In 2004, interest rates were continuing their downward trend and yield was getting increasingly expensive, challenging our clients’ ability to live off their assets. Our view at that time was that a protracted period of low interest rates would ultimately end with a bout of inflation. Starting in 2004, we began funding a strategy to assemble a portfolio of single-tenant triple-net leased retail assets (Walgreens, 7-11, Burger King). In a triple-net lease, the tenant signs a long-term lease, assumes all the responsibilities of ownership (property tax, insurance, operating cost/upkeep), and remits net rent to the landlord. These leases typically have escalators in them so rent grows over time. We found the going in yields on these assets particularly appealing and thought the triple-net lease structure plus rent escalators would hold up very well in an inflationary environment.
The firm we partnered with for this program had significant experience assembling portfolios with a mixture of tenants, both investment grade and non investment grade, and adding value by strategically managing lease maturities. This mixture of credits and value-add strategies created a highly stable and predictable cash flow for our clients. Thus, over a ten-year period we have funded the acquisition of three portfolios, producing average annual distributable cash flow to clients of 12% per year. Two portfolios have been sold and provided total net returns of 13%-15% IRR over 9-11 years.