National Retail Properties: Why Not Buy The 6%+ Yielding Preferred Stock?

| About: National Retail (NNN)

Summary

National Retail Properties is up ~15 percent YTD.

However, the common stock has gotten too expensive at ~20x 2016e AFFO, IMO.

An alternative to the common stock is the REITs Series D Cumulative Redeemable Preferred Stock.

I discuss the pros and cons of investing in National Retail Properties' preferred stock.

The Series D preferred stock yields more than 6 percent.

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Image Credit: National Retail Properties

Real estate investment trust National Retail Properties, Inc. (NYSE:NNN) has had a good run in 2016. The REITs stock is up ~15 percent since January whereas the S&P 500 stock market index gained just about 1 percent so far this year. The outperformance is especially remarkable considering that stocks had the worst start to a year ever.

National Retail Properties' YTD performance is worthy of applause, but it also raises questions about whether (income) investors should continue to buy into the REIT's stock at elevated valuations. In the last piece I penned on the REIT, titled "National Retail Properties: Overvalued", I drew attention to the fact that the real estate company was selling for a rich price: ~20x 2016e adjusted funds from operations.

National Retail Properties is not the only REIT that comes with a big price tag: Realty Income (NYSE:O) also sells far above its historical valuation range, at more than ~21x this year's adjusted funds from operations. Since the surge in REIT common stock prices has driven down National Retail Properties' and Realty Income's effective dividend yield below 4 percent, it does make a lot of sense to pay a little more attention to REIT's preferred stocks, which look like a good deal for income investors right now.

Buy National Retail Properties' Preferred Stock

Luckily, there is a way of investing in National Retail Properties for income investors who don't want to pay such a high price for the REIT's common stock. The alternative is to buy National Retail Properties' 6.625% Series D Cumulative Redeemable Preferred Stock (NNN-PD). National Retail Properties' preferred stock comes with a couple of advantages and disadvantages that are listed next.

Advantages

Advantages that come with investing in National Retail Properties' preferred stock include:

  • The Series D preferred stock yields 6.37 percent at the time of writing, with shares selling for ~$26. The preferred stock pays a quarterly dividend of $0.4141, or $1.66 annually. National Retail Properties' common stock, on the other hand, yields 'only' 3.77 percent. In other words, buying the preferred stock gives income investors a 260 bps yield advantage.
  • The preferred stock carries a much lower risk than the REIT's common stock.
  • Buying the preferred stock can result in better portfolio protection since it is (much) less volatile than the common stock.

Disadvantages

The most obvious disadvantages include:

  • National Retail Properties' preferred stock does not pay a 'growing' dividend. The preferred stock will continue to pay 'only' $0.4141/share whereas the common stock dividends will most likely continue to grow in the future.
  • The Series D preferred stock has limited upside potential whereas the common stock is more sensitive to positive catalysts such as good earnings reports, rating upgrades, dividend increases etc.

Your Takeaway

With REITs bordering on being very expensive, it is a good time to shift the focus over to National Retail Properties' preferred stock, which has a distinct and significant yield advantage over the common stock. The preferred stock yields ~260 bps more than the common stock which is a big deal for valuation-sensitive income investors. Buy for income.

Disclosure: I am/we are long O.

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.