Single Tenant Net Lease Invetment Returns

CREPATH's picture
Rank: Orangutan | 340

For those that work for REITS or companies that focus on purchasing single tenant net lease office/industrial...What are the typical returns that you solve for on a levered/unlevered IRR and Cash on Cash basis? I understand the basic draws to these type of investments considering that the asset generally have significant term and are less risky assuming they are leased to credit tenants. However can someone go into more detail on the specific appeal of these asset classes and why some of the biggest REITS seem to target them?

Thanks,

Comments (18)

Oct 22, 2014
CREPATH:

I understand the basic draws to these type of investments considering that the asset generally have significant term and are less risky assuming they are leased to credit tenants. However can someone go into more detail on the specific appeal of these asset classes and why some of the biggest REITS seem to target them?

Same reasons you just mentioned. They are supposed to "weather the storm." Bigger REITs are the ones who can afford to target them because their cost of capital is so freakin cheap that it's laughable.

Oct 22, 2014
CREPATH:

For those that work for REITS or companies that focus on purchasing single tenant net lease office/industrial...What are the typical returns that you solve for on a levered/unlevered IRR and Cash on Cash basis? I understand the basic draws to these type of investments considering that the asset generally have significant term and are less risky assuming they are leased to credit tenants. However can someone go into more detail on the specific appeal of these asset classes and why some of the biggest REITS seem to target them?

Thanks,

Its just their niche.

Oct 22, 2014

Think of it as an investment grade company issuing a high yield bond. The REIT has a WACC of say a 5 and charges a straight line 9 over the course of the lease. The REIT makes the spread, plus whatever cap rate turn it gets at sale.

Oct 22, 2014

Think of it as an investment grade company issuing a high yield bond. The REIT has a WACC of say a 5 and charges a straight line 9 over the course of the lease. The REIT makes the spread, plus whatever cap rate turn it gets at sale. Companies like net leases because rent is tax deductible and they can allocate their cash to higher margin business lines rather than owning real estate.

Oct 22, 2014
falconpunch19:

Think of it as an investment grade company issuing a high yield bond. The REIT has a WACC of say a 5 and charges a straight line 9 over the course of the lease. The REIT makes the spread, plus whatever cap rate turn it gets at sale. Companies like net leases because rent is tax deductible and they can allocate their cash to higher margin business lines rather than owning real estate.

I'd be curious to know the effects of GAAP rule change around 09/10 that brought capital leases onto the b/s and started treating them essentially as long term debt rather than purely as a p&l item. It was a hangover effect from off balance sheet transactions 10 years earlier but it must have had an effect on the single tenant and sale/leaseback business. We were in the middle of an acquisition of a grocery retailer in 2011 where the accountants came in and said that the long term leases had to go into the balance sheet and almost blew the deal up because the debt guys looked at it and said that debt had increased a pretty large amount because the company had to throw dozens of 25 year leases onto the b/s.

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Oct 22, 2014

Agree with institutional players having access to cheap capital. With AAA credit worthy tenants, it is very unlikely they will default, so the institutional players that can target lower returns (ones with access to cheap capital) are the ones that usually win in the bidding process. Also agree that for certain shops it is there core competency / niche, and they know how to price things better than anyone else within their focused market.

Also, NNN investments are transparent (as opposed to a highrise office investment with complex CAM reimbursements & caps on certain expenses). Lastly, with NNN, the burden of RET & OPEX increases are put on the tenant. The owner doesn't have to worry about grossing up expenses, base years, caps, etc.

Oct 22, 2014

My data goes back a few years when I worked in RE but there are a few niche players like Wells and WP Carey, and probably a few newer ones, that target these because they're not promising big returns just safe long term cash flows so like others have said their cost of capital is very low, especially of they're credit tenants. Smaller deals like a CVS or Walgreens are typically for 1031 exchanges where it's driven by tax and wanting no management responsibilities. Normal REIT's don't typically get involved as a big part of their portfolios because the yields can't satisfy their dividends.

Oct 23, 2014
Dingdong08:

Smaller deals like a CVS or Walgreens are typically for 1031 exchanges where it's driven by tax and wanting no management responsibilities. Normal REIT's don't typically get involved as a big part of their portfolios because the yields can't satisfy their dividends.

