Commercial Real Estate Finance

A few different kinds of real estate asset types have become increasingly popular, thanks to the resiliency they’ve shown since the financial downturn. REITs, of course, have become enormously popular thanks to their fund-raising and buying power; multifamily and self-storage, too, have shown strong performance in contrast to the weaker single-family, retail, and office markets. One type of asset, which has seen less hype than others but has nonetheless proved resilient in the down economy is the triple-net leased (NNN) retail property.

Certain retailers remain unaffected by Internet retail, and these include the enormous supermarkets and drug stores that often occupy large, stand-alone buildings and hold triple-net leases. Landlords like the triple-net arrangement, since it allows them to pass all of the property’s operational costs directly to the tenant while keeping a single, stable tenant.

Other good triple-net tenants are in the restaurant industry. Of course, the success of a restaurant depends on its brand, location, reputation, etc., but if these fundamentals are in good shape, the restaurant can be reliable and profitable for many years. This goes for large steak houses as much as Taco Bell franchises.

Still, the triple net lease and the size of the tenant are no guarantee of success. Let me direct your attention to an IPO that took place back in September.

Spirit Realty Capital (NYSE: SRC), a triple-net retail REIT based in Arizona, announced it would offer 29 million shares at $15, below its originally stated $16-$18 range.  Prior to this IPO, Forbes’ Brad Thomas offered the details of the REIT and its IPO:

Excluding fees, Spirit Realty expects to generate about $418 million from the IPO (assuming mid-point price of $17 per share) and of that, $399 million will be used to pay debts. Spirit counts $3.6 billion in real-estate investments and loans. Its 1,183 properties nationally were roughly 98.2 percent leased as of midyear.

Okay, so Spirit Realty had to adjust its price and lower expectations a tad. Sometimes that happens with IPOs. Still, the prospect of investing in a REIT whose almost 1200 properties are 98% occupied seems a pretty safe bet.

The above Forbes article, however, was skeptical, warning readers about the inevitably inflated prices that come with IPOs, as well as this REIT’s high level of debt. More over, it raised concerns over the stability of its tenants:

My concern with Spirit’s portfolio is that the tenant base has a high-degree of non-rated credit and the exposure could lead to breaches or delay in payment of rent by that may materially and adversely affect the company. Spirit’s three largest tenants (based on average base rent) are Shopko/Pamida, 84 Properties, LLC, and Carmike Cinemas(CKEC)– representing around 40 percent of the overall portfolio.

The challenge of triple-net real estate is finding a robust, reliable tenant. While supermarkets and movie theaters perform well in many markets, no company is immune to closures.

Case in point: Richmond BizSense reported last week that, since its IPO, Spirit Realty has gotten mixed up in the bankruptcy of a local restaurant operator, Cornett Hospitality. Among the restaurateur’s businesses?  A Topeka’s Steakhouse and two Hooters locations. That’s right, even Hooters locations were behind on their rent!

All of which goes to show potential investors must be extremely diligent in vetting the tenants of triple net/retail landlords. Even if the tenant is Hooters.

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