Public companies are starting to take a hard look at their real assets to determine if they really need to own them. Case in point, Motorola which began taking an asset light approach to its balance sheet in May when it sold two of its Schaumburg assets to Oak Street Real Estate Capital and simultaneously leased them back. Now they’ve completed the sale of the last remaining buildings on their Schaumburg campus. Sale-leasebacks make a lot of sense for companies looking to create cash to invest in their core business. By signing a long term lease tenants can maximize value upon exit, control the asset for as long as they want and use the proceeds to reinvest in their core business.
Here’s an interesting article from GlobeSt discussing whether a bubble is forming in the net lease market. http://www.globest.com/sites/nataliedolce/2016/07/22/net-lease-challenges-or-a-bubble/. A few things to think about when buying net lease deals to increase the odds of a favorable outcome:
- Minimum lease term of 11 years
- Tenant/guarantor must have an investment grade credit rating by S&P, Moodys, etc.
- Focus on deals with annual rent escalations – target 2% annual
- Only buy deals at unlevered yields of 7% or better
If you’re actively in the net lease market, you know that accomplishing all these things is nearly impossible. If you’re able to buy long-term, investment grade deals north of a 7 cap you’ll be well positioned to make money in this market. Good luck.
Bill Gross, fund manager at Janus Capital, appeared on Bloomberg (video below) shortly after the historic Brexit vote and pointed out insurance companies, pension funds and banks are slowly going bankrupt. He laid out some simple math by explaining that these financial institutions are paying 4-8% on their liabilities while earning 1-2% on their long-term bonds. He goes on to indicate mortgage backed securities paying a 3% coupon aren’t a bad deal. Compare that to a mission critical distribution facility net-leased to an investment grade tenant for 15 years. If you’re buying right, the going in yield on this type of asset can be north of 7% unlevered and 12-14% on a levered basis. That’s before factoring in the tax benefits of owning real estate. Net lease is an excellent place to find tax efficient yield in today’s market.