National Retail Properties: Buy This 'Safe Haven' REIT With A 3.8% Yield When Markets Crash

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Achilles Research


  • National Retail Properties looks like a good investment for investors that want to prioritize income stability in a volatile market.
  • I expect NNN to outperform during periods of heightened market volatility due to its predictable lease business.
  • National Retail Properties' AFFO multiple is a bit stretched today, which is why I recommend to wait for a drop below $50.
  • An investment in NNN yields 3.8 percent.

National Retail Properties, Inc.'s (NYSE:NNN) common stock is a compelling income vehicle for investors that want to rotate money into safer income vehicles in light of heightened market volatility and growing downside risks. The yield curve inverted further this week, flashing a strong recession signal. Investors that want to move money into higher-quality income vehicles with predictable businesses and exceptional dividend profiles may want to consider National Retail Properties once the share price drops below $50.

National Retail Properties - Portfolio Overview

National Retail Properties is structured as a real estate investment trust and invests in high-quality commercial properties subject to long-term net leases across the United States. At the end of the June quarter, the real estate investment trust owned 3,043 commercial properties in 48 states, reflecting approximately 32.1 million square feet.

Here's a location map.

Source: National Retail Properties Investor Presentation

National Retail Properties derives the majority of its rental revenues from the state of Texas, which accounts for 17.4 percent of the REIT's annualized base rent, which is almost twice as much as the second-largest state, Florida, generates.

Here are National Retail Properties' top 10 states and their revenue contributions.

Source: National Retail Properties Earnings Release

Looking into National Retail Properties' industry diversification, we can see that convenience stores, which tend to be recession-proof, make up the majority of the REIT's annualized base rent, 17.7 percent. Nonetheless, National Retail Properties is diversified across multiple industries including equipment rental, health and fitness centers, and medical service providers.

Here's an industry breakdown.

Source: National Retail Properties

Portfolio Quality

National Retail Properties has exceptional portfolio quality, which is one of three reasons (the other two being 1. A high degree of portfolio diversification, and 2. A very conservative AFFO payout ratio) why I recommend NNN to investors that want to hedge their portfolio against a U.S. recession.

National Retail Properties' occupancy rate has never dropped below 96.4 percent, even during the devastating real estate-led recession of 2008/09. This indicates a HIGH level of portfolio quality.

Source: National Retail Properties

The weighted-average lease term for National Retail Properties' lease portfolio was 11.4 years at the end of the June quarter. The majority of leases expire only after 2029. Long-duration leases stabilize NNN's portfolio and translate into cash flow visibility, which is something investors will appreciate during times of extreme market volatility.

Source: National Retail Properties

Very Conservative AFFO Payout Ratio

The third reason why I recommend National Retail Properties to income investors is because the REIT has historically had no problems coverings its dividend payout, and then some. In the last twelve quarters, National Retail Properties earned an average of $0.64/share in core FFO and an average of $0.65/share in adjusted FFO while the average dividend payout was just $0.48/share.

The implied AFFO payout ratio over the last three years was just 73 percent, which is exceptionally low.

Source: Achilles Research

National Retail Properties is a preferred income vehicle for DG investors that want to bet on a growing stream of dividend income over time. National Retail Properties has grown its dividend for 30 years straight, which makes the commercial property REIT a shining example of shareholder-orientation.

Here's National Retail Properties' 10-year dividend growth rate.

ChartData by YCharts


National Retail Properties has guided for $2.76-$2.81/share in adjusted funds from operations in 2019. Since shares currently sell for $54.60, the guidance effectively implies a ~19.6x 2019e AFFO multiple. I generally don't like to pay ~20x AFFO for an income vehicle, which is why I would wait for a drop below $50 before gobbling up some (more) shares. A $50 entry price implies a 17.9x 2019e AFFO multiple and a 4.1 percent forward dividend yield.

Risk Analysis

National Retail Properties, like all REITs, is vulnerable to a cyclical downturn that could negatively affect the financial health of some of its tenants. Retail companies, in particular, are at risk of reducing their store counts during recessions which is a risk factor investors need to account for. On the other hand, National Retail Properties has had exceptionally good occupancy rates, even during the last recession, so the risk is maybe not as large as some investors think it is.

Over the long haul, National Retail Properties has outperformed major stock market indices, which speaks to the value of an investment in NNN during times of heightened market volatility.

Source: National Retail Properties

Your Takeaway

National Retail Properties, as far as I am concerned, is a "safe haven" investment that income investors may want to buy in case they expect more market volatility.

Three reasons stand out why investors may want to consider NNN during more turbulent times in the stock market: 1. The REIT has a high degree of portfolio diversification along multiple categories, which limits cash flow risks; 2. NNN has superb portfolio utilization; and 3. A very conservative AFFO payout ratio points to more dividend upside going forward.

I do not like the valuation as much as I like the business, to be honest, but I believe there is a good chance that the share price could drop below $50 during the next market drop. Strong Buy during the next market hiccup.

This article was written by

Achilles Research profile picture
I am a dividend investor and look for undervalued investments in the stock market. I identify misunderstood and undervalued equity investments and hold those securities until their price approximates my estimate of intrinsic value. I am a long-term investor only. I am building a $100,000 high-yield income portfolio. I am running this portfolio as an experiment to see if long-term sustainable income can be generated from a diversified pool of high-risk, high-yield securities. I am willing to accept high risk in order to meet my performance goals.

Disclosure: I am/we are long NNN. 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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