Friday, November 16, 2012

Net Lease Investors Can't Get Enough High-Yielding REITs

NNN Lease Market News



Desperate for income, investors can't get enough high-yielding REITs and Wall Street is rushing to supply them. Companies are lining up to convert into REITs, a step that requires approval from the Internal Revenue Service.
Prisons, cell towers and golf courses were turned into REITs in the late 1990s, Mr. Westphal says with "pretty dreadful" results that in some cases produced losses of 90% or more.
So the market is changing and investors should temper their expectations accordingly.
While owning REITs is a good idea, panic buying isn't. Many investors are dumping money-market funds or bond funds and replacing them with higher-yielding REITs, says Morningstar analyst MichaelRawson. But REITs aren't bonds; the FTSE NAREIT Equity REITs Index, a benchmark of more than 120 of these stocks, lost 37.7% in 2008, when U.S. Treasury bonds had a positive 13.7% return.


UPREITS: TAX-DRIVEN CONVERSIONS FOR PROPERTY OWNERS


One of the more under-discussed aspects of the REIT is how it can benefit a seller of real estate. By contributing a property to a REIT you can achieve many of the same benefits associated with a §1031 exchange including deferral of gain recognition not to mention several other potential advantages. For the owner looking to monetize their investment in a tax advantaged manner with the possibility of additional upside this option deserves some additional examination. 






Tuesday, November 6, 2012

The Marketplace Views Ground Leases as a Very Secure Type of Investment

NNN Lease Market News



Andrew Fallon, assistant vice president at Calkain Cos.

Market values of land alone logically come in somewhat below what ownership of both land and improvements would fetch. And buyers just as logically expect a return premium for full ownership relative to ground leases.

Hence the historic differential in cap rates between ground leases and outright trades of land and net leased structures is typically in the range of 50 to 100 basis points depending on location, tenant credit, lease term and structure and related factors, notes active net lease investment broker Andrew Fallon, assistant vice president with specialty advisor Calkain Cos.

Well-positioned ground leases in major markets tend to trade at cap rates in the vicinity of 6 percent or a bit below these days, compared to roughly 6.5 to 7 for land and improvements subject to net leases. One potentially exploitable factor likely to generate outsize returns for the savvy small-cap investor is that full ownership of both land and improvements reverts to the landowner when the lease terminates.

Hence a forward-looking investor able to track down and land a replacement tenant (ideally with minimal retrofitting expenses) might be able to essentially secure ownership of a functional structure sooner rather than later – without really paying for it. Another strategic approach here is to actively trade in ground leases, insightfully buying and selling based on timing of built-in rental-rate escalations.

And when an existing tenant does opt to exercise renewal options again and again, the more typical passive high-net-worth individual playing this space today still owns land that should retain value throughout economic cycles, Fallon relates. Given that small-cap ground leases are mostly in high-traffic locations – and tend to trade in all-cash transactions – cap rates are generally less volatile than with leveraged real estate investments as interest rates rise and fall, he elaborates.

“The marketplace views ground leases as a very secure type of investment – even more than ownership of both land and (net leased) structures,” continues Fallon, who has brokered deals for ground leases of properties occupied by the likes of 7-Eleven, KFC/Taco Bell, McDonald’s, Chick-fil-A, Wells Fargo, Bank of America and others.

“The thinking is that if the tenant is willing to spend the capital on the improvements (knowing they’ll eventually revert to the landowner), then it’s a location worth committing to.”

Long-term ground leases these days have exceptional appeal for high-net-worth individual investors tired of dealing with “tenants, toilets and trash” – and who also seek better fixed-income returns than today’s dismal bond rates, and far less wealth-preservation risk than the stock market entails.

But again, given how NNN leases are structured, ground lease investing can also offer savvy small-cap real estate entrepreneurs opportunities to generate even better returns through active trading strategies – or embracing re-tenanting risk under the right circumstances.

