The Net Lease real estate sector has been hiding in plain sight and providing outsized returns to investors for years. Believe it or not, you know it well–it is your neighborhood pharmacy, go-to gas station, late night drive-thru restaurant, date night movie theater, your gym, or your child’s day care. You may not have realized it, but Net Lease is all around you and an integral part of your daily life. Many of these kinds of businesses lease their property under a net lease.
Long lease terms combined with built-in rent escalations make revenue projections straightforward and understandable. Net Lease REITs tend to be operationally efficient, highly transparent, and have repeatable business models. Most importantly, the lease structure shifts nearly all costs and uncertainty to the tenant, relieving the REIT or landlord from expense and shielding it from expenses that may rise over the life of the lease.
What is Net Lease Real Estate?
A “net lease” is a type of lease agreement made between the property owner and the tenant in which the tenant is responsible for paying both the rent and most, if not all, of the property expenses. The most common net lease is a “triple-net lease” where the tenant pays rent “net” of all of the expenses of a property, namely, (1) property taxes, (2) insurance and (3) maintenance. Property owners receive the consistent rental revenue paid by the tenant without the responsibility for property management expenses that can change over time. In addition, net leases generally have long initial lease terms of 10 years or more, providing predictability to the property owner. All types of properties are net leased to tenants, including revenue and profit-generating properties like restaurants, convenience stores or drug stores, distribution centers used by the businesses or other logistics-focused companies to move goods from production to customers, manufacturing facilities that make goods, and corporate headquarters. When you invest in the net lease sector, you are investing in the backbone of American business.
Traditional types of commercial real estate are typically multi-tenant properties such as office buildings, shopping malls, hotels, or apartments, which involve many more considerations for investors, such as shorter lease terms, unknown future expenses, and frictional costs of marketing and leasing space, to list a few. Multi-tenant property owners are responsible for paying property taxes and insurance, as well as maintaining and managing the property, including all common areas and non-revenue generating areas—adding substantial drag and uncertainty to future returns.
What are Net Lease REITs?
Net Lease REITs are real estate investment trusts which own portfolios of properties comprised primarily of properties leased to single tenants under net leases. The main difference between the Net Lease Sector and other real estate sectors is that REITs in the Net Lease Sector are defined and grouped by the lease type, rather than by property type (e.g., industrial, office, retail).
Net Lease is one of the fastest growing REIT sectors in the market. More and more companies are choosing to lease rather than own the properties that are integral to their businesses and operations. At the end of 2008, there were eleven REITs focused primarily on Net Lease real estate with gross assets of $19 billion. Ten years later, there are twenty-four Net Lease REITs with gross assets of over $140 billion–more than 7 times larger than ten years earlier. These companies own more than 23,000 properties across all 50 states which are leased to tenants operating in a variety of industries. In 2018 alone, the group expanded their portfolios by a collective $9.4 billion in new assets.
Sector Gross Assets