"Our intent is to buy properties on longer term leases so if it takes three, four, five years--who knows--we'll still have at least 10 years left, if not a little longer, when that [mortgage] market returns," Rouse says.
It used to be that 15 or 20-year leases were the norm in the sale-leaseback arena. But in recent years, cheap and plentiful CMBS debt fueled shorter term net lease property acquisitions, while it was largely highly leveraged buyers who could compete on 15-plus-year deals. Now the pendulum is swinging back.
While New York City-based LXP expects its purchases in the foreseeable future to be all-cash buys, it could very well put 30% to 40% floating-rate bank debt, the most readily available form of financing today, on portfolios of newly acquired properties, Rouse says.
The REIT will focus on office and industrial assets with tenants of BB- or better credit, according to Rouse, who adds: "We're very credit conscious." Automotive-related properties are off the table, as is by and large the Michigan market. LXP is looking at a small number of retail acquisitions as well, Rouse says, though any buys in this arena would be limited to portfolios of properties with strong sales performance and cross-defaulted leases "so in the event of bankruptcy, the tenant can't pick and choose."
Rouse reports that acquisition prospects are looking "quite good" now, noting that "cap rates are continuing to evolve, but people are starting to realize that the days of 8.5 cap rates and lower are gone." While he can't predict whether volume will be significant so early on, he does say the company expects to have new acquisitions during the next three months.
He also reports seeing particularly promising opportunities with developers who want build-to-suit business, but can't get the amount of bank financing they used to and either don't have enough of their own capital to fund projects or don't want to put as much equity in as they now need to. "Developers who want to participate in that build-to-suit market find they have to come up with 20%, 25% equity," Rouse observes.
Lexington Realty Trust currently owns interests in 288 properties totaling about 48.8 million square feet across the country. It has formed joint ventures with partners for acquisitions and ownership in the past, and expects to continue that part of its business strategy going forward. In fact, the REIT is currently looking to JV with one or more institutional investors as it looks to new buying opportunities fueled by its all-cash acquisition strategy ahead.
"We're optimistic about the market in the near term and the rest of the year," Rouse says. "We of course would like to see some normalcy in the commercial mortgage market return, but we don't expect it this year."
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