National Retail Properties (NYSE:NNN) is a single-tenant, triple net-lease REIT investing in retail properties across the United States. The REIT offers investors outstanding portfolio characteristics, a high degree of diversification, a solid dividend yield and a justifiable valuation based on 2014 run rate FFO levels.
Some basic facts about net lease REITs
Net lease REITs pretty much assign responsibility for their properties to the lessee and allocate costs such as real estate taxes, building insurance and maintenance expenses to the lessee as well.
The lessee, of course, has to shoulder all these costs in addition to the rent determined in the lease.
Since net-lease agreements burden the lessee with ancillary costs, the contractual rent will usually be lower than in standard leases. However, the real estate company does save money on property management costs which can easily go into the millions if the company has a large enough property portfolio.
1. Portfolio growth
If you want to live well today, you should have planted your seeds yesterday.
It is a good thing that National Retail Properties started seeding in 1984 when its was formed as Golden Corral Realty Corporation. The company has grown its property portfolio ever since, both organically and via opportunistic acquisitions, and the REIT continues to grow bigger and bigger each year.
The company now has 1,903 properties in 47 states, and no end to National Retail Properties' growth story is in sight.
2. Diversification minimizes cyclical downside risks
Investors would want a retail REIT to be as highly diversified as possible in order to minimize downside risks stemming from an outsized reliance on any particular industry, geography or tenant. If any particular industry or geography is doing badly, the REIT only takes a small hit and can move on, without putting its cash flow and dividend streams at much risk.
With more than 350 tenants, National Retail Properties exhibits a high degree of tenant diversification, which surely works to the benefit of shareholders. In addition, the top five industries account for less than 48% of base rent.
3. Strong portfolio characteristics
There is a quick and dirty test to determine whether a real estate investment business is doing a good job and attracting quality tenants: Check the occupancy rates.
Occupancy rates seem just like one of many key performance indicators that can easily be tossed aside, but they are clearly worth a closer look.
Constantly high occupancy rates signal that the properties of the REIT are in high demand and probably in good shape, especially if they are rented out to first class clients such as 7-Eleven, Susser, Best Buy or LA Fitness (which National Retail Properties does).
In our particular case, National Retail Properties reported an occupancy rate of 98.2% at the end of 2013 as well as in the first quarter of 2014. Its average occupancy rate over the last eleven years stood at an impressive 97.5%, indicating that the company indeed does a proper job in placing and keeping tenants.
It goes without saying that investors mainly invest in REIT investment vehicles because they want access to a recurring dividend stream, which many investors will be able to put to good use.
The credibility and consistency of a dividend stream can always be judged by looking at a REIT's dividend record. Does it pay consistently and also allow dividend growth?
In the case of National Retail Properties, the answer to both questions is yes. The REIT increased its dividends every year since 1990 (yes, that's 24 years) and throughout the financial crisis. The REIT currently pays investors $0.405 quarterly, which translates into a dividend yield of 4.4%.
However, this 4.4% is only the initial dividend yield. Given National Retail Properties' record of boosting dividends year after year for such a long time period, investors can reasonably expect higher payouts in the future.
National Retail Properties' reported a FFO (as well as an AFFO) of $0.51 per share for the first quarter of 2014 which translates into about $2.04 FFO run rate for fiscal year 2014.
For comparison purposes, National Retail Properties' first quarter 2013 FFO came in at $0.47 per share and its fourth quarter 2013 at $0.50 per share. All figures suggest that National Retail Properties indeed achieves a recurring FFO of around $0.50 per share per quarter.
With an estimated $2.04 per share in 2014 FFO, National Retail Properties presently trades at approximately 18 times 2014 FFO which is probably a bit more on the expensive side of the equation, but does not include incremental improvements from accretive portfolio acquisitions.
The Foolish Bottom Line
Renting properties out to high-quality tenants via long-term leases is a great way for building sustainable wealth.
A dependable cash flow stream from a well managed, diversified portfolio of retail properties allows shareholders to participate in National Retail Properties' growth story. The REIT has an outstanding record in rewarding shareholders and should do just as well in the future as it did in the past.