Wednesday, October 10, 2012

NNN Dollar General Sold

NNN Lease Market News



Dollar General Net Lease Sells for $1.23MM in Petersburg, VA

Calkain Companies recently sold a Dollar General (NYSE: DG) NNN net lease investment property located in Petersburg, VA. The transaction closed within the past 30 days and illustrated the compressing cap rates within the net lease segment of the market. The buyer was a privately held, fully integrated real estate investment company. The seller was a regional real estate developer. As a preferred developer for Dollar General, the same seller has engaged Calkain to sell another store in Halifax, VA. These Dollar General properties have been developed as part of Dollar General’s build-to-suit program. The stores have brand new 15-year NNN net leases, which provide passive income for the new owner.

Calkain’s Andrew Fallon, Assistant Vice President, facilitated the transaction by providing exclusive representation to the seller. More sales of Dollar General stores have been transacting since S&Praised the company’s credit rating to investment grade BBB- in April 2012. The Petersburg store was highly sought after given its proximity and access to the I-95 corridor, the surrounding demographics, and the favorable lease structure. Fallon commented, “As Dollar General continues to roll out new stores in new markets, the investor demand continues to increase for superior market locations.” The combination of tenant credit and triple net lease terms provide a passive, bond-like fixed income investment, “The leases with Dollar General’s guaranty provide a strong income stream for the buyer, who will have limited to no management responsibilities.” The buyer financed the purchase using a regional bank.

Calkain Companies is a boutique commercial real estate brokerage firm which specializes in assisting buyers and sellers with single and multi-tenant retail, industrial, hotel and office net leased transactions. While licensed to conduct business in many states, nationally, Calkain has multiple office locations throughout the Mid-Atlantic, Southeast, Northeast and a new office opening in the Midwest. Additional information about the firm and listings may be found at www.calkain.com.

Friday, September 28, 2012

Cap Rates on Walgreens and CVS Properties Remained Flat

NNN Lease Market News



Cap Rates on Walgreens and CVS Net Lease Properties 



Cap rates on Walgreens and CVS properties remained flat with the quarter prior at 6.45 percent and 6.7 percent respectively, but cap rates on restaurants fell 25 basis points to 7.25 percent. Cap rates on McDonald’s restaurants in particular fell 20 basis points to 4.8 percent, and cap rates on Dollar General stores fell 15 basis points, to 8.1 percent.


In addition, cap rates on properties leased to banks compressed 35 basis points, to 5.5 percent. Still, the cap rate compression on the most popular properties was below predictions. Back in May, researchers with Marcus & Millichap Real Estate Investment Services estimated that cap rates on dollar stores and drug stores would fall 30 basis points each from the first to the second quarter of 2012, while cap rates on quick service restaurants would fall 60 basis points.

However, few of those properties are trading in the core markets. Finding a McDonald’s or a Walgreens for sale in a primary market has “gotten tougher because there is not a lot of new things coming out of the ground and partly that’s what pushed down cap rates, as well as [the fact that] interest rates have gotten so low,” says Jonathan W. Hipp, president and CEO of Calkain Cos., a Reston, Va.-based brokerage and consulting firm specializing in the net lease sector.

To compensate for lack of product in prime locations, net lease investors have been more willing to accept risk in exchange for higher yields. Some are starting to buy assets leased to A-credit tenants in second-tier markets, Hipp notes. Others are investing in franchise restaurant locations instead of corporate-owned properties because they like the sector’s healthy growth.


Friday, September 14, 2012

Demand Heating up for Small and Mid-Size NNN Market

NNN Lease Market News



Low- and mid-range market sees growing activity as investors buy up store spaces; Eastern Consolidated starts new retail division

As the demand for these assets has increased in recent years, megadeals like Vornado’s $707 million retail condo purchase at 666 Fifth Avenue have grabbed headlines.
But the trend is now trickling down to the lower end of the market, brokers said, with demand heating up for small and mid-size retail condos in up-and-coming markets like southern Soho, especially along Canal Street, and the area adjacent to Times Square. An increase in 1031 exchanges — where owners buy property with money from the sale of property they already own, thus deferring the capital gains tax — has also contributed to the rising interest in retail condos, as investors have looked for cash flow in the difficult commercial real estate market, brokers said.
“It’s a very competitive market with lots of prospective buyers,” said Robin Abrams, executive vice president at Lansco, who noted that approximately half her brokers have done retail condo deals.

