Building for the future: The income potential of real estate

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. 

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.

• 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.

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.