An Introduction To NNN Investing
Retail Categories
Investment Types
Types of Sellers
The Buying Process
Market Analysis
Highest and Best Use Explained
Location and Site Analysis
Financial Feasibility
Industry Trends
Due Diligence
Financing
Low Risks of Default
Sample Lease Agreement
Sample Letter of Intent
Sample Commercial Inspection Report
Retail Categories
As the title suggest, our discussion is focused on the retail real estate segment rather than office or industrial/-manufacturing sector. The retail category is broad and offers numerous opportunities for high quality triple net tenants. My preference is retail because there are more investments opportunities in the retail segment to choose from.
As population grows retail offers a continuing supply of investment opportunities. The sub categories of retail opportunities are overwhelming not to mention the number of companies within these categories as the sample list below suggest.
Market Segments
1. Drug Stores: Walgreen, CVS, Rite Aid
2. Banking: Bank Of America, Wells Fargo, Citicorp,
3. Restaurants: McDonalds, Subway, Wendy’s, Burger
King, Dunkin Brands, Starbucks
4. Sporting Goods: Dick’s, Sports Authority, Foot Locker,
Modell’s Sporting Goods
5. Supermarkets: Kroger, Safeway, Publix, BI-LO,
Albertsons
6. Department Stores: Macy’s, Kohl’s, Sears Holding,
Nordstrom, Dillard’s, Belk
7. Mass Merchants: Wal-Mart, Costco, Target
8. Apparel: Gap, Nordstrom, J. Crew, Ralph Lauren, Foot
Locker
9. Office Supply: Staples, Office Depot, Office Max
Another advantage of many retail NNN leased opportunities is the purchase price of the asset. These assets are frequently in the $ 1to $5 million range and can be financed with approximately 20% – 30% down, depending on the terms of the lease and the tenant’s credit rating.
Company Credit Ratings
A critical element in selecting an investment is the risk. For NNN tenants, their credit rating is one of the best measures you can use to determine their ability to meet their lease obligations.
Below is a cross section of credit ratings as of 2015 for several retail companies. These ratings do tend to fluctuate from year to year based on a company’s financials but should be used as a guide when evaluating a potential investment. Ratings are from data published by the credit rating agencies Moody’s S&P and Fitch.
The top long term rating for Fitch and S&P is AAA while Moody’s uses Aaa. The lowest ratings are D, D and C respectfully.
1. Aaa and AAA:
Indicate extremely strong capacity to meet financial obligations.
2. Aa2, Aa3, AA+, AA- and AA:
Indicate a very strong capacity to meet financial obligations.
3. A1, A2, A3, A+, A-, and A:
Indicate a strong capacity to meet financial obligation.
4. Baa1, Baa2, Baa3, BBB+, BBB, BBB-:
Indicates a adequate capacity financial obligations however adverse conditions are more likely to lead to a weakened capacity,
Retail Company Ratings Reported by Moody’s and S&P (as of 1st quarter 2015)
Cumulative Historic Default Rates (In percent)
From the chart below you can see that investment grade ratings are a good hedge against default. Remember anything below triple B is considered non-investment grade and you can see the default rate raise considerably.
Rating categories
Moody’s
S&P
Aaa/AAA
Moody’s Municipal 0.00
Moody’s Corporate 0.52
S&P Municipal 0.00
S&P Corporate 0.60
Aa/AA
Moody’s Municipal 0.06
Moody’s Corporate 0.52
S&P Municipal 0.00
S&P Corporate1.50
A/A
Moody’s Municipal 0.03
Moody’s Corporate 1.29
S&P Municipal 0.23
S&P Corporate 2.91
Baa/BBB
Moody’s Municipal 0.13
Moody’s Corporate 4.64
S&P Municipal 0.32
S&P Corporate 10.29
Ba/BB
Moody’s Municipal 2.65
Moody’s Corporate 19.12
S&P Municipal 1.74
S&P Corporate 29.93
B/B
Moody’s Municipal 11.86
Moody’s Corporate 43.34
S&P Municipal 8.48
S&P Corporate 53.72
Caa-C/CCC-C
Moody’s Municipal 16.58
Moody’s Corporate 69.18
S&P Municipal 44.81
S&P Corporate 69.19
Investment Grade
Moody’s Municipal 0.07
Moody’s Corporate 2.09
S&P Municipal 0.20
S&P Corporate 4.14
Non-Invest Grade
Moody’s Municipal 4.29
Moody’s Corporate 31.37
S&P Municipal 7.37
S&P Corporate 42.35
All
Moody’s Municipal 0.10
Moody’s Corporate 9.70
S&P Municipal0.29
S&P Corporate 12.98
Retail Company Ratings Reported by Moody’s and S&P (as of 1st quarter 2015)
| Company | Moody’s | S&P |
| 7-Eleven | Baa1 | AA- |
| Advance Auto Parts | Baa3 | BBB- |
| Applebee’s | B2 | B |
| AutoZone | Baa1 | BBB |
| Bank of America | Baa2 | A- |
| BB&T Bank | A1 | A- |
| Best Buy | Baa2 | BB |
| Burger King | B3 | B+ |
| Chase Bank | A3 | A |
| Baa3 | BBB- | |
| Circle K | ||
| CVS | Baa1 | BBB+ |
| Dollar General | Baa3 | BBB- |
| Dunkin’ Donuts | B2 | B+ |
| Family Dollar | Baa3 | BBB- |
| FedEx | Baa1 | BBB |
| IHOP | B2 | B |
| Kohl’s | Baa1 | BBB+ |
| McDonald’s | A2 | A |
| O’Reilly Auto Parts | Baa2 | BBB |
| Pep Boys Auto | B1 | B |
| PNC Bank | A2 | A |
| Rite Aid | B2 | B |
| Shell Oil | Aa2 | AA |
| Sherwin-Williams | A3 | A |
| Starbucks | Baa1 | A- |
| SunTrust | A3 | BBB |
| Taco Bell | Baa3 | BBB |
| TD Bank | Aa3 | AA- |
| Verizon | Baa1 | BBB+ |
| Walgreens | Baa1 | BBB |
| Walmart | Aa2 | AA |
| Wendy’s | B1 | B+ |
Below is basic information about Applebee’s, a retail company that typically signs NNN leases. The information was obtained from the publicly available EDGAR system of the Securities and Exchange (SEC) filings and the MLS. The information is readily available and a good starting point for evaluating potential investments.DineEquity is one of the largest restaurant companies in the world and owns both Applebee’s and the IHOP restaurant chain. Their current policy is to enter into net leases rather than own their real estate.
The leases are 20-year initial terms with annual increases of 2% for the first 5 years. Following the first 5 years, lease rates increase 10% for each 5 year period till the lease expires.
Their leases contain an assignment clause, which is a concern for investors. Sites vary in size but average 1.4 acres with buildings averaging 5,000 S/F. NNN investments data indicates cap rates between 6.8-7.35 % depending on reaming term of lease. Sale prices for new units are average $2,500,000.