Category: Institutional Quality (5)

By John Egan, National Real Estate Investor

The investment signals Buffett’s confidence not only in Store, but also in net lease properties.

When billionaire investor Warren Buffett makes a deal, people take notice.

Such is the case with the recent purchase by Buffett’s conglomerate, Berkshire Hathaway, of a 9.8 percent stake in Scottsdale, Ariz.-based Store Capital Corp., a net lease REIT. The investment—in the form of 18.6 million privately-placed shares of common stock valued at $20.25 apiece—totals $377 million. Berkshire Hathaway is now Store’s third largest shareholder.

The investment signals Buffett’s confidence not only in Store, but also in net lease properties, says Ralph Cram, president and manager of Envoy Net Lease Partners LLC, a real estate finance company specializing in single-tenant, net leased assets. The cash infusion underscores the fact that the triple-net sector has hit bottom and is climbing back, Cram adds.

“We have seen buying activity of individual properties pick up significantly over the past 45 days,” he notes. “I believe that long-term rates falling recently has helped the triple-net market as well. So the worst has passed for now.”

The Buffett deal brings “favorable attention” to the net lease market, according to Michael Knott, managing director with Newport Beach, Calif.-based research firm Green Street Advisors. At Green Street, he tracks Store and competing net lease REITs Realty Income Corp. and National Retail Properties.

Looking solely at Store, Knott says it’s “a value investor haven” for Berkshire Hathaway. Why? He cites three reasons:

  • Buffett’s company bought its stake in Store at just 11x earnings.
  • Store represents “a safe earnings stream” backed by a diversified portfolio of properties operated by a diverse group of tenants.
  • Store’s management team enjoys a lengthy track record of success. This is the team’s third REIT, with the previous two REITs having been sold.

“The deal suggests there is value in Store’s unique platform in a fragmented net lease industry, and in management’s demonstrated history of generating favorable results for shareholders,” Knott says.

According to Knott, Store carefully evaluates and monitors its investments, and produces solid returns by taking “intelligent risks” with its underlying real estate.

On the day Buffett’s investment was announced, a number of publicly-held shopping center and mall REITs benefited from a bounce in their stock prices. So will the Buffett deal have a more sustained ripple effect on those REITs?

Read more…

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Ray Mahlaka | 12 August 2016
It’s no secret that income-chasing South African investors have been fervent backers of offshore property stocks.

The appetite for hard currency earnings has grown in recent years, with the tally of offshore property companies on the JSE’s more-than-R400 billion real estate sector reaching 15.

Investors will soon have three more offshore property companies to choose from, including Polish-focused GTC Group and Echo Polska Properties (EPP), and UK shopping mall developer Hammerson.

Already, offshore exposure in SA’s listed property sector is about 48% (end of June 2016) compared with no offshore exposure ten years ago, the latest figures from Stanlib show. GTC Group, EPP and Hammerson might garner strong support, if the five-year trend of offshore property stocks outperforming SA-focused stocks is anything to go by.

GTC Group – which owns a €1.3 billion (R19 billion) property portfolio of shopping malls and office properties in Poland and other South Eastern Europe regions such as Serbia, Romania, Croatia and Bulgaria – is planning to list on August 18.

The Warsaw Stock Exchange-listed company won’t issue new shares, as it’s embarking on an inward listing. GTC CEO Thomas Kurzmann says the company has been eyeing South Africa, given how institutional investors have been infatuated with Poland in the past two years.

“The listing will enable us to enlarge our shareholder base and give South African investors exposure to Central and Eastern Europe (CEE) and South Eastern Europe (SEE) regions,” Kurzmann tells Moneyweb.

The company has three development projects (two office properties and a shopping mall) and upon completion will add about €1 billion (R14 billion) to its property value. It also owns land for future development.

Echo Polska Properties

EPP, which is 49.9% held by sector heavyweight Redefine Properties, is planning to list in September. The secondary listing of Echo on the JSE’s main board will coincide with its primary listing on the Luxembourg Stock Exchange.

EPP is also looking to diversify its sources of capital with the listing and provide shareholders with access to Poland through its €1.2 billion (R17 billion) portfolio of largely retail properties.

EPP’s CEO Hadley Dean says the company has the capacity to grow its property portfolio to about €2 billion (R29 billion) in the coming years, given its pipeline of properties. Echo has a 70% interest in a shopping mall development and has options to buy ten properties under developments in Polish cities such as Krakow, Wroclaw, Gdansk, Katowice, and Lodz. Poland’s economy is widely considered to be performing better than its European peers; figures by EPP show that its economy grew by 28% between 2007 and 2015.

Hammerson

The third offering to the market will be London Stock Exchange-listed Hammerson, which owns shopping malls and retail parks in the UK, France and Ireland, with a property portfolio valued at £9 billion (R155 billion). The company already enjoys support from South African investors, who hold about 10% of its stock in London.

Says Ian Anderson, chief investment officer at Grindrod Asset Management: “Hammerson’s inward listing makes a lot more sense than some of the other listings we’ve seen in the sector, given the fact it already has a large SA shareholder [base] on its register.”

Hammerson will join the ranks of its UK-focused peers on the JSE, such as Capital & Counties, Capital & Regional and Intu Properties. Given that Hammerson has a market capitalisation of £4.1 billion (R70 billion), it’s likely to be included on the JSE’s Top 40 Index.

