A New Way to Think of STNL — as a Bond

There's currently growing single-tenant net-least (STNL) inventory. It might make an investor, developer, or landlord wonder about how to model behavior and strategy to make better decisions.

Chris Lomuto, an associate vice president in Northmarq's San Francisco office, has a suggestion: think about bonds. "Bonds make a pretty good metaphor for single tenant net lease," he told GlobeSt.com.

Back to financial basics for a moment. Bonds are fixed-interest financial instruments often associated with fixed-income investing. There are government bonds (Treasurys being the standard for "safe" investments but not the only type of government bond) and corporate. The principle is always the same. The investor buys a bond for a set amount. The seller then owes regular coupons that are interest payments. At the end of the bond's term, a balloon payment returns the principal to the investor.

An important aspect of bonds is secondary markets and liquidity. Investors buy and sell bonds all the time. If interest rates go up above the bond's yield, then the bond is typically worth less in trading because a buyer could invest elsewhere with a greater return. If the bond sells for less, though, it makes up for having a lower yield. Typically, yield and bond price move inversely in relationship to one another. Or the bond holder can choose to keep it until maturity.

To Lomuto, that is the appeal of the bond analogy. If interest rates go up, it's more expensive to buy a net-lease property, so the price typically must go down. If interest rates drop, then the value of the property increases.

That helps an investor or owner make a clear decision on the property. You bought the asset (net lease property or bond) when rates were very low. Now they are higher. You can choose to sell the property and recognize the loss. Or you can hold the property to maturity, with the property continuing to operate and generate income.

The important consideration is that, at this point, the "default risk on that real estate is still relatively low" if the tenant has strong credit and, as typical in net lease, has a lease that might last for 10 to 15 years. "If you're not forced to sell, you probably feel good holding it," he said. "You're disappointed because it's not worth what it was." But it's far from a disaster.