As a current or novice commercial real estate investor, you probably have many questions about what this uncertain time means for your investment properties and financial strategy. What happens now if you are in the process of buying a property? Will your bank still lend money for your pending purchase? Are NNN investments still a safe place to put your money and earn monthly income? What if you already own a property and your tenant can’t pay rent right now?
At Westwood Net Lease Advisors, COVID-19 is teaching us a few things about NNN investing in this unprecedented time in modern history. We are in daily contact with lenders, attorneys, and our clients, and continue to evaluate NNN developments so that we can answer your most pressing questions and help with your needs as the crisis unfolds around the country. We are pleased to say, there is some positive news for NNN investors – read on to learn more.
Essential Business Types are Still Viable Investments
Yes, banks are still willing to lend money for needs-based NNN tenants, such as Dollar General, CVS, 7-Eleven, and some health clinics such as DaVita, Fresenius, etc. Companies like these that are considered “essential” are increasing sales, adding thousands of employees, and evolving with consumer and CDC requirements. They are backed by investment-grade corporations more likely to ride out this tough economic time.
Cap Rates & Interest Rates are Favorable
What about cap rates? Currently, cap rates are stable, typically between 5.00-7.00%, and tend to lag 6-12 months behind market fluctuations, so they have the potential to stay relatively unchanged. However, depending on how much the retail market deteriorates, we could see an increase in cap rates later this year.
If you are financing a single-tenant NNN property, historically low interest rates can increase positive leverage, provide a higher cash-on-cash (CoC) return, and a better overall rate of return (IRR). With interest rates at historic lows and lenders still willing to give commercial mortgages for certain NNN lease investments, you can capitalize on the positive spreads between interest rates and cap rates and continue to receive a stable monthly income.
As COVID-19 forces the temporary shuttering of non-essential businesses, tenants are left without cash flow, leading them to ask if they can stop rent payments for a few months. Many of you do not know whether to honor this request or if you choose to, how to go about it. Westwood Net Lease Advisors recommends working with your tenants on this if you can afford to do so, but before you agree to a solution, there are certain swift steps you need to take.
1. First, find out if your financial institution will allow you to suspend mortgage payments for the same time the tenant is asking for rent relief. Many banks are allowing this and tacking the months you don’t pay onto the end of the mortgage term, but keep in mind, interest does continue to accrue despite the lack of payments.
2. Next, if the bank agrees to what you need, contact your attorney or a Westwood advisor to discuss amending the lease with a temporary lease addendum that ensures you recoup your rent over time. Some investors are increasing rent slightly each month for up to 18 months, others are asking for a set amount of payments. This is completely dependent on your risk tolerance and financial needs and should be decided upon with your attorney before you contact the tenant with your offer.
3. Finally, once you learn the bank’s terms and approve of the potential lease addendum, contact the tenant to discuss rent abatement. There is always room for negotiation – only you know the history of your tenant’s reliability and what you are comfortable with.
The Main NNN Lease Property Exclusion
Many great opportunities still exist for buyers who take quick action and utilize the current environment available to them, however, right now, most lenders are hitting the “pause” button on fast-food, QSRs, fast-casual or any other type of restaurant, despite the fact that they are normally solid investments. This may include canceling loans that are in process.
“Essential” NNN Investment Properties
Dollar General is a steadily growing company, adding around 1000 strategically located properties annually while increasing year-over-year sales from needs-based, recession-protected consumer products and services. The company reports that heightened demand for household essentials during the COVID-19 crisis has led to hiring up to 50,000 employees by the end of April.
“We are proud to serve as one of America’s essential retailers, and we believe our customers are relying on us now more than ever to provide an affordable, convenient retail option,” said Kathy Reardon, Senior VP and Chief People Officer.
A Dollar General property will typically sell for $1-2 million so it is a great option for the first-time investor, seasoned landlord, or someone who wants multiple locations throughout the country. Stores typically operate under 15-year absolute NNN leases with 10% rent increases every five years during option periods and provide 6.00-7.00% cap rates.
