The Net Lease real estate sector has been hiding in plain sight and providing outsized returns to investors for years, and believe it or not, you know it well, as your neighborhood pharmacy, go-to gas station, late night drive-thru restaurant, date night movie theater, morning workout facility 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 properties are leased to the companies who operate there, which pay rent to the landlord under a net lease.
Combining long lease terms with built in rent escalations make revenue projections straight forward 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 that burden and expense from the REIT or Landlord 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 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 benefit from the consistency of receiving rental revenue paid by the tenant without the responsibility for managing the property or paying 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 companies including properties used to generate revenue and profits 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 to make the 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 that require much more for investors to consider, such as shorter lease terms, unknown future expenses, 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 primarily comprised of properties leased to single tenants under net leases. The primary difference between the Net Lease real estate sector and other real estate sectors is that REITs in the Net Lease sector are defined and grouped by the lease type rather than a property type such as industrial, office, or 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 (11) REITs focused primarily focused on net lease real estate with gross assets of $19 billion. Ten years later, there are twenty-four (24) Net Lease REITs with gross assets of over $140 billion, or more than 7 times larger than ten years earlier. These companies own more than 23,000 properties across all 50 states 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