We purchase commercial real estate leased to tenants under long-term net lease agreements, generally 10-20 years. The lease payments generated each month are used to support predictable monthly dividend payments to our shareholders.
What We Own
We own over 4,900 properties, diversified with 248 commercial tenants operating in 47 industries, located throughout 49 states and Puerto Rico. These properties are generally freestanding buildings (not attached to any other structure) in prime locations with good access and visibility.
Most of our commercial tenants operate retail stores providing non-discretionary goods and services at low price points. Examples of such industries include convenience stores, dollar stores and drug stores which are among the most represented industries in our portfolio (as a percentage of revenue). Properties leased to investment-grade-rated tenants account for approximately 47% of our total annualized rental revenue as of 12/31/2016.
Net Lease Agreements
Most of our leases are structured as triple-net leases, which means that besides paying rent every month, the tenant is responsible for the property’s operating expenses (taxes, maintenance and insurance). This lease structure reduces our exposure to rising property operating expenses and preserves a predictable cash flow stream to pay the monthly dividend.
Characteristics of our Business
- Locations in significant markets or strategic locations critical to generating revenue for the business
- Property valuations near replacement cost
- Rental or lease payments that approximate market rents
- We seek to maintain a conservative capital structure with two-thirds equity and one-third long-term, fixed rate debt
- Funds to acquire new properties generally come from cash on hand or from our $2 billion acquisition credit facility. We permanently fund property purchases with the proceeds from common stock, preferred stock or bond offerings
- Access to public capital to fund growth is important as REIT tax status limits the amount of retained earnings that can be used to grow our business
- Additional growth has traditionally come externally by acquiring new properties at a favorable risk-adjusted return
- Rent increases built into leases have historically provided same store rental revenue increases up to 2% every year
How We Grow Our Earnings
The two primary ways we increase our earnings (and resulting dividend payments) are:
- Increasing the size of our real estate portfolio
- We are able to generate increasing cash flow from our new property acquisitions based on the “investment spread”, or difference, we achieve between the “cost of capital” we use to acquire the property and the return, or “lease yield”, we receive from the property we buy
Lease Yield – Cost of Capital = Investment Spread
- The “lease yield” is the return we receive based on rental payments relative to the price we paid for the property
- The “cost of capital” is the weighted-average cost of issuing a combination of common stock, preferred stock, and debt based on our desired leverage ratios
- Regularly increasing rent on our existing leases
- Fixed rent increases
- Variable rent increases (e.g. percentage rent based on a percentage of the tenants’ gross sales)
- Hybrid fixed/variable rent increases (e.g. increases capped by CPI)
Our Tax Status
When we listed on the NYSE in 1994, we elected to be taxed as a “real estate investment trust” because 1) our primary assets are the properties that we own, and 2) because REIT tax status provides us with tax treatment favorable to the payment of dividends.
As long as we meet certain operating metrics and distribute 90% of our taxable income as dividends to shareholders, we pay no federal income tax. This eliminates the “double taxation” of the income we generate and the dividends we pass along to our shareholders.