Late last year in this space I reported that credit tenant lease (NYSE:CTL) financing for Walgreens (NYSE: WAG) stores was becoming increasingly hard to find. The shortage was not because Walgreens was not credit worthy nor was it due to the credit crunch that has gripped the banking industry for the last 20 months. Walgreens CTL loans were unavailable due to their extreme popularity and incredible demand.
CTL loans are funded by investment bankers who issue private placement mortgage backed bonds and sell them to fixed income investors. The investors, mostly insurance companies, endowments and retirement funds, had purchased so many Walgreens bonds that they were full to capacity and could not take-on anymore Walgreens debt. At the time I described Walgreens as a “victim of its own success”.
Well I’m happy to report that, for now, CTL lenders are once again lending against new and existing Walgreens stores as-well-as Walgreens development projects.
Followers of WAG know that the drug store chain has drastically curtailed their expansion plans. This slowdown in new store openings has in-turn, reduced the demand for new Walgreens mortgage bonds and has helped alleviate the CTL logjam that was preventing banks from underwriting WAG deals.
The stock market recovery has also contributed to the new-found liquidity in Walgreens mortgage debt. As the market grows so-to does the portfolios of the investors who buy WAG paper. The corresponding increase in the value of their portfolios has mitigated the problem of being overweight WAG bonds allowing them back into the market.
Also Walgreens bond buyers have raised their interest rate requirements slightly to account for the additional risk to their funds. This small risk premium is not due to a credit problem with Walgreens, but is derived from the disproportionately large Walgreens positions they hold.
So the combination of the slowdown in the Walgreens expansion, the rising stock market and a modest interest rate hike, have made Walgreens CTL lending possible again. This is truly good news for commercial real estate investors and bankers alike, but I’d recommend that those looking to finance a Walgreens purchase, refinance or construction project strike while the iron is hot. CTL financing is dependable, long-term, high leverage, non-recourse financing, but, as we saw during the last quarter of last year, Walgreens CTL loans can be discontinued without notice.
Disclosure: Author long WAG. Also, in the normal course of business as a commercial mortgage lender, author originates WAG CTL loans