National Retail Properties (NYSE:NNN) is a real estate investment trust, or REIT, which focuses on retail real estate, as its name implies. The company has about 2,800 properties in its large portfolio, and it leases these properties out to more than 400 different retail tenants. National Realty specializes in free-standing (single-tenant) retail properties, as opposed to shopping malls or strip centers.
Unlike the other leading free-standing retail REIT, Realty Income (NYSE:O), National Retail is a pure-play retail REIT. Approximately 20% of Realty Income's portfolio is made up of nonretail property types -- which isn't necessarily a bad thing, but if you want to invest exclusively in free-standing retail properties, National Realty is the way to go.
However, given the headwinds facing so many retailers today, is National Retail Properties still worth a look, or should all brick-and-mortar retail stocks be avoided?
The right kind of retail
It's absolutely true that many retailers are struggling or have already gone bankrupt. In fact, in the days before I wrote this, leading mattress retailer Mattress Firm declared bankruptcy. Quite frankly, e-commerce is wreaking havoc on many retail businesses.
However, National Retail Properties does a great job of avoiding the vulnerable property types. The company's strategy involves avoiding malls and strip centers entirely and avoiding any tenants in retail categories that are particularly susceptible to e-commerce headwinds.
Take a look at National Retail Properties' top categories. Nearly 18% of the portfolio consists of convenience stores, such as 7-Eleven and Sunoco. These businesses generally sell nondiscretionary products (like gasoline) that people need no matter what the economy is doing. And they generally need these products right away.
Other categories such as restaurants (20% of the portfolio), automotive service centers (7.6%), and family entertainment centers (6.4%) have similar e-commerce-resistant qualities.
And they have the right kind of lease structure
Not only do National Retail's tenants operate in desirable areas of the retail industry, but all of the company's properties are leased to those tenants in a way that's designed for stability and growth.
Specifically, all of National Retail Properties' tenants are on triple-net leases. If you're not familiar, this is a type of commercial lease that is typically used for free-standing properties, under which the tenants agree to cover property taxes, building insurance, and most maintenance expenses. These are most of the variable costs of owning properties -- for example, if a property's tax bill doubles one year, it doesn't cost National Retail another dime.
In addition, triple-net leases are typically executed with long (15-plus-year) initial terms with regular rent increases, or escalators, built right in. In fact, the majority of National Retail Properties' current leases don't expire until after 2027.
To sum it up, a triple-net lease is designed to keep income as predictable as possible for as long as possible. The combination of triple-net leases and a focus on e-commerce-resistant businesses is why National Retail Properties has a remarkably strong 99.2% occupancy rate.
National Retail Properties is one of the few REITs listed in the S&P Dividend Aristocrats index. The company not only has a 4.4% dividend yield, but it has increased its payout for 29 consecutive years.
Risks you should know about
There are a few obvious risks here. For example, one of the company's major tenants could go bankrupt, causing the vacancy rate to spike and income to fall.
Perhaps the biggest not-so-obvious risk is interest rates. REIT stocks tend to do quite poorly in rising-rate environments, and if bond yields keep rising (the 10-year Treasury is a good REIT indicator), you can expect REITs to come under pressure. However, it's important to realize that this is a stock-price risk, not a risk to National Retail's business. In fact, the company has little variable-rate debt and has limited borrowing needs in any given year.
Over the long run, however, National Realty has performed well throughout rising- and falling-rate environments. In fact, over the past 25 years, National Retail has generated annualized 11.9% total returns -- handily beating the S&P 500.
National Retail Properties is an excellent way to invest in retail for the long run, with minimal worry about e-commerce headwinds and the effects of recessions on the business. While the stock might be a little volatile during periods of rising or falling interest rates, National Retail should perform quite well over time.