Do Buyers Expect a Discount When Buying Net Lease Portfolios?

When would it make sense to sell a portfolio versus single-asset? We chatted with Toby Scrivner, senior director of Stan Johnson Co., on the subject and so much more in this exclusive Q&A on the subject of net lease.

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GlobeSt.com: How does pricing differ when comparing portfolios versus single-asset transactions for the same tenant?

Toby Scrivner: In our experience, we routinely find that buyers expect a discount when acquiring portfolios of net lease assets versus their single-asset counterparts. Until recently though, we hadn’t really analyzed the data to quantify this perception or theory of a “portfolio premium” – premium meaning that investors will pay a lower cap rate when the transaction size is larger. But many factors can influence an investment property’s cap rate – credit of the tenant, age of the property, remaining lease term – and since not all portfolios are created equal, we see them trade at different cap rates. Therefore, the only way to measure the theory of the “portfolio premium” was to compare sales data for the most commonly transacted tenant/property – and the data actually refutes the theory! Of the 13 often-traded retail tenants we recently evaluated, all but one reported a negative variance in single-asset versus portfolio prices, meaning buyers are regularly paying higher average cap rates when buying in bulk.

When would it make sense to sell as a portfolio?

Scrivner: It depends on the seller’s motivation. If maximum pricing isn’t the top priority, a portfolio sale could make the most sense. For example, a seller might be more interested in minimizing the time required to execute a transaction. Time is a valuable and frequently expensive resource and selling as a portfolio to a single buyer can really expediate the process.

Is the same buyer pool going to be interested in both portfolio and single-asset sales?

Scrivner: There are definitely buyers who have an interest in both portfolios and single-assets when a specific tenant or credit is involved. That being said, there are buyers that require a certain deal size or dollar amount before they can justify spending necessary time to underwrite the investment. The buyer pool for large portfolios tend to be comprised of more sophisticated, experienced buyers, and as a general rule, the larger the transaction size, the smaller the pool of buyers.

What advice do you have for sellers in today’s market?

Scrivner: Returning to our analysis, there are likely numerous factors involved in these reported sales that could have impacted the cap rates positively or negatively. But if a consistently higher cap rate can be measured on portfolio sales with similar asset characteristics (credit, real estate quality, lease terms, etc.), how much bigger would the spread be for diverse portfolios, when individual properties are specifically marketed and sold to a targeted, vastly bigger buyer pool? If the goal is to maximize your return on investment when selling a net lease property, the evidence indicates that individual asset sales are the best way to achieve this goal.