As the Chief Operating Officer at MAG Capital Partners, Neil Wahlgren focuses on strategy, capital markets, and equity. His job is to make sure that they get the money at the right time and at the right place.
MAG works in a specialty niche. As an investment group, they target single tenant net lease for triple net industrial properties and buying through a sale-leaseback.
MAG CP buys industrial buildings. Most of which have only a single tenant. These properties are industrial spaces that could house manufacturing companies or act as a warehouse or distribution location. The utility value of those types of properties is in having that long-term tenant in place.
Other types of commercial properties include multi-tenant flex industrial properties. These are usually located in an industrial part of town and are composed of long buildings housing small demo shops and storage spaces. Space allocation would be 80% warehouse and 20% office and bathroom. Also, there would be truck loading docks.
Specialty industrial properties are those that house laboratories, R&Ds such as those in biotech or gas industries. Those are considered an independent class and would always have a suit.
MAG CP prefers Class B industrial buildings built in the 90s. Most have leases that are structured as a triple net which means that paying for the big 3 expense items – insurance, taxes, maintenance/utilities – remains a responsibility of the tenant.
There are no surprises. There are no expenses that would cause rent to deviate. So they’re able to pay investors a high degree of cash flow from day 1. Leases run for 10-20 year terms and are more longer-term than for those in retail and multifamily.
Neil shares that they ride in annual rent bumps in the lease contract of 2% per year.
With this type of property, the bones of the real estate matter less. The true risk is the creditworthiness of the tenant. Neil makes sure to look at the prospect of a tenant staying viable throughout the duration of the time they’re holding the property.
They also require tenants to submit quarterly statements so that they can monitor the financial health and welfare of their tenants. If ever a tenant is having problems, they’d work with the tenant by either doing rent abatement or adjusting their terms.
They might also facilitate getting private equity groups to buy the distressed company. The group will absorb the lease and other obligations.
Or they will just release the tenant from the contract and hire a releasing firm to start working towards getting that space filled.
One way is to do a stabilized acquisition. In this case, the existing tenant already has a lease to the owner. The new owner will become the new recipient of the ongoing cash flow stream.
The second way is a sale lease back. What happens is the original owner of the property will simultaneously sign a triple net lease with the new owner after the sale.
Sale lease backs are usually done by manufacturing companies that got sold to private equity groups. Private equity groups don’t like to own real estate, so they prefer to release the capital and invest that into the company to grow the company.
The advantage of that is the private equity group can leverage extracting the entire value of the property compared to what they’d get if they just refinanced. Also, 100% of rent payment is tax-deductible. If they own the property, they’d only be able to write off a smaller amount in their taxes.
In 2020, MAG CP bought 10 different properties. The tenants in those properties included 2 aerospace manufacturing companies and 2 food manufacturing companies.
They prefer to buy in the Midwest which has better cap rates leading to more cash flow for the same amount of purchase price. Also, being centrally located, the location is ideal for national manufacturing firms who ship to the West Coast and East Coast.
Each firm in the space specializes in some scope or scale in real estate. MAG CP focuses on the mid-market with deal sizes ranging from $5M-25M. Their average purchase price is $15M.
The size of the property is typically between 100,000-300,000 square feet. Financing is done by getting 70% from commercial lenders and 30% as equity – 15% contributed by their own managers and 15% from investors.
Most commercial properties that MAG CP acquires are optimized first for cash flow. They are 100% occupied and cash flow from day 1.
They get an 8-9% return on day 1 from an annualized basis which goes up half a percentage point per year. Building value is done by paying down the outstanding principal or through credit enhancement.
As the business of their tenant grows over the years, their credit score improves as well. MAG CP will be able to compress the cap rates by selling at a much higher appreciation later on.
Most lenders require the managers of an investment group to sign a personal recourse loan. Interest rates are in the low mid-3s with 70% loan-to-value.
The security a lender is getting is usually tied to the creditworthiness of a tenant. MAG CP gets 20 to 25-year loans that mostly have a 10-year term. They prefer to hold the property for 5-7 years and exit long before they have to think about refinancing.
There are prepaid penalties for exiting early. Commercial mortgage-backed securities (CMBS) have a 30-year amortization. The upside is there is a decrease in rent payment, increase in cash flow, and lower rates. But if you sell before you reach 10 years, there will be a steep prepayment penalty.
Neil was a military pilot for 12 years before he moved to the Bay Area and started working in real estate. A family friend had an investment firm focused on building a network of investors and equity. They would JV with operators in different classes, and diversify and partner with a number of different specialists.
Neil loved the simplicity of it all as they just need to keep doing what they’re doing and keep making rent. It is extremely predictable.
Neil’s biggest challenge is getting his investor group excited about an upcoming deal. Sometimes there are setbacks that are outside their control which can alter their timelines.
Outside inspections are the wild cards as anything could come up. At the end of the day, if things aren’t working out, they have to make the decision to walk away from the deal before they’re ready.
The further you are removed from end-users or consumers, the better you are. MAG CP is doing so well because a majority of their tenants are not retail stores or month-to-month renters, which come with a lot of variabilities.
Manufacturing firms have lasted through several recessions and built up corporate resiliency. They have cash reserves to survive downturns for months or even years.
With most people turning to online shopping, there has been good demand pressure in the industrial space as the likes of Amazon, grocery delivery services, and shipping services grow and expand.
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