The 'Final Four' Net Lease REIT Showdown

Summary

• I think you know who I’m picking, not only to win the semi-final, but to take it all the way to the finish line.
• I was able to become successful because I became laser-focused on my passion.
• Although inflation and rising rates are risks, I believe that these four names should hold up well and deliver above average returns for investors.
• I do much more than just articles at iREIT on Alpha: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

JoeChristensen/iStock Unreleased via Getty Images

As many of my Seeking Alpha followers know, I was a "baller" back in the day, which in layman's terms means that I love basketball. I was a walk-on at a small college in South Carolina which believe it or not has the "blue hose" as the mascot.

I won't go into much detail on the "blue hose" terminology, but for those who aren't familiar with Presbyterian College, you can study up on the school HERE.

One of the biggest memories I had in college was playing against the University of North Carolina. It wasn't a game that counted, after all, UNC is a Division I school, and at the time my school did not participate in the NCAA (we were NAIA).

However, what was memorable about the UNC matchup was that I played on the court of the opposing opponent at the Dean Smith Center.

Now, I'm just a few years younger than MJ (Michael Jordan) but it I can tell you that when I ran up and down that court it felt as though I was running in the same heavenly space as the greatest player of all-time. It was simply one of the most memorable basketball experiences in my lifetime.

Years later, my oldest daughter (who now works for CNBC) went to UNC and I enjoyed going with her to quite a few games, and later participating in Franklin Street activities (for those who went to UNC, you know what I mean).

I'll tell you that one of the things on my bucket list is to meet MJ. In my book, he will always be the greatest basketball player on the planet.

Anyway, if you haven't heard, there's a big match this weekend called the Final Four. In just a few hours, UNC will be taking on Duke, in the semi-final matchup.

Major online sports books, including BetMGM, Draft Kings and Caesars favor the Blue Devils by 4.5 points. The basketball odds were set at -110, meaning you have to bet $110 in order to win $100 in profit.

In the other semi-final matchup Kansas is also a 4.5-point favorite over Villanova, according to the Gambling.com consensus, but BetMGM has the spread at only 3.5 points.

I think you know who I'm picking, not only to win the semi-final, but to take it all the way to the winner's bracket.

However, as a consolation, if UNC does lose, at least there will be a North Carolina team in the final, and I think everyone would like to see Coach K. finish with a win.

"Discipline is doing what you are supposed to do in the best possible manner at the time you are supposed to do it." - Coach K

Coach K. is also one of the best coaches on the planet. Many years ago, I was in Las Vegas attending a conference and I stumbled upon him at the roulette table. I spoke with him very briefly and told him that I was a "baller".

I can assure you, if I had the b-ball skills, I would most definitely not be writing articles on Seeking Alpha. However, I was able to become successful because I became laser-focused on my passion.

"When you are passionate, you always have your destination in sight and you are not distracted by obstacles. Because you love what you are pursuing, things like rejection and setbacks will not hinder you in your pursuit. You believe that nothing can stop you!" - Coach K

Well, without further ado, let's get started on my "Final Four" Net Lease REIT article, in which I will provide you with the details on (four of) my favorite net lease REITs.

Realty Income (O)

Our first "Final Four" pick from the next lease sector is also my top holding, Realty Income. As you can see below, shares are trading at close to the same price as January 1, 2022, after gaining around 10% since March 15th.

YCHARTS / Seeking Alpha

This stalwart net lease REIT has a market cap of $42 Billion which is 3 times the size of the next largest peer, and this is important because it's one of the most important competitive advantages in which the company can pursue large-scale sale-leaseback or portfolio transactions without creating financing contingencies or concentration risks.

This size advantage gives Realty Income a distinct scale advantage and helps to secure them a spot in the Final Four.

As many readers know, Realty Income is more than just the largest company in the sector, but also one of the highest quality. iREIT's IQ rating system has Realty Income's quality score at 98/100 meaning the company is one of the safest and securest of the over 200 companies we research (and rate).

