Covenant strength is the robustness of a promise implied by a lease contract with a tenant. In plain English, it is a measure of how likely a given tenant will cough up when their rent is due.
If tenants don’t pay – either because they can’t or won’t – then a real estate investment trust (Reit) does not have a business. It has assets it can sell or re-let to other tenants, but re-letting is not a given and having assets is not the same as generating revenue or more importantly generating a profit.
Despite its obvious importance, you’d be forgiven for not having heard the term before. Covenant strength often goes amiss in discussions about a Reit's investment qualities, in favour of reported numbers which, though vital, don’t tell the whole story.