Got a boring but thriving industrial company in the heartland? With a billion in deals under its belt, Little Rock’s Tempus Realty Partners may have a financial offer you can't refuse.
By Brandon Kochkodin, Forbes Staff
The big break for Tempus Realty Partners came during the pandemic. Founded in 2016 and based in Little Rock, Arkansas, the little known commercial real estate firm headed by Dan Andrews and Isaac Smith was looking to make a name for itself by establishing a presence in the heartland, an area frequently overlooked by coastal commercial real estate giants.
It was March 2020 and the duo had just closed on a 230,000 square foot office complex in Greenville, South Carolina called Axis Park. The building, which Tempus bought for $18.4 million in 2017, was being used by Greenville County for its administrative office. Tempus made some enhancements including a glass storefront, an open concept design, and a new courtyard and was able to sell it for $33.1 million, right before the shift to work-from-home policies triggered a downturn in the office market.
As lockdowns swept the nation, Tempus had an advantage over its competitors. It was flush with cash as fear swept through commercial real estate.
“Everybody else was shut down and so scared to do anything. We were scared too, but we had this capital ready to deploy if the right opportunity came along,” says Andrews, 44.
That opportunity came in September 2020 in the form of a 486,000 square foot warehouse situated between Lake Butte des Morts and Lake Winnebago in Oshkosh, Wisconsin. The owner, Hoffmaster Group, a 125 year old maker of high-end, sustainable disposable cutlery, paper plates, and napkins, wanted to engage in a sale-leaseback to raise capital. In a sale-leaseback, a company sells a property while immediately leasing it back, continuing to operate as usual. The terms were good but Andrews and Smith were still skittish.
Then, a chance encounter swayed Smith. While on a family trip 9,000 feet above sea level in the ski town of Crested Butte, Colorado, Smith stepped out for a date night with his wife at a restaurant called the Breadery, which bills itself as “a sourdough and vegetable forward eatery.” The timing was impeccable. During the dinner, Smith stepped outside and noticed a delivery being made to the restaurant—boxes prominently labeled with Hoffmaster's name.
“I remember taking a picture of those boxes and sending it to Dan saying ‘I think we should do it,’’’ Smith, 42, recalls. This marked Tempus’ first “arms-length sourced sale-leaseback,” according to Andrews, meaning it came to them from a broker. They bought the building for $23.75 million from Hoffmaster and then sold it 15 months later for $32 million. Because they executed the deal when other buyers were sidelined, doors opened with brokers who had previously ignored their calls.
Since inception, Tempus has acquired 106 properties worth $1 billion, with total assets currently valued at around $800 million, according to Andrews. The bulk of those transactions, $810 million worth, have come in the years after the pandemic. Tempus Evergreen, the firm’s private REIT with $100 million in equity, claims a 15% return from June 2022 through the end of 2023, net of fees (Andrews says the fund charges 1.75% annually on the equity value of the portfolio and takes a 1% cut on the price paid for any properties purchased.) Over the same period, the public REIT index (NAREIT) yielded only 7.7%, while the private REIT Index (NCREIF) plummeted by 16.9%. Additionally, a selection of nine completed investments, separate from those included in Evergreen, had an average internal rate of return of 27% over an average holding period of 3.2 years.
Tempus biggest sale-leaseback to date has been an $83.5 million acquisition of three buildings totaling 610,000 square feet outside Detroit in December, 2021, leased to US Farathane, a plastics manufacturer for the auto industry. US Farathane’s founder was so impressed with the transaction that he became an investor in privately-held Tempus after the deal closed. Closer to home, they developed a $72 million manufacturing facility in Conway, Arkansas for Westrock Coffee, a company specializing in white-label coffee and tea.
“We’ve done over $800 million in sale-leasebacks over the last three and a half years because we were able to get in that door and prove we were able to close,” boasts Andrews. “Our message is that we have a quick decision making process and we’re flexible, that really put us at the top of people’s list.”
When it comes to sale-leasebacks, trust is the currency that matters most. Sellers and their advisors prefer working with established buyers because transactions often need to close quickly. The risk of a deal falling apart over financial nitpicking or insufficient funds at closing is high. The last thing sellers want is an eleventh hour implosion because some real estate firm decides to nickel-and-dime over things like repairs, a security deposit, or new lease provisions, or is unable to produce the requisite funds.
Sale-leaseback transactions are popular for several reasons. For investors, these deals come with a tenant already in place, usually the company that used to own the building. Also, because they have history with the property, they’re likely to be more invested in it than a typical tenant. Sale-leasebacks can also offer entrepreneurs a way to buy a business, with little or no money up front. Finally, these transactions can be very profitable, especially when they’re part of a private equity deal. Private equity firms are mainly after the business, not the real estate. They use the property to help with financing, taking advantage of the lower cost of capital. And since private equity deals are fast-paced and competitive, these firms often prefer a sure and fair deal on the real estate over waiting around for the highest offer.
Tempus’ September 2020 Hoffmaster transaction was a game changer for the firm.
