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National Retail Properties: A Dividend You Can Count On

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beritaja.com

Seven Eleven

Roman Tiraspolsky

Dear readers/followers,

By now you cognize that I for illustration investing into REITs. In fact, I scheme to allocate up to 30% of my portfolio into REITs this twelvemonth and a important information of that superior will beryllium going into net lease REITs. Why nett lease? I judge that successful lawsuit of a Fed pivot, nett lease REITs will outperform different types of REITs owed to their long-duration (long word leases and indebtedness maturities) and successful lawsuit of a sustained play of precocious inflation, nett lease REITs should outperform owed to their higher yields and build-in rent increases. In this article, I want to analyse National Retail Properties (NYSE:NNN) and spot if it makes a bully finance based connected our accustomed criteria. In particular, I want to spot whether we tin realistically expect NNN banal to generate alpha.

Overview

National Retail Properties is simply a nett lease REIT that owns 3,411 single-tenant properties passim nan U.S. pinch semipermanent leases (WAULT of 10.4 years). These properties thin to beryllium smaller than those of NNN's awesome competitors and mean $2-4 Million successful plus size. The REIT sees this arsenic an advantage arsenic it makes its properties much fungible and makes it easier to switch a tenant aliases waste nan plus (as it increases nan imaginable number of buyers that tin spend it). The institution is good diversified pinch operations successful 48 states and complete 400 tenants. The mostly of gross comes from restaurants (18%), followed by convenience stores (16.5%) and automotive services (13.7%). Top 25 tenants relationship for 55% of revenue, but nary tenants represents much than 5%.

tenants

NNN Investor Presentation

The institution stated successful their presentation that NNN’s semipermanent unit nett lease strategy creates a coagulated instauration of highly predictable operating income. In particular, complete nan past 20 years their occupancy ne'er fell beneath 93.7% (not moreover successful 2008 and 2020, which is simply a testament to their stability) and has averaged 98% - importantly supra nan mean for nan REIT industry.

occupancy

NNN Investor Presentation

Financials

2022 was a unspeakable twelvemonth for REITs successful position of value action, but it was really a beautiful bully twelvemonth for NNN successful position of their operational results, arsenic reported successful their Q4 2022 net report. In particular, their FFO accrued by 15.6% YoY to a full of $3.10 per share. This summation was driven by an summation to adjacent afloat occupancy (99.4%), aforesaid shop NOI maturation of 1.6% arsenic good arsenic caller acquisitions.

In 2022 nan institution continued to turn and amended its portfolio. It acquired 223 properties for $848 Million astatine an mean headdress complaint of 6.4% and sold 33 properties for $311 Million astatine an mean headdress complaint of 5.9%. Notice that nan institution is trading astatine headdress rates beneath their acquisition headdress rates, this is awesome and apt a consequence of nan truth that they are buying nan mostly of their properties from their tenants directly, fundamentally doing sale-leasebacks, which allows them to acquisition properties astatine a discount compared to nan marketplace (this is illustrated beneath by nan mean headdress complaint for a sale-leaseback transaction of 7.5% vs marketplace transaction of 7.3%).

investment

NNN Investor Presentation

As acold arsenic guidance nan institution announced 2023 Core FFO guidance of $3.14-3.20 per stock (up only astir 1% compared to 2022). Personally I was expecting stronger maturation particularly arsenic nan institution plans to get further $500-600 Million of assets and only waste $100-120 Million of assets, but I conjecture they want to beryllium blimpish fixed nan difficult macroeconomic backdrop and astonishment to nan upside.

The institution has a coagulated BBB+ rated equilibrium expanse pinch $4 Billion successful indebtedness and will not look immoderate indebtedness maturities successful 2023, but there's a important repayment owed successful June 2024 of $350 Million which will apt consequence successful an summation successful liking disbursal arsenic it gets refinanced astatine a higher rate. The institution has virtually nary cash, but has entree to a $1.1 cardinal unsecured slope in installments statement (of which $160 Million has been utilized to date) should it request liquidity. The REIT enjoys a reasonably debased costs of indebtedness pinch a weighted mean liking complaint of conscionable 3.7% (under nan 10-yr treasury output of 3.8% but supra immoderate of its peers, EPRT has a 3.3% mean liking rate), though this will apt summation erstwhile they refinance their 2024 tranche.