CVS Health has approximately 10,000 U.S. retail locations and approximately 1,100 walk-in medical clinics serving an estimated 38 million people. CVS fills 352 million prescriptions per year – more than any other U.S. pharmacy. It is now the largest pharmacy-led healthcare company in America.
Due to the coronavirus pandemic, CVS is currently hiring 50,000 people for full-time, part-time, and temporary in-store positions, home delivery drivers, distribution, and customer service professionals. The company is making employee health an even bigger priority so they can carry on with business while caring for their customers.
“In recognition of the essential role employees are playing as the country faces the COVID-19 pandemic, the company is awarding bonuses to employees required to be at CVS to assist patients and customers in this time of unprecedented need. As they continue to be there for those we serve, we’re taking extra steps to provide peace of mind and help them navigate these uncertain times.”– Larry J. Merlo, President and CEO, CVS Health.
As of today, the company plans on continued growth. They recently opened 53 HealthHUB locations in five states, including Florida, Georgia, New Jersey, Pennsylvania and Texas. HealthHUB is a new format that dedicates 20% of floor space to a broader range of health care services. The company plans to bring its HealthHUB store format to 17 states in the first part of 2020, with a total of 1500 by year-end 2021.
CVS sites are typically 1.0-2.0 acre, hard-corner lots that sell in the $4-7 million range and offer 5.00-6.00% cap rates with 10-20 year lease terms.
The convenience store industry has been designated essential for food, beverage, fuel, and other products and services. Some companies, including 7-Eleven, have launched hiring initiatives and are increasing compensation to reward their staff, who are on the front lines in dealing with the public.
7-Eleven Inc., the world’s largest convenience store retailer, said it expects to hire as many as 20,000 new store employees right away, either directly or by independent franchisees, to meet the increased demand for products and services amid the COVID-19 pandemic. The company also anticipates some of the new hires will help meet the increase in mobile orders through its 7Now delivery app, which offers delivery to more than 30 million U.S. households.
“7-Eleven is a neighborhood store, and it’s our priority to serve the communities in which we operate during this unprecedented crisis,” said 7-Eleven President and CEO Joe DePinto. “This will provide job opportunities and ensure 7-Eleven stores remain clean and in-stock with the goods our customers need during this critical time.”
7-Eleven stores sell in the $2 to $6 million range and offer 4.50-6.00% cap rates. This tenant typically operates under a 5- to 20-year NNN lease with 5-10% rent increases every five years.
Other Stable Net-Lease Options
DaVita Kidney Care and Fresenius Medical Care clinics are two of the most sought-after investment opportunities in the growing healthcare industry. Both corporations help patients with chronic kidney disease and end-stage renal disease get the treatments they need for a better quality of life. No matter what the COVID-19 crisis brings, their patients require routine visits, which produces financial stability at each location. We do not know yet if they will continue to add locations as planned, but current properties remain a stable investment choice.
- DaVita investors benefit from a price point that starts at $2 million with a 5.00-6.00% cap rate, 10-15-year NN leases with minor management, and 5-10% rent increases every five years.
- The average Fresenius Medical Care property starts at $2 million, offers a 10-to 15-year lease with rent escalations, and 5.00-6.00% cap rates.
To Wrap it Up –COVID-19: What it Means for NNN Investing
So far, we are seeing the NNN market show small signs of change due to the uncertainty of COVID-19, some that work in our clients’ favors and some that may not. As advisors, it is our responsibility to ensure your investment needs are met and that you stay informed throughout this crisis.
Therefore, Westwood Net Lease Advisors continues to embrace a remote work structure with industry-specific technology, collaboration, and shared resources, and work with each other, other market professionals, and you while practicing social distancing. We know you have questions about your prior, current, and future NNN opportunities – we are here to offer perspective and advice, at no charge. Contact us today, 314-997-5227.