So, it was natural that, first, Ivanhoé Cambridge would bid to purchase IDI Logistics and its 111 U.S. properties when former owner Brookfield Property Partners put it on the market in 2018. It was also a slam dunk that, when it sought another deep-pocketed investor to share in the estimated $4.7 billion (all figures Canadian) price tag, Oxford Properties would be a willing partner.
The shared objectives led to Wednesday’s announcement the two giant Canadian institutional investors had forged a 50-50 joint venture to own and manage IDI, its 36-million-square-foot portfolio and an additional 17 million square feet of development potential.
“We’re very excited to be doing this with Oxford which has like interests, capital and the ability to take on some development risk when some people might shy away from it,” Ivanhoé Cambridge’s executive vice-president of industrial, North America, Mario Morroni told RENX in an interview. He called Oxford “the perfect partner” for this venture — their first together in the industrial sector.
“They definitely understand investment risk, they’ve done that across the globe and that is very important. They also understand logistics. They have a great platform in Canada, a small piece in Europe and they haven’t done anything in the U.S.
“So we knew they had the appetite to want to grow this properly, with us, over the next three to five years.”
Oxford a “like-minded partner”
Kevin Egan, head of New York and U.S. investments at Oxford, echoed those thoughts: “Ivanhoé wanted a like-minded partner with similar investment philosophies, including a long-term mindset,” he told RENX. They also share the same perspective on logistics as a long-term investment.
“Part of our strategy is to meaningfully increase our global allocations in the logistics sector,” Egan said, noting this is Oxford’s first venture in the U.S. industrial market. “We think the macroeconomic fundamentals, particularly with the shift to e-commerce and population growth in certain areas, is quite favourable to the logistics sector.”
The IDI Logistics portfolio is ideally suited to fulfill those goals for Ivanhoé and Oxford, Morroni and Egan agree.
“IDI was an opportunity to own, together with Ivanhoé, a very large portfolio (of) about 47 million square feet, in one shot,” Egan said. “Top-quality assets, top-quality management team in a scale transaction.
“In addition, we have a very large development pipeline, about 17 million square feet, and the team to built it out.
“So it’s a combination of great assets, great management team, great portfolio and a meaningful pipeline that will lead to great returns.”
Oxford’s total industrial portfolio is at $4.7 billion in assets under management. In Canada, it has $1.9 billion in AUM, comprising about 13.4 million square feet.
IDI portfolio well suited to e-commerce
With e-commerce booming, industrial vacancy rates falling in many major North American markets and rents generally rising, Ivanhoé and Oxford consider IDI’s portfolio well-placed to capitalize on those trends.
“(There are) several reasons why we liked this portfolio: No. 1 is the strength of the team,” Morroni said. “They were a team that was put together probably 30 years ago, the top people who were there.
“The amount of experience they have in these markets, to be able to develop about six million square feet every year. They’ve managed and sold through cycles which was very important to us. We like the pipeline they have.”
The portfolio is also modern, with most of the product constructed by IDI itself during the past decade.
“For the most part it’s anywhere between, call it 300,000 to 400,000 square feet on average, and it’s about a 2010 build. That’s why I’m saying the characteristics meet the requirements today,” Morroni said. “You are looking at 30-plus, up until 40-foot clear heights. You’ve got crossdocks, you’ve got the proper depth of duckboards for the trucks to be able to turn. It is e-commerce based, so it has to be appropriately suited for that.”
The portfolio was also diligently managed. With IDI’s prolific pace of new product development, it was constantly giving the assets “a haircut” Morroni said, to divest lower-yielding stabilized assets.
That strategy will continue, though there will be some adjustments to IDI’s geographic weighting, Morroni said, particularly in markets which might be more susceptible to an economic downturn: “We’re gonna tweak maybe some of the markets to a certain degree.
“But the whole focus is a build-to-core strategy. That’s why we were interested in this whole business, is their capabilities on the development side.”
Ivanhoé is bulking up on industrial
The purchase is the latest in a string of high-profile acquisitions for Ivanhoé in industrial and logistics.
Ivanhoé’s goal is to hold about 20 per cent of its asset value in the sector as it continues to diversify its commercial real estate holdings. This purchase pushes its industrial assets above $9 billion, with about $6.5 billion of that investment in Canada and the U.S. and the rest in Brazil, Asia-Pacific and some in Europe.
Since announcing that strategy, in the past two years Ivanhoé has invested heavily in North American industrial:
* partnered with Blackstone to buy and privatize Pure Industrial Real Estate Trust (PIRET);
* purchased TPG Real Estate’s Evergreen Industrial Properties portfolio of 150 U.S. light industrial assets;
* and purchased Colony Commerce Centre in Ontario, Calif., from Caprock Partners, with three million square feet of development potential.
Major development potential
In addition to the existing assets, the North American deals all involve development potential. As Morroni notes, at current prices developing and stabilizing properties leads to higher returns than having to buy portfolios such as those held by PIRET, Evergreen or IDI.
“Given where pricing is today, to go out and buy a portfolio of this size and quality would be extremely expensive,” he observed. “Going forward, we want to be able to build to better yield-on-cost and get a little bit better returns than paying top dollar after someone else has already built the stuff.”
Looking ahead, both Ivanhoé and Oxford believe industrial and logistics are better positioned to withstand an expected economic downtown than some other CRE sectors.
With demand continuing to outstrip supply across North America, they both plan to develop within their pipelines and continue searching out potential acquisitions.
“We have more runway,” Oxford’s Egan said. “Our plan in the U.S. is to continue to expand and grow our industrial logistics exposure and we plan to do that through the IDI platform. In addition to this development pipeline (though), we have more appetite to grow.”
“Supply has been in check, so that’s not an issue there. Demand has been very strong,” Morroni said. “We can’t build enough In the U.S. to satisfy that supply right now. But again in the U.S., e-commerce has been the driver; how many sales are going from bricks and mortar over to e-com is going to be a big component of the space that’s needed.
“We’re constantly monitoring that and making sure we do this cautiously. But, at the same time we want to make sure we keep our nose in the current.”