2023-09-15 09:00:00 ET
Summary
- Net Lease REITs have sold off this year, creating significant bargains.
- Several Net Lease REITs offer investors high safe yield at low prices, with strong balance sheets and double-digit upside in share price.
- This article examines growth, balance sheet, dividend, and valuation metrics for three such companies.
Net Lease REITs have returned a dismal (-11.7)% thus far this year, badly lagging all the major indices, which have posted gains ranging from 3.5% (S&P 600) to 40.0% (NASDAQ). Only 4 REIT sectors (Billboards, Farmland, Cell Towers, and Cannabis) have fared worse this year than Net Lease REITs.
Hoya Capital Income Builder
The sell-off has driven up Net Lease REIT yields to very attractive levels. As a result, some intriguing bargains are now available.
Here are three Net Lease REITs with strong balance sheets, decent growth prospects for 2024, and yields approaching 7%.
W. P. Carey ( WPC )
W. P. Carey
W. P. Carey, with a market cap of $13.5 billion, owns and operates a portfolio of 1475 net lease properties totaling over 180 msf (million square feet). WPC also owns and operates 85 self-storage properties totaling 53,000 units, currently enjoying 92% occupancy. The company has offices in New York, London, Amsterdam, and Dallas, and its properties stretch across the U.S., as well as Northern and Western Europe.
In making acquisitions, WPC management focuses on the creditworthiness of the tenant, the criticality of the property to the tenant's operations, and the fundamental value of the underlying real estate. They lean toward key distribution facilities or profitable manufacturing plants, critical R&D or data centers, top-performing retail stores, and corporate headquarters.
The company actively monitors its assets on these variables, and recycles and redevelops properties accordingly.
WPC currently earns $1.47 billion in ABR (annual base rent) from 398 tenants, with 65% of ABR coming from the U.S. and 34% from Europe. 97% of leases have built-in rent escalators, either fixed or CPI-linked, with a weighted average lease term of 11.2 years. Contractual same-store growth in ABR has climbed to 4.3%. Lease expirations are extremely smooth, as shown below.
The top 10 WPC tenants account for only 19.0% of ABR, and 30% of ABR comes from tenants who have investment-grade balance sheets. The net lease portfolio is 99.0% occupied, which is very impressive for a company this size.
More than half of ABR comes from industrial and warehouse facilities, and WPC's exposure to Office properties currently accounts for 16% of ABR.
Company investor presentation
WPC's ABR is phenomenally diversified across industries, with retail stores accounting for only 20%, and no other category contributing as much as 10%.
WPC Growth
Here are the 3-year growth figures for FFO (funds from operations) and TCFO (total cash from operations).
Metric | 2019 | 2020 | 2021 | 2022 | 3-year CAGR |
FFO (millions) | $856 | $866 | $897 | $1106 | -- |
FFO Growth % | -- | 1.2 | 3.8 | 23.3 | 8.9% |
FFO per share | $4.59 | $4.96 | $4.90 | $5.52 | -- |
FFO per share growth % | -- | 8.1 | (-1.2) | 12.7 | 6.3% |
TCFO (millions) | $812 | $802 | $926 | $1004 | -- |
TCFO Growth % | -- | (-1.2) | 15.5 | 8.4 | 7.3% |
Source: TD Ameritrade, CompaniesMarketCap.com, and author calculations
The pandemic had only a mild effect on WPC's revenues and cash flow, both of which posted very healthy gains in 2022. All in all, WPC is a very healthy COW.
Meanwhile, here is how the stock price has done over the past 3 twelve-month periods, compared to the REIT average as represented by the Vanguard Real Estate Index Fund ETF Shares ( VNQ ). On stock price alone, WPC investors have lost an average of (-2.5)%, while the VNQ has been essentially flat at 0.55%.
Metric | 2020 | 2021 | 2022 | 2023 | 3-yr CAGR |
WPC share price Sept. 11 | $68.18 | $75.38 | $86.21 | $63.33 | -- |
WPC share price Gain % | -- | 10.6 | 14.4 | (-26.5) | (-2.43)% |
VNQ share price Sept. 11 | $80.25 | $106.40 | $95.81 | $81.59 | -- |
VNQ share price Gain % | -- | 32.6 | (-10.0) | (-14.8) | 0.55% |
Source: MarketWatch.com and author calculations
WPC Balance sheet
Here are the key metrics for WPC's investment grade balance sheet.
Company | Liquidity Ratio | Debt Ratio | Debt/EBITDA | Bond Rating |
WPC | 1.94 | 33% | 6.5 | BBB+ |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
WPC is holding $204 million in cash, over against $8.8 billion in debt, held at a favorable 3.3% weighted average interest rate, but the weighted average maturity is just 3.9 years, with more than half due between now and the end of 2026.
