Market Still Adjusting to Debt Woes, Says Pandaleon

When CPN NetLease last spoke with George Pandaleon, president of Inland Institutional Capital Partners, last fall, the subprime meltdown was still fresh news and still a harbinger of uncertainty more than anything else. Since then, the reverberations of the crisis have become all too well known, and a new – and much tougher – borrowing and lending paradigm has established itself. But has the crisis been particularly calamitous on the net lease industry? Pandaleon says no. Certainly lending conditions haven’t adversely affected the $1.1 billion joint venture that Inland American and Lexington Realty Trust formed in 2007, Lease Strategic Assets Fund L.P., whose purpose is to acquire and manage net lease properties. Recently, Inland American and Lexington folded a final group of seed properties into the JV, and plan to acquire perhaps $400 million more in net-lease properties over the next two years for it. CPN: What’s the outlook for buyers of net-lease properties such as American Inland and its JV partners? Pandaleon: The market is still adjusting. But going forward I believe there will be more attractive opportunities to buy net-lease assets. One reason is that corporations are now looking at their real estate assets more closely than they might have in the days when debt financing was easy. So properties will enter the net lease market in greater numbers through sale-leasebacks, as the current tough conditions continue. Sale lease-backs have been an option for some time, of course, and companies have been taking advantage of the structure, but I believe as the credit markets remain challenging – and they will for the foreseeable future – the pressure will mount to monetize real estate assets more than ever. Borrowing costs from other sources are going to remain high, and corporate earnings aren’t going to be so strong. CPN: How are net-lease cap rates going to move? Pandaleon: You can’t get a 75 percent loan-to-value, interest-only loan anymore, but instead you might get a 65 percent, loan-to-value loan that isn’t interest only. That’s just the state of the debt markets these days. That changes the numbers, and will eventually make the cap rates higher for net-leased assets. CPN: Do you see new competitors entering the net-lease space? Pandaleon: Not in vast numbers. The number of players who can buy net lease assets has been diminished by the reduced availability of debt, and it’s going to stay that way for quite a while. That isn’t to say, however, that there aren’t still a good many solid net-lease players. It’s just that the game is going to continue to require more equity capital, which makes it more attract for buyers like us who have that capital.