Animal Spirits Podcast - Talk Your Book: The Net Lease REIT ETF

Episode Date: June 10, 2019

On today's Talk Your Book, Michael & Ben sat down with Chris Burbach & Alexi Panagiotakopoulos to discuss investing in REITs and their new net lease REIT ETF. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits talk, your book is brought to you by Fundamental Income. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holt's wealth management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritthold's wealth management may maintain positions in the securities discussed in this

podcast. We sat with Chris Burbank and Alexi Pana Yadacopoulos to talk about a, what I described sort of as like a smart beta ETF in the REIT space, which is definitely something new on the scene. Right. So I actually, after talking to these guys, it kind of felt to me like this is almost like a low-val factor in the reed industry. And so before we get into their fund, we wanted to look at- Actually, I think it's, I think it's quality. Yeah, it could be kind of quality lowball, multi-factor. And I think you actually used the term beta in our talk as a verb. You said, why haven't Reiths been more smart-bated?

But that's effectively what they're trying to do. So the whole REIT industry, so there's a company called Ney-Reit, National Association of Reets or something like that. And they put together a bunch of good data on this. And so there's like almost $1.3 trillion in the Futsi-Nay-Reed All-Reets market cap index. So it's a pretty good size. But the actual commercial real estate size is many multiples higher than that. So it's like they said as of the end of 2017, it was somewhere between $14 and $17 trillion. So obviously commercial real estate is an enormous part of the economy. They also broke it down by total market cap overseas. And I guess that's close to like

$1.5 trillion or something. So the remarket is pretty good size. And there really has only been in terms of index money. But wait a minute. But wait a minute. It says the total equity wheat market cap is 1.1 trillion. Okay. So wait, I have a question. Not all of these reits obviously are publicly traded. I mean, to state the obvious. Right. Oh, that's a good point. Like the non-traded reits that a lot of advisors and insurance people try to sell. Right. So now I don't know what the actual breakdown between public and private is here because obviously there are, what are the, what are the ones that advisors sell when they're trying to earn a huge commission. What are those called? The non-publicly traded reeds. Yes. I guess I don't really understand the difference between those

and how they work, but this is part of an index. So I assume these are all publicly traded, but I guess someone can try. Someone can let us know on that. These are all publicly traded. The biggest holdings are realty income corp. National Retail properties, WP. Carey. So these are all publicly traded. I think the difference with these from most reits is that, and we'll look to all of these charts and PDFs in the show notes, is that these are single tenants leased to individual companies with long-term leases. So in other words, there's kickers such that the lease increases, call it 4% a year, whatever the numbers are. So to your point, maybe the business models are low vile. I'm not sure that the stocks necessarily are, although we did look

back at the top three holdings and they all crashed less than the index. I mean, Don't be mistaken, these things did get annihilated, but it looks like REITs fell almost 70%. Yeah, the Vanguard VNQ, which is kind of the market cap-weighted one, that fell close to 70% in the crisis. Now, backing up just a set, for those who don't know, reits are just, they're called real estate investment trusts. And the way that they're set up from a tax perspective is they get tax preferential treatment if they pay out 90% of their earnings in the form of a dividend. So, reits are equity-like in the fact that they are volatile, but. they also have a relatively high income. So people kind of look at them as something of a hybrid. But I think you, based on the loss characteristics, you still have to assume that these in terms of portfolio

management are in the stock section of asset classes. So when I first met these guys, I was asking them, this seems pretty interesting. How come nobody's done this yet? And one of the things that they mentioned was that this is pretty new, the net lease, just space in general. In 2008, there was only 11 public net lease reits with $19 billion in assets. Today, there's 24 with 140. So the space is up many, many, many times over. And the reed industry only goes back to like the 80s, I guess. And back then, I'm sure it was just a handful of companies. Like the Wilshare reit index goes back to 1979 on Fred. And that's as far back as you can go. But I'm sure this is, this was still a very immature market back there. And these are still relatively new securities.

