A New Net Lease REIT Better than Realty Income?

Realty Income (O) is a member of the S&P500 as well as a dividend aristocrat. How can a new net lease REIT possibly be better than Realty Income? The answer is it can, and it can’t be better! It is impossible to create Realty Income’s history and track record overnight, but a new REIT with outstanding leadership and better properties than Realty Income is worth a look.

For reference on why Realty Income has been an excellent investment:

  • 15.3% average annual return since 1994
  • 602 consecutive monthly dividends paid
  • 92 quarterly increases
  • 4.5% annualized dividend growth since 1994

The new net lease REIT had its IPO on 8/13/2020 and is called NETSTREIT (NTST). Just in case any of you are not aware of what a net-lease REIT is, it means the landlord (NETSTREIT) bears no responsibility for the property. The tenant is required for all the maintenance, insurance, and even taxes.

This makes the landlord only liable for the cost to purchase the property as long as there is a tenant. Simply put, net lease deals have the possibility of high returns with lower risk as long as there are quality tenants.

Full Disclosure before we get started, I own Realty Income, NETSTREIT, as well as W.P. Carey.  

New Net Lease REIT – NETSTREIT Overview

NETSTREIT is a REIT headquartered in Dallas, Texas. It specializes in acquiring Single-Tenant Net Lease Retail properties throughout the USA. The portfolio’s focus is to find properties for tenants that are e-commerce resistant with strong balance sheets. The management team aims to generate consistent cash flows and dividends for its investors.

New Net Lease REIT

COVID-19 Rent Collection

Rent collection during COVID-19 has been challenging so a great test of portfolio strength is to see how well the rent was paid during this time. NETSTREIT has had some great success with their rent collection during COVID-19.

  • Q2 2020 – 87% paid rent
  • July 2020 – 95% paid rent
  • August 2020 – 99% paid rent
  • September 2020 – 99.5 % bringing third quarter rent to collect to 98%

Portfolio of Properties & Tenants

At the time of the IPO, NETSTREIT had 163 properties that were 100% occupied. Of the tenants, 64% of them are investment grade. Interestingly, the rest of the tenants are not rated. Being not rated as a company is not a bad or good indicator but instead puts the responsibility on NETSTREIT’s team of underwriters to ensure the tenant can pay.

New Net Lease REIT

The fact that NETSTREIT does business with unrated businesses gives them more negotiating leverage over leasing terms. This allows them to get better rates from companies that are fiscally strong. Two examples of unrated tenants are Hobby Lobby and Ollies Bargain Outlet.

Why spend so much time on who is renting the properties when looking at a REIT? We have seen over the years companies like Art Van, Shopko, SEARS, Mattress Firm, ToysRUs, Sports Authority, and Buffets, Inc file bankruptcy. What did all of these companies have in common? They were significant net lease tenants who were not investment-grade companies. Who rents is as important as the property!

Breaking down NETSTREIT’s portfolio is built around retailers that most people regularly visit out of necessity. It has a mix of discount stores like dollar stores which have been highly successful in the past few years. Then the portfolio has some service properties with tenants like Firestone, Caliber Collision, and Starbucks. Some of those service properties, depending on who you talk to could also be considered necessity stores. Then a small portion of the portfolio is comprised of various properties.

New Net Lease REIT

The top industries by annualized base rent

  • 14% of convenience stores
  • 14% home improvement
  • 11% of discount retailers
  • 10% of drug stores
  • 8% of general retail

Income REIT or Growth?

NETSTREIT recently declared its inaugural cash dividend of $0.10 per share for the third quarter of 2020. That dividend was prorated due to IPO timing, which puts the annualized dividend rate at $0.80 per share. Not too bad for generating some income or extra cash with a 4% yield.

Even though I love dividends, the real story here is the growth potential. NETSREIT has been averaging $114 million in acquisition activity per quarter. That acquisition activity added 72 properties to the portfolio from December 2019 to July 2020. The latest press release shows the acquisitions have continued, and they have grown from 163 properties at IPO to 189 as of 10/13/20.

Realty Income VS NETSTREIT

If we were going to base this off of dividend alone, Realty Income would hands down win but investing is never that simple. NETSTREIT has a considerable advantage over Realty Income; it’s tiny. When looking at Realty Income with over 6,500 properties adding 20 or so properties doesn’t move the ticker much. On the other hand, 20 quality properties to a small company like NETSREIT does move the ticker.

To compare the difference in the companies’ size, consider NETSREIT has a market cap of $480 million, and Realty Income brought in $389 million in Q3 2020 from rental revenue.

With this in mind, I think Realty Income or even W.P. Carney are better for retirement income right now. Still, younger investors or those looking for some growth now and pay later might want to consider the new net lease REIT as it will most likely just continue to grow.

What REIT would you rather own between Realty Income vs NETSREIT? Leave a comment below!

This post is my opinion, which is strictly for information & educational purposes only. The post is not intended to provide any investment advice. Please seek your own duly licensed professional for investment advice as they will be able to consider your situation. Please read my Terms & Conditions Page for a full disclaimer.

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