Jack Cuneo

By Gail Kalinoski, Contributing Editor

Less than a month after telling shareholders it was exploring ways to provide a “liquidity event,” Chambers Street Properties, a self-managed Maryland REIT, made it official Tuesday, announcing it intends to list its common shares on the New York Stock Exchange. The REIT said it expected to be trading on the NYSE under the ticker CSG on or by May 21.

The REIT, which has its headquarters in Princeton, N.J., also said it was planning a modified “Dutch Auction” tender offer to purchase as much as $125 million of its common shares. Chambers Street would select the lowest price within a range of $10.10 and $10.60. The tender offer will be paid for with funds from its unsecured revolving credit facility.

In an April 2 letter to stockholders, Chambers Street president & CEO Jack Cuneo said the firm had hired Wells Fargo Securities L.L.C. and Citigroup Global Markets Inc. as its financial advisors. He noted listing its shares on a national exchange was a possible outcome as it positioned itself for a “future liquidity event.”

The firm’s board of trustees deemed listing on the NYSE to be “in the best interest of the company and its shareholders,” according to a news release from Chambers Street Tuesday.

“Chambers Street believes that a listing will enable it to continue to execute its asset management, portfolio growth, and capital strategies designed to maximize shareholder value,” the release stated. “Publicly traded real estate companies have enjoyed strong returns in recent years, and companies that own net lease properties, similar to Chambers Street, are trading at attractive valuations. In addition, Chambers Street believes that a listing on the NYSE will provide access to additional potential investors as well as to a broader range of potential sources of capital.”

Because of the pending listing, Chambers Street officials could not comment beyond the firm’s news release.

The plan for public listing comes as the REIT has had a particularly active year since changing its name from CB Richard Ellis Realty Trust last June and moving to self-management. The REIT has about $3.2 billion in real estate holdings in the United States and abroad. It currently owns or has majority interests in 129 properties, mostly industrial and office assets, in 22 U.S. states, Germany and the United Kingdom. As of Dec. 31, 2012, the portfolio was 98 percent leased to 272 tenants, with diversity in locations, industries and lease expirations.

Two weeks ago, Chambers Street said Big O Development Inc., a major tenant at its Summit Distribution Center property in Salt Lake City, had signed a five-year lease renewal. An automotive tire distributor, Big O leases more than 100,000 feet of the 275,000-square-foot center, acquired in 2010 as part of a seven-property industrial portfolio.

Celebration Office Center, Orlando

Chambers Street has made four big acquisitions so far this year, including acquiring the remaining interests in 17 properties it owned in joint venture with Duke Realty Corp. The portfolio, which sold for a reported $98.6 million, comprised 16 office properties and one industrial asset, an 820,000-square-foot warehouse/distribution facility in Phoenix. The office properties included three buildings with a total of 542,000 square feet in Cincinnati and two buildings with a total of 451,000 square feet in Columbus. Other properties were located in Dallas; Fort Lauderdale; Houston; Minneapolis; Raleigh, N.C.; and two in Orlando  – Celebration Office Center and Northpoint III, with a total of 209,000 square feet.

In February, Chambers Street made its first acquisitions in the Philadelphia area, closing on two office buildings totaling 300,000 square feet in Malvern, Pa. The two buildings were developed by Chambers Street, then still known as CB Richard Ellis Realty Trust, and Trammell Crow, a CBRE Group subsidiary, in joint venture and leased to Endo Health Solutions.

Inland American REIT wants to sell its 143-branch SunTrust Net Lease Portfolio, and the real estate company has selected Jones Lang LaSalle’s Capital Markets Group to find a buyer for the group of assets, which is valued at more than $275 million.

The 715,000-square-foot collection of SunTrust Bank retail branches consists of eight sub-portfolios subject to eight master leases in strong banking markets throughout in the Mid-Atlantic and Southeastern U.S., with 40 percent of the portfolio located in Florida. While there are only five years remaining on the terms, an option structure commits SunTrust Bank to renew for an additional 10 years.

It’s a package that practically any investor would love in the current market. “It’s unusual to have something like this in the market today,” Randy Blankstein, president of The Boulder Group, told Commercial Property Executive. “It’s the sweet spot of what people are looking for–investment grade tenants, long-term leases–so I think it will be well received in the market because there’s a lot of pent-up equity.”

Inland has its reasons for letting go of the portfolio. “The disposition of these net lease retail assets corresponds to Inland American’s long-term portfolio strategy to move into additional multi-tenant, necessity-based retail properties,” Jeff Manno, vice president of transactions of Inland American, said in a prepared statement.

Inland’s timing appears to be just right. “In terms of the general net lease market, it is without a doubt a seller’s market at this point in time,” Winston Orzechowski, research director with Calkain Cos., told CPE. “What we’re looking at right now is there’s a huge amount of demand and that’s pressing cap rates very, very low and this is being triggered by a few different things. On the one hand, while we’re now beginning to see new development, we really hadn’t had much in the last few years so essentially there’s been a dwindling pool of assets. Couple this with the fact that financing is becoming much easier. Credit is generally more available than it was a few years ago and then you tie that in with the fact that interest rates are still very, very low, so it’s quite easy at this point in time to raise the necessary capital to invest in these investments.”

