Observer Lite: 12/18/2024

Everything old is new again
The resurgence of non-traded REIT focused on net lease continues with New Mountain Capital’s 4Q disclosures for the planned launch of New Mountain Net Lease Trust (“NEWLEASE”), a perpetual-life, non-listed REIT focused primarily on single-tenant, difficult-to-vacate, operationally critical facilities housed in fundamentally sound real estate.

New Mountain’s net lease platform has acquired $2.1 billion of industrial triple net lease assets over the past 8 years within two funds, holding a portfolio of 22 million square feet across 217 properties located in 45 states and Canadian provinces.

NEWLEASE will be seeded with 166 of New Mountain Net Lease Partners (Fund I) industrial assets acquired from 2018-2022 and comprising 15.4 million square feet (“Seed Portfolio”). Leased to 33 unique tenants, the Seed Portfolio includes a 15.1 year weighted average lease term remaining, is 100% occupied, and generates $85 million of annualized base rent. The Seed Portfolio has collected 100% of contractual rent due since inception and no leases expire prior to 2032.

New Mountain describes its angle as a ‘defensive core-plus real estate strategy focused on U.S. assets primarily leased to sponsor-backed non-investment grade tenants in industries that are well-researched by New Mountain.’ According to disclosures, New Mountain’s private equity and credit platforms each review over 1,000 deal opportunities annually providing differentiated sourcing and underwriting.

Initial REIT leverage is estimated at 59% with a target range of 55-75% over time. Pharmaceuatical contract development and manufacturing organization PCI Pharma Services (majority owned by Kohlberg & Company) is the largest tenant concentration of the Seed Portfolio (and only above 10%). NEWLEASE will wholly own a 100% interest in 100 of the 166 asset Seed Portfolio (remaining assets ownership <100%).

Interestingly, the target asset types listed include multiple non-industrial buckets (Automotive Services, Medical/Veterinarian Facilities, and Family Entertainment) which could create more competition for traditional retail net lease investors.

However, the most unique aspect of the NEWLEASE plan may be the seed from New Mountain Net Lease Partners (Fund I). Recent non-traded REIT launches from Morgan Stanley (North Haven) and Fortress excluded legacy seed assets and started at ‘zero.’ Perhaps New Mountain Fund I evaluated multiple exit options, and a REIT conversion was the most beneficial for investors.

Or there was no attractive exit option and seeding a non-traded REIT created a net lease version of the private equity continuation fund, allowing the sponsor to retain asset management fees through a new perpetual vehicle. In any case, potential investors to NEWLEASE will have the opportunity to evaluate a meaningful existing portfolio as part of their due diligence.

NEWLEASE filings faintly reference New Mountain Net Lease Partners II, which raised $825 million of equity commitments in 2023, and appears to target the exact same asset types…

-Sean Hostert