NNN REIT: A Core REIT Holdings With A 5.4% Yield

seekingalpha03-26

NNN REIT offers a solid 5.4% dividend yield and stable double-digit total returns.The trust has a strong acquisition history and a low payout ratio, making it an attractive investment.The stock is ...

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I see NNN REIT as a high-quality core holding in a passive income investor portfolio and the stock has growth and re-rating upside as it acquires more properties in the future. With a strong acquisition history and a low payout ratio based on adjusted funds from operations, I think that NNN REIT offers investors a very attractive risk/reward relationship. The trust's stock is selling for compelling funds from operations multiple as well and the dividend is very, very safe. My Rating History In December 2023, I pointed to NNN REIT's ability to outperform the S&P 500 over a long stretch of time as a prime reason to buy the REIT's stock for a passive income portfolio. Though the trust has most recently underperformed, I think that long-term investors have an opportunity here to acquire a very well-managed commercial trust that produces a boatload of recurring AFFO. Portfolio Review, Income Trend And Acquisitions NNN REIT owned 3,532 net-lease properties in the United States at the end of 2023 which produced more than half a billion in AFFO. Net-lease properties are attractive assets to own for REITs since the burden of maintenance, operation, and insurance is shifted over to the tenant. NNN REIT is one of the largest retail trusts in the United States and its top tenants include large retail chains like 7-11 and Camping World. The REIT earned $591.5 million in AFFO, up 4% YoY, in 2023 and the portfolio is very well-leased. The trust had a portfolio occupancy of 99.5% in 4Q-23, which was above NNN REIT's long-term average of 98.1%. Adjusted Funds From Operations (NNN REIT) Historically, NNN REIT has been an active force in terms of acquisitions and has regularly acquired new properties through its relationship network as well as through open market transactions. In 2023, the retail REIT acquired properties totaling $820 million which reflected a $28 million decline compared to 2022. According to the trust's guidance, NNN REIT anticipates to acquire between $400-500 million in real estate this year while disposing of approximately $80-120 million. Relationship Network (NNN REIT) The main reason to buy and own NNN REIT is because the trust offers passive income investors a very safe dividend, in my view. The trust earned $3.26 per share in AFFO in 2023 and paid out $2.23, implying a dividend payout ratio of 68.4%. In 2022, the payout ratio was 67.3%. The low payout ratio based on AFFO is what I think makes NNN REIT a value REIT. Realty Income Corporation (O) paid out 76.1% of its AFFO last year, so NNN REIT continues to offer passive income investors a much higher safety margin when it comes to the payment of dividends. Affordable FFO Multiple With Expansion Potential NNN REIT sees $3.29 to $3.35 per share in AFFO which, at a present stock price of $42,49, translates into a 2024 FFO multiple of 12.8x. Realty Income sees between $4.13 and $4.21 per share in AFFO in 2024 which implies a FFO multiple of 12.5x. Thus, Realty Income has a slight valuation edge compared to NNN REIT, but the latter has stronger dividend payout metrics. I think that NNN could sell at 15x AFFO when taking into account its very safe dividend and growth in underlying AFFO, the same multiple that I also think Realty Income could sell at. A 15x AFFO multiple translates into an intrinsic value of $50 for NNN REIT and it is also my long-term stock price target. Why The Investment Thesis Might Not Play Out As Anticipated NNN REIT can really only meaningfully grow through acquisitions which poses a risk in itself as the trust may be forced to make excessively generous acquisition offers for real estate. Furthermore, NNN REIT is subject to operating conditions in the retail real estate industry and a downturn in the economy might affect the trust's ability to collect its rents. In the long-run, however, this has not been a serious issue for NNN REIT and even during a recession the dividend should be fine. My Conclusion NNN REIT is a well-managed commercial REIT which generates a gigantic amount of AFFO from its underlying real estate portfolio. The trust comfortably earns its dividend with AFFO and the payout ratio of 68% compares favorably to Realty Income's. Acquisitions are one way in which NNN REIT can grow its AFFO moving forward and the trust has a history of making accretive acquisitions that add value for shareholders.  The ultimate value, however, is in NNN REIT's well-covered 5.4% yield as well as the REIT's demonstrated ability to produce 11% annual returns over many decades. As such, I think that NNN is a great choice for passive income investors and the dividend can be anticipated to grow in 2024.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2422584796"}