National Retail Properties: Spreading 'Dividend Love' For More Than 30 Years

Summary

  • NNN’s tenant base allows it to be fairly well isolated from the kind of secular threats the physical retail industry is facing these days.
  • NNN's portfolio is even more resilient to macroeconomic pressures today.
  • NNN is one of the highest-rated REITs we track in the triple-net space – or in the REIT space in general.
  • Looking for a portfolio of ideas like this one? Members of iREIT on Alpha get exclusive access to our model portfolio. Get started today »

This article was co-produced with Nicholas Ward.

2019 was a great year for REITs. That’s for sure.

Take the collective set that is the Vanguard Real Estate ETF (VNQ), which posted capital gains of nearly 25%. When you add the VNQ’s 3%-plus dividend to the equation, we’re talking about total returns of roughly 29%.

What’s more, the VNQ is up another 5.8% during 2020 - so far.

This positive performance is great for real estate investors. Obviously. However, it also means that value is becoming more and more difficult to find.

That’s why we’ve been focusing so much of our recent coverage on beaten-down names in the shopping mall space. It’s the most distressed area of REITdom, without a doubt, meaning that it’s trading at very low prices.

To be sure, we continue to believe that long-term investors are best served buying high-quality names at or – better yet – below fair value. That’s why we continue to hunt for discounted blue chips.

Yet sometimes it’s best to take a step back and simply bask in the glory of a well-run triple-net play. Like National Retail Properties (NYSE:NNN).

It certainly isn’t a bargain-barrel company these days. But it continues to perform quite well, showing exactly why it’s the sort of stock that can generate massive wealth for shareholders over the long term.

Company Overview

National Realty Properties is a leading triple net lease REIT with more than 3,100 single tenant retail properties under management. Its 2019 occupancy ratio came in at 99%, which is incidentally above its long-term average of 98%.

The graphic below is a bit outdated, since NNN hasn’t published its 2019 annual report yet with Q4 data. So be advised that the company acquired 79 properties in Q4 and sold 16, for a net gain of 63.

Source: NNN November Investor Update

As you can see above, its portfolio is nicely diversified from a geographical standpoint.

As of Q4, Georgia did hop above North Carolina in terms of its top five state exposure list. So here’s the updated list of the company’s top 10 states.

Source: Q4 2019 Earnings Report

Next up, here’s a graphic from NNN’s November investor update, which sheds further light on its tenant portfolio. The company clearly focuses on:

  • Convenience stores
  • Full-service and limited-service restaurants
  • Automotive services
  • Entertainment centers
  • Health and fitness centers.

Source: NNN November Investor Update

Here’s an updated list of its industry exposure, published as part of its recent Q4 report:

Source: Q4 2019 Earnings Report

Great Points to Talk About

All in all, NNN’s well-diversified portfolio of properties has allowed it to maintain a much higher long-term occupancy rating than the REIT sector at large. This enables it to generate reliable funds from operations (FFO) throughout a wide variety of economic environments.

As of today, management is still growing the portfolio at a respectable rate, a trend we expect to continue. We also believe that NNN’s tenant base allows it to be fairly well isolated from the kind of secular threats the physical retail industry is facing these days due to the rise of e-commerce.

This protection is becoming ever more important in the REIT space. During the Q4 conference call, CEO Jay Whitehurst highlighted the company’s continued focus on staying ahead of the game:

“We have very little exposure to apparel or other retail concepts that are struggling with e-commerce and getting negative headlines. The primary lines of trade that make up our tenant mix are expanding and adding stores. And our major tenants are playing offense in their respective businesses. Moreover, our focus is on acquiring good real estate locations at reasonable rents. By concentrating our underwriting on these factors, we create an enduring margin of safety that better withstands any turmoil in the general economy or in any tenant’s individual business.”

In short, if you’re looking for a REIT to sleep well at night with, you don’t have to look any further than National Retail Properties. Heck, even at the depths of the Great Recession, its occupancy ratio never dropped below 96.4%. And we believe its portfolio is even more resilient to macroeconomic pressures today.

So, with all that being said, let’s dive into the recent Q4 results, break down the company’s dividend, and arrive at our fair value estimate.

Take It From Corporate

NNN had a fine year in 2019.

Being the low beta, highly defensive name it is, its total returns did lag the major indexes as they climbed. However, NNN’s 14.8% annual total returns are nothing to scoff at.

While we’re certainly happy to own this sort of stock through a myriad of market environments, we don’t exactly expect it to outperform in a market led by high-growth tech stocks and other more speculative bets.

However, during the call, management did take time to note its top-performing status over the longer term. There’s no two ways about it: It has generated massive wealth for its shareholders through the years.

“As you've heard many times before, we run our business with a long-term focus on multi-year results. True to that philosophy, National Retail Properties delivered total shareholder returns that exceeded the REIT averages and many major indices over the past two, three, five, 10, 15, 20, and 25 year periods, respectively.”

This is exactly the type of approach we like to see in management teams. When we talk about investing, we harp about the importance of maintaining a patient, conservative, long-term mindset. Because that allows investors to avoid the pitfalls oftentimes created by fear and greed that surround short-term market movements.

These same principles apply to corporate leadership – a concept management not only grasps, but also implements.

More Good Stuff to Say

During Q4, NNN invested $243 million into the aforementioned 79 single-tenant properties with an initial cap rate of 6.8%. For the full year, it invested $725.5 million into 210 single-tenant properties with an initial cap rate of 6.9%.

Management noted that its 2019 investments produced average lease spans of nearly 18 years per property.

