have no cap, “we think sale-leasebacks
are going to become an even more
attractive alternative to debt financing
than they have been historically.”
the construction and leasing costs asso-
ciated with converting the facility into
an R&D headquarters for the Astellas
Institute of Regenerative Medicine.
Fox points out the company pioneered SLBs in the early 1980s. “I’ve
been doing this for 16 years, and looking at all of the investment types, there’s
no better place to earn high current
cash yields relative to the risks we take
on the real estate and the credits behind
them than doing net lease and, especially, sale-leasebacks,” he says.
Although the current tenant had
come to regard the Westborough facility as less critical to its operations than
it once was, the lease wasn’t due to
expire until 2026. “The passive
work, but there’s a whole world of
other opportunities out there—let’s
figure them out.’ You can’t do that
unless you’re digging in with tenants,
onsite, understanding what’s going
on physically at these properties.”
He cites the advantages: “We’re able
to structure our own deals, get long
lease terms and favorable bumps, get
covenants within these leases, have a lot
of access to senior management and
structure an investment that provides a
lot of downside protection. It provides a
lot of upside as well, in the form of
inflation-based increases, appreciation
in the real property and also in the way
we manage these assets.”
“
We wanted to grow our
AIRM won’t be the only tenant of its
type on WPC’s tenant roster, but healthcare and pharma users represent just
4% of its portfolio. That’s not an unusually small percentage, either: WPC’s
largest tenant, German retailer Hellweg,
represents just 5.3% of its base rent. By
design, the portfolio isn’t heavily
weighted toward any one industry.
balance sheet, and the
best way to do that is to
focus on achieving the
lowest possible cost of
capital. Investors are going
“Net lease needs to be diversified,”
says Fox. “It provides protection
against any downturn in a particular
geography, industry or asset class,
but it also provides us with opportunities to allocate capital to where we
see the best risk-return at that point
in time. We can sell into strength and
then buy where we see opportunity.”
The company takes “a proactive
approach” to asset management, Fox
says. “We’re always looking for opportunities to expand or reinvest in our
tenants and buildings. Expansions
provide us a way to put more capital to
work, typically at above-market yields;
these are truly off-market opportunities since we own these assets.
to value regular cash flows
from rental income more
highly than the episodic
cash flows associated
with the investment
“We are increasing the criticality of
these assets to tenants since we’re both
modifying or building to their specs
and modernizing the buildings as
well,” he continues. The end result is “a
higher-quality piece of real estate” in
WPC’s portfolio.
management business.”
JASON FOX
CEO
The retail story in 2017 has borne
out WPC’s diversification thesis. Retail
assets comprise “a very small part of
our portfolio,” Fox says. “Most of that is
in Europe, and mainly with tenants
that are fairly well insulated from
e-commerce disruption. But the rest of
the net lease retail world has really suffered. We’re seeing bankruptcies in
retail and their cost of capital has deteriorated because of those risks.
Generally, we just think the US has
been over-retailed, and e-commerce
will magnify those effects.”
Gordon characterizes the phrase
“proactive asset management” as a
catch-all for the company’s approach.
“The diversified nature of our portfo-lio, and its scale, is ideally suited to this
approach,” he says. “What we mean by
‘proactive’ is discrete transactions to
effect change on our existing assets.”
His team will complete between 100
and 150 of these deals in any given year.
approach would have been to sit back
and clip coupons for eight years and
maybe think about re-tenanting with
another office user in seven-and-half-years,” Gordon says. But that approach
“leaves a lot of value on the table.”
Brick-and-mortar retail’s challenges
have been evident for some time; a
newfound concern is the prospect of
the Federal Reserve taking a more
hawkish approach to the federal funds
rate this year. “The Fed has been talking about perhaps even increasing the
number of rate hikes they’re going to
do this year, mostly as a result of
expected inflation increases,” says Fox.
Those transactions could range from
a fairly routine renewal to February’s
triple-net deal signed by a subsidiary of
Tokyo-based pharmaceutical giant
Astellas for WPC’s 251,000-square-foot
office facility in the Boston suburb of
Westborough, MA. The 18-year lease
will commence in September, after the
current tenant—a leading consumer
electronics brand—vacates the property. WPC will cover up to $56 million of
Further, the shortage of life sciences
space in Greater Boston presented an
opportunity. Gordon’s team negotiated an early lease termination with the
current tenant in Westborough, leading to “a huge pickup in rent” once
AIRM moves in.
Given its creation of additional
shareholder value and alignment with
an investment-grade tenant, the
AIRM deal has “all of the components
we look for, and we’re seeking more
like it,” Gordon says. It’s a good example of saying, ‘The status quo might
Here again, though, WPC’s
approach serves as a bulwark. “One of
the ways in which we’ve differentiated
ourselves quite well from our peers is
that almost 70% of our leases are
indexed to inflation,” Fox says. “I
think the entire investment community underappreciates that fact about
our rent structure.” Because of the
high allocation of inflation-linked
rent bumps, he says, “In 2018 we
should outperform on a same-store
basis relative to our peers.” ◆
www.globest.com/realestateforum
MARCH/APRIL 2018 REAL ESTATE FORUM 21
