NNN REIT: Q1, This 5.5% Yielding Stock Offers Something You Can't Get From Treasury Yields

seekingalpha05-04

NNN REIT offers stability and reliability for long-term investors seeking income, with consistent and steady growth in earnings and dividends.The REIT has shown the ability to grow through ...

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Get From Treasury Yields\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-04 19:00 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4689002-nnn-reit-q1-this-5-5-percent-yielding-stock-offers-treasury-yields><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>NNN REIT offers stability and reliability for long-term investors seeking income, with consistent and steady growth in earnings and dividends.The REIT has shown the ability to grow through ...</p>\n\n<a href=\"https://seekingalpha.com/article/4689002-nnn-reit-q1-this-5-5-percent-yielding-stock-offers-treasury-yields\">Source 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(A)"},"translate_title":"NNN房地产投资信托基金：Q1，这种5.5%收益率的股票提供了一些你无法从国债收益率中获得的东西","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ADC.AU":1,"XLRE":1,"US7Y.BOND":1,"US6M.BOND":1,"US5Y.BOND":1,"US3Y.BOND":1,"US30Y.BOND":1,"US2Y.BOND":1,"US12M.BOND":1,"US10Y.BOND":1,"REIT":1,"O":1,"NNN":1,"ADC":1,"CFA.SI":1,"BIG":1,"US912797FH58.BOND":0.6,"US912797FS14.BOND":0.6,"US912797GB79.BOND":0.6,"US912797GK78.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GW17.BOND":0.6,"US912797HE00.BOND":0.6,"US912797HH31.BOND":0.6},"content_text":"NNN REIT offers stability and reliability for long-term investors seeking income, with consistent and steady growth in earnings and dividends.The REIT has shown the ability to grow through acquisitions, taking advantage of lower cost of capital and attractive spreads.NNN REIT has a lower payout ratio compared to its peers, indicating potential for higher dividend increases and reinvestment in the business.Portfolio tenants like Big Lots, Frisch's Restaurants, and Joann's are currently facing headwinds due to higher interest rates, and this could impact NNN's financials going forward.NNN offers investors double-digit upside to their price target of $46.   Torsten AsmusInvestment Thesis With high interest rates currently, treasury yields have risen significantly the past two years, in turn causing lower-yielding investments like REITs (XLRE) to sell off. And while investors may have flocked to those safer, fixed-rate investments because of this, it has given long-term investors nice entry points into high-quality stocks like NNN REIT (NYSE:NNN). Those who follow me may know I retired from the U.S. military this past November after 21 years and have been building my portfolio to serve my needs in retirement. My main goal is income and NNN REIT offers investors something they can't get from treasuries, and that's stability & reliability. Reason being is that yields are likely to be much lower in the next year or two. Moreover, when yields are lower investors will likely move back into the market. But in the case of NNN, they continue to deliver solid earnings quarter after quarter, year after year. In this article I discuss why this 5.5% yielding REIT may not offer the highest yield currently, but offers other metrics you can't get from fixed-rate investments. Previous Rating I last covered NNN REIT this past February in an article: NNN REIT: A Wonderful REIT At A Great Price. The stock was trading below $40 a share, where I think is a great entry point, especially for long-term investors. Since then, the REIT is up slightly around $41 a share where it trades at the time of writing. Despite the challenging economic environment, the company continued to perform well beating analysts' estimates on FFO and continuing to grow their portfolio. They also made more than $800 million in acquisitions, the third highest amount in company history. I also touched on their 2024 outlook guidance and conservative balance sheet, which made them one of the strongest retail REITs in the sector in my opinion. Latest Quarterly Earnings Report If you can't tell from reading my articles, I'm a conservative person who likes routine. The Navy offered that to me and it's probably one of the reasons I lasted for 21 years. And NNN REIT offers me that same concept in my opinion. Routine, steady earnings. Nothing flashy or a huge beat. Just steady as she goes. And as a dividend investor, that's something I want in my portfolio and a reason why NNN is a core holding for me. During the first quarter to start their fiscal year on April 30th, the company continued that trend delivering a beat on FFO estimates by a penny. Revenue also beat the $212.03 million consensus coming in at $215 million for the quarter. Both FFO & revenue grew 3.8% and 5.3% on an annual basis. Again, nothing to write home about, but consistent and steady growth, something I love to see from my portfolio holdings. AFFO of $0.84 also increased 2.4% over the same period. Core FFO of $0.83 stayed flat while AFFO increased from $0.82 in the prior quarter. However, revenue experienced a slight decline from $216 million over the same period. This could be contributed to the slight decline in occupancy the REIT saw quarter-over-quarter where this declined to 99.4%. But as a long-term investor, slight quarterly declines in a company's financials or occupancy should be of no concern as many are facing headwinds due to the current macro environment. One of the highest quality REITs, Agree Realty (ADC) also saw a slight dip in occupancy from the prior quarter to 99.6% from 99.8%. But both are still above the sector average. Real Estate Ownership While higher interest rates have made it harder to find investments at attractive spreads, NNN REIT continues to find acquisitions due to their lower cost of capital. And during the first quarter the REIT continued on their path toward growth, investing $124.5 million in 20 additional properties. This brought their total count to 3,546 properties and these had a weighted-average lease term of 11.8 