Saying the net lease brokerage market in the Midwest has been underserved, Calkain Cos. has established an office in St. Louis to handle deals in the region.

Teal Henderson, a broker with Reston, Va.-based Calkain for nearly three years in its Tampa office, was selected to run the St. Louis location.

“We felt she was a prime candidate to go there,” executive vice president David Sobelman told Commercial Property Executive. “She has some connections there, some family there and had already been doing some business there. So it was a nice fit.”

“Teal has been an integral part of Calkain’s growth and expansion; we’re very happy that she agreed to open our office in the Midwest,” added Jonathan Hipp, president & CEO.

“The Midwest market has been largely ignored by the triple-net lease investor pool, mainly due to lack of professionals focused on the area,” Henderson said. “As the macroeconomic outlook is improving in primary markets and with the inventory of prime assets still low, the Midwest is now seeing an uptick in investment-grade credit tenants seeking new markets that have the demographics to support the expansion.”

Sobelman said he expected much of the firm’s Midwest business to involve banks, restaurants and drug stores.

“Mainly because the population there wants those types of assets,” he said, adding that tenants are looking for expansion or to open new sites.

“We’re seeing more growth in those markets, and we’re seeing more and more tenants comfortable with building a brand-new building for themselves,” Sobelman added.

Calkain–which also has offices in Fort Lauderdale, Fla.; Bethesda, Md.; and Burlington, Mass.–specializes in assisting buyers and sellers with single- and multi-tenant retail, industrial, hotel and office net lease transactions.

“We feel the net lease properties, as a whole, are one of the most stable assets you can purchase in real estate,” Sobelman concluded. “They are providing a very stable return and most of the time above-market yield.”

Calkain is currently marketing two net-lease portfolios that have Midwest locations. Nineteen Circle K gas station/convenience stores with sites in Indiana, Ohio, Illinois and Iowa are being sold by the Canadian-based parent company, Alimentation Couche-Tard. Sobelman said Patrick Nutt is the lead broker on that listing, but Henderson’s presence in the Midwest market has helped with the marketing. Calkain is also the exclusive broker for a 10-property portfolio of corporate-based Fred’s Stores, a discount retailer with more than 700 locations. Illinois is one of the locations for the stores in the portfolio, along with Kentucky, Arkansas and Mississippi.

Jones Lang LaSalle’s Capital Markets team has secured $48 million in Credit Tenant Leasing financing from a foreign institutional investor for an industrial and bus maintenance complex in Newark, N.J., owned by Hartz Mountain Industries Inc.

The investor provided the 4.323 percent, fixed-rate, 24-year loan for the property at 601 Doremus Ave. that consists of 21.7 acres of land and 638,092 square feet of space that is leased to New Jersey Transit Corp. through 2036.

“This was an extremely complex financing assignment for a very unique property that involved a modified industrial condominium regime. The loan provides financing for a critical facility for New Jersey Transit, in which the entire city’s buses are maintained,” said Joe Garibaldi, JLL managing director, who lead the team on the deal.

Executive vice presidents Brion Haist and Bill Cavagnaro also worked on the financing deal.

The financing derives its proceeds from the direct sale of bonds to investors in the global capital markets rather than capital from commercial real estate lenders. Haist said CTL financing works well for corporations, the federal government, certain municipal government entities and healthcare facilities such as hospitals.

“By and large, most of these rely on the concept of the triple net lease,” Haist said, noting that the New Jersey Transit facility has a triple net lease.

Haist told Commercial Property Executive that the unidentified foreign institutional investor frequently participates in CTL financing because it securitizes the rent stream that comes off the triple net lease.

“The securitization is structured in a way to isolate those rent payments against the credit of the tenant making them,” Haist said, adding that most tenants have credit worthiness that is at or near investment grade.

Haist, who joined the Jones Lang LaSalle Capital Markets team in November, 2010, said his group has done over $8 billion of these types of transactions over the last 10 years, both at JLL and at other firms.

“It’s a focus for our unit,” he said.

Jones Lang LaSalle Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers. In 2011, the team – comprised of more than 1,200 specialists – completed $60 billion in investment sale and debt and equity transactions globally. In the United States, the team grew its volume by 122 percent in 2011 and is gaining market share across all property types.

Inland Real Estate Corp. has been busy in the last month. This week, the firm picked up seven single-tenant retail properties that feature 95,630 square feet of gross leasable area, as well as two grocery-anchored retail properties in Wisconsin. The single-tenant properties, acquired in conjunction with joint-venture partner Inland Private Capital Corp., cost an aggregate $40.8 million, excluding closing costs and adjustments. The Wisconsin grocery centers were taken for $33 million.

