In 5 min. What Triple Net NNN Real Estate Brokers Won't Tell You! And How You Can Protect Yourself?

The multi-family sector has endured a substantial setback, plummeting by 6.6% year over year. In contrast, the industrial real estate sector has surged impressively by 7.0% since 2022. The office market has taken a colossal decline of upto 60% in some areas around the Chicago city and will have an impact globally because of the adoption of WFH Work From Home. While NNN realestate also has declined in value. As I have written before about the rule off thumbs you should take into consideration, higher interest rates lower asset prices, which are phenomenal for cash buyers.

The prevailing surge in interest rates has adversely impacted triple net lease investors, creating a scarcity in acquiring financing. This scarcity has consequently led to a reduction in demand, resulting in a decline in asset values. The expansive liquidity injected into the markets by the Fed during and before the pandemic era inflated asset prices and compressed cap rates. However, those prosperous times have faded away.

In this unfolding scenario, there's a discernible deceleration in triple net lease rent growth, with securing financing presenting a formidable challenge. Uncertainty looms large around the pricing of NNN deals, given the erratic market conditions heightened by rampant inflation. Seeking guidance from seasoned experts remains an imperative until the market attains a semblance of stability. Amidst these macroeconomic challenges, national tenants in the NNN domain have adeptly embraced technology, streamlined operations, and placed a premium on customer-centric approaches. Many have successfully addressed supply chain hurdles through innovative collaborations with their vendors.

Looking ahead to the first quarter of 2024, a select roster of exemplary NNN high-credit national entities emerges, including CVS, Walgreens, Dollar Tree, Family Dollar, 7-Eleven, Sheetz, Reilly’s, Pep Boys, Fresenius, and others. Cap rates for these esteemed NNN tenant brands are anticipated to fluctuate between 5.00% and 7.00%. Moreover, several of these prestigious entities offer extended leases coupled with robust parent corporate guarantees.

Hence, retail triple net leasing emerges as an enticing asset opportunity in the forthcoming year. There is a palpable resurgence in brick-and-mortar store sales. Notably, numerous NNN lease tenants, distinguished national retail names, continue to innovate with novel concepts and expand their footprint in the market. Industries such as Day Care, medical services, QSR/Fast food, and other service sectors remain resilient, relatively unscathed by supply chain limitations and economic uncertainties.

The above is an article trying to pitch that triple net NNN realestate is a good option for an investment. I beg to differ. If you perform a discounted cash flow and treat the NNN realestate lease like a bond with the current discount rate you will be loosing money. Plus with Triple net leases your equity is capped at a 2.5% per year even though if the area has a property increase of 6%. Corporations such as CVS are selling their owned realestate to raise capital to invest it in a short strategy, for example buying Abbott bonds (going long) and shorting Abbott stock, to create cashflow (bond) and capital gains in this recession to keep shareholders happy. If you think the stock is going up you do the opposite. If the company's stock goes down 60% you make a killing in capital gains and you get paid the bond yield. For shorting the stock make sure the entity resides in a low tax jurisdiction, however for the bond you will have to pay the dividend tax rate where the company you invested in resides. The Triple net is a good strategy for a fund manager to charge fees on retail. You are better off investing in a ETF with 0.5% management fee structure that has a short strategy on the retail sector.

In addition the banks now are only lending on a debt service coverage ratio of 1.25x as well as lenders require investors have a net worth of $1.0 million or more. Also Net lease investors may qualify if their annual income is minimum $200K (or $300K if joint income). To add insult to injury lenders require investors to have liquid cash for a down payment of 25% – 45% of the loan’s total value. So what that means, is you need to pool money and start a fund to buy the deals in cash and ride the wave for the next 3-5 years before you can perform a cashout refinance, but hang on there, remember your equity is capped by the rent increases. Sure you can argue if interest rates go down I can sell the lease for more! By how much? 1-3% more, so if your NNN lease is giving you 7% now, you will sell it to the next investor for a 4% return when interest rates go down to 1% again?

So for example buying a lease for 10million at 7% and selling the lease for $17,500,000 at 4% over a five year period. That is a 15% gross yoy return, which you can execute a 1031 exchange kick the capital gains tax backwards. Sounds very attractive doesn't it? Only if AIG still sold their business interruption policy at a discount to 9% premium to cover a 10 million dollar interruption with payment as balloon at end of horizon. (hint: That will never happen!). That's not even factoring in the real estate commissions of 6%.

So basically you should execute a discounted cashflow on the stream of income from the triple net lease and include the current discount rate, you will see you'll be in the negative.

This is how to determine a discount rate generally:

You will compare Discount rates & Corporate Bonds vs Sovereign Debt.

Discount Rate (DR): Risk free rate (RFR) which is defined as the US 10 yr which is the barometer of inflation.

Equity Risk Premium (ERP): Is the amount you need to get paid to take that amount of risk usually 1-3% on top of Bonds.

In terms of bonds, the corporation must pay you back. In contrast equity, the corporation does not have to pay you anything. You own a share in a business, if the business is performing well, they pay a dividend. As an equity holder you have a claim on the company's assets which is extremely different than a debt contract and FYI they are treated differently on tax purposes. So you have to get paid more for taking that risk.

