Triple-Net Leased Property Portfolios and REIT Performance

Triple-net lease (NNN) agreements require tenants to pay all property operating expenses in addition to rent and utilities. These expenses include real estate taxes, insurance, and maintenance, significantly relieving the landlord of a property’s operating burden. Given that much of the property’s operating responsibility rests with the tenant, NNN leased properties collect comparatively lower rents than those with conventional leases or other net leases that corresponds to the lower amount of risk assumed by the property owner. Extant literature provides little evidence on the impact of holding triple-net leased property portfolios on Real Estate Investment Trusts (REIT) performance. In this paper, we examine the relative performance of Equity REITs holding NNN leased property portfolios and the relationship between REIT NNN property portfolios and firm operational efficiency, profitability, and value. We believe this examination is relevant given the nature of REITs as pass-through identities designed to pay out 90% or more of earnings as dividends where the goal of the REIT manager is to efficiently and profitably operate real estate assets. We explore whether the strategy of holding NNN portfolios improves or sacrifices REIT performance and shareholder value.