National Retail Properties (NYSE:NNN) reported a solid fourth quarter that saw shares rise materially on the day. Since bond prices were also rallying, the increase in share price appears to be influenced by a mix of the increased guidance for FFO in 2016 and the appreciation in high quality triple net lease REITs which rallied with treasuries.
Fourth quarter AFFO came in at $.57 per share which was in line with analyst estimates and easily covered the most recent quarterly dividend of $.435 per share. Portfolio occupancy, an important factor for the performance of a REIT, was 99.1% at the end of the year and at the end of September 2015. At the end of 2014 it was "only" 98.6%.
During the year they also secured a substantial amount of new financing with $328 million raised from issuing new shares and $395 million raised from issuing notes paying 4% interest with a ten year maturity. The combination indicates a shift to using slightly more debt financing which should strengthen the growth rate in non-GAAP metrics like FFO per share. They invested $726 million in 221 new properties, which is extremely similar to the total amount of capital they raised. Effectively they were doing a solid job of raising capital and putting it to work in investments that would earn a higher return than what was indicated by their current capital structure. In addition, they paid off a loan for $150 million that was bearing interest at 6.15%. Since the loan was replaced with a larger loan at a lower rate, the net impact should be favorable for shareholders.
At the end of the year they also had $650 million available on bank credit facilities which should provide them with substantial negotiating power to work on finding new deals in a market where most companies are seeing share prices tank as the United States grapples with the concept of another recession. The high level of available funding is critical to management's ability to effectively negotiate attractive purchases because it allows them to close on deals without a substantial delay. If that credit facility is used in the near future, I wouldn't be surprised to hear the company announce issuance of new shares to pay off the loan so they would have it available for further negotiations.
FFO Yield and AFFO Yield
At the current prices with the full year figures finally known, NNN is trading at an FFO yield of 4.66% and an AFFO yield of 4.91%. It is worth noting that Realty Income Corporation (NYSE:O) is also trading at an FFO yield of 4.66% presently. However, if we use recurring FFO the value for FFO yield would rise to 4.82%. A substantial difference in these values was a tax charge associated with the change of the status of some subsidiaries. This was a non-recurring charge, but it did not fall under the costs that are typically added back to compute FFO.
All around I think the recurring FFO value here is more relevant to the long term projections for the company because I see no reason to expect the other charge to recur.
The best of breed triple net lease REITs have been on a tear in January as they soared with treasury prices. Several REITs have suffered substantially so far this year; it just hasn't been an issue for National Retail Properties, Realty Income Corp, or STORE Capital (NYSE:STOR). There are probably a few others I've left out that deserve mention. These are simply the three that I keep at the top of my list as best of breed candidates.
Despite the exceptional quality of NNN's business and the revenues that I believe are highly sustainable, I'm becoming concerned about share prices. I love the business model for NNN, but there is substantial risk of a dip in bond prices that would send yields climbing and that could cause these REITs to take a hit.
NNN had a solid fourth quarter where they met analyst estimates on AFFO. Their FFO yield metrics will look relatively weaker due to the inclusion of non-recurring charges, so I would prefer the recurring FFO metrics for analysis. While the rest of the economy has been tanking, a few select REITs have delivered excellent performance. They have rallied in line with treasuries, but the yields are reaching low levels due to the strong price performance.
In short, the company has done precisely what they should be doing. They managed the portfolio intelligently and kept vacancies to a minimum. They issued equity and debt at prices and yields that were attractively relative to what they could earn on new investments made with the capital. Their emphasis on quality tenants allows them to trade at a premium when most of the market is selling off, but the decreasing yields should be on each investor's mind. I'm long NNN and STOR, but I'm contemplating the max price I'm willing to hold through.
Disclosure: I am/we are long NNN, STOR.
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.
Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.