Wednesday, April 28, 2010
In a retail climate often described as a veritable desert for new developments, there have been recent signs of life. David Sobelman, Executive Vice President of Calkain Companies, has observed that in high credit tenants, there has been a relatively unnoticed trend in developments.
Below he answers five questions relating to this trend:
1. What, if any, developments are you seeing in the net lease or retail markets?
High credit tenants, those with investment grade credit ratings, seem to be the only tenants currently seeking expansion opportunities. These include Walgreens, CVS, TD Bank, Chase Bank, Blue Cross Blue Shield.
2. Do you see any trends developing which may indicate our future?
It seems that there is more “chatter” about looking for new sites; either ground up development or retrofitting existing locations for new tenancy.
3. Have you seen any tenant development lately? If so, how much and concerning which tenants or sectors?
Short answer, yes. Walgreens is active, as is CVS. Drug stores, c-stores, some banks are taking over vacant bank sites through mergers mostly though.
4. Why do you think there is a preference to develop new properties when vacancies are very high?
Cheap land. Lower construction costs, developers being able to negotiate better contracts with contractors to build sites and increase their overall returns.
5. Are these developments related to certain areas, such as the urban market?
There is a definite trend towards proven markets, urban real estate falls into that category. Less speculative areas are sought out more than “in the path of growth” areas that were popular 3-5 years ago.
Wednesday, April 21, 2010
On March 17th CNL Lifestyle Properties, an Orlando based REIT, acquired four California triple net lease marinas (the Anacapa Isle Marina is pictured above) through sale-leaseback deals worth a total of $55 million. The marinas are strategically located next to California’s three largest cities of Los Angeles, San Francisco and San Jose and add 1,984 boat slips to CNL Lifestyle properties marina portfolio (19 in all). Almar Management, the current operator, will continue to run the marinas and according to Almar’s CEO Randy Short, the deal will enable them to “focus on property enhancements that improve the experience for our boaters and their families”. These deals represent an interesting upsurge in non-traditional net lease activity.
CNL Lifestyle Properties focuses on “lifestyle” assets, such as golf courses, ski resorts, marinas and various other attractions. Their portfolio contains properties which are almost always structured as triple net leases and provides an intriguing investment angle. According to Byron Carlock, President of CNL Lifestyle Properties, these assets are “supply constrained”, ensuring a low threat of new entrants and stable demand. He also noted that though spending had decreased during the recession, attendance actually remained consistent, demonstrating stability in demand. Furthermore, CNL did not encounter a bankruptcy or default in any of its assets.
This year, CNL plans to invest $300-400 million in new lifestyle assets. Their conservative financial strategy has created a portfolio that is 28% leveraged by debt, though their long term target is 50%. Mr. Carlock noted their properties receive a high level of return due to their portfolio being acquired at around an 11% cap rate. He also interprets an increased interest in the market as more private equity firms look to enter the lifestyle area.
Though for many, the term “net lease” conjures up images of mundane grocery stores, Walgreens, and McDonalds, there is actually a diverse array of triple net properties in existence. This is no better highlighted than by the “lifestyle” assets which CNL Lifestyle Properties specializes in. Though the recession may have hit people hard, many still find ways to enjoy themselves and take part in their hobbies. As Mr. Carlock observed, “pursuing ones passions does not involve extravagance”.
This article was contributed to by Mr. Byron Carlock, Jr. president and CEO of CNL Lifestyle Properties,Inc., an unlisted real estate investment trust that owns a portfolio of 119 lifestyle properties in the United States and Canada. Headquartered in Orlando, Florida, CNL Lifestyle Properties specializes in the acquisition of ski and mountain lifestyle, attraction, golf and other lifestyle assets.
Wednesday, April 14, 2010
Walgreens recently closed the purchase of Duane Reade, a deal which included “all 258 Duane Reade stores in the New York City metropolitan area, as well as Duane Reade’s corporate office at 440 Ninth Ave. and two distribution centers”. The transaction was all-cash and involved the absorption of $457 million in debt. This bolsters Walgreens already impressive presence in the drugstore/pharmacy market, adding a prominent urban chain and presenting new opportunities for net lease investors.
