Danai Pathomvanich
Oct 15, 2014
The US Federal Reserve’s policy to keep benchmark rates at 0.25 per cent until 2015 has given rise to non-traditional alternative US investments that can provide stable bond-like returns at much higher yield.
Because of expected continuing low-yields from traditional bond funds, many institutional investors are turning to other types of alternative investments such as triple-net lease funds for bond-like security and added yields.
While most US bond funds yield between two and three per cent per annum, well-run and well-diversified triple-net lease funds offer dividend yields of between five and eight per cent.
In some circumstances, triple-net funds may also provide capital gain opportunities from rising real estate prices.
More importantly, many Asian institutional investors who are gradually diversifying overseas have shown tremendous interest in triple-net lease funds.
Triple net leases
In the United States, triple-net lease commercial properties have been in existence for decades. Net- leased properties are structured so that owners require negligible management and minimal oversight.
Tenants pay not only rents but are also responsible for property expenses normally paid by owners, including taxes, insurance and maintenance.
Triple-net lease cash flows are also very dependable. Well-managed triple-net lease funds own well-located properties that are leased to high-credit-quality rated-tenants including investment grade tenants.
Shopping center triple-net lease tenants may include well-known retailers such as Walgreens, Target and Nordstrom.
Other triple-net lease tenants include global fast-food companies such as McDonalds, Burger King and KFC.
Sustainable triple-net lease portfolios
Top-quality sustainable triple-net lease portfolios should include many “best-in-class” names that regularly pay durable rent checks measured by consistent earnings generated from strategically acquired facilities.
For instance, Nordstrom and Target stores are critical anchor tenants for regional shopping centers drawing customers who drive hours to their shopping destinations.
Well-run triple-net lease funds should be well-managed and focused. For instance, several of the most successful focus solely on “investment grade” properties. Others may focus on stable but growing regions.
A sound risk management profile requires carefully acquired assets. For instance several successful US triple-net lease funds have properties with primary remaining lease terms of about 10 to 12 years and average age of about five years.
Voracious appetites
The slow US recovery and low-benchmark Fed interest rates have made triple-net lease funds very attractive for institutional investors seeking yield and safety.
One of the most well known companies that a primarily features triple-net lease asset is New York Stock Exchange listed National Retail Properties.
Structured as a Real Estate Investment Trust, the company as of June 30, 2014 owned a diversified portfolio of 1,927 investment properties across 47 states, with total gross leasable area of approximately 20.8 million square feet.
More importantly, to provide proper diversification, these properties are leased to tenants in 38 industry classifications.
The company claims that its occupancy rate has never dropped below 93.5% in its history because of strong underwriting and smart selection of tenants.
In June 2014 it was 98.5 per cent. In 2013, National Retail paid a dividend yield of 4.8 per cent. According to the company, it has provided investors with one year (13.4 per cent), 5 year (23.2 per cent) and 10 year (14.8 per cent) total investment returns.
Asian institutional investors
Large Asian institutional investors that are diversifying parts of their fast-growing portfolios overseas are now carefully scrutinizing triple-net lease funds.
Triple-net lease bond-like funds provide higher yields than traditional conservative bond investments often considered for their nascent forays into foreign markets.
Asian institutional investors are becoming extremely yield-conscious because their fast-aging societies will require massive pension payouts in the next several decades.