Realty Income also utilizes a fortress balance sheet in order to provide another distinct competitive advantage as a low-cost producer. The company has an A-rated balance sheet and it this means it can secure unsecured debt at very low rates, and when you combine the equity cost (5.2% AFFO yield currently), the WACC (weighted average cost of capital) is around 4.0%.

Realty Income's business model is still ~83% retail but it focuses on defensive operators who are recession-resistant such as Walgreens (WBA), CVS (CVS), Walmart (WMT), and Amazon (AMZN). This focus on quality has allowed the company to maintain occupancy above 96.6% since 1996 (the portfolio occupancy is currently 98.2%).

Recently, the company announced it was acquiring the Encore Boston, a trophy Wynn property that cost $2.6 billion to build. However, Realty Income is buying it for $1.7 billion, far below replacement cost, and that equates to a 5.9% cap rate for a Class A property. Due to Realty Income's low cost of capital (WACC is ~4%) this deal is expected to generate an investments spread of almost 200bs.

FAST Graphs

In 2021 Realty Income generated $3.59 in Adjusted Funds From Operations ('AFFO'), and this is expected to grow by 9% in 2022 and another 4% in 2023. Shares are trading slightly below their historical average based on P/AFFO and shares are now yielding 4.3% (which is paid monthly).

Currently shares are trading at $69.30. This is below our buy below target of $72.00. While shares may not be at a screaming buy level, I am always a fan of picking up more shares of this top-quality REIT at or below fair value.

iREIT on Alpha

W.P. Carey (WPC)

The second company earning a spot on the Net Lease "Final Four" is W.P. Carey.

WPC went public in 1998 as a Master Limited Partnership and in September 2012 it converted to a REIT structure. As seen below, shares are trading at around the same price as January 1st, and +10% since mid-February.

YCHARTS / Seeking Alpha

WPC owns 1,304 net lease properties covering approximately 156 million square feet and for nearly five decades, the company has invested in high-quality single-tenant industrial, warehouse, office, retail and self-storage properties subject to long-term net leases with built-in rent escalators.

The portfolio is located primarily in the U.S. and Northern and Western Europe and is well-diversified by tenant, property type, geographic location and tenant industry.

One key differentiator for WPC is the companies 35% expose to Europe (based on ABR) and even with the volatile markets across Europe, we still view this strategic diversification to be opportunistic.

Last month, WPC acquired Corporate Property Associates 18 (CPA:18) in a transaction valued at $2.7B including the assumption of debt. The CPA:18 portfolio is well aligned with WPC's existing asset base and following the closure, will help reduce tenant concentration, and streamlines the business model.

The portfolio also includes 65 operating self-storage assets currently run by two public companies - Extra Space (EXR) and CubeSmart (CUBE) - which could further enhance rent growth.

While WPC is certainly considered a net lease REIT, it's important to recognize that the company is truly unique in how it operates its business model. Throughout multiple recessions, and now a global pandemic, the New York-based landlord has been able to deliver on its promise of increase its dividend for every single year since 1998 (in March WPC raised the dividend by 0.2%).

In 2021 WPC did a record $1.72 billion of deals and on the recent Citi Investor call the CEO, Jason Fox, said

"…we're at a strong pace thus far in 2022. I think it's sustainable going forward. I think it's reflected in the initial guidance we released a couple of weeks ago at earnings at $1.5 billion to $2 billion for the year, $1.75 billion at the midpoint. And we have good visibility into a growing pipeline. So, we feel good about that number. I think that's number one."

Fast Graphs

Also, in 2021 WPC generated just over 6% AFFO per share growth as well as providing an attractive dividend yield averaging over 5%. Importantly, over many years WPC has constructed a portfolio that's uniquely positioned (among net lease REITs) to benefit from inflation.