Catalyst Fund Managers portfolio manager Zayd Sulaiman says the weakness of the rand has prompted South African investors to increase allocations into offshore property stocks. Given the stellar performance of rand hedge stocks in recent years, Sulaiman advises that investors look at long-term risk-adjusted total returns when judging the investment case of offshore property stocks

 

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Our goal is to introduce a “new asset class” being passive real estate investment and an opportunity for US and Foreign investors to invest in institutional quality commercial real estate, underwritten by Fortune 500 companies, Government and other corporate tenants in the United States.

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May 18, 2016 | Ryan Boysen | Bisnow.com

The fundamentals of the national economy and the specifics of the current DC development boom have combined to make this a great time to be in the triple net lease game in DC, according to Calkain Co’s CEO Jonathan Hipp (above on left with NYU’s Dr. Sam Chandon).

He tells us triple net lease deals continue to prosper in all sectors, but he’s noticed investors from all over the country, and sometimes even internationally, are willing to go the extra mile for the right urban retail deal in the right market and pay an extraordinary cap rate. And DC in particular is a very desirable market.

Jon says investors have been attracted to net lease deals lately because they function almost like a fixed income asset, “real estate wrapped in a bond,” as he calls it, but often deliver a higher return. Net lease deals offer investors a way to de-risk their portfolio by switching from active to passive investing, and the recent volatility in the stock markets has made those types of investments particularly attractive, he says.

On top of that, the fundamentals of the national economy continue to make for a strong outlook, with the statistics for new jobs, income growth, labor participation and unemployment claims better now than they were in 2006, according to a summary of remarks delivered by Sam, an economist and the dean of NYU’s Schack Institute of Real Estate, at a recent event hosted by Calkain.

Read full article at Bisnow.com

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FEBRUARY 19 BY  PROPERTY METRICS

The NNN Lease, often just called the triple net lease, is a common lease structure used in commercial real estate. Despite the popularity of the NNN lease, the triple net lease structure is still commonly misunderstood by many commercial real estate professionals. In this article we’ll take a deep dive into the NNN lease, dispel some common misconceptions about the triple net lease, and then finally we’ll tie it all together with a clear and concise example.

What is a Triple Net (NNN) Lease?

First of all, what exactly is a triple net, or NNN, lease? A triple net (NNN) lease is defined as a lease structure where the tenant is responsible for paying all operating expenses associated with a property. The triple net or NNN lease is considered a “turnkey” investment since the landlord is not responsible for paying any operating expenses. With that said, in order to fully understand the NNN lease you must first understand the spectrum of commercial real estate leases.

The Spectrum of Commercial Real Estate Leases

All commercial real estate leases fall somewhere along a spectrum with absolute net leases on one end and absolute gross leases on the other end. Most leases fall somewhere in the middle and are considered to be a hybrid lease.

When most people talk about a triple net or NNN lease, they are usually thinking about an absolute net lease. However, just because a lease is called or labelled an NNN lease, does not mean it’s actually an absolute net lease. Often a lease will be called a “triple net lease” for convenience when in fact it is not.

For example, when a building is brand new the tenant may indeed be responsible for funding replacements such as the roof or HVAC systems as they wear out over time. However, on older buildings a lease can often be called triple net, but actually require the landlord to fund these capital expenditures over time, rather than the tenant.

The most important thing to remember when working with commercial real estate leases is to ALWAYS read the lease. The only way to truly understand the terms and conditions of a lease is to actually read the lease. Simple labels like triple net, full service, or modified gross, which are commonly used by brokers and landlords, will often conflict with the actual terms of the lease.

What the NNN Lease Does Not Include

Even if your lease is a true absolute net lease, a common misconception is that even a true absolute net lease covers ALL expenses associated with a property, which is not always the case. While a true absolute NNN lease with a strong tenant can be thought of as a turnkey commercial property from the landlord or investor’s perspective, even an absolute net lease has some expenses that won’t be covered by the tenant(s).

For example, it’s rare for an NNN lease to cover the accounting costs charged by the landlords CPA or legal costs charged by the landlord’s attorneys when drafting or reviewing documents. While these costs are usually small relative to the purchase price of a property, they are nonetheless not typically covered in a standard “NNN lease”.

Triple Net Lease Investment Risks

A common misconception with triple net lease investments is that they are almost risk-free. While triple net investments do offer several advantages, there are still several risks that should be taken into consideration. The primary advantages of triple net lease investments are that you get a predictable revenue stream due to the long-term leases and pass-throughs in place, and you also get a relatively hassle-free investment due to the low management requirements.

While these are compelling advantages, triple net leases also do come with several inherent risks. First, because most triple net lease investments are for single-tenant properties, tenant credit risk is important to understand. For example, not many today doubt the strength of a triple net Walgreens investment since the lease is guaranteed by the parent company, which is publicly traded and financially strong. On the other hand, it is very possible for financial strong and publicly traded tenant to fall out of favor over the term of the lease and ultimately go bankrupt. Since single tenant triple net properties are either 0% vacant or 100% vacant, this should be taken into consideration.

Another risk to consider is the risk of re-leasing. A lot of triple net investment properties are sold towards the end of a longer term lease, shifting the risk of re-leasing the property to the new owner. If the new owner does not have this skillset or a strong team to handle this, then this could present considerable tenant rollover risk.

Assessing Tenant Credit Risk in a Triple Net Lease

One important component to take into account when analyzing a triple net lease investment property is understanding the credit risk of the actual tenant(s). After all, a lease is only as strong as the tenant behind it, so analyzing the financial statements of the tenant on the other side of the NNN lease is critical in understanding downside risk.

Many single tenant triple net lease deals involve publicly traded companies such as Starbucks, Walgreens, or Arby’s. In this case it’s easy to pull up credit ratings on the companies bond issues and to also read stock analyst reports.