A new buy list stock I added in April is National Retail Properties (NNN). Why on earth would I add a retail REIT to my buy list with the constant threat of eCommerce on brick-and-mortar stores? National Retail Properties has a lot going for it and it’s a rare buying opportunity in the retail REIT industry.
NNN is widely diversified in the U.S., with no high concentration in any single business. NNN has successfully increased its dividend annually since 1989. At a 5.6% yield, it’s a good income provider. Let’s look at it more closely.
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National Retail Properties Business Model
NNN is a fully integrated real estate investment trust (REIT). It acquires, owns, invests in, and develops properties and leases them primarily to retail tenants under long-term net leases. It owns about 3,532 properties with an aggregate gross leasable area of over 35 million square feet, across 49 states.
The company’s portfolio includes the following types of businesses:
| convenience stores | automotive service |
| restaurants-full service | restaurants-limited service |
| family entertainment centers | health and fitness |
| theaters | recreational vehicle dealers, parts, and accessories |
| equipment rental | automotive parts |
| wholesale clubs | home improvement |
| drug stores | travel plazas |
| furniture |
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NNN Investment Thesis
Why is NNN a good story? It focuses on smaller single-tenant properties leading to great geographic and tenant diversification. Its largest tenant, 7-Eleven, represents only 4.4% of its business. Its largest line of business, convenience stores, represents nearly 18%. NNN leases its properties to over 370 different tenants across 37 industries.
This ensures NNN has a higher occupancy rate than the industry standard, currently above 99%! While the brick-and-mortar retail store environment is rapidly shifting toward online businesses, NNN is one of the retail REITs that won’t be affected.
It enjoys strong business fundamentals as tenants have proved resilient to current macroeconomic pressures from rising interest rates and high inflation. However, we think these headwinds will likely lead to more modest FFO growth of 2%-3% through 2025. The stock was on a downtrend trend early in 2024, slightly up lately but still at an attractive price.
NNN Last Quarter and Recent Activities
National Retail Properties has been executing well. In 2023, it grew its core funds from operations (FFO) by 3.8% and deployed over $800M for new real estate investments. In Q4 alone, NNN invested ~$269.7M including the acquisition of 40 properties with a leasable area of ~278,000 square feet. It maintained high occupancy levels at 99.5% throughout the year, with a weighted average remaining lease term of 10.1 years.
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Potential Risks for National Retail Properties
Our concern with the traditional brick-and-mortar retail industry boils down to the e-commerce threat. The threat is real and it’s pushing brick-and-mortar stores to reinvent their ways of doing business.
NNN made sure to stay away from businesses that would suffer the most from online competition; books, consumer electronics, and office supplies each represent less than 2% of its business, and NNN has virtually no apparel-oriented tenants. The risk of oversupply of retail real estate is becoming less likely since new developments should slow down in this high-interest rate environment. Expect more conservative FFO growth moving forward.
NNN Dividend Growth Perspective
NNN has increased its dividend every year since 1989 and management is committed to providing dividend growth to its shareholders. Its FFO payout ratio has been stable since 2013; the company grows its funds from operations at about the same rate it grows its dividend. This reflects a strong business model and ensures stability for shareholders. The company’s management believes the company is in good shape to fund acquisitions in 2024, after having invested more than $800M in 2023.
The dividend increase for 2023 was a conservative 2.7%; we believe this could be risk management, a prudent move.
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Final Thoughts on National Retail Properties
National Retail Properties rents space to many different many types of businesses and many tenants, has a high occupancy rate, and stays away from retail businesses that are most vulnerable to online competition.
If you’re an income-seeking investor who wants to go back to investing in REITs or increase your exposure to the sector, you could be served well by NNN.
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