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RENO, NV-The DP Industrial portfolio has changed hands for more than $1.8 billion. DP Industrial is four-year-old joint venture of locally based industrial developer Dermody Properties and CalSTRS that owns 24.7 million sf of distribution space in 114 properties and 518 acres of land that can support an additional nine million sf.

The built space, which is approximately 90% leased, was sold to a new fund of the Denver-based international distribution REIT ProLogis that includes a substantial investment by Lehman Bros. The developable land was acquired by ProLogis directly. ProLogis says the aggregate cost of the two deals is $1.85 billion.

For Dermody Properties, which developed the entire portfolio, the sale means a fresh start. Michael Dermody tells GlobeSt.com his core development team remains in place and that land acquisitions are in the works so the company can maintain is pace of developing three million sf per annum.

“We’ve been an institutional partner for 17 years, first with CalPERS and then with CalSTRS,” Dermody says. “As we go forward we look for forward to a private, entrepreneurial chapter.”

Aside from completing some of the 1.2 million sf in the DP Industrial portfolio that is under construction, Dermody says his company will not act as a fee-based developer for ProLogis going forward.

“What drove the deal was pricing. These are unique times for portfolio dispositions and we wanted to take advantage of that,” he says. “We are going to complete the transaction and then reinvest [on our own].”

For ProLogis, the deal instantly gives it a leading position in Nevada, which is home to more than 60% of the overall portfolio, and improves its positions in Eastern Pennsylvania, Chicago and Southern California–markets ProLogis believes will outpace average national rent growth. The deal also strengthens its land bank, expands relationships with existing customers and enhances returns through active portfolio management and fee income.

Approximately 49% or 12 million sf of the portfolio is located in the Reno area and another 16% (four million sf) is located in the Las Vegas area. ProLogis chairman and CEO Jeffrey Schwartz says Reno is growing in stature as a regional distribution hub that can serve consumer markets throughout California, Nevada and the Pacific Northwest.

“We believe our expanded position there will deliver a sustained competitive advantage for ProLogis as we serve customers with large-scale distribution needs across the western US,” he says.

The new fund, ProLogis North American Properties Fund III, was formed to acquire the built and under-construction portion of the DP Industrial portfolio. ProLogis says affiliates of Lehman Brothers acted as adviser to the fund and provided debt and equity financing to the venture. ProLogis has a 20% equity interest in the fund.

Walter Rakowich, ProLogis’ president and COO, says the DP Industrial portfolio is similar to its existing assets in terms of construction, building size, office finish and tenancy. The average age of the buildings in the portfolio is eight years and more than 50% of the tenants have pre-existing relationships with ProLogis. “At 90.5% leased on average, we believe the portfolio…offers us an…opportunity to increase occupancy and stabilized yields over the near term,” he says.

With regard to the developable land, approximately 64% is located in Greater Chicago and Eastern Pennsylvania, both major distribution markets. More than 200 acres are located adjacent to a key intermodal facility outside Chicago operated by the Union Pacific Railway Co. “Across the board, the DP land bank is extremely well-located for future industrial development,” Rakowich says.

ProLogis is the world’s largest owner, manager and developer of distribution facilities. As of the end of March, it owned, managed and had under development 436.9 million sf in 2,525 properties worldwide. Its customers include manufacturers, retailers, transportation companies, third-party logistics providers and other enterprises with large-scale distribution needs.

Dermody says he will continue developing in the same markets as it has in the past, including Reno and Las Vegas, Chicago, Harrisburg, PA and Savannah, GA. The company is also launching an office in Portland, OR, where it recently acquired 13 acres for a speculative warehouse development.

In addition to industrial, Dermody says the company will pursue other types of development as well, including commercial, retail, land and office. Dermody also alluded to a structural change in the company that would give its core development team ownership and partnership opportunities.

“[We] are looking forward to a refreshed style of doing business as well as an even greater emphasis on giving back to our communities,” he says. “This is an exciting transition period for our entire team.”

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