NNN REIT Stock: Stable Dividend But No Alpha (NYSE:NNN) (2024)

NNN REIT Stock: Stable Dividend But No Alpha (NYSE:NNN) (1)

National Retail Properties, Inc., which recently changed its name to NNN REIT, Inc (NYSE:NNN), is a major net lease real estate investment trust ("REIT") with almost 3,500 properties located across the U.S. They focus on single-tenant buildings spread across a number of industries with long leases and built-in rent increases, which makes them relatively safe. NNN's properties are on the smaller side compared to competitors, with an average asset size of just $3 million.

This smaller asset size dictates the kind of tenants they have. You will not find a Home Depot (HD) in NNN's buildings, but rather convenience stores (16.5%), automotive services (13.7%), restaurants (8.9%), Health and Fitness facilities (4.9%), and more. The company is well diversified, with over 400 tenants. Top 25 of them account for over half of ABR (annualized base rent), but no single tenant accounts for more than 5%.

Moreover, I consider many of these industries to be relatively resistant to trends that are currently threatening some real estate - e-commerce, potential recession, etc. This makes the revenues highly visible and predictable - the weighted average unexpired lease term is over 10 years! It is because of this safe mix of tenants and advantageous lease conditions that the REIT has maintained occupancy above 93% even during the 2008 financial crisis. Currently, occupancy is nearly perfect at 99.4% and above the 98% 20-year average.

Despite a tough economic environment, the company performed quite well during Q1 2023, as confirmed by management on the earnings call. In particular, core funds from operations ("FFO") increased by 3.9% to $0.80 per share, driven primarily by same-store NOI growth as well as $155 million in acquisitions (43 properties).

I like the fact that NNN is going shopping now that prices have come down. This is reflected in a relatively high initial cap rate for their acquisitions of 7% (despite a very long average lease duration of 19 years). This cap rate was 40 bps higher than the previous quarter. From what I've heard on earnings calls, most companies feel that cap rates have peaked. NNN's success is partly attributable to their good relationships with existing clients and their sale-leaseback strategy, which is quickly becoming the new standard in the net lease space.

Of course, the company wasn't just buying new properties, but also selling existing ones. They sold 6 properties for a total of $12 Million. What's important is that the cap rate achieved on disposals was below the acquisition by - 6.6% to be exact. This means that NNN is able to effectively recycle capital. The result is quite reassuring when you consider that 50% of sold properties were vacant.

For 2023, management has confirmed their guidance to grow FFO per share by 5 cents, to $3.19. That's an annual increase of less than 2% and below most of its peers, as seen in the chart below.

It's clear that NNN is not a growth name, and most investors don't expect outrageous returns. What they do expect is a stable income. NNN has delivered on this with their growing dividend, with 33 years of consecutive dividend increases. For 2023, the dividend should total $2.22 per share, which translates to a solid 5% yield. The company also has relatively conservative payout targets, with only 67% of FFO being paid out. That leaves the company with almost $50 Million each quarter to reinvest. Going forward, I don't expect the dividend to grow more than FFO, so I wouldn't count on growth of more than 1-2% per year. At the same time, though, this is a dividend you can count on - given the low payout ratio and conservative portfolio of properties with really solid lease terms.

Of course, no investment comes without risk, and the risk for NNN mostly has to do with debt. Their net debt represents 40% of gross assets and stands at 5.3x EBITDA. That's reasonable, especially when you consider interest coverage of 4.7x in Q1 2023. I also like the fact that they have no material debt maturities until late next year, and they have abundant liquidity, with almost a billion dollars remaining on their line of credit. Management summarized their liquidity position as follows: "NNN is in a terrific position to fund the remaining of our 2023 acquisition guidance."

With a 5% dividend and sub-2% growth, we need to buy the stock at a discount to reasonably expect to beat the market and generate alpha. Fortunately, given the current environment, we might be able to do just that. Currently, the stock trades at 13.8x FFO, which is considerably below its long-term average of 17.7x and also below peers such as Essential Properties Realty Trust, Inc. (EPRT) or Realty Income Corporation (O), which trade around 15x FFO.

