For example, hotel, multi-family and mini-storage rents are determined by a variety of factors, including supply and demand. Many of these operators have had to decrease rents in order to stabilize occupancy rates and to meet debt-service and operating-expense requirements. However, most triple-net properties provide for fixed rental increases, and some include percentage-of-sales multipliers. Having growth and income incorporated into a sustainable revenue stream makes the triple-net sector a very appealing alternative.
So with a well-balanced investment strategy, triple-net investors seek a fundamentally safe, low-risk strategy where principal preservation and sustainable income -- and growth -- are a must. Essentially, the triple-net investor is seeking a bond-like investment in a real estate wrapper.
While you could invest in
stock, which is paying around a 1.1% dividend yield, you could, instead, acquire a triple-net property leased to Walgreen. The latter would provide more security than the stock, while achieving an unleveraged return of approximately 6% to 6.5%. Most Walgreen leases are 25 years, excluding options, with minimal management responsibilities, making this type of investment comparable to a bond.
The Triple-Net REITs
There are five triple-net REITs in the FTSE NAREIT Index with a combined market capitalization of $11.281 billion as of July 31. The retail sub-sector has produced an average year-to-date total return of 18.24% and has an average dividend yield of 4.28%.
These five triple-net REITs --
(O - Get Report)
National Retail Properties
(NNN - Get Report)
American Realty Capital Trust
Agree Realty Corporation
(ADC - Get Report)
American Realty Capital Properties
(ARCP - Get Report)
-- are all worth considering, as they are supported by a common value proposition of durability and sustainability.
The essence of an intelligent investment strategy is to build a portfolio around lasting differentiation. By providing a well-balanced platform supported by credit, income and growth, triple-net properties provide for a powerfully repeatable fixed-income alternative with differentiated characteristics.
Ben Graham, author of
The Intelligent Investor
, wrote: "It is the consistency in the products that creates consistency in a company's profits. Consistency and durability are attributes for competitive advantage."
Repeatability is the essence of the triple-net investment strategy and also the prime source of competitive advantage. Triple-net REITs offer transparency, liquidity and sustainability. Because of these balanced attributes, investors should consider what Albert Einstein called "the most powerful force in the universe": the power of compounding.
At the time of publication, the author had no positions in any of the investments mentioned
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.