|
Capital Commercial Investments,
Inc. (CCI) funded this long-term, high-income investment opportunity on
July 20, 2001. Two industrial real estate properties located in Houston,
Texas, the Continental Can and Walker Bolt facilities, were combined to
produce a high-income investment allowing investors to receive a 15%
cash-on-cash return paid monthly. The Continental Can facility
(the company is now known as Consolidated Container) is located at 6831
Silsbee in South Houston just south of the 610 Loop and Interstate Highway
45. The real property includes 81,282 total square feet (SF) including
more than 8,000 SF of office, and is situated on 4.48 acres. Continental
Can is a $7.3 billion dollar company and one of the largest manufacturers
of rigid plastic containers in the U.S. The Walker Bolt facility
is located at 10202 Airline Drive, and is comprised of seven legal lots
totaling 2.9 acres. The improvements include approximately 57,489
SF of office and warehouse space as well as two 5-ton bridge cranes.
Walker Bolt is a regionally based company specializing in fasteners that
are used by NASA, power plants, and the oil and gas industry.
CCI purchased the properties
in third quarter of 2001 for $1,990,000 or $24.48
PSF and $959,000 or $16.68 PSF,
respectively. A senior debt loan of approximately $2,150,000 was
obtained, and 20 limited partnership shares were sold to 28 investors for
$49,500 a share. The project will return better than 15% cash-on-cash
return while reserving funds each year for possible tenant rollover expenses.
The partnership agreement specifies a 75/25% LP/GP Split after a 10% cumulative
preferred return. CCI anticipates distributing 15% per annum to the
Limited Partners.
CONTINENTAL CAN - 81,282 SF
Operations
Continental Can is one of
the largest manufacturers of rigid plastic containers in the U.S., selling
over 4 billion containers each year. The company markets its products
to the consumer, agricultural, and industrial chemical industries.
They produce containers for a variety of products including water, milk,
ketchup, salsa, soap, motor oil, anti-freeze, insect repellent, fertilizers,
and medical supplies. Proctor & Gamble is reported to be Continental
Can’s largest customer, accounting for about 15% of sales. As of
1996, Continental Can reports to have more than $8 million in equipment,
not including installation costs, contained in the 6831 Silsbee facility.
Also incorporated into this project are high amperage power supply units
and rail service which the tenant requires.
Credit
Previously know as Continental
Can, Consolidated Container was created in early 1999 when Reid Plastics
merged with Suiza Foods Corporation’s domestic plastic packaging operations.
One of the nation’s largest food processor and distributors, Suiza Foods,
assumed 43% ownership of Continental Can. Suiza recently sold its
overseas packaging company leaving Continental Can as its remaining packaging
investment. A merger between Suiza Food and Dean Foods Company was
recently announced, forming a national dairy and specialty foods company
with $10 billion in revenue. A remaining undisclosed portion of the
Continental Can is owned by Vestar Capital Partners, a private equity partnership.
The management company was founded by seven persons from the management
buy-out group of Credit Suisse First Boston. Vestar’s $4 billion
in funds are backed by such institutional investors as IBM and General
Motors, as well as ivy league schools, private banks and charitable organizations.
Continental Can is well funded
and poised to serve its numerous parent companies. Suiza Foods, the
most direct parent company, recorded a net sales growth of almost 30% to
$5.8 billion for the year ending December, 2000, compared with $4.5 billion
in 1999. Operating Income of $375 million was reported, along with
an increase in earnings per share of almost 15%. The following are
the available operating results for Continental Can since its merger and
recent acquisition.
Lease
Continental Can’s third
lease at this location commenced June, 1994 and expires May, 2004.
A lease rate of $21,467/month ($0.2683 psf) is currently in effect with
annual increases to $24,133/month ($0.3017psf) in 2004. CCI has conservatively
assumed this tenant will renew at $24,733/monthly with no steps in rent.
Continental Can is expected to remain as the tenant for the bulk of this
analysis, given a five-year lease renewal clause in the current lease agreement
as well as extensive costs of moving.