Analysts expect AFFO to grow by 4% in 2022, which is par for the course. iREIT scores WPC high on quality - 90/100 - however the shares are a tad rich for us now, this we have a Hold rating. We're always looking to own more shares in this durable dividend-payer, especially at a discount.

iREIT on Alpha

Essential Properties Trust (EPRT)

The third company to earn a spot in the "Final Four' is Essential Properties. As viewed below, EPRT shares have traded down by ~10% YTD.

YCHARTS / Seeking Alpha

EPRT is a net lease REIT which focuses on acquires, owns, and manages "single-tenant properties that are net leased to middle-market companies operating in service-oriented or experience-based businesses."

The portfolio included 1,451 properties in 46 states and was 99.9% leased with a remaining average lease term of 14.0 years.

One of the differentiators for EPRT is that the company buys smaller properties, averaging around $2.3 million in size, and this means that the underlying real estate ('LAND') is usually well-located. The company believes that its middle market focus provides the best risk-adjusted returns in the net lease sector.

So far in 2022 EPRT has closed $197 million of investments at a weighted average cash cap rate of 7.1% with a robust investment pipeline. Analysts are forecasting 12% growth (AFFO per share) in 2022 and 10% growth in 2023. Those double-digit estimates rank EPRT as one of the fastest growing REITs in our coverage spectrum.

Fast Graphs

Shares are now trading at $25.30 with a P/AFFO multiple of 18.3x (normal is 20.1x). The dividend yield is 4.1%, and there's plenty of powder to grow based upon the low payout ratio of just 70%.

We have done extremely well owning EPRT and we recently added more share to our Durable Income portfolio. Although EPRT is not the highest quality net lease REIT, we find the valuation and growth prospects extremely attractive.

iREIT on Alpha

VICI Properties (VICI)

The final company in our "Final Four" bracket is VICI Properties, a gaming REIT that owns gaming, hospitality, and entertainment destinations, subject to long-term triple net leases. As viewed below, VICI has traded down ~4.5% YTD.

YCHARTS / Seeking Alpha

VICI was formed in October 2017 as part of the bankruptcy reorganization of Caesars Entertainment into separate gaming and real estate entities. Following an initial distribution of shares to creditors, VICI completed a $1.4 billion IPO in February 2018 that reduced leverage and provided funding for growth.

Today, VICI's national, geographically diverse portfolio currently consists of 28 market leading properties, including Caesars Palace Las Vegas, Harrah's Las Vegas and the Venetian Resort, three of the most iconic entertainment facilities on the Las Vegas Strip.

In just a few weeks VICI should be closing on the MGM Properties (MGP) portfolio that will add another 15 properties to the existing portfolio. This transformative deal will enhance VICI's geographic and tenant diversification, that should also result in an upgrade to investment grade (later in the year).

VICI grew earnings (AFFO per share) by 11% in both 2020 and 2021 and analysts expect the strong earnings growth to continue with expectations for 6% and 8% growth in 2022 and 2023 respectively.

Fast Graphs

VICI is currently has a dividend yield of 5.1% and shares are trading at $28.46 which is below our buy below target of $36.00. Historically shares have traded at a 16.5x (based on AFFO) and are now trading at 15.4x. We also think there's some multiple expansion for VICI (and GLPI) as investors warm up the unique sector and validation (of gaming assets) by Realty Income.

iREIT on Alpha

Who Are You Betting On?

Of course, one of the reasons that I decided to focus this article on the net lease REITs is so that I could also write on my favorite sport, as well as my favorite college basketball team.

Heel Yeah!

Monday night we'll know who wins the NCAA Men's tournament, and as Coach K explains,

"Courage and confidence are what decision making is all about."

I have confidence in the Net Lease REIT sector, and that's why we have maintained an overweight recommendation (status) during these volatile times. Although inflation and rising rates are risks, I believe that these four names should hold up well and deliver above average returns for investors.

As always, thank you for reading and I look forward to your comments below.

Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of O, VICI, WPC, EPRT either through stock ownership, options, or other derivatives. 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.

