Sustainability Retrofit
Here Comes the Sun!
Real estate, one of the largest contributors to carbon emissions, accounts for approximately 37% of the world's greenhouse gas emissions. This makes it a critical sector in the global effort to combat climate change. Fortunately, there are many solutions available to help reduce the carbon footprint of real estate, and one of the most impactful is solar power. This article discusses key benefits of installing solar panels for CRE occupiers. Save on the Cost of Power Solar panels allow buildings to generate their own electricity, reducing the amount of power tenants need to purchase from the grid. This is particularly beneficial for commercial real estate, where energy costs can be a significant expense for tenants. By installing solar panels, tenants can reduce energy bills, freeing up resources to reinvest in their businesses or operations. In addition, they can potentially earn revenue by selling excess power back to the grid through net metering programs. Hedge Against Utility Rate Increases The cost of energy varies and can rise unexpectedly due to factors like fuel costs or infrastructure maintenance. As a result, occupiers who rely solely on the traditional grid electricity for their power are subject to rate increases that can impact their operating costs. Based on data from the U.S. Energy Information Administration, electricity costs in the U.S. have increased by 2.28% on an annual basis from 2005-2020 and 7.08% since 2020. Through solar energy, companies can protect themselves against unplanned rate increases and stabilize their energy expenses. Solar panels can also reduce over-reliance on the grid during peak periods when the electricity demand is high compared to the supply. Moreover, solar panel systems have a long lifespan and require minimal maintenance. It means tenants can continue to benefit from the fixed cost of solar energy for many years, even as traditional grid electricity rates continue to rise. Reduce Carbon Emissions and Support Corporate Sustainability Goals Traditional energy sources, such as fossil fuels, produce greenhouse gas emissions that contribute to climate change. On the other hand, solar panels generate electricity using the sun, a renewable energy source that does not produce harmful emissions. Occupiers who install solar panels can minimize their carbon footprint and contribute to the wider goal of reducing greenhouse gas emissions. It can also help them achieve their corporate sustainability goals and align with the expectations of their stakeholders, including investors, customers and employees. Receive Renewable Energy Certificates (State Dependent) Tenants who install solar panels on their building can also receive Renewable Energy Certificates, or RECs, to offset carbon emissions. One REC is issued for every MWh of electricity generated and delivered to the grid by a renewable energy resource. The use of renewable energy, verified with RECs, ensures a company’s electricity is provided from renewable sources that produce low- or zero-emissions, thereby reducing the tenant’s market-based scope 2 emissions. Start Enjoying the Benefits of Solar with W. P. Carey Installing solar is one of the best things companies can do to shrink the carbon emissions of their buildings. If they lease their real estate, leveraging their landlord relationship is a great way to explore options for solar installation. W. P. Carey, a leading real estate investor with over 1,400 properties, recently launched its CareySolar program, a solution providing eligible tenants the opportunity to take advantage of rooftop and carport solar installations on their leased properties with no upfront investment. By embracing opportunities like this, companies can save money, reduce their carbon emissions and help the environment. Contact W. P. Carey today to learn more!
Benefits of Green Leasing for Net Lease REITs
The real estate industry continues to face increased scrutiny regarding climate-related disclosures from many different stakeholders, including investors and regulatory agencies. As the SEC finalizes its proposed rules around these disclosures, the net lease industry is grappling with how to collect and report on climate-related data given the majority of a net lease REIT’s carbon emissions are Scope 3, or indirect. Without any direct control over the operations of their properties, net lease REITs have the added challenge of establishing access to their tenants’ utility data in order to understand the power consumption and potential sustainability opportunities at their properties. One effective approach to improving sustainability and disclosure quality for net lease REITs is through green leasing, in which green clauses are incorporated into leases that encourage landlords and tenants to collaborate on energy efficient and sustainable practices by aligning financial incentives and sustainability goals. Here are three of the most significant benefits of green leasing for net lease REITs: Increases data transparency to help identify a greater number of sustainability opportunities Collecting sustainability-related data has historically been difficult for net lease REITs due to the triple-net lease structure whereby tenants are responsible for the day-to-day operations of the property. However, by implementing a green clause in their leases, landlords can require tenants to disclose electricity, water consumption, waste management and other energy usage data at their properties. This enables net lease REITs to easily collect data and benchmark the energy usage of their portfolio to better identify inefficient buildings and target attractive sustainability opportunities within their portfolio. Incentivizes landlords to invest in green building upgrades There are a number of ways green leasing can support the implementation of projects that reduce a property’s carbon footprint. For example, green leases can include a clause that give landlords the ability to install on-site renewable energy such as solar panels at their properties so long as they can sell power back to the tenant at the same retail electricity rates as the tenant pays a utility company. Furthermore, green leases often include cost-recovery clauses for energy efficiency upgrades which helps solve the “split-incentive problem” – where landlords pay 100% of the capital expense for energy upgrades while only tenants receive the monetary benefits attributed to the decrease in energy consumption. Through a cost-recovery clause, landlords can amortize and recover capital costs for energy efficiency improvements, increasing incentives to pursue these types of projects while still benefiting the tenant through cost savings. Fosters greater tenant-landlord sustainability partnerships Perhaps the biggest benefit of green leasing is the improvement in tenant engagement. Green leases are designed to benefit both tenants and landlords, providing incentive for both parties to partner on sustainability projects including renewable energy opportunities, building energy retrofits and green building certifications. In order to implement a green lease, landlords and tenants must engage in an ongoing dialogue and align on sustainability goals, objectives and opportunities, ultimately strengthening the relationship, enabling tenants to achieve their own sustainability goals and improving the likelihood of tenant renewals. Conclusion Green leasing is a great tool to enable both landlords and tenants to reduce the adverse effect that real estate has on climate change. Particularly for the net lease industry, green leasing can help improve energy data collection, enhance the environmental performance of leased properties and align financial incentives so all parties benefit. It’s a win-win-win for everyone involved – landlords, tenants and most importantly, the environment.
