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Shopping Centers Today -> May 2004
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INVESTORS HOT FOR CREDIT TENANT LEASE DEALS
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These long-term leases generally require retail tenants to possess a triple-B or higher credit rating.
By the end of last year, some $2.7 billion worth of credit tenant lease deals were done, up from about $1.8 billion the year before, according to Anthony Napolitano, publisher of the Private Placement Monitor, a news service that specializes in tracking private-market deals. (This does not represent the total CTL market; considered private-placement transactions, CTLs are not registered with the Securities and Exchange Commission, and thus the total market volume is unknown.)
Depending on tenant strength, some spreads have tightened by 25 to 50 basis points over the 10-year Treasury, says Steven Maloy, a managing director at New York City-based net lease lender Chappo, Maloy & Co. Such tightening happened just recently, from January to mid-February, says Maloy, and that included retailers beyond those with high credit ratings.
CTL spreads are not tracked specifically, but because they involve corporate credit and deliver a fixed rate of return, the market uses corporate bond spreads to gauge their performance.
The spreads on triple-B-rated corporate bonds have narrowed drastically since late September 2002, when they priced at 344 basis points over the 10-year Treasury, according to Wachovia Securities.
By late March these bonds had tightened to 128 basis points over Treasuries. Single-A bond spreads closed up considerably too, pricing at 64 basis points over Treasuries, compared to 162 basis points in September 2002.
Yield-hungry investors and CTL property buyers are heating up the market, says William R. Pollert, president of Capital Lease Funding, a net lease REIT. Interest rates are so low (the 10-year Treasury was at 3.78 percent at press time) that corporate bond spreads look better than the government bond, says Pollert.
“This is an expanding area of the fixed-income, private-placement market, and it has not seen any abatement whatsoever,” said Steve Jacobson, a principal at William Blair & Co., a Chicago-based investment bank.
Cap rates, too, are dropping in the CTL market, thanks to intense competition among purchasers, says David Cobb, executive vice president and chief investment officer of Commercial Net Lease Realty, Orlando, Fla. Properties that had fetched cap rates of 9 to 9.5 percent six months ago bear only about 8 percent now, says Cobb.
To be sure, buyers are still paying for properties occupied by well-run companies, such as CVS, rated A2 rating by Moody’s. But they are also more willing to buy properties with lower-rated tenants, such as Charlotte, N.C.-based car dealer Sonic Automotive, which has a senior unsecured credit rating of B1 from Moody’s. Lower-credit-rated Eckerd and Toys ‘R’ Us, too, are among the tenants at CTL properties that are being snatched up.
As long as the retailers display certain qualities, such as being a public company with a market cap of $100 million to $1 billion, there will be buyers, industry sources say.
The CTL market may wait a long time before cap and interest rates rise, some say. For one thing, the Federal Reserve Board left the target rate unchanged in March at 1 percent, the lowest it has been since 1958. A tight market will probably keep things hot too.
“Lots of investors would like to put more money in,” said Napolitano, but that’s easier said than done. “There are just not enough deals.”
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