Variable rate instruments account for 5.0% of the company's debt.
WPC Dividend
WPC pays a dividend approaching 7%, with an excellent safety rating of C-, meaning the company errs slightly on the side of paying the investor, rather than retaining earnings.
Company | Div. Yield | 5-yr Div. Growth | Div. Score | Payout | Div. Safety |
WPC | 6.75 | 1.3 | 7.02 | 80% | C- |
Source: Hoya Capital Income Builder, TD Ameritrade, Seeking Alpha Premium
Dividend Score projects the Yield three years from now, on shares bought today, assuming the Dividend Growth rate remains unchanged.
WPC Valuation
Net Lease REITs are "cheap" now, and WPC is just a little cheaper.
Company | Div. Score | Price/FFO '23 | Premium to NAV |
WPC | 7.02 | 11.9 | (-13.2)% |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
The average Wall Street analyst price target for WPC is $74.60, implying 18.4% upside.
Bottom line: WPC
For value investors, high yield plus low price equals bargain. WPC is not a yield trap. Its balance sheet is solid, and its growth prospects decent, and analysts agree it has double-digit upside in share price, which should intrigue growth investors as well.
Spirit Realty Capital ( SRC )
Spirit Realty Capital
Spirit Realty Capital sits right in the market cap sweet spot at $5.2 billion. Like WPC, SRC focuses on income-producing, strategically located retail, industrial, and office properties. SRC owns just over 2000 properties, 99.8% occupied, with weighted average lease term of 15.3 years, generating $695 million in ABR from 345 tenants spread across 37 industries and 49 U.S. states.
Company investor presentation
The top 10 tenants account for only 22% of ABR. Their underwriting focus is similar to WPC, except that they also consider industry relevance in choosing acquisitions.
Company investor presentation
SRC's geographic diversity is also impressive. About 57% of SRC's ABR comes from states in the Sunbelt (15% from Texas alone), but a healthy 19% dose comes from the Midwest and another 15% from the Mid-Atlantic.
Over the past 12 months, SRC's acquisitions have tilted more and more heavily toward industrial manufacturing and distribution facilities, which are currently in short supply and enjoying outstanding leasing spreads.
SRC Growth
SRC took a hit during the pandemic but came roaring back with FROG-like growth rates over the past two years.
Metric | 2019 | 2020 | 2021 | 2022 | 3-year CAGR |
FFO (millions) | $305 | $286 | $388 | $494 | -- |
FFO Growth % | -- | (-6.3) | 35.7 | 27.3 | 17.4% |
FFO per share | $3.34 | $2.73 | $3.26 | $3.66 | -- |
FFO per share growth % | -- | (-18.3) | 19.4 | 12.2 | 3.1% |
TCFO (millions) | $339 | $314 | $411 | $486 | -- |
TCFO Growth % | -- | (-7.4) | 30.9 | 18.2 | 12.8% |
Source: TD Ameritrade, CompaniesMarketCap.com, and author calculations
Meanwhile, here is how the stock price has done over the past 3 twelve-month periods, compared to the REIT average as represented by the Vanguard Real Estate ETF. Both SRC shares and VNQ shares have been essentially flat, at 0.37% and 0.55% respectively.
Metric | 2020 | 2021 | 2022 | 2023 | 3-yr CAGR |
SRC share price Sept. 11 | $36.20 | $49.45 | $41.61 | $36.60 | -- |
SRC share price Gain % | -- | 36.6 | (-15.9) | (-12.0) | 0.37% |
VNQ share price Sept. 11 | $80.25 | $106.40 | $95.81 | $81.59 | -- |
VNQ share price Gain % | -- | 32.6 | (-10.0) | (-14.8) | 0.55% |
Source: MarketWatch.com and author calculations
SRC Balance sheet
Here are the key metrics for SRC's investment-grade balance sheet. 99.8% of SRC's portfolio is unencumbered by debt.
Company | Liquidity Ratio | Debt Ratio | Debt/EBITDA | Bond Rating |
SRC | 2.09 | 38% | 6.0 | BBB |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
SRC is holding $175 million in cash, against total debts of $3.8 billion, held at an average interest rate of 3.42%, with average term to maturity of 5.1 years. Debt maturities are favorable, with nothing coming due in 2023 or 2024, and less than 10% of the total payable in 2026. Almost all the debt is unsecured, and none is held at variable rates.
SRC Dividend
Despite being a rich payer at 7.32% current yield, SRC still rates B- for dividend safety, so the dividend is in absolutely no danger. Though the dividend growth rate is slow at 2.0%, SRC still outshines even the average Net Lease REIT and almost doubles the average REIT overall.
