Category: REIT (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…

By David Sobelman Jan 04, 2017

While net lease remains one of the most stable asset classes, volatility and uncertainty in the market will present challenges for the sector.

We can all breathe a sigh of relief that the worry and stress of 2016 are over and we can now focus on the year ahead. Politics, interest rates and even sports have made us all wonder what could transpire and should we even try to fathom what the coming year entails.

Every interview from our nation’s leading experts, in their respective fields, begins with an explanation on our nation’s micro and macro economies with the words, “I think.” We’ve all heard it before but give it little attention when it’s spoken. For instance, a moderator asks, “Where are cap rights going in the next twelve months?” and the expert answers, “‘I think they will (insert answer here.)” Or the moderator asks, “What will happen to commercial real estate values in 2017?” and the expert answers, “I think values will (insert answer here.)” You get the picture.

But my colleagues and I, who are asked to opine on the state of the overall commercial real estate market and how tangential and outside influences may either impede or bolster the coming real estate cycle, are wondering ourselves how to navigate our and, in some cases, our clients’ decisions in the coming year.

With the vast differences in answers to the questions we’re receiving, its clear that pinpointing a specific response is 2017’s greatest challenge. Even Hessam Nadji, president & CEO of Marcus & Millichap (M&M), who is a regular face on national television and a historical proponent of bringing into account the strength of the markets, chose to publicly sell 37,296 shares of M&M stock in the final months of 2016 at a value of roughly $2.5 million. “I think” that sale may speak volumes to what his real thoughts may be on the coming market cycle.

But what we should all consider is that net lease investments have become an industry in and of themselves. The asset class is seen as one of the most stable types of commercial real estate investment, with as little as 250 basis points of variance from the trough of the recession to the peak of the market.

Compared to other asset types, that spread is very manageable for most investors. Additionally, the International Council of Shopping Centers has begun to embrace the product type as it has instituted the N3 conference series around the country: panel discussions that highlight various regional topics focused on net lease assets.

ICSC has also established the first education and information session for continuing education (CE) credits at its annual RECon conference in Las Vegas in May. These developments could be a strong indicator that the world’s largest real estate association has now embraced the building type as it has been clearly shown that the issues surrounding that market appeal to the masses. This is drastically different than just 10 years ago when a single-tenant investment was rarely mentioned outside its core practitioners.

2017 will prove to many, in and out of the net lease industry, that even in the most drastic of economic circumstances, a single-tenant property and the growing industry that surrounds the asset type will continue to resonate as the safe haven for landlords and investors.

Few investment vehicles, real estate or otherwise, provide the risk-adjusted returns of triple-net lease properties. Add in the opportunity for an appreciating real estate asset and annual returns could far outpace anything in its peer group. But despite its stability, the sector will face its challenges.

History has shown that the hurdles of the net lease sector are not solely in the ups and downs of the market, but in attempting to precisely time the market—that is this year’s biggest challenge.

David Sobelman is the founder & CEO of Generation Income Properties (a public net lease REIT) and the executive vice president of net lease brokerage firm Calkain Cos.

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By James Nelson

NEW YORK CITY—For the December 2016 of the Full Nelson, I had the pleasure of sitting down with Victor Calanog, Chief Economist & Senior Vice President at Reis, to discuss the impact of the Presidential election on the New York City real estate market.

JAMES:  What do you have to say about the Presidential election results?

VICTOR: The downside seems to be out of the way.  When it looked like Trump was going to win the election, the DOW was down 800 to 900 points, and low and behold the market was up the next seven to eight trading days.  The markets appear to be taking a bet on greater economic activity resulting from things like infrastructure investments that tend to stimulate more economic activity, which is why the stock of companies like construction services rose anywhere from seven to 20 percent right when Trump was elected.  Then the questions is whether or not inflation will come at its heels, which is why the 10- year Treasuries have been rising quite a bit as well.

JAMES:  What impact does the election have on the real estate market? 

