NNN - NNN REIT: Frustrating Round Trip Refreshes A 'Buy-The-Plunge' Moment

2023-09-13 16:00:00 ET

Summary

• NNN REIT stock has experienced a significant round-trip decline, rallying 27% before giving up all its gains and falling to a lower low this week.
• The market de-rated NNN's valuation downward due to highly competitive Treasury yields. I believe the market has gotten it spot on.
• As such, assessing whether NNN has reached capitulation levels, suggesting maximum selling exhaustion, is necessary before capitalizing.
• I gleaned that moment has arrived, as NNN looks well-positioned to reverse the downfall from here. Upgrade to Strong Buy.

If there was one REIT stock that made an incredible round trip since my Buy rating last year, it has got to be NNN REIT ( NNN ) stock. The leading retail REIT owns a " diversified portfolio of freestanding retail stores located across the United States." The REIT was formerly known as National Retail Properties and changed its name in April 2023.

I urged investors to buy NNN in October 2022, as I gleaned a steep selloff that was "emblematic of a rapid capitulation move." Such astute moves are used to shake out weak holders in a hurry, leading to peak pessimism in investor psychology (inflicting maximum pain) and maximum selling exhaustion before a bullish reversal can be found. I highlighted back then the market de-rated NNN to account for heightened execution risks of a hard landing, which spooked investors before the market, and NNN bottomed.

Keen investors should recall the now seemingly "funny" call that Bloomberg Economics made in mid-October 2022 as the market bottomed. Here's how it sounded like, courtesy of Bloomberg:

The latest recession probability models by Bloomberg economists Anna Wong and Eliza Winger forecast a higher recession probability across all timeframes, with the 12-month estimate of a downturn by October 2023 hitting 100%, up from 65% for the comparable period in the previous update. - Bloomberg

We all know by now that the "100% forecast" likely spooked investors (who relied on it to make investing decisions) into selling at the lows, including in NNN. Accordingly, NNN bottomed out in mid-October 2022 before staging a spectacular rally that nearly topped 27% in price-performance terms (excluding dividends). However, NNN has given up all its gains and perhaps more at writing, falling to a lower low than in October 2022 this week.

Interestingly, while the S&P 500 ( SPX ) ( SPY ) has pulled back from its August highs, it didn't collapse toward its 2022 lows, as investors and economists lifted their previous gloomy recessionary thesis. Fund managers have also become more optimistic as they continue deploying their dry powder to avoid missing out on potential gains. The regional banking crisis has also abated, as investors realized we would not fall into a massive liquidity crisis that could spark the "sum of all fears" hard landing scenario.

Furthermore, keen investors should recall that NNN REIT delivered a highly robust second-quarter or FQ2 earnings release in early August. Management provided an upgraded core FFO guidance for 2023 between $3.17 to $3.22 compared to its previous outlook of $3.14 to $3.20. Occupancy rates remained highly robust at 99.4%. With the economy remaining resilient, NNN REIT managed to exceed its long-term average of 98% over the past four quarters.

It also acquired properties at highly attractive cap rates, on average above 7%, while disposing of the underperforming ones at solid cap rates of 5.1% on average. Moreover, it has no significant near-term debt maturities that could impact its financial standing adversely, while also managed to raise $13.3M in net proceeds in Q2. Also, it raised its dividends, and its prudent and disciplined payout ratio of 68% for the first half of 2023 suggests no imminent threat to its forward dividends.

NNN remains attractively priced. Seeking Alpha Quant assigned NNN with an overall "B" valuation grade, supported by relative appeal against its peers. Accordingly, NNN's forward AFFO multiple is assigned a "B+" grade at 11.8x, compared to peers' median of 14.1x, reflecting a substantial 16.5% relative discount.

Furthermore, the US consumer has remained resilient, benefiting NNN REIT's tenants. With the US economy not expected to fall into a deep recession, it frustrates me to see that NNN has made such a remarkable round trip, giving up all the gains it made nearly one year ago... until I realized the market has likely got it right.

Investors across the spectrum, from retail to institutional, are enamored with Treasury bills right now, given their highly attractive yields and "risk-free" levels, unless you believe the US government will default. Near-term maturities yield more than 5% recently, attracting investors. In addition, investors are also positioning for a peak hawkish Fed with rate cuts expected from 2024. As such, income investors are also expected to load up on higher-duration bills, locking in the more attractive yields at the current levels.

With that in mind, we shouldn't be surprised (although frustrated) that NNN fell below its October 2022 lows as the market de-rated its valuation to account for highly competitive Treasury yields. NNN last traded at a forward dividend yield of 6%. Hence, the de-rating is necessary to attract income investors to return to the fold despite facing headwinds from risk-free assets.

As such, assessing whether we have significant buying support at the current levels is critical to ascertain whether buyers believe the appeal of NNN's valuation and risk/reward profile is appropriate.

I assessed a potential bear trap (false downside breakdown) on NNN that could be validated by the end of the week. It's a formidable bullish price action signal, suggesting robust buying sentiments as investors returned.

As seen above, taking out NNN's October lows was the necessary trigger to compel selling exhaustion (wreaking havoc on investors' psychology) as investors fled following the round trip.

Supported by NNN's attractive "B" valuation grade as assigned by Seeking Alpha Quant, I believe the risk/reward profile favors buyers at the current levels.

Investors who missed NNN's October lows should capitalize on the recent capitulation to load up. More conservative buyers can consider waiting for the price action to be validated before adding.

Rating: Upgrade to Strong Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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