Hunting for Yield
- Dec 18, 2013
If you’re in any business, you likely have signed up for several market and transaction updates to keep current in your industry. Recently, I read up on a triple-net transaction that closed at a 4 percent capitalization rate, all-cash, for a single national credit fast food tenant. I asked myself: “Have we not learned …or is it that investors are hungry for yield and cannot find it?”
Ten-year bonds are still hovering way below four percent (2.87 percent as of Dec. 16), so given the comparison, an investor might settle for the security of recurring income with a credit or government tenant and not worry about property management headaches. Using the Rule of 72, a method for measuring the time it takes for an investment’s value to double, it would take 18 years for that to happen. With inflation hovering at an average of 2 percent in 2012, around 1.50-1.75 percent in 2013, and thoughts of inflation skyrocketing not too far down the horizon, it will take even longer for anything meaningful to help your portfolio. So what are the alternatives?
Bridge and mezzanine plays continue to be a great opportunity. Whether you choose to invest in single transactions through a trusted source, an investment fund, or a REIT, the appeal of this part of the capital stack is worthwhile and has a strong record of success. Yields can be anywhere in the 8-15 percent range depending on the capacity of the operator and how they structure their return pro-forma. Determining which types of transactions that will flavor the fund is an important part of your investment consideration as well. Traditional FIRE-related tenants (Finance, Insurance, and Real Estate) fill office and retail space more slowly than ICE-related tenants (Intellectual Capital, Energy, and Education) which are seeing quite a bit of expansion, per Colliers International CEO, Dylan Taylor. Understanding these market dynamics will give comfort in how realistic the volume of transactions will occur and whether or not they can generate the returns promised by the operator.
With private equity giants like Blackstone launching nine digit-sized funds, the inefficiencies will be in the smaller transaction. With so much capital to deploy, these large vehicles won’t be willing to look at secondary markets. Investors will have less competition and will be able to find better risk-adjusted returns.
If the bridge or mezzanine plays are too risky for you, banks can be your friend. In order to compete with these bridge players, they have been opening up the purse strings to offer more interest-only loans. From 2010 to the present, there has been an increasing amount of originations that have some type of non-amortizing component, according to Aleksandrs Rozens at Bloomberg. This can be great for short-term holders who wish to maximize NOI for their investors and leverage the acquisition to juice returns.