VICTOR: I was saying that Brexit would be a nonevent for commercial property fundamentals, as well as pricing in the US.  The US is perceived to be a safe haven on a risk adjusted basis, and superstar cities with real estate like New York and San Francisco are reaping a lot of those benefits given that they are real assets that are generating income.  That is the overall context as to why a lot of the geopolitical upheavals that are having an effect on other countries are largely leaving us unaffected.  The question has been raised, will a President that has a background in commercial real estate be good for commercial real estate?  I think it seems to be leading that way in terms of where investors are placing bets.  If there are deals to be had out there, people are waiting for more preferential tax treatments, if tax policies change.  We don’t believe we will see the end of 1031 exchanges, so that will benefit a lot real estate investments.  This is not going to lift all boats, but places like New York and San Francisco will likely benefit disproportionately.

JAMES:  Do you think that foreign interest in New York will continue?

VICTOR:  In relative terms, I suspect that if there are benefits to be had, if the economy keeps growing, if treasury rates don’t spike where the risk free rate is more attractive than riskier options, I suspect that any kind of foreign policy change and or boiling of the waters when it comes to how the US relates to the EU and other trading partners, a lot of that will probably be to New York’s benefit as opposed to its disadvantage.  For example, if there is any kind of effect on Brexit on the property markets it is that it probably rendered London as a safe haven for foreign investment as less of an option.  Where else will that kind money go?  New York.

JAMES:  We are witnessing a slowdown in sales in New York City.  And we would think that this decline was a result of a lot of uncertainty.  Now that we are post-election, how do you see sales activity for 2017?

VICTOR: Before the November elections we were not sure whether a Clinton or Trump administration would benefit or harm investments, real estate, or the climate in general. Now that we know Trump will be in office, what people are waiting for will be what changes to rules, regulations, need to be considered before making a commitment.  I think many are waiting on the sidelines until they are familiar with said rules.  Come January, all of these administrative changes will be rolled out in a more definitive way.  I suspect you will see a burst of economic activity at the start of next year, and let’s see how 2017 pans out.

JAMES:  If the 10-year treasury is up, what impact will that have on pricing?

VICTOR: If the 10-year Treasury rate rises past a certain level then you will see greater upward pressure on cap rates, and therefore possibly lower valuations.  But, spreads are still relatively healthy.  A 4 or 5 percent cap rate sounds low until you consider the fact that we were coming from a 1.8 to 1.9 percent 10- year Treasury.  Therefore, a 77-80 bps rise in 10-year Treasuries does not worry me as much.  On the other hand, if 10-year Treasuries climb to the 4 or 5 percent levels then you are looking at an investment comparison where you have got a 4-5 percent sure thing versus riskier alternatives like equities or commercial real estate.  I am not worried right now, but November 9th really pushed 10-year Treasuries in a way that the Federal Reserve could not do for two years.  It ended QE 3, it raised borrowing rates overnight in December 2014, it threatened to raise it again in December 2015, and still no real blip in interested rates until November 9th.  So here we are.

JAMES:  The overall development market is down substantially, and we believe it is a result of not having construction financing available. Do you think that Trump’s election might ease some of the restrictions and regulations on the larger banks? 

VICTOR: It does look like the Trump administration is leaning towards less of a regulatory burden not just for real estate companies, but for banks in general.  It is yet to be seen what kind of impact January will have on changes to regulatory burdens like HVCRE and a lot of the topics that construction financing folks are worried about.  The buzz word is will the Trump administration provide us with a definitive roadmap on which we can hang our hats; whether it means we are writing checks to finance new development or banking on not just short term interest rate movements, but shovels in the ground two years from now on a one million square foot office building that won’t see the light of day until 2019.  If we have that definitive road map, we will feel a little bit more confident about writing that check, and if not then we will probably hold back.

By Reuben Gregg Brewer

In a recent news updateVEREIT (NYSE:VER) was flagged as having been downgraded by a Bank of America Merrill Lynch analyst along with Realty Income (NYSE:O), National Retail Properties (NYSE:NNN), and Spirit Realty (NYSE:SRC). The logic being that there’s limited upside because of the long-term lease nature of the triple net lease business. I won’t argue that, but there’s something important to note about VEREIT compared to this trio–diversification.

The retail group

As a shareholder of VEREIT, what caught my eye about this particular news release was that it lumped the real estate investment trust, or REIT, in with the retail sector. Retail accounts for essentially all of National Retail’s portfolio, nearly 90% of Spirit Realty’s portfolio, and roughly 80% of Realty Income’s portfolio. Spirit and Realty Income both have some exposure to office and industrial, but retail is the clear driving force at each of these REITs.

