National Retail Properties: Stack This 5% Yield Onto Your Dividend Portfolio

Summary

  • National Retail Properties is a high-quality net lease REIT with a long history of dividend growth and bottom line growth.
  • NNN maintains a strong balance sheet and a diversified portfolio of e-commerce resistant tenants.
  • The shares are attractively priced at the moment, especially considering the robust bottom line growth expected this year.
  • Looking for a portfolio of ideas like this one? Members of Hoya Capital Income Builder get exclusive access to our model portfolio. Learn More »
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I like high yield stocks as much as anyone else, and see value in beaten down names such as Medical Properties Trust (MPW), Capital Southwest (CSWC), and Altria (MO). However, diversification is key to sleeping well at night, and I also reserve a part of my portfolio for middle of the road yields like National Retail Properties (NYSE:NNN) that provide a good mix of safety and income.

Stocks like NNN are good core holdings to have in a portfolio for their durable income characteristics, and in this article, I highlight why the current down cycle presents a great opportunity to layer into this quality name, so let's get started.

Why NNN?

National Retail Properties is a truly "national" triple net lease REIT with a diverse high-quality portfolio of 3,305 properties that span across 48 states in the contiguous U.S. It has over 380 tenants and this includes long-standing relationships, with its top 25 tenants representing 56% of NNN's annual rent.

NNN is led by an experienced management team, with an average 21-year tenure in the senior leadership team. Moreover, 61% of NNN's employees have been with the company for over 5 years. Like its peer, NNN is also a dividend aristocrat, with 33 consecutive years of raises under its belt, including the recent 3.8% raise to $0.55 per share.

NNN's national tenant base is comprised mostly of e-commerce resistant tenants in service, experiential, and the quick service restaurant categories. This has enabled NNN to generate rather steady results, even during the tumultuous 2020 timeframe. Since 2003, NNN's occupancy has never fallen below 96.4%, averaging 98.0% over this time period. At present, NNN's occupancy stands at a very healthy 99.1%.

National Retail Properties - diversification reduces risk

NNN Portfolio Mix (Investor Presentation)

NNN also maintains long-weighted average lease term of 10.6 years, putting it on par with that of other retail net lease REITs, and its leases are well-staggered, with only 5.9% of leases expiring through 2024. NNN has also been an active consolidator, as it acquired 102 properties in the first half of the year for $365 million with an attractive initial cash yield of 6.2%.

Importantly, NNN's bottom line is growing robustly, as first half core FFO per share grew by 11.4% compared to last year. It appears management is showing no signs of slowing down, as it raised guidance three times year. The latest guidance raised core FFO per share from $3.04 at the midpoint to $3.10.

Meanwhile, NNN is also not totally dependent on capital markets to fund growth, as it maintains plenty of retained capital. This is reflected by the 68% payout ratio, based on the recently raised $0.55 dividend and Q2 AFFO per share of $0.81. It also maintains a strong BBB+ rated balance sheet, with a 14-year weighted average debt maturity with little near-term maturities.

Net debt to EBITDA is at a safe 5.4x and fixed charge coverage ratio is at 4.7x. Management expects to see $180 million in cash flow after dividends and $100 million per year from dispositions, which goes a long way towards funding its $600-700 million a year in acquisitions.

Factors that could drive the share price down include general market volatility and the prospect for higher interest rates, which may drive negative investor sentiment towards perceived "slow-growing" net lease REITs. However, higher interest rates are not necessarily a bad thing, as that results in less competition from highly leveraged players that rely more on debt. This is supported by management comments during the recent conference call, noting less competition from private equity players in the 6-7 percent cap rate range on new acquisitions.

Lastly, I see value in NNN at the current price of $44.88, especially after the recent drop from the $48 level from earlier this month. Moreover, it has a forward P/FFO of 14.4, sitting comfortably below its normal P/FFO of 17.7 over the past 10 years. I'm also considering the overall quality of the enterprise and the robust bottom line growth expected this year. Sell side analysts have an average price target of $49.69, translating to a potential one-year 16% total return including dividends.

NNN stock valuation

NNN Valuation (FAST Graphs)

Investor Takeaway

NNN is a high-quality net lease REIT with a long history of dividend growth and bottom line growth. It maintains a strong balance sheet and a diversified portfolio of e-commerce resistant tenants. The shares are attractively priced at the moment, especially considering the robust bottom line growth expected this year. I believe NNN could be a core holding in any REIT portfolio.

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This article was written by

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Build sustainable portfolio income with premium dividend yields up to 10%.

I'm a U.S. based financial writer with a BSc in Economics and an MBA in Finance. I have over 12 years of investment experience, and generally focus on stocks that are more defensive in nature, with a medium to long-term horizon. My goal is to share useful and insightful knowledge and analysis with readers.  Contributing author for Hoya Capital Income Builder. 

Disclosure: I/we have a beneficial long position in the shares of NNN either through stock ownership, options, or other derivatives. 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: I am not an investment advisor. This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.

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