Tiny Mortgage REIT Set For Massive Pivot With 98-Asset Portfolio
A quiet mortgage REIT is slated to become one of the largest industrial REITs in the country.
Los Angeles-based Industrial Realty Group is contributing 98 of its 200 owned industrial assets to a partnership with publicly traded Sachem Capital Corp. that will add $2.9B in gross real estate asset value to Sachem’s existing $470M in assets.
The deal is expected to close by the end of the year, subject to approval from Sachem shareholders, who would end up owning 5.9% of the combined entity. The new entity will operate as IRG Realty Trust Inc. and Sachem's SACH ticker will switch to IRGT, a spokesperson confirmed Monday.
The REIT's implied enterprise value of $3.4B will make it one of the 10 largest U.S. industrial REITs, according to a joint statement from the companies.
Shares in Sachem, a small-cap stock that on Friday had a market capitalization under $50M, were up more than 25% in early trading Monday to more than $1.25 per share. The deal values Sachem shares at $2 each, a 90% premium to the stock’s 30-day volume-weighted average price.
“We are excited that this transaction will bring a high quality industrial real estate portfolio to the public market with scale, diversification, and a clear operating strategy,” IRG founder Stuart Lichter said in a statement.
IRG, a private development and investment firm, will own 94.1% of the combined entity at closing, and the firm will transition into an institutional industrial REIT with 90% of operating income coming from stabilized assets and 10% coming from loan investments, according to a presentation filed with the Securities and Exchange Commission on Monday.
The deal is expected to be accretive to Sachem shareholders the same year it closes. Sachem CEO John Villano will leave his post, although he’ll retain a seat on the board of directors, and day-to-day operations of the new portfolio of properties will be supported by an IRG subsidiary.
The seven-member board of directors will be led by Lichter and have at least four independent directors.
Scotiabank is expected to arrange a new credit facility concurrent with the closing, and the deal is forecast to cut Sachem’s leverage from 87.4% to 52%. Management intends to bring leverage below six turns through lease-ups, mark-to-market leasing, financing synergies and other investments.
The deal allows IRG to publicly list nearly half of its industrial portfolio without a traditional initial public offering. The 98-asset portfolio IRG is contributing to the venture spans 48M SF and was 90.5% occupied at the end of the first quarter.
Roughly a quarter of the industrial assets coming from IRG are in Michigan and the rest are spread throughout the country, with a concentration in the Midwest. Sachem’s loan portfolio almost exclusively covers properties in the Northeast, Florida and South Carolina.
Sachem's mortgage business will also pivot as part of the switch to IRGT. The REIT will target a smaller transaction count but larger loans sized between $10M and $50M, compared to the $2M to $10M loans in its portfolio today, according to the presentation. It is aiming to shift its customer base from small investors and early-stage syndicators to experienced real estate operators with robust balance sheets.
IRG's listing of the industrial assets is part of a broader shakeup of real estate assets on the public markets as a string of buyouts promises to take some REITs private at the same time that new REITs are launching for in-demand alternative assets like senior housing.
Healthpeak Properties spun off its senior housing assets into a separate REIT in March called Janus Living that’s seen shares rise more than 30% since its IPO. Blackstone raised $1.75B this month when it launched a REIT to buy newly built data centers called Blackstone Digital Infrastructure Trust.
