Commercial Real Estate Strategy – Part of a Balanced Investment Portfolio

With continued volatility in the stock market, unattractive yields in the bond market, and uncertainty in the global markets, investors continue to search for “flight to safety” investments that have the potential to provide attractive risk adjusted returns.

One such strategy that should be considered as part of a balanced, diversified investment portfolio is an investment in single tenant net lease (STNL) assets. Well known, respected brands such as McDonalds, Advanced Auto Parts, CVS, Auto Zone, Wendy’s, Lowe’s, Pep Boys, Starbucks, Dollar General, Arby’s, as well as many others are included in this category.

If you are an investor looking for stable, predictable cash flow from a passive real estate investment , this strategy may be attractive to you as a bond replacement strategy, providing the opportunity for higher yields than the stock or bond markets.

In a single-tenant net lease investment, the tenant (as an example, McDonalds, CVS, Auto Zone, Wendy’s etc.), is responsible to pay for all operating expenses, including: real estate taxes, building insurance, and maintenance of the property they occupy. When considering an investment of this type, it is important to carefully analyze what is commonly referred to as the “three legged stool” attributes of a particular asset. One leg is the credit of the tenant, the second leg is the lease term, and the third leg is the underlying real estate itself – location and potential. For an investment in this product type to be considered as a true bond replacement strategy, the property under consideration should have a tenant with an investment grade credit rating. To be considered “investment” grade, a tenant should have a credit rating with one of the nationally recognized rating agencies such as Moody’s or Standard & Poor’s, of at least a BBB- or better. The longer the lease term remaining on the property, the more attractive the potential investment. A property with a lease term of 10, 15, 20 years or more remaining is not unusual with this type of investment. Finally, real estate has always been, and will always be about location. Will the location of the asset still be attractive when the lease term expires, and desirable for a different use and/or tenant upon the expiration of the lease term in the event the current tenant does not extend or renew their lease. For an investment of this type to warrant serious consideration, all three legs of the stool need to stand on their own.

Through some simple due diligence and research, an investor can determine that buying a net lease real estate investment has the potential to provide a higher return than buying the corporate bond of the same company that will be the tenant of the property.

This type of investment strategy is suitable for investors who have a preservation of equity mindset, as well as those seeking stable, predictable cash flows, with the potential of higher yields than the stock or bond markets, backed by an investment grade tenant.

As with any other financial investment, you should always consult with a trusted advisor, financial planner and a qualified real estate attorney before making any financial commitment.