June 4, 2014
Interviewed by: Privcap
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Deal Story: Avnet

Kathleen Barthmaier of W. P. Carey describes the firm’s $23 million acquisition of Avnet technology solutions headquarters in Phoenix, Arizona and how the firm balances the credit quality of tenants and real estate fundamentals amid growing appetite for secondary transactions.

Kathleen Barthmaier of W. P. Carey describes the firm’s $23 million acquisition of Avnet technology solutions headquarters in Phoenix, Arizona and how the firm balances the credit quality of tenants and real estate fundamentals amid growing appetite for secondary transactions.

Deal Story: Avnet

Told by Katie Barthmaier of W. P. Carey

Zoe Hughes, Privcap:

I’m joined here today by Katie Barthmaier of W. P. Carey. Thank you so much for joining me, Katie.

Katie Barthmaier, W. P. Carey: 

Thank you, Zoe.

Hughes: W. P. Carey is well known for corporate sale leasebacks, but we’re seeing a significant growth of the secondary transactions. One recent acquisition was the global headquarters of Avnet—their technology solutions group in Phoenix, Arizona. Tell me about the deal. Give me some highlights.

Barthmaier: Avnet is a global distributor of electronics components. They’re an investment-grade company rated triple B-minus and headquartered in Phoenix. The particular facility we bought is the headquarters of one of their divisions: global technology solutions. It’s located in Tempe, in Arizona State University Research Park. The facility was leased to them by a company called Piedmont, who extended the lease to be a new 10-year term. So, we acquired the facility subject to the 10-year lease in December 2013.

Hughes: Tell me about the sellers of the Avnet technology solutions headquarters: Piedmont Office Trust. Why were they selling?

Barthmaier: Piedmont was motivated to exit the transaction to maximize their IRR returns with a shorter hold period. They also were focused on closing the deal before year-end. So, we had to move on a tight timeline and that’s one reason they chose to work with us—just the certainty of close. We signed the transaction in mid-November and had to close by December 30.

Hughes: How did you get comfortable with the deal and obviously such a shorter lease term?

Barthmaier: Historically, we’re known for acquiring 15- to 20-year leases. In this case, we were able to get comfortable with a 10-year lease for a few reasons. On every transaction we look at the credit quality of the tenant, the quality of the real estate, and how important the asset is to the company. In this case, Avnet is a very strong global company, so we weren’t concerned for those initial 10 years. The real estate is an excellent asset in beautiful location in the ASU Research Park and when Piedmont extended the lease, they actually reduced Avnet’s rent. So, the rent is well below market rent and the facility is important to Avnet, as it was a build-to-suit for them. It’s the headquarters for their technology solutions business and they will be committed and stay and extend the lease.

Hughes: Are there things you look for in terms of the loyalty of the tenant to the property? Was there anything in terms of Avnet that said, “Yes, they’re going to stay here perhaps for the long term, beyond that 10-year lease?”

Barthmaier: Absolutely. Again, the fact that it was a build-to-suit for them; it was built to their specifications. Also, they had spent a lot of capital in upgrading the facility. As we were analyzing the transaction, they actually decided to move forward with a solar panel project, which again demonstrates their commitment to the facility.

Hughes: How are you balancing that credit analysis with Avnet and, obviously, the real estate?  

Barthmaier: Every transaction is unique. I would say the key word is “balance” in this situation. The pricing we are able to provide depends on the balance between the credit quality of the real estate and the importance of the asset.  

Hughes: In terms of secondary transactions, I’d love to get a sense as to whether this going to become more of a focus for W.P. Carey as you look out over 2014 and in the future.

Barthmaier: It very well could be. There are some interesting market dynamics going on right now where we’re driven to deliver long-term dividends to our investors and other institutional investors are more focused on IRR returns. They’re looking for a faster exit. And there can be more situations like this where an institutional investor will go to the tenant, give them a rent concession in exchange for a lease extension, and someone like us could come in and buy the long-term cash flow.

Hughes: Obviously, you mentioned the below-market rent. Are you expecting rent increases in the future?

Barthmaier: I believe there will be rent increases, particularly in this submarket and this particular research park. It’s a beautiful location. It has a very corporate-campus feel; there are about 25 sites within the park and most of them are already completely leased. There are two new build to suits going on in the park and the rents for those are substantially above where our rent is set.  

Hughes: In terms of supply, do you see that as an issue in secondary markets, especially when they’re technology driven? There seems to be a lot of appetite for technology-driven real estate.

Barthmaier: It’s interesting that you mention the supply because another thing that came out in our discussions with brokers in the Phoenix market in particular was that while there is some vacancy in the market, there is not a lot of large box of supply. So, if a tenant were looking for a new facility, most likely they would have to build a new facility.

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