The Net Lease Preference for Medtail

NEW YORK CITY—Medical retail or “medtail” is the sector that interests Envoy Net Lease Partners. That’s one tip from Ralph Cram, the president of the real estate finance company that specializes in single-tenant net leased properties. He’s one of the speakers on the capital markets panel at GlobeSt.com’s April 3-4 Net Lease conference in New York City.

Experiential retail has been sought as the Holy Grail for successful tenants. But in a GlobeSt.com interview, Cram says now it’s not food but medical office space.

“Some chains are doing really well but it’s a pretty saturated market for most restaurants,” he states. “We see most of the growth in the single-tenant net lease area if not industrial it’s going to be in medical office.” That’s where Envoy is focusing most of its attention to build up a pipeline of projects. The Northbrook, IL-headquartered company is even sponsoring the Health & Wellness Pavilion at ICSC’s RECon in Las Vegas in May. 

Envoy’s business of making loans has switched from doing primarily commercial and retail properties, states Cram. “About a third or half of our business is now in medical and medical-related properties we call ‘medtail,’” he says. Some of their deals include DaVita home dialysis centers and financing joint venture equity for hospital urgent care clinics.

Cram has underwritten, acquired or financed $1.5 billion of real estate assets across all product types and a wide geographic swath, having more than 25 years of CRE experience. In 2011, he co-founded Envoy to provide equity and gap financing to developers of build-to-suit single tenant net lease properties.

He notes now Envoy is seeing as many requests for JV equity as for debt financing. For Envoy, “It is usually two to three times debt to equity. So, there is that capital available to a certain level,” Cram adds.

Cram comments that the Trump administration is likely to allow more mergers and acquisitions. He sees this as affecting net leases especially with banks and drugstores.

He references BB&T and SunTrust’s February 2019 merger valued at $66 billion. It’s expected to close in Q4 2019.

The merger will likely result in two branches overlapping in the same neighborhood. So, it’s likely that one will shut down. He explains this can lead to a situation where “even if you have a tenant where the rent is being paid, you don’t know if it’s going to be vacant the next year or so.” Plus, it’s harder to sell vacant property than one that’s leased.

With drugstores, although the Walgreens merger with Rite-Aid fell through, Walgreens still purchased about 2,000 Rite-Aid stores. Albertsons’ attempt to acquire Rite-Aid also collapsed. On March 13, CNN reported the drugstore chain was eliminating its top three executives including CEO John Standley, along with 400 employees.

“It’s going to be a little bit harder to sell people on bank branch stores and drugstores, especially the shorter term drugstores,” says Cram. In addition, he adds Walgreens is reducing the amount of space for dry goods, reducing their rent on renewals.

Cram will share additional insights at GlobeSt.com’s event. Mark Maughan, head of net lease investments at Sundance Bay, will moderate the panel. Cram will be joined by Gary Chou, SVP and senior director, Matthews Real Estate Investment Services; Kyle Gore, managing director and principal, CGA Capital; Elyssa McMullen, SVP, lease finance group, Prudential Capital Group; and Tivon Moffitt, SVP, JLL.

Cram will also ask the other speakers: What are they seeing in their businesses that’s different from last year? What’s working and what’s not working?

See the full agenda and register for the GlobeSt.com’s 17th Annual Net Lease Event.