Download - Net lease Investments
NET LEASED INVESTMENTSJonathan Hipp, President & CEO
David Sobelman, Executive Vice President Rick Fernandez, Assistant Vice President
Discussion Topics
• Net Lease Structure
• Elements of Net Lease Investing
• Market Update
• Due Diligence
• CAP Rates vs. Interest Rates
• Net Lease Planning as a Strategic Investment Tool
Net Lease Structure
• Tenant Negotiates Lease with Developer/Landlord
• Lease Provides for Landlord and Tenant Responsibilities
• Variations on LeaseTerms and Intricacies
Elements of Net Lease Investing
Return On Investment Tied to a Few Main Factors:• Intrinsic Real Estate Value
• Single Tenant, Multi-Tenant (Wrapped in a Single Tenant Net Lease Structure) • Land, Vacant Building, Construction Costs, Barriers to Entry
• Tenant’s Credit• Current Financial Snapshot• Future Financial Outlook• Previous Year’s Reporting• Tenant’s Lease
• Landlord Responsibilities• Varying Degrees of Landlord
Responsibility for Property Related Expenses
• Truly Passive?• Long Term Leases• Bond-Like Investments• Rental Increases in the Lease
Market Update
Going to a “Back to Basics” Investment Ideology– Intrinsic Real Estate Value– Strong Tenancy– Spread Better– Passivity– Real Estate as
Backstop of a Bond-Like Investment
Washington Metro
Market Update on Net Leases
Trends in the Washington, DC Metropolitan Area• Demographic Influences
– Unemployment Rate– Population Growth
2007 Civilian Population Aged 16+ in Labor Force
5 miles 10 miles 25 miles
Employed 92.8% 93.2% 94.8%
Unemployed 7.2% 6.8% 5.2%
2012 Civilian Population 16+ in Labor Force
5 miles 10 miles 25 miles
Employed 93.2% 93.6% 95.2%
Unemployed 6.8% 6.4% 4.8%
Population Growth Estimate
5 miles 10 miles 25 miles
2007 Total Pop. 689,502 1,883,676 4,525,069
2012 Total Pop. 713,268 1,941,803 4,797,200
2007-2012 Ann. Rate 0.68% 0.61% 1.17%
Top 10 Annual Growth AreasBy Percentage Change
Annual Growth Rate Absolute Annual Growth
07-12Rank
00-07 Rank
CMSA07-12 Rank
00-07 Rank
1 1 Riverside, CA 2 2
2 2 Las Vegas, NV 9 8
3 4 Phoenix, AZ 4 3
4 3 Sacramento, CA 5 4
5 7 Jacksonville, FL 19 19
6 6 Washington, DC – VA – MD – WV 1 1
7 5 Naples, FL 37 41
8 11 Boise, ID 41 43
8 17 San Diego, CA 6 13
8 8 Tampa, FL 18 17
Source: Claritas, Inc.
Top 10 Annual Growth AreasBy Absolute Change
Annual Growth Rate Absolute Annual Growth
07-12Rank
00-07 Rank
CMSA07-12 Rank
00-07 Rank
1 1 Washington, DC – VA – MD – WV 6 6
2 2 Riverside, CA 1 1
3 4 Los Angeles, CA 36 42
4 3 Phoenix, AZ 3 4
5 4 Sacramento, CA 4 3
6 13 San Diego, CA 8 17
7 9 Atlanta, GA 21 22
8 4 Dallas – Fort Worth, TX 22 20
9 8 Las Vegas, NV 2 2
10 11 Houston, TX 17 15
Source: Claritas, Inc.
