Oxford Properties Group tapped the commercial mortgage-backed securities market to finance its acquisition of a $2.2 billion light industrial portfolio from KKR.
The company, the wholly owned real estate arm of Ontario Municipal Employees Retirement System, believes the CMBS market will offer the best execution and proceeds to finance the September acquisition of the 14.5 million-square-foot portfolio.
“If you think about lenders and the appetite for the industrial asset class, every lender and investor is low on industrial allocations. When a large transaction like this comes around, it’s a way for lenders and investors to take advantage of operating fundamentals [of the sector],” says Ankit Bhatt, vice-president of Investments who oversees the US Industrial business at Oxford Properties.
The 149-property portfolio consists of distribution centers located along major markets including the Inland Empire and the Baltimore-Washington, DC corridor and has assets in markets that also include Dallas, Atlanta, Phoenix, Chicago, Houston, Tampa, Orlando and San Diego. “These are businesses that you need in a good economy and a bad economy. These are your necessity-based businesses that need to be close to population centers,” Bhatt says.
Behind the loan
Portfolios of this size and diversification are a natural fit for the single-asset/single-borrower market. “No one tenant makes up more than 3 percent of the entire portfolio and there’s a good, diversified tenant base,” Bhatt says. “[CMBS lenders] are also able to scale on transactions like this and the pricing was very helpful too.”
Oxford Properties believes that light industrial properties are highly defensive in nature and covid-19 resilient. The properties are also becoming an increasingly valuable link in the post-covid supply chain. Smaller industrial spaces that are close to the end-user have rapidly grown in importance as the logistical demands of e-commerce increased, with this process only accelerating during the pandemic.
“When a large transaction like this comes around, it’s a way for lenders and investors to take advantage of operating fundamentals [of the sector]”
“With the whole concept of instant delivery, next day requirements, and the need for fulfilling the orders and being close to consumers, the supply chain has evolved since the last four years. It continues to evolve, and I think we’re still [in] early stages in that,” says Bhatt.
Oxford sees upside potential not only in the growth of e-commerce, but in the wide possibility for rent increases among light industrial tenants over the coming years. The firm’s plan is to hold the portfolio for the long-term and hopes to tap into these rent increases, Bhatt adds.
“Demand keeps going up, but your supply is pretty stagnant. If anything, it’s actually shrinking. So, the rent growth dynamic as an investor is actually quite strong. That’s why we think that this is a really, really great time to be acquiring a light industrial portfolio like this,” Bhatt says.
Oxford was very familiar with the portfolio, having been the mezzanine lender prior to its acquisition of the entire portfolio. “We had a balcony seat viewing of the assets during covid and we had a tremendous amount of conviction [and] great comfort with the asset,” Bhatt adds.
There was one more factor that was appealing for Oxford – the relatively small size of many of the tenants. “We at Oxford realize the power of small businesses,” Bhatt says, adding that the portfolio’s smaller tenants need to be close to their end-users in the same way that their larger counterparts do. “[We are helping to] drive the entrepreneurs and economy of the country.”
The firm has substantially grown its global industrial business over the past few years, acquiring the ISI Logistics portfolio with Ivanhoe Cambridge for $3.5 billion in 2019. The following year, the firm made a major investment in Lineage Logistics, a cold storage logistics specialist. The firm was also a cornerstone investor in the 2021 initial public offering of ESR Cayman, an Asian logistics platform, and also struck a deal in January to acquire M7 Real Estate that will allow it to deploy more than $4 billion into the European industrial market over the next few years.
The activity is part of a broader plan to have about a third of the firm’s portfolio allocated to industrial assets.