As markets have continued to shift over the past several years, we believe investors may need to reconsider their approach to portfolio construction. Assets from the private markets, such as private real estate, may offer a potential solution to help investors pursue better outcomes including diversification, reduced volatility, and attractive current income.
Seeking consistent returns has become more difficult with a traditional portfolio.
Portfolios limited to public equity and public fixed income have struggled to deliver on the traditional benefits of a balanced portfolio as stocks and bonds have demonstrated positive correlation in each of the past three years.1
Income remains a critical component of a diversified portfolio, but investors may need to look outside of traditional sources.
Institutional investors allocate to assets from the private markets, such as private real estate, which typically deliver returns in the form of income.2
Triple net lease offers a differentiated approach to income investing by creating cash flow from private real estate.
Blue Owl’s triple net lease strategy seeks to provide a differentiated stream of tax-advantaged income over the long term.
Regardless of age, net worth, or investment experience, investors tend to look to the markets to help grow their wealth and build towards financial goals. Today’s market backdrop can be a challenging place to do that as inflation persists, uncertainty about rates continues, and cross-asset correlations remain elevated. We believe taking a page from the institutional playbook and including assets from the private markets, such as private real estate, is essential for investors as they pursue their long-term goals. In this piece, we will aim to dig into this opportunity.
Smart money – investing in real estate like an institution
Though the specific investment goals of an institutional investor may differ from those of individuals, the roadmap to get there should have some similarities. To effectively plan for their future needs, institutions look to allocate to strategies that can potentially deliver consistent, predictable returns over the long term. For 80% of institutional investors today, that means investing outside of public exchanges2. Institutions allocate to these assets for their ability to provide diversification, attractive returns, and lower volatility – all qualities that can aid investors’ portfolios as well.
One of the most popular asset classes among institutions is real estate, with more than half of institutional investors allocating.2 The private real estate market spans a broad array of industries and building types and presents a variety of investible strategies. Institutions invest in private real estate because it can play a hybrid role, serving multiple purposes in a portfolio. Income-producing real estate from core and core-plus can be supplemented with value-add and opportunistic strategies, aligning institutional portfolios with their objectives – by focusing on stable income to ensure they have capital on hand to fund the future needs of the organizations they serve, while also participating in the potential for upside.
We believe there are similar benefits for individual investors as well. By anchoring their allocations with income-producing strategies, investors can potentially add much-needed stability to their portfolios in times when public markets are not moving up and to the right.
| Core | Core plus | Value-add | Opportunistic | |
|---|---|---|---|---|
| Cell label Risk of loss | Cell label Much lower | Cell label Lower | Cell label Medium | Cell label Higher |
| Cell label Return composition | Cell label Current income | Cell label Current income + capital appreciation | Cell label Current income + capital appreciation | Cell label Capital appreciation |
| Cell label Asset strategy | Cell label Buy and hold | Cell label Light renovations, re-leasing | Cell label Heavy renovations, major re-tenanting | Cell label Ground up redevelopment, major rehabilitation |
| Hold period | 10+ years | 5-7 years | 5-7 years | <5 years |
A differentiated approach to real estate
The inflationary environment that markets have experienced over the last two years has presented challenges for real estate managers. Rapidly rising expenses, including repairs, maintenance, insurance, and real estate taxes, can eat away at the rental payments that property owners receive from their tenants, effectively reducing the net income on the bottom line. There is, however, an approach to real estate investment that seeks to provide insulation from these hurdles.
Blue Owl Real Estate is a leader in triple net-lease real estate investing, providing flexible real estate solutions to tenants while offering investors access to credit-oriented real estate strategies.
A triple net lease refers to a net lease in which the tenant is responsible for the taxes, insurance, and maintenance of a property throughout the life of the lease; whereas a gross lease the landlord agrees to pay for all expenses that come with the property. Blue Owl, as the property owner, receives rent payments, net of expenses, and passes the income through to investors in the form of monthly distributions. Additionally, structured into all our lease agreements are contractual rent escalators, which seeks to increase the cashflow coming off our properties throughout our lease, regardless of market conditions.
Blue Owl's Triple Net Lease real estate strategy provides several portfolio benefits:
- Long-term, predictable income – The long-term nature of our leases, which are typically 15+ years, creates a contractual stream of income that gives us high visibility into future cash flows.
- Capital preservation – Blue Owl leases exclusively to high-quality businesses, conducting a rigorous credit evaluation process and employing post-transaction monitoring to increase the likelihood that tenants will be able to make rent payments for the life of the lease.
- Hedge against inflation – The net lease structure shields our investors from the expense growth that comes with inflationary environments. Additionally, annual rent escalators are built into our lease agreements, helping our income stream to keep pace with inflation.
- Tax advantages – Our real estate strategy is accessed through Real Estate Investment Trusts (REITs), which are a type of investment fund that can invest in private real estate. REITs offer unique tax advantages because a majority of their distributions are treated as return of capital (ROC) — meaning they are tax deferred until redemption. REIT investors also receive a 20% reduction in their individual tax rates on any distributions that do not qualify as ROC.
These benefits can provide consistent income with less public market correlation, bringing ballast to investor portfolios. The ability to deliver on these potential benefits for investors is where the experience of the manager is critical. Blue Owl’s market-leading real estate platform brings scale, experience, and a demonstrated track record to investors through innovative and accessible fund structures designed to help meet their needs.
Meeting the moment with private markets
A well-balanced portfolio today should seek to provide principal preservation and a hedge against volatility – we believe solutions to achieve this may be found outside of public markets. Accessing income-oriented private real estate through a triple net lease strategy can offer high and recurring tax-efficient current income while providing diversification with exposure to private markets.
We believe consistency of returns has become increasingly valuable in today’s market environment. Blue Owl’s net lease real estate strategy seeks to provide investors that stability.
Past performance is not a guarantee of future results. The views and opinions expressed herein are those of Blue Owl and are subject to change as markets and other conditions fluctuate. Blue Owl is under no obligation to update or keep current the information presented.
Please see endnotes and important information at the end of this page.
