Walton Street makes big industrial exit in Mexico

The Chicago-based private equity real estate firm has harvested about a quarter of the assets in its first Mexico fund as it prepares for its largest fundraise to date in the Latin American nation.

Walton Street Capital has sold all of the industrial assets in its Mexico-focused fund, with plans to redeploy some of the sale proceeds into assembling a vast portfolio of new properties over the next couple of years.

The Chicago-based real estate fund manager recently exited the bulk of its industrial property investments in the Latin American nation, as a partnership comprising the firm, Mexican industrial developer Finsa and American International Group sold 34 properties totaling 520,000 square meters (5.6 million square feet) and with an aggregate value of $372 million to Fibra Uno, according to an announcement by the Mexican real estate investment trust last week. 

The assets originally were acquired at a capitalization rate of 10 percentwith the majority of the capital coming from Walton Street’s debut Mexico-focused private equity real estate fund, Walton Street Mexico Fund I, and then sold to Fibra Uno at a 7 percent cap rate. In 2010, the firm formed a partnership with Finsa to initially invest $100 million in industrial real estate in Mexico through the fund. The investments made through the joint venture accounted for at least a quarter of the assets in Mexico Fund I, which closed on $277 million in commitments from 20 investors in October 2008.
The bulk of the proceeds from the sale to Fibra Uno either will be returned to Fund I investors or re-invested in a listed private equity real estate fund that the firm jointly raised with Finsa last year, collecting a total of 2.75 billion Mexican pesos, or roughly $210 million. Of that amount, Walton Street co-invested $38 million in the vehicle, which is known locally as a certificado de capital de desarrollo (CKD) and raises capital primarily from Mexican pension plans.

Through both ventures, Walton Street had 4.3 million square feet of industrial space under management in Mexico as of December. In addition, the fund manager also owned 7.8 million square feet of land for future industrial development. Industrial real estate had represented Walton Street’s largest property segment in Mexico, accounting for 39 percent of the capital invested in the country as of September 30, 2012.

Following the sale to Fibra Uno, Walton Street and Finsa are planning to assemble a new industrial portfolio of more than 1.5 million square meters over the next two years, according to an article in El Economista, a Mexican business newspaper. About one quarter of the CKD’s capital already has been invested.

Meanwhile, Walton Street is readying its largest real estate fundraise in Mexico yet, after filing in March to raise its first independent CKD. The fund manager is targeting $5 billion Mexican pesos ($384.77 million) for the offering, of which it will co-invest $10 million, according to an investor presentation.

The fund will pursue investments in a broad range of property sectors in Mexico, including office, industrial, hospitality, parking facilities and schools, among others, and target gross returns of 16 percent to 20 percent. The transactions would be those made outside of the Finsa CKD, as well as another CKD that Walton Street formed with Mexican retail developer Planigrupo last year. Walton Street declined to comment, but PERE understands that the new vehicle, known as Walton Street Mexico CKD II, could go public before the start of the fourth quarter.

The new CKD also represents Walton Street’s first solo Mexican capital raise since Walton Street Mexico Fund I. That original vehicle, however, has been an underperformer and represented one of the 25 fund interests that the New Jersey Division of Investment agreed to sell to a partnership between NorthStar Realty Finance and Goldman Sachs Asset Management in June. According to the pension plan’s most recent investment report, the state’s investment in the fund was worth 89 percent of its original value as of May 30.

Walton Street has been investing in Mexico since 1998, beginning with its second real estate fund, Walton Street Real Estate Fund II. The firm opened an office in Mexico City in 2006 and currently has a 12-person team focused on investments, acquisitions, administration and finances in the country.