Westmount, Ares JV keeps leverage low in industrial portfolio recap

A simplified debt structure was important for the deal, says Westmount founder Cliff Booth.

Westmount Realty Capital is showing its long-term commitment to the upper Midwest industrial market via a major portfolio recapitalization with Ares Management, a transaction in which the partners opted to keep the leverage on the underlying assets low.

The Dallas-based investment management company is maintaining its share of a 6.1 million-square-foot portfolio, which mainly consists of light industrial and logistics facilities located near major urban centers in the Chicago and Milwaukee areas. Ares Management came into the deal to replace Westmount’s original co-owner in the portfolio, Partners Group.

CBRE and Eastdil advised on the deal.

“We wanted to stay in the transaction,” Cliff Booth, founder of Westmount, told Real Estate Capital USA. “We still believe in the assets and the growth potential in the markets.”

The portfolio’s proximity to Chicago and Milwaukee supply-chain arteries is a key to its continued rent growth and low vacancies, with Booth noting that Westmount and partners put together the portfolio several years ago – prior to the current industrial market boom.

“We have a very strong conviction that these are mature markets,” Booth said. “These assets are close to city locations, airports and freeways.”

The portfolio is 98.8 percent leased with no single tenant representing more than 9.9 percent, further convincing Westmount to commit for the long haul. “The corollary of low vacancy and great rent growth is probably the most relevant reason that we see that there is more runway left on this portfolio,” Booth added.

Keeping leverage low

A simple financing structure without mezzanine debt or preferred equity was an important part of the recapitalization. “The fact that we weren’t trying to put on preferred equity or mezzanine or any kind of structure on it made it very attractive to the debt markets,” Booth said.

This also translated to better pricing.

“When you don’t put those kinds of restrictions on a deal, you’re safer,” Booth said. ”And you get a much lower interest rate. If you put a mezzanine or any kind of higher leverage on it, you’re going to have a much higher interest rate. The cash-on-cash return that we’re getting is pretty attractive as a result.”

A lower-leverage approach could put Westmount in an even better position if expected rate increases cause substantial disruptions in the debt market. “I think [rate increases are] going to be a bit of a shock to some groups,” Booth said. “The groups that lever up I think are going to be hit a little bit harder than people like us who don’t.”