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Net Lease REITs

How net lease REITs collect rent from single tenants who also cover taxes, insurance, and upkeep on long, escalating leases

What net lease REITs own

Net lease REITs typically own free-standing, single-tenant buildings: convenience stores, drugstores, restaurants, discount and dollar stores, auto parts and service locations, and similar retail formats, along with some diversified portfolios that include industrial and office buildings leased under the same structure. Tenant industries within net lease are diverse, spanning convenience and gas stations, dollar and discount stores, casual and quick-service restaurants, auto parts and service centers, health and fitness clubs, and movie theaters, among others; some net lease REITs favor tenants with investment-grade credit ratings, while others accept more non-investment-grade tenants in exchange for a higher rent yield on the property. Regardless of tenant type, the underlying real estate — typically a well-located parcel along a busy road or near other retail — often retains value even if a given tenant eventually leaves, since the site itself remains useful for a range of similar businesses. Realty Income, W. P. Carey, National Retail Properties, and Agree Realty are among the best-known net lease REITs; Realty Income is widely known for paying its dividend monthly.

How they make money

The defining feature of this sector is the "net lease" itself: the tenant pays not just base rent but also property taxes, insurance, and most maintenance costs, leaving the landlord with a simpler, lower-volatility income stream than gross-lease sectors like office or enclosed malls. Leases are typically long at signing, often ten to twenty years, and usually include contractual rent escalators, commonly a modest fixed percentage step-up on a set schedule. Because the cash flow is so contractual and long-dated, a net lease is sometimes described as behaving like a bond secured by real estate, which is part of why the sector is sometimes compared with fixed income more broadly.

How net lease REITs grow

Because escalators are modest and contractual, net lease REITs generally grow less from rising rent on their existing buildings and more from buying additional properties. A common source of new acquisitions is the sale-leaseback: a REIT buys a property from an operating company and immediately leases it back to that same company, which frees up capital for the operating business while giving the REIT a new income-producing property with an established tenant already in place. Net lease REITs compete for acquisitions not only against each other but also against private investors, including many looking to complete a 1031 like-kind exchange, which can affect pricing and availability of properties that fit a REIT's target profile.

Key risks

Because each property typically depends on a single tenant's ability to pay rent, tenant credit quality is central to evaluating this sector. Concentration in a particular retail category or a handful of large tenants can amplify the impact if one industry or company runs into trouble. Some net lease REITs mitigate single-property risk through master leases, which bundle multiple properties operated by the same tenant under one lease and one corporate guarantee, so a tenant generally can't selectively give back only its weakest individual locations. Growth also depends on continuing to buy properties, so a REIT's cost of capital — its share price and borrowing costs — directly affects how profitably it can keep expanding through acquisitions.

Metrics that matter

Weighted average lease term (WALT) and tenant and industry diversification are central to evaluating net lease portfolios, alongside occupancy, which tends to run very high in this sector given its long-term, single-tenant structure. Portfolio granularity also matters: a REIT with thousands of smaller properties is generally less exposed to the loss of any single lease than one with a portfolio concentrated in a smaller number of larger properties. The spread between acquisition cap rates and a REIT's cost of capital is also a key driver of whether new purchases add value; see implied cap rate for how the market prices a REIT's existing portfolio by comparison.

Where net lease fits in this site's sectors

Net lease portfolios are often grouped within this site's retail sector classification even though some tenants may operate in industrial, office, or other property types; see the retail REITs guide for the broader category. Because net lease investing spans so many retail categories, tenant mix is often just as important to understand as property type when comparing two net lease REITs. Current net lease REITs, including Realty Income, can be found there; the sectors overview covers the rest of the series.

See it in the data: Retail REITs → Realty Income profile →

Research and education only — nothing here is investment advice. Figures such as the 90% distribution rule are general and can change; always confirm against a company's filings.