VEREIT’s portfolio, on the other hand, is far more diversified. Retail makes up around 60% of the portfolio, split largely between retail stores (35%) and restaurants (24%), with office at 23% and industrial at 16%. A near term goal is to reduce the exposure to restaurants, but even without that it’s pretty clear that retail is important to VEREIT, but it has materially more sector diversification than the other three REITs with which it was lumped.

The diversification doesn’t stop there. That’s because the numbers above are for the company’s owned portfolio. VEREIT also has an asset management business that sells and manages non-traded REITs. It’s Cole division has been struggling of late, but largely because of its association with the VEREIT… or more specifically American Realty Capital Properties, what VEREIT was known as before a name change and strategic repositioning. The problem is that the repositioning came along with an accounting scandal that resulted in Cole losing key brokerage relationships even though Cole wasn’t implicated in the troubles in any way.

Although Cole isn’t much of a contributor to the bottom line today, at one point it was a more notable business. And if VEREIT can continue the improving trends at Cole, it has the potential to regain at least some of its former glory. Either way, the Cole business is yet another diversification away from retail since Cole, and thus VEREIT, earns money for managing the portfolios of Cole’s products–regardless of what’s inside.

A different beast

Clearly, VEREIT is not simply a retail triple net lease REIT. It’s much more than that and this is an important distinction that investors should be aware of. Moreover, looked at as a whole, there’s really only one REIT to which you can compare VEREIT… and that’s WP Carey (NYSE:WPC).

That said, Carey is slightly different from VEREIT because it invests internationally and VEREIT is focused on North America. So they are the closest comparisons, but if you really want diversification in the triple net lease space Carey, with roughly 37% of its portfolio outside the United States, is probably your best option. It’s also less exposed to retail. Carey’s portfolio breakdown is industrial 28%, office 25%, warehouse 18%, retail 16%, and self storage 5% (“other” rounds that to 100%). Carey’s asset management arm, meanwhile, makes up about 8% of its adjusted funds from operations. Carey is truly a different animal in the triple net lease space.

I’m not suggesting that VEREIT or Carey are better or worse than Realty Income, National Retail, or Spirit. Nor am I suggesting that any of them are more or less prepared for a rising interest rate environment. What I am trying to stress is that neither VEREIT nor Carey are your run of the mill retail focused triple net lease REIT. They are broadly diversified by property type and both have an asset management arm. That materially changes how you have to look at them, with the international exposure at Carey adding even more differentiation to the mix.

Essentially, this goes back to a key investment priority: Make sure you understand what you own.

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Skyscraper buildings made from one hundred dollar money banknotes on cloudy background.

By Allen Kenney

In the the latest episode of The REIT Report: NAREIT’s Weekly Podcast, Mike Grupe, NAREIT executive vice president for research and investor outreach, offered his perspective on the implications of real estate being elevated to a new headline sector under the Global Industry Classification Standard (GICS).

Equity REITs were moved from the financial sector to the new real estate sector at the close of trading on Aug. 31. They were joined by a number of real estate management and development companies. Overall, Equity REITs account for more than 95 percent of the equity market capitalization of the new real estate sector.

Grupe speculated that the greatest effect of the move on REIT investment would be to provide a greater level of visibility for real estate’s role in the economy and for publicly traded real estate companies.

“That visibility is important,” he said. “Up until now, REITs were embedded in the financial sector, but the financial sector also includes commercial banks, insurance companies, finance companies and other types of diversified financial companies. This change brings [REITs] to the forefront and establishes them among one of the highest 11 headline sectors of GICS.”

As a result, Grupe said, real estate will become “a much more prominent part of the conversation” for investment decision makers as they design portfolio strategies and set asset allocations. Grupe also noted that separating real estate away from the financial sector should mean that REIT stocks are more likely to trade based on underlying real estate fundamentals, as opposed to the economic factors that tend to drive financial stocks.

“I think that will create a situation in which real estate companies will be free of those other factors,” he said. “We’ll see that the valuations of the stocks and the trading activity will reflect more directly the actual developments in the real estate sector.”

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