| NET LEASE FORUM |
Volume 6 - Number 10 | May 20, 2008
|
|
New York City—In a departure from its usual strategy of utilizing unsecured debt, locally based iStar Financial Inc. is borrowing $960 million of first mortgage financing backed by a portfolio of 34 single-tenant office, R&D and industrial properties in its corporate tenant lease portfolio. The cross-collateralized, cross-defaulted, interest-only loan is being provided by GE Real Estate and was arranged by Holliday Fenoglio Fowler LP’s John Fowler, Janet Krolman and Greg LaBine.
The loan has a three-year term, is repayable in 20 months and has a floating rate, with a Libor margin “in the mid-300 range,” iStar CFO Catherine D. Rice said during the company’s May 2 first quarter earnings results conference call. The assets backing the loan have a book value of $1.1 billion and an appraisal value of $1.6 billion; roughly half of the portfolio’s 11.9 million sf is leased to investment-grade tenants.
The REIT has already received $810 million of the proceeds that are being used to help pay off remaining interim debt related to its purchase of Fremont Investment & Loan--and expects the remainder to be funded before the end of the second quarter “As you know, most real estate lenders today are looking for 10-year, locked-out capital,” Rice says. “And given our unsecured debt strategy I think that was less appealing to us. So this loan, a three-year loan with a lockout for only 20 months, I think was very attractive in this particular market.”
“Historically, iStar would have obtained financing on an unsecured basis by utilizing the company’s BBB, investment-grade credit rating,” HFF’s Krolman says. “However, the current market conditions are such that it was more efficient and cost effective to finance a subset of their existing single-tenant portfolio on a secured basis.”
Separately, iStar recently completed a $53-million mortgage financing on a small pool of four corporate tenant lease properties in its AutoStar portfolio. The pricing on that financing is 165 basis points over Libor, Rice said.
“We’re really trying to position these as shorter-term financings,” Rice adds, “so that when credit markets become more attractive we can repay them without expecting significant prepayment penalties.
|
|
|||||||||||||||||
David Steinwedell joined Austin, TX-based AIC Ventures LP as managing partner of acquisitions at the beginning of the year. NET LEASE forum recently spoke to Steinwedell, who was previously chief investment officer at Wells Real Estate Funds, to discuss AIC’s net lease property investment focus, including its recently launched seventh fund.
Q: Tell us a bit about AIC Ventures’ history. Have sale-leaseback investments always been its focus?
A: Yes, the company has been in existence since 1990. It has more than $750 million of assets under management right now. We’re just finishing up our sixth find, which is dedicated to long term sale-leasebacks in the office and industrial sectors. And we’re kicking off our seventh fund. We’ll probably have our first acquisition for the seventh fund this quarter.
Q: My understanding is the company’s focus is on small and middle-market companies. Is that correct, and why that focus?
A: It’s where there’s a need. There are a number of companies that have been concentrated on the larger, investment grade tenants, but we’ve found our niche in working with the middle market companies because they tend to be ignored by the big players. In the market today with the credit crunch, they’re the ones that have been hit the hardest. They used to be able to borrow on a pretty healthy basis, but they can’t now. So they can use the sale-leaseback to access capital and fund their business expansion or retire debt and do a variety of things that are very beneficial to the company.
Q: Tell us about AIC Ventures’ capital sources.
A: We raise capital from high-net worth individuals and we have about 400 investors who are currently active in one of our funds. We have a number of investors who will invest in each fund, and then we find new investors who want to join up with us.
Q: Is the sixth fund, NL Ventures VI, fully invested now?
A: That will end in the neighborhood of $340 million or $350 million, and if you count what we have under control, we’re at about $320 million. So we can do a couple more deals in our sixth fund, and then our seventh fund will be about the same size. Our average deal size is about $10 million, so we’ll end up in the 30 to 35 number of transactions range for each fund.
Q: Will the seventh fund have a similar focus on office and industrial properties, or is there anything different about its target acquisitions?
A: No, it’s staying the same--office and industrial, generally the continental United States, major and secondary markets. We will go to the small side of the secondary range, too. And the tenants that we work with, we need to understand how their business operates, and we have people within our organization who have extremely strong backgrounds in underwriting corporate credit and they can really dig in and understand the needs of a private company and how we can structure something to meet their needs.
Q: The company had a record first quarter, with 10 deals totaling $100 million of investment. Do you expect this pace and volume of investment to continue?
