Justin Arasin, Head of Capital Formation and Product Development for U.S. Realty Advisors, LLC, joined Keith Black, Managing Director of RIA Channel, to discuss investments in triple net lease real estate.
The democratization of alternative investments enables high-net-worth individuals to access private markets. Over the last twenty years, investors have been educated on the value of alternatives in portfolio construction. Structures are evolving to provide favorable tax reporting and liquidity terms.
From 2020 to 2022, individual investors increased their allocations to alternative investments threefold, moving from a 60% equity and 40% fixed income allocation to one with 40% allocated to equities and fixed income and 20% in alternative investments (40/40/20). Today’s discussion is not about learning the value of private markets but about where private markets fit in portfolio construction and what assets are sold to make room for alternative allocation.
Arasin notes that investors may want to consider allocations to net lease real estate, as it can address three primary concerns expressed by today’s investors. These concerns or goals include income that is tax-advantaged and protected from inflation, assets that can diversify portfolios and provide ballast, and assets that can experience capital appreciation over time. Net lease real estate properties feature long-term leases of 15-20 years or longer, with rents scheduled to increase over time. Tenants of net lease properties are also responsible for all expenses, such as maintenance, insurance, and property taxes. Net lease real estate tends to have a low correlation between returns to equity and fixed-income investments.
Prudent investors may be able to purchase high-quality assets today at up to a 25% discount to recent valuations. Cap rates were stable near 6% from 2014 to 2021, but recently moved toward the top of the cap rate range over the last twenty years, above 8%. If and when interest rates decline, cap rates on net lease real estate may decline, providing investors with capital appreciation. USRA is especially constructive on industrial and manufacturing properties, with key demand drivers coming from onshoring and fiscal policy initiatives.
Investors may wish to consider a barbell of liquidity within the alternative investment allocation, mixing capital call/drawdown structures with perpetually offered funds.
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