Chelsea Mandel, the founder and managing director of Ascension Advisory, a sale-leaseback advisory firm, was initially hesitant to take a chance on Tempus. The Arkansas duo had been reaching out to Ascension for months, but Mandel told them she was unlikely to send a deal their way because she wasn’t familiar with them as a buyer. Finally, Tempus made an offer on one of her smaller deals that was too strong to turn down and Tempus convinced Mandel to take a chance.
“Our team likes working with them. They’re diligent, but they move quickly, they’re efficient,” says Mandel, who promotes herself as the sale-leaseback specialist for small business. “If they commit to a deal, they do what they say they’re going to do.” Ascension has now done four deals with Tempus totaling $28.6 million for six buildings in Maryland, Minnesota, South Carolina, and Ohio.
Tempus’ portfolio mostly consists of multipurpose industrial buildings which make up about 65% of their properties. This includes things like 15 buildings in Alabama, Michigan, Arizona, Georgia, Nevada, Ohio, South Carolina and Texas they purchased from and leased back to W.W. Williams, a commercial trucking repair company, for $39.2 million in 2022. Tempus deals tend to range in size from $5 million to $80 million, with an average around $30 million, well below the hunting ground for major PE firms like Apollo or large REITs like W.P. Carey, a large industrial and warehouse REIT and a pioneer of sale-leasebacks deals. In 2023 Carey invested $1.3 billion in deals. Tempus steers clear of specialty properties such as biotech facilities believing, Andrews says, that a property’s flexibility is a “proxy for credit.” Despite challenges in the office market, Tempus remains open to opportunities where the price and location is right- an example being a $65 million one office complex occupied by Uber Freight in Rogers, Arkansas that they closed in July 2022. Today commercial office space represents 15% of their holdings. In terms of locations, Tempus loves middle America, preferring properties located in areas with at least 100,000 residents, but shuns large cities like Atlanta, New York and Los Angeles.
Before sale-leasebacks, Dan Andrews was a vice president at USA Drug, a Pine Bluff, Arkansas drug chain once known as “America’s Low Price Drug Store.” USA Drug grew to over 150 locations and annual sales of $825 million by the time Walgreens bought it in 2012 for $550 million. After the transaction, USA Drug’s founder Stephen LaFrance created a family office called Dale Capital Partners and appointed Andrews as its CEO. An active real estate investor, Dale was a client of Isaac Smith, a broker at a global real estate investment firm, Colliers, where Smith continues to work.
The concept for Tempus originated from Andrews’ experiences at Dale. “We were looking to do deals a certain way,” Smith says. “What’s really key about Tempus is that we put our own money in the pot.” But Smith and Andrews say they don’t hog the best deals for themselves. On average, the firm’s seven partners supply 15% of the capital for each deal, with a minimum contribution of at least $1 million, though they’re capped at 40%, according to Andrews.
The rest of the money, Andrews and Smith say, is mostly debt in the form of bank loans.
“We’re able to go to some of our bank relationships and say ‘hey we need the ability to go out and take down $50 million dollars’ and not have to hear ‘okay as long as it appraises,’” Smith says. “We just need a yes.”
Using their own funds and leveraging strong relationships with their bankers, Tempus is able to explore creative approaches that other firms might shy away from.
Its recent Shutterfly deal is an example. In 2022, the San Francisco-based company’s Lifetouch division, which specializes in school photography, had two buildings in Eden Prairie, Minnesota, but only needed one of them. With a private equity owner (Apollo bought Shutterfly for $2.7 billion in 2019) having excess office space was verboten. Shedding the wasted space and raising capital through a sale-leaseback was a no-brainer. The catch was that they still required all the parking spaces.
“A lot of people looked at that deal,” Andrews says. But they were getting hung up on what was an empty office building that wouldn’t come with any parking. “An empty office building is a liability.”
Tempus’ solution was straightforward: demolish building number two. Not only did this secure the deal—Shutterfly was sticking around, but wasn’t interested in sharing its campus, as Andrews pointed out—but it also proved to be addition by subtraction. Removing the extra building increased the property’s value by several million dollars, allowing Tempus to make a higher bid, ultimately paying close to $29 million.
While the pandemic opened doors for Tempus, its lingering effects continue to cast a long shadow over the real estate sector.
According to Green Street, a real estate analytics and research firm, the commercial property market has declined 7% over the past year and 21% from its peak in March 2022. The downturn has primarily affected the office market, but there are worries about the future of industrial properties. In January JPMorgan analysts said that the industrial sector is showing ‘signs of softening,’ though the bank is still bullish on its long-term prospects.
“Industrial was still probably the strongest real estate asset class last year,” says Anthony Graziano, the CEO at Integra Realty Resources, a commercial real estate research and advisory firm. “It slowed down starting in Q2 and Q3, but I’m putting slow in quotes because it’s still strong.” Also working in Tempus’ favor, says Graziano, is that the Midwest hasn’t experienced the surge in property values that have happened just about everywhere else in America.
Tempus admits that the market for small and mid-sized private equity deals involving sale leasebacks has become more challenging, but believes its head-down under the radar approach and preference for mundane industrial properties will allow it to persevere until the market picks up again.
“Industrials are softening, but it’s still very healthy,” says Andrews. “We’re particularly bullish on manufacturing.”
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