Net Lease Investment Strategies Remain Unchanged
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LOS ANGELES-The third panel during RealShare Net Lease West here last week, titled “Investment Strategies for 2013,” revealed that panelists’ core investment strategies are remaining relatively unchanged next year, even with the possibility of a guard change in the White House and looming fiscal cliff issues. Moderator John Glass, SVP, investments, for Marcus & Millichap, asked the panelists whether they are looking at different markets and product types, and for the most part, the answer was no.
“We’re spending a lot of time finding out how the deal relates to our strategy,” said Michael Escalante, CIO of Griffin Capital Corp. “We’re only buying seven properties in 2012, so we have a selective acquisition strategy. We have a lot of balls in the air at any given time.” He added that there is creativity in terms of deal structuring and that 70% of his firm’s properties are investment grade.
Howard Sands, founding principal of Corporate Partners Capital Group Inc., said his firm will be looking at smaller deals, and Andrew Winer, CIO of American Realty Capital Global Trust, added that he anticipates his company will be very productive in 2013 and 2014, although liquidity is still at a premium.
With inventory down dramatically and more tenants gravitating toward shorter-term leases, Glass asked the panelists if they are planning to move toward short-term vs. a long-term leases—and what is the threshold? Christopher Volk, president and CEO of STORE Capital, answered that his firm doesn’t look at a lot of short-term leases. “We’re providers of capital to companies, and we try to create demand and increase the market. We don’t spend time looking at rent to sales in a retail tenant—instead we make sure they’re not paying too much to build as the cost to build the asset is important.”
Sands said that short-term leases require a different investor profile and aren’t nearly as financeable as long-term leases. At some point, they’re no longer net leases. “If you’re going below nine years, you’re looking at a real estate transaction.”
Derek Layne, associate director, investment sales for Stan Johnson Co., added that there is a bifurcation on longer-term net lease deals. “Once you get to nine years, there are no bonds on the investment side and it is definitely more real estate focused.”
Next, the panel discussed how to measure the profitability of a bank-branch tenant in a short term lease. Winer said looking at the level of deposits is important, but so is being comfortable with job growth and other fundamentals in the area. “You need to look at the downside, and the demographics have to be good.”
The discussion shifted to Obamacare and its impact on investment strategy. While not focused on the medical-office sector, Escalante said, “We are bullish on the impact of Obamacare relative to certain aspects of the underlying credit quality of people going to hospitals.” Since credit quality is likely to increase, so will revenues, he said. “Obamacare will have a more dramatic impact on the individual provider of services.” Winer added that many investors are getting out of skilled nursing and into medical office because of the general shift away from guaranteed government sponsorship.
When asked if they would consider aggregating assets for a more appealing sale, Escalante said his firm has aggregated two or three properties “where we think there’s a big of arbitrage” and is testing out this method. Sands said his firm has done quite a bit of opportunistic reselling, and Volk added that since his firm’s bread and butter is chain restaurants and movie theaters, “we try to add value by being inventive” with similar strategies.
Sands summed up, “The economy still has lots of problems, so the lending criteria is a lot stricter than pre-recession. We’re in a maze, with fewer perfect opportunities available.”
Escalante said his firm has been bullish on the impact of Obamacare relative to certain aspects including the rising underlying credit quality of hospital patients leading to increased revenues.
Most of the panelists said they expect to be very productive in 2013 and 2014, particularly with smaller net lease deals and shorter-term leases.
The conference gave attendees ample networking opportunities: during the prior evening’s cocktail party, at breakfast the morning of the event, in between sessions and after the conference.
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