Inside the REIT C-Suite
This is an HTML version of a story that ran in the June issue of Real Estate Forum. To see the article in its original format, click here.
Net lease has undergone a major transition, going from market niche to a transactional market force marked by big-play deals and even bigger mega-mergers. A mere glance at industry news headlines over the past several months will serve as testament to the sector’s growth, be it a big-name merger announcement, a multi-million-dollar IPO or the completion of a massive portfolio acquisition.
Real Estate Forum recently invited the chief executives of major New York City-based net lease REITs to our offices in Lower Manhattan for a candid discussion on the business’ transformation and prospects. The five heavy hitters were frank in their comments, which covered everything from the pros and cons of being a public company and the increased competition in the market to the impact of mergers and consolidation and the direction of the investment sales market.
An edited version of the discussion follows. (It’s worth noting that this roundtable took place mere days before American Realty Capital announced its intention to acquire CapLease Inc. in a $2.2-billion deal set to close in the third quarter.)
SULE AYGOREN: There’s been so much increased investor interest in net lease. How has the competitive playing field changed?
GORDON F. DuGAN: A good example of just where the net lease industry is would be to look at a roster of a net lease conference, and see how many attendees there are. I remember wondering if there was even a need for a net lease conference a few years ago, and now it’s full of a variety of different players. [For the record, our 2013 RealShare Net Lease Conference greeted roughly 300 attendees.]
PAUL H. McDOWELL: You need to consider that there are two components of investors. There’s the public REITs and those we compete against to buy product. That’s obviously driving cap rates down; there’s competition to buy product. The other component consists of investors who are interested in investing in the public companies. For a long time we faced significant competition to buy assets and a lack of investor interest in our stocks. Now we’re facing significant competition to buy assets, but we’re also seeing quite a bit of investor interest in our shares, which is helping to expand our multiples and drive our cost of capital lower. It’s making public REITs more competitive in the market than we were a couple of years ago.
NICHOLAS S. SCHORSCH: To add a third component, we’ve also seen much growth in the non-traded REIT space. This expanded interest has grown the industry to an expected $18 billion in non-traded REIT sales this year. Investors that are looking for the income that the public REITs have traditionally provided are now finding more comfort in the non-traded space, where they don’t have to deal with the volatility of today’s markets. So the industry revolves around providing investors with consistent, durable income in a market where safe, yielding assets are very scarce.
The non-traded REIT is tomorrow’s publicly traded REIT. We view non-traded REITs as incubator companies with the ability to be taken public or merge with a public REIT or institutional investor such as a pension fund. The key to this space is that the portfolios must be constructed correctly from the beginning with the exit in mind.