STNL Investors Flock to Day Care Assets

The once-overlooked child care center-occupied triple net leased investment category has been quickly emerging as a major food group for STNL investors. The past 12 months have proven to be a banner period for this segment with sales soaring nationally to 390 transactions and $884 million of transaction volume, and representing a 396% increase over a five-year period. Currently averaging 6.8%, with brand new 15-year corporate-guaranteed opportunities ranging in the mid-to-high 5% range, child care cap rates are typically more attractive than fast food, dollar stores, drug stores and gas stations. 

Part of the reason child care has stayed under the radar over the years, is that all but one operator is privately held and most are backed by private equity groups. The child care segment is quite active with mergers and acquisitions, however, and every year or two, a larger operator trades hands from one PE group to another. 

Many investors are surprised when they learn that KinderCare Learning Centers, the largest tenant in the child care space with over 1,500 locations, offer full corporate guarantees on many of their schools. The second largest operator, Learning Care Group with 900+ locations, offers similar corporate guarantees or subsidiary guarantees. If a buyer wants a higher rate of return, they can purchase a center with a franchisee guaranty such as The Goddard School or Kiddie Academy, who stringently choose their franchisees based on financial solvency and operating experience. These properties currently trade in the low-to-high 6% cap range on 15- to 20-year NNN leases. 

A number of economic factors are playing into the expansion of the child care market. First, as the dual-parent workforce participation continues to increase throughout the U.S., so do household incomes and the demand for private day care schooling. It is projected that revenue for the child care sector will increase 4% annually over the next five-year period. There are also many markets throughout the country considered “child care deserts” meaning there are significantly more parents that have their children on a waiting list than there are open enrollment slots.

A diverse and expanding set of investors are active in purchasing within this asset class. Traditional private capital makes up the largest segment, however, publicly-traded REITs, private funds, syndicators, family offices and other investment groups are very active in the space. We anticipate that more institutions will enter the airspace and compete to buy these properties, especially newly formed, publicly traded REITs.

Without question, the day care-occupied property niche offers enormous potential for growth and we anticipate that as some mid-range operators continue expansion into the child care deserts, net lease investors will witness an influx of new construction or retrofitted assets on the market. As an expert in this product type with more than $94 million in sales this year, SRS has seen the value in this growing STNL segment and we believe it will only continue to grow over the coming years.

Chad Lieber is Vice President of SRS – National Net Lease Group.