Strategy.Why Net Lease?
Essential Assets are properties where tenants are expected to operate and occupy to maintain business continuity – regardless of economic conditions
Investment in the building
Strategic Location Relative
To Tenant’s Skilled Labor Force
Examples of Business Essential Assets:
- World, national or regional headquarters
- Principal Manufacturing Facilities
- Primary Distribution Centers
For the period April 2020 through April 2021 – at the height of the Covid-19 pandemic – we collected approximately 100% of contractual rent.
Triple and Absolute Net Leases.
What is a Net Lease? A lease where the tenant pays:
A diversified portfolio of single-tenant, net leased office and industrial real estate assets has the potential to provide consistent income, tax-advantaged returns, and a hedge against inflation.
Time Period: Last 10 years through April 2021. 2. Cumulative Growth in Rental Rate = 20.0% 3. Cumulative Growth in CPI = 18.2%
+10% = The excess real return achieved over inflation by providing contractual increases in net rent over the previous 10-year period.
Lease Payments are Equivalent to the Senior Unsecured Credit Quality of the Tenant.
Equivalent in lower risk spectrum with superior intrinsic benefits:
Net Lease Real Estate Provides Superior Returns with Equivalent Risk Profile.
Office Cap Rate Spread over BBB Yields
Industrial Cap Rate Spread over BBB Yields
The spread between net lease and corporate bonds is at historically high levels, providing even greater outsized returns for net lease investors versus risk equivalent corporate bond yields.
Source: Bloomberg and Green Street
Breaking Down the Components of Single Tenant Net Lease
A STNL has two components of value:
1. Lease Obligation
2. Unencumbered Land & Building
Lease Obligation Component
Valued by discounting the projected future rent payments (less landlord’s expense obligations) using a discount rate based on the tenant’s unsecured public market yield of similar duration to its lease term.
Unencumbered Land & Building Component
Valued via two methodologies:
1. Capitalizing Net Operating Income (NOI) for a stabilized, market-rate, 95% leased building, subtracting projected aggregate lease-up costs (e.g. TI’s, L/C’s, free rent and downtime)
2. Estimating replacement cost including land, building and developer profit but excluding lease-up costs
- NPV of the Lease Obligation of $32 million accounts for 64% of the Purchase Price
- Residual Value of $18 million is a 55% discount to the $40 million replacement cost
- 15-year lease to a BBB-credit-rated tenant
- $4.50 per square foot NNN rental rate with 2.50% annual escalations
- 500,000-square-foot building
- $50,000,000 purchase price based on a 4.50% going-in cap rate
- 3.00% lease discount rate based on tenant’s 15-year senior unsecured bonds
- Replacement cost is $40,000,000, or $80 per square foot
Conclusion: Longer lease terms generate a higher proportion of the total return from the lease obligation income. When evaluating a prospective acquisition, measuring the two components of value and comparing to the unencumbered land and building value today can be a useful tool to gauge whether expected returns modeled using conventional underwriting methodology are reasonable in a scenario where the single tenant net lease is not renewed at expiration.