So we will let Alexi and Chris explain this in greater detail. Hope you enjoy this. We'll be back after for some final thoughts. We are sitting here with Chris Burbach and Alexi Paneotocopoulos, co-founders of Fundamental Income, gentlemen, thank you for coming on the show today. Thanks for having us. Thank you. So give us a general sense of the opportunity set in the commercial real estate space.

Generally, like when people think about REITs or within real estate in general, They tend to think in property types, and so they think about office or retail or industrial buildings and or they just think of it as one big asset class. And the reality is that real estate in general is a lot of different things. And so we focus on a segment of the market that is, it's called net lease. And it's essentially real estate investment companies that buy properties and lease them back to companies over long periods of time. And so what ends up happening is that you have a really, really long term stream of cash flow. And it's much more akin to like investing in fixed income versus in real estate. And so the rest of the real estate is they tend to be operating companies that are investing either developing properties and or buying properties and managing them more efficiently or trying to turn over rents or whatever else and add value to those buildings. And that's not our game. We're more focused on long term cash. So this is a new ETF. I forgot to mention that, which is why you guys are here to talk about it. The symbol is NETL. Is that right? Correct. So you say that this is more bond-like. So the businesses sure are more bond-like because the cash flows are steady. But what about when they're actually freely traded?

So when you look at a, like the stocks don't act like bonds. Yeah, the stocks themselves trade a lot like real estate. And the way that the composition of the shareholder base within real estate is heavily passively managed. So almost half of the shareholder base in REITs is an index funds, whether it's in the S&P 500 or the S&P 500 or 600 or within REITS specific indexes or mutual funds like the VNQ, they tend to invest broad basely. And so when you look at, let me just talk about that for a sec. So they're really only like two dominant ETFs in the real estate industry. How come this space has not been like smart-baited or why are you guys the first, maybe talk about your background and how you got here. Is that the first time beta has been used as a verb? But it's true. They're really not that many factor options in the REIT space. So maybe why is that? And what about your background made you guys want to look at it in a different way? So I think the REIT space has matured quite a bit in the last 10 years and people are still investing in the same way they did 10 years ago. So when you look at NetLease in general, it's a subset, it's a business model focus.

And so it might be smart beta version of investing in REITs in the sense that we're pulling a subset out of the market that has a different way of making money and a different way of generating returns for shareholders. Most people, I think there's a certain inertia in terms of how they invest. And when you look at it, it's a lot of people invest in REITs like it's an asset class and they go, oh, I'll just buy the V&Q. And the reality is that when you have that much that's passively managed, and the other half is an actively managed kind of mutual fund set that is heavily influenced

by funds flows themselves. But second, they operate under a paradigm of what's the value of this reed relative to the underlying properties. And there's this paradigm that exists in terms of, all right, I can't really pay much more than what these properties are worth. Now, what that relevance is to a investor in a stock of whether an office building is worth a five cap to a Russian oligarch versus someone in Middle America investing in a REIT, they have very little to do with each other. And so what we're doing is when you look at that paradigm, what we're trying to do is break it out and say, right, focus on the cash flow. If you're going to invest in a company of any sort, regardless of it's a reader or an operating business, you want to understand the return composition. And with net lease, you have a really predictable business model that can generate a specific return.

One of the biggest things, too, if you look at the broad-based sectors, VNQs, the IYRs, the ICFs, and you go down the mutual fund complexes, everybody is playing the space in the same way. It's all market cap weighted. It's predominantly tilted towards the largest names. Simon Property Group, you go through. It's all Avalon Bay. It's Equinix. It's the biggest names. Why is it advantageous for a company to have a single tenant as opposed to pool their risks? What if the tenant that they sign up with, defaults or business isn't good? Like, why would you not want to pull your tenants? So historically, REITs have been looked at as just real estate owners. Whereas like Chris said earlier, this is more of a cash flow and credit function. And so now the risk of being single tenant versus multi-tenant

