Case Study – Seymour, IN

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Transcript of Case Study - Seymore IN.mp4

Speaker1:
So, Seymour. So, uh, building we, uh, bought in June of 2023, in Seymour, Indiana, home of John Mellencamp, uh, home of little pink houses. Uh, and we had a 1031 exchange of a building we sold in March of that year. And we were shopping for this building. Uh, we found it. Um, and at first we also already owned a building in Indianapolis and in Ohio in the market. So it's all very close by. But first we're like Seymour, Indiana. It's the middle of nowhere. Uh, it's an hour south of Indianapolis. I'm like, I don't know about this. And then I fly out there to go visit the building. And I'm driving down south from Indianapolis towards it on the interstate, and I see so many trucks like I'm on the busiest corridors of the East Coast. And I see so many huge warehouses that are being built and are already in, many that are already occupied, and so much so that it's far greater than the local population would support. And I'm like, what's going on here? So we drive down to the building. I get there and, um, the building is great. It's, you know, a modern 32 foot clear building, tilt up construction, large, uh, parking courts, truck courts, uh courts, partially cross docked, uh, all great things. And, uh, and it's it's packed. And they're running around with the loaders, uh, which are all electric. They're not, uh, you know, powered by natural gas anymore. Uh, and they're just whizzing around, and it's all pet supplies.

Speaker1:
Uh, for a company that supplies, uh, around the country. And this is their national distribution hub for all their thousand stores. And, you know, I'm learning about their business because that's what we do. I want to we want to learn about attendance, business, why they're there. And then I hit upon the magic question. Uh, how many people work in this building? And they said, oh, we we have 500 people working here on three shifts. On like 500 people. You're in Seymour, Indiana, and you have 500 people working. Here you go. Yeah. Well, they can't move because they can't get 500 people somewhere else. Labor. And this is something we really learned during Covid. Labor is more of a sticking point for a tenant, uh, than the building or anything else, or even the rent. Because if a tenant wants to move to the other side of town and save $0.50 to a dollar a foot, they'll lose half their employees. They'll go next door for an extra dollar an hour. Right? Uh, because they don't want to drive that extra 20 minutes each way. So labor is one of the stickiest things there is for a tenant. Uh, and they're already so automated already they've made it as efficient as possible. So when I heard that I was, I got very excited because all of a sudden I loved it because the tenant was paying. Oh, about 282. $2.80 per square foot.

Speaker1:
And the market for an older building like theirs is probably $4 a foot and a brand new building like the ones I just driven on past, past, uh, in Indianapolis, uh, would have been 7 or $8 a foot. So there's a great, uh, delta there between what the tenant was paying and even a below market rent. Uh, than we had six years left on the lease. Um, so we we had a natural time frame to, to capture, uh, that rent, uh, that rent difference. The other thing that we found. Is that, you know, Indianapolis airport is controlled by Fedex at night. Uh, Cincinnati's airports controlled by Amazon at night. And the Louisville airport is controlled by UPS at night, as those are their regional hubs. Some of their national hubs in this building was exactly one hour from all three of those airports on an interstate. And that is why all those other warehouses were being built there, and all that truck traffic was there is because it's a triangle between UPS, Amazon and Fedex. Right. And. They could. They could receive, uh, goods from around the world, uh, from an airport an hour away from one of the three providers and driving out. They were ten hours away by truck, which is the time that, uh, you know, that's a day's driving for a truck is ten hours, maybe 12 at some places, uh, to something like 70% of the population of the country. From this location. Those airports at night, they don't have any traffic coming in.

Speaker1:
Passenger traffic. So, uh, these companies Fedex, UPS and Amazon, they make a deal with the airport, they put their operations at that airport, and at night, all of their planes are coming and going. They come in in the night, they unload, there's warehouses there. Uh, and then they're sort everything out, uh, to go back out. So, you know, if you're faxing something out of California to, um, you know, New York, right? It'll probably fly through Indianapolis, right, because that is their sorting facility. And then they take all the stuff that's going to New York and put it on a plane out to New York, you know, very early in the morning. Right? So it can get to New York and get to the distribution and out. Right. And then the things that need to go back to California gets sorted, and they go back to California or Washington or Florida or Texas or wherever. Uh, it's a hub and spoke system that all these companies use. And it makes sense. Uh, so they basically control the airports at night, uh, because, uh, and it's good for the cities and the airports because otherwise they said, you know, they're putting something to use for several hours that would otherwise be completely unused. Wherever their stuff is coming in from China, Taiwan, Mexico or wherever, it still has to get to their warehouse. Before and they sort it in the warehouse, they stack it up and they warehouse it.

