When it comes to real estate investment trusts, most people think that the most important aspects are whether the tenants pay their rent and if that rent is enough to cover the debt service of a REIT. That’s true, but there is an even better type of REIT if you are looking for safety — “triple-net” lease REITs.
These REITs will lease out property to tenants in which the tenant not only pays rent, but also all the real estate taxes, building insurance and maintenance. It’s where the landlord basically says, “pay me my rent and everything else is your problem.”
These triple-net lease REITs aren’t entirely free of risk. Most of the time, a triple-net lease is with a single tenant. So the REIT must be certain the tenant is creditworthy. That’s why you see big public companies as tenants of these REITs.
Safe REITs to Buy: Realty Income Corp (O)
Dividend Yield: 3.4%
Realty Income Corp (NYSE:O), favorite of favorites, payer of monthly dividends, is one of my ideal choices for a long-term diversified portfolio. Realty Income is massive, with more than 4,600 properties and 243 commercial tenants scattered all over the country. It has raised its dividend 75 consecutive quarters and returns twice the compounded average annual return of the S&P 500 Index.
As far as those triple-net creditworthy tenants go, the top twenty include Walgreens Boots Alliance Inc (NASDAQ:WBA), FedEx Corporation (NYSE:FDX), LA Fitness, AMC Entertainment Holdings Inc (NYSE:AMC), Diageo, Regal Entertainment Group (NYSE:RGC), Rite Aid Corporation (NYSE:RAD), and Wal-Mart Stores, Inc. (NYSE:WMT). These are, you’ll notice, retail stores selling consumer staples at price points that attract shoppers from all demographics.
Occupancy is 97.8%, so there are only 101 vacant properties out of more than 4,600. In some states, 100% of those properties are leased. They can also raise rents and thereby increase cash flow.
Safe REITs to Buy: National Retail Properties, Inc. (NNN)
Dividend Yield: 3.5%
National Retail Properties, Inc. (NYSE:NNN) even has a stock symbol to match the abbreviation for “triple-net.” Whereas Realty Income has about 80% of its portfolio in retail, NNN is all about those consumer staples retailers, as well as service-centered companies. The other thing about these types of businesses, and why they make for great triple-net REITs, is that “staples” and “service businesses” are synonyms for “recession proof.”
People have to buy certain items all year, and that means a level of guaranteed business for these companies, which in turn means guaranteed revenue and guaranteed rent, insurance, tax payments and maintenance.
You can see that in the performance of NNN, which has returned about 15% annually over the past 25 years, and raised its dividend for 26 straight years. It yields about 3.5% compared to Realty Income’s 3.4%.
By the way, the National Retail Federation increased its 2016 retail sales forecast for a YoY increase of 3.4% vs. 3.1%. That is good news for NNN.
Safe REITs to Buy: Store Capital Corp (STOR)
Dividend Yield: 3.6%
Store Capital Corp (NYSE:STOR) explains itself in its very name. Store is actually an acronym, which stands for “Single Tenant Operational Real Estate,” the way most triple-net REITs operate.
However, STOR takes a different approach than the other two selections. Few giant chains here, folks. Instead, they are service-focused, with 72% of its portfolio in that space and only 15% in retail. STOR will lease out to tenants that are in the middle-market, making between $20 million and $300 million in revenue.
That means the companies are not only reliable and doing well, but have the capacity to grow. It also means leasing to companies that are known on a more regional level, things like fishing gear stores, furniture stores, busy distribution facilities or even day care.
STOR has a 3.6% yield, putting it on par with its peers.
As of this writing, Lawrence Meyers was long STOR stock.