July 6, 2015
Interviewed by: Privcap
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Deal Analysis: Closing An 11-Year Core, Net Lease

W. P. Carey executive director Katie Barthmaier talks about the firm’s acquisition of the Intuit office property in Plano, Texas and how the tenant’s $9M of capital improvements since 2001 helped them underwrite a shorter lease term.

W. P. Carey executive director Katie Barthmaier talks about the firm’s acquisition of the Intuit office property in Plano, Texas and how the tenant’s $9M of capital improvements since 2001 helped them underwrite a shorter lease term.

Deal Analysis: Closing an 11-Year Core, Net-Lease Deal
Told by Katie Barthmaier of W. P. Carey

Describe your net-lease acquisition of the Intuit office property in Dallas and why it’s so unique for W. P. Carey.

Katie Barthmaier, W. P. Carey: The Intuit transaction was a bit unique for us at W. P. Carey because we typically focus on long-term, single-tenant opportunities, preferably 15 to 20 years. In this case, CPA 18—our public, non-traded REIT fund—acquired this office building that’s leased to Intuit in the Dallas submarket for 11 years with an earlier termination right. We acquired the facility from a company called Piedmont Realty Trust that we worked with before acquiring the Avnet facility last year. We have a great relationship with [Piedmont] and they chose us because of our ability to execute in a timely fashion.

The reason we were able to get comfortable with the shorter-term lease is that we have a very strong asset in a thriving market that’s leased to Intuit. And, most importantly, our basis in the property is very attractive. That was really the key to our underwriting.

This was a build-to-suit facility for Intuit in 2001. How did Intuit’s capital improvements since then play into your underwriting?

Barthmaier: It was a build-to-suit for Intuit in 2001. And the facility houses the professional software. It is a core regional office for Intuit globally. It was interesting when I toured the facility—they really made it their own. They have a basketball court, a volleyball court and even a community garden. What most impressed me, touring with the manager, is how proud he was of the facility and some of the projects they’ve done recently, including the landscaping. Over the past three years, Intuit has invested about $9 million of capital into upgrades in the facility. Even during our due diligence, they requested some solar work to put panels on the roof and on the roof of the parking structure. All of that demonstrated their commitment to the property.

In underwriting such real estate deals, and given market competition, do we need to be more subjective in our analysis?

Barthmaier: The quantitative is a bit easier to underwrite. But the qualitative—the soft touch—to understand really what’s going on at the property is more and more important. In this case, we had both. We could see their commitment to the property, but we also felt very comfortable with the numbers and our basis in the property. It’s in Legacy Park, which is a suburb of Dallas to the north. It’s a thriving area. Our rent for this property is at $11.50 per square foot, where the market is in the $18 to $20 range. So what’s interesting is that, even if Intuit were to leave the property, which we don’t foresee, our downside is very protected and may in fact be an upside.

How do you underwrite the criticality of an asset to a tenant over an 11-year period?

Barthmaier: Eleven years is a long time. What helped us in this situation, again, is that it was a build-to-suit for them. The way we observed the employees at the site, the discussions with the manager, really [gave us] a feel that it does feel like it’s their property. They made it their own.

How do you view the office’s location in Legacy Business Park, in Plano, Texas?

Barthmaier: Legacy is a thriving market. And…the location was critical to our analysis, particularly for the residual analysis. Dallas, in general, is the fourth-largest MSA in the country and has been growing very rapidly. I’m not sure if you’re familiar with the history, but [Legacy] was developed by Ross Perot in the early ‘80s when he moved the EDS headquarters there. Since then, it’s really grown into a mixed-used town center. There [are] a lot of corporate headquarters and regional headquarters (including JC Penney, Erickson and Frito-Lay), and there’s some recent news that Toyota is moving their headquarters from California to Legacy. That is very big news for the market. It’s 1.5 million square feet, over 4,000 employees, and they’ll bring with them a lot of the suppliers. So there’s a lot of activity and demand in the market.

What about new development concerns?

Barthmaier: We see it as a very strong market currently. Dallas, interestingly, has a history of development. That’s something we had to take into consideration as well. What’s to keep Intuit or someone [else] from building a new facility? However, again, it comes back to the math, where we feel very confident and comfortable with our basis in the property. It would be difficult to recreate this building with the parking structure for the same price we bought it for.

What was the biggest challenge you faced?

Barthmaier: The biggest challenge is winning it, because it’s such a competitive market and that’s where I think our relationship, our reputation, our experience and our pricing came into play.

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