A: It may increase. Our deal flow is coming from a broader and broader number of sources, and a lot of that is driven by the fact that we have complete discretion over our capital. There are no financing contingencies. We don’t need to have lender approval or investor approval. So we’re seeing a lot of traffic, especially from deals that have blown up someplace else--a lender walked away, or somebody left the seller at the altar. We’ve picked up a number of deals that way, because we can close pretty rapidly.
Q: I had noticed from your website that you close deals all-cash. Do you ultimately put debt financing on your acquisitions?
A: After closing, we’ll typically put some debt on. We have a line that we can place deals into or we can pursue transactions with our life company relationships or some bank relationships that we have.
Q: But being an all-cash buyer, I would imagine that positions you well in the market these days?
A: It does, and I think a lot of people say they’re an all-cash buyer but then they have appraisal contingencies or financing contingencies, and really they’re not. What we’ve been able to prove is that we actually are an all-cash buyer. The discretion for an investment decision resides with the four managing partners, of which I am one, and our investment committee. That gives people a lot of comfort. They know that, ‘O.K., I’m dealing with people who have control of what they want to do, and they don’t have to wait for somebody else to make a decision on their behalf.’
Q: In closing, what’s your overall outlook for the sale-leaseback market for the remainder of the year and beyond?
A: I think across the spectrum, companies are going to be looking to do more and more sale-leasebacks, whether they’re investment grade companies or private companies, just because of the turmoil that’s still in the credit markets. So I think it’s going to be a strong year in terms of sale-leaseback volume, from the demand side. It will be interesting to see if supply can match up with that, because if folks need to place high debt levels on property to buy it, that can be really hard for them to do. The days of 80% to 90% loan-to-values are gone, and those players that used to play that way can’t do that anymore.
|
|
New York City—American Realty Capital entered into an exclusive multi-year agreement with Sandler O’Neill Mortgage Finance LP, an affiliate of Sandler O’Neill + Partners LP, to target sale-leaseback opportunities with middle market financial institutions. Together they “will identify and meet with select financial institutions to discuss the potential benefits of completing a sale-leaseback transaction, and where appropriate, facilitate ARC’s acquisition and sale-leaseback of the financial institution’s real estate on a long-term, net lease basis,”ARC officials said.
“The rationale for banks to consider sale-leaseback transactions of bank-owned property is straightforward: such a transaction could enable the bank to raise cash to meet strategic and funding needs, convert non-earning 100% risk-weighted assets into potentially lower risk-weighted interest earning assets, mitigate potential risk of decline in market value of owned real estate, monetize off-balance sheet value into earnings over the life of the lease and potentially bolster GAAP earnings,” stated Tom Killian, a principal in Sandler’s investment banking group and manager of its sale-leaseback effort.
The agreement appears to be similar to the arrangement with Sandler that was established with the former American Financial Realty Trust in the summer of 2006, shortly before ARC founder, chairman and CEO Nicholas S. Schorsch departed from AFR.
Schorsch was featured during last month’s RealShare Net Lease, held at the Marriott Marquis in New York City on April 29. As the “Net Lease Insider” he was interviewed by John Salustri, editorial director of Real Estate Media, which produced the conference. Among the topics he discussed, Schorsch noted that while he is still very interested in the bank property space, he also has made a point with his new venture, ARC, in diversifying beyond it. He and a colleague left AFR in the summer of 2006 because “there was a disagreement over the direction forward,” he said. “Our focus has been diversifying beyond the bank space--not getting out of the bank branch space.”
“There are a variety of uses at Main and Main,” Schorsch observed. “We are focused on anything you drive by…Things people will do in good times and bad.”
|
|
New York City—Few investors in the net lease property world seem to be paying attention to the green building movement right now, but that is likely to change as corporate tenants demand more environmentally responsible spaced buildings for their businesses.
The industry will begin to see a change “when retailers start saying, ‘I’m not going into that site,’” because it does not meet the tenant’s sustainability initiatives, suggested Justin Doak, LEED retail sector manager for the US Green Building Council, speaking at last month’s RealShare Net Lease conference. “Green in a way has become the seven-pound gorilla,” added Doak, speaking on the conference’s “Green Outlook: The Greening of Corporate Real Estate” panel. “Green has become a common benchmark in real estate.”
