The DP deal

Within hours after ProLogis closed its $1.85 billion property portfolio of DP Industrial, representatives of the Denver-based real estate giant began rolling boxes of files out of DP's Reno office.

And the next morning, even as they took a deep breath after a fast-paced sale of the portfolio, employees of Dermody Properties were beginning to fill their file cabinets anew with information about land purchases to start the company on its new life as a private developer.

The ProLogis staff in Reno, meanwhile, began gearing up to manage a portfolio that's now the biggest in northern Nevada about 16 million square feet, about a quarter of all the industrial and distribution space under roof in the region.

Here's how the deal will work:

ProLogis, the world's largest owner and developer of distribution facilities, worked with Lehman Brothers to put together a $1.8 billion fund to provide debt and equity financing for the purchase.

Investors in the fund hold an 80 percent stake; ProLogis will keep a 20 percent interest. It also will own outright all of the land some 518 acres capable of supporting 9.3 million square feet of development that it acquired.

DP Industrial, the seller of the portfolio, is a joint venture of Reno's Dermody Properties and the California State Teachers Retirement System. The split of the proceeds between Dermody Properties and CalSTRS remains a secret.

The $1.85 billion tab on the acquisition includes approximately $1.74 billion of cash and $107 million in assumed debt, a ProLogis spokesman said.

The cash component includes a combination of debt and equity financing.

The portfolio that ProLogis purchased includes 114 properties and 24.7 million square feet of distribution space. About half of it is in the Reno area. The rest is in Las Vegas, Pennsylvania, Chicago and Southern California.

The deal also includes 1.2 million square feet of development that's in progress.

For a nearly $2 billion transaction, the sale came together fairly quickly.

DP Industrial began shopping the portfolio seriously in the last days of March after Michael Dermody, its president and chief executive officer, decided the company needed to get back to its entrepreneurial roots.

ProLogis quickly emerged as a leading buyer in a field of potential purchasers that included domestic and international companies.

Jeffrey Schwartz, the chairman and CEO of ProLogis, said the company was interested in strengthening its position in Reno, where it owned about 4.4 million square feet of distribution space before buying the DP portfolio.

"We believe our expanded position there will deliver a sustained competitive advantage for ProLogis," Schwartz said.

And Walter Rakowich, the president and chief operating officer of ProLogis, said the DP portfolio meshed well with ProLogis facilities across the nation. The two companies' properties are similar in construction, building size and office finish, he said. More than 50 percent of the former DP space is leased to companies that also are tenants of ProLogis.

And Rakowich said the 90.5 percent occupancy of the buildings in the DP portfolio gives his company some upside potential. More upside, he said, comes from the buildings' location in markets where industrial rents have been rising faster than the national average.

ProLogis isn't looking to flip the properties, said Brandon Page, who oversees its Reno-area operations.

"Our intention is to maintain and operate the existing buildings," he said.

ProLogis will beef up its staff in Reno to handle the leasing and management of the much-expanded portfolio.

At the Dermody Properties office, meanwhile, employees were beginning to get accustomed to their new roles as entrepreneurs rather than financial partners of a giant retirement fund.

Dermody said the company hopes to continue developing about 3 million square feet a year expanding its focus to include retail and office space as well as industrial buildings and is working toward acquisition of land.

The company also is shopping for existing buildings.

On both scores, Dermody Properties faces a challenge. Along with CalSTRS, it sold its portfolio because it thought the prices being paid for industrial properties were too good to pass up.

But now Dermody finds itself needing to pay those same prices as it assembles a new package of land and buildings.

The company's executives believe, however, that an independent outfit can move more quickly and fill market niches in a way that a developer tied to institutional money cannot, Dermody said.

He said the company's staff has looked forward to what he called "a refreshed style of doing business" as it worked to close the sale to ProLogis.

When Dermody decided this winter to recapitalize the company, he said the firm would continue to pursue work in the five regions where it's established Reno, Las Vegas, Chicago, Harrisburg, Pa., and Savannah, Ga. Next month, the company will begin a project at Portland, Ore.

Dermody credited the company's staff for building the value of the portfolio before its sale to ProLogis. While different skills are needed to build a company from the ground up, he said executives think many current staff members are ready to make the transition.

"We know we have a lot of those skills already in place," Dermody said.

The streamlined company is free to compete with ProLogis in markets where they both have operations.

"I'm afraid that they may decide to compete with us," Dermody quipped.

Big as the DP deal might look in Reno, it didn't make a big splash in the ProLogis bucket. The company owns or manages $28.6 billion in assets worldwide, and that total includes some 436.9 million square feet in 2,525 properties.

Dermody Properties, meanwhile, begins its new life as a much smaller organization.

"We're starting with a clean slate," Dermody said.