In a commercial real estate market where transaction activity remains subdued, net lease REITs have been busy deploying billions in capital and steadily growing their portfolios. Many companies in the sector have good liquidity and a desire to grow and are expected to actively pursue deals they view as attractive—despite ongoing market volatility.
Net lease REITs are by nature an acquisitive group. They need to make accretive investments to grow their FFO per share, and the sector is coming off a robust year of deal-making with an especially active fourth quarter. Notable highlights include:
- Realty Income Corp. (NYSE: O) invested $3.9 billion last year, with $1.7 billion occurring in the fourth quarter.
- Essential Properties Realty Trust, Inc. (NYSE: EPRT) invested $1.2 billion last year, which included $333.4 million in the fourth quarter
- W. P. Carey Inc. (NYSE: WPC) closed on $1.6 billion in acquisitions in 2024, including a record high of $840 million in the fourth quarter.
- Agree Realty Corp. (NYSE: ADC) invested $951 million in 2024, with $371 million in the fourth quarter.
“One can make the argument, isn't the fourth quarter usually the biggest acquisition quarter in the year?” says Scott Merkle, managing director at SLB Capital Advisors, a real estate advisory firm specializing in sale-leasebacks. “That's usually accurate, and that probably played a role here. But more importantly, the net lease REITs coming into 2025 were trading at very attractive levels, so they had good currency with which to acquire properties.”
Net lease REITs coming into 2025 were trading at very attractive levels, so they had good currency with which to acquire properties
Fourth quarter investment activity also accelerated along with signals that the Federal Reserve was moving into a rate-easing cycle, adds Jason Fox, president and CEO of W. P. Carey. “That flowed through to the 10-year Treasury and helped propel sellers who had largely been on the sidelines for much of 2024 into action, with bid-ask spreads between buyers and sellers coming in meaningfully,” he says.
Appetite for Growth
Despite market volatility fueled by President Trump’s proposed tariff policy, net lease REITs are maintaining cautious optimism for more growth ahead with guidance, thus far, that is similar to 2024. “The appetite to do deals and deploy capital is still there. We're seeing it every day in the transactions that we're working on with REITs that are actively offering on sale-leasebacks,” Merkle says. Net lease REITs are buying existing net lease properties and also investing in sale-leasebacks, both on a one-off and portfolio basis.
However, all buyers are being a bit more cautious right now given uncertainty surrounding the impact from tariffs on consumer spending, supply chains, and the global economy. “The biggest headwind to the sector is volatility,” says Spenser Glimcher, managing director, self-storage & net lease, at Green Street. “It's one thing if the economy is slowing, but it's the uncertainty of the swings in markets week-to-week or day-to-day,” she adds.
Companies are navigating in a market where there is less certainty around the ability to deploy capital and execute on acquisition opportunities. Will deals take longer to get done? And will buyers and sellers try to renegotiate different pricing or cap rates?
“The volatility in the market, if anything, has made it even more important in terms of having balance sheets and liquidity because there is a certain amount of acquisition expectation that's built into this sector every year,” says Haendel St. Juste, managing director and senior REIT analyst at Mizuho Americas. Net lease REITs rely on acquisitions because it is not an internal high-growth sub-sector. Historically, more than two-thirds of growth in the sector has come from acquisitions, he notes.
Tapping Equity Markets
Historically, net lease REITs have funded acquisitions with roughly 50-50 equity and debt, and they’re often tapping equity via ATMs as well as traditional equity issuance. For example, EPRT has pre-funded its growth for the coming year thanks to an upsized stock offering in March that raised $254.2 million.
“Because these companies are serial acquirers, the sub-sector requires lots more fresh equity every year,” St. Juste says. “Their stock price and cost of capital matters because they’re spread investing, and that’s why you see their balance sheets a little bit more liquid.”
Investors often gravitate to net lease REIT stocks during cyclical downturns and volatility because of the bond-like characteristics of the sector. And the defensive nature of the sector has garnered attention this year as investors have looked for a safe spot to place capital.
Net lease REITs have diversified tenancy with long-term leases that also have embedded rent bumps. Balance sheets are typically liquid and low-levered, and investors also like the steady dividend yield they deliver. “From a positioning perspective, we've seen a number of investors that have built their portfolios a bit more towards long-duration sectors in the last couple of months. If you look at what's worked year to date, it's been health care, towers, gaming, and triple net,” St. Juste says.
Varied Approach to Acquisitions
Although the desire to grow is there, the capacity for growth within the sector is a mixed bag. Most net lease REITs like to invest on a leverage-neutral basis and tend to be conservative allocators of capital. “If you're not trading in a premium–5% or greater to your NAV–you're kind of in the cost of capital penalty box because you're not able to go out and issue equity to grow,” Glimcher says.
Triple net REITs without the need to raise any additional capital to reach, and potentially exceed, acquisition targets should be net winners, according to St. Juste.
W. P. Carey is among the net lease REITs sitting in a strong capital position. “We've talked this year about having a clear path to fund our investments in 2025 without the need to raise any equity,” Fox says. The REIT plans to fund acquisitions with the sale of non-core operating assets, primarily dispositions of its legacy self-storage properties. The REIT also has a $2 billion credit facility that’s largely undrawn.
W. P. Carey started 2025 with guidance for acquisitions in a range between $1 billion and $1.5 billion. “I've characterized that as appropriately conservative given the market uncertainty,” Fox says. The REIT has completed about $449 million in investments through April, primarily involving single-tenant industrial assets.
The biggest and obvious headwind is the uncertainty in the world right now, where interest rates are going, where tariffs are going to land, and how that’s all going to flow through to inflation. “This uncertainty tends to chill transaction markets, and we'll probably see some of that, especially from portfolio sellers who may not be as motivated to be in the market right now,” Fox notes.
However, some of those same challenges also could provide tailwinds by creating buying opportunities and perhaps motivate sellers to pursue a sale-leaseback to raise capital for their business. “We've done some of our best deals over the years during times of significant uncertainty or when there's capital markets dislocation,” he adds.
We've done some of our best deals over the years during times of significant uncertainty or when there's capital markets dislocation
Searching for Buying Opportunities
Finding buying opportunities could be a near-term challenge with uncertainty that may keep sellers on the sidelines. The M&A market is typically a big source of investment opportunities for REITs as sale-leasebacks are often used as a financing tool.
However, the pipeline for M&A deals has been relatively quiet this year, given the uncertainty and volatility in capital markets that make pricing more challenging. REITs also are seeing increased competition from private equity groups. According to SLB Capital Advisors, there were three large sale-leaseback deals announced in first quarter by SouthState Bank, AT&T and REI totaling more than $1.5 billion, and all three of those deals went to private equity buyers.
“We hear from all the buyers we talk to that there is a shortage of quality sale-leasebacks out there, so there’s probably not as much acquisition volume as they would like, but REITs are actively pursuing those deals that they view as being attractive,” Merkle says.
REITs also are well-positioned to win deals when they choose to do so, he says. “They're not stretching; they're not overpaying; but when they like an acquisition they're going after it and putting forth attractive, compelling offers,” he adds.
Despite an appetite for growth, net lease REITs are keeping a close eye on their capital costs, potential credit risk and slowing economic growth. “I think the sub-sector is a net winner here, and acquisitions will be part of the story,” St. Juste says. “But we'll probably hear of deals taking a little bit longer, and in some cases, maybe a bit more competition from new private equity sources in the space.”