AYGOREN: Where do you see the cap rates and prices now for
the properties that you’re going after?
SCHORSCH: Cap rate compression is something that’s talked
about often, yet misunderstood. As a company, we’re focused on
building portfolios on a granular level, which gives us our competitive advantage. Most of these deals are being sourced off-market;
therefore we don’t see much competition. If anything, we’ve seen a
15% to 20% uptick in the amount of product coming to market,
new tenants and new credits as corporations continue to look to
reposition their balance sheets, and that creates a great buying
opportunity. There may be compression on the ask of a particular
deal, but not where the deals are getting bought.
McDOWELL: Cap-rate compression in the REIT sector is a little
overblown. Every broker you talk to is going to tell you how the cap
rates are compressing very heavily. But our average cap rates over the
past few years have been reasonably steady. They’ve obviously come
down in some areas, but the cost of financing is much cheaper. In
2006 and ’07, we were buying assets at 7.5% and 8% caps, and the
cost of debt was 5.5%. So your net positive spread was 100 to 150 basis
points. Now, you can buy that same asset, even at 7.25%, but your
financing cost is 3% or 4%. Your net positive spread is very wide.
DuGAN: The flip side of that, though, is what makes the net lease
industry almost unique. The business is very scalable and there are
more assets available when pricing becomes more attractive. So as
valuations have gone up, transaction volumes have also gone up
because there are more willing sellers at this point in the cycle. If
we go back to ’09, there was no capital available, but there were no
willing sellers, either, and there was very little sales volume. At this
point it’s still at an attractive place as an investor. There’s a lot of
competition, but there are a lot of assets on the market, too.
the REIT sector is
a little overblown.”
SULE AYGOREN: There’s been so much increased
investor interest in net lease. How has the competitive playing field changed?
GORDON F. DuGAN: A good example of just where
the net lease industry is would be to look at a roster of
a net lease conference, and see how many attendees
there are. I remember wondering if there was even a
need for a net lease conference a few years ago, and
now it’s full of a variety of different players. [For the
record, our 2013 RealShare Net Lease Conference greeted
roughly 300 attendees.]
PAUL H. McDOWELL: You need to consider that
there are two components of investors. There’s the
public REITs and those we compete against to buy
product. That’s obviously driving cap rates down;
there’s competition to buy product. The other component consists of investors who are interested in investing in the
public companies. For a long time we faced significant competition
to buy assets and a lack of investor interest in our stocks. Now we’re
facing significant competition to buy assets, but we’re also seeing
quite a bit of investor interest in our shares, which is helping to
expand our multiples and drive our cost of capital lower. It’s making public REITs more competitive in the market than we were a
couple of years ago.
NICHOLAS S. SCHORSCH: To add a third component, we’ve also
seen much growth in the non-traded REIT space. This expanded
interest has grown the industry to an expected $18 billion in non-traded REIT sales this year. Investors that are looking for the
income that the public REITs have traditionally provided are now
finding more comfort in the non-traded space, where they don’t
have to deal with the volatility of today’s markets. So the industry
revolves around providing investors with consistent, durable
income in a market where safe, yielding assets are very scarce.
The non-traded REIT is tomorrow’s publicly traded REIT. We
view non-traded REITs as incubator companies with the ability to
be taken public or merge with a public REIT or institutional
investor such as a pension fund. The key to this space is that the
portfolios must be constructed correctly from the beginning with
the exit in mind.
PAUL H. MCDOWELL
“Surprisingly, there’s been a low level of sale-leaseback activity the past few years.”
Gramercy Capital Corp.
AYGOREN: What types of sellers are the most active? Are you
seeing a lot of sale-leaseback opportunities or other property
owners selling their assets?
DuGAN: We see more property owners selling their assets. They
bought something, it may have appreciated and certainly, if they’re
managing institutional money, they have a finite time frame for holding the property. So now is a good time for them to sell. We see a
decent amount of activity there. Surprisingly, there’s been a low level
of sale-leaseback activity the past few years. Pre-crisis, where companies like Spirit bought the big Shopco portfolio, there were quite a
few more sale-leaseback opportunities. That could change, though.
RICHARD J. ROUSE: Volume is building, probably because of the
lower cap rates. You see companies like Walgreens, which has its