The RealShare Net Lease sale-leasebacks panel had a realistic but generally positive tone.
NEW YORK CITY—Although several sale-leaseback players have seen a slow-down in the market, they haven’t given up hope just yet. In fact, they remain active in the market and have noticed some trends, a group of them said during a panel discussion here on Thursday at RealShare Net Lease.
“Last year was down year-over-year about 10%, but some big office deals skewed that so activity is down more like 25% and that has continued this year with a slow first quarter,” noted Matt Tucker, managing director, Gladstone Commercial Corp. “2017 could be good but it’s going to depend on if tax reform gets done and what legislation passes.”
Asserted Kathleen Barthmaier, managing director, W. P. Carey, “It’s been said that March is the new January and I think that’s true. Given political and tax uncertainty, people were waiting to make their move in early 2017, but we did see more activity in March so I do expect a better back end of 2017. Our goal this year is to invest $1 billion.”
Still not seeing a great deal of sale-leaseback activity, Peter Weisman, principal, Net Lease Advisors, quipped, “I’m hoping that April is the new January for sale leasebacks. There is a lag between the rise of interest rates and cap rates; maybe that’s part of the reason for the slowdown.”
For Kenneth Zakin, senior managing director, NGKF Capital Markets, a solution has been to turn to the overseas markets. “We’re working internationally in the office and industrial space with credit sale-leasebacks or net lease deals. The financing rates are attractive—much more than in the US, the spreads are better.”
He hasn’t carved out an easy path with that strategy, however. “The challenge is you have tax issues and you have to worry about foreclosure, bank risk and how local laws address that, as well as value-add tax issues. So it’s not for the faint of heart but it’s fascinating.”
Continued Zakin, “We’re very active also on retail deals. I’m agnostic on asset type and, for the most part, on size too. We expect this year to be about the same as 2016, depending on rates.”
The panel shifted the discussion to what types of deals they generally work on. “We like transactions that are more complex,” shared Barthmaier. “We like to spend more time digging into the credit types and more to get the best return for investors.”
Added Zakin, “Many of the companies we work with are global. We have a trucking business so we’re building truck stops internationally and we’ve looked at some deals in Mexico.”
At Gladstone, which solely does office and industrial deals, “We feel that real estate is local so we’re focused on about 25 markets around the country. They’re not necessarily in MSAs, we want to be in areas where if there’s office, there are area amenities and multifamily properties. We’re not trying to be a financial engineer just going everywhere to get returns.”
Similarly, Weisman explained, “We’re 100% domestic. Real estate is local and [straying from that] is how things got crazy in 2007.”
In terms of alternative investments, Barthmaier revealed that “we absolutely are looking at them. We always consider the same factors: credit, quality of the real estate and the importance of it to the compay. We determine the lease based on that.”
Tucker has a different take. “We actively avoid specialized properties. In our experience, if you get one of those assets back, it’s very expensive to refit that space for another tenant. “
Barthmaier explained, “We agree. That’s why we underwrite credit aggressively. Our lease with Nord Anglia Education Inc. was for 25 years.”
Today, noted Weisman, “Lenders look more closely at where the building is and what will be done with it if the tenant leaves in five years. Special use, like a refrigerated building, could be a good property if there’s a good reason for a tenant to stay. When a property is a vital, crucial asset for a company, that’s the best type of deal.”