is completely different. And so when you look at assignment property group, you have a large property multi-tenant lease to multiple operating companies that are renting space on short-term leases that are constantly rolling. Whereas if your realty income or W.P. Carey, you have hundreds, thousands properties that are leased under long-term leases to individual companies. So meaning that in a potential recession, the assignments of the world, they're going to be more vulnerable because their companies are potentially going to go out of business. They're not going to be able to, with a net lease, there's terms in the contract where rent

will go up 2% of a year or something like that. So how does a typical contract work in the net lease space? So a typical contract is you buy a piece of property, you lease it back over a long period of time, generally 15, 20 years. And that can be, depending on which sector it is, it can be as short as 10. And the tenant is responsible for paying all the property expenses. and there is generally lease escalators built into it. So it'll say initial run is X and it's going to go up Y percent per year and sometimes has CPI factors built in. But the general contract is you know

what your cash flow is going to be over the period of time that you sign up for. So what was it in your guys' background that made you want to develop this type of strategy? What was this born out of? So my background, I was an executive for two net lease rates and most recently a net lease rate called store capital. I was the head of credit and did a lot on the capital market side. And one of the the things that you do as a public company is you look at who your shareholder base is two plus years years ago I was looking at it and noticed how much of our shareholder base was passive. Even at that, it was less than some of the more established companies that have been around a long time that were in. Sorry to interrupt, but those market cap weighted passive REIT funds, they basically have to buy into those

companies, right? Yeah, exactly. So that's why they're taking up a bigger share of those companies. Exactly. And when you have that shareholder base, it's index based, if people are going in and out of the S&P 500 or in and out of the VNQ, immediately that is going to affect the stock price. But if you're not in those at all, and there's money flowing in, you're going to be left behind from a return standpoint. And so one of the things I noticed was, all right, we're underrepresented in indexes. How do you get in indexes? And the reality is you don't get to just call somebody and say, hey, I want to be in your index. And there wasn't a net lease index. More importantly, it really hadn't been fully defined by the market. And so it set me down this path of trying

to figure out how do you create an ETF and ultimately led us to where we're out today is trying to create a channel for people to invest directly in net lease without having to pick stocks. And that's important in that today's day and age, no one's really selecting stocks the way they used to. And so if there isn't a fund that directly invest in net lease, you're going to get left behind or you're just kind of kind of float in a raft in an ocean. And I wanted to create a channel directly to it. One of the biggest things, too, if you look at the S&P, there's one net lease company in it. It's realty income. If you look at the VNQ, roughly 8% of the fund is net lease. You look at other broad base, it's either underrepresented or zero.

And a lot of it is market cap-based or the definition of inclusion does not put them into the index. And so that's what we did is we're setting out to define a sector where if you talk to a reed analyst or a re-trader or just a broad-based research company, they might name eight or nine companies that are pure net lease. But what they leave out is casino reits. They leave out specialty reeds when they are technically specialty or technically casino, if you will, but their business model underlying is net lease.

So we defined that by 24 companies that all have the same business model. So unlike other REIT strategies that define by property type or just being a REIT as a whole, we wanted to look further below it, look at profitability. In fact of the matter is net lease, REITs across the board have gross profit margins of almost 90%, EBITDA margins of almost 80%, and that's roughly 30% higher than any other REIT in the sector. So what is that sort of sector diversification among those 24 holdings? You mentioned a few of them, but how wide is that range? Yeah, the 24 really run the gamut.

Within our index, we've put sector constraints. The top five are weighted or capped at 8%. The remainder are capped at 4%. But within that, we have a constraint for non-diversified reits. So, for instance, Vichy or GLP or MGP, MGP is the MGM essentially reet. They lease property to MGM solely. So 100% of their revenue comes from MGM.

