A Treasure Hunt for Absolute Return Potential: Real Estate Net Lease Business Models That Deliver #Net_LeaseApril 16, 2019
The Net Lease Real Estate Index was created because net lease REITs, as a group, have outperformed just about every comparable benchmark for a long time.
Occasionally, net lease companies will also make use of unsecured bank term notes, which can be another highly efficient form of leverage Lease Escalations : Net lease REITs tend to have regularly scheduled tenant lease escalations, which is especially attractive given the long-term nature of the leases.
Assuming net lease companies are trading at AFFO multiples that exceed their investment AFFO multiples at cost, then this added “external” growth is accretive to existing shareholders and is another important tool to deliver returns.
Having high current equity returns is a starting point for shareholder value creation and also provides a margin of safety for having accretive external growth should traded AFFO multiples erode.
(Going-In Lease Yield – (Cash Costs ÷ Average Assets at Cost))÷Going-In Lease Yield
(1 ÷ Current Traded AFFO Multiple) ÷ (1 ÷ Investment AFFO Multiple) x % of NOI Growth from External Growth
Beginning Run Rate AFFO + Internal Growth + External Growth = Total AFFO
Total Existing Shareholder AFFO – Beginning Run Rate AFFO – Internal Growth AFFO = External Growth AFFO
The second observation is that the comparative model presumes that all the internal and external growth occurs at the start of each year.
2 External Growth Rate reflects AFFO growth for existing shareholders as a result of new investments funded through new share issuances and is computed as follows: