With all due respect to anyone renting right now, dealing with tenants can be a giant pain in the neck.
Unless we’re talking about a slumlord or some other kind of unethical real estate baron – and yes, I fully acknowledge those do exist – most landlords tend to work very hard for their income.
For starters, there’s the normal, built-into-the-lease expectations they have to manage. This includes timely renovations and building upgrades, staying on top of the regular wear and tear of a building (aka depreciation), and taking care of the toilets, the trash and the taxes.
Those last three are known as the three Ts in this line of business (toilets, trash, and taxes).
Then there are “those” kinds of tenants they have to deal with. Tom Chiarella, who was a landlord for almost two decades, has some stories to tell in that regard. According to his article on Popular Mechanics, the following details are some of the lesser problems he had to face over the course of his real estate career:
People will flush anything down a toilet. Curlers. Popsicle wrappers. Combs. I’m not saying they do it on purpose. Maybe they didn’t notice the jet-black comb on the blazingly contrasting white porcelain floor of the toilet bowl. Maybe they just flicked the handle and down it went. Accidents happen. But when you’re the one kneeling on a damp bath towel on a Wednesday afternoon, fishing around in a toilet with a thirty-foot snake, I’m telling you: You see some stuff. Poker chips. Warning labels. Handfuls of expired vitamins.
There was an afternoon when I, the landlord, stood with a plumber as he ground around for about fifteen minutes until he broke through the offending blockage. Moments later, an artichoke leaf floated up, then another, and another. Seriously: artichoke leaves. “I don’t know anything about that,” my tenant told me when I called that night. Paradoxically, he then added, “That must have been an accident.”
For the record, artichokes aren’t exactly the smallest vegetable available. They’re much better disposed of in a trash can or compost bin.
The Obvious Upside to the Job
Admittedly, those kinds of aggravations can be more on the residential-specific side of the landlord spectrum. However, there are plenty of businesses that are more than capable of creating undesirable, unnecessary “situations” in their own special ways.
All things considered, if you’ve never been a landlord before, you might want to count your blessings.
With that said, there is obviously money to be made out of it. Otherwise, nobody in a free society would ever willingly subject themselves to those kinds of reoccurring headaches and hassles.
When managed with the right goals and the right application, renting out property can bring in the kind of money that can build real estate empires – the very concept that REITs are built on.
People need homes, and businesses need space. Yet not all of them – maybe even most of them – aren’t always willing or able to buy up their own property in the process. So they rent instead, a decision that provides steady income for hundreds of publicly traded REITs… and reliable dividend returns for investors like you and me…
When everything goes as planned.
While there’s no way to predict absolutely everything, there is a way REITs can significantly shorten the list of negative possibilities they have to worry about. That’s through triple net leases.
The New Big Deal on the REIT Block
I’ve long-since noted that, out of all the REITs I cover, the ones that operate with triple net leases are among my favorites (I also have
built over 100 free-standing buildings myself, as a developer). From a landlord’s perspective, these are about the most favorable leasing conditions around.
Here’s how I described them in an April 2018 Forbes piece titled, “3 Highly Predictable REITs to Help You Sleep Well at Night.” These are rental properties “with long-term leases (10-25 years)” signed by “high credit-quality tenants.”
They’re called net leases because:
“… they generally use a triple-net lease structure, whereby tenants pay all expenses related to property management: property taxes, insurance, and maintenance. Like a ground lease, triple-net leases result in long-term, relatively predictable income streams.
Similar to a bank, net lease REITs essentially capture the “spread” between the acquisition cap rate and their cost of capital. Furthermore, compared to other REITs, net lease REITs [tend to] function more like a financing company rather than an operating company. These REITs hold the long-term, capital-intensive real estate assets that other companies prefer not to hold on their balance sheets.”
In and of itself, that’s a fine kind of business structure to bet on. But perhaps better still is how, as of today, there is now officially an ETF on the market that holds absolutely nothing other than triple net REITs.
