[vc_row][vc_column][vc_column_text]Even seasoned investors often will ask, what is this thing called a WALT?

Page Contents

 

• A W.A.L.T
• How Does a WALT Work?
• Is a Higher or Lower WALT Work?

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A W.A.L.T

Even seasoned investors often will ask, what is this thing called a WALT? WALT stands for a Weighted Average Lease Term of a specific investment or portfolio of investments, specifically in the commercial real estate space.

 

How Does a WALT Work?

All the leases within a profile are averaged based off a length of term divided by the square footage. And so the pro rata, the weighted average term of a building. So for instance, a tenant with a 20,000 square foot space would have double the exposure to the WALT, double the effect of the walt as a tenant with 10,000 sq ft. For example, generally conceptually, a higher WALT, a higher weighted average lease term makes for a more stable asset because the cash flow is more stable if all effects of all other variables are the same. For instance, credit, other tenants, cash flow, inflation, those sorts of things. But whenever we look at Walt from the standard of underwriting a real estate asset, we see that a lower WALT will sometimes give you more upside if the existing leases are below market.

Sometimes you do not want a long WALT. And sometimes you do not want very, very long leases. Especially if the leases are bad or they’re under performing or they’re under market. Also, sometimes, leases that should have triple net (NNN), which is expense reimbursement opportunities with them, do not carry those. And so you have to wait for the next lease renewal period to build and negotiate those in.

 

Is a Higher or Lower WALT Better?

We’ve acquired a number of off market assets that have very, very under performing assets. That are very under performing assets because of the leases that are intrinsic within the building, have been there forever. These leases are under performing, where you have an owner who’s unwilling to have the tough decisions and tough conversations with those tenants.

Also, a lower WALT means more risk if the leases are already at market. And so the WALT, the weighted average lease term affects, both things. If you have an acquisition opportunity that has bad leases, you want a lower WALT.

If you have an acquisition opportunity that has really great or standard or market leases, you want a longer WALT. And so the longer you can send existing tenants that have at or above market prices, especially ones that have a CPI adjustment clause in them to be able to combat inflation, the more useful a WALT or weighted average lease term is to your investment decision making within the commercial real estate context.

 

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