Today Exchange Traded Concepts and Fundamental Income have launched the first ETF to target net lease real estate investment trusts (REITs). The NETLease Corporate Real Estate ETF (NETL) focuses on REITs that lease their properties for terms of 10 years or more, specifying rent increases ahead of time and generally requiring that the lessee handles usual landlord responsibilities like paying for taxes and repairs.
NETL comes with an expense ratio of 0.60% and lists on the NYSE Arca.
The fund tracks an index that covers 24 net lease REITs generating at least 85% of their revenue from net lease activities. The index is cap-weighted, but subject to limits that are replaced on the components during every quarterly rebalancing and reconstitution in order to ensure diversification, according to the prospectus.
“Net lease is a sector that has been producing results for investors for a long time, and a lot of those results have gotten lost due to the way they are categorized within the REIT space,” said Chris Burbach, co-founder and partner of Fundamental Income.
He points out that REITs have typically been classified based on their property type than business model. That means the nature of net lease REITs has been obscured by this perspective and the space has been largely overlooked by traditional real estate investors.
“With net lease, essentially, from day one, you know what your return is, making the predictable income more certain,” explained Alexi Panagiotakopoulos, Fundamental Income co-founder and partner.
All Net Lease
“In reality, net lease REITs are simply exposure to corporate credits. You’re investing in the backbone of America,” he added. “When you look at who’s renting these places, it’s [firms] like FedEx, Starbucks, Walgreens, Home Depot, Tractor Supply and Taco Bell. Everywhere we go, it’s net lease all around us.”
Burbach says that, typically, companies would own businesses that were integral to their operations: “They’d use debt and a little bit of equity to pay for it. What they’re realizing is that it’s a lot cheaper for a net lease REIT to buy the property from them. It frees up that equity capital so that the company can go on to open new locations. It’s a much more efficient capital source.”
A decade ago, according to Burbach, there were 11 REITs using the net lease business model. Now there are 24 publicly traded REITs worth $140 billion. There is also a slew of nonpublic net lease REITs, and currently there is more than $3 trillion in property on operating companies’ balance sheets that have yet to make that shift, he adds.
Right now, the top three companies in the Fundamental Income Net Lease Index underlying NETL are Vereit at an 8.13% weighting, W.P Carey at a 8.12% weighting and Realty Income at a 8.07% weighting.
Contact Heather Bell at [email protected]