Comments

[Brad Thomas]

.
Thanks for reading....

A shout out to my oldest daughter who was named one of the most influential women in commercial real estate: www.kenashleycre.com/...

Come visit iREIT on Alpha (2-week free trial):

seekingalpha.com/...

PS: Message me for retiree and veteran discounts

[Randol33]

As usual, the listed picks are dropping while the market continues to rise.

[steve7074]

@Randol33 Isn’t that a little short-term focused ?

[Retire2020]

@Brad Thomas Congratulations to your daughter's recognition. All the best.

[Strive2greatness]

Brad, I enjoy your articles. Can you share with us what is the suitable amount of $ invested based on aged. I guess what is the plan for someone to retire, lets say investing only to O or these four stocks? What is the $ invested to achieve a certain number for dividends in purpose of retiring. Thank you so much.

[Brad Thomas]

@Strive2greatness

Thank you for reading and commenting...

As you know, every investor has his or her unique profile, and age is certainly a factor. In general I suggest allocating 10% to 20% of your investment portfolio in REITs. So for example, if you invest 10% in REITs, I suggest that you own at least 10 (10% in each name) to provide some level of diversification.

Also, please remember that we have retiree discounts at iREIT on Alpha. I will send you a discount from our customer service team.

All the best,

Brad

[LStephenson]

@Strive2greatness I will give you a long term investment strategy to consider you won't get from licensed brokers, but it sure worked for me and depending on your background, resources, timeline and objectives this is as close as you can come to a guaranteed template to financial independence. Look only at Dividend Aristocrats and Dividend Kings. Look at their longterm average annual growth and their rolling ten year average annual growth rate. Invest in them and for as long as possible let the dividends simply reinvest. The absolute magic of compounding over time will astound anyone in yield.

For example, Realty Income Corporation (O) has a 15.5% average annual return from October 1994 when going public to now. If you run the math on that it will astound you. It is never too late to start a program like this. Right now my advice has been to go into WPC as its yield has been the standout winner among the top tier for diversified industrial, commercial and/or retail single tenant NNN portfolio.

Those reported yields are a combination of stock price increases and dividend increases, but you can accomplish astounding portfolio growth and dependable increasing spendable income from these players.

Follow Brad and a couple other writers that focus on the REIT players and actually meet with and report on the quality of the management teams and then follow the key parameters of occupancy, payout ratio, amount and type of leverage, dividend yield and increase rates and you will do fine. Additionally, I personally avoid highly regulated industries (like healthcare) and wasting tenants (like apartments). If you don't have personal experience in this area maybe stay with players whose tenants you recognize and are offering goods and/or services that are recession resistant to the general public and you will gain both knowledge and confidence in the process.

Take a look at the tenant mix of O and NNN. You will both recognize many of them, plus you will learn many, especially in Realty Income's portfolio are credit tenants themselves.

Best of luck in your investing, but follow the fundamentals and top tier proven players and you won't need much luck to do well.

God Bless

[SallyV6]

This article title is cute and fun but the BEST triple net lease REIT is …hands down… STOR. Here’s a recent article I found - www.privateeyecapital.com/...

should return 15% a year I think. It’s a top 4 position for me.

[Brad Thomas]

@SallyV6 Thank you for reading & commenting... have a great week!

[King Rat]

@SallyV6
I agree on STOR and first bought it before Buffett... but I am worried about the mysterious and unceremonious sacking of one of if not the best CEO in all of REITs. Something is sure fishy.

[seIII]

@King Rat Mary co-founded STORE Capital in 2011, has served as a member of its Board of Directors since 2016, and was named Chief Operating Officer in 2017. She was appointed President in September 2020 and ascended to Chief Executive Officer in April 2021. Mary has played a key role in the Company’s portfolio growth while leading all areas of operations. LONG STOR.

[nopilikia]

VICI is a very good bet going forward. After all, in the long run the "house" never loses. Long VICI.

