Treasury is, and that’s at about 1.92%. So
here you have safe cash flows that produce
quite a high yield.”
Of course, the dividend yield is not the
only component to value for CapLease,
McDowell points out. “You’re hoping for
total return, and that’s based on REIT divi-
dend and how much you hope the shares
will rise in the course of a given year. The
two together produce your total return
percentage. The knockoff on net lease
assets for years has been fixed cash flows,
so portfolios have bond-like characteris-
tics. When the REIT atmosphere is too
frothy, you can’t raise rents as tenants
move out because you have long-term
leases. But that said, long-term cash flows
look very attractive. REITs have had strong
returns in the past 12 months. People look
for safety in earnings, and they find that in
net-lease REITs.”
According to Jonathan Hipp, founding
president and CEO of Calkain Cos. of
Gregg Seibert, SVP of investments for
Scottsdale-based Spirit Realty Capital, says
that triple-net investing is safe and has
experienced some cap rate compression
due in part to lower yields on alternative
financial products such as bonds, stocks
and money-market funds. In fact, net lease
has become an attractive alternative for a
lot of investors. “The current dividend on
our stock is approximately 6.4%, so com-
pared to a lot of other liquid investments,
the yield is considered high,” says Seibert.
Net lease has long been deemed a safe haven for investors seeking
guaranteed returns. But today, many investors are venturing outside
the safe and known into riskier territory, in search of higher yields.
Does this mean that net lease investments are facing ho-hum status?
Reston, VA, investors seeking a higher
yield without a doubt need to look at a dif-
ferent sector. “But if you look at other
vehicles, yes, net lease is a good invest-
ment. Lack of product is more of an issue
than lack of capital.”
Retailers that are particularly active within
the net lease sector include gas stations and
discount chain stores like Dollar General or
Family Dollar. “They’re bringing product to
the market, as are the banks, but not a lot of
big boxes are being delivered” in the net
lease space, says Hipp. “That doesn’t mean
there’s nothing being built, but compared to
the past, it’s very low.”
As a sector, net lease is very much driven
by the economy, he explains. “The hous-
ing market is just now starting to kind of
feel like it’s picking up—not across the
whole country, but definitely in the
Northeast and parts of the Southeast,
housing is gaining some traction and gain-
ing legs. As people begin to feel their
houses are starting to appreciate in value,
and they’re not underwater, it helps con-
sumer confidence. And markets are driven
by consumer confidence.”
than on money-market accounts or bonds.
Most would say the yield is still attractive,
on a risk-adjusted basis.”
Clearly, asset values are higher today
than in the past, and there are only so
many dollar stores in the country, says
Gordon DuGan, CEO of Gramercy Capital
in New York City. “My own view is that net
lease is more of a real estate business than
a credit business. Twenty-five years ago,
when I first started out, it was a credit busi-
ness with a strong retail component. Now,
it’s primarily real estate with a strong credit
component.”
DuGan says net-lease companies are
trading well because they have performed
extremely well throughout the downturn.
“Bill Ackman, who is a brilliant investor,
put out a piece on why Realty Income was
short a few years ago, and Realty Income
has just continued to prove him wrong in
that case. When the net-lease strategy is
done well, it’s a very attractive risk-return
business.”
Knowing your tenant is crucial to suc-
cess, Domb says. “The other night, I had
dinner with a couple, and the wife says,
market. “If you’re in the banking industry,
you clearly want to be with somebody with
good credit who’s expanding, like TD
Bank, or if you’re in the dollar-store sector,
go with Dollar General or Family Dollar. If
you get everything on your wish list, it’s a
good investment, but you’re probably pay-
ing the most aggressive cap rate because
that’s what everybody else wants to buy. ”
While Hipp isn’t saying for sure that cap
rates have bottomed out, “I’m not sure
how much lower they can go. If we aren’t
at the bottom, we’re very close to it.”
The fact that we’re close to bottom on
cap rates could mean that developers will
be feeling some pressure, since this could
bring more sellers to the net-lease market.
“Over the past 18 months, if you were a
seller and waited, it was a smart decision,”
says Hipp. “But now sellers could take a
penalty if they wait, so as prices move up,
they may feel they’d better sell now before
cap rates get any higher. If there were 10
Walgreens on the market and 50 buyers,
and suddenly you have 40 Walgreens on
the market, there’s some price pressure.
The developers who could hold out
