Seeking Alpha

Net Lease REITs: An Underappreciated Sector In A Crowded Market (Podcast)

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About: Vanguard Real Estate ETF (VNQ), IYR, SCHH, NETL, STOR, Includes: BBRE, DRN, DRV, FREL, FRI, IARAX, ICF, JRS, KBWY, LRET, NRO, O, PPTY, PSR, REK, RFI, RIF, RNP, RORE, RQI, RWR, SPG, SPG.PJ, SRS, SRVR, URE, USRT, VRAI, XLRE
by: Let's Talk ETFs
Summary

REITs were a popular choice for income-seeking investors in 2019, with healthy inflows and strong performance for broad REIT ETFs like VNQ and SCHH.

Net Lease REITs account for roughly 8-10% of broad REIT ETFs; investors that wanted greater exposure to the relative safety of this REIT sub-sector were required to buy individual names.

That all changed with the launch of NETL - the first ETF to offer targeted exposure to an index comprised exclusively of the 23 U.S.-listed net lease REITs in March.

NETL's founders, Chris Burbach and Alexi Panagiotakopoulos, join the latest Let's Talk ETFs to explain why net lease REITs are at the sweet spot of a relatively safe and balanced total strategy.

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By Jonathan Liss

As the exchange-traded fund space has grown and matured over the better part of nearly three decades, the sheer number of niche sub-sectors, themes, and strategies investors can access has multiplied exponentially. Launches of funds offering access to previously uncovered slices of the market - commonplace for the first two decades or so after the first ETF, SPY, listed on the American Stock Exchange in 1993 - have become few and far between.

Enter the team at Fundamental Income and the NETLease Corporate Real Estate ETF (NETL) they launched in March 2019. Chris Burbach was Executive Vice President for NETL top holding STORE Capital Corporation (STOR) from February 2012 to February 2019. While there, he hired Alexi Panagiotakopoulos fresh out of Business school, the W.P. Carey School at Arizona State University. The two have become close friends since - and decided to launch an indexing firm - Fundamental Income - and related ETF together in 2018 to fill what they perceived as major gap in available fund offerings in the REIT space.

To speak with Chris and Alexi is to be preached the gospel of triple net lease REITs. Triple net leases provide a level of predictability to property owners as the renters sign relatively long deals (12.2 years on average according to NETL's fact sheet) and are responsible for all potential payments associated with their property for the length of their lease - rent, utilities, and ongoing upkeep including repair of damages; thus the "triple" in "triple net lease."

Another key feature of net lease REITs Chris and Alexi point to is their broad diversification - geographically, across many different industries, and companies. So whereas a Simon Property Group (SPG) will hold only malls in their portfolio, Realty Income (O) will own hundreds of different property types across dozens of states. The Fundamental Income Net Lease Real Estate Index that underlies NETL automatically cap weights REITs with too much exposure to individual companies or brands in their rental portfolio, further mitigating downside risks.

The result is a patchwork of American businesses - broadly diversified across 50 states and every imaginable industry. There're chain stores like CVS (NYSE:CVS) and Whole Foods, gas stations, pre-schools and locally-owned gyms, camping goods stores and everything in between. As Alexi puts it, "Investing in net lease REITs is investing in the growth of American business."

Show Notes

  • 2:45 - Chris and Alexi's backstories - Why a net lease REIT-focused ETF?
  • 6:30 - What is a "triple net" lease?
  • 11:45 - Why do REITs generally hold just one type of property?
  • 12:30 - How many publicly traded net lease REITs are there in the US?
  • 18:15 - Are triple net leases a growing phenomenon?
  • 19:30 - Is this a U.S.-specific model, or are there international equivalents?
  • 22:00 - Why is the current 8-10% exposure to triple net lease REITs offered by broad ETFs like Vanguard Real Estate ETF (VNQ), iShares U.S. Real Estate ETF (IYR) and Schwab U.S. REIT ETF (SCHH) not nearly enough?
  • 30:45 - Breaking down the index: Tiered cap-weighting strategy, single company limitations, geographical diversification
  • 35:15 - NETL's top holding... STOR breakdown.
  • 42:45 - Is this a true total return strategy: Dividend income vs. capital appreciation.

Disclosure: I am/we are long NETL, STOR, VNQ. 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.

Additional disclosure: Chris Burbach and Alexi Panagiotakopoulos are long NETL and STOR. You can see NETL's holdings updated daily at netleaseetf.com/...

Jonathan Liss is long VNQ.