The Risk free rate equals 3% +3% = 6% equity risk premium, then you add +1-10% depending how risky you perceive the company to be. This is how you come up with the discount rate. Some analyst use beta which is the stocks or the investments correlation to the market.

Sovereigns

Below you will see the order of risk to invest in soverign bonds from low to high:

-Low risk sovereigns are: USA, Germany, Switzerland and Japan (2-3% yield) in good times now (4%-5.0%). Corporate bond equivalent Johnson & Johnson and Apple.

-Medium Risk sovereigns: United kingdom, India, Brazil, South Korea, Finland, Sweden & New Zealand (4-5%) in good times now (6-7%). Corporate bond equivalent Best buy

-High Risk sovereigns: Chile, Poland, Pakistan, Malaysia, Indonesia and Hungry (8-10%) in good times now (11-16%). Corporate bonds equivalent Game Stop & AMC.

There are two risks in a bond, 1.inflation risk and 2. Default risk. You could have a country with low inflation but with high default risk. The same scenario plays out in corporate bonds. You would rather buy a senior corporate bond like Apple or J&J than buy sovereign debt in a tier 3 country such as Indonesia or Malaysia. Question, What's safer J&J or the government of Hungry?

What's that got to do with Triple NNN leases, bonds and or Equities?

Triple Net lease are Equities acting as bonds because of the corporate guarantee. The Triple Net lease holder has given the corporate an option to rent the premises below market value for a guaranteed stream of income. Investors look at bonds, triple net & equities differently, however they look at dividend yield in terms of equities. If you look at J&J or Abbott their divended yield fluctuates with the stock price between (2-3%) What does that remind you off? It reminds you of corporate bonds. You are getting 2-3% however you also have default risk if the company does poorly. The Triple Net is the same it's giving you (5-6%) What does that remind you off? It reminds you of medium risk sovereign debt. So you are receiving 5-6% however you also have default risk if the corporate guarantor defaults. In terms of stocks if the company is doing poorly and own equity, the company can slash the dividends. However thay can't slash the obligation to pay on the bond side (debt agreement). In a tripple Net if the corporate guarantor can not pay, you will have to take them to court and if the corporate guarantor goes bust well you immensely overpaid for the built up square feet.

Alot of people confuse dividend yield to bond yields. You can think of it as a carry trade. As stated above, If you go long Abbott stock and short Abbott Bonds. You could collect a net 0% because you have to pay interest when shorting debt. In this strategy you are betting that the stock will go up. If you are bearish you do the opposite, you short Abbott stock and you go long Abbott Bonds. If the company goes bankrupt you make lots of money and to add the cherry on top you get paid your bond yield and money back. One more issue to take into consideration is to ask what is the loan to value of the triple net lease.

Finally it's important to think about any investment as primarily cash flow generating machines with a secondary bonus of capital gains, therefore not deploying your soldiers to work for free.

Do you want to know more about raising capital? Do you want to know how you can take your company public via other methods such as reverse merges? Do you want to know about structuring deals via onshore/offshore vehicles? And do you want to know about instruments? Subscribe to this newsletter...

In monopoly (UK Version) it works out that Pentonville road, Angel of Islington & Uston, the light blue sites on the left give you 159% return and are the best in terms of arithmetical return but the dark green sites which are what people think that are better Oxford Street, Bronze Street, and Regent Street only give you 101% return so they are very bad. The next best sites are the orange ones which are Bow Street, Vine Street, and Malbrough Street. They give you 141% return but they are better than Pentonville Road, Uston & Angel of Islington because there is an increased incidence of landing on them.?You land on them more often and the reason for that is, there is a card in the chance that orders you to go to jail. And if you go to jail, you are past the blue sites and about to land on the orange ones. In addition to that, there is another card in chance, ordering you to advance to Pall Mall which does the same thing, it takes you past the blue sites and another one demanding to advance to Marly Bourne Station.

There’s also another one demanding you to go back three spaces, which in one position will land you on Vine Street. So there’s an overwhelming case for having the orange sites. Now, most people do not know that.??

Quote

"Life is movement and movement in my opinion is represented as a wheel. It may be a car wheel, bicycle wheel,?or even a semi-truck wheel. In the end, you choose the size, width,?and type of rubber. What’s even better, you also have a choice to fill it with more air than the recommended pressure (for some that’s un heard of), however, one thing is crystal clear; to live a full life and have choices you must be willing to transform into a wheel rather than being a spoke on that wheel."

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This article is for information purposes only, does not constitute individual (investment) advice and investment decisions must not be based merely on this article.

The contents of this article are based on publicly available information and/or sources which we deem trustworthy. Although reasonable care has been employed to publish data and information as truthfully and correctly as possible, we cannot accept any liability for the contents of this document.

Investing involves risks and the value of investments may go up or down. Past performance is no indication of future performance. Any projections and forecasts are based on a certain number of suppositions and assumptions concerning the current and future market conditions and there is no guarantee that the expected result will ultimately be achieved. Currency fluctuations may influence your returns.?

The information included is subject to change and Lamar Sidwell (aka Amer Alamer) has no obligation after the date of publication of the text to update or inform the information accordingly.