WALKER BOLT - 57,489
SF
Operations
Walker Bolt produces specialty
bolting that is used in the oil and gas industry as well as in power generation
plants, pulp mills, mining operations, and fertilizer plants. Walker
Bolt, owned by Industrial Holdings, Inc., is part of their Stud, Bolt,
and Gasket Group which manufactures and distributes stud bolts, nuts, gaskets,
hoses, fittings and other products from 11 locations in Texas and Louisiana.
Walker Bolt primarily targets its products to the petrochemical, chemical,
and oil and gas industries located in the Gulf Coast region of the U.S.
Industrial Holdings’ other business interests include energy, engineered
products, and heavy fabrication. Walker Bolt has operated from the current
facility since 1963. Over the years, the property has expanded to
meet the needs of Walker Bolt and their customers.
Credit
Industrial Holdings was
recently purchased by T-3 Energy, a privately held oil-field services company
and First Reserve, who acts as financial and strategic partner. T-3
Energy, formed in February, 2000, is a Houston based holding company which
targets Gulf of Mexico-focused specialty manufacturing and service companies.
First Reserve was founded in 1980, and invests exclusively within the energy
and energy-related sectors of the economy. Their current portfolio
of energy holdings has a market value in excess of $1.7 billion.
Lease
The current lease terms
for Walker Bolt were negotiated early this year. Starting April,
2001, the company pays monthly an annual amount of $122,000 for the first
year. The remaining years are as follows: 2nd year $135,000, 3rd
year $145,000, and $150,000, $155,000, $160,000 and $165,000 during the
final four years. CCI has modeled a renewal of the tenant at a market
rate of $160,000. We strongly believe the tenant will renew given
the extensive permanent and semi-permanent mounted equipment used in their
business process. Given current leasing comparables, the rate reflects
a current market rate of $0.18 psf along with 3% inflation over 7 years.
5 Year Pro-Forma Cash
Flows1
| Combined
Facilities |
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
|
|
$398,713
|
$419,033
|
$411,713
|
$435,359
|
$440,359
|
|
|
$13,961
|
$14,571
|
$14,351
|
$15,061
|
$15,211
|
| Net
Operating Income |
$384,752
|
$404,462
|
$397,362
|
$420,298
|
$425,148
|
|
|
$215,802
|
$215,802
|
$215,802
|
$215,802
|
$215,802
|
|
Capital
Reserve/Leasing Costs 3,4
|
$20,564
|
$20,564
|
$20,564
|
$35,569
|
$20,564
|
|
|
$148,387
|
$168,097
|
$160,997
|
$168,928
|
$188,783
|
|
|
$99,000
|
$99,000
|
$99,000
|
$99,000
|
$99,000
|
|
|
$49,500
|
$49,500
|
$49,500
|
$49,500
|
$49,500
|
|
|
$-113
|
$19,597
|
$12,497
|
$20,428
|
$40,283
|
-
3% General Inflation Factor is used for all Economic ProForma
assumptions
-
Given a Senior Note with a loan balance of approximately
$2,150,000 (73% LTV) and a 8% interest rate, 20 year amortization
-
A Capital Expense Reserve of $0.15 PSF is included in the
Capital Reserve and Leasing Costs
-
Renewal Probabilities for Tenants are assumed to be 95% for
Continental Can and 90% for Walker Bolt
-
Market Leasing assumption include a 9 month vacancy and 5
Year Lease terms
This opportunity represented an excellent investment for
the following reasons:
-
Investors participate in a 75% ownership position of high
income producing properties with a 15% plus cash-on-cash yield paid monthly.
-
Overall risk is reduced with the inclusion of two tenants
with heavy credit backing engaged in different business models with associated
income streams.
-
Future contractual rent increases for both properties’ guarantee
additional dollars to combat with inflation and cover possible rollover
costs.
-
Extremely high cost to move because of extensive investment
in plant equipment and connectivity as well as their historically proven
long tenancy history.
-
Purchase leased properties at $22 PSF which is well below
current replacement cost of almost $40 PSF.
|
10202
Airline Drive