Company | Div. Yield | 5-yr Div. Growth | Div. Score | Payout | Div. Safety |
SRC | 7.32% | 2.0% | 7.77 | 70% | B- |
Source: Hoya Capital Income Builder, TD Ameritrade, Seeking Alpha Premium
SRC Valuation
Like WPC, SRC is even cheaper right now than the average Net Lease REIT, which in turn is considerably cheaper than REITs in general.
Company | Div. Score | Price/FFO '23 | Premium to NAV |
SRC | 6.14 | 10.1 | (-20.4)% |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
The average Wall Street analyst price target for SRC is $43.53, implying 18.4% upside, same as WPC.
Bottom line: SRC
Like WPC, SRC offers investors high yield plus low price, but with a slightly better balance sheet, and almost identical upside.
Broadstone Net Lease ( BNL )
Broadstone Net Lease
Founded in 2007, BNL went public as a REIT in late 2020. With a market cap of $3.3 billion, the company owns and operates 801 properties totaling 38.5 msf (rentable), currently 99.4% occupied, in 44 states and Canada, net leased to 221 tenants in 54 industries, generating $391 million in ABR, mixed as follows:
- 52% industrial
- 17% healthcare
- 13% restaurant
- 12% retail
- 6% office.
Company investor presentation
The weighted average lease term is 10.7 years, with rent escalators averaging 2.0%. Lease expirations over the next 3 years are minimal.
The tenant base is well-diversified, with the top tenant accounting for only 4.0% of ABR, the top 10 only 19.4%, and the top 20 just 32.1%.
Company investor presentation
BNL's weighted average initial cash cap rate on acquisition in 2023 has been 7.2%, on $85 million of investments, with a pipeline of another $167 million under control. Acquisitions over the past 5 years have tilted heavily toward industrial facilities, and cap rates have averaged 6% or better since 2015.
Roughly 10% of ABR comes from assets in Texas, with the Great Lakes region being the next highest concentration.
BNL Growth
BNL did not go public as a REIT until late 2020 but has shown steady growth in cash flow since the IPO.
Metric | 2019 | 2020 | 2021 | 2022 | 3-year CAGR |
FFO (millions) | NR | NR | $256 | $274 | -- |
FFO Growth % | -- | -- | -- | 7.0 | NA |
FFO per share | NR | $1.50 | $1.56 | $1.52 | -- |
FFO per share growth % | -- | -- | 4.0 | (-2.6) | NA |
TCFO (millions) | $147 | $179 | $245 | $256 | -- |
TCFO Growth % | -- | 21.8 | 36.9 | 4.5 | 20.3% |
Source: TD Ameritrade, CompaniesMarketCap.com, and author calculations
Meanwhile, here is how the stock price has done over the past 3 twelve-month periods, compared to the REIT average as represented by the Vanguard Real Estate ETF. Both BNL shares and VNQ shares have been essentially flat, at 0.24% and 0.55% respectively.
Metric | 2020 | 2021 | 2022 | 2023 | 3-yr CAGR |
BNL share price Sept. 11 | $16.30 | $26.26 | $19.52 | $16.42 | -- |
BNL share price Gain % | -- | 61.1 | (-25.7) | (-15.9) | 0.24% |
VNQ share price Sept. 11 | $80.25 | $106.40 | $95.81 | $81.59 | -- |
VNQ share price Gain % | -- | 32.6 | (-10.0) | (-14.8) | 0.55 |
Source: MarketWatch.com and author calculations
BNL Balance sheet
Here are the key balance sheet metrics.
Company | Liquidity Ratio | Debt Ratio | Debt/EBITDA | Bond Rating |
BNL | 2.55 | 39% | 5.2 | BBB |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
Total debt is just under $2 billion, against about $21 million in cash. Maturities are very favorable, with negligible payments due between now and 2026, and $1 billion in untapped revolver capacity. Only 2.0% of debt is held at variable rates. The fixed-charge coverage ratio is 4.1x.
Company investor presentation
BNL Dividend
BNL is the best dividend payer of the three companies reviewed in this article, and the dividend safety grade of B indicates that the dividend, if anything, is too safe.
Company | Div. Yield | 1-yr Div. Growth | Div. Score | Payout | Div. Safety |
BNL | 6.83% | 6.7% | 8.30 | 70% | B |
Source: Hoya Capital Income Builder, TD Ameritrade, Seeking Alpha Premium
BNL Valuation
Like WPC and SRC, the price on BNL is low, compared to both the Net Lease sector and the overall REIT average.
Company | Div. Score | Price/FFO '23 | Premium to NAV |
BNL | 8.30 | 10.6 | (-21.9)% |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
The average Wall Street analyst price target for BNL is $19.60, implying 21.4% upside, even greater than WPC or SRC.
Bottom line: BNL
Like the other two companies reviewed in this article, BNL offers high, safe yield at a low price, with a strong balance sheet and significant upside in share price.
For further details see:
3 Stable High-Yielding Net Lease REITs With Upside