Earnings Update: Net Lease REITs (Q1 2025)

As we explained in last earnings update for net lease REITs, a higher-for-longer interest rate environment is not bad, on balance, for net lease REITs.

Net lease REITs have lower leverage and access to cheaper and wider ranging capital than their private market peers, while cap rates (stabilized NOI yields) have been slowly dragged upward by buoyant interest rates.

Cap rates for all kinds of net lease properties have gradually increased for 12 consecutive quarters, or three consecutive years, according to the Boulder Group.

CBRE measures cap rates slightly different, resulting in modestly higher average Q1 2025 cap rates. For example, CBRE estimates the average cap rate for closed retail net lease properties at 7% instead of the Boulder Group's ~6.5%.

Given long-term and highly predictable revenue streams, the net lease REIT business model is basically to grow cash flows by consistently investing in assets at higher yields than one's cost of capital. That spread between weighted average cost of capital and effective asset yields is critical to the growth or stagnation of the REIT.

With interest rates basically flat, net lease REIT stock prices up, and cap rates ticking higher, that critical investment spread is widening for most net lease REITs.

Perhaps that is one reason why net lease REITs (NETL) have outperformed the broader real estate index (VNQ) year-to-date.

Somewhat surprisingly, the current environment is a Goldilocks one for net lease REITs.

Over the next few years, interest rates are likely to decline to some degree, which should expand the investment spread further, at least for a period of time until cap rates begin to decline as well.

With that, let's look at the Q1 2025 earnings reports for our six net lease REITs: