Where’s the Yield? Fixed Income vs. Net Lease

Net lease real estate assets leased to investment grade tenants and corporate bonds issued by investment grade companies often feature similar investment profiles due to their low tenant/issuer default risk, current yield generation, and visibility into long term cash flow generation (often 10-20 years). Both investments involve an agreement between two parties to borrow something in exchange for monthly payments. In the case of a net lease asset, the tenant essentially borrows a building and makes monthly payments to the landlord. In the case of a bond, a borrower receives a principal amount and agrees to make monthly interest payments and return principal. This passive payment structure makes both investments attractive to investors focused on generating stable cash flows and seeking predictable yield.

Both net lease real estate and corporate bond risk profiles are also highly dependent on the tenant or issuer’s credit quality. If an issuer defaults, the fixed income investor would lose future coupon payments and likely their original investment or principal. If a tenant defaults, the landlord would not receive future rent payments until a new tenant leases the facility. Thus, investors in both asset classes often pay a premium for investment grade tenants/issuers due to their lower default risk.

This newsletter highlights the similarities and differences between holding net lease real estate and corporate bonds.