West Virginia Market Represents High Returns and Stable Demand

An analysis of West Virginia’s most recent demographic data reveals a State that is stable and predictable. The market exhibits the following characteristics:

• The highest rate of home ownership in the nation
• #7 ranking for the percent of population living in the state of birth
• Population growth of 0.6% between April 2000 and July 2009

The slow, steady growth in West Virginia should be viewed not as inhibiting investment but as a variable in one’s market assessment that can be easily quantified. As a net lease investor, this should provide confidence that with careful analysis, any fluctuations in this growth factor should not be enough to jeopardize your investment’s success.

For certain net lease tenants that target lower income households, such as Dollar General, this is especially auspicious. West Virginia’s high rate of home ownership creates a large base of Dollar General’s target demographic that is largely immobile. This strong demand will likely mean continued growth of net leased tenants like Dollar General and similar tenants in the West Virginia Market.

It is no secret there is a scarcity of high quality inventory in primary markets. This is leading to a “downward compression of cap rates across all sectors.” If this trend continues, the strength of these markets will no longer justify the inflated price tags and slim yields of the assets themselves. Opportunistic net lease investors will need to begin looking beyond these supply constrained markets to have any chance of earning a superior risk-adjusted rate of return.

West Virginia net lease investment represents the opportunity to realize property value appreciation while still delivering a secure stream of cash flows. The State benefits from the same creditworthy tenants that make up the nation’s primary markets and West Virginia banks enjoy the eighth highest ROA in the country. For the willing investor, there should be plenty of opportunities that have been overlooked in this thinly traded market.

Industrial Assets – A Shifting Investment Paradigm

It has been estimated that as much as $97 billion will be invested in the US commercial market by global investors in 2011. DTZ, a British-based real estate services firm, stated this represents a 54% increase from their December 2009 prediction. In short, growing confidence in real estate investment will pull investors off the bench – leaving the industrial sector poised to benefit. However, investors scrambling to find viable and profitable net lease investments are running into a short term problem. There is a lack of both current supply and new industrial construction in the pipeline.

Investors want quality, top rated tenants in the strongest urban markets. These investments are increasingly rare. However, “Mission Critical” net lease industrial assets are available - investors may just need to rethink their criteria. These properties often have existing permitted industrial uses, are located in and around quality commercial markets, and provide goods and services unique to their businesses. The real values of these investments are not only the tenant, or even the property, but the permitted use so critical to the nature of the business. Sellers are willing to sign long-term leases at higher returns than current market rates because these properties are so critical. Increasingly, investors are overlooking traditional analytics and considering these investments. With intelligent investment they can provide a highly profitable return.

Another strategy worth a long look is value-added investing. As infill land becomes scarce and land prices rise, this opportunity makes increasingly more sense. According to Marcus & Millichap, last year approximately 30 million square feet of industrial space totaling $2 billion was sold for redevelopment or demolition nationwide.

Value-added investing provides an opportunity for 3^rd party or sale-leaseback owners who are able and willing to renovate or retro-fit their properties. Often these buildings are structurally sound with adequate ceiling heights but need functional changes such as more loading docks, upgrades of fire protection systems, lighting, HVAC, or internal reconfiguration. A quality rehab in the right location can command the same rates as new construction in outlying, less desirable locations. In addition, rehabbed properties in the right location can double their pre-renovation value.

Mature buildings and mature industries provide an opportunity for buyers and sellers to think creatively in making their real estate NNN play.

W. Douglas Wright | Director- Industrial
CALKAIN COMPANIES, INC.

Wild Wild Wawa

As a relative newcomer to the net lease market, Wawa convenient store gas stations are one of the hottest sought after triple net lease investment properties in the market today. With an implied credit rating of BBB- / outlook Stable, most investors understand the credit-worthiness of this privately owned company, which is considered one of the strongest convenient store operators in the country. In 2009, Wawa was ranked No. 55 in Forbes’ America’s Largest Private Companies list. Wawa currently operates more than 570 convenient stores throughout the mid-Atlantic, 270+ of which include gas.

Most Wawa net leases properties offer an investor long-term security and absolutely no management responsibilities in the form of a 20-year primary term nnn ground lease. These ground leases provide additional investment security given the nature of the real estate investment made by Wawa’s real estate team, including the Wawa Engineering and Construction Department which is responsible for the design, engineering and construction of all new stores and remodels. As with any ground lease investment, a landlord should be comforted by the fact that the tenant, in this case Wawa, has made a significant capital investment in the construction of the building, which at the end of the lease will become property of the ground lease owner.

Also driving the demand and value of Wawa triple net lease properties is the strong real estate fundamentals of the property sites. Wawa’s real estate team has specific site select criteria, which focus on key trade area location characteristics. Wawa net lease properties are typically located at signalized corners and out-parcel/pads of shopping centers with good visibility and ingress/egress. Ideal trade area characteristics include adequate population and minimum traffic counts of at least 25,000 vehicles per day. Sites should be located on high-volume intersections near other commercial traffic generators.

Pros

• Implied BBB- credit; investment grade
• Strong real estate fundamentals
• NNN ground lease structure

Cons

• Private company
• Gas pumps raise environmental concerns
• Ground lease provides no depreciation on land