Real Estate Forum - October 2015

ing. The second is they are doing build-to-
suit development for tenants that are look-
ing to expand. In this scenario, they can
control and manipulate multiple variables
such as construction costs, rent that tenant
will pay, tenant improvements and more.”
In turn, they can create a better yield for a
new building with a long-term tenant that
they would otherwise have to pay a market
cap rate for if they were to acquire it from
another developer.”
Sabatini says his firm’s approach and
evaluation of any new investment remains
consistent. “We look at the creditworthi-
ness of the tenant, the strength of the real
estate fundamentals as well as the fungibil-
ity of the asset and the structure of the
transaction. The way we capture yield is
over the long term, so we not only evaluate
initial yields but also look at contractual
escalations over the life of the lease. A
large part of that consideration is how cur-
rent rent compares with current market
rents and what potential upside we have
on renewals or releasing of the asset at the
end of the initial term of the lease.”
A large part of W. P. Carey’s strategy is
its global presence and capabilities,
Sabatini adds. “Our on-the-ground team
in Europe, where cap rates and lending
rates compare favorably with the US, has
been able to underwrite and secure signifi-
cant accretive opportunities for both our
owned portfolio as well as our managed
REITs. For longer-term institutional inves-
tors such as ourselves, the analysis is some-
what comparable. However, some of
today’s shorter-term investors often maxi-
mize their yield by securing shorter-term,
lower-rate debt with the idea that they will
be selling the asset before they need to
refinance. That is a much riskier proposi-
tion and one into which we do not buy.”
tion,” says Sabatini. “In cases where the
initial winner of the bid fails to close on a
timely basis on the agreed upon terms, the
seller or their representatives will often
turn to us because of the certainty of close
that we have historically delivered.”
O’Shea says the biggest issue is under-
writing the residual valuations and craft-
ing a really efficient exit strategy for these
assets. “Lower leverage and best-deal eco-
nomics. There are real estate cycles, and
they have their own historical context and
deal dynamics. We are living in unprece-
dented times, and it’s worth noting the
Black Swans that are appearing more fre-
quently in our practice.” ◆
Operators,
franchisees
and firms
that own and
occupy their
real estate are
recognizing
the current opportunity and
are choosing to structure
long-term leases and sell
their underlying real estate.”