Looking for High Occupancy and Long-Term Leases

March 16, 2020

Looking for High Occupancy and Long-Term Leases

March 16, 2020 | James Sprow | Blue Vault

In today’s turbulent financial markets it’s very difficult to identify safe havens for investment. With regard to commercial real estate, two measures of relative safety might be the combination of a real estate portfolio’s weighted average occupancy and its weighted average lease maturity. In simple terms, the higher the occupancy level and the longer the average lease terms the better. Of course, the quality of tenants is important as well, as are the types of tenants. The credit-worthiness of the corporations that lease properties is a very important consideration and many REITs are justifiably proud of their high percentage of financially strong tenants. Also, nontraded REIT managers extol the virtues of “necessity-based retail” and “triple-net leases” as qualities that tend to insulate their cash flow streams from the ups and downs of the economy. Necessity-based retail usually includes grocery-anchored shopping centers, pharmacies, discount stores, and service establishments. These types of tenants tend to be relatively more immune to the ups and downs of economic cycles. They also tend to be more immune to the rapid growth of online shopping. Triple-net leases protect the property owners from the responsibilities for maintenance, taxes, insurance, and other expenses that are borne by the tenants and their corporate owners.

Looking at the combination of occupancy rates and lease maturities for the nontraded REITs in the Q3 2019 Blue Vault Nontraded REIT Industry Review, we can identify those REITs that have two attractive metrics:  high occupancy rates and longer-term leases. In the plot below, those REITs are found in the upper right area of the scatter plot. 

As expected, the REITs with a good combination of high occupancies and long-term leases tend to be those with triple-net leased retail properties. And, as expected, a look at their tenant rosters will confirm that they tend to have leases with more necessity-based or recession-resistant tenant types.

REITs 4, 5, 7, 8 and 9 are all advised by CIM. The tenants in CIM Income NAV (4), CIM Real Estate Finance Trust (5) and Cole Credit Property Trust V (7) are predominantly triple-net leased, recession-resistant retail tenants. The two Cole Office & Industrial REITs (8 and 9) have high occupancy rates. Carter Validus Mission Critical REIT II’s tenants are in the healthcare and data center asset classes. Corporate Property Associates 18 – Global (10) is a well-diversified, maturing REIT.

On the other end of the spectrum, REITs like KBS REIT II (17), KBS REIT III (18), KBS Growth & Income REIT (16) and NorthStar Healthcare Income (20) are not doing so well, and two of them are in the process of liquidation. Industrial Property Trust (13) was sold to ProLogis in January 2020. 

Legend (Lease Term and Percent Lease are weighted averages based upon GLA):

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John E. Moriarty, ChFC
December 2015
February 3, 2016

I have been in the financial services industry for 20 years and our firm provides an education platform that gets clients to “think differently” about their financial picture.  For many years we have communicated to clients the need to diversify their portfolios using alternative asset classes and more specifically, private non-traded investments.  Due diligence on these types of financial vehicles is essential and when I learned about Blue Vault in 2010, our firm immediately began using their material as a tool to build confidence in the minds of our advisors on which alternatives to recommend to clients.  I am impressed with the way Blue Vault continues to add value to their subscribers and I view their publication as a tremendous resource in today’s complex world.