It seems that the bond
market for corporate
credit has recovered faster than
the bank system is recovering.”
STEVEN ORCHARD
George Smith Partners
$5 billion-plus in 2010. The concerns will be twofold, he says: “One,
continued resiliency and improvement in the corporate bond market, to the good, and two, whether we endure a spike in US
Treasury yields, which would be to the bad.
In general, the net lease sector is not
immune to the difficult financing environment faced by the broader commercial real
estate market. “All the lenders are cherry-picking the deals because they can,” observes
David Akeman, director of the capital markets
group of Tulsa, OK-based Stan Johnson Co.
That said, many in the net lease market
make the argument that such properties are
faring better than others in terms of being able
to secure debt. The old adage in the investment world that cash is king still holds true, but
net lease players are noting that when it comes
to getting debt, “cash flow is king.”
Are net leases more in favor with lenders
today? “I think they have to be. Net leases are
cash flow generators,” says Gordon DuGan,
president and CEO of New York City-based
W.P. Carey & Co. “Now, more than ever, no
lender wants to hear a story that isn’t based
on existing cash flow.”
Orchard concurs: “Net lease is a much
more liquid market than other alternatives”
in terms of property types. “Credit and cash
flow is so much more important than it has
ever been, and it’s really limiting the kinds of
projects that can be done.”
W.P. Carey—which typically buys sale-leasebacks that are not investment-grade tenant properties—has had success securing
debt financing and refinancing dollars during the past year. During a roughly one-year
period through early September, the company had closed on about $380 million of
non-recourse debt financings and refinancings for properties owned by itself and its
non-traded REIT affiliates.
“I’ve been surprised at our ability to get
debt,” DuGan admits. “At the beginning of
March, I would have said nobody’s going to
lend a nickel for the rest of the year.”
But Carey’s success may be more an exception than rule. Most in the net lease market
will agree that without an investment-grade
tenant and a truly long-term lease, debt
financing is significantly more difficult to
come by today.
What’s considered a true net lease deal
today has reverted back to the historical notion, and not what might
have been dubbed “net lease” when the market looked like it was
going nowhere but up and debt was cheap and easy. True net lease
deals are “long-term, investment-grade deals,” says Net Lease Capital
Advisors’ president, Bruce MacDonald. “If you have a five-year term,
that’s not really a net lease deal. That’s financed as real estate.”
And the bond market is not a panacea, notes Orchard, given
that it provides CTL financing for a limited world of properties.
Even within investment-grade tenants, many bond investors are
opting to buy in the A to AAA credits and are shying away for the
lesser end of the investment-grade spectrum, he says. As Jonathan
Hipp, president and CEO of Reston, VA-headquartered Calkain
Cos. puts it, “It’s a flight to quality.”
As a result, even if it is faring better than other asset types, the
To learn more about our real estate advisory services and investment opportunities, visit
usrealtyadvisors.com or contact Jack Genende, David Grazioli or Matt Snyder at 212.581.4540.