The joint-venture purchase acquired a portfolio of two free-standing stores that are net-leased to CVS Pharmacy, as well as one asset net-leased to Walgreens, for $17.1 million. The venture also acquired a second portfolio for $23.7 million that includes one asset net-leased to CVS as well as three properties net-leased to Walgreens. The stores range in size from 12,900 to 14,490 square feet and are located in seven states. At the time of closing, the IRC-IPCC joint venture placed loans of $25.8 millon on the portfolios.

The JV also acquired the Wisconsin properties together. The first asset, a neighborhood shopping center anchored by a Pick ‘n Save grocery, is located in the village of Mt. Pleasant and was acquired for approximately $21.3 million. The second property, a single-tenant asset leased to the same grocery chain, is in Sheboygan and was acquired for approximately $11.7 million. The Mt. Pleasant center totals 83,233 square feet and is 98 percent leased to tenants including Texas Roadhouse and U.S. Cellular. Both assets are newly constructed.

On the last day of February, Inland Real Estate picked up the Cincinnati-area Stone Creek Towne Center for $36 million and, earlier that week, spent $73.4 million on Westgate Shopping Center in Fairview Park, near Cleveland. Scott Carr, executive vice president and chief investment officer for Inland Real Estate Corporation, called the purchases “a way to facilitate operational and leasing efficiencies.” He went on to note that the area’s demographics, coupled with the properties’ positioning, were “acquired at prices that deliver strong returns.”

Recent data from services firm Marcus & Millichap Real Estate Services Inc. shows that the net-lease space is poised for increased buyer interest in 2012. According to a report written by Bill Rose, the firm’s national director of the national retail group, transaction activity for net-leased drugstore properties has jumped 18 percent in the last 12 months. Cap rates have compressed to the mid-6 or low-7 percent range, and investors are increasingly seeing such assets as safety plays to hedge against the risk of the stock market.

Is retail a victim of the Internet and heading the way of the horse and buggy? The big-box stores, which tend to sell merchandise that can be purchased online by consumers, seem particularly hard hit by recent economic and technological trends. Circuit City filed for Chapter 11 bankruptcy protection and closed its stores; Borders liquidated after failing to find a buyer at any price; Filene’s Basement was acquired by Sym’s, which is now liquidating; and Sears, folded into Kmart, is struggling.

The pace of retail store closings in general continues. The 65 million square feet in 4,000 store closings announced by retailers in 2011 represented an increase of 40 percent over the space reduction in 2010, according to the International Council of Shopping Centers (ICSC).

“In the U.S., there is always turnover in the retail market. Stores close all the time,” commented Victor Canalog, vice president of economics and research at Reis Inc. Nevertheless, although he acknowledged that there will always be a need for shopping, Canalog suggested spaces may continue to go dark in future as part of a longer-term trend. “If there is a recovery, there will still be massive competition for the typical customer coming from the Internet,” he said. “Many wonder if the U.S. may have more than enough retail per woman, man and child.”

The good news is that the effects of the retail sector contraction, and in particular, the big-box closings, on the single-tenant net lease sector have been muted, according to net lease players. Randy Blankstein, president of The Boulder Group, observed that in reality, the big-box shutdowns have garnered much attention in the news but have not directly affected a lot of net-leased properties. Agreed Ethan Nessen, managing director of Corporate Realty Investment Capital L.L.C.: “Ten years ago, I would have told you there would have been some form of contagion, but this time around, the effects have really been compartmentalized and isolated from the rest of the market.”

Nessen argued that many of the companies that failed did so for specific reasons, rather than because of pandemic problems in retail. While Sharper Image, Borders and Circuit City have fallen, a slew of other big-box businesses remain very healthy.

“There are very, very strong big-box powerhouses—such as Lowe’s, Walmart and Home Depot—that are not going anywhere,” Nessen affirmed. And smaller-box retail stores—such as restaurants and drug stores—generally tend to be “booming,” he added.

No doubt, the price will fall for any net lease property that is unlucky enough to be on the market when bankruptcy is unexpectedly declared by the tenant. If the retail company is undergoing a Chapter 11, sellers that can afford to be patient may want to take the property off the market and wait it out, suggested Howard Sands, managing director & founding principal of Corporate Partners Capital Group Inc. Investor demand will be low during the period of uncertainty, and if the lease is reaffirmed by the tenant the property value could actually increase, he explained—especially given that the company is likely to emerge from reorganization financially stronger than before.

In a worst-case scenario, in which the store will be shut down in a Chapter 7 bankruptcy, developers and net lease brokers say that emptied retail spaces in core urban areas can be filled in a relatively short period of time. “We do not see them sitting empty for a long time,” said Sidney Domb, president of United Trust Fund, of properties in his Miami market. Blankstein said that in urban locations such as Michigan Avenue in Chicago it could take several weeks for a Borders to re-tenant. Other vacated properties—such as those in secondary or tertiary locations— however, “can sit empty for a year and still not have a possibility for re-tenanting,” he said.

For such reasons, the main effect of the big-box failures is that the quality of the real estate and the tenant becomes even more important to the investor, according to net lease brokers and sponsors. The real or perceived risk of retail company closings “makes investors more motivated to have good-credit tenants,” put in Sands.