[Brad Thomas]

@nopilikia I'll be in Vegas in May -- for my birthday!

[Brute80]

@Brad Thomas I live here Brad. Lots of new things to do and in the works. Enjoy your stay and don’t get too crazy! Haha

[Brad Thomas]

@Brute80 Let's grab a coffee... I will be there May 10th -- my birthday!

[Dr.DaveR]

I am curious as to what started the downtrend for $VICI as of June 2021? Fundamentals look worthy of starting a positron.

[Brad Thomas]

@DaveBest As the CEO explained to me on the recent call, regarding short interest:

"...when we closed on the Venetian last week, we paid for the Venetian with I think about 3.2 billion of forward equity, right? So the short interest that everyone has seen in VICI going back to last March when we raised the equity for Venetian and then even more so as we raised the forward equity for MGP in early September, the way forward equity works is when forward equity is raised, the investment banks go into the market and they borrow a share which technically means then they're short, right? They take the borrowed share and they give that borrowed share to those who've participated in the equity race, right?

So for every share they need to give out to those who've just participated in equity raise you've got one more share of short interest exposure. It's not that the banks believe VICI is going down or Agree is going down or Realty Income, all those of us who use forward equity, it's not that they're betting against us, it's just that the mechanism by which you create forward equity.

So when we settled our purchase of the Venetian with our equity proceeds last week, what happened was that the banks had to go out and buy back shares in order to cover their short position.

So you should see what was, I think Brad, about an 80 odd million short position drastically reduced the next time short interest exposure is reported because of the fact that all of the short interest tied to our forward equity is gone."

Come visit us at iREIT on Alpha where you can watch the entire interview (or read the entire transcript)

seekingalpha.com/...

Thank you for the question :)

[Xav Welsh]

Thanks for the article. I’m in all 4 plus a few others. GLTA!

[Brad Thomas]

@Xav Welsh You're welcome

[zedk47]

STOR looks quite attractive at the moment, -15% YTD

[Brad Thomas]

@zedk47 Yes...

I'm planning to interview the CEO ... come and check out all of our CEO interviews - last week I interviewed:

$ONL
$NTST
$DOC

and this week I'm interviewing:

$BRMK
$SACH
$PW

Come check out the 2-week free trial:

seekingalpha.com/...

All the best. Brad

[jc4877]

@Brad Thomas thank you Brad, why has eprt performed so well over the last 2-5 years? Is it that’s a smaller reit and able to grow ffo so quickly?

[hfloch]

Great memory...closing out the season at the Dean Dome a few years ago against Duke with the crowd going crazy as Grayson Allen missed 3 out of 4 free throws as the crowd erupted. My son's tenure coincided with Lauren's. I am sure that she knew of him. He is now in pro sports at a higher level. If you want, private message me.

[Brad Thomas]

@hfloch I just sent you a message.. I look forward to catching up.

[hawkeyec]

I prefer WPC which I have had for a while. Best yield of the four. Oh, and just for your edification the goat is Bill Russell, the only veteran of any sport with more rings than fingers on both hands.

[Brad Thomas]

@hawkeyec Good luck and thanks for commenting. All the best. Brad

[Bucknfl]

VICI appears to be flirting with moving above 30 soon.

[Brad Thomas]

@Bucknfl Yes, spring should release as soon as MGP closes :)

[JapeL]

WPC, O, VICI and STOR among my top holdings. Wonder if VICI will Indeed appreciate after the big deal goes through? And will the divvy be raised? Incidentally, Wolf also got me into BASF just before the war. One of my biggest holdings now, and I am not as worried about it as commenters on your piece on it.

[HASK59]

I own 3 of the 4 REITS mentioned here and plan to hold them in my IRA for a long time. As for hoops, I live in the Kansas City area and I'm cheering for KU to knock off UNC tomorrow night. My wife has her PhD from KU and is a big fan. She even taught Danny Manning in one of her classes back in 1986.

