The net-lease sector of commercial real estate has been strong throughout economic cycles, and now there is more evidence of perceived investor interest in these types of assets.
At the root of this transaction is retailer Shopko, which has about 370 mass-merchandise stores based in the Midwest and West Coast. The retailer, which is privately held by private-equity group Sun Capital Partners, has been opening stores over the last couple of years, according to a press release from 2016. Shopko stores average between 15,000 and 35,000 square feet.
Spirit management contends that the deal “isolates Shopko concentration with a structure that can preserve and maximize the value of the Shopko assets.” Shopko is currently its most significant tenant.
Spirit executives say that other than the units with Shopko locations, SpinCo will be comprised of 925 properties. The new REIT is projected by Spirit to have $2.7 billion in assets and $220 million in annualized rent.
The deal will leave Spirit with about 1,540 properties, valued near $5.4 billion. After the SpinCo deal, the largest tenants in the company’s portfolio will be Walgreens, AMC Entertainment Group and Cajun Global, which is a franchisor of Church’s Chicken, and Texas Chicken, a concept with restaurants in Asia.
Though net-lease assets are considered a sought-after safe haven in commercial real estate because of their necessity tenants, Spirit saw a dip in earnings over the second quarter. Year-over-year revenues fell for the period as well as the first half of 2017. Net income came in at $23.2 million in the second quarter, while it was nearly twice that over the same period in 2016. Spirit is not very close to its 52-week-high stock price, either.
But Spirit is still making acquisitions, including $92.8 million in the most recent quarter.
The SpinCo effort shows perceived investor interest. And why not?
A JLL net-lease report of the second quarter shows that cap rates for retail properties are at 5.7 percent, lower than both office and industrial, and investors are holding on to their assets for now.
The commercial real estate services firm also says that REITs are pouring more money into the sector after a property sell off 2016. They are reportedly looking for higher-quality assets now.
Meanwhile, The Boulder Group points out that net-lease retail has overall been immune to the many store closures gaining attention lately. The firm also says that Walgreens’ purchase of nearly 2,200 Rite Aid stores will help the transaction market gain traction. Additionally, cap rates for most major net-lease retail chains over the last five years are the lowest they have been in the decade.
Another net-lease REIT, especially guided by an expanding tenant, will be bound to attract investor interest.
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