Net Lease REITs' Favorable Run to Extend Through 2021

There’s no let-up in the performance of net lease REITs, a segment that took great momentum into the second half of the year after a bang-up Q2 2021, according to SLB Capital Advisors.

The firm said capital raising and acquisitions have hit new heights for the second quarter, raising $1.8 billion.

This was the highest quarterly tally since Q3 2019 when $2.7 billion was raised.

Scott Merkle, Managing Partner, SLB Capital Advisors, said the influx of capital was driven by attractive share prices. The Fundamental Income Net Lease Real Estate ETF (NETL) has risen ~25% year to date.

Net lease REITs acquired $4.5 billion in assets, up 40 percent sequentially, from Q1 and the highest level since Q4 2019.

“Of the main real estate sectors, industrial is undoubtedly the most sought-after and has grown even stronger throughout the pandemic,” Merkle said. “It has been the darling property sector for years now with no end in sight. Across most of the United States, demand for industrial properties has continued to increase throughout 2021, vacancies are at all-time lows, and rents have been growing at record levels. Given these strong underlying dynamics, cap rates keep declining and valuations have continued their upward march.”

Expect Robust Acquisition Activity Through 2021

The brisk pace of new capital into net lease REITs pre-sages the likelihood of heightened acquisition activity for the balance of 2021.

“The influx of new capital is a proxy for deals in the pipeline and they can consummate these deals,” Merkle said. “This is the best time in the history of time to sell corporate real estate and we expect this to be evident in net lease acquisition activity in 2021.”

Net lease REITs have become a reliable source of passive yield for investors in this low-interest rate environment generally void of many attractive yield profiles, Eli Randel, Chief Strategy Officer of CREXi, said. “Given massive amounts of wealth and capital seeking placement and adequate low-risk return, our data is showing a surge in demand for net lease investment,” Randel added.

Defensive Profile Makes Net lease REITs Attractive

Net lease REITs own and operate a diverse portfolio of assets both geographically (given their national focus) and by property type. The REITs in aggregate own over $250 billion in assets ranging from retail, office, industrial, casinos, seniors housing and billboards, among others.

Sheheryar Hafeez, Managing Director, JLL Capital Markets, said the common trait among net lease REITs is that they generally own assets which exhibit a relatively defensive profile and focus, to a large extent, on mission critical assets within each subsector (e.g. corporate office headquarters, single tenant/purpose built retail, e-commerce warehouses, Las Vegas casinos etc.).

Additionally, “the lease terms tend to be longer term in nature with annual CPI-based or fixed percentage-based rent bumps, providing for a hedge against a volatile economic and capital markets environment,” Hafeez said. “As a result, the sector has posted a strong 20 percent total shareholder returns YTD 2021.

“Net lease REITs also benefit from a favorable cost of capital due to, among other factors, their scale. The sector has traded at a consistent premium to NAV during the past five years, providing the REITs with ability to continue to grow accretively through the cycle. [The sector currently trades at a 13 percent premium to NAV.]

“Within the sector, the relative cost of capital advantage has led to large mergers as evidenced by recently announced Realty Income’s acquisition of VEREIT and VICI’s acquisition of MGM Growth Properties. The fertile M&A activity in the space points to a high-level confidence in the outlook among REIT management teams and boards.”