While it's true that O's reputation is better and EPRT has faster growth prospects, I do see some upside for NNN here. Assuming a 15x multiple leaves us with 8% of upside over the next two to three years. Added to dividend and growth, this will likely get our total return to 8-9% per year, which isn't great, but certainly not bad either considering the stable dividend.

As such, I think NNN can make sense for income investors seeking dividend income. NNN REIT will likely deliver on this front as it has for the past 33 years. For investors that are seeking alpha, however, the stock isn't cheap enough to a point where we could reasonably expect to beat a broader market index. That's why I rate NNN REIT, Inc as a hold here at $43.60 per share and will only consider upgrading NNN stock to a buy if it drops by at least 10-15%.

This article was written by

Deep Value Explorer




Hey everyone and welcome to the Deep Value Explorer page! I am a business student with a passion for REIT. I've been interested in the topic for about 2 years and I would like to share my insights and findings with you here. With that, follow to find undervalued gems!Disclaimer - I am associated with another SA contributor David Ksir. I am not a financial advisor and the information on my page is solely for illustrative purposes. Always do your own research before investing.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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I'm an enthusiast with a deep understanding of real estate investment trusts (REITs), particularly in the net lease space. I've been following the industry for several years and have a keen interest in analyzing undervalued gems. Now, let's delve into the concepts discussed in the article about NNN REIT, Inc.:

  1. NNN REIT Overview:

    • NNN REIT, formerly National Retail Properties, is a major net lease REIT listed on the NYSE under the symbol NNN.
    • The company recently changed its name and has almost 3,500 properties across the U.S.
    • Specializing in single-tenant buildings, it focuses on various industries with long leases and built-in rent increases.
  2. Property Portfolio:

    • NNN's properties are relatively smaller, with an average asset size of $3 million.
    • Tenant diversity includes convenience stores (16.5%), automotive services (13.7%), restaurants (8.9%), Health and Fitness facilities (4.9%), among others.
    • The company boasts over 400 tenants, and the top 25 contribute to over half of the annualized base rent (ABR).
  3. Resilience to Market Trends:

    • Industries targeted by NNN are considered resistant to trends affecting some real estate sectors, such as e-commerce and potential recession.
    • The weighted average unexpired lease term is over 10 years, ensuring revenue visibility and predictability.
  4. Performance Metrics:

    • NNN has maintained high occupancy rates, even during economic downturns. Currently, occupancy stands at 99.4%.
    • Q1 2023 performance indicates a 3.9% increase in core funds from operations (FFO) to $0.80 per share.
    • Successful acquisition strategy is evident in a relatively high initial cap rate of 7%.
  5. Dividend and Growth:

    • NNN is not positioned as a growth stock, but rather as a stable income investment.
    • The company has a track record of 33 consecutive years of dividend increases.
    • Dividend for 2023 is expected to be $2.22 per share, translating to a 5% yield.
  6. Financial Health and Risks:

    • NNN's net debt represents 40% of gross assets, with a reasonable net debt to EBITDA ratio of 5.3x.
    • The company has a strong liquidity position, with almost a billion dollars remaining on its line of credit.
  7. Valuation and Recommendation:

    • The stock is currently trading at 13.8x FFO, below its long-term average of 17.7x and peers like Essential Properties Realty Trust, Inc. (EPRT) or Realty Income Corporation (O).
    • The analyst rates NNN REIT as a hold at $43.60 per share, suggesting consideration for buying if the stock drops by at least 10-15%.

In conclusion, NNN REIT is positioned as a stable income investment with a focus on dividends and a conservative portfolio. The article suggests potential for total returns of 8-9% per year when factoring in dividends, growth, and possible stock appreciation, making it suitable for income investors. However, for those seeking alpha, the stock may not be cheap enough unless it experiences a significant price drop.

NNN REIT Stock: Stable Dividend But No Alpha (NYSE:NNN) (2024)


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