ORANGE COUNTY, CA-Dividend yield is not the only component to value in a net lease investment, points out Paul McDowell, CEO of CapLease. “You're hoping for total return, and that's based on REIT dividend and how much do you hope the shares will rise in the course of a given year. The two together produce your total return percentage.”
McDowell adds that the knockoff on net lease assets for years has been fixed cash flows, so portfolios have bond-like characteristics. “When the REIT atmosphere is too frothy, you can't raise rents as tenants move out because you have long-term leases. But that said, long-term cash flows look very attractive. REITs have strong returns in the past 12 months. People look for safety in earnings, and they find that in net-lease REITs. Everyone values our shares more and more.”
According to Jonathan Hipp, founding president and CEO of Calkain Cos., if investors are seeking a higher yield, there's no question that they need to look at a different sector. “But if you look at other vehicles, yes, net lease is a good investment. Lack of product is more of an issue than lack of capital.”
Active retailers within the net lease sector include gas stations and discount chain stores like Wawa, Dollar General or Family Dollar, Hipp says. “They are bringing product to the market, and the banks are, but not a lot of new big boxes are being delivered [in the net lease space]. This is true all over the country. That doesn't mean that there's zero being built, but in terms of the past, it's very low in comparison.”
Net lease is very economy driven, Hipp explains. “The housing market is just now starting to kind of feel like it's picking up—not across the whole country, but definitely in the Northeast and parts of the Southeast, housing is gaining some traction and gaining legs. As people begin to feel their houses are starting to appreciate in value, and they're not underwater, this helps consumer confidence overall. Markets are driven by consumer confidence.”
Gregg Seibert, SVP, investments for Spirit Realty Capital says that triple-net investing is safe and has experienced some cap-rate compression, due in part to lower yields on alternative financial products such as bonds, stocks, and money-market funds. In fact, net lease has become an attractive alternative for a lot of investors. “The current dividend on our stock (SRC on NYSE) is approximately 6.4%, so compared to a lot of other liquid investments, the yield is considered high,” says Seibert.
Like other industry experts, Seibert says net lease has a very good track record. “I've been in it 17-18 years, and as far as shareholders of triple-net REITs are concerned, it has pretty much been a success story, with the exception of the blip from the financial crisis in 2008-2009. It's been a very strong sector, and although the yields are still low on a historical basis, it's still attractive to investors. The yield alternative on REITs is higher than on money-market accounts or bonds, and most would say the yield is still attractive on a risk-adjusted basis.”
Clearly, asset values are higher today than in the past, and there are only so many dollar stores in the country, says Gordon DuGan, CEO of Gramercy Capital. “My own view is that the net-lease business is more of a real estate business than a credit business. Twenty-five years ago, when I first started in the business, it was a credit business with a strong retail component, but now it's primarily real estate with a strong credit component.”
DuGan says net-lease companies are trading well because they have performed extremely well throughout the downturn. “Bill Ackman, who is a brilliant investor, put out a piece on why Realty Income was short a few years ago, and Realty Income has just continued to perform and prove him wrong in that case. When the net-lease strategy is done well, it's a very attractive risk-return business.”
In a recent GlobeStTV video, Seibert revealed that there are major changes at work at Spirit Realty. At our recent RealShare Net Lease Conference in New York City, he talked about the way life will change once Spirit Realty's acquisition of Cole Credit II closes.
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Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
