Trends Watch: Triple Net Lease Investing
By Elana Margulies-Snyderman and Edward LaPuma
View the article from April 21, 2022, at EisnerAmper: Trends Watch
EisnerAmper’s Trends Watch is a weekly entry to their Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms.
This week, Elana talks with Ed LaPuma about the outlook of sale-leaseback investing.
What is your outlook for triple net lease investing?
We expect true sale-leaseback (what we refer to as “primary market transactions”) and investor-to-investor trading of net leased investments (“secondary market transactions”) to continue to gain in popularity in the coming six-to-18 months. This is based on the belief that investor demand for downside protection increases at times of uncertainty. The war in the Ukraine, a rapid rise in interest rates, and the return of inflation have increased volatility in more traditional economic markets. Meanwhile, the sale-leaseback provides contractual income, capital preservation, and inflation protection. Importantly, an increased corporate understanding of the sale-leaseback will drive primary market transactions as companies increasingly recognize that investment in their core business is rewarded more highly than tying up their capital in real estate.
Although the sector’s popularity will remain high, interest rates will play a significant role in pricing. With the Federal Reserve’s recent approval of a 0.25 percentage point rate hike, the first increase since December 2018, we naturally expect cap rates to begin trending higher across the board as both the ability to finance acquisitions becomes more expensive and investors begin to compare yields to other structured products.
Where are the greatest opportunities and why?
Currently, our firm believes the best opportunities can be found: 1) investing outside of the United States; 2) with our existing tenant-clients; and 3) by partnering with developers in build-to-suits.
Investing outside the U.S. provides significant opportunity without a commensurate level of competition. The reduced level of competition is a result of the fact that international markets introduce several variables/risks not found when investing in the U.S. Specifically, tax, legal and currency add complexity. And, on top of these issues, culture is important. In short, while opportunity exists, it is expensive and difficult to break into international markets.
A more easily exploited opportunity sits with our current tenant-client list. Working with them to expand existing facilities and/or participate in follow-on sale-leasebacks is a win-win. Having already well-established comfort with both the credit and real estate allows us to reduce its already expeditious underwriting and closing timeframe and provide our tenant-clients with the efficiency and surety of close they have come to expect. Importantly, approximately one-third of our investments are with partners from other transactions. As examples, we are 1) currently wrapping up an expansion of a food grade-facility in Wisconsin that has doubled its total square footage, 2) kicking off the funding of an expansion of an automotive part manufacturing facility in Georgia, and 3) underwriting the potential expansion of a laboratory facility soon to be acquired in Kansas.
Finally, we have cultivated and benefited from our relationships with developers. We provide our developer partners with secure and trustworthy capital to allow either the funding of construction or take-out capital upon completion. This allows developers the ability to efficiently manage their own capital in the pursuit of new opportunities. Presently, we are working through a six-property pipeline for two different tenants with the same developer partner.
What are the greatest challenges you face and why?
While the investing landscape has become more crowded with new entrants, we find that our relationships with our existing corporate clients, sponsors, developers, and other intermediaries provide ample access to both on- and off-market transactions. Unsurprisingly, we find that over 30% of the transactions we source come from repeat transactions with an established relationship.
What keeps you up at night?
Not unlike investors across many asset classes, the recent spike in inflation, interest rate response by the Federal Reserve, and the current war in Ukraine keep us eager to remain ahead of the curve. These issues are especially concerning as they may relate to a potential recession within the next 12-to-24 months, as seen in similar past economic environments. With GDP growth being called into question, this both increases risk as it relates to the credit quality of existing tenant-clients and creates an opportunity set as alternative capital sources for potential tenant-clients, such as sale-leasebacks, take center stage in lieu of traditional bank financing.
The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.
About LCN Capital Partners
Founded in 2011 by Edward V. LaPuma and Bryan York Colwell, LCN has assets under management in excess of $6.0 billion across its seven funds. Headquartered in New York City, LCN also has offices in London, Amsterdam, Cologne, and Luxembourg.
LCN Capital Partners is a recognized leader in the primary sale-leaseback and build-to-suit markets, where investments and leases are directly originated with corporate users of mission-critical real estate. LCN delivers a long-term solution for its tenant-clients by providing a non-bank capital resource, efficient monetization of on-balance sheet real estate, continued operational control of key assets, enhanced financial metrics, and potential tax benefits. In addition, LCN’s investing partners benefit from the long-term and inflation-protected distributions that it supplies. For more information, please visit: https://www.lcnpartners.com/.