Driven by sustainably high-quality income, the Triple-Net REIT sector has recently become the "golden child" for fixed-income investors.
Differentiated by contractual long-term leases and "wide moat" diversification fundamentals, the Triple-Net REIT players have all become beacons for durably attractive dividend investors.
The demand for repeatable dividend income has pushed shares higher for many REITs while also creating a wave of consolidation in the $14.8 billion investment category.
Still smaller than the primary real estate food group -- shopping centers, apartments, office, and industrial -- the Triple-Net sector is beginning to blossom into a primary investment classification.
The Triple-Net REITs were once perceived as a niche REIT sub-sector made up of a few landlords wanting to securitize fast food stores, daycares, and smaller automotive service assets. However, the demand for low cost debt and equity has stimulated a whole new era for investing as property owners have begun to flood the market with just about every form of free-standing real estate that could be leased on a long term basis.
Take for example Penn National Gaming and struggling retailer J.C. Penney . Both are non-traditional real estate companies that happen to own a sizeable amount of real estate. By transitioning into a REIT structure, these two companies could "spin-off" the "brick and mortar" properties into a REIT and tap into the highly attractive REIT arena.
But wait! Aren't REITs supposed to have diversified income streams? In addition, don't REITs have management teams dedicated to controlling portfolio risk and making sure that all of the individual rent checks are converted to dividend checks? (Remember REITs are forced to payout at least 90% of earnings).
Triple-Net REITs Today
Today Triple-Net REIT investors have a growing menu of options and, as part of the competitive landscape, many of the "best in class" players are implementing strategically-unique platforms - all aimed to deliver consistency in the form of stable and growing dividends.
Realty Income , National Retail Properties , and W.P. Carey (WPC) are all veteran Triple-Net REITs that have paid AND increased dividends for a combined 50 years in a row! Now these pros know how to shoot free throws and win games...
Other Triple-Net REITs with similar skills for sinking baskets include EPR Properties , CapLease , Lexington Realty Trust , Agree Realty , and Spirit Realty .
Over the past few years, several; non-traded REITs have begun to transform the Triple-Net industry bringing in a whole new world of talent.
By raising money in a more unique "blind pool" format, non-listed REITs have been able to raise substantial equity -- albeit with illiquid shares -- used to aggregate billion of dollars in free-standing net leased assets.
One such player, American Realty Capital Properties , has grown from an unknown 2-tenant REIT (listed on NASDAQ on September 7, 2011) with only 63 properties into a dominating $2.6 billion (market cap) REIT with over 800 individual properties. Even more amazing, ARCP beefed up in just 25 months by acquiring an affiliated non-traded REIT, American Realty Capital Trust III , for around $2.3 billion.
A few weeks ago ARCP made a hostile takeover offer to acquire Cole Credit Property Trust III in a $7.4 deal (in assets) that would've made ARCP the largest Triple-Net REIT in the nation. CCPT3, also schooled in the non-listed REIT playground, ignored ARCP's offer and the Phoenix-based REIT is now moving down the road to become a publicly-listed REIT (under the ticker COLE) in June or July (of 2013).
Pick a Winner and Watch the Dividends Roll
The options for investing in Triple-Net REITs are getting better and better. When selecting a Triple-Net REIT it's important to consider the company's industry, its current competitive position within that industry, and the "economic moat" around the company; that is, a sustainable competitive advantage that helps preserve long-term pricing power and profitability.
Remember, as Ben Graham believed, "a stock does not become a sound investment merely because it can be bought at close to its asset value." An intelligent investor must find a "margin of safety" that can minimize portfolio risk and most importantly, PROTECT YOUR PRINCIPAL AT ALL COSTS.
While it is impossible to eliminate all investment risk, Graham's methods greatly minimize such risk by filtering out the more speculative securities from the outset. Don't forget: the wider the margin of safety, the lower the risk and the greater potential for gain. That's a winning strategy and also the reason that I'm attracted to Triple-Net REITs and the dividends that make me sleep well at night!
At the time of publication the author had no position in any of the stocks mentioned. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.