net lease investments
DESCRIPTION
Calkain Companies, Inc. where triple net lease properties are the focus of our business. Working through the net lease investment process with our clients is the basis and foundation our firm.TRANSCRIPT
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]