KKR Backs Single-Tenant Company in $50.8 Billion Market

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KKR & Co. made its first investment in single-tenant commercial real estate, a market in which $50.8 billion of U.S. properties changed hands last year, by taking a stake in closely held Drawbridge Realty.

The funds will help San Francisco-based Drawbridge expand nationally through acquisitions, said Kristi Huller, a KKR spokeswoman. She wouldn’t disclose how much the firm invested. Drawbridge buys, develops and manages properties for corporations, mainly office, research and industrial buildings. It oversees about 3 million square feet (279,000 square meters) valued at about $800 million.

KKR’s investment comes amid strong investor demand for single-tenant real estate and the potential for asset sales by American Realty Capital Properties Inc. as it tries to recover from an accounting scandal. Single-tenant properties offer predictable yields over long periods, typically 10 to 20 years.

“This is a very good time in the market cycle to recapitalize,” said Bernie Haddigan, senior managing director in the capital markets unit of CBRE Group Inc., the world’s largest commercial broker. “The single-tenant world is the most bond-like proxy. There is an increasing appetite for that stability.”

Drawbridge’s properties are located in the San Francisco Bay area; San Diego; Salt Lake City; Austin, Texas; and Raleigh-Durham, North Carolina.

“With the support of KKR, we will work to create value by building an increasingly diversified investment platform,” Mark Whiting, Drawbridge’s co-founder and chief executive officer, said in a statement Friday.

Triple-Net

Single-tenant properties usually are leased on a triple-net basis, with tenants paying for building maintenance, property taxes and insurance. Typical net-lease properties include chain stores, restaurants, health clubs and clinics.

Sales of U.S. single-tenant properties rose 6 percent to $50.8 billion last year after jumping 40 percent in 2013, according to Real Capital Analytics Inc. The measure includes sales of properties for at least $2.5 million.

American Realty is looking at possible asset sales as the company tries to regain investment-grade status, CEO Glenn Rufrano said on a May 7 conference call.

“This company has never culled its assets,” he said. “Our first look here is culling assets so that we can determine what the risk relationship long-term should be at our asset base.”

Landlord IPO

Investor interest was underscored by Store Capital Corp.’s Nov. 18 initial public offering. Shares of the single-tenant landlord, backed by Oaktree Capital Management LP, have risen 15 percent since the IPO.

Billy Butcher, KKR’s co-head of real estate acquisitions in the Americas, will join the board of Drawbridge. Drawbridge was started in 1999 by Whiting and others. Townsend Group, a Cleveland-based pension consultant and fund manager, invested in Drawbridge with KKR.

KKR raised its first property fund in 2013. Past investments include suburban malls, an outlet center, U.K. retail warehouses and a housing development in the oil hub of Williston, North Dakota.

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