Private equity giant KKR (NYSE: KKR) is expanding its global real estate business. It's launching a new platform to invest in a diversified portfolio of triple net lease real estate and recruited a veteran team to build out the multibillion-dollar platform. Here's a closer look at KKR's latest real estate venture and why it's focusing on this real estate segment.
Building out its real estate capabilities
KKR has been steadily expanding its real estate business over the years. It started investing in the sector in 1981 and formed a dedicated real estate platform a decade ago. The private equity giant currently has $32 billion of assets under management across several real estate classes, including industrial real estate. It recently cashed in on the industrial real estate boom by selling a portion of its industrial portfolio for $2.2 billion.
The company is now launching a real estate strategy focused on triple net lease real estate by forming Strategic Lease Partners. KKR's investment positions that platform to acquire more than $3 billion in assets. It aims to purchase properties secured by triple net leases and complete sale-leaseback transactions.
KKR hired two industry veterans to lead this new venture, both of whom formerly worked for diversified REIT (real estate investment trust) and net lease giant W.P. Carey (NYSE: WPC). They bring with them expertise in sale-leaseback and build-to-suit transactions. In addition, they have deep industry relationships, which should enhance KKR's ability to rapidly scale this new platform.
Why triple net lease real estate?
Triple net leases, or NNN leases, are agreements where the tenant is responsible for the three major property expenses: property taxes, building insurance, and maintenance. Because all three of these financial burdens fall on the tenant, properties secured by NNN leases tend to generate very stable rental income. Further, NNN leases typically have initial terms of a decade or more with built-in rental rate increases. That provides the owner with steadily rising rental income.
Landlords utilize NNN leases for a variety of property types. They are typically mission-critical real estate occupied by a single tenant whose operations depend on that property. For example, W.P. Carey's portfolio includes industrial facilities, warehouses, office buildings, freestanding retail properties, education facilities, hotels, laboratories, fitness facilities, theaters, student housing, land, and restaurants -- all secured by NNN leases. That ability to diversify across property types further stabilizes its income stream.
The predictable income stream provided by triple net leases makes them appealing to investors. Several publicly traded REITs focus on owning properties secured by these leases because they help support stable and growing dividends.
For example, W.P. Carey has increased its dividend every year since going public in 1998. Another notable REIT focused on NNN real estate is Realty Income (NYSE: O). The retail REIT has paid 613 consecutive monthly dividends while growing its payout in each of the last 95 straight quarters.
That investor appeal is drawing KKR to the sector. It wants to offer its clients the ability to generate steadily rising income from real estate.
A smart bet on a stable asset class
NNN real estate isn't flashy. It doesn't have the upside potential of some other property types. However, it's very stable, making it ideal for investors seeking to generate predictable income. That makes it an excellent fit for KKR's growing real estate platform.