Pardue:There are three main factors to consider when underwriting any property: lease structure, quality of the real estate and tenant credit. Typically, credit is the largest driver when the asset has over 10 years of remaining lease term. In the case of small cap deals, we take a different approach on underwriting the tenant's credit-worthiness. Usually, on investment-grade deals or large public entities, we can lean on the bond ratings to determine default risk allowing us to focus on the deal's lease structure and real estate attributes. Due to the fact that small cap tenants are typically private entities, we often have to rely on a more in-depth underwriting approach. In order to determine default risk of a small cap company, an investor must take into account how the company is positioned in the macroeconomic environment, industry changing consumer trends, and drill down on the company with a formal business analysis including SWOT, ratio analysis, peer benchmarking and evaluating the firm's leadership track record. For example, we recently capitalized a pipeline of hospitals in which, at first glance, the company had a relatively short track record and smaller balance sheet. However, upon further analysis, investors noted that the operating company had strategically assembled a top-notch experienced leadership team, created a unique business plan that addressed the needs of today's changing market, and achieved nearly 100% year-over-year growth in revenue, EBITDA, and facility openings.

GlobeSt.com: What are the keys to marketing small cap net lease investment deals?

Pardue:Most net lease investors understand the inherent risk with this product-type. There can be more issues marketing small cap deals because there is less information about the tenant and it can be harder to forecast income streams. However, the key to marketing these deals is to be as transparent as possible and to tell a company narrative that explains why the subject company will be in business for the entire lease term, based on the previous analysis of economy, industry and tenant's business plan within this environment. This way, our investors can better understand the risk associated with making the investment. In addition to proper analysis, there are other specialized methods in marketing small cap properties. For example, we recently encountered a portfolio of properties that did not have a store-level financial reporting requirement in the lease. This caused concerns among investors. As a result, my team was able to locate other developers and property owners that owned comparable assets where lease did have financials reporting. This allowed us to close the transactions successfully at a benchmark cap rate on behalf of our client.

GlobeSt.com: How do you ensure a smooth closing of a small cap net deal?

Pardue:Whenever we enter a small cap transaction we ensure that the investor understands the type of investment that they are embarking on. A small cap lease offers steady yields and, with proper analysis, can offer similar risk associated with a standard triple net lease. In many cases, we will have to structure unique credit enhancements in order to achieve the seller's target cap rate, while giving the investor the comfort they require to move forward with the transaction.