3 Reasons Why National Retail Properties Is A Better Buy Than Realty Income
- O and NNN are among the safest blue chips in the entire REIT sector.
- They also boast impressive dividend growth track records and look increasingly attractive after the recent sell-off in their stock prices.
- We share three reasons why NNN is a better buy than O right now.
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Realty Income (NYSE:O) and National Retail Properties (NYSE:NNN) are among the safest blue chips in the entire REIT sector thanks to their impressive credit ratings (A- for O and BBB+ for NNN), very conservative triple net lease REIT business models, proven management, and very impressive cash flow consistency in the face of the Great Recession and the COVID-19 lockdowns. These strengths are evidenced by O's and NNN's lengthy dividend growth streaks:
Moreover, investors have an intriguing opportunity to add shares in one or both of these proven dividend growth machines at an attractive starting yield thanks to the recent sell-off in the stock prices of both of them:
Investor can buy O shares with a starting dividend yield of 5% and NNN shares with a starting dividend yield of 5.25%.
While we rate both stocks as a Buy at the moment, in this article we share three reasons why NNN is a better buy than O right now.
#1. More Attractive Valuation
The biggest reason why we believe that NNN is a better buy than O right now is simply by virtue of its more attractive valuation across virtually every metric. Its EV/EBITDA ratio is 15.52x, well below O's 16.82x EV/EBITDA ratio. NNN also has a substantially lower P/AFFO ratio than O does, at 12.95x vs. 15.30x, respectively.
Most importantly, it is trading at a discount to NAV (0.98x), meaning that you get access to its well-diversified and expertly managed portfolio at a discount to its private market value, compared to O's 1.08x price to NAV multiple. Last, but not least, NNN gives investors a starting yield of 5.25% at present prices, whereas O gives them a 5% yield.
Another way of looking at their valuations is evaluating current valuations relative to recent historical multiples that Mr. Market has assigned to each REIT. O trades at a meaningful discount relative to its five-year average price to NAV ratio of 1.24x. Moreover, its five-year average EV/EBITDA ratio is 19.41x and its five-year average price to AFFO ratio is 18.52x, while its five-year average dividend yield is 4.37%. As a result, O definitely looks undervalued compared to its own history, making it a clear Buy.
That said, NNN is also very discounted relative to its history, with a five-year average price to NAV ratio of 1.06x, a five-year average EV/EBITDA ratio of 17.50x, a five-year average price to AFFO ratio of 15.80x, and a five-year average dividend yield of 4.71%.
#2. Greater Growth Potential
Another reason why we think that NNN is a better buy right now compared to O is the fact that it has greater growth potential moving forward. This stems from two factors. First, O's size has become so large (with a $58.9 billion enterprise value) that it takes billions and billions of dollars in acquisitions each year in order to move the growth needle in any meaningful way. In contrast, NNN has a much smaller size ($11.6 billion enterprise value), so it is much easier for it to acquire properties to move the needle for growth without having to make massive acquisitions (which bring their own integration and corporate cultural issues with them and often require paying a large premium to pull off) or compromise underwriting quality.
Another reason why we are more bullish on NNN's growth potential moving forward is that it takes a relationship-based acquisition approach that enables it to invest in lower credit quality tenants without going far out on the risk spectrum. Furthermore, in exchange for investing in a property with a lower credit quality, NNN can often get higher initial cap rates and better built-in rent bumps than O typically gets with its greater focus on investment grade tenants.
In a period where the cost of capital is increasingly elevated due to beaten down equity valuations and elevated interest rates, we believe these more organic growth factors are more important than ever in driving incremental growth.
#3. Stronger Balance Sheet
While O has a slightly superior credit rating to NNN, we think that this misrepresents the true underlying strength of their balance sheets and instead reflects the greater name brand, vastly larger size, and greater investment grade tenant exposure that O enjoys.
NNN's balance sheet is incredibly strong with 99.8% of its assets unencumbered, leading to a mere $10 million of secured debt. This means that it can quite easily raise capital by taking out mortgages on or selling its properties if it found the need to do so. Moreover, its weighted average debt maturity term is quite lengthy at 13.7 years. Best of all, it has hardly any debt maturing in 2023, and that debt is at a 5.2% interest rate (its highest interest rate on any outstanding debt), so it should face little to no headwinds from having to refinance debt this year while interest rates are elevated. Perhaps the biggest symbol of its financial strength is the fact that it has $1.2 billion of fixed rate debt not due until 2050-2052 at a weighted average interest rate of just 3.2%.
When combined with its $1.1 billion bank credit line (with an accordion feature that can increase it to $2 billion), NNN not only enjoys significant liquidity and flexibility, but it should face limited debt refinancing risk in the current elevated interest rate environment. Last, but not least, its interest coverage and fixed-charge coverage ratios are quite conservative at 4.7x each.
Meanwhile, O's weighted average term to maturity is less than half that of NNN's at 6.2 years. O also has a meaningful amount of debt maturing this year and in each year following for the foreseeable future. This means that it could face greater interest rate headwinds than NNN in the near-term.
While O's fixed charge coverage ratio is slightly higher than NNN's at 5.2x, both are extremely conservative and NNN has less unsecured debt than NNN on a percentage basis at 95% (though this is also quite conservative).
While both businesses definitely have strong balance sheets, we prefer NNN's because they have less near-term maturities, so we expect fewer headwinds from the need to refinance debt this year while interest rates remain elevated.
Overall, O and NNN are two great REITs that have earned investor confidence and appear poised to continue delivering exceptionally reliable dividends and dividend growth for years to come.
Moreover, thanks to the double-digit dip in the share price of each over the past month and a half, both are now trading at meaningful discounts to historical averages and appear to be clear buys.
That said, we prefer NNN over O at the moment due to its convincingly cheaper valuation, stronger growth potential, and better near-term debt maturity profile.
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This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.
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