Another panelist, Hirschfeld Ventures LLC CEO John Hirschfeld, told the relatively small audience that he was glad the room was not yet full. “The guys out there haven’t grabbed onto this yet,” he said in reference to people mingling in the hallway. “I think there’s a peculiar ignorance on the part of landlords to the benefits of green, which I see as a great advantage.” An audience member asked whether that was a result of the difficulty of measuring the residual value of greening a building, and Hirschfeld replied: “It’s one part that, and four parts that they’re not looking past next year.”
Hirschfeld should know, the net lease market veteran and former U.S. Realty Advisors senior executive has formed his own company to pursue green commercial real estate investments. He has formed a joint venture with GreenOrder Inc. to acquire existing commercial properties and retrofit them to green standards before selling them to other investors. The fund will focus largely, though not exclusively, on single-tenant assets, he said.
Another panelist, tenant rep and CTRR president Marissa Manley, reported seeing increased interest on the part of some clients to incorporate green building principals into their space requirements. She said she is currently working with an R&D tenant that initially made it a low priority, but has now assigned a person to its space search team specifically to focus on green elements. That said, she did note that “those who can are delaying decision-making” on space requirements in general right now given the economy.
However, tenants are starting to demand certain components in their buildings or spaces be green, Doak said, and developers are responding. He estimated there are currently approximately $10 billion worth of residential and commercial properties that are LEED certified, but predicted that figure will rise to $60 billion in 2010.
|
Indianapolis—Locally based Duke Realty Corp. and CB Richard Ellis Realty Trust of Princeton, NJ formed a joint venture to invest in as much as $800 million of newly developed build-to-suit bulk industrial projects. Expansion of the venture is anticipated, and properties are expected to be held as long-term investments.
With a three-year investment horizon, the duo has already identified six projects with a total of about 5.2 million sf for acquisition, which are expected to be contributed to the JV this year. Those six properties will cost approximately $250 million. Properties will be developed by Duke, which will also receive fees for services provided to the venture, including asset management, property management, construction management, development and leasing.
“The formation of this industrial joint venture marks an important milestone in Duke’s broader joint venture and fund business strategy. This venture will allow Duke to retain an interest in key bulk industrial build-to-suit projects, recycle a significant amount of capital and strengthen its private capital track record with the ultimate goal of launching additional funds,” Duke chairman and CEO Denny Oklak said in an announcement.
“CB Richard Ellis Realty Trust is excited to partner with one of the pre-eminent industrial developers in the U.S.,” added Jack Cuneo, president and CEO of CB Richard Ellis Realty Trust. “The venture provides us exclusive access to a pipeline of newly constructed, institutional quality industrial properties around the country.”
|
|
New York City—The first quarter conference call season has wrapped up, with perhaps the most noticeable trend being that the calls--at least as far as companies solely or partly focused on net lease investments are concerned--were shorter than usual. It’s likely that the shorter calls reflect the slower market that currently exists.
Here are several noteworthy quotes and observations from some of the quarter’s calls:
|
Supply of net lease properties available for purchase was up in the first quarter, according to the Q1 2008 “Net Lease Market Report” from Northbrook, IL-based Boulder Net Lease Funds LLC, but cap rate movement was mixed. In late March, Boulder was tracking 20,964 available properties, compared to 18,164 properties in the fourth quarter of 2007. Mean cap rates in the first quarter were flat in the office sector at 7.5%; up five basis points to 7.3% for retail and down 33 basis points to 7.5% for industrial. For the same time period, the 10-year Treasury was down 26 basis points to 3.83%.
 |
|
|
|
Sacramento—The California Legislative Analyst’s Office has recommended the state no longer exclude from capital gains taxation 1031 exchanges that involve out-of-state properties. The recommendation is among several that the LAO has made in order to increase state revenues and balance its budget. The LAO estimates the exchange-related recommendation would result in a gain of $25 million in tax revenues in 2008-09, and $50 million in 2009-10. The LAO states the “tax-free exchanges are allowed even when in-state property is exchanged for out-of-state property. Subsequent sales of out-of-state property, which ought to trigger deferred capital gains taxes, are rarely, if ever, reported to California.”
Home Depot Scales Back New Store Pipeline
Atlanta—The Home Depot, based here, has reduced its plans for square footage growth, eliminating about 50 planned new store openings from its pipeline. “The company has determined it will no longer pursue the opening of approximately 50 US stores that have been in its new store pipeline, in some cases for more than 10 years,” the company reported. “This is a continuation of our disciplined approach to capital allocation that we outlined last year,” chairman and CEO Frank Blake, says “We will invest in our core retail business, in this case our existing stores, which drive our most profitable sales.” In addition, the company plans to close 15 underperforming US stores. The home improvement retailer still plans to open 55 new stores during its current fiscal year, including 36 in the US, and beginning with fiscal 2009 intends to grow square footage by approximately 1.5% annually. The company currently has 2,258 stores.