The heightened investor preference for investment-grade tenancies has contributed to a decompression in the cap rate differential between properties that are occupied by stronger credit versus those occupied by weaker credit tenants, said Sands. Nevertheless, cap rates for net lease investments overall have now heated up. The fact remains that despite the trends in the larger retail world, investor demand for net lease is still pretty strong in general, driven by low interest rates and paltry returns on alternative investments. Investors are now showing active demand for properties with investment-grade and non-investment-grade tenants, said Sands. “A lot of money has been raised for net lease product,” added Nessen.

Research by The Boulder Group shows that cap rates for all net lease sectors continued to fall in the fourth quarter. The main contributor to the decline is a “shortage of new net-leased development,” according to a company report. Cap rates in the retail net lease sector fell from 7.83 percent at the start of 2011 to 7.72 percent by the fourth quarter. “Ironically, there has been no increase in cap rates in the net lease sector, and if anything there is still a compression,” Nessen agreed.

Another reason for the resilience of net lease as an investment in the wake of larger troubles in the retail sector is that the net lease space is simply much more diversified today. Particular problems in the big box retail segment will not give the entire industry a black eye, Nessen said. That was not always the case. “Ten years ago, there was a lot more concentration on retail and big-box retail in net lease,” he said.

The impact of store closings on the sector has also been minimized by the fact that only some of the big-box users prefer single-tenant space. “A lot of single-tenant properties were scrambling because they lost one big tenant,” cautioned Canalog. But while Borders and Circuit City are more likely to be single-tenant and therefore net leased, most Filene’s Basements are in-line, pointed out Nessen.

As for the long-term trend, opinions differ. Nessen takes an optimistic view. “Maybe there will be a decline in retail in the book, DVD and CD categories. Beyond that, we do not see a decline, and we will continue to see growth overall,” he said. Domb, on the other hand, believes the weakening in the retail sector is real. Because of the lack of demand from companies to engage in sale-leasebacks of retail space, UTF has readjusted its business strategy and shifted its emphasis away from retail build-to-suits in favor of medical office buildings.

“Fewer companies in big box are expanding. We go where the expansion is. Now the expansion is big in medical and manufacturing,” he said. The company has engaged in a $203 million build-to-suit/sale-leaseback transaction—the largest in its history—with the Sisters of Mercy. “Before, we would never be building a hospital/medical (property). We do big boxes,” said Domb. UTF is also working on three other properties, none of which are retail. “In the past, certainly at least one project would have been retail,” said Domb.

For analysis of retail real estate’s performance, turn to “Retail Retracts.”

While the retail sector did not fare as badly as some had feared as a result of high unemployment, fundamentals continue to founder. Balancing the actions of distressed retail real estate tenants with those of expanding tenants, “net on net, we will still see relatively high vacancies for retail real estate,” predicted Victor Canalog, vice president of economics and research at Reis Inc. The retail vacancy rate, he said, still stands at 11 percent, which is a 21-year high. “The rate may decline slightly in 2012, but the only reason is that construction is really, really tight.”

The shuttering of many retail companies, said Canalog, is “absolutely contributing to the lack of demand for retail (space).”

Indeed, according to the International Council of Shopping Centers, the Deltona/Dayton, Fla., MSA, the metro with the second-largest market share (0.9 percent) of total space closed in the fourth quarter, is expected to be disproportionately affected by Sears Holdings’ closings. And most of the 975,000 square feet of retail space lost in the fourth quarter in Boston, the metro with the largest amount of space closed, is attributed to the complete liquidation of Syms and Filene’s Basement stores, according to ICSC.

For more on the impact of big-box retail closures on the net lease investment market, see “Going Dark,” which appeared in the March 2012 issue of CPE.

William Polk Carey, founder and chairman of multi-billion-dollar investment management company W. P. Carey & Co., died of natural causes in West Palm Beach, Fla., on Monday, Jan. 2. Carey, a trailblazer in the sale-leaseback arena, was 81 years old.

Read Commercial Property Executive’s original story on Carey here.

“William Polk Carey was a pioneer in sale-leasebacks,” Sidney Domb, president and CEO of United Trust Fund, a leader in the sale and leaseback of corporate real estate, told CPE. “I started in 1972 and there was a W. P. Carey then. He had vision and foresight to explore and go into Europe with sale-leasebacks when no one else chose to enter. He was fearless in his decisions and he will be missed.”

“As an institutional-quality buyer, they’ve been a very reliable, very well-capitalized, very well-managed firm that’s been a significant player in that niche for many, many years,” Jeff Hughes, senior director in investment sales with leading net lease firm Stan Johnson Co., said, speaking to CPE about the firm Carey founded.

With Carey as a driving force, sale-leasebacks became somewhat of a game-changer.

“He started in the industry 40-plus years ago, and prior to that time, corporate America did not have a very good outlet to take real estate assets off their balance sheet and monetize them in the form of a sale-leaseback transaction,” Hughes noted. “So it’s been a very significant financing mechanism that has allowed corporate America to do just that. If you’re in the business of building widgets then arguably you shouldn’t also be in the business of owning your manufacturing facility or your warehousing facility or your retail outlets. Carey pioneered the concept of taking that real estate off the balance sheet — you don’t need to own it, just sell it and lease it back on a long-term basis. It frees up your capital to plow it back into whatever industry you’re in, it allows you to do 100 percent financing of that asset and it still allows you long-term effective control of the asset through that long-term lease.”

