Faropoint's Sale-Leaseback Strategy Starts Small For Big Returns

Faropoint is looking to do what few large investors will — buy individual warehouses direct from users.

The industrial asset manager launched a $300M sale-leaseback fund dedicated to buying properties from tenants to lease back to them, giving tenants an easy way to secure the cash they need to keep going and allowing Faropoint to aggregate warehouse portfolios it can sell to larger investors.

So far, Faropoint’s fund has acquired or contracted about 1M SF that spans 12 fully occupied buildings across the Midwest and New Jersey. It plans to expand to the South, where preleasing activity is strong and the biggest pool of mega-box warehouse space is available, like in Texas and Georgia.

The fund locked down $170M in capital commitments after its initial close in August, which came from a domestic pension fund in the Middle East.  

Companies launching funds to acquire industrial real estate is commonplace — the property type has been a favored one for years now. But this fund's focus solely on sale-leaseback industrial deals, in which an owner-occupier sells its property to a real estate investor and then leases it back, is rare. The reasoning: There are a lot of these deals and not many competitors are gunning specifically for them. 

There have been more than $42B in sale-leasebacks since 2022, and industrial properties make up almost half of that. In the tighter lending environment of the last few years, some smaller industrial tenants have become unable to secure the loans needed to expand their businesses without double-digit interest tacked on.

"They assess it on their own that doing a sale-leaseback at a 7 or even an 8% cap is favorable compared to taking that loan," Faropoint Vice President of Capital Development Ori Regev said.

CEO Adir Levitas told Bisnow underwriting the assets in off-market private deals is challenging because these companies don't usually have the robust, healthy financial situations over a sustained period of time that buyers like to see before they sign on the dotted line. 

To calculate risk, Faropoint uses financial statements, talks to company management and reviews a building's vacancy rate with the goal of seeing diversified offerings. That way, there's a better chance of covering rent and having enough runway to stay afloat. 

"We look at three layers — location, functionality and credit — when we're assessing the buildings," Regev said. 

The next step of Faropoint’s strategy is to pool properties together into large portfolios and flip them to other industrial investors at a nice profit. The execs said they are targeting a value-add level of return. 

That strategy calls for a lot of square feet. With the sale-leaseback fund, Faropoint can strike where the iron is hot, one asset at a time.

Building portfolios is favorable in this environment, Regev said, because large buyers usually don't turn an eye to a single asset. 

"When you give them a portfolio of 100 or 200 warehouses, that is suddenly something that they can access, they can underwrite freely, and they can really put their time and effort into," Regev said.

Investor appetite for larger transactions grew during the first half of 2024. That coincides with a rise in user demand for big spaces: Leasing for properties over 1M SF in the first half of this year outpaced 2023 levels by over 6M SF. 

The fund is targeting properties that are around 200K SF and are right outside of major cities along the East Coast and Sun Belt. A recent deal highlights its sweet spot: It purchased a 220K SF warehousing and manufacturing plant in Georgia for $16.5M. 

One of the worries with sale-leasebacks is the tenant going into default on a 15-year lease. Faropoint execs said they don't see that as a big risk with their strategy because they are focusing less on creditworthiness of tenants and more on property fundamentals.

"If we were credit first, we would probably have to compromise on the real estate location and functionality and probably buy something in the middle of nowhere where it would have been really hard to re-lease if we needed," Levitas said. 

It's the same strategy Faropoint uses for its value-add fund.

The company is confident with how the fund will perform in today's industrial market because, in times of uncertainty, the investor is largely sticking with what it knows.

"We know how to do one thing, which is urban logistics, and all kinds of slicing and dicing of strategies within urban logistics," Levitas said.