LXP Agrees to Terminate Lease On 530,000-SF Building
Baltimore—Lexington Realty Trust agreed to an early termination of its lease with USF&G Financial Services Corp., a subsidiary of St. Paul Fire and Marine Insurance Co., for the 530,000-sf building at 100 Light St. in Baltimore. The lease was scheduled to expire on Sept. 30, 2009. In exchange, the New York City-based REIT received fee ownership interest in the land under the building (valued at $16 million), a $27.1-million payment and assignment of all current subleases in the building. LXP is now managing and repositioning the building and is developing a 10-story parking garage directly across the street from the building for use by building tenants.
Tenet Markets 34 MOB Portfolio
Dallas—Tenet Healthcare Corp., based here, announced plans to sell 34 medical office buildings totaling 2.4 million sf. To be traded as either one portfolio or as several regional sub-portfolios, the properties will be sold subject to long-term ground leases. They are located throughout the Southeast, including Florida, as well as California and Texas. Jones Lang LaSalle has been tapped to market the deal. “This portfolio sale will allow our hospitals to focus on our core business of caring for patients and removes the non-core function of property management responsibilities,” Tenet CFO Biggs Porter says in an announcement.
N3 Expands to Big-Box Development Arena
Fort Worth—Locally based N3 Real Estate is expanding beyond small pad retail development to also target big-box retail assets. The company recently named Jim Shindler to head up its big-box development initiative. He joins the company from Hunt Properties. “We’re very proud of our reputation for site selection, high-quality construction and on-time, on-budget delivery for our retail clients,” states Jason Keen, founder and managing partner of N3. “Having the necessary capital in place will allow Jim and I, along with our business development team, to forge relationships in new markets, and to continue our success of delivering stores so our clients can focus on driving core business and retail sales. Having a source of known capital available for both the construction debt and equity provides a unique competitive advantage in today’s market.” As previously reported in NET LEASE forum, N3 Real Estate is the development arm of a new fund in which a joint venture of two Netherlands based companies plan to invest $1 billion in US retail real estate, with a particular focus on credit tenant, net lease transactions. UDC Global LLC, the US holding company of one of those companies, acquired a 75% interest in N3 last summer. In other personnel news, N3 named Brenna A. Wadleigh its president. Charged with strategic and operational management for N3 and the fund, Wadleigh joins the company from Crescent Real Estate Equities Co.
CapLease Gets New Financing From Wachovia
New York City—CapLease Inc. entered into a new $250-million term loan and revolving credit agreement with Wachovia Bank NA, and used $210.4 million of term loan borrowings to refinance the collateral previously financed on a short-term warehouse agreement with Wachovia. The two-year facility has a one-year extension option and “eliminates margin call risk to CapLease for general interest rate and credit spread changes on all loan collateral other than CMBS securities,” the New York City-based REIT reports.
Berman Hired to Gramercy Realty Team
New York City—Gramercy Capital Corp. added to the management team of its Gramercy Realty division with the hiring of Michael Berman as SVP of leasing and portfolio management. Most recently with Antares Investment Partners, Berman has more than 20 years’ experience in commercial property leasing and asset management with such companies as Brookfield Properties, Equity Office Properties and Reckson Associates. The Gramercy Realty division is in charge of the New York City-based REIT’s owned commercial properties, which are net leased primarily to financial institutions.
 |
|
|
Atlanta—Wells Real Estate Investment Trust II closed on the acquisition of a five-building, one million-sf portfolio sale-leaseback with AT&T Services Inc. and subsidiaries, which will continue to occupy the buildings with initial lease terms of 10 to 15 years. The properties are located in Atlanta’s Buckhead market in the Lenox Park office park. AT&T was represented by the capital markets group of the Staubach Co. “This is a rare real estate opportunity--a million sf of prime office property, fully leased to a world-class tenant, in the top submarket of a top-10 city,” says Wells Real Estate Funds chief real estate officer Don Henry.
DEVELOPMENT
Budapest—ProLogis will construct a 220,000-sf build-to-suit industrial facility here for UTi (Hungary) Logistics LLC. The facility will be located in the ProLogis Park Budapest-Sziget and will be operated as a regional distribution center for one of UTi’s clients.
