As with most other sectors in commercial real estate, the economic earthquake set off by the coronavirus pandemic has rattled investors in net lease properties.
A first quarter report from The Boulder Group, a Wilmette, Ill.-based real estate investment firm specializing in single-tenant net lease properties, indicates many institutional investors have canceled or paused net lease acquisitions amid the ongoing market instability. However, net lease deals are still being executed by private investors and 1031 exchange buyers, the report says. Active investors are focusing on properties occupied by essential businesses that have largely escaped harm from the pandemic, such as drugstores, convenience stores, dollar stores and grocery stores.
Even before the pandemic threatened lives and livelihoods around the world, Phoenix-based investment firm Fundamental Income Strategies LLC had planned to roll out a net lease investment platform. Despite the pandemic—and even emboldened by it—the firm launched its Fundamental Income Properties LLC platform on April 22.
A fund managed by Toronto-based Brookfield Asset Management Inc. injected an initial equity investment of $500 million into the platform. That money is aimed at establishing, through a combination of equity and debt, a $1.0 billion to $1.5 billion portfolio of single-tenant net lease properties across the country. Among the platform’s targets are single-tenant properties that house restaurants, grocery stores, convenience stores, furniture stores, auto repair centers, car washes and day care centers.
To help steer the new initiative, Fundamental Income Properties just brought aboard Greg Lang as a partner. Lang previously served as vice president of acquisitions at Rochester, N.Y.-based net lease REIT Broadstone Net Lease Inc. and as managing director of acquisitions at Scottsdale, Ariz.-based net lease REIT STORE Capital Corp.
Former STORE Capital executives Chris Burbach and Alexi Panagiotakopoulos lead the Fundamental Income Properties platform as CEO and chief investment officer, respectively. They’re partners and co-founders of Fundamental Income Strategies. Last year, Fundamental Income Strategies teamed up with Exchange Traded Concepts LLC, an Oklahoma City-based ETF adviser, to form the publicly-traded NETLease Corporate Real Estate ETF.
“We really believe that net lease has been an overlooked, underserved market,” Panagiotakopoulos says. “The strategy behind Fundamental Income was always to have a private vehicle that served institutional capital, and a public vehicle like NETLease ETF that gave access to retail investors and smaller institutional investors.”
Panagiotakopoulos and Burbach chatted with NREI about why they set up their net lease investment platform and what their game plan is.
This Q&A has been edited for length, style and clarity.
NREI: You were thinking about building this platform before the huge economic hit we’re taking right now, correct?
Panagiotakopoulos: We started talking about this while the economy was seemingly fine. Obviously, the economic downturn makes what we’re doing even more important now. But we’ve always had this view that small businesses and middle-market companies are completely underserved and overlooked by the larger institutions.
It’s very difficult to create a granular net lease portfolio when you’re looking at $1 million to $5 million deals. Large institutions won’t do a deal that’s less than $50 million or $100 million, and that’s why the investment-grade names get a lot of attention, like Walmart and Walgreens and Home Depot. One of those locations could go for $20 million or $25 million.
Burbach: At the beginning of this year, we started thinking about the overall landscape of net lease real estate. We saw that there was room for more capital to come into the space and started talking to partners. We found a great partner in Brookfield, who shared our vision and shared our view of the opportunity in the $3.8 trillion addressable market.
NREI: What’s your approach to buying single-tenant net lease properties?
Panagiotakopoulos: Companies are looking for more efficient ways to clean up their balance sheets and raise capital that they can redeploy without having to dilute shareholders. We really want to partner with local, regional and national brands to help shore up balance sheets, help them grow and really be a capital partner that they can rely on.
Burbach: What we’re targeting is operating businesses that want to sell the real estate that they own and lease it back so that they can use that capital in a productive way, whether it be to strengthen their balance sheet or to buy a competitor or to build a new store.
NREI: What is the attraction to single-tenant net lease versus other types of commercial real estate investment?
Burbach: What you ultimately get is a really predictable stream of cash flow that’s contractual and bears a lot of the same qualities in terms of risk that a fixed-income product like a bond or a bank loan has. It’s got the added benefits of having built-in rent increases.
NREI: What kind of reaction have you gotten to the new investment platform?
Panagiotakopoulos: I can’t tell you the amount of phone calls and emails that we were inundated with—close contacts and businesspeople and even folks we don’t know—in the first seven days after we announced the platform. We probably saw an influx of 100 potential deals. We’ve issued a couple of LOIs, and we’re working with a number of institutions on gassing up transactions. We’re trying to be active right out of the gate to help fill a void and backstop what’s going on in the economy. Right now, access to capital markets is very, very ambiguous and rare.
Chris and I are true patriots. We’re sons of entrepreneurs, and born and raised and proud American citizens, and we hope everything comes back. We believe in the success and resiliency of American business. That’s really what’s fueling the fire.