Real estate investing is a proven way to make passive income. Among the safest strategies is investing in ground leases. Under this structure, the investor owns the land underneath a building, providing further incentive for tenants to make rental payments lest they lose their building. That makes them extremely safe investments.
The easiest way to get in on the ground floor of ground leases is by investing in a real estate investment trust (REIT) that focuses on these leases. Three rock-solid options to consider are Agree Realty (ADC 1.25%), Four Corners Property Trust (FCPT 1.24%), and Safehold (SAFE).
Built on a solid foundation
Agree Realty is a retail REIT focused on owning properties leased to essential retailers resistant to disruption from e-commerce and economic downturns. It holds over 1,600 properties leased to companies in the tire and auto service, grocery, home improvement, and convenience sectors.
The company primarily owns net leased properties. These are freestanding properties triple net leased (NNN) to tenants under long-term contracts, making them responsible for covering building insurance, maintenance, and real estate taxes. These leases supply Agree Realty with very stable rental income to support its dividend. The company pays a monthly dividend that currently yields 4.4%. Put another way, every $1,000 invested in Agree Realty can produce $44 of annual passive income at that rate.
In addition to net lease real estate, Agree Realty has a growing ground lease portfolio. It had 193 ground leases at the end of the second quarter, supplying 13% of its annual base rent. It owns land leased to high-quality tenants like Lowes, Walmart, The Home Depot, and Costco, with a weighted average remaining lease term of 11.8 years. That ground lease portfolio supplies Agree Realty with very stable rental income, providing great foundational support for its dividend.
The company has been steadily growing its ground lease portfolio. It acquired eight more ground leases in the second quarter for $22.6 million, representing 5.1% of the properties it purchased in the quarter. Those new additions will provide it with incremental rental income so that Agree Realty can continue increasing its dividend payment.
A satisfying passive income stream
Four Corners Property Trust is also a retail REIT focused primarily on net lease properties. The company owns 960 properties leased to 116 brands, predominantly in the restaurant industry. In addition to restaurants, it has started diversifying into the medical retail and auto service sectors.
Restaurant giant Darden is its largest tenant at 55% of its portfolio. That's because Darden spun off its real estate portfolio to create Four Corners a few years ago. The REIT has since acquired restaurant properties from other leading brands and expanded into additional service-oriented retail sectors. Those acquisitions have included ground leases, which comprise 11% of its portfolio. The other 34% of its portfolio features both building and ground leases.
Four Corners Property Trust's net and ground lease portfolio provide it with stable rental income. That helps support its very tasty dividend, which currently yields 5.7%.
A very safe passive income stream
Safehold is working to revolutionize the ground lease sector. Fellow REIT iStar (STAR) formed it in 2017 to help companies unlock the value of their real estate through a new type of ground lease. Those two companies recently agreed to combine to enhance Safehold's ability to capitalize on the ground lease sector.
The company held $5.9 billion of ground leases at the end of the second quarter. It owned the land under offices, multifamily properties, hotels, life science centers, mixed-used buildings, and other property types. Its ground leases had a weighted average remaining term of 92 years, giving it significant visibility into future rental income.
That portfolio provides very stable income to help support Safehold's 2.9%-yielding dividend. The company grew its portfolio by 7% in the period by securing additional ground leases. It ended the quarter with $930 million of liquidity to fund more ground lease transactions. Meanwhile, its combination with iStar will give it greater capacity to finance more ground leases to grow its portfolio and stable dividend.
Built on strong foundations
Ground leases are one of the safest real estate investments because tenants could lose their building if they fail to make their ground lease payment. That means they tend to produce durable income that steadily rises at a contractually guaranteed annual rate. That makes them extremely safe options for generating passive income.
Meanwhile, REITs make it easy to collect passive income secured by ground leases. Agree Realty, Four Corners Property Trust, and Safehold all have large and growing ground lease portfolios. That makes them excellent options for investors seeking to add this safer income stream to their portfolios.
