Gordon Whiting, founder and Senior Portfolio Manager of Angelo, Gordon's net lease real estate strategy, gave us his input on the industrial market:
1. What is your opinion of the industrial market today?
The strength of the industrial market today is still market specific and varies depending on the location and type of industrial asset. In general the bid and the ask spread has compressed and sellers have much more realistic valuations. In the single tenant triple net lease market, particularly in the less than investment grade area, where we specialize, initial cap rates are still double digit with annual rental increases. Those increases are usually tied to the increase in CPI and most times have a minimum rental increase. I believe that now is a good time to buy these assets and it is also a good time for sellers to sell. Mortgage financing has loosened up and that is a helpful market dynamic.
2. What are some current developments that should be watched?
I would watch how companies try and refinance the $360 billion of bank debt and high yield bond maturities that come due between now and 2012. It may be difficult for many non-investment grade companies which are highly levered to refinance this debt and that could cause them to sell their corporate owned real estate and lease it back in order to pay off their debt. This has caused the negotiating power to shift back to the buyers. I see this possibly continuing through 2014 as there is over $1.1 trillion of leveraged loans and high yield bonds that mature between now and 2014.*
3. Where do you see the market in 6 months? A year?
I see the market in the same place in 6 months or a year. I see it as a good time to buy real estate and a good time for sellers to sell in order to generate capital to pay off debt that is maturing, if they don’t have access to the capital markets. Many middle market companies still don’t have access to the capital markets and this is a good way for them to monetize the capital that they have trapped in bricks and mortar.
4. What role are net leases playing in the market?
Net leases or really sale leasebacks play an important role in the market and I believe that role will continue to grow as companies turn to the real estate that they own in order to generate capital. It is also a good time to be an investor in net leased real estate as prices are lower than they have been in many years, cap rates are up and they provide steady current income with the possibility for long term capital gains.
5. Where would you invest in the industrial market today?
Definitely in the less than investment grade single tenant triple net lease market. If you do your real estate and credit underwriting properly and have a long term lease given the double digit cap rates and rental increases today you will have a very attractive investment. It has high current cash flow, tax shield from depreciation for individuals, positive option value from either credit or market improvement and a built in hedge against inflation, particularly if your rental increases are tied to the increase in CPI. Now is the time to invest!
*Morgan Stanley, “How the Tight Credit market is Augmenting the Investment Opportunity for Private Debt Capital”, May 2009
Gordon J. Whiting joined Angelo, Gordon in 2004 and is the founder and Senior Portfolio Manager of the firm's net lease real estate strategy.