So these might have more attractive qualities. these underlying businesses than a lot of the reeds that we see. How do the yields on these compare to the other ones? Is it comparable or is it? They trade at lower multiples or higher yields than comparable property types like industrial or office or the reed market overall. What's the reason for that? I think a lot of it has to do with who's the active buyers are in the market. So you have people that come from that traditional real estate set that invest close to N.A.V. And so the cap rates and single tenant tends to be higher than say an office building in New York City. And so people just gravitate towards what the property market itself and how it trades.

And so when you look at it, it's like a gravitational force back to NAV. And the reality is, is that if you just take the cash flows that these companies have contractually built out and you put it in front of a fixed income investor, they're going to look at it totally different than, say, a read analyst that is sitting in a mutual fund and it's going to evaluate it a different way. And in my mind, it's cash is cash. And so you've got to focus on the return. And that's what we're really trying to do here is we're trying to get people to get away from behavioral finance and looking at 9 West 57th and walking past a beautiful office building and saying, well, how does it actually make money? And the net lease sector is very dissectable. You can actually define where the returns are coming from and predict how they're going to perform fundamentally. That's for the business. For the business. So in the short term, the stocks can act a lot

differently. Right. And Chris did a study and actually separated out price return from cash. And if you look at the total return of the index, it literally is in lockstep with the cash. Price bounces around. But as total return grows, cash is growing and it's pushing total return. So this is much more of a cash flow expansion versus a multiple expansion, which if you're an investor, that's what you love to hear. Is the hope, too, that you're going to get lower volatility than those market cap weighted? If we can succeed in redefining the market and essentially pulling this out of REITs, I mean, net lease is to us, and we joke about this, but it's a conduit to corporate cash flow. And they identify much more with commercial finance companies than REITs, mainly because if you look at our index on a weighted average basis, there's roughly 10.8 years remaining on the lease. You have contractual rent bumps of roughly one to

one and a half percent a year. And so when you look at it, it's a long-term bond to Walgreens or Home Depot or Dow Chemical or FedEx or Amazon or whoever it might be. And so from a volatility perspective, if we can redefine it and change the way funds flow in and out of it, then yes, it can become a more stable product. So let's talk about that. So the underlying business, again, is sort of bond-like. but where does something like this fit in a portfolio? Are you targeting people that have existing re-holdings? Is this going to replace income products like, say, preferred stocks or MLPs? Like, where does this fit in an advisor or client's portfolio?

It really just depends, and it can fit in all of it. Chris, and my belief is that this is an absolute return strategy. It's long-term total return with current income. And so, yes, it can replace MLPs and preferreds from a risk premium standpoint because you do have the current income factor, but you also are not giving up the upside. Meaning what? From a sense that there's growth, I mean, the dividend, it's not a bond. It's not a coupon. It is a growing dividend. And so people have to remember, REIT is a tax classification, not a business model. And so whether you own an equity or whether you own a REIT, you still own an

equity. You own an equity reed. And so these businesses, like I said earlier, you're able to dissect the cash flow and the return profile. And the equity value is able to grow over time and the dividend is growing over time. So you'd hope that this is kind of in portfolio management terms, kind of in between the stock and a bond asset classes, which is a space where advisors are often coming to us and say, we want something there, but we don't want to pay too much for hedge fund or whatever it is. Well, and so where we are in the cycle, if you really look at it, you have such broad-based exposure to the U.S. economy. So if you look at our index construction and then you look at the underlying securities, there's 24

companies that are all publicly traded, cumulatively $108 billion in market capital. they have 23.5,000 properties that they lease on a single tenant basis to over 2,000 tenants across 40 different industries, across all 50 states and U.S. territories with a little bit of overseas exposure. But it is a domestic product that you have no more than 3.5% exposure to any one company and no more than 20% exposure to anyone industry. And so that's the biggest differentiation between this REITTF and say investing directly into Prologis or Simon property because if you're an industrial reed, all you buy is industrial property. Yes, you may have different tenants and different companies, but all you have is industrial property. Net lease is

