O - NNN Reit: This Net Lease King Pays You A Juicy 5.3% Yield

2023-12-08 10:40:00 ET

Summary

• NNN Reit is a reliable FFO and dividend machine with a history of consistent growth and high occupancy rates.
• The trust's portfolio consists of well-leased commercial properties, primarily convenience stores, with long-term net leases.
• NNN Reit offers a 5.3% dividend yield and has a higher margin of dividend safety compared to Realty Income.

NNN Reit Inc. ( NNN ) , formerly known as National Retail Properties, is an FFO and dividend machine that has produced decades of solid, persistent growth. The properties contained in the real estate investment trust’s portfolio are leased at a rate exceeding the industry average and NNN Reit has an impressive dividend history spanning more than three decades.

The trust covers its dividend with funds from operations, raised its AFFO guidance in 3Q-23 and has a lower dividend pay-out ratio than Realty Income Corp. ( O ) .

Even though the trust’s stock has soared lately, I think NNN Reit is a top-notch passive income investment for long-term investors that seek income security more than anything else.

My Rating History

In National Retail Properties: Lock In A 5.2% Quality Yield On The Dip , I laid out my core rationale for investing in the real estate investment trust: NNN Reit outperformed the S&P 500 index by a substantial margin over the last thirty years and is an acquisition-hungry trust.

NNN Reit raised its AFFO outlook for 3Q-23 and the stock offers passive income investors very compelling income value for the long-term.

NNN Reit Owns A Cycle-Proven, Well-Leased Commercial Property Portfolio

Like Realty Income,NNN Reit owns a cycle-tested portfolio of commercial real estate that are mostly leased to retail customers on 10-20-year net leases.

The trust owned 3,511 properties at the end of 3Q-23 including 35.8 million square feet. The trust’s properties were represented in 49 states and the weighted average lease term for NNN Reit was 10.1 years compared to 9.7 years for Realty Income.

NNN Reit’s core focus are convenience stores which in their totality produce 16.8% of the trust’s annualized base rent. Typical franchise names popping up on the real estate investment trust’s tenant list include 7-Eleven, LA Fitness, Mister Car Wash, Walgreens and Camping World. The largest state is Texas which included 547 properties which represented 16% of the trust’s total property count.

NNN Reit has been able to raise its dividend for more than three decades because the single tenant net lease REIT is laser-focused on ensuring that its real estate portfolio is well-occupied.

The average occupancy rate for the trust’s real estate portfolio was 98.1% between 2003 and 3Q-23, and the present occupancy is even better than that: 99.2%. Realty Income’s occupancy in 3Q-23 was 98.8%, so NNN Reit’s portfolio is slightly better utilized.

5.3% Dividend With Implicitly Guaranteed Dividend Growth, High Margin Of Dividend Safety

NNN Reit’s real estate is producing predictable FFO and the dividend is well-covered by FFO, and I don’t see a scenario in which this would drastically change moving forward.

The trust’s properties generated $2.44 per share in AFFO in 2023 and NNN Reit paid out 68% of its AFFO to investors. Realty Income has a higher pay-out ratio of 76%, so I see a higher margin of safety for NNN Reit’s dividend relative to the one provided by its larger and more expensive net lease rival.

NNN Reit, over the very long-term, has not disappointed in terms of delivering a higher dividend. The real estate investment trust raised its dividend for 34 years straight, including years that included the Dotcom crash, the financial crisis and the pandemic.

Trusts that make it through those periods alright and manage to grow their pay-out for the benefit of passive income investors should be at the top of retirees’ investment lists, in my view.

NNN Reit Is Cheaper Than Realty Income, Raised Its 2023 AFFO Guidance

NNN Reit raised its expectations for AFFO guidance in the third quarter to $3.22-3.26 per share , up from $3.20-3.25 per share that were expected in the second quarter. Since NNN Reit’s stock is selling $41.70, the present AFFO multiple is 12.9x. Realty Income sees $3.98-4.01 per share in AFFO in 2023 and with a stock price of $54.92, the valuation implies a 13.7x AFFO multiple.

Why NNN Reit Might Disappoint

What are some of the risks that passive income investors might have to deal with when it comes to NNN Reit? After all, the trust has produced dividend growth for 34 years and comfortably covers its dividend with FFO.

NNN Reit is overly reliant on acquisitions to grow its FFO growth and it has acquired $590 million worth of real estate on average each year between 2007 and 2022.

Just like Realty Income, NNN Reit is so large that a small number of property acquisitions don’t affect the bottom line very much and it must acquire properties on the open market or through its relationship network. Thus, the trust will be increasingly forced to turn to larger and larger transactions in order to make a difference in terms of FFO.

Should these acquisitions dry up, maybe because of a market downturn, or could only be completed at low cap rates, NNN Reit may see its FFO and dividend growth may slow moving forward.

My Conclusion

NNN Reit’s long-term net lease investment strategy has produced impressive results for the real estate investment trust as it produced 34 year of steady dividend growth.

NNN Reit has a lower AFFO pay-out ratio, higher occupancy and a longer weighted average lease term than Realty Income which translates to a higher margin of dividend safety.

Though the trust’s stock has seen a strong recovery since the end of October, I think that NNN Reit is one of those passive income investments that retirees can continue to comfortably rely on for their dividend checks moving forward. The 5.3% yield is a Strong Buy.

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