National Retail Properties (NYSE:NNN) has seen recessions before, but none quite like the one it's about to experience. The social distancing efforts to slow the spread of COVID-19 seem to be working, but the cost of effectively shutting down the economy will be high.

That raises the questions: Is this bellwether net-lease real estate investment trust (REIT), off nearly 50% from its early-year highs, a bargain today? Or is there more pain to come?

Focused on a tough sector

National Retail Properties has long been favored by dividend investors because of its incredible streak of 30 consecutive annual dividend increases. Dividend growth isn't fast, but a slow and steady pace has more than kept up with the historical growth rate of inflation. Very few companies can match its dividend record and even fewer real estate investment trusts can. As a result, it has a history of trading at a premium price. 

The word yield spelled out with dice sitting atop stacks of coins

Image source: Getty Images.

However, the REIT is focused 100% on owning single-tenant retail properties in North America. As COVID-19 has marched across the globe and across the United States, the U.S. government has pushed non-essential businesses to shutter in an effort to slow the spread of the disease. The infection rate has started to level off, but it looks like the social distancing effort is going to push the country into a recession. There are two problems for National Retail as a result.

The first issue is that many of the company's retail tenants were likely forced to shut their stores or limit their operations. Looking at National Retail's top 10 sectors, at least 40% of its properties, if not more, would likely be deemed non-essential businesses. Although occupancy is in the high 90% range, the norm for this REIT, it remains to be seen if it needs to offer rent concessions to its tenants to help them through this difficult period. That could crimp the REIT's top line, and make it more difficult to keep paying its dividend. 

The second problem is that, assuming there is a recession, demand could be weak even after non-essential businesses are allowed to reopen. Customers might also be slow to return to retail stores because of concerns about the coronavirus. So National Retail's lessees aren't likely to see business return to normal after opening, which will pressure their top lines and make it difficult to pay rent. So the REIT may still be dealing with a troubled portfolio even after social distancing measures get lifted.

That's not a favorable outlook, and it helps explain why the stock has fallen so far from its early-year highs. The dividend yield, meanwhile, is around 6.7%, the highest it's been since the deep 2008-09 recession. 

Getting ready for the worst

There are a few pieces of good news in the mix that investors should know about it. For example, while 40% of the company's portfolio is likely non-essential, there's a significant portion of the portfolio that is likely to still be open. For example, many of its properties are auto-related, from gas station convenience stores to auto parts and services. So it still has lessees that are operating, even if it is at a reduced level. Meanwhile, occupancy during the last recession fell to "just" 96.4% in 2009 before starting to bounce back. That would be a desirable number for most REITs in a good year, and it occurred during a very severe economic contraction. So COVID-19 and the impact it is having is bad, but National Retail isn't falling off a cliff, nor did it do so during the last downturn. 

NNN Chart

NNN data by YCharts

Meanwhile, the REIT's payout ratio in 2019 was a solid 72% of adjusted funds from operations (AFFO), which is like earnings for an industrial concern. That may sound high, but for a REIT it's fairly modest, and it provides some leeway to deal with difficult periods. Further, in mid-February, before things got really bad, National Retail was able to issue $700 million worth of low-interest long-term bonds. It used the cash to pay off near-term maturities, solidifying its financial position going into what is likely to be a downturn. Note, too, that the REIT's financial debt-to-equity ratio of roughly 0.3 times is reasonable, if not modest. Moreover, it was able to cover its 2019 interest expenses by roughly 3.6 times, which is also solid. In other words, it looks like National Retail's balance sheet is in good shape. 

All in all, despite Wall Street's concerns, it appears that National Retail is ready for a rough market. But that brings up the question of valuation. The dividend yield, as noted above, hasn't been this high since the last recession. This suggests that dividend-focused investors might want to take a look. And with the stock off by around 50%, what was once an expensive stock is much less so now. Using 2019 AFFO and the current share price, the REIT is trading hands at roughly 11 times trailing AFFO -- that's down from around 20 times. National Retail looks to be priced at an attractive level today, even noting that AFFO will likely decline some this year.

Time for more research

If you are a conservative investor looking for bargains today, National Retail Properties should be of interest to you. Yes, Wall Street's concerns about its retail-focused portfolio are legitimate, and near-term results could be weak. But it looks like this high-yield stock is in solid shape to handle the hit and thrive over the long term. You may have to hold through a difficult recession and perhaps even more downside in the stock, but long-term it will likely be worth it.