The following column is from Gino Sabatini, W. P. Carey head of investments. W. P. Carey is a GlobeSt.com Thought Leader. The views expressed are the author’s own.
Following the twin shadows of a pending recession and increasing interest rates in 2019, the 2020 US economic outlook has shifted to a stable, low interest-rate environment for the year ahead. This context creates an opportunity for companies to secure favorably priced, long-term capital via a sale-leaseback. This means that commercial real estate brokers, charged with identifying investors to fund and structure these deals, must look for investors who not only offer competitive pricing, but also innovative deal structures and certainty of close. Large, public net lease REITs are particularly well suited to the current environment when you consider these factors.
Competitive Pricing: With current interest rates at an all-time low, demand from yield-driven investors will continue to support the availability of low-cost capital. Large, publicly traded net lease REITs—with strong balance sheets and consistent operating and dividend histories—have a cost-of-capital advantage over their smaller net lease REIT peers and most private equity real estate sources. These larger REITs can provide attractively priced capital and pricing for standalone sale-leaseback investments. They also offer long-term leases and have better access to capital, which enables them to be an ongoing and reliable provider of attractively priced funding for existing tenants’ future and ongoing initiatives, including follow-on investments, forward commitments and expansions.
Transaction Structure – Current & Future Funding: Large net lease REITs offer financial strength that can enable brokers to add value when structuring net lease transactions. The brokers are able to address their clients’ current capital needs while simultaneously negotiating the inclusion of commitments to fund expansions and upgrades for other critical assets. Moreover, deal structure and documentation for these types of deals are more complex, so working with a REIT with in-depth experience is essential.
Timing: Certainty of close is always critical, particularly in today’s world of record M&A activity where sale-leasebacks can serve as a cost-effective part of the capital stack for new acquisitions. As such, working with an established investor with experience structuring complex sale-leasebacks and build-to-suits across industries, geographies and asset types is critical. Off-market transactions are also an effective way for brokers to quickly and confidentially structure deals with a qualified investor.
The Environmental Factor: Public net lease REITs will attribute additional value to a potential tenant’s corporate responsibility initiatives, existing environmental programs and renewable energy practices, particularly amid increasing interest from institutional shareholders. Because institutions see established environmental practices as key to maintaining and enhancing long-term corporate value, brokers who highlight these practices can increase the long-term value of corporate properties and make these assets more attractive while expanding potential acquisition proceeds from net lease buyers.
Brokers who work with an experienced, well-capitalized net lease REIT are better positioned to maximize transaction proceeds, while ensuring their client’s long-term capital and real estate needs will continue to be supported by their landlord and partner. It’s a win-win for all.