completely agnostic to property type and asset classes. So you could do a net lease to an Amazon distribution center, to a Walgreens pharmacy, to a child care center, to a Taco Bell, a Starbucks, a Home Depot. What is the typical timeline for these, obviously it probably changes, but for these leases that these companies are taking? How far out are they looking on these things? average depends on which sector again. So industrial tends to be a little bit shorter, closer to 10 years. And then if you deal with service-oriented businesses like restaurants, they're 15 or 20 years. And the leases generally will have renewal options included in them. So they'll have four or five-year renewal options. And what these companies are trying to do is mimic the ownership of these properties. So they continue to operate there. They want to continue to be there. And they want the optionality to continue to go forward and use them. And so they want to control it. But they also want the efficiency of leasing versus putting their own equity and some debt into it. And that's a big piece that Chris is talking about is predictability is tremendous here. And there's been a huge paradigm shift macroeconomically in our economy where business owners no longer want to own their real estate. You guys are in the

wealth management business. You're not in the real estate business to go buy a building and then sublease it out to tenants and improve it and capitalize it and decide whether you're going to borrow money from JPMorgan or Comerica. So WeWork has been in the news a lot lately. I mean, they don't own their space. Right. And they're subleasing. Part of that, is office demand. They're empty floors and office buildings. And WeWork is able to have smashing success leasing the entire property and then parceling it up. We heard about the new WeWork News where they said they're going to start buying them and kind of leasing them out to themselves because then they know that it's filled basically with their own tenants. It's kind of similar. And that could

absolutely become a net lease because they could go buy an entire building and then they pay one rent to the quote unquote net lease reed. But then they're profiting on the arbitrage of paying one rent and then re-renting to smaller tenants who can't afford to buy the whole building. I think it's important to understand, though. It's the real group that's looking at this, that are operating businesses like restaurants, childcare, they're looking at it as a cost capital comparison between how I have traditionally capitalized my business, which is I go to my bank and I have a line of credit and then I'll go out and get a real estate loan or a mortgage, but I've got to put in 30 or 40 points of equity where if you want to grow your

business and you think you're going to be doing a 20, 25 percent ROE on your operation, you're not going to want to invest that in real estate that maybe is going to be set up to do at 12. You want to get something that's much more oriented towards what you are used to doing. Two-part question. Net lease is a bet on what exactly? What are you exposed to? And how does this go wrong? What are the biggest risks to this product? So number one, it's a bet on the U.S. economy, as simple as it gets. You're investing in companies that we joke about, but we call them the backbone of America. So it's everybody from FedEx and Amazon. to Walgreens and CVS, Walmart, BJs, Taco Bell, Dow Chemical, Nissan.

These are companies that sign these contracts. Absolutely. And Chris, correct me if I'm wrong, but I think the average company in America is double B. Generally. Generally, no matter the cap, so whether they're $100 million or $10 million or billion. And so you're betting on corporations to pay their rents. So I guess the obvious risk is one recession, but that's a risk to any company. Within recession is corporate credit.

So just because the S&P's down 20% doesn't mean Home Depot stops paying their rent. True. So these companies will not be immune to selling in terms of at least their share price will go down just as the same way everything else goes down. I guess the benefit is that if you have the temerity to stick with it, you know that these are businesses that are still contractually obliged to pay their rent. Yeah. So there's definitely equity correlation. The underlying cash flows are not correlated to the broad-based market performance. So you hope that those cash flows act as something of a floor. Absolutely. I'll take the under on that. And what about interest rates? If you look at the business model itself, these businesses are, as sensitive to interest rates as any other business in America. And obviously, like, they act as like a gravitational force on valuations. And REITs in general tend to get hit a little bit with interest rate. But if you look at it, you're going in with a dividend yield that's in place. It has a business model that has growth built into it, which is a counterbalance to increasing interest rates. And so pragmatically, equity cash flow can get hit if you have to refinance your obligations at higher rates. But when you have long term streams of cash flow that are

set out and you have growth built into it. They're not going to get hit any more than any other businesses. So the businesses might be steady. Again, the stocks are a different story, which is what we're investing. I mean, we're investing in the business, but people, we have to be realistic. Right. But that's partly what we're trying to change. I mean, we also have the belief that we do not believe rates are going to have drastic moves over the coming 10, 20 year period. But the same, I'm going to hold you to that. Perfect. At the same time, you have existing leases that on a weight average basis are 11 years and underlying debt on the properties themselves or on the companies that are fixed at six years. And so I don't know where rates are going to be in six years.

