Net lease REITs are performing in line with Fitch Ratings’ expectations, and they remain on the positive side of the ledger when determining our Neutral Outlook for U.S. Equity REITs. Fundamentals remain solid, and these companies are expected to maintain consistent demand in 2025 and 2026, despite an economically turbulent environment.
Investment-grade net lease REITs rated by Fitch offer competitive costs of capital. This stems from their relatively favorable access to various forms of capital, especially common equity and unsecured debt. Net lease REITs generally do not face substantial operational and maintenance drains on cash flow. This enables a healthy and consistent net lease REIT bid on commercial real estate, whether it is required for liquidity purposes or sought by owners of commercial real estate for investments in core operations. The result creates a growth avenue for the net lease REITs to build their portfolios, which are typically unencumbered and thus supportive to alternative liquidity.
LIKE THIS CONTENT? Subscribe to the CPE Capital Markets Newsletter
Demand for high-quality, well-located net lease properties has been solid, especially those leased to investment-grade businesses. This demand supports these properties’ long-term durability. With this healthy institutional appetite, Fitch believes that net lease assets are readily financeable and are supportive of an issuer’s liquidity profile.
Net lease REITs, including Agree Realty Corp. (A-/Stable), Essential Properties Realty Trust, Inc. (BBB/Positive), Four Corners Property Trust Inc. (BBB/Stable), Getty Realty Corp. (BBB–/Stable) STORE Capital LLC (BBB/Stable) and Global Net Lease Inc. (BB+/RWP) tend to be shielded from increases in property operating expenses. These costs, which include maintenance, property taxes and insurance, are typically passed on to the tenant. Fitch anticipates net lease REITs to execute prudently when tenant turnover occurs, replacing departing tenants with stronger credit tenants. Stronger credit tenants may include value-oriented business tenants, as well as service- and experience-based tenants, which are more resistant to e-commerce pressures.
Fitch also looks for issuers to have dynamic management teams with solid track records; quality portfolios that are diversified in terms of geography, asset type and tenant; and stable occupancies and cash flows. Net lease REITs with solid balance sheets that have low leverage and plentiful liquidity will be well-positioned for success, and potentially higher ratings, in the coming years.
Chris Wimmer, CFA, is senior director with Fitch Ratings.
0 Comments