What's your experience of holding STNL for over a decade?

Question

I am venturing into STNL as an income strategy to supplement my income from day job and SFR income. Having spent over 20 years as SFR investments, I have very positive feeling about SFR investments - especially because of the capital appreciation I enjoyed in the recent past. Since I am new to STNL, I want to learn from the folks what your experience has been, especially if you have held the properties for over a decade? Did you feel the overall return (rental income + potential capital appreciation) was similar to residential or multi-family investments? If you were to go back in time, which one would you rather do it? SFR, MFR, STNL or MTNL?

Don Bingham · Answer

@Alex S. Long term leases do not hurt value, that's not what I was alluding to. I was conveying that value in the middle of country for net lease assets are almost exclusively a function of lease term and tenant aside from fantastic real estate in a few key metro areas. While asset value on the coasts, particularly southern CA where I am located, is slightly less predicated on lease term as general land appreciation provides more value/security than elsewhere. Of course lease and tenant are still the driving factor, they are just not the only factor at play, unlike say, Amarillo TX where if Starbucks leaves your site you're likely left holding the bag.

Don Bingham · Answer

This is a valid point @Aamir V. I'm glad you brought it up. Value and appreciation are strongly tied to the lease with net lease investments but there are various measures that can be taken to protect against this. One being what I said previously, buying fantastic hard corner, irreplaceable real estate, with ideally below 5% rent to sales ratio. Another is buying a deal with relatively below market rent (be wary of how long is left on the term at purchase to avoid 40+ years of below market rent). Another would be buying a deal nearing the end of its term at a discount, and using this as a value add opportunity by extending the lease.

Of course, it is most ideal to buy these assets without liquidity in mind. This way if you'd like to sell, you can wait until this lease extension occurs to do so and take advantage of full value, as my client did with the NNN Arco I mentioned. It is also important to keep in mind that net lease deals in the middle of country are very prone to lack of appreciation due to leases. Net lease deals on the coasts are more subject to regular real estate appreciation, with leases still playing a role.

Hope this is helpful.

Petro B. · Answer

Lack of tenant/sources of cash flow diversification would be the biggest concern for me. There is a lot of downside risk with potentially long vacancy periods, re-work needed for a new tenant, etc. Also, agree with @Aamir V. , if you are buying into an asset with existing long-term lease forced appreciation is limited.

Alex S. · Answer

@Don Bingham ok gotcha! That totally makes sense.

Thanks!

Alex S. · Answer

@Don Bingham could you expound on what you mean about long-term leases in the middle of the country hurting appreciation?

I understand the coasts appreciate faster in general, but how do long-term leases affect that?

Steve Morris · Answer

About 25% of the long-term holders I run into are happy.  However, STNLs were cheaper 5-10 years ago.  Based on about 20 owners here's my experience (I am NOT a STNL broker).  As always, having a corporate guarantee on the lease is always better (and costs more usually).

The usual angst is about re-ups at the end of the lease term.  You walk a fine line since if they do lousy they want out and if they great they want a bigger place.

About 33% have to re-lease the place up with new tenants, so a generic building and good location is a lot better.  You could sell the empty building, but it'll be worth less.

Aamir V. · Answer

I would love to hear more about this, too, from others here.

I will tell you that I'm helping my dad, and he has held a few STNL for almost 20 years.  The rents have been fine, but the appreciation is hard to grasp.  Like how are @James Storey and @Don Bingham thinking about valuation when its tied to the lease... which is getting shorter every year?  There's an underlying renewal assumption that could be blown up by something like the pandemic, right?

Don Bingham · Answer

Prithvi,

I agree with James. I have not held a single tenant property for over a decade but the majority of my clients have. I am selling a NNN Arco currently and it serves as a good example. Even being a service station in California (lots of uncertainty), he has still enjoyed incredible appreciation and rent growth since he purchased the site. He purchased for $3.5mm in 2003, the tenant had issues and was replaced by Arco corporate in 2007. The new tenant has paid $31,500 monthly (100% above 2.5% CPI) since then and just renewed his lease by 20 years in 2017. We now have his deal listed for $8mm and have received multiple offers in the first two weeks, all reasonably close to list.

He was able to achieve this return by purchasing fantastic real estate and getting a great credit tenant. If you focus on great real estate, strong tenancy, relatively new buildings, and good ingress and egress, you will be off to races and should enjoy a great lifelong investment.

Please feel free to shoot me an email if you please, I always have lots of good inventory that fit the above criteria. Happy to help.

Don

James Storey · Answer

Though I haven't held an STNL for over 10 years, I can attest to their strength through my experience as portfolio manager of STNL that were held for over 20 years. As the demand for space increases, caused by overall population growth, rental rates have followed suit. Sometimes rates have seen as much as 3.5% increase year over year especially within medical and industrial.

As long as you buy in a good area and not super old, you won't have a problem keeping it leased and leasing it for more and more ever renewal. There are a lot of variables to consider though that is just too much for a post.

James Storey, CCIM

What's your experience of holding STNL for over a decade?

Most Popular Reply