years. This increased from 3,532 at the end of Q4. Fellow analyst Sanjay Chandiramani explained NNN's lower cost of capital and how they typically invest at attractive spreads which is accretive for the bottom line. I suggest REIT investors read his article as it explained in detail how the REIT continues to show steady growth. During Q1 NNN's acquisitions had an weighted-average cap rate of 8%, up from 7.6% in the prior quarter. Unlike Agree Realty who prefers not to go up the risk curve as much, NNN can afford to as they have a higher percentage of non-investment grade tenants. ADC's acquisition cap rate during their latest quarter was 7.7%. As a result, this allows NNN REIT to have more bargaining power when it comes to lease terms. Author creationMoreover, this can lead to higher shareholder returns in the future. You can see in the chart above how NNN has pushed cap rates up on a quarterly basis from the prior year. And their dispositions over this same period were roughly 6.2%, so the REIT is making acquisitions at attractive spreads to their cost of capital. So, while treasuries currently give investors higher yields and may trend higher, they can't offer future growth and the ability to own quality real estate through the market. Moreover, yields have been somewhat volatile over the past year while NNN has continued delivering steady returns to its shareholders, showing their resiliency. And in the next 6-12 months yields are likely to be lower than current levels, and have seen slight declines recently. Ability To Grow Dividends Over Time Another metric yields don't offer is the ability to receive growing dividends, which then can be used to compound for strong total returns. NNN REIT has one of the lowest payout ratios amongst its retail peers. This is in comparison to Realty Income's (O) 77% payout ratio and Agree Realty's 73%. Furthermore, the company will likely reward investors with another dividend increase in the next couple of months, giving them a 35-year dividend streak, longer than Realty Income's. Analysts expect a half penny increase to $0.57 for an annualized dividend to $2.28. I expect another $0.015 to $0.02 increase to $0.58 - $0.5850. NNN REITUsing their shares outstanding of roughly 182.3 million, this gives NNN REIT a conservative payout of 68.3% with AFFO of $153 million during the first quarter. This is in-line with the company's 68.4% they ended with in 2023. And seeing by the lower payout ratio, this gives management the ability for higher increases, or to use the extra capital to reinvest back into the business, and not heavily dilute shareholders. And NNN's management is very conservative when it comes to this. During Q1, more than half of their acquisitions were funded with free cash flow and they expect 65% to be funded with FCF for 2024. Total Return Value Furthermore, a growing dividend allows shareholders to compound over the long-term, something investing in treasuries or bonds can't offer. Although NNN has trailed the S&P in total returns over the past decade, this equates to nearly an 8.5% annual return. You also have the ability to use your dividends to reinvest into additional dividend paying stocks that potentially are undervalued. In turn, increasing your total returns in the process. Seeking AlphaRisks To Thesis As mentioned previously, treasury yields could go higher, possibly reaching 6% according to JPMorgan's (JPM) CEO. If so, this will continue to not only weigh on cap rates, making investing at attractive spreads more difficult, but put pressure on portfolio tenants as well. The REIT saw a slight drop in occupancy from the prior quarter and had 22 vacant properties in its portfolio during Q1. Although the FED chair Jerome Powell stated rates re unlikely to go higher, if inflation remain sticky, they may be forced to conduct another hike. If so, portfolio tenants will continue to face financial pressure, and this could impact NNN REIT going forward. And because they have a lower percentage of investment-grade tenants, this gives their portfolio tenants a higher likelihood of bankruptcies. During the quarter, management did address that some tenants are facing financial pressures. Big Lots (BIG) has faced downward pressures as well as top tenant, Frisch's Restaurants, who account for 1.6% of their total portfolio. Portfolio tenant Joann's previously filed for bankruptcy but accounted for a small percentage of their portfolio at less than 1%. Upside Potential And last but not least, NNN, like many of their peers, also offer investors strong upside potential. Using their midpoint of AFFO guidance, this gives NNN REIT a forward P/AFFO ratio of 12.3x, below the sector median's 14.32x. During my last thesis in February, I had a price target of nearly $46 for the stock. Using the Dividend Discount Model, this remains the same. This gives investors the potential for more than 12% upside from the current price of roughly $41. Additionally, with REITs considered lower-growth investments, I use a lower rate than that of their 5-year average. And a WACC of 7%, the lower end of the 7 -10% historical range for the S&P. This is to manage expectations, but still NNN offers upside and a well-covered dividend that's likely to continue growing for the foreseeable future. Author DDMBottom Line With their first quarter in the books for 2024, NNN showed why they have a long streak of operations and delivering steady earnings over time. Despite a decline in revenue, NNN managed to grow its core FFO, AFFO, and revenue year-over-year.  Additionally, they were able to make acquisitions at attractive spreads, which will likely be accretive to their bottom line going forward. And if interest rates decline sometime in the near to medium term, NNN could gives investors some nice, double-digit upside as the macro environment picture becomes more favorable for REITs. Because of their consistency and reliability to deliver steady growth, I continue to rate NNN REIT a buy at current levels.","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/2432114584"}