W. P. Carey's Approach to Sustainability
Net Lease REITs are unique because our tenants typically retain operational control of the property. This structure has enormous benefits for both landlord and tenant. The landlord is not exposed to operating costs or capital expenses and is able to own and manage a large and growing portfolio very efficiently. Meanwhile, the tenant retains operational control, enabling them to adapt the property to their specific operational needs. W. P. Carey prides itself on its proactive approach to asset management. Our goal is to create long-term relationships with our tenants, proactively working with their management teams to optimize their real estate to meet their evolving needs. In recent years, sustainability has grown to be a top priority for W. P. Carey and our tenant base alike. While the net lease structure has many benefits, it presents some challenges when it comes to helping our tenants reduce their carbon footprint. First and foremost, without direct operational control, it can be difficult for net lease landlords to access property-level emissions data in a scalable way. However, with real estate being one of the biggest contributors to global greenhouse gas emissions, net lease REITs must create the systems and processes to facilitate collaboration with our tenants to reduce the carbon footprint of the portfolio. To tackle the challenge, we employ a three-phased approach to quantify and reduce our portfolio’s global carbon footprint: Step 1: Data – Scalable systems to collect and analyze our portfolio’s carbon footprint data The first step – and perhaps the most challenging for net lease REITs in general – is to collect tenants’ energy usage data to accurately analyze and benchmark our portfolio. In 2021, W. P. Carey launched a program to leverage a suite of SaaS platforms to collect utility data in an automated and scalable manner. The data feeds into our proprietary business intelligence platform, enabling us to track energy usage, identify outliers and opportunities, and integrate with third-party benchmarking organizations. It also enables us to equip our tenants with tools to better manage and benchmark their own energy consumption. As of December 31, 2021, we’ve collected data from tenants representing over 30% of annualized base rent (ABR). In 2022, we intend to further expand this program throughout our portfolio. Step 2: Engagement – Systematic tenant outreach and collaboration The next step is to proactively engage with tenants to jumpstart actionable conversations that lead to projects that reduce carbon footprint. At W. P. Carey, each asset manager is responsible for a portfolio of tenants across all property types and regions. Our asset managers develop long-term relationships with tenant management teams, providing a direct and ongoing dialogue about the tenant’s business and how they can operate more effectively in their real estate. These conversations have created direct opportunities to pursue sustainability projects that both lower tenant operating costs and enhance W. P. Carey portfolio value. Step 3: Action – Targeted sustainability projects that lower carbon footprint The final step is to act on the insights and identify property-level sustainability opportunities within the portfolio. Sustainability projects fall within five key areas: renewable energy opportunities, building energy retrofits, existing building green certifications, new construction green certifications and tenant energy audits. In addition to the primary goal of reducing carbon footprint, collaborating with our tenants to invest in sustainability projects has several key benefits. For the tenant, a more efficient building reduces operating cost and helps reduces the tenant’s scope 1 and 2 emissions. For W. P. Carey, sustainability projects provide an enormous addressable opportunity set of accretive investments within our existing portfolio. These projects enable us to extend leases, enhance criticality of properties and improve the overall value of the portfolio. Conclusion Reducing the carbon footprint of a global net lease portfolio is an enormous long-term challenge. However, by developing a scalable, technology-driven approach to collecting data and engaging with tenants, we can systematically identify sustainability opportunities that are beneficial to the planet, attractive to tenants and improve our broader portfolio. At W. P. Carey, we’re committed to scaling up this effort and being an innovative sustainability leader in the net lease industry.
