Fund Motivation

In the process of sourcing acquisitions opportunities for Elion’s Value-Add Industrial Fund I and Industrial Fund II (“EIF I” and “EIF II”), we’ve reviewed and underwritten hundreds of Industrial assets across our target markets. Where there are significantly-below-market leases with short-term residual weighted average lease term (WALT) of 3 years or less, we’ve been able to acquire the properties and execute a lease-up strategy, bringing the rent roll in line with the market before selling to a cash flow-seeking investor to realize mid-teens levered returns. However, we frequently see high-quality assets with longer WALTs and/or in-place rent that is at or above current market rates - limiting our ability to add value within the shorter holding period of our Value-Add strategy. These assets often present a compelling opportunity for investors seeking a mix of stable income and growth in value over a longer holding period of 5 - 10 years.

In addition, since 2023 we’ve seen a unique opportunity in the real estate market created by a confluence of macroeconomic factors that may magnify these returns.

First, a short period of low demand growth and healthy supply growth, higher cost of debt, and stronger yields on alternative investments such as corporate and U.S. Treasury Bonds has created an opportunity to buy Industrial assets at significant discounts to peak pricing seen in 2022. As long-term inflation expectations are expected to fall over the next several years, yields on bonds would follow a similar downward path taking the cost of equity for income-generating real estate with it and surging asset values as stabilized cap rates fall.

Second, the cycle of supply and demand in the U.S. Industrial Real Estate market is arriving at an inflection point, with construction starts falling to lower levels and net absorption returning to a path of growth. In markets with strong fundamentals, future market rent growth is likely to outpace annual escalations of in-place leases - allowing the investor to grow the mark-to-market spread of in-place leases and putting downward pressure on exit cap rates for investments.

Source: Elion Intelligence, Costar Group

Although higher returns are typically associated with taking excess risk, this opportunity is interesting in that many of the identified drivers of return double as drivers of reduced risk:

In-place tenants with a significantly below-market lease are less likely to prematurely vacate the space as they would be stepping up to current market rent at a faster pace.
In the event that a tenant were to default, the investor has the opportunity to capture any mark-to-market value earlier than anticipated which may shorten the holding period and increase the IRR of the investment.
Markets with strong fundamentals tend to create new demand that outpaces new supply, leading to falling vacancy rates and in turn, higher rent growth and ability to re-lease at rates that are accretive to the landlord. This is especially true over time as there is less land available for new construction.

Figure 1: Source: Elion Intelligence, Costar Group

Additionally, the longer holding period of 5 to 10 years creates a natural hedge against cyclical macroeconomic events that create down markets with respect to property values. When factoring in returns from cash flow, the downside risk is further limited.

Combined, these factors offer a short window of opportunity to realize high-single-digit to low-teen levered returns on average, approaching a mid-teen levered return in some cases, with minimal additional risk compared to traditional Core investments.

Acquisition Strategy Overview

Elion will seek to assemble a portfolio of institutional quality Industrial real estate that is highly functional and suitable for warehousing and distribution tenants in select U.S. primary and secondary markets. These assets at acquisition will be a mixture of short and long duration WALTs. This will allow us to create value through lease-up efforts while consistently collecting cash flow, reducing variability in distributions.

Target Markets

The selected target markets listed below share one or more of the following characteristics leading to high likelihood of long-term growth and liquidity:

Strong and stable growth in population, real retail sales, and/or GDP
Adjacency to key supply chain components such as airports and seaports
Strong/growing eCommerce penetration
Geographic, political, economic, and/or legal constraints on new supply

Further, our portfolio will overweight on the core coastal markets while filling in from alternative markets where risk and return is compelling.

* indicates a core coastal market.

Target Assets

Assets to be acquired will primarily be Class A logistics-focused industrial properties between approximately 100k and 600k square feet. Older buildings in high quality locations and with high quality functionality on par with Class A buildings will also be considered. The quality of the properties influence the quality of the potential tenant base and will reduce leasing risk. Special attention will be given to:

Distance to key supply chain components such as airports and seaports
Population, retail sales, and consumer spending within a distribution and last-mile delivery radius
Building Vintage
Clear Heights
Dock-to-Size Ratio
Coverage Ratio
Logistics Loading and Operational Efficiency

Target Tenancy

In addition to high-quality functionality, Elion will primarily source highly-occupied assets by tenants with strong credit. The tenant quality serves as a tool for lower risk of default and preservation of asset value. We will consider assets falling into two categories:

Growth

Growth assets will have a WALT of 7 or fewer years and have a meaningful spread between market and in-place rents through which Elion will create value and provide returns mostly through capital growth. These opportunities will primarily be sourced from our core coastal markets and are to be held 5 - 7 years. Our expectation is to stabilize these assets at or below replacement cost and at a yield that is debt neutral on fixed rate financing.