At the same time, the underlying cash flows are growing at 1 and 1.5% a year. And these REITs jobs are to grow. And so they're very dynamic companies. And so even if rates tick up, cap rates are going to move. And so now if you have a $1 billion portfolio, your next billion dollars is going to be at an adjusted cap rate. So you're blending it over time. It's not like, hey, we're buying 10 billion today and we're never buying again. So there's constantly role. I mean, these are actively managed portfolios, but they're actively managed by the underlying REIT teams. Chris was head of credit for store capital. And Chris and the management team there, Chris Vogue, they were going through the portfolio constantly combing it and selling

in and out of properties as they needed to, managing exposures. And the REIT equity analysts require the management teams to do that. And that's part of the beauty of a transparent product. So if you look at interval funds or mutual funds or private non-trader REITs, you don't have that same level of accountability. We're on a quarterly basis. Someone's ripping apart your earnings call. All right. What did we miss?

I think at the end of the day, we just challenge people to think for themselves. Years ago, REITs were created as a tax strategy. You guys don't create portfolios because everybody's a C-Corp or everybody's domiciled in Canada. Like, that's not how you invest. And so what we did here was break out a business. business model and show people that, yes, this is real estate. It is a real asset strategy on a fee simple basis. So there is inflation benefits, but you're investing in the equity of a company and that company return is fully dissectable. And so if you break it down in the four parts,

it can be an absolute return strategy. The S&P yields 1.9, 2. This strategy historically, across the board, has yielded roughly 5. And so it's a lot easier to get to 6, 7% return when you're three quarters away there. Did it surprise you guys when you looked into this asset class that there wasn't much in terms of unique structures in place? I mean, absolutely. One of the biggest things, though, is that this sector has grown tremendously over 10 years. In 2008, if you look at net lease as defined, it was 11 public companies for 19 billion in gross assets. Today, it's 24 public companies for 140 billion in gross assets. Last year alone, Chris, they bought 17 billion. So year-over-year growth is tremendous. And because of the paradigm shift in the economy and the way management teams

are running operations, it's going to continue to grow. Research shows there's roughly three trillion of corporate real estate on balance sheets. Over time, that's going to continue to come off corporate balance sheets and be owned by reits. A lot of them are net lease reits because those properties are operationally essential to a business. And so what I would say is think deeper as to why you're investing in a reet. A lot of people just buy the V&Q because that's like, oh yeah, that's our real estate exposure. But they don't necessarily know how a data center reet makes money. And if you think about it, a hotel reet, hotels turn daily, their one-night leases, multi-family turn annually, residential leases, same thing. Office, three to five years,

retail, five to seven, everybody's different. All the businesses are not created equal. And the way a timber reet makes money and the way an office reet makes money are completely different. effectively looking at this like the duration of a bond, which people look at and you're splicing out into that. Exactly. Yeah, but it's also with growth. So if your bond, the best thing that can happen to you is you get paid back. With this, it's you have growth built in and you're also, like you have a business model that's evolving and going to be, give you something that's more like an absolute total return. But going back to what you're saying, are you surprised that it exists? The answer is no. I mean, the way that if you really look at how money's managed today, it's

