iPort 12: Any Port in Storm?

By Chris Mahowald, Bradley Mitchell
2019 | Case No. RE142 | Length 18 pgs.

In January 2011, Jeff Kelter and Bob Savage, the managing partners of KTR Capital Partners (KTR), convened an investment committee meeting in KTR’s New York City headquarters to decide whether to proceed with the acquisition of iPort 12. If approved, KTR would fund a $5.3 million non-refundable deposit for the purchase of an 89 percent vacant, two-building warehouse project comprising 1.3 million square feet in Carteret, New Jersey.

In 2007, California-based Pannacotta Development had built iPort 12 near two active New Jersey shipping ports for $122 million. Now in 2011, with only one tenant, the property was losing $2.7 million at the operating level, and the project’s $76.5 million construction loan was in default. The lender, Bank of America (BofA), had taken control of the property and decided to sell the buildings. The transaction market was at a standstill and BofA knew iPort 12 would certainly sell for less than the loan balance. KTR, one of only a few buyer prospects, was under contract to purchase the project for $53 million—less than half of Pannacotta $122 million cost.

It was a heady time for KTR. The fully integrated real estate private equity fund manager specializing in industrial property was sitting on $375 million of uninvested capital from KTR’s $700 million second fund, a 2008-vintage vehicle whose investment period was due to expire at the end of 2011. On the heels of the financial crisis, KTR’s 2009 and 2010 investments were priced to deliver relatively safe 13 percent IRRs, with potential upside if the market recovered. But the investment market had begun to shift in late 2010. Prices for well-located, leased properties had firmed as the capital markets recovered. In sharp contrast, the market for properties with substantial vacancy was an entirely different story as leasing activity remained depressed. As debt service shortfalls mounted, lenders became impatient, seized control and began selling the distressed collateral for defaulted loans. Buying these properties meant considerably greater risk than KTR’s 2009 and 2010 acquisitions. But, with more risk came the prospect of 20 percent or higher IRRs.

Learning Objective

  • Understand how to underwrite a distressed investment opportunity in turbulent market conditions, and how to determine an appropriate risk-adjusted return potential.
  • Evaluate financing a high-risk investment opportunity and understand the tradeoffs associated with financing decisions related to levels of leverage, rate, and type of lender.
  • Assess considerations related to building a real estate investment business amid a heavily distressed market environment and the impacts of fundraising cycles.
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