The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.
Real estate is an attractive investment for current returns, future growth, and diversification in any portfolio. The COVID-19 pandemic has impacted the real estate industry, and many real estate investment trusts (REITs) saw valuations decline substantially last year. However, not all real estate investments are created equally, and NETL is an example of resilience amid a crisis.
The Fundamental Income Net Lease Real Estate Exchange-Traded Fund ETF & Index NETL defines and tracks the performance of the rapidly expanding public net lease real estate sector. The ETF owns 25 publicly-traded REITs in the U.S. It's traded on the NYSE and NASDAQ and focuses solely on free-standing, single-tenant real estate.
Fundamental Income calls this real estate "the real estate of America"—it's your neighborhood grocery store, drive-thru coffee shop, go-to gas station and the closest distribution center delivering your most recent Amazon order. This ETF excludes and owns no malls, no multi-tenant office, and no multifamily.
Net Lease understands that investors are concerned with the current uncertainty, inflation and low-interest rates. That is why they highlight the value of Triple Net Leases and the shareholder's opportunity to own the public net lease sector in a diversified, tradeable, and transparent manner. Thus, there still are high-quality REITs that withstand chaos and generate consistent income with identifiable growth.
Opportunity Behind 2021 and Net Lease American REITs
Real estate investment trusts or REITs are companies that own or finance income-producing real estate in a broad range of property sectors, such as office, healthcare, retail, residential and industrial. Holders of REIT securities are entitled to a share of the income produced by the underlying real estate holdings.
REITs typically pass through 90% of their taxable income to shareholders as dividends, serving as a dependable stream of income. In addition, U.S. REITs have characteristics of both equity and fixed-income securities that offer a number of potential benefits to investors.
Underlying properties owned by REITs and associated rent rates charged to real estate tenants have historically grown faster than the rate of inflation and offer diversification benefits through lower correlations to other asset classes.
Not All Real Estates are Created Equally: Net Lease
The Net Lease real estate sector consists of a different type of REIT. It's defined by a business model centered around a specific lease type and structure, rather than simply by property categories such as industrial, office or retail. As a result, Net Lease REITs generally own thousands of properties broadly diversified across multiple industries, property types and geographic footprints.
A net lease, most commonly known as a triple-net lease, is a type of lease agreement made between the property owner and tenant. It's generally characterized by minimal expenses for the property owners and a longer-term contractional lease tenant income stream. Ultimately this translates into the tenant paying rent and most, if not all, of the property expenses, including the property taxes, insurance and maintenance of the property over a long-term lease of 20-25 years.
Long-term contractional lease payments and minimal to no landlord expenses have historically resulted in net lease REITs achieving the highest gross profit margins within the real estate sector.
The tenants occupying the properties owned by Net Lease REITs operate across a variety of industries. The buildings that process your online orders like Amazon and FedEx, the gym you work out at, the drug store you shop at, your favorite Home Depot, and drive-thru restaurant are likely leased from one of the nation's public Net Lease REITs.
This is the reason it is so attractive, all these tenants are part of your daily routines, whether it is buying a coffee in a Starbucks SBUX on your way to work, buy food in Taco Bell, or going to a CVS to fill a prescription.
In the end, this translates into more consistent and sustainable cash flow, higher gross margins, higher EBITDA, and thus a greater dividend yield. In addition, Net Lease REITs employ dividend payout ratios of roughly 80%, allowing them to reinvest cash flow, growing their property portfolio annually, which combined with contractual rent growth on an annual basis provides investors the opportunity to capture a meaningful total return over and above the current return of roughly 4.34%.
As investors search for yield, Net Lease REITs can serve as a value-oriented core equity position, that can protect against inflation, provide current return, and can provide the opportunity to capture upside equity appreciation—something bonds can't achieve.
And it's important to note that in 2020, of the 52 REITs that raised dividends, 9 of them were NetLease REITs. In addition, excluding cannabis REITs which have projected 5-year dividend growth rates of 53%, Net Lease REITs have the 3rd highest expected dividend growth rate at 22%, lagging only Cell tower REITs at 26% and single-family rental homes at 25%, respectively.
Fundamental Income Company's Overview
Fundamental Income, the sponsor and index provider of the Net Lease Corporate Real Estate ETF, is an investment firm led by seven partners with more than $15 billion in net lease experience and nearly 50 years of combined history in credit and capital markets.
In addition to the Net Lease ETF, Fundamental Income recently launched Fundamental Income Properties, a private, institutional net lease REIT platform, after an initial equity commitment of $500 million from a fund managed Brookfield Asset Management BAM.
The fund is composed of highly liquid, publicly-traded REITs specializing in the net lease sector, including Store Capital STOR, Realty Income O, W.P Carey WPC, Spirit Realty SRC, National Retail Properties NNN and Vereit VER.
The underlying portfolio properties have a cumulative enterprise value of $195B, a 98.9% occupancy rate, trade over $800 million of average daily volume, and have an effective 30-day SEC yield of 4.34% as of the end of Jan. 2021.
Photo by Jason Dent
The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.
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