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Net Lease REITs: Revival Amid Rate Retreat



  • Net Lease REITs, among the most interest-rate-sensitive real estate sectors, were left for dead in early 2018 as interest rates surged and NAV premiums eroded, seemingly stifling external growth plans.
  • Signs of slowing global growth, along with retreating commodity prices, have put downward pressure on inflation and interest rates in recent months. Net lease REITs have surged 15% since May.
  • “Goldilocks” economic conditions- low interest rates along with solid, but unspectacular growth- are ideal for these REITs. The recent share price surge has restored their coveted cost of capital advantage.
  • 3Q18 earnings were strong across the sector. Spirit and Vereit appear to have put their troubles behind them. Realty Income, National Retail, and STORE continue to power ahead.
  • Net lease REITs are among the only sectors still growing via acquisitions, on pace for nearly $5B in net acquisitions in 2018, more than the entire REIT sector combined.

REIT Rankings: Net Lease

In our REIT Rankings series, we analyze each of the commercial and residential real estate sectors. We rank REITs within the sectors based on both common and unique valuation metrics, presenting investors with numerous options that fit their own investing style and risk/return objectives. We update these rankings every quarter with new developments.

REIT rankings net lease

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Net Lease Sector Overview

Net Lease REITs comprise roughly 7% of the REIT Indexes (VNQ and IYR). Within our Hoya Capital Net Lease Index, we track the seven largest REITs within the sector, which account for roughly $55 billion in market value: National Retail (NNN), Realty Income (O), Spirit Realty (SRC), STORE Capital (STOR), Vereit (VER), EPR Properties (EPR), and W.P. Carey (WPC).

net lease sector overview

Net lease REITs generally rent properties with long-term leases (10-25 years) to high credit-quality tenants, usually in the retail and restaurant spaces. "Net lease" refers to the triple-net lease structure, whereby tenants pay all expenses related to property management: property taxes, insurance, and maintenance. Most leases have contractual rent bumps, often tied to the CPI index, but some REITs take on more inflation risk than others. Like a ground lease, triple-net leases result in long-term, relatively predictable income streams. These companies hold the long-term, capital-intensive real estate assets that other companies prefer not to hold on their balance sheets. Assets are often acquired in sale-leaseback-type transactions through existing relationships, thus avoiding brokerage fees and other transaction-related costs.

net lease REITs 101Similar to a bank, net lease REITs essentially capture the "spread" between the acquisition cap rate and their cost of capital. Access to capital and cost of capital are the

This article was written by

Hoya Capital profile picture

Alex Pettee is President and Director of Research and ETFs at Hoya Capital. Hoya manages institutional and individual portfolios of publicly traded real estate securities.

Alex leads the investing group Hoya Capital Income Builder. The service features a team of analysts focusing on real income-producing asset classes that offer the opportunity for reliable income, diversification, and inflation hedging. Learn More.

Analyst’s Disclosure: I am/we are long VNQ, STOR, SRC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (6)

catsaunders financial profile picture
I got burned on WHLR but own SRC
Jimmy Grisham profile picture
Thanks for the net lease update, Hoya. I own a serious piece of STOR, but it's well above my buy price. NNN and O are quality names that I like, but are nowhere near a buy. The others are not appealing to me. STOR keeps cranking out the numbers, so I try to remain patient and let them do their thing. If the stock rallies much more, I will likely cash in the chips. It has already been a home run for me. Another 6% div raise is pretty much locked in for next year, and the future looks bright, but it's hard to refrain from cashing in a 50% return in a year and a half. Cheers!
While other REIT authors on SA recycle their buy recommendations on the same set of names month after month, I find that I learn something new with every Hoya piece. I especially appreciate the focus on sector-wide issues and comparisons. Thanks for another thought-provoking analysis.
Awayk profile picture
Thanks, Hoya. Any thoughts on ADC? Too small to be included?
Henry Miles profile picture
Never forget that a lease, in whatever form, is a piece of paper. It's not a business, it's not a tenant, it's not an empty building.
cemanuel profile picture
I'll be referencing this over the next month so thank you. I've had my eye on WPC to buy after January 1 when I add money to my Roth - my Roth is only for reits. I should look over the others here as well, except for O; know plenty about it, like the stability/safety but the yield in a reit is too low for me.
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Related Stocks

SymbolLast Price% Chg
EPR Properties
iShares U.S. Real Estate ETF
Spirit Realty Capital, Inc.
Vanguard Real Estate Index Fund ETF Shares
W. P. Carey Inc.

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