National Retail Properties (NNN 1.49%) has increased its dividend annually for 32 consecutive years, making it a Dividend Aristocrat. That streak is longer than larger peer Realty Income, which is at "just" 28 years. A fundamental reason why National Retail has managed to outdo so many other real estate investment trusts (REITs) on the dividend front is by keeping its business plans simple. Here's why that matters.
One thing
Net lease REITs like National Retail and Realty Income own single-tenant properties. However, their tenants are responsible for most of the operating costs of the assets they occupy. That keeps costs low for the REITs and allows them to focus more time on other aspects of their portfolios, like buying new properties. Moreover, while any individual property is a pretty high risk, given a single tenant, net lease assets that are spread across enough properties are considered fairly low risk. National Retail's portfolio includes nearly 3,200 locations.
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In addition to the net lease approach, National Retail also makes a habit of forming strong relationships with its tenants. That's notable because roughly 70% of its acquisitions have come from existing tenants since 2007. That means it didn't have to go out and find those properties; the properties, $6 billion worth, basically came to National Retail. Once again, this keeps costs low.
Costs are a theme here because net lease assets are really a way for companies to raise cash by selling their properties. The key is that once sold to a REIT like National Retail, the seller generally inks a long-term lease to retain access to the property. Effectively, National Retail makes the difference between its cost of capital and the rent it receives. Keeping operating costs low helps keep profits as high as possible. Maintaining low operating costs, by the way, is another reason National Retail is laser-focused on just the retail sector, which means it doesn't have to spend the time and money trying to learn and track multiple property sectors.
What you do and what you don't do
This is where the story gets interesting. Two of the primary sources of capital for a REIT are stock and bond sales. These are vital because REITs have to pay out 90% of their taxable income as dividends to avoid corporate-level taxation. Thus, there's not a whole lot of cash around to put toward new acquisitions, and raising capital in the markets is a frequent occurrence in the REIT sector.
However, timing matters. If a REIT's stock price is low and, thus, its dividend yield high, selling stock is effectively quite costly. And when bond yields are low, selling bonds makes more sense. Today, National Retail's stock yields around 4.4%, and it can issue long-term debt in the low 3% interest rate range. When asked about capital raising during National Retail's third-quarter 2021 earnings conference call, CFO Kevin Habicht explained:
I think we've done two debt offerings this year and raised zero equity. Granted, we used a large portion of that raise to redeem some preferred, so maybe that's -- a chunk of that's just a refinance is the way to think about it. But you've not seen us issue any equity this year because we do think the debt markets have been very attractive when we can issue 3% 30-year debt, that's of interest to us. And so that's what we did.
In other words, National Retail, once again, opted for the most cost-effective way to finance its business. When it comes to keeping costs down, the choices you make and the ones you don't make can make a material difference. Clearly, National Retail puts a great deal of thought into how it can keep its business lean and mean so it can pass as much income on to investors as possible as it steadily grows its business. Right now that includes focusing on low-cost debt sales over higher-cost equity issuances.
Nuances matter
Investors often spend so much time looking at a company's growth trajectory that they forget about other factors, like operating efficiency. National Retail tends to be a slow and steady tortoise on the growth front, but it makes up for that by spending a lot of time working on efficient and prudent capital management. This ethos can be seen throughout its business, from its net lease approach to its preferred acquisition methods to its capital raising plans. For long-term dividend investors, being a cheapskate like National Retail might actually be exciting, noting that there's an impressive 33 years worth of dividend proof behind that statement.
