NNN State of the Union
STNL leased financing has been fluid now for the last few years and competition amongst the Capital Markets has been steadily increasing. Of particular note, underwriting standards have remained reasonable and have resisted the urge to be watered down despite the additional availability of capital (read: no bubble in the foreseeable future).
Credit rated tenants have continued to receive preferred pricing from all lender types, and we have noticed that all of the talk of lenders being full of tenants such as Walgreens and CVS is actually coming to fruition. Life companies and banks are reaching capacity with the exception of only the most conservative requests, with the slack being picked up by Wall Street and a spattering of national/regional sources.
The recent interest rate spike did little to temper cap rates for STNL leased assets—especially credit rated leases—though there are still a few tricks for garnering additional cash/cash return under these circumstances. For example, we are able to arrange interest only financing starting with loan requests of 65% and below, and lease remainders of 15 years or longer. The interest only period can be up to 10 years. The market for conservative Rite Aid requests has also come back. Pricing is currently just shy of 5% for a 10 year fixed, 30 year amortized loan. Considering Rite Aids are trading north of 7% cap rates, this provides some good positive cash flow, assuming you are comfortable with Rite Aid credit.
One thing to keep in mind with regards to non-recourse requests on STNL assets is that lenders are very conscious of the balloon amount vs the vacant property value. They don’t want to receive the keys to an upside down loan on an empty property with no borrower guarantee. As such, there needs to be a good amount of lease remainder left past the fixed term/balloon payment, with the initial LTV request and amortization length being used to manage the remainder of the refinance risk.
Looking forward, there appears to be little slow down to the momentum of STNL assets as the number of buyers is increasing and inventory is limited. The good news is that we are successfully financing these assets with a wide variety of capital scenarios that range from providing maximum cash flow to maximum LTV on a self-liquidating basis.