Thursday, September 13, 2012

NNN Investment in Spring Hill, FL Sold

NNN  Lease Market News



Sale of Multi-Tenant NNN Investment in Spring Hill, FL


Calkain Companies, a national net lease commercial real estate firm, recently brokered the sale of a multi-tenant, NNN investment in Spring Hill, Florida. The two-tenant investment property is situated on 1.08+/- acres with high visibility to busy US HWY 19, just 30 minutes North of Tampa. It is occupied by Pet Supermarket, based out of Sunrise, Florida. BBB- rated, Humana Marketplace, headquartered in Kentucky is also a tenant.

The site is a 9000+/-sf building divided into 7000+/-sf for Pet Supermarket and 2000+/-sf for Humana. Pet Supermarket renewed their lease for 7 years with structured increases and options and Humana exercised their 2 year option. The seller, an experienced private owner and long-time client of Calkain, was looking to liquidate to secure other opportunities. The property sold for $1.61MM which is a 8% cap rate to a private Florida based buyer completing a 1031 exchange.

Calkain Associate, Teal Henderson, who was recently tapped to open the new Midwest office in St. Louis, MO from Tampa, exclusively represented the private seller and provided marketing and transaction support services throughout the sales process. The property was initially introduced to the market with quickly expiring leases. Henderson commented, "We quickly recognized the hurdle of the current lease terms being unfavorable along with the tertiary and lesser known Florida location of Spring Hill. We counseled the seller in reaching out to the tenants and restructuring with more attractive terms. Then after successful negotiations, we re-introduced the property on the market and generated a quick contract. A private buyer interested in a Florida property with an investment grade tenant with ties to the medical industry purchased the asset." As a NNN ground lease, this investment requires that the tenant pay for real estate taxes, insurance, and maintenance expenses, which effectively provides the landlord with a passive, bond-like income stream through commercial real estate ownership. The transaction occurred within the last 15 days and will be recorded in the public records.

Calkain Companies is a boutique commercial real estate brokerage firm which specializes in assisting buyers and sellers with single and multi-tenant retail, industrial, hotel and office net leased transactions. While licensed to conduct business in many states, nationally, Calkain has multiple office locations throughout the Mid-Atlantic, Southeast, Northeast and a new office opening in the Midwest. Additional information about the firm and listings may be found at www.calkain.com.

Wednesday, September 5, 2012

Net Leased Property Market Heats Up



NNN Lease Market News



The record-setting $14.5M purchase of a CVS net-lease property in Adams Morgan last week confirmed what everyone's thinking: prescription drug prices have gotten way out of hand. We'll be sure to ask President Obama about that in Charlotte. But something else the deal shows, Calkain's Rick Fernandez tells us, is investment demand for the sector in DC is approaching historical highs.
 As with other real estate assets, investors are drawn to DC's triple-net market for its resiliency. "This market has weathered recessions very well," Rick (above, with his sons Alex and Jack at Sunday's Nats-Cards game) tells us. "In terms of investor demand, it's right up there with New York City." Combine that with minimal construction starts and economic uncertainty and you've got a recipe for shrinking cap rates—the Adams Morgan CVS traded at a sub-6% cap.
 Here's the Adams Morgan CVS. In large part, pricing and demand are being driven by 1031 exchange buyers and high-net-worth investors concerned about their financial health, Rick says. Net-lease properties with a strong credit tenant provide cash flow and income with a real estate backstop that provides a measure of security that the stock market can't equal, and "now is an extremely favorable time for sellers of net lease properties." Institutional players are in the market, too, he tells us, but private buyers have provided the majority of aggressive offers in DC so far this year.
 Rick tells us urban locations are the most sought-after because of economic stability, population growth in the urban core it's easier to find replacement tenants in a tight spot. "At a pad site in front of a big box in the suburbs, you have fewer options to replace a tenant. If you're downtown, a 4,000 SF rectangle has a wide variety of tenants to attract."