Industry Insiders Say What's Getting Tougher for Net Lease REITs
Big-box stores are good investments today which can be repurposed as distribution centers in the future, says one expert at GlobeSt.com's Net Lease RealShare conference.
NEW YORK CITY—With talk of a possible softening economy, while still bullish on net lease several experts speaking at GlobeSt.com’s 17th Annual Net Lease event shared their observations and strategies. They served on the panel, “Net Lease REITs: Bull or Bear” moderated by John Massocca, VP Equity Research REITs, Landenburg Thalmann & Co. Inc.
“From where we traded at the last downturn, I think we can do a lot better because companies are significantly positioned a lot better than where we were the last time,” said Daniel Donlan, SVP, capital markets at Essential Properties.
One strategy that has helped his company is that when a company wants to build or renovate, Essential Properties receives rent as they fund the development. “So there is not the lack of getting paid,” he said. “We also typically roll that tenant into a master lease. It lowers our execution risk and gives us more protection.”
Matt Partridge, CFO and COO at Hutton, observed speakers at another panel at the event discuss requests for the first right of refusal in net lease deals. However Partridge warned the audience, “That’s all good in concept but once you are one of 10 developers vying for a build- to-suit program, you are going to give up certain things.” He added spreads have compressed significantly and with high quality retailers there is just not as much growth in new developments. He said Hutton is looking to diversify.
Jason Kessler, chief investment officer at ARCTRUST, agreed with Partridge. He stated with most of ARCTRUST’s developments, with long-term credit leases, he has seen tenants dropping lower returns. Plus, there is not the depth of tenants. “If there is a cheaper execution, we will do so,” he added.
In the last three or four years negotiations are become more difficult as retailers are asking for more changes, according to Partridge. This has also resulted in pushback from the REITs. But to Donlan’s point, he has observed retailers more receptive to master lease structures.
Amar Goli, managing director at Sands Investment Group, stated with uncertainties in the economy, his firm will negotiate the ability to terminate and get their deposit back at his company’s option if the 10-year Treasury spikes in the 30 days to closing. The seller can take their product back out to market and get their pricing but Sands will have included termination options in the contract.
Big-box retail still appeals to Dan Lovitz, SVP acquisitions at VEREIT. Although he said it’s too early to tell whether the whispers of a recession will become a louder voice, he noted this type of store has “weathered the ‘retail apocalypse.’” Lovitz said he’s seeing new big-box retail with good owners in good markets in good locations with transportation access near highways and at relatively inexpensive prices.
Looking to the future, Lovitz commented, “In a push, they can be repurposed 15 years from now as last mile distribution centers.”