10-Year Treasury Rates and The Amazon Effect in Net Lease
Kyle Gore, managing director at CGA Capital, looks at interest rates, big net lease deals, and Amazon in his preview of GlobeSt.com’s Net Lease Conference.
NEW YORK CITY—“The 10-year Treasury is trading at its six-month low in yield. It’s fully 70 basis points lower than it was in November,” says Kyle Gore, managing director and principal, CGA Capital. He’s one of the capital markets panelists at GlobeSt.com’s upcoming 17th annual Net Lease Event.
Many people were anticipating rising interest rates. But on Wednesday, the Federal Reserve voted to keep interest rates steady, signaling they’d maintain the status quo for the rest of the year. “The 10-year Treasury is likely going to be lower going into this year’s conference than it was last year,” Gore states.
On Friday, yield on the 10-year Treasury note fell to 2.44%, its lowest level since January 2018. It also dipped below the 2.45% yield on the three-month Treasury bill. That created an inverted yield curve when the yield for a shorter Treasury is higher than a longer-term one. Historically, this has been a predictor of a recession. On Friday, the stock market reacted with the S&P 500 tumbling 1.9% and the Dow dropping more than 450 points. Gore says although the Fed isn’t going to reduce rates, the text of their language “is Fed speak for we might be in a slowdown or starting to slow down.”
For net lease, Gore says contradictory forces are at work. In the continued global hunt for yield, there is a huge demand for leaseback debt as well as equity—meaning there’s a ton of available capital. He comments there’s an inherent desire for companies to unlock value in real estate and they realize that unless they’re in the real estate business, owning real estate is unrelated to their business models. Companies target rates of return on their equity that far exceeds what a private institutional investor will expect as return on equity on a real estate transaction. So, that should drive more sale leaseback and net lease financings, he explains.
“On the other side of the ledger, the same low interest rate environment means corporations are flush with cash for now and don’t necessarily need capital,” Gore continues. He notes there are lease accounting changes. As a result, accountants and lawyers have advised signing shorter lease terms with greater flexibility. But Gore strongly disagrees with this strategy emphasizing companies should not have been executing sale leasebacks or leases for tax or accounting reasons.
“It should have been about return on equity, earnings, and getting capital to invest in their business. While accounting is a consideration, it certainly should not be the sole driver nor should it be a primary driver,” he asserts.
Gore also points to a potential for an Amazon Effect to hit net lease. “It’s under the radar. Amazon is engaging in a series of build-to-suit sale leaseback transactions, distribution centers, some of which are in tertiary markets,” says Gore. “It is foreseeable that sometime in the future, that Amazon will be one of the largest lessees in future net lease financings for awhile.”
He notes Amazon has said that they need $20 billion of new real estate globally over the next five years.
Look for the closing of major sale leasebacks, north of a billion dollars, Gore notes. One such deal previously reported in GlobeSt.com is WarnerMedia’s proposed sale leaseback at 30 Hudson Yards. The company has tapped Cushman & Wakefield’s Doug Harmon for this deal and is aiming to raise $2 billion.
Harmon previously handled the company’s sale leaseback at Time Warner Center. In January 2014, Time Warner sold their property at 10 Columbus Circle to Related Companies, GIC which manages Singapore’s foreign reserves and the Abu Dhabi Investment Authority for $1.3 billion, according to Real Capital Analytics. The sale leaseback allowed WarnerMedia to stay at the property and also raise capital for its investment in Hudson Yards.
In another major deal, Reuben Brothers is acquiring Banco Santander’s headquarters outside of Madrid for €283 million cash. As it is net of debt, the total consideration possibly exceeds €2 billion.
With other trends, Gore has seen an increase in not-for-profit healthcare and government deals. As a medical office example, CGA loaned Northwell Health and the University Financing Foundation $246 million in financing to build an outpatient medical complex on the Upper East Side. The deal involved six parcels with vacant buildings. Gore points out a springing lease provided Northwell control of the land with options to expand Lenox Hill Hospital.
With the GlobeSt.com conference Gore says, “Networking alone makes it worth it. But this year it’s worth going even if you were just to listen in on the conference and the hallway chatter.”
Learn more and register for the GlobeSt.com Net Lease Event scheduled for April 3-4 at the Roosevelt Hotel in New York City.