[Brad Thomas]

@HASK59 PhD? She should be writing on Seeking Alpha, LOL. Thanks for reading and have a great weekend.

[HASK59]

@Brad Thomas She's not an investment person. Rock Chalk Jayhawk. Go KU. REITS getting hammered across the board today. Surprising.

[BryanMill$]

I always enjoy your articles, but....good grief man, focus!!

Kidding: I'm a basketball fan myself.

[Brad Thomas]

@BryanMill$ Ha. I love writing about real estate and I like providing entertainment value. Have a great weekend.

[pelican11]

I’m in all 4 finalists, but only adding to VICI at current pricing. Pleasantly surprised to see your VICI buy below target at $36. Room to run!

And sorry, but I got Kansas winning it all.

Thanks for the article.

[Brad Thomas]

@pelican11 Regarding VICI, the gaming sector deserves a better multiple than 15x... now that O has entered the space, I think we'll see more deal flow and respect from Mr. Market....

Regarding Kansas, keep the wager modest (aka ...protect principal at ALL costs).

Thanks for reading and have a great weekend!

[seIII]

Agree received its issuer rating increase from Moody’s on 3.30.22 to Baa1 and Joey Agree bought 3309 shares on 3/23-3/24. Any other triple net’s projected to receive a ratings increase and/or have their senior leaders buying shares? BTW - MJ was the 2nd best player of all time after Bill Russell. 2 time college national champion, 11 NBA titles in 13 years, 2 NBA titles as player coach, greatest defensive player of all time, greatest rebounder of all time and greatest champion of all time. Russell is the Realty Income of the NBA.

[Brad Thomas]

@seIII I grew up as a Dr. J fan ... I met Dikembe Mutombo last week at a conference in West Palm Beach.... he's a big guy! Thanks for reading and all the best

[seIII]

@Brad Thomas Any other triple net’s projected to receive a ratings increase and/or have their senior leaders buying shares?

[Brad Thomas]

@seIII Good question... perhaps FCPT goes to BBB (from BBB-) and EPRT should get rated (by S&P)...

[thirdcamper]

ADC didn't make the quarter finals?

[Brad Thomas]

@thirdcamper Well..

I knew that was coming....

ADC is a great net lease REIT and kudos to Joey Agree for taking this ugly duckling into a beautiful SWAN. I hope to interview Joey this week for iREIT on Alpha members.... Come check out our best-in-class marketplace platform: seekingalpha.com/...

Have a great weekend and all the best.

[thirdcamper]

@Brad Thomas I knew you liked it, so I thought it might get there.

[Dr. LouX]

@Brad Thomas Quite remarkably I own all four! I have owned O since the beginning of time (and am not adding unless it is below $70) but I have recently added VICI after reading your recommendation. All four are winners! Cheers.

[Brad Thomas]

@Dr. LouX Great job! Thanks for reading and all the best!

[Triton240]

Your instincts were certainly intact on the Duke/UNC matchup. Even as a NCSU grad (although I did send quite a few checks to UNC while my step son attended) I was pulling for UNC all the way. And what a game it was! A nail biter to the very end. What a game. They have an uphill battle ahead of them against Kansas.

I am fairly long with WPC at 830 shares but it certainly hasn't been an exciting investment, kind of like watching paint dry. As a near retiree (again) I do like the dividend income it generates! VICI looks interesting but I would worry about the real recovery of EPRT. Has the pandemic completely soured the folks against experiential activities like movies, theme parks and the like? I'm probably wrong but my gut says people have generally switched on line services like Netflix, Prime Video etc., for their movie entertainment. Time will tell but I will watch that one from court side.

[Brad Thomas]

@Triton240

My oldest daughter looked at NCSU, UVA, W&L, Duke, and UNC....but the first minute she stepped onto the UNC campus, she said, that's where's I'm going...

Fast forward a few years, she was just named as one of the most influential women in commercial real estate:

twitter.com/...

Thanks for reading and commenting. Have a great weekend.