Los Angeles-based Industrial Realty Group is taking a major step to unlock value from its decades-old industrial portfolio by combining 98 properties into a new real estate investment trust through publicly traded lender Sachem Capital.
Under the deal, Connecticut–based Sachem is shifting its business model from a loan originator to a large industrial REIT, betting steady rental income will generate more durable, long-term cash flow than its current lending platform.
The combined entity is expected to rank among the top 10 publicly listed industrial REITs by enterprise value, with a geographically and operationally diversified portfolio, the firms said in a release Monday.
Privately held Industrial Realty Group will own about 94.1% of the new company through operating partnership units, with existing Sachem shareholders holding roughly 5.9%, according to the release.
Industrial Realty Group plans to contribute 98 industrial properties to create IRG Realty Trust, a public REIT with an implied enterprise value of about $3.4 billion.
"This transaction will bring a high quality industrial real estate portfolio to the public market with scale, diversification, and a clear operating strategy," Stuart Lichter, Industrial Realty Group's founder and chairman, said in a statement.
At its core, the deal shifts Industrial Realty Group's portfolio into a public structure that emphasizes steady, contractual rental income while providing access to equity markets.
Industrial tenants drive cash flow
The properties are primarily "mission-critical industrial infrastructure" leased to manufacturing, distribution and logistics tenants, according to the companies. Those tenants generate consistent rent payments, underpinning the REIT's expected "durable current cash flows."
By placing the assets into a publicly traded REIT, Industrial Realty Group can monetize stabilized properties while retaining a controlling stake tied to long-term rental income.
The transaction provides immediate scale and raises the firm's market profile versus operating privately. Public-market exposure also offers a clearer path to realizing asset value, as REIT investors typically favor stable, rent-backed cash flows and diversified portfolios.
Industrial Realty Group also stands to benefit from embedded upside in the portfolio.
A meaningful share of leases are below market, creating opportunities to increase rents as leases roll and reset at higher rates, the company said. Along with leasing, acquisitions and development, that dynamic creates multiple pathways for long-term growth tied to its core holdings, Industrial Realty Group said.
Model constrained in current form
On a call with investors, Sachem said its current model is constrained by a high cost of capital and limited deployment capacity. By contrast, a larger, diversified REIT with stable cash flow and a stronger balance sheet is expected to attract more institutional investors and lower financing costs.
"We expect the combination to improve our cost of capital, which should result in improved cash flow generation over time," said Sachem CEO John Villano.
Lower capital costs would allow the company to fund acquisitions more efficiently and compete more effectively in its lending business.
Sachem is not abandoning lending altogether. The combined company plans to continue originating loans, supported by income from owned properties.
Sachem's board of directors unanimously approved the deal, which is expected to close by the end of the year.