Real estate assets and the related ETFs have been taken to task during the March broader market sell-off, but some corners of this segment look appealing. That includes net lease operators, a group accessible via the NETLease Corporate Real Estate ETF (NETL).
The NETLease Corporate Real Estate ETF tracks a market-cap selected and weighted index of net lease U.S. real estate equities and is a product of Exchange Traded Concepts, a large ETF company. The NETL ETF is uniquely focused entirely on Net Lease Real Estate Investment Trusts (REITs), which is one of the fastest-growing sectors within the REIT space.
With marquee net lease properties, including casinos and other consumer discretionary venues, shuttered across the country, some net lease names have been punished. However, Alexi Panagiotakopoulos, co-founder of Fundamental Income, the firm behind NETL, views recent bloodletting in the space as too much too soon.
“Amidst the coronavirus drawdown, and forced closing of nearly all businesses and real estate, the REIT sector as a whole was hit extremely hard, including gaming REITs,” said Panagiotakopoulos.
The three major gaming REITs are Gaming and Leisure Properties, Inc. (NASDAQ: GLPI), MGM Growth Properties (NYSE: MGP), and Vici Properties (NYSE: VICI). NETL features exposure to each of those names.
Those names are following gaming operators lower, but the REITs sport massive yields, offer robust rent coverage and are deeply discounted relative to historical norms.
Sustainable Cash Flows
NETL encompasses a variety of REITs that provide sustainable cash flows by leasing their properties through long-term contractual leases on a triple-net lease basis. The leases have terms that are generally 10 years or longer, predetermined rental rate increases, and minimal landlord responsibilities.
The net lease space and NETL itself were “founded on an investment thesis that long-term, corporate cash flows generated from properties that a tenant requires to generate revenue, can improve the risk-adjusted returns, over and above the perceived credit rating of an underlying tenant because that “property” is more important to the tenant than say other unsecured obligations or subordinated and discretionary expense items,” said Panagiotakopoulos.
Net Lease REITs focus on properties leased to individual companies. They generally lease properties on longer lease terms. More importantly, the tenant is responsible for most if not all operating expenses, property taxes and insurance costs. Those are important points in the current climate.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.