When Jeffrey Kelter and Robert Savage, senior partners at New York-based industrial owner and developer KTR Capital Partners, set out to find an exit strategy for two of their firm's investment funds, they had no idea they would end up selling the entire business.
In early 2014, the two executives began exploring alternatives for KTR's first two real estate vehicles, KTR Industrial Fund I and II, including options to sell the funds' assets or recapitalize the vehicles. Fund I, which attracted $505 million in investor capital in March 2006, and Fund II, which collected $700 million in December 2008, hold 13 million square feet and 28 million square feet of industrial space, respectively.
“Over the course of the year, the nature of the process changed,” said Eugene Reilly, chief executive of The Americas at Prologis, which agreed to buy KTR's real estate assets and operating platform for $5.9 billion last month, in a joint venture with Norges Bank Investment Management, manager of the Norwegian Government Pension Fund Global. “What they might have envisioned a year ago morphed into a different deal.” KTR did not comment as of press time.
The San Francisco-based industrial real estate company was interested in the KTR fund assets primarily because of the similarities between the two firms' investment strategy, in that Prologis and KTR both favor Class A properties in supply-constrained markets in the US. In fact, the 60 million-square-foot KTR portfolio that Prologis is buying has an approximately 95 percent overlap with the company's existing US holdings, and so will strengthen its positions in Southern California, New Jersey, Chicago, South Florida, Seattle and Dallas. Moreover, the two companies share 150 multimarket customers, or tenants that have multiple leases in multiple markets with the same landlord, and both manage their real estate internally.
In fact, Prologis and KTR frequently competed with each other on new investments and leasing, Reilly noted. If the company was to buy KTR's properties, he reasoned, it was important to buy all of the assets. However, KTR's third fund, the $1.2 billion KTR Industrial Fund III, was only half-invested at the time of Prologis' discussions with KTR. “They came to the conclusion that if you're buying the third fund, you need to buy the whole platform,” he recalled.
As discussed during Prologis' earnings call last month, Kelter and Savage will not be joining the staff at their company's buyer, and have also signed a non-compete agreement, thereby keeping them out of the market. Prologis will, however, have the opportunity to recruit talent from KTR. “They have the best people,” Reilly said. “And we'll need people to manage 60 million square feet of real estate.”