Net Leased Investment Sector Continued to Gain Momentum

NNN Lease Market News

The U.S. retail investment sales market staged a strong performance last year as property sales rose 32 percent from 2010 to nearly $61 billion.

Prices for power centers and neighborhood centers increased 9.1 and 7.2 percent, to $148 and $135 per square foot, respectively.

While the highly coveted single-tenant net-lease investment sector continued to gain momentum, shopping centers and other multi-tenant properties captured nearly 68 percent of total sales, for which cap rates compressed by 40 basis points.

How are single-tenant, net-leased investments different from multi-tenant buildings?

Multi-tenant buildings have more than one tenant, and as a result, owners and landlords must juggle multiple leases that begin and end at different times. These leases are rarely longer than seven years. That means that the building's financial performance is vulnerable to the ups and downs of the market.

Many net-lease investors have previously owned other types of real estate but are looking for an investment that requires less maintenance and supervision. For example, many apartment investors end up selling their high-maintenance properties and then reinvesting the sale proceeds in single-tenant, net-leased retail properties, as do many land owners who have previously never received any income or tax benefits from their property.

Who can invest in single-tenant, net-leased properties?

Net leased properties are appealing to a wide variety of buyers, from high net worth individuals to partnerships to large institutional investors like real estate investment trusts, life insurance companies and pension funds. Net leased properties also are very attractive to investors who need to do 1031 tax-deferred exchanges, or 1031 exchanges for short.

What are the benefits of investing in single-tenant, net-leased properties?

Many people consider single-tenant, net-leased properties as bond-like investments because of their stable, predictable returns. Because tenants commit to long-term leases, there's very little re-leasing risk. Moreover, single-tenant, net-leased investments can be tailored to an investor's risk-reward expectations by choosing tenants with different credit profiles. For example, some tenants are rated by national credit ratings agencies while other tenants have only their previous financial performance to recommend them.

When is the best time to invest in a single-tenant, net-lease property?

Net-leased properties are like all-weather tires. They are good investments in both good and bad economic times and in hot and cold real estate markets. Here's why: a single-tenant net lease is guaranteed by a long-term lease at pre-set rental rates. As an owner, you know exactly who will be a tenant in your building, how long that tenant will be there and exactly how much rent they will pay you. That means you will derive a steady income from your investment, regardless of how the economy or real estate market is performing.

Gateway investment markets New York, Northern New Jersey, Los Angeles, Chicago, Washington, D.C., South Florida and Boston dominated this investment activity.

Nontraded NNN Lease Investments REIT Will do a Better Job

NNN Lease Market News

Industry executives say these new nontraded REITswill do a better job of giving investors a way to invest in real estate without the volatility of exchange-traded REITs, which have assets of roughly $500 billion. Like existing nontraded REITs, the new ones are offering attractive initial dividends, such as American Realty Capital's nearly 7% distribution and Cole Real Estate's 5.5% distribution.

But these new structures haven't completely silenced critics, who point out that some fees remain high and investors might still face redemption problems.

Jim Sullivan, a managing director at REIT research firm Green Street Advisors, says investors are still better off investing in a publicly traded REIT. "They are more liquid, they are more transparent and the market tells you every day what they're worth," he says.

Traded REITs, like nontraded ones, are required to pay at least 90% of their taxable income in the form of dividends. But unlike nontraded REITs, traded REITs' values are set throughout the trading day, giving investors instant transparency.

Nontraded REITs first became popular a decade ago. The pitch: Long-term investors would hold them for seven to 10 years, during which time they would collect attractive dividends. Then the REITs would sell their properties or go public, returning to investors their principal plus any gains. The trade-off was that redemptions would be limited during the lives of the REITs.

But fees were high—as much as 11% in initial sales charges. And only 19 of about 90 have returned investors' principal over the years. http://online.wsj.com

“A dividend that high indicates the market doesn’t believe that dividend is sustainable.

Yields in the 20s and 30s (and higher) often reflect a view by the market that this

dividend is likely to be cut. When investors get jittery about a REIT’s ability to cover

its dividend, they tend to sell shares, which causes the yields to jump. Some REITs

have suspended their dividends, while others have either trimmed them or opted to

pay a portion of them in stock.”  BradThomas.

Dollar General Up By One Notch to BBB-minus

NNN Lease Market News

  

Standard & Poor's upgraded Dollar General rating by one notch to BBB-minus.

The action was hardly a shocker - Dollar General was on the agency's latest list of rising stars, fallen angels published on April 9, one of 23 global companies that were poised for a return to high grade. S&P had placed the company on CreditWatch with positive implications back in March.

But the upgrade is also the result of the company's robust sales, expectations for future growth as well as its commanding market position as a discount retailer.

 "Dollar General's revolutionary retail-innovations, ample square footage growth potential and strong management execution continue to deliver out-sized market share gains," Bank ofAmerica Merrill Lynch analysts said in a recent note.

The analysts do concede that Dollar General typically sells traditional convenience and some staple foods, and not usually fresh items.

The expansion in potentially underserved markets as well as its strategy of keeping its prices in line with cost increases will help position it in the longer run, Barclays said in a note.

And while longer term debt reduction might be deferred in lieu of share buybacks, Barclays says the company's solid free cash flow of around $536mln in 2011, and estimates of $643mln in 2012 and $949mln in 2014, will allow for a reduction of its approximately $2.5bln in debt and buttress earnings per share growth.

 http://www.reuters.com

NNN Lease Market Recovery Hindered by Tight Lending

NNN Lease Market News

NAR Reports U.S. Commercial Real Estate Recovery Hindered by Tight Lending

Based on the National Association of Realtors' (NAR) annual Commercial Real Estate 2012 Lending Survey, U.S. commercial real estate markets showed signs of recovery in 2011; commercial lending standards have tightened in the past year for small businesses and scuttled a major portion of contracted transactions for smaller properties.
Lawrence Yun, NAR chief economist, said there is a significant split in commercial lending depending on value.  "This is very much a tale of two markets.  There have been notable improvements in capital for large commercial transactions valued at $2.5 million or higher, but there remain significant challenges for small business," he said.
NAR's Commercial Division, formed in 1990, provides targeted products and services to meet the needs of the commercial market and constituency within NAR. The NAR commercial components include commercial members; commercial committees, subcommittees and forums; commercial real estate boards and structures; and the NAR commercial affiliate organizations - CCIM Institute, Institute of Real Estate Management, Realtors Land Institute, Society of Industrial and Office Realtors®, and Counselors of Real Estate.


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