Income

Income assets will have WALTs of 7 years or more and will be sourced from all target markets. Our focus will be on buying at yields that are at least debt neutral based on fixed rate debt to deliver attractive cash yields, with annual increases that outpace inflation. A larger portion of returns for these assets will be created from income. We also expect to stabilize these assets at or below replacement costs if re-leasing is part of our business plan. Special attention will be given to tenant credit quality.

Debt Strategy

Our ability to procure accretive debt will serve as an additional tool to magnify cash flow and returns. To that end, we will seek both fixed and floating rate financing with a maximum loan-to-cost of 50% from banks, life insurance companies, CMBS, and debt funds. We will prioritize fund-level credit facilities and other sources of debt that allow crossing between assets.

Seed Investments

Elion has identified several high-quality Industrial assets fitting into this strategy. See attachment for underwriting details.

Elion’s Advantage: Network, Technology, Research, and Domain Expertise

Elion has traditionally sourced and underwritten acquisitions opportunities by creating and maintaining strong relationships with brokers and owners in our target markets. The network we’ve built over time has been one of our strongest assets, providing us access to favorable off-market deals and confidence in our underwriting.

The recent availability of granular data related to demand, supply, rent, and pricing in the commercial real estate industry has made it increasingly possible to leverage quantitative tools to analyze investments. Elion strives to be at the forefront of the industry with respect to developing and utilizing such novel quantitative methods through data analytics, statistical models, and machine learning/AI. We have developed or are developing tools that allow us to:

Forecast market-level demand, supply, vacancy, and cap rates that are a) more tailored to our niche, strategies, and target markets b) more transparent in terms of forecast drivers and uncertainty and c) updated more frequently than is available from third-party research firms.
Nowcast and forecast market rent for specific properties, taking into account property-specific factors, historical lease comps, and current/expected market conditions that impact the utility of a property to a logistics tenant and their willingness to pay higher rent.
Source more off-market deals and manage/optimize our deal-flow metrics.
Analyze and underwrite deals faster and with more conviction so we can increase our efficiency, maximize our performance/win-rate, and minimize regret.
Manage investment cycle end-to-end from sourcing to disposition, maintaining firm grip on our growing portfolio and creating more optimization levers.

All of these tools have been or are being developed as a joint effort between our research, technology, acquisitions, portfolio management, and asset management teams in order to take advantage of Elion’s internal domain expertise in commercial real estate investing, logistics, and data science/engineering. Ultimately, they enhance our ability to make the best decisions in our role as fiduciaries and stewards of our Limited Partners’ capital.

Appendix

Figure 3: Retail Sales Growth - last 5 years vs. next 5 years

Figure 4: GDP Growth - last 5 years vs. next 5 years

Figure 5: Population Growth - last 5 years vs. next 5 years

Disclaimer

This underwriting information is provided by Elion Partners, LLC (“Elion”) at your request as a one-on-one communication in connection with our meeting and is only provided for informational purposes and is not, and may not be relied on in any manner as legal, business, financial, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any investment, fund, account, vehicle or product managed by Elion, including Elion Industrial Fund II, LP and its related parallel funds and feeder funds, or to otherwise participate in any investment strategy.

This material is not to be reproduced in whole or in part or used for any purpose except as authorized by Elion. By accepting this material, you agree (i) to treat this material as strictly confidential and not disclose this material directly or indirectly to any party other than your shareholders, partners, members, directors, officers, employees and representatives, (ii) to cause your shareholders, partners, members, directors, officers, employees and representatives to use the information only to evaluate your potential interest in the investment opportunity with Elion and for no other purpose and will not divulge any such information to any other party except to your professional advisors under duties of confidentiality, and (iii) to return it promptly upon request.

Neither Elion Partners or any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein and nothing contained herein shall be relied upon as a promise or representation whether as to the past or future performance. The information contained herein does not purport to contain all of the information that may be required to evaluate an investment opportunity with Elion and you are encouraged to read the definitive legal documents related to the investment opportunity, and to conduct your own independent analysis of the data referred to in this underwriting prior to making an investment decision.

Past performance is not necessarily indicative of future results and there can be no assurance that an investment opportunity with Elion will achieve comparable results or that Elion will be able to implement any specific investment strategy or achieve its investment objectives for any investment opportunity.