Elwood, IL—A Binswanger team headed by Richard Plonsker represented Bissell Homecare Inc. in its negotiations for a 500,000-sf build-to-suit distribution facility. It will be developed by CenterPoint Properties and will be located in the CenterPoint Intermodal Center here. The facility, slated for completion at the end of the year, will serve as Bissell’s Midwest distribution center.
Laveen, AZ—Construction has begun on a 55,000-sf Safeway as well as a freestanding Fletcher Tire building adjacent to shop space also under construction at the Laveen Ranch Marketplace here. The project is being developed by Evergreen Development Co.
Ocala, FL—Agree Realty Corp. announced plans to develop a retail store here that is pre-leased to what it describes as “a national leader in the U.S. chain drugstore industry.” The development is slated for completion in the fourth quarter.
Saga, Japan—ProLogis has agreed to construct a build-to-suit 260,000-sf distribution center here for Hitachi Transport System. Located in the ProLogis Parc Kyama, the property will be operated as a regional distribution center for the Aeon Group.
Zaragoza, Spain—ProLogis will develop an 860,000-sf distribution facility in this city in Northern Spain for lease to Bosch-Siemens Home Appliances SA, which will use the property to distribute appliances to its network of retailers throughout Southern Europe.
INVESTMENT SALES
Milyang City, South Korea—The ProLogis Korea Property Fund paid $31 million for a 292,330-sf warehouse here. Built in 2007, the property is fully leased to a local retail company. The fund also paid $17.2 million for a two-property portfolio of warehouse buildings totaling 269,560 sf in Cheonan City, South Korea. Built in 2007, the buildings are fully leased to a local third-party logistics provider.
Kennesaw, GA—The 175,900-sf headquarters of Heidelberg USA was purchased by Falcon Real Estate Investment Co. on behalf of its client, overseas private investor GEM Kennesaw LLC, for $22.3 million, GlobeSt.com reports. The purchaser was in a 1031 exchange, and the seller was a group of tenant-in-common owners in a Macfarlan Capital Partners LP–sponsored investment. Citigroup provided $13.4 million of financing. Nineteen years remain on Heidelberg USA’s 23-year bondable net lease.
Marysville, OH—Two clients of Grubb & Ellis Realty Investors LLC’s wealth management program each purchased a Walgreens property in Columbus, OH suburbs in recent weeks. In Marysville, a client purchased a newly constructed 15,000-sf property. And another client purchased a 25,000-sf, two-story Walgreens in Upper Arlington. The seller of both assets, Arlington-Tremont LLC, was represented in the transaction by Robert Miller of Millco Investments.
 North Bergen, NJ |
Schaumburg, IL—A 4,000-sf Fifth Third Bank building here was purchased by Grubb & Ellis Realty Investors LLC on behalf of a private client of its wealth management program. The ground-leases property building is on an outparcel of the Prairie Towne Center. The seller, JBAS LLC, was represented by Nathan Martin of the Staubach Co.’s capital markets group.
LEASING
Newark, CA—Colliers International’s Greig Lagomarsino represented LBA Realty in the lease of its building at 8333 Central Ave. here to FedEx Ground. The tenant is leasing the entire building plus 6.16 acres of vacant adjacent land for 10 years. It is believed to be the largest industrial lease in the Bay Area so far this year, according to Colliers.
Rome—Coop Italia has leased an entire 327,000-sf distribution facility in Rome that was recently completed by ProLogis. Located in the ProLogis Park Anagni, the building will be used by the tenant to serve its network of retail grocery outlets in the greater metro Rome area.
SALE-LEASEBACKS
Icheon City, South Korea—A portfolio of nine distribution buildings here totaling 327,000 sf was purchased by the ProLogis Korea Property Fund for $38.1 million in a sale-leaseback. The seller/tenant is described as “a major third-party logistics provider in Korea.”
Rockland, MA—American Realty Capital Trust Inc. acquired a portfolio of 18 properties in Southeastern Massachusetts and the Cape Cod market from Rockland Trust Co. for $32.96 million. Rockland is the sole tenant of the properties under triple-net leases that have initial lease terms of 10 or 15 years, plus four five-year renewal options. The properties total approximately 121,000 sf of bank branch, office and operations center space. The REIT is financing the acquisition with $24.41 million of debt that matures in May 2103 and has a variable interest rate of 1.375% over the 30-day Libor. —Michelle Napoli
|
 |
|