To Have and to Hold
The net lease market is firing on all cylinders with record capital raising, persistent demand for reliable cash flows and the emergence of new players seeking low-maintenance assets offering predictable income and long-term leases. Aggressive market dynamics are driving cap rates to historic lows, making now an opportune time for sellers and private equity owners to unlock a lower cost of capital through a sale-leaseback of corporate real estate vs. traditional financing. However, with new sources of capital entering the market, it’s more difficult for sellers to navigate the expanding buyer pool and choose a capital partner that’s truly “the one.” In addition to more traditional net lease investors like public REITs, private and institutional investors have continued to grow their share of the net lease market. According to CBRE, institutional and equity funds accounted for $6.3 billion in volume in the second quarter of 2021, a 99% increase from the prior year. The steady performance of the sector coupled with attractive market dynamics position these funds well for an easy flip of their investments a few years down the line. However, this does not always leave sellers well positioned to take advantage of the full suite of benefits a sale-leaseback can offer if done so with the right partner. In order to choose the right buyer, sellers should ask themselves these three questions before settling down: 1. Does my company need flexibility over the long term? Unlike a fund, a long-term holder isn’t looking to hit a short-dated return hurdle and flip the asset 4-6 years down the line. Whether it’s a potential merger or subleasing underutilized space, a long-term landlord focused on deploying additional capital to support the evolving needs of its tenants may be a better fit than a short-term holder focused on disposition opportunities. 2. Is my company growing? While many tenants prefer quiet enjoyment of their space, having a landlord aligned with growth can be key. If a tenant wants to expand their existing facility to add space or make sustainability enhancements, a landlord aligned with long-term growth is happy to continue investing in the facility in a way that’s going to support the needs of its tenants and improve the long-term value of the property. 3. Do I understand the buyer's underwriting process? Most long-term investors will spend the time to get to know a business and its unique structure rather than relying solely on credit ratings or focusing on the real estate alone. This is particularly important for sub-investment grade or non-rated companies to ensure they are being valued appropriately during the underwriting process and able to maximize sale-leaseback proceeds. Conclusion Whether you’re a company looking to sell one asset or a portfolio of assets, it’s a big decision. Before jumping into that commitment, it’s important to remember that at the core of any relationship should be a true partnership. This means choosing a partner that will recognize the full value of your real estate from the start and support your evolving needs.
Why Tenant-Landlord Relationships Matter
Since our founding in 1973, W. P. Carey has been a long-term partner to our tenants. This means that when we invest in a property, we are also committed to advancing the tenant’s business and look to support their evolving real estate and capital needs throughout the duration of their lease and beyond. A Long-term Partner: Building Beyond the Original Transaction W. P. Carey partnered with Sonae MC, a leading Portuguese food retailer, in 2018 when it acquired its mission-critical warehouse facility in the Azambuja logistics park, Portugal’s prime logistics hub outside of Lisbon. Since its founding in 1985, Sonae MC has steadily grown its market share. Today, the company has more than 1,300 stores throughout Portugal and Spain, 35,000 employees and a broad range of products and services. At the time of the acquisition, Sonae MC was experiencing rapid growth, particularly through its city-center convenience stores and e-commerce operations. In order to meet rising demand and continue executing on its strategic plans, the company needed additional food distribution warehouse space. “In recent years, Sonae MC has been expanding its store portfolio, mostly with small, convenience stores; in the last decade, 750 new stores were opened. This growth will continue for the next few years to solidify even more of our dominant market share. This means our company’s logistics operation has to continue growing its warehouse footprint to be able to receive, prepare and ship an ever-growing number of merchandise," explained Rui Braz, Head of Area – Logistics Development at Sonae MC. To support Sonae MC’s growing business, W. P. Carey partnered with the company and agreed to fund a $28 million expansion of the Azambuja facility. Completed in 2020, the 300,000-square-foot expansion was custom built to Sonae MC’s specifications and totaled over 840,000 square feet, making it the largest refrigerated warehouse in Portugal. With the additional space, Sonae MC was able to increase its capacity and speed of supply to Mainland stores in the central and southern regions of Portugal. “The Azambuja expansion was part of a plan to strengthen our logistic capability, which makes it a fundamental piece to the company’s strategy,” said Braz. A Shared Vision: Committing to a Greener Future Our ability to support our tenants’ real estate needs goes beyond just expansions. We can also partner with our tenants on projects to help reduce their carbon footprint and meet their sustainability goals. W. P. Carey and Sonae MC are both committed to creating a greener future, which meant the expansion of the Azambuja warehouse was built with