One strategy for success in business is to provide a product or service that everyone needs on a regular basis. The free-standing retail sector does just that, leasing space to stores that sell basic staples, including pharmacies and convenience stores. Other tenants provide services or experiences, including restaurants, theaters, and health and fitness centers.
These REITs are sometimes referred to as net lease REITs, as the tenant pays taxes, maintenance, and insurance in addition to the monthly rent. This reduces the REITs’ exposure to rising operating expenses and helps make cash flows more predictable.
This strategy has resulted in high occupancy rates for these REITs, especially as many of these goods and services are less exposed to competition from online sales than are other types of consumer purchases. Because of the every-day nature of these goods and services, the properties owned by these REITs are located in nearly every community in the country. This provides a broad geographic diversification to the economic exposures in these REITs’ portfolios.
Investors have been rewarded by the success of this strategy, with total returns in the double digits over one-, five- and 10-year horizons—a rarity in today’s investment world. These robust returns have resulted in a low cost of equity capital, allowing the sector to continue to grow, with net acquisitions of $4.3 billion over the past four quarters.
For more information, visit reit.com/retail
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