The emergence of the Single Tenant Net Leased (STNL) marketplace has largely benefitted developers and landlords. They have been able to trade properties at 150 to 200 basis point spreads, creating significant gains, while the corporate tenants have largely been shut out of this market. This year, however, a number of companies have changed that dynamic.
Windstream Spins Off
One of the more talked about transactions this year was Windstream’s spinning off its telecommunications assets to a REIT, and leasing back those assets under a 15 year master lease. Much of the conversation was about the evolving definition of a REIT, and the extent to which other telecoms like AT&T or Verizon could use a similar structure to lower their tax liabilities. Less discussed was the incredible value of corporate leases. This sale/leaseback provided Windstream with working capital it can reinvest to further its growth strategy, and is significant enough to support a publicly traded REIT with only one tenant.
But to capitalize on real estate, a company must first control it. Kroger would seem to agree. Its most recent 10-K, from February 2014, states that the “Company’s current strategy emphasizes self-development and ownership of store real estate.” Credit-worthy tenants like Kroger are benefiting from low interest rates, and can save 20 – 40% on occupancy costs by utilizing their own capital, instead of paying a developer’s risk adjusted build to-suit cap rate. Often situated as an anchor tenant, Kroger is forcing its way into the STNL market by getting shopping center owners to either sell of a pad site or treat the center like a condominium interest, segmenting off part of the building.
Red Lobster Capitalizes
The best example of monetizing a real estate portfolio may be in the two stage deal which saw Darden Restaurants sell its Red Lobster brand and all 700 of the locations to Golden Gate Capital for $2.1 billion in July 2014. As part of the acquisition, Golden Gate signed long term leases on more than 500 restaurants, and sold them to ARCP for $1.5 billion as a sale leaseback transaction. What makes this example stand out from the others? Look at the math: Golden Gate sold approximately 71% of the real estate for approximately 71% of the total price it paid for the company. The buildings were only worth what the market would bear, but Golden Gate created value by agreeing to the long-term leases, and could then capitalize on its own credit.
Evolution of the RE Department
Not every company is in a position to monetize its real estate, and not every company could execute each of the above strategies. The point is that every company should be looking more strategically at its real estate. The traditional corporate real estate department takes an operational view of the portfolio, treating each lease as a line item expense. But by treating real estate as an asset, and by understanding the value of credit-tenant leases, corporate tenants can get their share of the STNL market.