For AEI Capital, Asset Success Trumps Distress

Plenty of investors are preparing to benefit from the coming wave of distressed asset sales, but net lease investors are not unanimously enthusiastic about the prospects. As net lease investors weigh whether to adopt an opportunistic approach, some veteran players are sticking to longtime conservative strategies. In that debate, AEI Capital Corp., a 39-year-old firm specializing in net-lease retail assets, makes the case for buying only successful stores tenanted by proven national brands.“Over the last couple of years, people lost track of the basics,” contended George Rerat, vice president of acquisitions. Net lease specialists, like many other investors, often failed to discriminate among different types of assets, he explained. A national chain restaurant owned by a franchisee frequently commanded the same price as an outlet owned by the parent company even though the parent company had much higher credit, he pointed out. And a store offering a rent-to-sales ratio of only 5 percent seemed just as attractive to investors as a comparable asset whose rent was 15 percent of sales. During the boom years, AEI Capital stuck to its knitting: a well-trafficked location in a healthy trade area, assets that can be re-sold following a five- to seven-year hold, a healthy potential for appreciation and a cash-only policy. AEI Capital has also focused on what it has considered to be the most successful brands in a given retail category. The firm never invested in stores with the now-defunct Circuit City brand, for instance, instead acquiring $30 million worth of Best Buy stores, including several 2009 purchases. Staples, CarMax and Dick’s Sporting Goods and Tractor Supply are among other brands in its stable.Rerat estimated that AEI Capital’s 2009 acquisition volume will be down about 20 percent compared to last year. As with investors of all stripes, its biggest current challenge continues to be reliable pricing. But that trend is likely to change next year, thanks in large part to a fund it is scheduled to launch this fall. That fund could help increase its 2010 acquisitions by 50 percent compared to this year, Rerat reported.