Triple Net Lease Credit Ratings
Triple Net Lease Credit Ratings
by: Robert Stec
Many investors are pursuing commercial real estate investment opportunities today, particularly the attractive triple net lease properties. These investment vehicles offer an attractive alternative to other types of investments, because the return on investment is typically strong with a minimum amount of risk, especially when compared to other types of real estate investing. The key to a good triple net lease arrangement is having the best possible tenant in place, for the longest lease term possible. To accomplish this, the investor must conduct solid research and due diligence into potential triple net lease tenants.
One of the best ways to do this is to determine the potential tenant’s credit worthiness. Potential tenants’ credit qualifications provide that information, in a standardized way that is simple to obtain and to understand. The investor can access the corporate tenant ratings through a couple of well-known sources, Standard & Poor’s (S&P) and Moodys. Both companies provide financial market data to investors, including credit ratings, index data, and investment research. Tenants’ ratings may be found through Standard & Poor’s at http://www.standardandpoors.com/home/en/us. Moody’s provides basically the same type of information, and can be located here: http://www.moodys.com/Pages/atc.aspx.
Each company has their own specific designation symbols for their ratings. The best-rated companies bear ratings of AAA, AA, or A with S&P, and Aaa, Aa, and A with Moody’s. AAA and Aaa rated companies have an extremely strong capacity to meet financial obligations. AA and Aa companies have a very strong capacity and A companies have strong capacity to meet financial obligations but may be susceptible to adverse financial conditions that may arise in economic markets. From there, S&P’s ratings go to BBB, BB, B, CCC, CC, C- and D-. The remainder of Moody’s ratings range from Baa, Ba, B, Caa, Ca, and C. S&P ratings may have a “+” or “-“ added to them to “show relative standing within the major rating categories.” Moody’s adds the numbers 1, 2, or 3 to the alphabetical ratings.
These ratings, both for S&P and Moody’s, are considered long-term ratings. The companies also issue short term ratings but investors will be most concerned with extended projections. AAA through BBB- are considered by S&P to be “Investment Grade” ratings. BB+ and below are considered to be speculative. As ratings decline, so too does the potential tenant’s ability to meet its financial obligations. The lowest ratings indicate companies that are currently very financial vulnerable, have filed for federal bankruptcy protection, and have defaulted on significant financial obligations. The best rated companies pose the lowest risk for default as triple net lease tenants, but those tenants will also demand lower lease rates as a result of that stability. Companies with lower ratings do indeed pose greater risk for lease default, however the investor will be compensated for the higher risk though larger deposits and higher lease rates.
Some examples of well-known companies and their ratings include: Wal-Mart: S&P AA, Moody’s Aa2 Bank of America: S&P A+, Moody’s Aa3 Walgreens: S&P A, Moody’s A2 Home Depot: S&P BBB+, Moody’s Baa1 CVS/Caremark: S&P BBB+, Moody’s Baa2 Ford: S&P BB-, Moody’s Ba2 Ace Hardware: S&P BB-, Moody’s Ba3 Arby’s: S&P B+, Moody’s No Rating BevMo!: S&P B-, Moody’s Caa1