HAUZ - Net Lease REITs: Surviving Inflation For Now

• Understood to be one of the more "bond-like" and rate-sensitive REIT sectors, net lease REITs have surprisingly been among the best-performing property sectors this year despite the challenging macroeconomic environment.
• Even with rent growth significantly lagging inflation, net lease REITs are still on-pace for double-digit earnings growth as robust accretive external growth has more-than-offset the drag from muted property-level growth.
• The counterintuitive outperformance is consistent with the phenomenon discussed earlier this year in which net lease REITs actually outperformed the REIT sector during the prior Fed rate hike cycle.
• Critically, net lease valuations respond to long-term interest rate and inflation expectations - not short-term rates or realized inflation - and market participants aren't buying the "new normal" of permanently elevated inflation.
• Within the net lease sector, inflation risk isn't always efficiently-priced. We take a deep-dive into the inflation risk across the sector, and reiterate our positive outlook on REITs that can outperform in a variety of potential macroeconomic environments.

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