The insatiable demand for income is as strong as ever and that quest for yield has driven down cap rates to record low levels. That strong demand for stable income-producing investments is fueling the sale/leaseback business and many corporations are taking advantage of the beneficial opportunities of cap rate compression and low interest rates.
For REIT 101 Investors: The CAP rate; or capitalization rate, is the relationship of the net operating income (NOI) of the property divided by the sales price or appraised value. So a property with $200K of NOI that sold for $2 million, sold at a 10 CAP ($200K divided by $2 million).
The fundamental environment for REITs today -- from occupancy to rental rates -- is very sound and when interest rates do begin to rise, the REITs with the best fundamentals will be in a better position to capture the enhanced value creation. For income investors, the biggest, and perhaps the most important, element to consider is the sustainability of dividends. Ben Graham summed up the repeatable dividend model in his famous book, The Intelligent Investor:
"One of the most persuasive tests of high-quality is an uninterrupted record of dividend payments going back over many years. We think that a record of continuous dividend payments for the last 20 years or ore is an important plus factor in the company's quality rating."
Triple-net REITs are valuable components to an Intelligent REIT portfolio. my newsletter HERE.
Brad Thomas is a contributor for The Street and a leading expert in REIT Investing. He will be speaking at the
Interface Net Lease Conference on September 12 at the New York City Bar Association in New York City.
At the time of publication, Thomas was long O.