Connecting Sound Economics With Experience in Real Estate
CREDIT RATINGS & INVESTMENT GRADE
The three (3) most important factors in successful Single-Tenant Net-Leased investing are: Location, Credit Quality (corporate guarantee) and tenant Brand name strength.
A Single-Tenant Net-Lease (Net Lease or NNN) property investment has many of the characteristics of buying a bond. The *Investment Grade”* (IG) rating from Moody’s, Standard & Poor and Fitch are an important factor to consider along with the location aspects and condition of the property.
A Credit Rating Is An Assessment Of The Creditworthiness Of A Borrower
Think of it this way, a credit rating is an assessment of the creditworthiness of a borrower. As individuals, we have credit scores from credit bureaus such as Experian and TransUnion using a form scale from Fair Isaac (FICO). Scores range from 300 (extremely poor credit score) to 850 (extremely high credit). Hopefully, we are all familiar with our credit score, and have seen the advertisements for “free credit scores”.
Rating Agencies Evaluate Corporate And Government Credit Strength
Moody’s, Standard & Poor and Fitch evaluate corporations and government entity credit strength, but through a different scoring scale. Naturally, we’d want to invest in excellent or great credit scores whether it be an individual, business or government.
Many investors seek to invest in Investment Grade property assets which are tenanted by corporations with credit ratings at least BBB- or higher by Fitch and Standard & Poor or Baa3 or higher by Moody’s. Likewise, certain institutional investors such as pension funds, foundations and banks can only invest in Investment Grade bonds and properties leased to Investment Grade tenants.
Investment Grade Credit Signifies a High Likelihood of Payment
Many Single-Tenant Net-Leased Triple Net Retail properties are leased to publicly traded companies such as CVS, Walgreens, Autozone, 7-11, Dollar General, McDonald’s, Chick-Fil-A, Starbucks, Walmart, Whole Foods, Hobby Lobby or Kroger. In this case, it’s easy to pull up investment research from reputable online stock analysis sources or a good site for the number of stores in a chain, sales growth trends, and same store sales is: https://retail-index.emarketer.com.
In the case of medical and dental properties, the guarantor might be a large hospital system or Dental Services Organization backed by significant private equity firms or hedge funds.
Credit Rating Agency Classification Systems
An investment grade is a rating that signifies a municipal or corporate bond presents a relatively low risk of default. Bond rating firms like Standard & Poor’s and Moody’s use different designations, consisting of the upper- and lower-case letters “A” and “B,” to identify a bond’s credit quality rating. “AAA” and “AA” (high credit quality) and “A” and “BBB” (medium credit quality) are considered investment grade. (Source: investopedia.com March 5, 2020).
The chart below shows the different rating types from Moody’s, Standard & Poor’s, Fitch and AM Best.
Junk Bonds Are Not Investment Grade
A rating of below Baa3/BBB-/bbb- is considered to be a speculative grade or a “junk bond”, which means there is a more likely chance of default. Due to this risk, investors are typically compensated with a higher yield/interest rate to compensate for the risk premium associated with a lower credit ranking. Anything below a B3/B-/b- is very risky and at an even higher risk of default, thus increasing the yield/interest rate even higher. Investors should pay particular attention to Credit Rating Downgrades. Downgrades are a signal that the corporation/government entity is over leveraged or the earning ability/revenues are decreasing.
Going back to individual credit rating example from above, Jason Rick’s has developed the following comparison breakdown as an illustration:
Naturally, when investing in Single Tenant Net Leases it would be wise to invest in “Investment grade” retailers or medical groups. The yields won’t be as high as the speculative “junk”, but if you’re looking for risk adjusted returns investment grade is the less volatile investment strategy.
Net Lease Properties Versus Muni Bonds
With net leased properties, especially investment grade, credit tenants (also known as a Credit Tenant Lease or CTL) the rental income is backed by financially secure entities and you have the value of the underlying real estate. Plus the investor has all or a portion of the income sheltered from taxes because most governments want to encourage investment and development. Net leases are Main Street investing.
Wall Street pushes conservative investors towards municipal bonds because of their tax treatment by the US government and supposed security. Many municipal bonds are extremely risky because of out of control public pensions, faulty revenue projections and most importantly, barely keep up with inflation or lose value due to debased money. Year-to-date total returns for municipal bonds in 2020 were negative 1% as of March 13th.
Real Estate Has Income Stream and Intrinsic Value
Real estate is a tangible, physical asset hence the name “real” estate. Whereas bonds, stocks and derivatives are financial products backed by the issuing counterparty a net lease is a contractual financial agreement plus physical property. They perform like a mix of debt and equity. The performance on the income portion is related to the financial health of the tenant and location of the property. The performance of the equity portion is related to the location and the brand image of the tenant.
Net Lease Definition – Triple Net Defined – NNN Explained
A “Net Lease” property is one where the property owner and the tenant agree to a long term contract in which the tenant agrees to lease the property, pay monthly rent and also pay all or most of the expenses related to the property.