I'm seeing a ton of these trade at 5% cap rates or lower. The effect is even radiating out from credit tenants like the aforementioned pharmacies to non-credit or junk credit. I could obviously be wrong, but I think in the long run there's a strong chance a lot of these high net worth investors will look back and think they should have just paid the capital gains tax...

Oct 27, 2014

semi rant/answer.

REITs are a bit like musical chairs, they consistently have to raise capital because buying at 5% caps with say 5% wacc (I see 6-8% in most sub $8b mkt cap.) at 2.99% P+I with a 6-7% distro 97% payout- the math on a straight line never equals out. its mainly return of capital, not return on capital. especially when you consider the so called "low gearing" of 35-50% they are not value add magicians its just financial engineering.

hidden insider knowledge: "perils of wisdom";

How they make the paper numbers work is with IFRS or even gaap the valuations are out to lunch because you can capitalise light bulb changes and window washing. Also see recent S&P bond rating changes for RE-
(hint no reit is ever undervalued with ifrs accounting)

REITs are a confidence game of so called liquidity which is why they are better in a high cap regular type interest rate enviro. Put more succinctly, I would never buy previous REIT owned assets because they never upkeep them because all their profit is given away. You can tell I don't like the REIT model because it is not sustainable without consistent dilution.

The reit mgt. fees put old school HY milken fees from his wilshire days to shame, internal or externally managed.

answer:

They buy stuff to get the acquisition fee or if internal mgt they make it up with "industry standard" renewal fees- basically rewrite all the leases on close to reflect the new owner- yoink they just got the new industry standard 10% fee from new leasing revenue for that building.

This is why they are writing that business without care that they actually never make a profit on the actual asset.

Oct 28, 2014

Thanks for the responses. Would people recommend working at a REIT that specializes in triple NNN single tenant properties in Acquisitions? Why or why not? Thanks.

Oct 28, 2014

It is hard to say. Do you have other offers? Are you currently working in real estate? How big is the REIT? Many smaller single tenant REITs are getting crushed by the Coles and institutional money.

As a broad statement, yes, I would recommend working at a NNN single-tenant REIT. For a single-tenant building, you focus a lot more on the tenant, more so than you would a multi-tenant building. This will allow you to learn about companies and industries, and not just real estate. The only downfall of doing NNN leases is you do not get experience modeling more complex transactions or working with modified gross leases.

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Oct 28, 2014
AcquisitionsGuy:

It is hard to say. Do you have other offers? Are you currently working in real estate? How big is the REIT? Many smaller single tenant REITs are getting crushed by the Coles and institutional money.

As a broad statement, yes, I would recommend working at a NNN single-tenant REIT. For a single-tenant building, you focus a lot more on the tenant, more so than you would a multi-tenant building. This will allow you to learn about companies and industries, and not just real estate. The only downfall of doing NNN leases is you do not get experience modeling more complex transactions or working with modified gross leases.

Would be one of the larger players in this space. I currently work in acquisition and work on multi tenant office buildings both CBD and suburban however the firm would be an upgrade from a visibility standpoint. Only concern is I might not be learning a much only doing NNN single tenant and possibly being pigeon holed.

Oct 28, 2014
AcquisitionsGuy:

It is hard to say. Do you have other offers? Are you currently working in real estate? How big is the REIT? Many smaller single tenant REITs are getting crushed by the Coles and institutional money.

As a broad statement, yes, I would recommend working at a NNN single-tenant REIT. For a single-tenant building, you focus a lot more on the tenant, more so than you would a multi-tenant building. This will allow you to learn about companies and industries, and not just real estate. The only downfall of doing NNN leases is you do not get experience modeling more complex transactions or working with modified gross leases.

Would be one of the larger players in this space. I currently work in acquisition and work on multi tenant office buildings both CBD and suburban however the firm would be an upgrade from a visibility standpoint. Only concern is I might not be learning a much only doing NNN single tenant and possibly being pigeon holed.

Nov 4, 2014

Single-tenant net lease sales are an important niche in the corporate real estate space. A single-tenant, net lease property is typically described as a free-standing office, industrial or retail building that is leased and occupied by one user or one company.

Benefits:
> Single-tenant net lease properties maintain their value in volatile markets due to their bond-like, long-term lease and the underlying credit tenancy
> Passive income stream with minimal owner responsibilities
> Corporations using long-term leases take the real estate asset and subsequent debt off their books and place it on the investor's

Nov 4, 2014
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