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CHICAGO-Teaming up for the second time this year, First Industrial Realty Trust Inc. and the California State Teachers Retirement System have a different modus operandi in mind with the 216-property, 14.4-million-sf portfolio it acquired for $1.01 billion from Duke Realty Corp. While the first, $950-million joint venture between the locally-based national industrial REIT and the mammoth pension fund seeks to buy into value-added opportunities, the most recent hook-up will focus on stabilizing the new assets and selling them, possibly within five years.

"Ultimately, we think the parts of the portfolio are more valuable than the whole," says president and chief executive officer Michael W. Brennan. While occupancy across the portfolio stands at 85%, First Industrial believes it can push that above 90%, Brennan explains. That will push a 7.75% going-in capitalization rate to 9% once the portfolio is stabilized.

How will FirstCal Industrial 2 achieve that, company officials were asked during a conference call Thursday, after Duke Realty could not? "They are a very good company and have done a very good job," says executive vice president of operations David P. Draft. However, Duke Realty's 115-million-sf portfolio is split between office and industrial properties, in 14 markets, mostly in the Midwest and Southeast. In addition to being national, First Industrial picks up a portfolio with two-thirds of the assets in Atlanta, Minneapolis and Nashville, markets where it has a strong presence. "This is our only produce type, in terms of industrial," Draft adds.

While paying $70 per sf for the portfolio, First Industrial officials believe the replacement value is $85 per sf. "We became more and more impressed with the portfolio as we did our due diligence," Brennan says.

However, it no longer fits the seller's overall strategy. "The sale of this portfolio is a continuation of our long-term strategy of recycling assets into higher yielding new developments," says Duke Realty chairman and chief executive officer Dennis Oklak. "Within the industrial side of our business, it also greatly accelerates our ownership focus toward newly developed bulk warehouse properties in top-tier distribution markets such as Atlanta, Chicago, Dallas and Indianapolis."

Brennan says his company, which already sells a property from its own portfolio once every three days, could sell about $200 million a year from the Duke Realty portfolio. "Our own disposition due diligence suggests this portfolio can be optimally sold in five years," he says.

CalSTRS is a 90% partner with $234 million in equity while First Industrial Realty Trust is contributing $26 million. The joint venture has put down a $10-million, non-refundable earnest money deposit, and closing is expected in 30 days. FirstCal Industrial 2 will use a subscription line, which will not encumber individual properties with mortgages, at 4.5%, Brennan says.

The first First Industrial-CalSTRS joint venture has invested $100 million so far with 2.4 million sf of assets acquired from Principal Real Estate Investors, with another $350 million in deals under contract, says chief investment officer Johannson L. Yap.

The most recent deal allows REIT Duke Realty to pay a special dividend ranging from $0.90 a share to $1.20 a share.

Instant Insights /

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