Net leases transfer property expenses, in addition to rent and utilities, to the tenant. As the name implies, in a NNN lease situation, the tenant is responsible for most of these property expenses:
• + Property Taxes = N
• ++ Property Insurance = NN
• ++ Maintenance = NN
• +++ Maintenance, Roof & Structure = NNN
The acronym TIM for Taxes, Insurance and Maintenance can be used to remember Triple Net or NNN. Property owners reap the benefits of consistent rental income paid by the tenant without the risk of uncontrolled expenses that can increase over the life of the investment. Additionally, Net Lease properties typically have long term leases (10 to 25 years) which provide stable, predictable income and cash flow to the investor.
Michael Flight is a founding principal of Concordia Realty Corporation, Concordia Equity Partners LLC and more recently Liberty Token Real Estate Fund, a net leased property fund curated to create a conservative, safe haven portfolio of long term, Single-Tenant Net-Leased properties designed for geographic diversification, tenant credit diversification and industry diversification.
Michael is a real estate entrepreneur who is an expert in Retail Real Estate (Shopping Centers and Single-Tenant Net-Leased) investment, leasing, operations, and redevelopment. Michael has been active in commercial real estate over the past 34 years and has handled more than $500 million worth of real estate transactions. Michael has extensive experience in development, leasing, sales, property management, and innovative financing techniques.
Michael has been featured on The Real Estate Guys Radio Show, Cash Flow Connections podcast, the Real Estate Espresso podcast, the Kingdom Capitalist podcast, and Buck Joffrey’s Wealth Formula podcasts to name a few. Michael is also a well-known speaker at FreedomFest, Investor Summit at Sea, the Intelligent Investors Real Estate Conference, the Multifamily Investor Network Conference, and the Liberland 5th Anniversary Conference. He is a published author having been recently, and was featured in the #1 Amazon bestselling book: DESIRE, DISCIPLINE & DETERMINATION (2019). He is currently finishing a book on the benefits of Single-Tenant Net-Lease (STNL) real estate investments.
Michael has been elected to public office and is currently serving in his third term as treasurer of the Riverside Public Library. He also serves on the real estate investment advisory boards of two non-profits: Chicago Hope Homes and Sunshine Gospel Ministries and is a founding board member for Freedom of Life, a Romanian NGO helping women achieve liberty and build new lives while recovering from human trafficking.
Jason Ricks, CCIM is a Concordia Equity Partners principal whose primary focus is on acquisitions, leasing, and development. Jason is a native Texan, professional real estate investor and certified commercial investment member (CCIM). Jason’s background in retail leasing and asset management make him an invaluable member of Concordia’s team for developing strategies to unlock the value of a property. Jason also has extensive experience and familiarity with south and southwestern US markets. Jason’s most recent experience is with AMLI Residential as the Vice President for Retail Asset Management where he established and has led the mixed-used Retail Asset Management team working on premier properties worth hundreds of millions across the country. Prior to that, he served as an Asset Manager for BH Properties where he oversaw a 2.2 million square foot value-add retail portfolio throughout Texas and Oklahoma. Jason broke into the commercial real estate business as a Shopping Center broker for Tarantino Properties. He received his BS in Business Management from Oklahoma State University, where he was a Team Captain for the Oklahoma State Football Team (The Cowboys). Jason is an active member of the International Shopping Counsel of Centers (ICSC). Most recently, he was featured in the #1 Amazon bestselling book: DESIRE, DISCIPLINE & DETERMINATION (2019).
Concordia Realty Corporation has been successfully connecting sound economics with experience in real estate for more than 30 years. Our wide range of experience has uniquely positioned us to redevelop and repurpose properties that are experiencing disruptions related to technology and merchandising. This experience has built a skill-set that helps to add value to all of our real estate ventures.
More recently, Concordia Equity Partners LLC was created to provide the same investment opportunities and expertise that our institutional partners have enjoyed over the years. We are a premier private real estate investment and management firm that specializes in Retail Real Estate, including Shopping Centers and Single-Tenant Net-Lease properties. Our newest venture is Liberty Real Estate Fund (LibertyFund.io) a blockchain based security token fund. LibertyFund is focused on investing in high quality, well located Single-Tenant Net-Leased (NNN) properties in targeted high growth, low tax areas of the United States. The portfolio has been specifically designed to provide stable, recession resistant income combined with inflation protected wealth preservation and equity growth.
has been successfully connecting sound economics with experience in real estate for more than 30 years. More recently, Concordia Equity Partners LLC was created to provide the same investment opportunities and expertise that our institutional partners have enjoyed over the years. We are a premier private real estate investment and management firm that specializes in Retail Real Estate, including Shopping Centers and Single-Tenant Net-Lease Detail/Medical (“Medtail”) properties. Our wide range of experience has uniquely positioned us to redevelop and repurpose properties that are experiencing disruptions related to technology and merchandising. This experience has built a skill-set that helps to add value to all of our real estate ventures.