Regards to higher interest rates, investors may want to look at those REITs with low cost structures.
REITs are the real estate equivalent of equity mutual funds. In the latter, the investor can buy into a diversified mutual fund and leave the actual investment management to the fund manager. The fund manager decides which stocks to buy and sell and when to do so.
With commercial real estate and REITs taking a breather in the wake of the Fed’s tapering expectations, the time to perhaps add some exposure could be on. However, given that the next few months may be rocky with regards to higher interest rates, investors may want to look at those REITs with low cost structures.
And you can’t get any lower than the triple-net lease real estate firms.
Net-leased buildings require little to no management and only minimal oversight on the part of the property owner due to how their leases are structured. At their core, these lease agreements requires the tenant to pay not just rent but also some or all of the property expenses that normally would be paid by the property owner. That includes things like rent, plus taxes, insurance and maintenance. At the same time, cash flows for these types of properties are quite dependable because leases are often signed for multiyear terms.
For the REITs that use these lease structures it can mean extremely low costs of property ownership. Ultimately, that trickles back towards investors in the way of higher and steadily growing dividend payments. Often those payments outpace rises in interest rates and inflation.
So it’s no wonder why investors have flocked to triple-net REITs. Over the past three years, these lease structured REIT's have more than doubled their share of the broad FTSE NAREIT Equity REIT index to 6% - with the last two years experiencing 11% share price growth. More importantly, analysts predict this trend will continue as both retail and institutional investors flock to the REIT type. Adding in huge amounts of triple-net M&A and you have a recipe for long term success.
Aug 18, 2014