Carey applied the sale-leaseback concept to veritably every sector of commercial real estate around the world. Past transactions include the $58.1 million acquisition of a 473,000-square-foot portfolio of boat fabrication and servicing facilities from a premier U.S. yacht builder, and the simultaneous closing of a 25-year lease agreement with the seller. The firm’s deals in the retail sector include the $154 million purchase of a 1.3 million-square-foot portfolio of retail facilities in Germany from do-it-yourself retailer Hellweg Die Profi-Baumärkte GmbH & Co. KG, which subsequently signed a 25-year lease with W. P. Carey for the space.

“Bill Carey was a pioneer in that industry, pioneering a concept that later became very mainstream in the capital-markets world,” Hughes said. “Many other institutions followed that path and mirrored that strategy, but he was a pioneer in making it commonplace and doing it on a very large and very professional scale for many years.”

Pioneer. It is the word that flows from the mouth of many in the commercial real estate business when ruminating about Carey. “Bill was a pioneer in the net-lease industry and those of us who now work exclusively in this niche owe tribute to his early work,” Bruce S. MacDonald, president of Net Lease Capital Advisors, shared with CPE. “He was a generous individual who gave back to the education and business communities he was a part of.  He leaves the legacy of having contributed to the growth of an industry and of having built a respected firm.

Since his passing, W. P. Carey’s board of directors unanimously elected Benjamin H. Griswold IV, a director with the firm since 2006, as non-executive chairman of the board. “A significant component of Bill’s legacy is the balanced strength of this organization and the quality of our people at all levels, which is consistent with the gold standard he set for himself and others,” Griswold said of the late Carey. “The depth and breadth of the talent within the firm and their dedication to its core beliefs position us well to continue our success and maintain the tradition of excellence that has been emblematic of W. P. Carey throughout its history.”

When Wm. Polk Carey passed away yesterday, he left behind a legacy. The 81-year-old founder & chairman of multibillion-dollar investment management company W. P. Carey & Co. was a trailblazer in the sale-leaseback arena.

A direct descendant of President James K. Polk, Carey, who passed away of natural causes in West Palm Beach, Fla., had leadership in his blood. Armed with a background as a leader in corporate finance, he founded W. P. Carey in 1973 and became one of the founding fathers of the sale-leaseback strategy, molding the company into a top force in long-term sale-leaseback and build-to-suit financing in the commercial real estate industry. The company now boasts a global investment portfolio valued at roughly $11.8 billion.

Among notable transactions, under Carey’s guidance, the company closed a $225 million mega-deal in which it acquired 21 floors of the New York Times Building in Manhattan while simultaneously signing a deal with the newspaper to remain in the space under a 15-year contract.

In addition to his role as a vanguard in commercial real estate, Carey will be remembered as an altruistic individual who was well known in charitable circles. He established the W. P. Carey Foundation in 1988 to support educational opportunities at such colleges as Arizona State University, Johns Hopkins University and the University of Maryland. Carey ensured that his generosity would outlive him by naming the foundation as the primary beneficiary of his common stock in W. P. Carey.

Demand for commercial real estate assets in the face of economic volatility helped compress cap rates for net-lease properties in the third quarter, according to a national survey by the Boulder Group. The market  for single-tenant assets should remain stable through the end of the year as demand for core assets keeps the lid on cap rates.

Released on Tuesday, the analysis by Northbrook, Ill.-based Boulder cited the decline in retail cap rates as the best illustration of the trend. During the third quarter, the bid-ask spread for retail property cap rates declined 20 basis points to 46 basis points. Overall, retail continues to offer the lowest cap rates among the three net-lease property types. Reckoned by asking prices nationwide, the average cap rate for retail properties dropped 25 basis points to end the third quarter at 7.75 percent.

As for the two other major categories of net-lease assets, cap rates for office properties dipped 15 basis points to 8.24 percent, and industrial assets declined 23 basis points to 8.47 percent.

Cap rates declined for generally for restaurants, banks, net-leased federal government properties and leaseholds; ground leases, zero cash-properties, CVS drugstores, and Dollar Brand outlets all registered upticks. Among national retail brands, rates dropped for Walgreens (5 basis points), FedEx (54 basis points) and McDonalds (40 basis points). “Historically low interest rates and a lack of quality single tenant properties were secondary contributing factors to the compression of cap rates that occurred in the third quarter of 2011,” the report said.  Supply of net-leased properties is under pressure from two directions. A development slowdown continues to reduce the volume of new product available to buyers. Retail properties on the market ticked up from 2,256 to 2,360.

A total of 540 office properties were on the market by the end of September, 103 more than during the third quarter and a 19% increase. The industrial sector added 30 new properties during the quarter, bringing the total available to 300 nationwide. Meanwhile, fewer sale-leaseback deals are coming to market because corporations needing to raise capital can turn to cash on hand and low-cost debt.

