Net-Lease REITs Rule the Roost

Real Estate


Thirty years ago, Paul Fleischman won a Newbery Medal award for his booklet Joyful Noise: Poems for Two Voices.

Comprised of 14 children’s poems about insects, it’s meant to be read by two people at a time. These back-and-forth conversations essentially capture the lives – or perceived lives – of various bugs, from grasshoppers to whirligig beetles to mayflies.

Here’s a snippet from the piece about bumblebees:

Voices 1 and 2: Being a bee

Voice 1: Is a joy.

Voice 2: Is a pain.

Voice 1: I’m a queen.

Voice 2: I’m a worker.

Voices 1 and 2: I’ll gladly explain.

From there, these industrious insects buzz about their days. The queen mentions how, “Upon rising, I’m fed by my royal attendants.” To which the worker sighs about being “up at dawn guarding the hive’s narrow entrance.”

The queen takes for granted that someone else bathes and grooms her. The worker gripes about having to “take out the hive’s morning trash.” And then she has to “put in an hour making wax without two minutes’ time to sit still and relax.”

No doubt, you get the picture from there. One bee is utterly adored; the other utterly unappreciated – an easy conclusion to reach well before the queen’s closing lines of, “Truly a bee’s is the best of all lives” said simultaneously with the worker’s, “Truly a bee’s is the worst of all lives.”

Same hive. Very different stories.

I’d say it’s all about perspective, but clearly that’s not the case here. There are major differences at play, making one role or rank far more preferable than the other.

It rather reminds me of a tale of two REITs.

The Varied Realm of Real Estate Investment Trusts

Real estate investment trusts, or REITs, come in many shapes and sizes.

There’s significant money to be made in owning buildings or other structures, and renting out the subsequent spaces. That’s why the once small business category encompasses so many segments now.

There are office REITs that own and manage office buildings…

Mall and shopping center REITs that own and manage retail complexes…

Industrial REITs that own and manage warehouses, distribution centers and such…

Healthcare REITs that own and manage hospitals, doctor’s offices, urgent care facilities, etc…

Infrastructure REITs that own and manage cell towers, energy pipelines, and the like…

In and of themselves, none of those really strike me as queen bee vs. worker bee comparisons. It’s not until you get to net lease REITs vs. residential REITs – especially those of the apartment kind – that it becomes clear

Now that’s quite the unfair matchup right there, at least when it comes to management expectations. Those two real estate business classifications might fall under the same roof, but they involve very, very different experiences.

Let the Vastly Uneven Battle Begin

Let’s begin with apartment REITs, which can be quite the hassle to run.

Every apartment lease is different, of course. But most potential complex residents expect a whole lot of amenities before they’ll sign on the dotted line. That probably includes:

  • Being “up at dawn” or earlier like that worker bee in the case of overnight snowstorms
  • Conducting certain repairs and maintenance
  • Taking care of trash removal (also like the hive employee)
  • Repairing normal wear and tear issues
  • Providing pest control, rather like “guarding the hive’s narrow entrance.”

While management likely doesn’t handle the dirty work itself, it does have to hire the right people to handle it. There’s a lot of responsibility involved and very little gratitude.

Unless you’re a known slumlord, tenants expect to be treated like queens.

Positions are very much reversed, however, in the case of net lease REITs. We’ll turn to trusted iREIT on Alpha contributor Hoya Capital to describe them.

This still-accurate excerpt is from his August 2016 article, “REIT Rankings: Triple Net Lease”:

“Net lease REITs rent properties with long-term leases (10-25 years) to high credit-quality tenants, particularly 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. Similar to a ground lease, triple-net leases result in a long-term, relatively [predictable] income stream…

By the nature of the portfolio, compared to other REITs, net lease REITs are typically more like a financing company than an operating company. These companies hold the long-term, capital-intensive real estate assets that other companies prefer not to hold on their balance sheets.”

In many ways, it’s a landlord’s ideal deal.

Business Is Booming

So what kind of businesses do net lease REITs attract? For starters, think about the typical kinds of companies that often operate best in stand-alone buildings.

  • Fast-food restaurants that require drive-throughs
  • Auto parts and garage chains
  • Gyms
  • Big-box stores such as Costco, B.J.’s, or Sam’s Club

Other stores that might sign on include movie theatres, dollar stores, grocery stores and home-improvement retailers.

As the previously mentioned Hoya Capital Real Estate stated in a much more recent (i.e., September 3, 2019) article published exclusively on iREIT on Alpha’s exclusive Marketplace platform:

“While nearly two-thirds of net lease REITs’ revenue comes from retail-based tenants, it’s primarily the “right kind” of retail. Restaurants, convenience stores, fitness, and home improvement are top tenants…”

These places prefer as much autonomy as possible without the full risk of ownership. They want to run on their own hours on their own terms… but not on their own property. For them, it’s simply easier that way.

And for investors? Well, I’ll quote Hoya one more time, this one being from his recent article:

“Despite mounting concerns of a “retail apocalypse 2.0” given the unexpected surge in store closings this year, net lease REITs have bucked the negative retail trends and continue to outperform…

[They’ve] become adept at swimming upstream against these retail-related currents. The top net lease REITs command clear competitive advantages over the private market through access to capital.”

Plus, because of their long-term leases, these portfolio plays provide steady streams of additional income for savvy investors.

Some of our top Net Lease picks year-to-date include Agree Realty (ADC) +26.07%, Essential Properties (EPRT) +65.03%, Realty Income (O) +19.0%, Spirit Realty (SRC) +35.12%, Store Capital (STOR) +33.1%, Vereit (VER) +35.1%, and W.P Carey (WPC) +37.9%.  

I own shares in EPRT, O, STOR, VER, and WPC.

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