By PJ Behr , CCIM
COMMITMENT : THE CORNERSTONE OF NET LEASE
One of the most appealing aspects of net lease is its focus on the long term . Since net leases are traditionally longer , investors can rely on stable continuous income , and tenants can count on predictable leasing costs .
But building for the long term takes careful planning , a deep understanding of your tenants , access to relevant data , and most importantly , a willingness to cultivate and maintain strong working relationships that will go the distance .
By PJ Behr , CCIM
Net lease transactions have increased significantly over the last 20 years ( see chart on opposite page ), and the sector has also grown significantly wider and deeper , as more operators realize that monetizing their owned real estate through sale-leasebacks can provide a prudent form of capital . By reinvesting sale-leaseback proceeds back into their business , operators can increase their return on invested capital , helping them grow in the future .
Moreover , the free-standing nature of the asset provides flexibility , which became essential for many businesses during COVID-19 . As Jackson Hsieh , CEO of Spirit Realty , noted on a spring earnings call :
“ Because [ net lease ] properties are free-standing , single-tenant , and fully controlled by the operator , tenants can adjust their operations and quickly adapt their space to take advantage of changing circumstances and consumer demand . COVID was the ultimate stress test to the net-lease model and showcased its durability .”
A FORMULA FOR SUCCESS Spirit Realty invests in single-tenant assets with long-term triple-net leases . We have a portfolio of more than 1,800 properties with more than 300 tenants , representing approximately $ 7 billion in real estate investment across 48 states and 28 industries . Our portfolio is well diversified , with approximately 75 percent of our rents coming from retail properties and the rest from industrial and other asset classes .
In order to build for the long term , our underwriting platform focuses on real estate quality , industry relevance , and tenant credits . We use our proprietary tools to analyze acquisitions and provide us with a deep dive on any asset that we ’ re considering acquiring .
When looking for investments in the triple-net space , we start with the real estate , which is the underlying value of any investment . However , the tenant and the industry also have to work over the long term . When we evaluate tenants , we want to understand their business model , how they ’ re doing in the current environment , and if they ’ ve adapted over time to remain relevant in their industry .
It ’ s also necessary to look at the industry itself to understand its long-term prospects . We ’ ve seen that play out over the last twelve months , with industries and tenants that were able to withstand the impacts of COVID-19 and come out on the other side — some stronger than others .
A good example is home décor retailer At Home . At Home has more than 200 stores in 40 states and is headquartered in Dallas where Spirit is also located . There ’ s a fair amount of competition in the home goods space , but in 2019 , Spirit dug into At Home ’ s business model and industry , and we liked how their business model was executed . Our underwriting convinced us that At Home ’ s model is best in class , and the real estate is solid , so we committed to deepening our relationship with them .
We partnered with At Home on their store expansion efforts in 2019 and doubled our exposure to 12 locations . Then , during the summer of 2020 , when capital was extremely hard for retailers to obtain and many businesses were shut down due to the pandemic , our relationship with At Home allowed us to do another sale-leaseback .
The home goods sector became more popular as 2020 wore on and people were spending more time at home . Because of At Home ’ s business model , the company was in a superior position to take advantage of
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COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE SUMMER 2021