Why It Pays To Be The Landlord (And Investors Can Profit, Too)
Longtime readers know that I recently moved from one sportsmen’s paradise to another. And as an an avid fisherman, there’s no better time to cast a line in the water than during spring spawning season. So March is always the time to get out the old tackle box and see what needs replenishing.
Having just moved to river country, I am also in the market for a couple of kayaks. And I’m not sure my tent, sleeping bag, and other camping gear survived the trip. Fortunately, Bass Pro has a great selection of all kinds of hunting, fishing, and general outdoor merchandise.
I’ll admit it… I spend a disproportionate amount of time and money at Bass Pro Shops. I can spend hours browsing (my wife, not so much) and admiring the massive 25,000-gallon freshwater aquarium. But as an investor, I can’t help but wonder how much cash is stuffed in those checkout registers each day.
Well, Forbes estimates that the chain (which doubled in size after merging with rival Cabela’s) generates about $7 billion in annual sales. The flagship location in Springfield, Missouri attracts over 4 million annual visitors by itself. Aside from retail operations, Bass Pro also owns Big Cedar Lodge, an upscale wilderness resort, as well as White River Marine, a top boat manufacturer.
Bass Pro has other admirable qualities as well, having been named one of “America’s Most Reputable Retailers”. It also made the shortlist of “America’s Best Large Employers” for treating its 50,000 workers like family (a generous 45% employee discount probably doesn’t hurt). Founder John Morris started out by selling fishing baits in the back of his father’s store in the 1970s. He has since amassed a net worth of $6 billion and now gives back freely to wildlife conservation efforts.
I’d love to join him by picking up a few shares and becoming a part-owner of this outstanding organization. Unfortunately, that’s not possible. Bass Pro is a privately-held company and isn’t publicly traded. But I may have found the next best thing…
And while it doesn’t sell rods and reels – it can help you land a whale of a dividend.
Just Sit Back And Collect The Checks…
You see, Bass Pro doesn’t typically own the real estate that its stores occupy. And these properties, often located along highly-trafficked, space-constrained corridors, can be quite valuable. My neighborhood location in Little Rock, AR was appraised at $12.2 million in 2013. Less than a decade later, the 102,000 square-foot property sold for $22 million.
Of course, that handsome $10 million gain is in addition to regular rent checks made payable to the landlord each month.
Now, commercial properties can rack up some hefty expenses. Think you pay a lot for yard care? Imagine the outlays for a 500,000-square-foot shopping center. There’s landscaping and irrigation work to be done. Parking lots must occasionally be re-paved and freshly painted. Exterior lights have to be changed.
But many owners have passed common area maintenance and upkeep costs along to their renters. In fact, these same tenants are also obligated to pay for the property’s insurance premiums. And the yearly real estate taxes.
What financial responsibilities does that leave for the landlord? Well, not many, except maybe the mortgage note. The lessee is on the hook for just about everything else. This arrangement — referred to as a “triple-net lease” in industry parlance — is quite common. And it can shield investors from some of the peskier and uncontrollable expenses that tend to grow larger over time.
Just ask National Retail Properties (NYSE: NNN). The clever ticker symbol says it all. The real estate investment trust employs the triple net arrangement across its entire 32 million square foot portfolio. It has worked out pretty well for shareholders. The stock has posted a healthy 12% average annual return over the past quarter-century, nearly doubling the market’s performance with less risk.
Not bad. But Realty Income (NYSE: O) has done even better, delivering a 15.5% compounded annual return since hitting the market in 1994. It utilizes the same triple-net lease structure across 11,000 properties globally, providing 622 consecutive monthly dividends.
With 98 straight quarters of increasing distributions (even during the pandemic), Realty Income is one of my absolute favorite securities for income seekers. I’ve held the stock in our High-Yield Investing premium portfolio since 2013 and consider it a textbook example of a “Lifetime Wealth Generator”.
Source: Realty Income Investor Presentation
Action To Take
If you’re a regular, you know by know that I’m a huge fan of real estate investment trusts (REITs). And triple-net REITs are one of the best bets around for long-term income (and total returns).
There’s a reason why property is one of the preferred asset classes of the wealthy. So you can’t go wrong with either NNN or O in this case.
But what if I told you there is another triple-net landlord that is actually beating Realty Income at its own game? By some metrics, it’s considered to be best-in-class. Don’t just take my word for it… Warren Buffett thinks so, too.
In fact, Buffett has owned it for years. You might even say that it’s his favorite real estate stock – and at 5.2%, his highest dividend yielder as well. That’s why we recently added it to our portfolio over at High-Yield Investing.
To learn how to gain access to this pick as well as our entire portfolio, including our latest special reports, go here now.