As for pricing, one-third of the net-lease assets on the market were offered for $1 million or less. The single largest category—39 percent—included properties priced between $1 million and $3 million. Higher-priced assets make up a considerably smaller proportion of what’s available. Eighteen percent of net-lease offerings carry price tags between $3 million and $6 million, and only 11 percent are priced at $6 million or more.

A new player on the net-lease scene is making a splash with a $105 million sale-leaseback deal with the O’Charley’s Inc. restaurant chain.

STORE Capital, a five-month old Scottsdale, Ariz.-based REIT, said late Monday that it has acquired 50 of O’Charley’s 342 restaurants, which the chain operates under the O’Charley’s, Ninety Nine Restaurant and Stoney River Legendary Steak brands. STORE will lease the properties back to O’Charley’s under a long-term triple-net lease. For its part, the restaurant chain said that it will use proceeds from the deal and $11.4 million in cash to redeem senior notes valued at $115.2  million

Details on the properties that changed hands were not disclosed yesterday, but according to information on O’Charley’s Web site, the company operates 227  locations in 18 Southeastern and Midwestern states under the O’Charley’s brand name; 106 Ninety Nine restaurants in upstate New York and New England; and 10 Stoney River locations in the Southeast and Midwest.

STORE—the firm name is an acronym for “single tenant operational real estate”—hung out its shingle in May with a $500 million equity raise, including a $400 million commitment from Oaktree Capital Management L.P., the investment management firm. The company is initially targeting restaurants, supermarkets, health clubs, education-related properties and other retail, service and distribution facilities.

STORE’s co-founders, REIT veterans Morton Fleischer and Christopher Volk, previously teamed up to start Spirit Finance in 2003, which the two ran for four years until selling it in 2007.  Fleisher was also the founder of Franchise Finance Corp., which he headed from 1980 until selling it to GE Capital in 2001.

Despite the prevailing economic headwinds, the net-lease space continues to perform. As proof, you need look no further than the opening of Stan Johnson Co.’s New York City office, the firm’s fourth major expansion since 2009, in order to be closer to its clients.

“The New York office was our next logical evolution,” Harold Briggs, managing director with Stan Johnson, told Commercial Property Executive. “It’s our strongest market in terms of client base, and our goal is to get close to the investors in the Northeast.”

The company, which is headquartered in Tulsa, Okla., and specializes in net-lease properties, has seen that client base grow when most firms were looking to contract. According to a report by The Boulder Group, cap rates for quality net-lease properties continued to compress in the second quarter of 2011 as demand for top properties tended to outstrip supply. And that demand for top clients is expected to continue through 2012.

“From 2007 through 2009 when investment sales as whole were down 90 percent, net-lease properties were still a star performer,” Briggs said. “It was and is a very attractive asset class.”

“We went against the trends and opened our Houston office in 2008,” Briggs said of the company’s first expansion effort. “We found two things. One, we were a lot closer to our [local] client base, but two, by going into the different markets we found strong talent in terms of our brokers.

The NYC office will bring two new brokers into the fold as managing directors: Jason Maier and Tom Georges. The city’s net-lease opportunities, according to Briggs, are numerous, including industrial and distribution space within the five boroughs, condo-ground-floor retail locations and big-box retailers in northern New Jersey.

Stan Johnson Co.’s satellite offices now include Houston, Chicago, Los Angeles and the upcoming NYC location, which will be located at 41 Madison Avenue.

Stan Johnson Co., representing both the seller and buyer, has orchestrated the sale of a 335,700-square-foot industrial building at 1700 Carillon Blvd., in Forest Park, Ohio, a Cincinnati suburb. Cincinnati United Contractors Inc. sold the property, currently occupied in its entirety by keys and signs distributor The Hillman Group, to Angelo, Gordon & Co.

According to a commercial real estate professional familiar with the suburban Cincinnati industrial market, 1700 Carillon Blvd., located at the Carillon Business Park, fetched $16.5 million. CUC originally developed the property for Hillman as a 109,000 square-foot build-to-suit in 2001 at a cost of $3 million, and completed the warehouse’s expansion to its current size in 2005. With the sale of the property finalized, CUC plans to redeploy its equity.

“The main challenge of this transaction was recasting the existing lease to add term and bringing it into conformance with institutional ownership standards,” said Craig Tomlinson, director of investment sales with Stan Johnson Co.,  in a prepared statement. “In that sense, it was really a three-way negotiation with buyer, seller and tenant.”

Industrial sales activity has increased in the greater Cincinnati market, according to third quarter 2010 report by Cassidy Turley. However, with closures and downsizings having plagued the market since the onset of the economic downturn, more than a few transactions have involved vacant or sparsely leased properties. During the third quarter, CECO Environmental Corp. sold its 250,000 square-foot plant for a reported $3 million and decreased its occupancy to just 30,000 square feet, and the long-vacant 254,000 square-foot Georgia Pacific building finally sold for just over $3 million.

