Dermody is oversubscribed again for its second industrial fund – Exclusive

Dermody Properties has closed on its second fund, Dermody Properties Industrial Fund II, PERE has learned.

The firm raised $619 million for the value-add fund launched in January, surpassing its $600 million target. The fundraise included four new investors on top of an otherwise 100 percent re-up from the predecessor fund, Dermody Properties Industrial Fund I. Indeed, the firm did not turn away any capital from interested investors, leading the fundraise to exceed the $600 million hard-cap. Investors include public and corporate pension funds, insurance companies and other institutional investors, according to Dermody Properties’ legal advisor Kirkland & Ellis. Park Hill Real Estate was the fund’s placement agent.

“I think [investors] appreciate our discipline,” Dermody Properties chief executive and chairman of the board Michael Dermody told PERE. “I think they also appreciate our relationship with our clients.”

Dermody Properties Industrial Fund I, the firm’s debut fund, also saw strong fundraising. After launching in late 2015, it closed on $442.4 million in January 2017, exceeding its $400 million target. The fund has been used to acquire and renovate undervalued logistics buildings, as well as to develop entirely new industrial facilities. Fund II will use the same strategy as Fund I and previous non-fund deals made since the firm’s inception 40 years ago, according to Dermody.

“We’re buying existing, high quality logistical facilities and then we’re repurposing them for more appropriate tenant usage,” he said. “Leasing is the key word to everything we do.”

The firm targets acquisitions in land-constrained markets around major US population centers and logistics hubs. Dermody said the team sources deals from its offices in Nevada, northern and southern California, Phoenix, Seattle, Chicago and Pennsylvania. After acquiring a property, Dermody Properties adds value by providing better management and bringing in tenants. New facilities are often built for e-commerce tenants that want taller buildings with more parking space. Tenants in Dermody Properties logistics facilities have included Urban Outfitters, GameStop, Amazon and Wayfair, among others.

The firm has an average investment period of three years, which includes the time it takes to renovate an existing industrial property or build a new facility and lease it up. Dermody noted that, in the past, the firm has had an average lease up time of six months after building. The firm has been successful in attracting and maintaining tenants, according to Dermody, who cited an average lease renewal rate of 70 percent over the firm’s lifetime. He did not give an exact timeframe for the life of Fund II, but said it was structured to allow the long-term holding of assets.

Like Dermody Properties Industrial Fund I, the firm’s second fund will also be used to target investment returns in the mid-to-high teens. As of January, Dermody Properties had invested 92 percent of the capital in the debut fund, with the remaining 8 percent being reserved for expenses. The firm did not disclose performance for the first fund as it has yet to make any exits.

Dermody Properties was established in 1982, continuing the work of Michael Dermody’s father, who first started in 1960 as an independent landlord focused on warehousing and distribution. The firm has since partnered with large institutional investors including the California State Teachers Retirement System and the California Public Employees’ Retirement System. In 2007, it sold a 25 million-square-foot portfolio to Industrial REIT Prologis. The firm did not disclose its current assets under management.