Currently hot, net lease sector could cool off quickly if interest rates rise.
Nick Schorsch is bidding adieu — at least for now — to net-lease real estate, the sector that has been the backbone of his rise to dominance in the $10 billion-per-year nontraded real estate investment trust industry.
Mr. Schorsch, chief executive of REIT sponsor American Realty Capital, today informed broker-dealers who sell his REITs that in two months, he plans to end sales of American Realty Capital Trust V Inc., the latest in a series of nontraded REITs that bought net-lease properties. And after ARC V, as it's known in the industry, closes to sales Sept. 18, there will be not an ARC VI, Mr. Schorsch said.
“Net lease is great right now, but we don't know what's going to happen in 2014,” he said in an interview. American Realty Capital likely will take a break on creating and selling net-lease REITs for at least a year, and may wait as long as three years to bring a new net-lease offering to the market, he said.
“It's better to hold net-lease assets when the economy heats up,” he said.
The market has become wary of investing in net-lease real estate, with the specter of rising interest rates driving most of those fears. LPL Financial LLC, in a white paper circulated to advisers last month, focused on concerns from net-lease real estate, stating: “Valuations within the triple net segment of the market may be more stretched (than the overall real estate market), and the group has considerable exposure to rising interest rates.”
Net lease is a term in real estate that calls for the tenant to pay most of the costs associated with maintaining the property it leases, such as taxes, insurance, repairs and upkeep.
“Just as the various sectors of the fixed-income market react differently to changes in rates based on duration and credit quality, the same is true for the various sectors of real estate,” the LPL white paper said. “Net lease is one of the sectors that can be viewed as most sensitive to rate hikes.”
American Realty Capital has dominated nontraded REIT sales the past couple years.
Nontraded-REIT sales reached $7.8 billion in the first half of this year, an increase of 68.2% from last year, according to investment bank Robert A. Stanger & Co. Inc. American Realty Capital was responsible for 39.2% of all nontraded-REIT sales in the first half of 2013, according to Stanger.
Investors have bought $630 million of ARC V since it opened in April. In total, the REIT will raise $1.7 billion from investors. Mr. Schorsch said that giving advisers and investors two months' notice of the REIT's cutoff of new sales would help make the closure of the REIT as orderly as possible, particularly for investors with retirement accounts.
