This Uniquely Positioned Net Lease REIT Pays 5.9%, But Wait For Pullback

Last week I wrote about Hannon Armstrong (NYSE:HASI), a "clean energy" REIT that invests in a wide range of energy-based assets. It was my first article on HASI and the comments generated substantial interest and curiosity.

I'm not sure if the interest in the article had more to with yield (around 7%) or growth potential (the company has a significant pipeline of deal flow), or maybe both.

Collectively, I think many readers are perplexed as to how HASI trades and how to compare the underlying assets. It's quite clear that HASI's assets are much different than most other REIT assets, and while the company does quality as a REIT, the asset base is out of the ordinary.

Forgetting about the assets for a minute, HASI's primary source of repayment is perhaps the strongest differentiator overall. I cannot think of another REIT that has 97% investment-grade rated contracts and based on credit alone, HASI has a very low probability of default. Of course, there is a chance for default and I don't know about you, but I would not know how to repo a fiber optic cable that is under the ocean and attached to the Reagan Defense Center.

For that reason, many believe HASI acts more like a BDC or an MLP, than a REIT.

However, I intend to analyze HASI as a Net Lease REIT. I think that's the best peer group based on the fact that the business model is tenant credit-based and this sector has higher payout ratios (compared with other asset classes). There is no perfect bucket (peer group) for HASI but it works for me.

A REIT Less Focused on Underlying Tenant Credit

As stated, HASI invests (or more accurately finances) in real estate in which around 97% of the portfolio is investment-grade rated. Most Net Lease REITs strive for higher investment-grade tenants, since there is a much lower probability for lease defaults. Although owning a high percentage ofinvestment-grade leases is no guarantee for success, most Net Lease REITs underwrite a lessee's source of repayment as a measure of risk management.

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Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor ...

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