GIC’s massive net lease bet is not easily replicated

There are multiple reasons not to expect the sovereign wealth fund’s $14bn STORE Capital deal to be repeated by other capital providers.

The $14 billion privatization of net lease real estate investment trust STORE Capital Corporation by Singaporean sovereign wealth fund GIC and Chicago-based net lease specialist Oak Street will be one of the largest-ever transactions in the US net lease sector when it closes next year. But arguably the most compelling aspect of the acquisition is the capital behind the deal.

The all-cash transaction is by far the Singaporean sovereign wealth fund’s largest investment in the US net lease sector. Indeed, GIC only previously made one other deal in the space, the formation last year of a core net lease retail real estate platform with New York-listed REIT RPT Realty, hedge fund Zimmer Partners and investment manager Monarch Alternative Capital.

As Scott Merkle, managing partner at New York-based real estate advisory firm SLB Capital Advisors, told us this week: “This is a big splash in the net lease sector and really validates the sector. We have seen a number of new entrants in this market over past two years, but they’re not capital providers or investors.”

As PERE reported in our May cover story, those groups have primarily been private equity firms – and capital allocators – such as The Carlyle Group, KKR and Ares Management.

In the deal announcement, Lee Kok Sun, GIC’s chief investment officer of real estate, pointed to STORE Capital’s “impressive cashflow profile, long-weighted average lease term and highly diversified portfolio with strong rent coverage” as the rationale for leading the investment.

Aside from GIC, however, few other large investors have struck blockbuster deals in the net lease space. Instead, those institutions have opted to form sizable joint ventures with operators in other real estate sectors where they can achieve higher, typically value-add returns. Net-lease buyers, however, typically are acquiring stabilized assets with a reliable cashflow stream. Investors view the sector as being “a little bit sleepier,” Merkle explains. “It’s not a high-octane asset class.”

As the private real estate industry continues to face interest rate hikes and broader market volatility, such a gargantuan investment in the net lease sector is not without its risks. In its Q1 2022 US net lease investment report, commercial real estate brokerage CBRE expected overall net lease cap rate compression to end this year, with cap rates expanding from 25 to 50 basis points for assets that have long-term leases with up to 2 percent annual rent increases. “Less favorable market conditions will weigh on net-lease investment volume and impact pricing as the year progresses,” the firm stated in its report.

The sub-investment grade credit profile of STORE’s tenant base is another potential risk factor, as an economic recession would trigger more issues across the company’s portfolio compared with a portfolio comprising investment-grade credit tenants.

As such, given current market conditions, we do not expect other big-name investors to follow GIC’s footsteps for the time being. Institutions that previously had considered large-scale investments in the sector are delaying those plans until the interest rate environment stabilizes so they can more reliably anticipate what their costs of capital will be, according to Merkle.

In contrast, GIC has a cost of capital advantage with its size, scale and deep capital resources and consequently does not need to rely on the mortgage market to finance its investments. Such an advantage is probably what made GIC comfortable with making its multibillion dollar wager on the net lease sector in the current environment, he says.

There are only a few other institutions able to make a similar bet, however. And given the dearth of other platform targets of this scale, the foreseeable future sees GIC having the net-lease playing field largely to itself.