But occupancy levels are on the rise. The vacancy rate dropped to 9.6 percent in the third quarter last year from 10.3 percent in the first quarter of 2010.

Sales activity in net-leased investments is substantially up since the beginning of 2010. Investors in today’s market are showing a flight to quality, zeroing in on retail properties with a single credit tenant. Properties occupied by quick-service restaurant chains and franchises, such as Jack in the Box or KFC, are among the more attractive investments. Many investors are exchanging out of various other property types into these net-leased assets that they view as more stable and secure investments.

The increased investor interest in the quick-service restaurant arena has led to a shortage of supply, resulting in a compression of capitalization rates. Properties trading at approximately $ 1.7 million to $1.8 million have experienced a cap-rate decrease of 50 to 75 basis points during the past year. In some properties, cap rates have dropped by as much as 100 basis points. For example, 12 months ago LA Fitness buildings in Southern California were trading at 10 caps. In the first half of 2010, LA Fitness buildings in the same market were trading at 9 caps.

The lack of supply in the market is due in part to increased hedge fund activity. With bank rolls of anywhere between $100 million and $1 billion, these funds are snapping up net-leased properties with quality tenants, which is driving prices up and further compressing cap rates. Although there has been an increase in distressed net-leased properties on the market, it is mostly occurring among retail strip centers valued in the $2 million to $3 million range and not in singe credit-tenant properties.

The increased activity among net-leased investments indicates that the commercial real estate market is starting to rebound, but make no mistake we are still in the midst of what is likely to be a long road to full recovery.

Courtesy Flickr Creative Commons user jimg944

By: Barbra Murray, Contributing Editor

Wineries and vineyards are about to become a big part of Realty Income Corp.’s portfolio now that the Escondido, Calif.-based real estate company has entered into a definitive purchase agreement with Diageo Chateau & Estate Wines. Realty Income will plunk down $269 million for two vineyard properties in Napa, Calif., and will lease them back to DC&E under guarantee by the wine company’s London-based parent company, Diageo Plc. Realty Income’s sale-leaseback transaction with DC&E is on track to close no later than June 30.

The transaction involves DC&E’s Sterling Vineyards winery (pictured) and Beaulieu Vineyards winery, which feature an aggregate 2,000 acres of vineyards, as well as buildings encompassing the wineries, production space, visitor centers and retail space for a total of approximately 400,000 square feet. Under the 20-year, triple-net lease agreement–which offers extension options for up to 60 additional years–the wine company will continue to manage and operate the properties. Realty Income is not going into the wine business; DC&E will still own and market its wine brands and products.

Companies owning self-occupied real estate continue to turn to sale-leaseback transactions in order to pocket cash in a hurry while staying put in their own digs. Such deals, however, are not as popular as they were a few years ago when investors could obtain credit for such acquisitions more easily. According to Real Capital Analytics Inc., sale-leaseback transactions for office, retail and industrial properties reached a six-year peak of $15 billion in 2007 and dropped to a six-year low of approximately $3.7 billion in 2009.

But the deals appear to be on the rise again. “U.S. sale-leaseback transaction activity in 2010 should easily top the amount recorded last year, but will still be well off from the totals seen in the middle of the last decade,” Dan Fasulo, managing director with Real Capital Analytics, told CPE. “Yet in the current risk-averse climate, many investors are attracted to the sale-leaseback format due to the perceived low risks involved when there is an established tenant.” Halfway through the year, office, retail and industrial property sale-leaseback transactions have already surpassed $2 billion.

Tulsa, Okla.-based net lease brokerage firm Stan Johnson Co. has completed the $62.7 million sale of a 20-property retail portfolio fully occupied by CVS/pharmacies.

The portfolio, which entails more than 248,000 square feet, has properties located in Alabama, California, Connecticut, Florida, Georgia, Illinois, Massachusetts, Michigan, New Hampshire, Pennsylvania, Texas and Virginia.

Jeff Hughes and Brandon Duff of Stan Johnson represented the buyer as well as the seller, both of whom were Texas-based. When announcing the news, Hughes said that the buyer was attracted to this particular deal given that the properties were highly leveraged and well suited to meet their particular needs.

He added that the company has several comparable transactions in the pipeline exceeding $150 million, with properties boasting long-term, bond-style leases with investment-grade tenants.

As part of its continuing expansion efforts, Stan Johnson recently opened a new regional branch in Chicago, appointing Duff as lead broker and associate director. The firm focuses exclusively on acquisition, disposition and financing of net-leased real estate in the retail, office, industrial and medical product sectors.

 What a difference a few years and a good lease make. Four years after its $25 million acquisition of the then-vacant 490,000-square-foot office complex at 550 King Street in Littleton, Mass., a joint venture of Angelo Gordon & Co. and National Development has sold the fully leased asset to Wells Real Estate Investment Trust II Inc. for $85.5 million in an off-market transaction. Home to IBM’s regional headquarters, the property holds the title of the largest software campus in Massachusetts.

