Navigating Net Lease Retail’s Opportunistic Landscape

Essential Properties Realty Trust’s strategy coming out of Covid has been to take advantage of opportunistic transactions. It hit the bullseye recently with the acquisition of a casual dining portfolio in the Northeast. The company struggled during the pandemic and shut down, according to Max Jenkins, Essential Properties Realty Trust’s SVP and head of Investments, but its pre-Covid performance had been great and the real estate fundamentals made sense. Jenkins, who was a participant in last week’s GlobeSt. NET LEASE Conference, took a look at the company’s real time data from 2021 and made a risk-adjusted decision to acquire the portfolio. “They are getting back to their pre-pandemic numbers and we decided to take advantage of the higher cap rates in the short term before the rest of the market picks up on it. The business was hurt during Covid but we believe in its longevity and we are a long term buy and hold investor.” 

Welcome to retail’s other story. While the larger industry narrative has focused on retail’s struggles during and after the pandemic, net lease investors have been focusing on these assets as good long term plays.

Smart investors will choose wisely where they put their money, of course. 

“One theme we have noticed is that the strong are getting stronger and the weak are getting weaker,” says Mark Maughan, managing director of Net Lease Investments for Sundance Bay, another participant at last week’s event. “Covid has definitely created some winners and losers.”

The weaker tenants fell by the wayside with no capital or revenue to expand and grow while the strong took advantage of the opportunities available during Covid to grow market share, he explains.

In the gas station space, for example, you see brands like Wawa getting stronger while the moms and pops are struggling. In the fast food sector, franchises were able to adapt faster while smaller stores were not. Likewise coffee shops such as Starbucks and quick service retailers with drive throughs.

Maughan hesitates more over broader retail, noting that banks are still leery about the category. Big and medium box retail, in particular, can find it tough to get financing and they are not very liquid. “You have to be very site specific and picky about the geography.”

Another category he is bearish about: gyms. “That business has been really hurt and everyone has gotten used to working out from home. Even with the rollout of the vaccinations, we are very hesitant to get back into financing the development of any gyms.”