Speaker1:
And then as their stores need it, they distribute it out. So, uh, and it might go out via Fedex or UPS or Amazon or it might be, uh, you know, through a truck. So since all of our goods. Right, you order something on Amazon Prime right now, it might go through the the Cincinnati hub today. Right. It's certainly a good chance. And, uh, so it it's it's like a port goods come in, they go to the warehouse and they get, you know, settled up and distributed or held until someone needs it and then they go out. So you need access to the distributors. So, uh, while Seymour, Indiana might seem like it's the middle of nowhere, it's actually the middle of everywhere. But, you know, and then their labor is sticky because they can't replace that labor. So I love the deal. It fit our exchange perfectly. And then now I had to go find a lender. And this is again in spring of 23, which was a difficult time for any lender anywhere. And uh, to tell people, oh, you want to go to middle of Indiana. It was not a great story at the time. And we worked with our broker, uh, our mortgage broker. And I said, just just get me on the phone with the guy. I go, I need one guy, and I go, just need someone to get on the phone and he'll show up. Right, I go.

Speaker1:
That's all I ask, right? And to the brokers credit, he got me on the phone with someone that and I explained the story and why, just as I'm telling you. And he said I'll be there next week. What day can you meet? And he drove up from, uh, Saint Louis, uh, and uh, he's like, yep. He as we walked out, he goes, we'll do the deal. No problem. He goes, everything we said was true and he got it. And so, uh, part of it is being able to to we're storytellers, uh, and you have to be able to tell the story to, uh, investors. You have to tell the story to lenders in a way that makes sense, uh, and the way that they want to invest with you and partner with you, uh, and, um, and then there's the process of negotiating the loan, uh, the loan terms, uh, and what we did on that deal, it was a ten year. It was a good example. The other deal was a was a, you know, a bridge deal. This was a ten year deal. Uh, but our lease only went for six years. So we said to them, you know, we want the ten year deal, but, you know, this lease comes up in six, so we want a chance to refinance in six years. Uh, so they gave us the right to prepay the loan, uh, if we refinance with them. At no cost. And if we refinanced with somebody else, we'd pay them a fee.

Speaker1:
A breakage fee, but theoretically you'd only do that if it's worth it. So basically, from the lender, we got a ten year. We we got a ten year commitment, but the bank only got a six year commitment from us. So at a at a great, great interest rate. Uh, and the bank got a great execution. They got a great tenant, they got a great sponsor, they got a lot of great things. And we got a great seller. Uh, you know, on that deal as well. Who knew what they were doing? And they were a pleasure to work with. Very professional. The building 763,000ft. Uh, and it was about $33.5 million. This is a 1031 exchange with our own money. On a building we sold. The value add is is the best one of all. Sit and wait and do nothing. My favorite value add of all all time. Right, I do nothing and we can add value. Uh. It's already. If the building was empty today, it would lease for more or it would release for more. Of the lease was up. Uh, they have six years, and, um, it gives us a runway to be able to do fixed debt, which is cheaper. Uh, which is great. And then, um, you know, five years from now, um, when we get ready for a lease negotiation, you know, we will. We could capture it theoretically, you know, 40% more rent. The arts are a booming business.

Speaker1:
People do more for their pets than they do for their children. So that was another thing that made me feel very good. They're paying $282.80 a foot. The market was $4 and new buildings were 7 to $8 a foot. So I could be at I could replace the current income at $283 a foot. Right. I just have to go around and find which tenants are, um, expiring and say, hey, you want to save money? Come over here. And by the way, I know there's 500 employees right around here who need a job. And there's also a Walmart distribution, uh, center right off of maybe a mile away at the exit. I mean, there are other, uh, major companies that were in this in Seymour. Uh, car manufacturing companies are there with parts suppliers, uh, uh, other distribution companies. Walmart had 1,000,000 square foot distribution facility a mile away. And Walmart is in the right places for the right reasons. You know, it's kind of the McDonald's theory, right? You know, there's McDonald's, Burger King, Taco Bell, Pizza Hut. They're all right next to each other for a reason. Someone did the research and figured out that's the spot to be. Walmart's figured out. The spot to be. So being next to Walmart is rare. You know, in terms of distribution building anyway is rarely a bad bet. And and coincidentally, they're they're expanding that building and putting a lot of money, new money into upgrading that they're building right now.

Speaker2:
It was a fabulous deal. I was like, you have to watch where you're walking in. That building was like a superhighway of forklifts running around in there. It was like, I've seen so.

Speaker1:
Many Indy 500.

Speaker2:
With. It was crazy.

Speaker1:
Um, and the difficulty in that deal. And because every deal has its hair and difficulty, it was the debt market. Right at the time, uh, it was extraordinarily difficult. Debt market. And I believed enough in it that I could sell the story and get someone to lend to us. And that's what we did. But that was the. You were always worried about one thing more than anything else, that deal was is getting the right debt.