Higher LTVs and Tax Plays Also Figure In; (Part 2 of a 4-Part Series)
October 12, 2011
The availability of inexpensive money from a variety of capital sources, both large and small, has fueled the more than $29 billion of confirmed single-tenant investment sales year to date.
Continued uncertainty with the stock market, together with lower yields available from more traditional investments and the relatively poor performance of multi-tenant retail, investors have been turning to the more predictable cash flow and returns associated with net-lease property. Lenders and funds have responded accordingly.
“The ‘buy’ side is being driven by the non-traded public REITs that raise funds from individual investors through broker-dealer networks,” said Scott E. Tracy, founding principal Corporate Partners Capital Group in Los Angeles.
CoStar data backs up the track record of fundraising for non-traded private REITS and public REITs. In the past year, five funds alone have raised more than $4 billion.
W. P. Carey & Co. LLC $1.76 billion
Realty Income Corp. $664 million
American Realty Capital Partners $642 million
National Retail Properties Inc. $540 million
Medical Properties Trust $450 million
That kind of fundraising clout makes acquisition credit facilities available to such firms dirt-cheap. For example, Realty Income Corp.’s average borrowing rate on its acquisition credit facility as of June 30, 2011, was just 2%. National Retail Properties’ credit facility currently accrues interest at a rate of 1.73%.
Jonathan Wolfe and Jordan Shtulman, senior vice presidents with Grubb & Ellis Sale Leasebacks/Net Leased Properties Group in Chicago, explained that as interest rates have moved lower, the cost of financing has followed suit. In addition, lenders are putting an emphasis credit quality — all of which has driven increased investor demand for net leased properties with strong credit tenants.
And because the non-investment grade net leased assets are more challenging to finance, the buyer pool for these types of properties is smaller. This is particularly true when the assets are located in secondary, tertiary and rural markets, Wolfe and Shtulman explained.
Tracy of Corporate Partners Capital Group also said that, in addition to the cheap money, an active 1031 tax deferred exchange market has re-emerged that is fueling activity at the lower price points.
Cynthia Shelton, director, investment sales at Colliers International in Orlando, confirmed that interest from 1031 buyers for single-tenant properties is strong. “There is lots of interest in these properties as it’s a rush to safety and returns that are better than T-bills and mutual funds while not as risky as stocks. Many restaurant franchisees are also coming back to the market with sale leasebacks.”
“Individual investors are taking money out of other investments that are not getting the return that they can get in real estate,” she said. “Many institutions and individuals are paying cash and financing after the close. Some are getting 50% to 60% loan-to-values with 20- to 25-year amortizations and 5- to 10-year terms depending on the tenant and term of the lease.”
“The investment grade credit with long-term leases can still get 70% to 80% loan-to-values and have a positive spread between the low interest rates and the yield on the real estate,” she said. “Some are using lines of credit with plans to refinance later.”
David Zacharia, principal of DZ Realty in Las Vegas, is seeing money coming from another common source.
“High net worth individuals is another large player in today’s net lease market acquiring many corporately leased fast food, drug store, auto parts, and dollar store leases. Almost half of these buyers are estimated to be transacting within a 1031 exchange,” Zacharia said.
“For the smaller deals, like McDonald’s, it’s almost exclusively coming from private, high net worth investors and family trusts,” said David B. Chasin, executive vice president of Pegasus Investments in Los Angeles. “For the larger deals (portfolios and single assets greater than $15 million), we’re seeing strong appetite from the private REITs, overseas (particularly Europe and Asia) and syndication platforms.”
Larry Hausman, a senior broker with Marcus and Millichap of Louisville, KY, said people are increasingly becoming more afraid of inflation and no longer want to hang on to their cash.
“Many investors are taking advantage of historic low interest rates to buy quality assets. Thus, there has been increasing competition for high quality assets that can yield greater returns than bonds of the same credit rating,” Hausman said.
Phil Ryan, an associate with Lavista Associates Inc. in Norcross, GA, said there are several reasons why capital is flowing to single-tenant properties.
“Capital is coming from several sources: the private equity investor who needs income, the institutional investor who needs to stay in real estate but desires to reallocate its holdings to diversify risk and several private equity groups that are raising funds in the market promising adequate returns with low risk,” Ryan said.