Duane Reed, which had struggled under debt and in July 2009 was downgraded to CCC+ by S&P, will certainly become more appealing now that it’s helmed by A+ rated Walgreens. In addition Walgreens has “agreed to repay or redeem Duane Reade’s outstanding debt related to the local chain’s July 2003 credit agreement, its 9.75% senior subordinated notes due 2011, its 11.75% senior secured notes due 2015, and its senior convertible notes due 2022.” The looming question is whether Walgreens will back Duane Reade leases or if they will be allowed to stand alone. If Walgreens does agree to back the leases, a high investment grade product would be added to the net lease market, if not, the asset will at lease become more attractive under the Walgreens flag.
This transaction also represents a great expansion into one the largest urban areas in the country by Walgreens. Duane Reade is centered in the New York metropolitan area and this purchase shows Walgreen’s desire to enter the urban market with force. This situation deserves close monitoring by those who are considering a net lease asset or have interest in investing in the surging urban market.
Wednesday, April 7, 2010
It has been recently reported that the US apartment market may have reached bottom and be poised for a rebound. Apartment vacancy rates have stopped rising and rents even showed a modest increase in the first quarter. As life is pumped back into this market, 1031 exchanges could subsequently rise. Apartment investors heavily utilized 1031 exchanges to move from active to passive assets (such as net leases) in the past. Will this trend repeat?
To gain insight, we have solicited the help of James Brennan Esq., LL.M., Managing Director and Corporate Counsel of Exchange Solutions Group, one of the foremost experts of 1031 exchanges.
1. With the possible return to health of the U.S. apartment market, do you expect to see increased 1031 tax exchange action?
The Baby Boom generation flocked to real estate as an investment class, particularly multifamily. With Baby Boom private investors aging and looking to make life decisions regarding retirement, relocation, and estate planning, and all of those activities are distinguishable from the active process of “adding value” to apartment complexes through sweat equity and property management. Many of those B and C investors are looking to get out of active management. After living through this cycle, they want out more now than ever.
2. What makes apartment owners keen to move from an active to passive asset?
Passive triple net leases are net insurance, net utilities, and net taxes to the tenant. Apartment owners that have built a net worth over $5 million are looking to create annuity-like income for their heirs who often are not in the real estate business. These family patriarchs and matriarchs are not looking to burden their heirs who often are busy professionals in metropolitan areas with decisions regarding leasing up property or fixing the roof. Triple net leases provide credit-rated tenants with predictable cashflow.
3. How popular are net leases for those exchanging out of apartments?
Net leases are not only used by multifamily baby-boomers but also multifamily “financial engineers”. While multifamily financing is often favorable from agencies like Fannie and Freddie many borrowers are in troubled financial shape with distressed assets. These assets often don’t pass muster to be financed or refinanced with agency debt. These investors can 1031 exchange either with low equity or after conducting a deed-in-lieu 1031 into a net lease. Once in the net lease asset, the equity can be unlocked fairly easily through either credit-tenant-lease paydown readvance or through a standard refinance. These strategies allow multifamily borrowers to get an asset banks trust more with a credit rating.
4. What is the psychographic profile of a typical investor who executes this strategy?
Apartment developers are often drivers or family stewards. These decision-makers have built wealth from the ground up often not in a traditional white-collar methodology. These hard-driving decision-makers have provided for their family, and also probably have setup life insurance trusts to allow for estate planning liquidity. Triple net leases go well with this concept of transitioning wealth to the next generation without many opportunities for losing value by the heirs. The family stewards have built wealth and are now simply trying to preserve it.
5. Are there any aspects of this strategy conducive to estate planning techniques?
In an effort to defer capital gains while family stewards are still living the patriarch or matriarch often engages in a like-kind exchange to transition between apartment assets and net lease assets. In a like-kind exchange you can trade into multiple replacement properties. Therefore, if you have three children and you sold your apartment complex for $15 million, you can buy three $5 million dollar net lease assets that produce income that can be divided up amongst the heirs. This avoids management by the one heir that may be more real estate savvy.
Equally as important, the credit-rated aspect of net leases allows trust officers and advisors to sleep at night knowing that they made defendable decisions on behalf of the trust. Therefore, if a real estate trust officer is transitioning from apartment assets, net lease income streams are fiduciary friendly.