It continues to believe that its focus on low-cost and low-rent properties will allow it to maintain its extraordinarily high occupancy ratio and continue to generate reliable cash flows for investors.

Also during 2019, NNN sold 59 properties, raising $126 million it will recycle into new investment opportunities. The average cap rates on the properties sold was 5.9% – well below the company’s investment standards for new acquisitions.

Management said it will continue to be active and aggressive when it comes to this accretive property recycling mindset. That way, it will not only improve the quality of its physical property portfolio, but also its cash flow outlook.

With specific regard to that latter consideration, NNN posted core FFO of $0.70/share in Q4. That was 11.1% higher than Q4-18’s $0.63/share total.

For the full year, its core-FFO came in at $2.76/share, representing 4.2% growth year-over-year.

Meanwhile, its diluted adjusted funds from operations (AFFO) was $0.71/share in Q4. That represented 9.2% growth over last year’s $0.65/share figure in Q4.

For the full year, its diluted AFFO totaled $2.80, up 4.47% from 2018’s $2.68/share result.

As you can see below, this doesn’t put NNN at the top of its peer chart, though its long-term reliability still makes it well worth owning.

And Another Thing Going for It

Lastly, we arrive at NNN’s balance sheet, which also remains strong.

Hey, you wouldn’t expect anything less from the company’s conservative management team, would you?

At the end of the year, it had a $134 million outstanding balance on its $900 million bank credit line. NNN redeemed $287.5 million in its 5.7% preferred stock during 2019 with common equity at an accretive basis.

Its average debt maturity was 8.3 years at the end of Q4. Its net-debt-to-EBIDTA (earnings before interest, depreciation, taxes, and amortization) ratio was 4.9x. And interest coverage and fixed interest coverage came in at 5x and 4x, respectively.

Simply put, management remains confident that its balance sheet is healthy and will allow the company to continue growing. Along those lines, CFO Kevin Habicht said:

“Our balance sheet remains in good position to fund future acquisitions and the weather potential economic and capital market turmoil.”

The Dividend

NNN currently yields 3.69%. This isn’t an enormous yield, by any means. But it's incredibly safe.

That’s why investors have historically paid a premium for these shares, pushing the yield level lower.

In the Q4 conference call, Whitehurst noted right away how:

“2019 was a year of significant milestones for National Retail Properties. Our 35th year in business, our 25th year listed on the New York Stock Exchange and, most importantly, our 30th year of consecutive annual dividend increases. Very few public companies and only two other REITs have matched this impressive track record of increasing the dividend for 30 consecutive years.

Maintaining a safe and growing dividend is at the heart of our corporate culture, and there's nothing in which we take more pride than returning to the owners of the company a meaningful cash return on their investment each year."

Source: NNN November Investor Update

That kind of commitment is significant to shareholders. It makes NNN the type of company investors seeking reliably increasing dividends can partner with over the long-term.

Consider CFO Habicht’s bit of levity later on in the call:

“As Jay mentioned and we're required to say every 15 minutes, we increased our annual dividend for 30 consecutive year in 2019. And our AFFO dividend payout ratio for the year was 72.2%, which was down a modest 20 basis points from 2018.”

That was meant to liven up what could otherwise be a long, fact-filled call. But it’s also a point of pride.

It’s clear this is a company focused on its shareholder dividend.

Looking ahead, it’s very likely that NNN’s positive dividend growth trend will continue. Its most recent dividend increase, for example, was 3%.

The company typically announces its annual raise in July when declaring the August dividend payment. Until then, its wide coverage margin – combined with its 4.2% core FFO growth last year – leads us to believe investors are in store for a mid-single digit increase when it’s announced this time around.

Valuation

We believe that NNN’s fair value sits in the $50/share area. This represents a 17.8x trailing 12-month P/FFO ratio, which is slightly below the company’s 10-year historical normal P/FFO ratio of 18.26x.

This certainly isn’t cheap. Though, as previously stated, NNN shares have historically commanded a premium because of their blue-chip quality. And we don’t expect for that to change anytime soon.

Yet this is the type of stock we’re willing to accumulate anyway, even at an elevated multiple. As previously stated, its very reliable dividend and dividend growth offer long-term benefits we can’t ignore.

NNN isn’t a stock that’s going to make anyone rich in the short term. Yet it’s helped many, many investors reach financial freedom across more significant stretches of time.

During the last 25 years, NNN’s average total shareholder return is 13.6%. Anytime you can compound your wealth at a double-digit clip over a multi-decade span, you know that you’re holding onto a real winner.

As you can see, NNN is one of the highest-rated REITs we track in the triple-net space – or in the REIT space in general.

Shares are currently trading at an 11% premium to our fair value estimate. So, at this time, we recommend that investors watch the stock closely.

This is a buy any time it trades at or around that fair value target.

Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.

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This article was written by

Brad Thomas profile picture
102.71K Followers
Author of iREIT on Alpha
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Brad Thomas is the CEO of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 6,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.

The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha). Thomas is also the editor of The Forbes Real Estate Investor and the Property Chronicle North America.

Thomas has also been featured in Forbes Magazine, Kiplinger’s, US News & World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox. He is the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, 2017, 2018, and 2019 (based on page views) and has over 102,000 followers (on Seeking Alpha). Thomas is also the author of The Intelligent REIT Investor Guide (Wiley). 

Thomas received a Bachelor of Science degree in Business/Economics from Presbyterian College and he is married with 5 wonderful kids. He has over 30 years of real estate investing experience and is one of the most prolific writers on Seeking Alpha (2,800+ articles since 2010). To learn more about Brad visit HERE.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any 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.

Additional disclosure: Nicholas Ward owns NNN.

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