Jay Bastian is SVP of Acquisitions for National Retail Properties, Inc., a NYSE traded REIT focused on single tenant, net leased retail and restaurant investments.
(1) Will the commercial real estate market bottom out in 2010?
Our only frame of reference is net lease, so we’ll stick with that. An acquisition we’re evaluating at the moment speaks to the current state of the market, and future implications. It’s a portfolio of drug stores, and we’ll separate out one asset as an example. The seller purchased it for a 9% cap in 2000, put 80% LTV, 25/10 year debt in place at 8%, with a balloon in 2010 at $2.5M. Hope you caught that, a 9% cap for an “A” credit drug store in 2000! Today’s value with 10 years remaining on the lease, may be 9%. In order to refinance, the Seller would have to write a check for $225,000 just to pay off the original lender, and has opted to sell the property instead. While the original mortgage LTV and amortization were a little aggressive, the rent’s only $21 psf, so decent fundamentals.
As far as the industry’s turnaround is concerned, if we have reasonably conservative underwriting on transactions pre-2005 that require additional equity, how does that translate to the scale, valuation, leverage, and lack of amortization in most transactions since? Again this focus is only on performing net lease properties, not the remaining universe of CRE with its pro-forma underwriting based on lease-up and growth in rental income across all property types, with impending debt maturities.
(2) Is commercial real estate’s fate tied to unemployment or any other pertinent economic factors?
Net lease real estate, at least in our retail and restaurant segment, is tied to the health of the consumer and disposable income. There’s been some fallout of various retail and restaurant chains, but for now it seems stabilized, if we’re at the bottom. As far as the balance of CRE, in order to see growth in rent and occupancy, there will need to be workforce expansion, whether existing companies, or new businesses. Obviously, CRE’s health is ultimately tied to the vitality of the real estate capital markets for imminent re-financing requirements and future development.
(3) When recovery does begin, what areas will grow first and fastest?
Our sense is that a recovery in lodging and casual/upscale dining occupancy levels and sales, along with increasing travel center revenues will provide evidence of the start of a recovery. This will hopefully indicate that employees on expense accounts are back on the road building business again, and trucks are delivering new inventory and product.
(4) Are there segments of commercial real estate that you find appealing even in this economy, including the net lease market?
Our bias is net lease, and especially so in this economy. I am sure there will be value-add plays out there, but if you’re investing in real estate, net lease offers stability and growth if well underwritten. Our targets are a 20 year lease, strong tenant, annual rent bumps for growth, conservative rent and valuation fundamentals, on a property that’s profitable for the tenant? With this uncertain economy, can’t imagine investing anywhere else.
(5) Would you prefer to invest: Close to home or in a stronger metro market?
What are your top two choices in your preferred area?
We focus first on unit level performance, strong real estate fundamentals, with a good operator as the tenant. We’re probably shy on some markets in the upper Midwest, but have investments and interest in the entire country.
(1) Will the commercial real estate market bottom out in 2010?
Our only frame of reference is net lease, so we’ll stick with that. An acquisition we’re evaluating at the moment speaks to the current state of the market, and future implications. It’s a portfolio of drug stores, and we’ll separate out one asset as an example. The seller purchased it for a 9% cap in 2000, put 80% LTV, 25/10 year debt in place at 8%, with a balloon in 2010 at $2.5M. Hope you caught that, a 9% cap for an “A” credit drug store in 2000! Today’s value with 10 years remaining on the lease, may be 9%. In order to refinance, the Seller would have to write a check for $225,000 just to pay off the original lender, and has opted to sell the property instead. While the original mortgage LTV and amortization were a little aggressive, the rent’s only $21 psf, so decent fundamentals.
As far as the industry’s turnaround is concerned, if we have reasonably conservative underwriting on transactions pre-2005 that require additional equity, how does that translate to the scale, valuation, leverage, and lack of amortization in most transactions since? Again this focus is only on performing net lease properties, not the remaining universe of CRE with its pro-forma underwriting based on lease-up and growth in rental income across all property types, with impending debt maturities.
(2) Is commercial real estate’s fate tied to unemployment or any other pertinent economic factors?
Net lease real estate, at least in our retail and restaurant segment, is tied to the health of the consumer and disposable income. There’s been some fallout of various retail and restaurant chains, but for now it seems stabilized, if we’re at the bottom. As far as the balance of CRE, in order to see growth in rent and occupancy, there will need to be workforce expansion, whether existing companies, or new businesses. Obviously, CRE’s health is ultimately tied to the vitality of the real estate capital markets for imminent re-financing requirements and future development.
(3) When recovery does begin, what areas will grow first and fastest?
Our sense is that a recovery in lodging and casual/upscale dining occupancy levels and sales, along with increasing travel center revenues will provide evidence of the start of a recovery. This will hopefully indicate that employees on expense accounts are back on the road building business again, and trucks are delivering new inventory and product.
(4) Are there segments of commercial real estate that you find appealing even in this economy, including the net lease market?
Our bias is net lease, and especially so in this economy. I am sure there will be value-add plays out there, but if you’re investing in real estate, net lease offers stability and growth if well underwritten. Our targets are a 20 year lease, strong tenant, annual rent bumps for growth, conservative rent and valuation fundamentals, on a property that’s profitable for the tenant? With this uncertain economy, can’t imagine investing anywhere else.
(5) Would you prefer to invest: Close to home or in a stronger metro market?
What are your top two choices in your preferred area?
We focus first on unit level performance, strong real estate fundamentals, with a good operator as the tenant. We’re probably shy on some markets in the upper Midwest, but have investments and interest in the entire country.
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Great interview, I hope they are accounting for those magical "expense accounts" being limited and work travelers spending money at Subway and Quiznos and not Ruth's Chris or even TGIFridays.
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