kind of done in a somewhat archaic way. And it's ripe for innovation. It's right for different ways of investing. And when you look at other income type products and the what's happening in the world and the amount of people that are starting to retire and need income for investing, there's this sensational demand for income. And how do you find income that's sustainable? And this is a product that's, I think, built for that type of audience. It's built for people that can grab on to something that they can count on and also have capital preservation at the same time. One last thing. When you talk about a bond, I mean, you mentioned earlier preferreds. And if we think about high yield as well, worrisome where we are now. When you look at loss rates within high yield and what you're actually

getting, like Chris said, the best case in areas you get your money back. You're a lender. And Nick Murray, be an owner, not a loner. And so when you look at it, it's like, if you're going to take those risks, you better be getting paid for them. And that's the biggest mismatchatch in professional management. I came from distressed debt. Chris managed portfolios off market before coming public. If you're not getting paid for the risk you're taking and you're taking equity risk for debt returns, it's a mouset that's going to fail. And so for us, we look at this as a risk-adjusted strategy saying, okay, you want exposure to CVS. Well, you try to go buy CVS bond one-off, you're not going to get paid for it. Or if you go buy high yield,

they're still yielding 4%. At the end of the day, you're going to get smoked in a default scenario. You have 50% loss rates. If you really break down net lease, like we said, they have 80% EBITDA margins. So think about the way a P&L is constructed. Rent is paid before EBDA. EBDA cannot be created without paying rent. It's a cost structure. So from a seniority of cash flow. It is senior to senior secured or senior unsecured bondholders, right? You just lost 70% of the audience. Well, maybe like you put numbers around it. So if you buy the H. YG, the average credit rating is a single B. Historically, that defaults almost 4% of the time. And on the average, they get about 50 cents on the dollar when it defaults. So if you're going into a high yield that's

trading at six, you're going to lose two of it. Your real return is going to be about a four. if you look historically how net lease is done through the Great Recession, the average loss rates at the first company I was out was 40 basis points a year. Stores average loss rates 30 basis points here. And they're trading at yields that are seven or eight. I'd rather have that. The math's going to work out better for you if you're in that type of product versus this is great because we have like an ETF yield war going on here. I mean, honestly, the ETF space is perfect for this kind of structure where you guys are trying to create this niche. And I think that's like one of the best parts about that the growth in ETFs is that we see unique funds like

this that come to market. The beauty of it too is we're not reinventing a mousetrap. There's no derivatives. There's no leverage. This is long only domestic equities. And if you look at the underlying holdings and the constituents, forget back testing. Forget telling you what the strategy could do if we did this and whatever. Do you look at the top 10 holdings and eight of the top 10 companies over the past 10 years have averaged 10 to 18 percent a year individually? In our eyes, that's excess yield. I don't know a lot of sectors where all 10 do the same exact return. So management teams are great. The model is really why this is working. And the proof is there. And they've been there. So whether you go look at realty income or WP Carey or store capital or

spirit or agree realty and you go down the list, the list stag, great companies that are doing fantastic returns. And all we're doing is shining a light on it saying, hey, pull it out of the VNQ. Let's look at it individually. So we were talking with Chris Burbank and Alexi Pana Yadacopoulos of Fundamental Income. The ticker on the ETF is NETL. That's net lease. Thank you so much for coming by today. Thank you, guys.

Thanks, guys. So if you go to their website and you look at a chart that we'll link to, tenant diversification, when you think of REITs, I think of, I don't know, like Simon properties and malls and giant buildings like that. but some of the tenants are Amazon Home Depot 7-Eleven, the New York Times, camping world FedEx. So this is not necessarily a bet on real estate per se, but maybe just a general bet on the American economy. Yeah, and the fact that these companies will continue to stay in business and pay the rent or pay their leases, it's an interesting idea.

And one of the things about the fact that we're now given more choice with a lot of these different ETFs, and you can be a little more thoughtful. about building your exposure in your portfolios. And I think it's going to take some effort from people if they really want to look into this stuff to understand the differences between these things. So Chris and Alexi and Fundamental Income, thank you for coming on.

Email us Animal Spiritspod at gmail.com and we'll see you next time.