Alex Pettee, CFA
Net Lease REITs: Analyzing Inflation Risk
Despite a wave of dividend hikes and robust external growth, net lease REITs have been among the weakest-performing property sectors this year amid concerns over soaring inflation and rising interest rates.
Despite their reputation as bond substitutes, net lease REITs have historically delivered above-average earnings growth as accretive external growth has more than offset the drag from muted property-level growth.
Thriving in the "lower for longer" macroeconomic environment that defined the 2010s, the new regime of higher inflation rates has raised questions about these REITs' ability to continue to outperform.
We’ve developed additional metrics to measure the inflation-hedging characteristics and potential risks. Since net lease REITs are among the more bond-like sectors, the need for diversification becomes especially important.
Net lease REITs are currently firing on all cylinders, taking full advantage of cheap capital to fuel a "buying spree" of property acquisitions. We see recent underperformance as a buying opportunity, particularly for net lease REITs that provide better inflation protection.