debt

NNN Investor Presentation

Lastly, it is worthy noting that nan yearly dividend per communal stock accrued to $2.16 successful 2022, marking nan 33rd consecutive twelvemonth of yearly dividend increases - nan 3rd longest grounds of consecutive yearly dividend increases of each nationalist REITs and 99% of each nationalist companies. The payout ratio vs FFO stood astatine a patient 69%. At nan existent value nan banal yields 4.6% and I expect nan institution to proceed to summation nan dividend successful bid to support nan track-record, though I expect early increases to only beryllium marginal (3-5 cents per year).

dividends

NNN Investor Presentation

Valuation

The banal presently trades astatine a marketplace headdress of $8.5 Billion. With rental income of $771 Million, nan marketplace is valuing their portfolio astatine an implied headdress complaint of 6.2%. This is very reasonable for nan benignant of properties they hold, particularly erstwhile compared to nan headdress complaint nan averaged for their disposals successful 2022 of 5.9% and besides erstwhile compared to nan implied headdress complaint of EPRT of 5.6%. I would reason that a adjacent headdress complaint would beryllium astir 6% meaning that NNN is really trading astatine a flimsy discount to its adjacent NAV.

On a comparative aggregate valuation basis, nan institution presently trades astatine a P/FFO of 14.90x. Its semipermanent mean (since IPO) stands 16.00x and since nan Great Financial Crisis astatine 17.5x FFO. I would reason that a adjacent aggregate would astir 16.50x FFO which leaves room for a aggregate description upside of astir 11% complete nan adjacent 2 to 3 years. Analysts are expecting FFO to turn marginally by only astir 1-3% per twelvemonth to an FFO of $3.31 per stock by 2025 - that would make nan PT $54.60 per stock (annual return successful excess of dividends of 5.2%).

valuation

Fast graphs

This intends we tin reasonably expect NNN to provide:

  • 4.6% dividend output increasing astatine 1-2% per year
  • FFO maturation of 2% per year
  • return from aggregate description of 3.2% per year
  • -> total yearly return of 9.8% (above nan expected return of nan market)

Remember really I make alpha:

  1. start pinch a thesis why a fixed industry/sector should outperform
  2. stay overweight successful those sectors for arsenic agelong arsenic nan thesis is valid
  3. look for companies pinch sound fundamentals that are either undervalued aliases reasonably weighted pinch exceptional maturation prospects
  4. if a institution becomes overvalued, trim nan position and rotate into different stock/sector that is still undervalued
  5. if a institution becomes progressively undervalued and nan thesis is still valid, adhd to nan position
  6. generate alpha and repeat

My full return past comes from nan dividend yield, EPS maturation and aggregate description arsenic nan valuation normalizes complete time. I ever target a full return successful excess of marketplace returns (>8%) to make alpha.

What things do I look for erstwhile selecting individual stocks to buy?

  1. strong and safe fundamentals
  2. good guidance teams pinch a track-record of caring astir shareholders
  3. healthy EPS growth
  4. well-covered dividend
  5. discount comparative to peers and/or humanities adjacent multiples
  6. other catalysts

Verdict

National Retail Properties checks disconnected each nan boxes, it is simply a good managed REIT pinch a proven track-record. The institution has managed to support occupancy supra 93% done nan Great Financial Crisis arsenic good arsenic nan Covid situation and has accrued its dividend for 33 consecutive years. This is simply a dividend you tin count on! Moreover, nan institution is trading astatine a reasonable valuation pinch a blimpish implied headdress complaint of 6.2% and a imaginable for aggregate description from nan existent P/FFO of 14.9x to 16.5x. Overall, this is simply a awesome institution astatine a bully value and tin beryllium expected to return 9.4% annually complete nan adjacent years. That's supra marketplace return, generating that saccharine alpha. For those reasons and based connected my criteria, I complaint NNN arsenic a "BUY" present astatine $46.90 per share. NNN has been and will stay 1 of my apical nett lease picks (along pinch EPRT and Realty Income).

This article was written by

David Ksir floor plan picture

Active full-time investor pinch a existent property backstage equity background. Disclaimer: I americium not a financial advisor and nary of nan contented I supply connected this website is financial advice. Content is provided for acquisition purposes only.

Disclosure: I/we person a beneficial agelong position successful nan shares of NNN either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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