deals on an annual basis, between 150 to 200 deals, it's a pretty fast-paced strategy, so you have to be very efficient.
That efficiency has a few components. The debt and equity has to be pre-committed, unsecured and easy. Technology provides the data that allows us to make fast decisions. And it is the local presence in 10 offices that source deals that are relationship-based. So, when all four components—the local offices, the debt, equity and technology are in place—it creates high efficiency, goes through a streamlined process and gets to a point where you close a deal almost every business day.
WMRE: What is your average hold period?
Idan Tzur: Fund I had a holding period of about four years, and for Funds II, the hold period should be up to eight years. This is the fund term, but the idea is to sell the properties hopefully as a portfolio to a buyer. So, our strategy is to aggregate a large amount of relatively small deals and sell it in one portfolio.
Adir Levitas: What needs to be understood is the basis of our strategy—the reason why we are an aggregator of last-mile properties. When we say last-mile, we mean 50,000-sq.-ft. properties on average that can reach on average 750,000 people within a 20-minuts drive. We think that what we do is so special because these are such small assets in smaller markets within big markets, meaning there are over 200,000 of those warehouses [in that market]. And so the opportunity is so large, but the inefficiency of purchasing one deal at a time is so cumbersome that institutional investors cannot do it by themselves. We're basically allowing access of institutional investors into an asset class that has institutional fundamentals, but is too granular for those institutions to aggregate by themselves.
WMRE: What does your firm do with the properties after acquiring them?
Adir Levitas: First, it's important to understand what is the profile of our property. We’re buying urban warehouses in dense areas, where it's very rare to find new land for construction. So, we rarely see any new construction. About 0.6 to .0.7 percent of the entire inventory for this property type in the U.S. is being built on an annual basis, so there's basically no new construction. The construction of existing buildings was usually somewhere in the beginning of the 1980s.
So today, the opportunity is not in building new due to lack of land and high construction costs, but in accessing this kind of property in terms of the ability to source the acquisitions. And the value-add is by institutionalizing the management, meaning those assets were mostly owned by individuals, family offices, small companies and small private investors. Buying, for instance, 30 of them in Philadelphia, provides the opportunity to mark them up to market rents, while investing capital into the property to make it look nicer to attract tenants with a better rent or credit profile.
And so the opportunity is basically to institutionalize those assets and the rents. Most of what we do is buy existing properties, invest some capital—add lipstick—to make it look nice and bring the rent back up to the market. But in 10 percent of the cases, we are exercising a more value-added approach, which could be buying a vacant property and upgrading it and then listing it. Or it could be buying a property with a short-term lease that's being done with the previous owner. Many of these properties involve an owner-user. Sometimes the user doesn't want the building on his balance sheet, so he sells it to us—we are a capital solution, and we lease it back to the user. And those kinds of opportunities allow you to have a new contract that could be reflective of the market rents.
WMRE: Can you share your firm's experience in securing this latest round of $1.6 billion in bank funding? And what were the terms of these transactions?
Idan Tzur: I think that our secret sauce is a good relationship with the banks that we have in our operation. It starts with Key Bank. It is the lead arranger of credit facilities for all three of our funds. The debt size, the total required debt, of course, changed between one fund to another. The average commitment was increased from an average of around $30 to $40 million to around $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 that I think it was attractive both from the lenders’ and borrowers’ perspective. It's competitive terms because it is our third facility in a proven strategy for the past five years. And so, the lenders that led the facility are comfortable with the diversification of assets, tenants and geography. It’s definitely competitive terms, but it didn't start that way. We have worked our way up through building relationships and proving our ability to operate in an institutional way that made the banks feel comfortable.
WMRE: What types of deals is your firm planning to seek with this money?
Adir Levitas: We try to compose a portfolio for each fund that has the right exposure to gateway markets, primary markets that have a lot of growth, and markets that have a lot of value, meaning upfront cash flow. Chicago, for example, has a lot of upfront cash flow, as does Philadelphia and Baltimore versus markets that have a lot of potential, but not much cash flow, like Miami and Northern New Jersey. So, the composition is to achieve the target IRL return with the lowest amount of risk possible.
We've grown into this market (Northern New Jersey) in the past few years, and so we're going to grow within all of those regions. We're now looking at Nashville, the Carolinas and Austin. Those are the type of markets we're looking to expand into.