REIT Launches IPO: How FrontView is Unlocking the Potential of Outparcel Property Investments
October 3rd marks the Initial public offering (IPO) of one of the most unique and specialized REITs on the NY Stock Exchange. FrontView is an under-the-radar net-lease REIT that solely focuses on acquiring outparcel properties. Outparcel properties, or “stand-alone” properties, are structures that have no physical connection to other buildings, highlighting both the estate and the company paying its premium price. While there’s no shortage of REITs that acquire out parcel properties as a part of their investment strategy, there is a scarcity of REITs that make it their identity. FrontView currently manages 278 properties, all outparcels, across 31 states. FrontViews' lack of property diversity could prove highly beneficial if outparcels continue to perform the way FrontView expects them to.
- Courtesy of Lev
Why Outparcels?
Outparcel properties are unique not only in their physical structure but also in the benefits they provide to their tenants and property managers. The most attractive aspect of these properties is their daily traffic counts. FrontView searches explicitly for and acquires outparcels that see a minimum 15,000 daily car traffic count at the closest corresponding intersection. These numbers not only drive the property's value up but also make it a much more desirable location for businesses to be in. This strategy promotes a trickle-down effect of additional benefits compared to the average commercial property.
What Separates FrontView From Other Net-Lease REITs?
This appeal provides excellent stability in economic downturns since the companies residing in these properties are often highly successful businesses that don’t want to lose a coveted location. Companies such as Verizon, IHOP, CVS, and AT&T are all in locations owned by FrontView, so questions related to tenant performance are undoubtedly limited. The additional business driven from positioning your company in an outparcel is something that existing tenants recognize, causing them to take excess measures to ensure they remain. Given their commitment to outparcels, FrontView can be more aggressive when negotiating contractual rent escalations. Having rent escalations that benefit the owner of the property is vital to ensure growing future cash flows. On September 9th, 2024, 93.2% of FrontView properties held fixed-rent escalations, meaning the rent increase to the properties' tenants will grow at a previously decided upon rate. This contractual arrangement diverges from other rent escalations based on the consumer price index (CPI). This form of rent escalation closely follows the CPI to account for inflation in the economy properly.
FrontViews' preference for fixed-based rent escalations has put them in a prime position to thrive under market conditions compared to other net-lease REITs as inflation rates decrease in the United States. When comparing FrontView to W.P. Carey, the largest net-lease REIT in market cap at $13.09 billion, we see a significant disparity in their contractual rent escalations. Only 44% of W.P. Carey’s portfolio contains fixed-rent escalations, with 53% being CPI-linked, so as inflation rates continue to decrease, so will W.P. Carey’s rent escalations. FrontView rent escalations will remain strong with the changing market, as their annual report shows a fixed minimum yearly increase of 1.7% to their rent escalation for the 93.2% of properties that use the fixed structure. This percentage is the minimum increase for all their properties, meaning many will see rent hikes surpassing the Fed’s 2% inflation target. As a result, they can achieve higher annual rent growth than REITs that rely primarily on CPI-based adjustments. FrontViews' pursuit of fixed-rent escalations isn’t simply a choice but rather a byproduct of holding desirable properties. Tenants looking to lease out outparcels are typically companies that understand their value, so it makes sense for FrontView to have more control in contract negotiations.
Courtesy of FrontView REIT, Inc.
FrontView has also seen significant increases in its cap rates. From 2022 to 2023, FrontView’s average cap rate increased from roughly 6.4% to 7.15%; most of this growth can be attributed to general net-lease property industry growth. “Although 68 basis points (bps) higher than a year ago, the average net-lease cap rate increased by only 10 bps quarter-over-quarter,” according to the CBRE market research team. As the chart above shows, FrontView's total acquisitions have been declining since 2021 due to the increase in mortgage rates. Since the Fed is beginning to lower interest rates for the first time in years, which has a direct impact on mortgage rates, it's likely to expect FrontView's acquisitions to return to or surpass their previous levels. Favorable market trends and the previously mentioned factors are proving to bode well for FrontView moving forward.
Where Does FrontView Stand Now?
On June 30th, FrontView's net loss for 2024 was recorded at $6.38 million, an increase from $5.12 million one year prior. This puts FrontView in a rough situation since they will likely not provide a dividend yield for shareholders after their IPO. Since a strong dividend yield often drives REIT returns, we may see investors act with hesitation. On the other hand, despite net losses, their acquisitions over the years have not impaired their debt-to-assets ratio. This past June, FrontView held a debt-to-asset ratio of 1.74, putting them in a stable position where they can look to acquire more properties. The company’s recent IPO comes at a reasonable time for the company, as executives are likely looking for the extra capital to bring them over the hump and turn their REIT profitable.
Even with FrontView experiencing net losses, investors took to the market when presented with the opportunity to gain equity in the company. FrontView’s underwritten IPO set forth 13,200,000 shares of its common stock for $19 per share. FrontViews total net proceeds after deducting expenses associated with the IPO came out to be approximately $231.9 million, providing FrontView with a serious increase in capital for numerous activities. FrontView plans for the proceeds first to repay borrowing outstanding under its revolving credit facility and term loan credit facility. FrontView will use the rest of the proceeds to enhance its efficiency and acquire more properties.
The main question with FrontView is the essence of their investing strategy. Outparcel property performance will make or break FrontView moving forward. So, if you are as confident in this property type as FrontView portfolio managers, I suggest looking into the REIT further. The answer to this question is the primary driver to finding out when or if FrontView will turn their net losses positive and give investors the dividend yields they are hoping for. Market conditions seem to be working in unison with FrontView, so if more acquisitions are what FrontView needs to get them over the hump, the decision to go public and gain capital should prove to be the best move to do precisely this.
