The Rush to Credit Tenants

Single-tenant, net-lease properties are a hot commodity these days. Case in point: Inland Real Estate Acquisitions — the buying arm of Inland Group, well-known for its portfolio of primarily grocery-anchored retail — recently purchased three Orlando office buildings 100% occupied by The Walt Disney Co. for more than $70 million. Inland was one of 15 bidders on the project.

Why would an investor known for its retail acquisitions splurge to buy an office property? “It didn't necessarily have to do with the product itself,” explains Joe Cosenza, vice chairman of Oak Brook, Ill.-based Inland Group, who negotiated the transaction. “It has to do with the fact that it's purely a sale-leaseback with a major credit tenant — and that's what interests us.” He added that he expects an initial return of 10.4%, not bad considering The Standard & Poor's 500-stock index fell 13.4% in the second quarter of 2002.

Investors are rushing to grab properties occupied by investment-grade tenants — especially those rated “A” and above, says David Steinwedell, CIO of Wells Real Estate Funds, an Atlanta-based real estate investment management firm with a $1.5 billion portfolio of predominantly single-tenant properties.

That's because cap rates have declined more than 75 basis points during the last six months — which means the purchase price of real estate investments has increased — and returns have dropped. “What it clearly shows is that people are looking for some semblance of security when there is so much uncertainty in the stock market and other areas,” he says.

So when Disney put the 440,000 sq. ft. of office space in Celebration Place Office Park in its planned community of Celebration, Fla., on the market, buyers were scrambling to make a bid, says Matthew Kelly, vice president of real estate development for The Celebration Co., the Disney subsidiary that sold the buildings. “Because the market, especially on the development side, is soft, the time seemed right to sell,” says Kelly. “A lot of that money ends up chasing the quality deals that are out there, so our buildings were really well-valued.”

But Cosenza isn't worried that the price was overbid. “My price wasn't what took it,” he says. “We were the one who could close in 30 days, who had the cash on hand and the reputation.”

Wells knows a good deal when it sees one. The key is diversification, Steinwedell of Wells says. For Wells, that means no more than 15% of the REIT is invested in any one tenant, industry, real estate market or lease-expiration year. “So if a certain market is weak, we're not globally exposed to it five or 10 years down the road — whenever a renewal was to occur,” he explains.

Take the firm's purchase of a three-building portfolio from The Alter Group, based in Chicago. The deal included a 148,605 sq. ft. building in Phoenix occupied by Massachusetts Financial Services; a 101,207 sq. ft. building in Atlanta, leased to Agilent Technologies and Philips Electronics; and a 47,400 sq. ft. building in Fort Lauderdale, Fla., leased to BellSouth Advertising and Publishing Corp. “I like that transaction because it got us really high-quality buildings, in three major markets with four great tenants,” says Steinwedell.

Ultimately, it's a matter of providing a stable return for investors despite the economy's contortions. “The best way to do that is investing in long-term net-lease properties where you're not faced with short-term turnover risk,” Steinwedell says. “We want to look at any transaction and always be able to balance the quality of the real estate and the quality of the tenant that's there.”

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