Market volatility is when investors can get opportunities to buy high-quality stocks at a discount. It's an opportunity to set your portfolio up for the long term. Real estate investment trusts (REITs) are an excellent option for any long-term investor looking for income and steady growth.
Retail REIT National Retail Properties (NNN 0.44%) has a 25-year record of delivering double-digit annual returns and pays a dividend that it's raised 32 years in a row. Additionally, the stock's attractively valued, allowing long-term investors to take advantage of this window of opportunity. Here's what you need to know.
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Built for durability
National Retail Properties leases single-tenant, freestanding retail buildings. In other words, it focuses on buildings with one occupant, avoiding shopping malls, outlets, and other multi-use properties. Its real estate portfolio includes convenience stores, automotive service centers, chain restaurants, fast food, gyms, movie theaters, and specialty retail totaling 3,223 properties across 48 states.
These are businesses that customers visit frequently, are resistant to disruption from e-commerce, and are likely to do well regardless of how the economy is. National Retail signs net leases, making the tenant responsible for paying taxes, insurance, and maintenance on the property.
For National Retail, its only worry is that its tenants can pay their rent because single-tenant properties are either occupied or not. A tenant leaving could impact overall occupancy, so this is always a risk to consider. However, in National Retail's case, the company rents to more than 370 national and regional tenants, so the diversification of their rental income helps minimize this risk.
REITs must pay at least 90% of their taxable income as dividends, and bottom line profits can be skewed by non-cash adjustments. Hence, their cash profits, referred to as funds from operations (FFO), help investors gauge whether a REIT is generating enough cash to pay its dividend. For example, National Retail's dividend payout ratio is 69% of FFO-per-share.
National Retail is strategic in building a durable company, but that doesn't make the business immune to volatility. You can see how years of steady growth in the business have come with occasional hiccups, like during the recessions in 2008-2009 and 2020.
NNN Funds from Operations (TTM) data by YCharts
But throughout this time, the company has not only made every dividend payment -- it's increased the dividend every year, through both good and bad times. It's a testament to the management team in place and the disciplined way it runs the company. This style won't set the market ablaze; the business has grown its FFO per share by an average of just 4% since 2016.
Strong financials for peace of mind
However, investors get peace of mind and comfort in owning a company that's proven to be reliable through multiple recessions. The stock market guarantees nothing, but National Retail is high on the list of stocks you can sleep well at night while owning.
It boils down to the company's stellar financials. Rental income should be dependable for the near future; National Retail has a 99% occupancy rate, meaning virtually no properties are sitting empty. Furthermore, the company's portfolio of leases has a remaining average duration of more than 10 years, and just 5% expire through the end of next year. More than half go beyond 2031.
Financially, National Retail Properties carries an "investment grade" credit rating from all three major bureaus, meaning they deem the company capable of meeting its financial obligations. The company has virtually zero debt due until 2024 and ended 2021 with $173 million in cash and its full bank credit line intact.
National Retail is built with consistency in mind but still prepares for a catastrophic event should one happen. One did happen when the pandemic first hit! The company managed well enough to keep putting cash in shareholders' pockets.
The buying window is open
The COVID-19 crash in March 2020 took National Retail's stock down along with the rest of the market. But unlike most, it hasn't quite recovered to pre-pandemic highs; shares remain about 20% below their former highs.
However, non-GAAP FFO-per-share was $3.06 in 2021, exceeding pre-pandemic levels of $2.80. In other words, the business is making more money per share, yet the stock price is lower. If we look at the stock's valuation using price-to-FFO (like price-to-earnings, but for REITs), the current ratio of 16 seems pretty reasonable for a steady but very durable business. For example, fellow retail REIT Realty Income trades at a price-to-FFO ratio of 23.
Soft guidance for 2022 could be a reason that the stock is struggling. The company's non-GAAP guidance for 2022 FFO-per-share is $3.01 to $3.07, flat with 2021 performance. However, the company noted that it received almost $32 million in deferred rent payments in 2021, which won't repeat in 2022, partially explaining the softer guidance.
Long-term investors should monitor how the company performs this year and sets guidance for 2023 and beyond, but it's hard not to trust a long-term record like what National Retail Properties has built.