Average Household Income GrowthTop 10 Markets
Annual Growth Rate Absolute Annual Growth
07-12Rank
07-12(%)
99-07 Rank
99-07(%)
CMSA07-12Rank
07-12 ($’s)
1 2.34 7 2.34 Washington, DC-VA-MD-WV 1 1,878.40
2 2.29 2 2.56 Virginia Beach, VA – NC 6 1,259.20
3 2.29 3 2.47 San Diego, CA 3 1,374.00
4 2.26 6 2.37 Baltimore, MD 2 1,421.80
5 2.21 4 2.42 Birmingham, AL 17 1,068.20
6 2.19 5 2.41 Morgantown, WV 54 789.4
7 2.12 9 2.32 Providence, RI – MA 14 1,137.40
8 2.11 8 2.34 Sacramento, CA 11 1,223.20
9 2.07 12 2.17 Philadelphia, PA-NJ-DE-MD 9 1,235.20
10 2.07 10 2.26 Richmond, VA 12 1,186.20
2.19 2.37 IRR Top 10 Average
1.81 1.94 IRR CMSA Average
Source: Claritas, Inc.
Market Update on Net Leases
Trends in the US • Demographic Influences
– Unemployment Rate Unchanged (4.6%)– Population Growth
• 7.2% Increase Over 7 Years• Northwest 2%• South/West 10%
Due Diligence
Why is One CVS Pharmacy Better Than Another?
• Surrounding Area
• Development Planned
• What Does Master Plan Currently Read?
• What are the Current and Future DemographicsTrends?
Example: Winn Dixie
Poor Demographics
Excellent Site
CVS/pharmacy
SAVE•A•LOT
• Politics of Economy and Future Economy– 1031 Exchange Timing and Capital Gains Rate
• 2010• Democrats• Republicans
CAP Rates vs. Interest Rates
Historical Rate Comparison
Source: Cap Rates from Real Capital Analytics
United States Federal Reserve
0
1
2
3
4
5
6
7
8
9
Ra
te (
% )
Conventional 1stMortgage (30year fixed)
Federal FundsRate
10 Year Treasury
Retail Cap Rates
CMBS Rates
Source: United States Federal Reserve
0
1
2
3
4
5
6
7
8
Ra
te (
% )
AAA CMBS
BBB CMBS
10 Year US Treasury
Investment Sales Still Up
Historical Net Lease Sales
Overview of Credit and Default Rates
A company rated A- by S&P (equivalent to an
A3 Moody’s rating) has a 0.60% probability of
defaulting over a five-year period. By
comparison, a company rated B+ by S&P
(equivalent to a B1 Moody’s rating) has a 25%
probability of defaulting over the same period.
Source: Moody’s
S&P MOODY’SPROBABILITY OF
DEFAULT (5 YEARS)
AAA Aaa 0.15%
AA+ Aa1 0.15%
AA Aa2 0.20%
AA- Aa3 0.20%
A+ A1 0.40%
A A2 0.60%
A- A3 0.60%
BBB+ Baa1 1.50%
BBB Baa2 2.00%
BBB- Baa3 4.00%
BB+ Ba1 7.00%
BB Ba2 9.00%
BB- Ba3 19.00%
B+ B1 25.00%
B B2 31.00%
B- B3 43.00%
CCC Caa-C 60.00%
Over a five-year period, what
portion of a rated entity or
investment is expected to
default?
COMPANY S&P CREDIT
Citibank AA+
Commerce Bank A+
Walgreens A+
PNC A+
McDonalds A
7-ElevenA
Colonial Bank BBB+
StarbucksBBB+
Tenant Overview
COMPANY S&P CREDIT
CVS BBB+
AutoZone BBB+
Advance Auto BB+
Burger King BB-
Rite Aid B
Applebee’s NR
Wawa NR
CVS/pharmacy
• Common Holdings of Assets– Land
– Multi Family
– Multi Tenant Retail, Office or Industrial
• Estate Planning– Long Term
– Less Complicated Investment for Heirs
– Less Management for Heirs
• Portfolio Diversification– Looking to Blend Their Yields with Lower Risk Investments
• Typically More Stabilized Assets
• Typically a Little Lower Return
• Typically Little or No Management
Net Lease Planning as a
Strategic Investment Tool
Calkain Companies, Inc.
11150 Sunset Hills RoadSuite 300
Reston, VA 20190
Tel: (703) 787-4714
Fax: (703) 787-4783
www.calkain.com
Jonathan HippPresident & Chief Executive Officer(703) [email protected]
David SobelmanVice President(813) [email protected]
Rick FernandezBusiness Development Director(703) [email protected]
