Montreal-Based Dalfen Finds U.S. a Happy Hunting Ground

In the last 2 1/2 years, Montreal-based Dalfen America Corp. has acquired approximately $204 million worth of industrial real estate, representing about 59 properties and more than six million square feet.

Managing partner and chief investment officer Sean Dalfen said the corporation owes its success to a pretty simple investment strategy: “I’m a firm believer that you can’t do everything well, and you have to focus on one thing and specialize in it.

“Our focus has been – over the past six years at this point – on identifying markets where we see growth, creating relationships – and the reputation that we have as a group that can close deals all-cash.”

Dalfen’s last set of deals announced in September provide a good illustration of the company’s investment strategy. It acquired 300,000 sq. ft. of industrial properties in Minneapolis, Phoenix and in Plainfield, Ind., through its Opportunistic Industrial Fund, Ashrei II. (Dalfen’s property at 4707 Baseline Rd., Phoenix, Arizona shown in image.)

The Plainfield property was acquired through a bankruptcy trustee sale. The Phoenix property was acquired in an off market transaction and the Minneapolis acquisition came about after Dalfen acquired the non-performing mortgage note in July 2013 and was subsequently transferred ownership of the 58,000-square-foot properties.

“We saw an opportunity in the downturn to acquire assets in distressed markets,” Dalfen said. Those markets typically fell hard in the 2008-09 financial crisis, but there was a reason they flew so high in the first place, which is what the company is counting on.

“There was a reason there was large growth,” Dalfen continued. “That’s because there was good market fundamentals, in terms of immigration, migration from other states in terms of job growth, in terms of other things. We picked up assets everywhere from Phoenix to Las Vegas. Over the past year, we have bought assets in 11 states.”

Following the September acquisitions, Dalfen still had $110 million worth of capital to deploy from its second opportunistic industrial fund, a process that it expects to take 12 to 18 months. It is already at work raising investment capital for a follow-on fund as well.

No fancy financial footwork

Dalfen stressed that the company’s deal-making does not hinge on any sort of financial alchemy but rather good old, solid economics. “Lots of people like to financially engineer things, we don’t believe that we are that sophisticated nor do we need to be.

“You have to buy the right assets in the right markets at the right price,” he explained. “No matter how bad a market gets, if you paid less than replacement cost or you or well located or you have all those features that make an asset successful, you will lease that asset.”

The company does not have an indefinite hold strategy, however. Its first opportunistic industrial fund, which began buying properties in 2010, is now a seller at the right price. Dalfen recently sold 600,000 square feet of properties from that first fund “after adding significant value through leasing, building improvements and successfully taking ownership of the properties secured by the non-performing loans that they had acquired.”

It sold properties in Phoenix; Lino Lakes, Minn.; Jacksonville, Fla.; and the Valley Freeway Commerce Center Phases I & II in Henderson, Nevada.

Long history

Parent company Dalfen Corp. can trace its roots to 1935 when Sean Dalfen’s grandfather came to Canada from Romania and established retail stores in the Maritimes, growing to about 40 stores. In the ’90s, his son Murray shuttered the retail business and shifted the focus on real estate.

“He bought about a building a year, through syndication, you know ‘friends and family deals,” Sean Dalfen said of his father’s initial real estate forays.

The third-generation Dalfen, a commercial real estate broker before joining the family business in 2006, shifted the strategy from raising investment capital only after a deal was identified. “In today’s world, you can’t move like that.”

The company still has plenty of non-industrial property on its books. It owns a number of office buildings in Florida as well as in Dallas and New Brunswick. It also owns retail in Quebec and Florida, a parcel of land for development in Brossard, Que. and executive offices/self-storage facilities in the province.

End game

“We acquired assets all over the place, terrific properties, many of which we subsequently sold,” said Dalfen.

“The game plan right now for the assets we have bought, and are currently buying, is to stabilize them and to do one of two things. If we believe that we can get better value on the market and they are not assets that we want to hold for whatever strategic reasons, then we will sell those assets.”

As for those assets the company believes are “longterm holds,” the company is currently working on a re-capitalization plan that will involve a large institution that will buy a majority of the assets and Dalfen will retain a minority ownership stake.

“Sometimes it just pays to hold on to properties that you believe are in many senses irreplaceable assets.”

He said “the options are all on the table” with regards to the company’s industrial assets, including creation of a real estate investment trust. “We now have, hands down, enough assets that if we wanted to start a REIT, we have enough market cap to do it.”

“For us, what is the best play for the investor, where we have a large part? What is the best play? For us it is to shrink our geographic density into certain key areas we want to focus in. We will still buy assets in many different markets but from the opportunistic end, it is not as easy to find deals as it was before.”

Not done yet

Dalfen is currently working on another, as-yet unannounced deal that will take his company in a new direction.

“That may end up being our largest business,” he said. “We are in the process of partnering with one of the largest shipping companies in the world and building certain key facilities at strategic points with them.”