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Recently I wrote an article (for Seeking Alpha) on Extra Storage Space (EXR), a well positioned self storage REIT with over 800 properties under management. As noted in the article, Extra Storage Space – Diversify Your Portfolio with a Self Storage Leader, Extra Space represents a diverse self storage portfolio with solid acquisition, development, and third party management prospects.

Although self storage is a fundamentally “safe” asset class, I consider the Single Tenant Net Lease (STNL) segment to be THE safest classification of all. Historically, the Single Tenant Net Lease (STNL) category has seen the least amount of tenant defaults and consequently the most sustainable and reliable revenue streams.

Due to high occupancy rates, this ultra safe asset class provides a sustainable yield compared to the other major asset classes. As you can see below, the Single Tenant Net Lease (STNL) classification offers the strongest average returns and the lowest beta of any sector in the publicly traded REIT industry:

Comparative Statistics for Public Traded REIT Industry from January 1994

Average Returns

Beta

Free Standing Retail (STNL)

14.24%

0.505

Self Storage

14.67%

0.513

Health Care

12.93%

0.567

Regional Malls

12.31%

0.831

Industrial-Office

10.53%

0.836

Shopping Centers

9.53%

0.717

(Source: NAREIT)

By comparison, the Dow Jones Total Market (formerly Dow Jones Wilshire 5000) index of the broad stock market had average total returns of only 8.37% during the same period above.

One of my favorite Single Tenant Net Lease (STNL) REITS is National Retail Properties, Inc. (NNN). Founded in 1984 and headquartered in Orlando, Florida, NNN acquires, owns, manages, and develops single tenant properties.

With 1,037 properties in 43 states, this net lease advisor focuses on purchasing and financing its growth strategy with facilities leased to many of the “best in class” retailers, convenience store operators, and restaurants. NNN was established in 1984 as Golden Corral Realty, Corp. and later organized as a REIT in 1998. Subsequently, the company acquired Captec Net Lease Realty (a public REIT) allowing total assets to exceed $1 billion. Currently (10-10), the REIT owns over $2.6 billion in assets with shareholder equity of around $1.54 billion.

In addition, the company has a modest leverage ratio with only $971,322 million in debt – making its investment grade (BBB-S&P) capitalization most conservative at 37% debt/assets. Also, as described as “fortress-like”, NNN has zero drawn on a $400 million line of credit (as of 11-10) as acquisitions have been funded by lower cost capital and also deployed from property sales (dispositions). According to an article in REIT Magazine (Nov-Dec 2010 issue), NNN sold over $1 billion of properties in the last five years and the company’s CEO, Craig Macnab, stated that “property sales are our source of capital…this presents us with a lot of opportunities to be selective and prudent in acquisitions.”

In terms of net lease investing, I like to describe the balanced strategy as the 3-legged stool model. In considering investment strategies, every investor should consider an allocated and balanced portfolio of CREDIT, INCOME, and GROWTH. All three of these legs (criteria) should support the stool such that there is a balanced portfolio objective. In my opinion, NNN represents a well balanced REIT with the following supporting criteria (legs):

CREDIT - With just under 12 million square feet and more than 275 tenants in 34 different industries, NNN provides facilities to many nationally recognized brands. This diversification of credit tenants allows minimum exposure for tenant default and mitigates risk relative to industry related concentration. For example, NNN’s restaurant category (includes fast food and casual dining) comprises under 12% of the REIT’s portfolio.

INCOME (Lease Term) – Unlike many other real estate sectors, the net lease category is much less volatile due to the nature of the long tern net lease structures. Many malls, shopping centers, office buildings, and apartments have been less stable die to exposure to shorter term leases. With 1,037 assets under management, NNN has an average lease term of 12 years and the company’s portfolio is over 96% occupied.

GROWTH (Dividend) – For most investors, the last leg to the stool is the most important leg. Certainly, the credit and lease terms are a must; however, the dividend (especially for REIT investors) is most relevant. Comparatively speaking, NNN enjoys one of the best dividends in the REIT world. The company’s 6.1% yield has become very popular as NNN has steadily increased its dividend for over 20 years. Here is an annualized comparison of NNN and other market indexes.

Annualized Total Return Comparison (*)

1 year

3 year

5 year

10 year

NNN

25.00%

8.40%

11.90%

17.60%

S&P 500

10.20%

-7.10%

0.60%

-0.40%

S&P 600

14.20%

-4.20%

1.60%

6.20%

Morgan Stanley REIT Index (RMS-G)

30.50%

-6.10%

1.90%

10.20%

(*) Total return comprised of share price and dividend paid

Here is a comparison of NNN’s current yield and several other public REITs:

Comparison of Public REIT Dividend History

REIT Name

Classification

Symbol

Annual Yield

5-Year Average

National Retail Properties, Inc.

STNL

NNN

6.10%

6.90%

Realty Income Corp.

STNL

O

5.00%

6.50%

Prologis

Industrial

PLS

3.00%

5.60%

Equity One

Shopping Center

EQY

4.80%

NA

Simon Property Group

Mall

SPG

3.10%

4.00%

CBL Property Associates

Mall & Shopping Center

CBL

4.50%

8.60%

SUMMARY

National Retail Properties, Inc. (NNN) delivers strong leadership evidenced by a superior track record combined with an enviable 6.1% dividend. Also, NNN is one of only 156 out of the more than 10,000 publicly traded companies to have increased dividends for 20 or more consecutive years. With a diversified (1,037 assets), well-balanced (credit, income, and growth) business model, this Single Tenant Net Lease REIT should be a recognized candidate to your overall investment portfolio.

Tune into National Retail Properties 4th Qtr. Earnings Call scheduled for Thursday, February 17th at 10:30 EST.

Source: National Retail Properties: A Well Balanced REIT