No charge-off needed
The Net Lease Observer often focuses time and attention on the equity side of net lease investing; however, experienced practitioners know the debt markets (availability and pricing) drive net lease activity.
Few private lenders disclose details on performance while listed banks rarely report details on specific asset classes as granular as single tenant net lease.
First Savings Bank, subsidiary of First Savings Financial Group (NASDAQ: FSFG), is one of the few financial institutions to publicly report its single tenant loan exposure on a standalone basis - net lease represents nearly 40% of its total loan book, or $751 million.
FSFG describes its net lease lending program in its latest Form 10-K:
“During 2013, we began a commercial real estate lending program that is focused on loans to high net worth individuals that are secured by low loan-to-value, single-tenant commercial properties that are generally leased to investment grade national-brand retailers…(“NNN Finance Program”). This program is designed to diversify the Company’s geographic and credit risk profile given the geographic dispersion of the loans and collateral, and the investment grade credit of the national-brand lessees.
The terms of the loans are generally consistent with the aforementioned terms of in-market commercial real estate loans; however, these cannot exceed 70% loan-to-value and loan maturities cannot exceed the expiration of the underlying leases…The average size of these loans originated was $1.8 million…”
FSFG’s single tenant net lease loan book is split 60%/40% between maturities of less than 5 years and over 5 years, respectively. Additionally, 80% of loans with a disclosed interest rate structure are fixed (rate structures on loans maturing in less than one year are not shared).
Over 55% of the current outstanding loans were originated from 2022-23.
Given the targeted borrowers are high net worth and the loan is generally secured by properties net leased to investment grade tenants on a long-term basis, it’s not surprising performance is strong. FSFG has experienced zero charge offs in its net lease book since it began a breakout in 2018.
The allowance for credit losses within the single tenant loan books sits at just $4 million, or 54bps on loans outstanding. While 37% of the bank’s outstanding loans sit within net lease deals, the category accounts for just 19% of the allowance for credit losses.
At the risk of stating the obvious, FSFG’s net lease loans have benefited from high borrower and collateral quality despite the recent surge in inflation and interest rates (and volatility). Hopefully, more lenders will disclose net lease segment performance as the asset class continues to expand its reach…
Blue Owl outlook
Blue Owl Capital (NYSE: OWL) released its 2025 Real Estate Outlook listing three major investment opportunities within private real estate:
European sale/leaseback transactions
Real estate credit
Digital infrastructure
OWL raised total private capital over $11 billion in the last two years alone. The immense investment required for planned data center infrastructure puts companies with a scale advantage in the driver’s seat, per the report. Additionally, the broader need for capital (including debt) has only increased as banks have pulled back just in time for $3 trillion of CRE maturities.
Blue Owl’s report concluded with optimism for current investments noting, “Today’s buying opportunity has the potential to yield some of the best performing vintages for real estate investments we have seen in more than a decade.”
Observer update
The Net Lease Observer will transition its platform and ‘back of the house’ systems from SubStack to beehiiv in the coming days as we continue to expand and enhance our content / offerings.
-Sean Hostert