WPC - Realty Income: A Skidding Net Lease Market Is Impacting The Largest Net Lease REIT

2024-05-20 12:22:34 ET

Summary

• The net lease market continues to grind to a halt, entering a second year of depressed transaction activity.
• Realty Income (O) is the largest net lease REIT and has a strong track record of dividend growth, largely fueled by an acquisitive strategy.
• We explore the impact of the slowing net lease market on O's acquisition activity, showcasing their willingness to be flexible within their business.

While net lease real estate is certainly not a new concept, the sector continues to grow at a rapid pace. For the uninitiated, a triple net or NNN lease, is a lease agreement where the lessee agrees to reimburse the landlord for property level expenses, including property taxes, insurance, and maintenance costs. Triple net leases come in various shapes and sizes, with the landlord and tenant splitting pieces of these responsibilities. However, most triple net leases have full reimbursement structures, known as absolute triple net leases.

In practicality, triple net real estate is a credit instrument backed by the value of the underlying real estate. Triple net leases are generally ten years or longer when inked, similar to where a partner might choose to issue long-term debt. However, unlike most forms of debt, triple net leases generally include contractual rent escalations, either fixed at an annual growth rate or linked to CPI....

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