As the single-tenant net leased market continues at a red hot pace and with prices for traditional properties such as fast-food eateries and drug stores skyrocketing, investors are beginning to explore secondary property types in the quest for higher yields.
In the past few months, notable single-tenant deals have occurred involving bank branches, day care centers and even charter schools.
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"Transaction volume in the net lease market remains high as equity fundraising continues at a strong pace," John Feeney, research director of The Boulder Group, noted in a recent report. "With substantial capital available and limited opportunities, institutional funds are exploring different avenues of capital deployment to reach acquisition goals.”
Some of the different strategies net lease investors are taking include buying properties with shorter term leases, those with smaller or non-investment grade tenants, or bundling large portfolios of properties priced below $2 million to take advantage of economies of scale, Feeney said. “In addition, the excess capital raised has caused some significant mergers, acquisitions and large portfolio purchases recently in the net lease market.”
Locking Up Bank Branches
One such deal involved Inland American Real Estate Trust, which closed the sale of a SunTrust net lease portfolio for $240 million to REITs affiliated with American Realty Capital. The portfolio included 139 retail bank branches, encompassing 715,000 square feet, throughout the Mid-Atlantic and Southeast.
Managing directors Guy Ponticiello, Bruce Westwood-Booth and Rob Bickel and vice president Brian Shanfeld of Jones Lang LaSalle led the transaction for Inland American.
“This is far from the only large-scale portfolio sale of triple-net leased properties we expect to see this year as portfolio acquisitions of this size allow investors to deploy capital quickly and efficiently, making them a formidable force in the market,” Ponticiello said.
In the past 12 months, Jones Lang LaSalle has closed more than $500 million of single-tenant, net-leased bank properties across the country, making the firm one of the nation’s leading brokers of such properties. In addition, JLL has nearly $500 million in bank credit offerings currently in the market.
Day Care is a New Darling
In another unusual deal, Calkain Cos. recently represented the seller of a Learning Experience day care facility in Richmond, VA, for $3 million. The facility, built in 2010 with a 15-year lease, is located in a business park setting, catering to parents who work nearby.
While the day care center's location may appeal to parents who work in the area, the appeal to investors is equally strong, noted Betty Friant, vice president at Calkain Cos.
"Day care facilities that are well-run and well-located can be purchased at much higher cap rates giving the investor a solid return on their investment. Investors are searching for higher yields in this market where McDonalds are trading in the 4+% cap range," who said the day care center sold for a cap rate approximately double that range.
In another notable day care investment deal, a traditional hotel investment firm based in Los Angeles called Beccaria Partners made its first foray in to the Tucson market where it bought a Children's Learning Adventure from Cole Real Estate Investments for $8.45 million, or about $328 per square foot.
Chad Tiedeman with Phoenix Commercial Advisors represented the seller. William Everitt and Clark Everitt with Investment Real Estate Associates represented the buyer.
Back To School
Charter school property investments represent another new investment wrinkle for net lease investors. One REIT, movie theater property owner EPR Properties, has established a new division to focus on such investments and spent $45.4 million in the second quarter of 2013 buying educational facilities, including investing in the build-to-suit construction of 13 public charter schools and one early childhood education center. The firm also acquired an early childhood education center located in Peoria, AZ, and a public charter school in Columbia, SC, all of which are subject to long-term triple net leases.
Such activity has prompted Virtus Real Estate Capital to spend the past year researching the segment. Unlike traditional real estate investing firms, Virtus Real Estate Capital develops its investing strategy emphasizing the role of specific demographic trends and seeks investments outside of traditional real estate asset classes.
"We have yet to make our first acquisition, but we currently have one property under contract and several more in the pipeline,” said Terrell Gates, CEO and founder, Virtus Real Estate Capital.
The per property deal size Virtus is considering is generally in the $3 million to $8 million range and 30,000 to 60,000 square feet.
Gates said real estate leased by education tenants requires very different market underwriting and due diligence than traditional real estate property types. Ultimately the school is responsible for the building and Virtus is responsible for overseeing the school’s operations regarding academics and performance of its students as those factors influence the school’s ability meet the requirements of the lease.
“Because this is special purpose real estate, you have to have a strong tenant and be confident that other operators could be successful there were the tenant to default,” Gates said. “We look at deals on a state by state basis given the different legislative and regulatory regime in each state.”
“Like our other property types, this is a very niche space with unique idiosyncrasies. Although that creates opportunity for a sage investor, it can be a landmine for the uninformed,” he said.
Currently, there are around 6,000 charter schools in operation throughout the U.S. and investors are taking notice because they can generate cap rates in the 9% to 10% range, Gates said.
Still Eating Up Fast Food
The expansion into different property types and tenant types doesn’t mean that investors are forsaking bread-and-butter deals such as fast-food eateries.
Single-tenant fast-food eatery sales in the first half of the year are outpacing deal totals and dollar volumes from the same period a year ago. Average per square foot prices are up from $378.70 from deals in the first half of 2012 to $461.70 this year.
This past week, Flynn Restaurant Group LLC acquired 62 Taco Bell and related Yum! Brands restaurants in Missouri and Illinois, primarily in the St. Louis market for an undisclosed price.
The restaurants have been added to Bell American Group, a division of Flynn Restaurant Group. The seller was Gateway Bells, LLC, an entity controlled by long-standing Taco Bell franchisee Don Ghareeb.
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