Consisting of two connected three-story structures, the IBM Littleton campus occupies an approximately 40-acre parcel in the I-495 technology corridor about 30 miles northwest of Boston. The property was originally developed for Digital Equipment Corp. in 1984, and underwent an extensive renovation in 2008. New owner Wells REIT has committed to financing tenant improvements to the tune of $5.5 million for IBM, which occupies the entire complex under a net lease agreement that runs to 2020.

For Norcross, Ga.-based Wells REIT II, the most valuable feature of the asset is its occupant. As noted in a report filed by Wells REIT II with the U.S. Securities and Exchange Commission, “the financial condition and results of operations of the tenant, IBM, is more relevant to investors than financial statements of the property acquired.” With the purchase, the office REIT’s portfolio now encompasses 91 buildings accounting for an aggregate 21 million square feet in 23 states and Washington, D.C. The buildings are 96 percent leased on average, a performance that outpaces the national office market by a wide margin. By the end of 2009, the average office vacancy rate had reached 17 percent, according to Marcus & Millichap Real Estate Investment Services Inc.

The Matrix

By Suzann D. Silverman, Editor-in-Chief

From retail condominiums to big boxes, Jonathan Hipp views Washington, D.C.’s urban retail market as a place for growth. And with the formation of Calkain Urban Investment Advisors under the leadership of Rick Fernandez, previously assistant vice president of Calkain Realty Advisors, he is prepared to be at the forefront of that growth.

“Everybody is mentioning urban as the next hot area,” said the president & CEO of Calkain Cos. “Not just the smaller boxes. Even the big boxes—Target, Kohl’s, JC Penney—all want to infill the urban markets.”

While Calkain has already made inroads in that business, with 10 transactions valued at more than $20 million completed and $30 million in current listings, Hipp is confident enough in the potential that the division has hired one new MBA and is currently interviewing others to fill out the team. “This is a division that definitely has legs,” he said.

Having a separate division, he added, provides a benefit because it emphasizes the company’s specialization in the area. And urban retail, whether in Washington or elsewhere, does come with characteristics different than its suburban cousin. There is, for instance, a growing incidence of retail condominiums on the ground floors of mixed-use complexes as well as the more traditional office building. “It’s a different kind of sell,” Hipp said. It also has the potential to attract some new types of buyers, those both domestic and foreign that want to invest in urban markets but do not want to make huge purchases. “(Having properties) as small as $1 million and up opens the market to a tremendous amount of people,” he noted.

In most sports, coaches use specialists to deal with pressure situations. In football, for example, they will bring in a slash-type runner on offense to cross the goal line or a pass rusher on defense to sack the quarterback. These specialists have specific skills and in many cases prove to be the difference between victory and defeat.

For those in real estate, and particularly with Stan Johnson Co., specialization is the maxim for those that want to succeed in these trying times and get deals closed, no matter what the size or complexity. Sellers are looking for brokers “that can make it rain”–in other words, that can find hidden opportunities. In our case, the only deals we do are single-tenant net-lease transactions. We have carved a niche in the market where we are known as “The Net Lease Authority™.”

Utilizing a specialist or a group of specialists affords sellers the day-to-day contacts, insights and perspective that brokers in a specific area possess, allowing them to be creative and find opportunities that others may not know exist. Now more than ever, in this recent market, we are seeing the need to find more creative solutions to meet complex problems. Due to our expertise and our knowledge of available single-tenant properties and players across the country, we were able to align the right investor with the most suitable single-tenant property that meets the objectives for everyone.

We have been able to leverage our frequent contacts with active players in the industry. Many off-market deals are initiated as our brokers talk with owners who share that they would indeed sell their property if we found them the right buyer and the right price. Firms that are not actively engaged with the market players and do not frequently communicate with property owners in their particular line of business are unaware of current and future needs that are the source of hidden opportunities. Single-tenant property owners that engage brokerage firms that do not specialize in this niche, or employ a local general real estate agent, cheat themselves of the many benefits a single-tenant specialist can provide.

Another benefit of specialization comes into play with the financing required to make the deal work. Along with our capital markets team, our brokers have the knowledge of available debt and terms today. We have the expertise to assist clients in designing and executing innovative transactional solutions to finance and control their real estate. Our solutions are uniquely designed to achieve specific cash flow and financial statement objectives, promote efficient use of capital and credit resources, and mitigate tax burdens.

The net lease investment property is unique in the fact that the value of the deal involves more than just the real estate. Specialization is extremely beneficial when it comes to other critical elements that go into these deals. A firm that focuses exclusively within the single-tenant industry is much more qualified to understand how the tenant’s credit, comps and key provisions of the lease structure can all affect the potential investor’s interest in a certain asset. A specialist has the knowledge and laser-like focus to know market conditions and other key factors that in the end determine a property’s true value.

In summary, specialization in the net lease niche offers clients the best source of hidden opportunities and the most qualified buyers, the best financing solution and the knowledge and expertise to evaluate the true value of an investment deal.

Stan Johnson is CEO of Stan Johnson Co., a 20-year-old company whose net lease group focuses exclusively on the acquisition, disposition and financing of net-leased real estate.