I’m extremely excited to tell you all about it…
This New REIT Has Elements of the SWAN Elements
Today NetLease Corporate Real Estate ETF (NETL) is launching and the strategy for this fund is that it is the first ETF focused solely on Net Lease REITs, which is one of the fastest growing sectors within the REIT space. Just a few days ago I wrote an article explaining,
“the backdrop (low rates, slightly higher yields, acquisition abundance) remains favorable for Triple Net REIT transaction volumes and earnings given their cost and access to capital advantage.”
NETL is a pure-play Net Lease REIT ETF that 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.
This newly created Net Lease ETF is based on the Fundamental Income Net Lease Real Estate Index (NNNLSCTR) which is calculated by Nasdaq and aims to allow investors to benefit from these unique Net Lease REIT fundamentals. The NETLease ETF does not have exposure to multi-tenant malls, traditional office buildings and multifamily owners, all of whom have significant capital expenditures and operating expense obligations.
“We are thrilled to be working with the Fundamental Income team to bring this timely and innovative fund to market,” said J. Garrett Stevens, CEO of Exchange Traded Concepts. “This Fund tracks the Net Lease real estate sector, which exemplifies consistent and predictable cash flows that Net Lease REITs derive from a diverse portfolio of corporate-leased properties. Great colleagues and great ideas are the true drivers of ETF success,” continued Stevens. “We’re very pleased to add Fundamental Income and NETL to our growing list of affiliates and innovative ETF solutions.” Chris Burbach, co-founder and Partner of Fundamental Income stated,
“We started Fundamental Income with a simple view that investments with cash flows built upon identifiable underlying fundamentals, that are stable and predictable, should be worth more than those without a clear foundation or less certainty.
Net Lease REITs have the potential to provide investment income and capital preservation, in a market searching for both, which is why we are excited to partner with ETC. We believe this ETF offers investors broad exposure to the tangible U.S. economy through the underlying predictable rents of NETL. The time has come for investors to shift their focus from property appearances to results and for Net Lease real estate to stand on its own – we created the Index to do just that.”
Burbach and co-founder Alexi Panagiokapoulos know the Net Lease REIT sector well as they formerly were employed with Store Capital (STOR) – Burbach was Executive VP of Underwriting and Panagiokapoulos specialized in credit and underwriting.
The new REIT ETF should create plenty of buzz as the portfolio of 24 REITs generates very stable revenues supported by over 23,000+ individual stand-alone properties. The ETF has no more than 3.5% exposure to any one tenant and no more than 20% exposure to any one tenant industry and no more than 5% exposure to any one state in the US (except Texas, which is the outlier at roughly 10%). The fee structure is 60 bps.
KaChing, KaChing…
That means, forget about the frig’n 3 T’s, just let NetLease ETF do all of the dirty work.
This new strategy is well thought-out, and I really like the fact that there is tremendous diversification across property sectors (24 REITs in the portfolio). It will be interesting to track this ETF, especially since we also recently created our own Net Lease REIT Index called SWANO.
The participants include Store Capital, W.P. Carey (WPC), Agree Realty (ADC), National Retail Properties (NNN), and Realty Income (O). As most know, we also created an equity REIT Index called DAVOS.
The participants include Digital Realty (DLR), American Tower (AMT), Ventas, Inc. (VTR), Realty Income (O), and Simon Properties.
In a few weeks (hopefully two) we plan to launch our new website and included in the iREIT Research Lab we will provide real-time results for over 30 REIT ETFs (including NetLease ETF), REIT Benchmarks, and our proprietary tracking indexes such as SWANO, DAVOS, and BLAST (our commercial mortgage REIT Index).
In closing: When it comes to Net Lease investing, there’s really no need to be a market timer. I have made the argument for years and years on Seeking Alpha, there’s one simple rule to remember when it comes to Net Lease REITs (Realty Income’s former CEO, Tom Lewis, taught me this rule): 5 + 5 = 10
What this means is that when you decide to purchase shares in a Net Lease REIT, there’s no reason to “get too cute”. You are typically going to obtain a dividend yield of approximately 5% (I know, blue chips like O are yielding much less now) and growth of another 5% (on average), and the result is an expected total return of 10%.
That’s much easier than pulling artichokes out of the toilet, right?
The author does not own shares in NETL, but he does own shares in DLR, VTR, O, SPG, BXMT, LADR, STWD, TRTX, STOR, and WPC.