net lease investments

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NET LEASED INVESTMENTS Jonathan Hipp, President & CEO David Sobelman, Executive Vice President Rick Fernandez, Assistant Vice President

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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.

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Page 1: Net lease Investments

NET LEASED INVESTMENTSJonathan Hipp, President & CEO

David Sobelman, Executive Vice President Rick Fernandez, Assistant Vice President

Page 2: Net lease Investments

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

Page 3: Net lease Investments

Net Lease Structure

• Tenant Negotiates Lease with Developer/Landlord

• Lease Provides for Landlord and Tenant Responsibilities

• Variations on LeaseTerms and Intricacies

Page 4: Net lease Investments

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

Page 5: Net lease Investments

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

Page 6: Net lease Investments

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%

Page 7: Net lease Investments

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.

Page 8: Net lease Investments

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.

Page 9: Net lease Investments

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.

Page 10: Net lease Investments

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%

Page 11: Net lease Investments

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

Page 12: Net lease Investments

CVS/pharmacy

SAVE•A•LOT

Page 13: Net lease Investments
Page 14: Net lease Investments
Page 15: Net lease Investments

• Politics of Economy and Future Economy– 1031 Exchange Timing and Capital Gains Rate

• 2010• Democrats• Republicans

CAP Rates vs. Interest Rates

Page 16: Net lease Investments

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

Page 17: Net lease Investments

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

Page 18: Net lease Investments

Investment Sales Still Up

Page 19: Net lease Investments

Historical Net Lease Sales

Page 20: Net lease Investments

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?

Page 21: Net lease Investments

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

Page 22: Net lease Investments

• 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

Page 23: Net lease Investments

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]