NNN REIT: High And Stable Income At A Low Price (NYSE:NNN)

EyeMark NNN REIT, Inc. (NYSE:NNN), incorporated in 1984 and headquartered in Orlando, FL, net-leases retail properties all over the country. I think there is potential for double-digit returns in the short term here because of the current price and the AFFO expectations. The yield is high enough that it creates a get-paid-to-wait situation. With low leverage, strong liquidity, and very low expenses, the risks are low enough to make NNN worthy of consideration for both dividend and value portfolios. Dividend & Capital Growth NNN currently pays a quarterly dividend of $0.57 per share, resulting in a forward yield of 5.35%. The payout ratio of 69.3% based on the low end of the AFFO range guided for 2024 reflects more than adequate coverage and leaves a great margin for financing growth internally. The payment record is also very promising, considering that NNN has been increasing the distribution for 33 years in a row: Seeking Alpha Investors who held this REIT for the long term have also seen their capital grow without reinvesting dividends as the business grew: Data by YCharts As a result, NNN has been outperforming the real estate and broader market for a long time: Data by YCharts However, after interest rates started rising, its performance has been more modest while the market has been anything but recently: Data by YCharts It’s interesting to see, though, that real estate as a whole greatly underperformed, which makes NNN appear quite resilient in a high-interest-rate environment. So, let’s have a look at its business to gain more insight. Portfolio and Leases The REIT’s portfolio consists of 3,546 properties that aggregate 36,137,000 square feet and are spread across 49 states. Though, the portfolio is well-diversified, nearly half of ABR comes from Sunbelt markets, but these are not bad markets to be concentrated in. Investor Presentation Its tenants belong to a great variety of industries, but I should note that it has significant exposure to automotive services: Investor Presentation Also, plenty of the top lines of trades it relies on for its ABR could be seen as servicing not essential needs. That being said, occupancy remains exceptionally strong at 99.4%, which is also above NNN’s 20-year average of 98.1% and well above the REIT industry’s average after excluding Hotel and Health Care REITs: Investor Presentation The resilient nature of the company’s business partially comes from the triple-net leases it underwrites which provide flexibility to the tenants’ businesses and allow for more predictable long-term cash flows for NNN because of limited expenses and long-terms; the WALT was 10 years as of the end of the first quarter. Of course, it wouldn’t be fair to merely attribute the sustainability here to the leases because it appears that management has done a great job at keeping occupancy high and expanding the business in a way that continually provides value to shareholders. Performance & Leverage The REIT delivered strong results in the last quarter. First of all, rental revenue increased by 5.5% to $214.8 million in the last quarter on a YoY basis. Additionally, AFFO of $0.84 per share is 2.4% higher than a year ago. Now, G&A expenses were 2.7% higher than a year ago at $12.6 million but this is in line with management’s guidance. Property-level expenses increased by 4.5% but remain low at $7.1 million, representing 3.3% of rental revenue. Interest expenses amounted to $44 million for the quarter, representing a 13.3% YoY increase. This remains at more than manageable levels considering the 4.4x interest coverage for the quarter. Given the current environment, the weighted average interest rate is also low enough at 4%. Moreover, debt to assets sits at 50.7% and debt to EBITDA at 5.6x, reflecting the low leverage and strong liquidity NNN enjoys. With a revolving credit facility of which $983.8MM is available to borrow and an accordion feature that allows for an increase of $900MM, the company probably won’t have a problem dealing with upcoming maturities: Investor Presentation I also don’t see significant risk from refinancing at higher rates because all of the amounts coming due up to 2030 are lower than 10% of total debt. All in all, NNN will probably be able to deliver good results for shareholders this year given the growth momentum and the absence of short-term expense headwinds. Valuation NNN’s forward FFO multiple is 12.72, slightly higher than the sector median of 12.62. It’s also not much lower than the average of its peers: Stock P/FFO NNN 12.87 FRT 14.87 BRX 10.98 ADC 15.2 KRG 10.97 PECO 13.56 Average 13.11 Click to enlarge However, on a historical-relative basis, trading at 12.87 times its projected FFO is very low for NNN. For example, its multiple just before its drawdown during the pandemic, and when it entered 2021 was around 20x based on forward FFO, which makes more sense for such an established and well-covered net-lease REIT. While its dividend hasn’t been growing fast in the last decade, its AFFO yield of 7.8% represents good enough value and once interest rates start going down the FFO multiple should expand to more “normal” levels. Risks Of course, interest rates may stay high for long enough for you to realize an opportunity cost, so this represents a short-term risk. The dividend yield is attractive, but you might end up underperforming the market if interest rates don’t start decreasing soon enough. Looking at the long term, there is also a risk related to the composition of the top industries the tenants work in. Most of them don’t look essential enough and during really adverse economic periods, that represents at least a headline risk for NNN even if the tenants prove to be resilient. Last, 16.8% of ABR comes from Texas, so potential long-term population and employment trend changes that might negatively affect retailers create a risk for the REIT’s bottom line. Verdict All in all, the risks are outweighed by the prospects. I expect NNN to deliver double-digit returns in the short term, so I am rating it a buy. Of course, I will be monitoring it in case something indicates a much lower upside once its multiple expands to higher levels. What do you think? Do you own this REIT or intend to? Let me know, and I’ll get back to you soon. Also, please leave a comment if you find this post useful; it means a lot! Thank you for reading.

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