sustainability in mind. In 2021, a solar roof generating an estimated 4,000 MWh/year was successfully installed on the newly expanded facility, earning a LEED Gold certification for the property. This makes the facility Portugal’s first LEED Gold certified warehouse, an exciting milestone for W. P. Carey, Sonae MC and the country as a whole. “Receiving a LEED Gold certification for our new building in Azambuja, being the first in Portugal and, on top of that, the first for a refrigerated warehouse, is an important acknowledgement of our focus on sustainability. The thought that was put into multiple aspects like the isolation of the building, rainwater utilization system, and the investment in the photovoltaic solar plant–that reduces 30% of our electrical power grid needs for the entire facility–clearly portrays our intention in diminishing the operation’s environmental footprint,” Braz added. The new building is also equipped with innovative cooling and insulation systems that are more energy efficient and environmentally friendly. The joint delivery of fresh produce allows 20% fewer deliveries to shops, a reduction of 1.4 million km traveled per year and the equivalent of 1,100 tons of CO2 saved per year. A Win-Win: Long-term Benefits for Both Tenant and Landlord W. P. Carey prides itself on serving as a long-term, flexible partner to its tenants. By building strong relationships we are able to not only understand the business objectives of each tenant, but also their unique corporate values. In the case of Sonae MC, we were thrilled to have the opportunity to support them and their business needs, while also advancing our goal of reducing the carbon footprint of our overall portfolio. “W. P. Carey has had a fundamental role in the development of this project, proving to be the right partner along the entire process of building this warehouse and its sustainability and efficiency features, which we’re all proud of,” Braz concluded.
The Importance of ESG for Net Lease REITs
Nearly three-quarters of institutional investors are factoring ESG into their investment decisions, up 18% since 2019 according to a recent report. As the importance of responsible investing continues to grow and more investors evaluate companies based on ESG-related criteria, REITs are recognizing both the benefits and necessity of a holistic ESG strategy. Despite the increased focus, the net lease industry has lagged behind. In a recent WMRE survey focused on the net lease sector, only six percent of respondents said ESG was a significant factor in their investment decisions. While net lease REITs have developed robust governance policies and social initiatives, environmental has been more difficult to address—largely due to the triple-net lease structure whereby tenants are responsible for the day-to-day operations of the property, including energy usage and environmental practices. While net lease REITs don’t directly control property operations, there is an enormous opportunity to work with tenants to reduce their environmental impact and implement sustainability initiatives to support the ‘E’ in ESG—here’s how. Integrate ESG into underwriting ESG criteria can be integrated into the underwriting of new investments both at the property and tenant levels. In assessing properties, factors to consider are the types of energy used, equipment age and waste management standards. Most importantly, considering not only the current state of the building, but what improvements can be made in the future, is critical. On the tenant level, it’s important to understand the company’s broader ESG goals and ensure they are committed to reducing their carbon footprint. For build-to-suit investments—where REITs fund the construction of a new facility— taking a proactive approach to engaging with tenants on sustainable design decisions early in the process is crucial and a great way to turn a conventional investment into a green one. Source sustainability projects from within Net lease REITs can source sustainability-focused opportunities from their own portfolio. REITs with industrial properties are particularly well suited to working with tenants on sustainability projects that improve carbon footprint, reduce operating expenses and enhance asset quality. Such projects include, renewable energy opportunities, green building certifications (ie. LEED, BREEAM), building efficiency retrofits or energy audits. By identifying owned properties best suited for certain projects and proactively reaching out to tenants, net lease REITs can build a steady pipeline of sustainable investments while helping tenants decrease operating costs and advance their environmental goals. Finance investments through green bonds As more investors look to increase their allocation to ESG-related investments, public net lease REITs may be able to secure attractive financing to fund their pipeline of sustainable investments through the issuance of green bonds. Green bonds are designed to support strategies and initiatives that have a positive environmental benefit and can help net lease REITs appeal to a wider investor base and raise the capital needed to fund green investments. In closing Implementing environmental initiatives as part of a broader ESG strategy is possible for all REITs, net lease included. At W. P. Carey, we take a proactive approach to reducing our global carbon footprint, partnering with our tenants to reduce their environmental impact and meet their own ESG goals. These initiatives are not only beneficial to the planet, but to a REIT’s broader portfolio. Green buildings generally increase property value, drive higher rents, attract higher-caliber tenants and often improve renewal outcomes, which can all lead to enhanced cost of capital and accelerated growth.