National Retail Properties: 5.4% Yield, Upcoming Dividend Hike And Cheap (NYSE:NNN)

Maxxa_Satori National Retail Properties Inc. (NYSE:NNN) is a well-managed, well-diversified commercial real estate investment trust with long-term dividend growth potential. The trust only paid out 67% of its adjusted funds from operations in the first quarter and National Retail Properties is poised to grow its dividend: The retail-focused net-lease real estate investment trust has raised its dividend for 34 consecutive years and a new dividend hike is poised to be announced in the third quarter. I think that National Retail Properties is a rock-solid, sleep-well-at-night real estate investment trust that has long-term dividend growth and out performance potential. My Rating History My last stock classification on National Retail Properties was Buy, issued in March 2024, on the back of solid AFFO performance in most recent quarters. In my last piece, I discussed the trust’s portfolio and dividend metrics. Since NNN is a fairly predictable investment, the REIT has met my expectations in terms of pay-out performance. Furthermore, with interest rates on the cusp of getting slashed, debt-financed real estate acquisitions could become more attractive from a growth point of view, which is a new angle I am presenting here. I anticipate that we are going to see one rate cut in 2024 with more to come in 2025. Rate cuts would be a very positive development for the real estate sector, as they translate into tailwinds for acquisitions. This would also probably benefit those trusts that have an extensive acquisition history under their belts, like National Retail Properties. A decrease in interest rates could be a catalyst for a higher acquisition guidance and, possibly, faster-than-expected AFFO growth. National Retail Properties is also nearing a decision about the customary increase in its dividend in the third quarter, which could be a catalyst for the stock also. I think that the risk/reward relationship is very much favorable and passive income investors can probably anticipate a dividend hike of around 3% in 3Q24. Portfolio Review, AFFO Growth And Pay-Out Ratio National Retail Properties is a large owner of single-tenant, retail-focused real properties that are leased to tenants on a net-lease basis. As of March 31, 2024, National Retail Properties owned 3,546 properties across that country that were leased to more than 385 different tenants. Texas is by far the largest state in terms of property representation and accounted for 552 retail-focused properties at the end of the first quarter. Nationwide Reach (National Retail Properties) The main feature of an investment in National Retail Properties is that the real estate investment trust consistently outperformed the industry occupancy average of the market. The trust achieved a long-term occupancy rate of 98.1% with the most recent occupancy clocking in at 99.4% in 1Q24. The ability to fully lease the property portfolio on a consistent basis is due to National Retail Properties’ hands-on management approach as well growing demand for retail space in the U.S. Occupancy (National Retail Properties) National Retail Properties’ real estate assets produced 3% YoY growth in adjusted funds from operations in 1Q23. Adjusted funds from operations clocked in at $153.3 million and were more than sufficient to support the trust’s dividend pay-out in the first quarter. Be that as it may, National Retail Properties, considering its large amount of retail properties, can only meaningfully boost its AFFO through third-party real estate acquisitions which is something that I anticipate to see more of, particularly when interest rates are adjusted downward and debt-financed acquisitions become more attractive for nationally operating trusts. Adjusted Funds From Operations (National Retail Properties) National Retail Properties’ produced $0.84 a share in adjusted funds from operations in the first quarter, reflecting a YoY growth rate of 2%. The real estate investment paid $0.565 a share in dividends last quarter, which equates to a dividend pay-out ratio of 67%. Realty Income Corp. (O) paid out 74% of its adjusted funds from operations in the last quarter and 76% in the last twelve months. National Retail Properties thus offers passive income investors a higher margin of dividend safety than Realty Income as well as the same kind of retail focus. Dividend (Author Created Table Using Trust Information) National Retail Properties is poised to hike its dividend in the third quarter, which is when the trust is customarily setting its new rate for the next year. Last year, in 3Q23, the trust raised its dividend by 3%, and I anticipate a similar dividend hike this year to $0.58 a share. A $0.58 a share dividend per quarter equates to a leading dividend yield of 5.5%. AFFO Multiple National Retail Properties foresees $3.29-3.35 a share in adjusted funds from operations in 2024, which translates into, given a present stock price of $42.22, an adjusted FFO multiple of 12.7x. This guidance implies that the real estate investment trust will do up to half a billion in acquisitions this year, which would still be below the average annual acquisition volume of $600 million in the last four years. Thus, the acquisition guidance should be easy to achieve. What makes National Retail Properties a ‘Buy’ here for me is the fact that the trust is a Dividend Aristocrat with a very stable dividend pay-out ratio and a well-covered yield exceeding 5%. Ultimately, investors interested in a trust like NNN are primarily motivated by a desire to produce recurring dividend income. Both trusts, National Retail Properties and Realty Income, are reliable dividend payers with a history of growth. I have no problem paying 12.7x AFFO for the privilege of investing in National Retail Properties, considering that I have a high degree of assurance that the trust will continue to raise its pay-out in the future. 2024 Guidance (National Retail Properties) Realty Income is the biggest peer to National Retail Properties, as it also mainly operates in the retail industry and has similar investment characteristics due to its net-lease approach to business. Realty Income is also a long-term investment vehicle that leverages the trust’s strength of growing its dividend consistently over time. Realty Income anticipates $4.17-$4.29 per share in adjusted funds from operations in 2024, which implies an AFFO multiple of 12.6x, so both Realty Income and National Retail’s stocks go for about the same valuation multiple. I like (and own) both trusts in my passive income portfolio. What makes Realty Income compelling as well is that the trust is a Dividend Aristocrat, has a 99% occupancy rate and has managed to grow its AFFO over the long-haul at an average annual rate of 5%. Realty Income is also a bit more focused on international markets and has recently boosted its non-retail income streams through deals in the gaming and industrial sectors. Top Long-Term Performance National Retail Properties’ stock produced attractive total returns over the long term. In the last thirty years, National Retail Properties’ acquisition-driven strategy to grow into a national single-tenant, net-lease trust has paid off handsomely, with the stock returning almost 11% annually for shareholders. The trust’s stock also outperformed the benchmark index, the NAREIT Equity REIT Index, and has delivered 34 years of consistent dividend growth for shareholders. Total Shareholder Return Comparison (Bloomberg) Why The Investment Thesis Has Risks National Retail Properties is a well-managed, retail-oriented real estate investment trust with high occupancy rates and a low dividend pay-out ratio based on adjusted funds from operations. With that said, though, National Retail Properties is focused on the U.S. market and is therefore dependent on the performance of the U.S. real estate market, whereas Realty Income is investing more heavily in Europe, leading to a stronger diversification profile. NNN, as I asserted, could profit from lower short-term interest rates, which in turn could provide fuel for a more aggressive stance on acquisitions. Should the central bank decide to push rate cuts out further into the future, my investment thesis in this respect might be off. At the same time, a catalyst for AFFO growth may fall by the wayside. My Conclusion National Retail Properties is a rock-solid, sleep-well-at-night net-lease trust with solid recurring adjusted funds from operations from its retail lease assets. The trust particularly deserves praise for its ability to deliver full occupancy and consistent dividend growth over a period of 34 years. Though passive income investors shouldn’t expect big jumps in AFFO (unless an acquisition is being announced), slow-and-steady growth has done the job here for National Retail Properties and the stock has delivered satisfying 11% annual returns over the last three decades. With the dividend being even safer than Realty Income’s, based on the AFFO-based dividend pay-out ratio, I think that National Retail Properties is a worthy investment choice for passive income investors. In terms of valuation, National Retail Properties is about as expensive as Realty Income and the long-term outlook for dividend growth, considering the trust’s more than 3-decade growth history, is very promising as well. Buy.

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