Why NNN REIT Remains A Top Income Pick

seekingalpha09-29

NNN REIT offers a solid 4.8% dividend yield with a conservative 67% AFFO payout ratio and 35 years of consecutive dividend growth.NNN's strong balance sheet, diversified portfolio, and accretive ...

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That was the case for many REITs 6 to 12 months ago, when concerns around the direction of inflation and interest rates came to a boil, driving down REIT prices to level that were previously unimagined. This brings me to NNN REIT (NYSE:NNN), which I last covered in March, highlighting it as a bargain opportunity while the market was 'asleep' on income stocks while chasing growth stocks at all costs. That bet paid off, as NNN has produced a 16% total return since then, well-surpassing the tech-heavy S&P 500's (SPY) 10% rise in price over the same time. While NNN may not be the table-pounding bargain that it was, I believe it remains a solid choice for income investors who prize 'buy right and hold tight' stocks at the current valuation. In this article, I revisit NNN including recent business fundamentals and discuss why that remains the case for this high-quality income stock, so let's get started! Why NNN? NNN REIT is a triple net lease REIT that used to be called National Retail Properties. Perhaps unbeknownst to some investors, NNN actually has a longer track record as a public company than its more popular peer, Realty Income Corp. (O). This includes 35 consecutive years of increasing its dividend through a multitude of economic events and interest rate environments. NNN carries 3,548 properties that are spread across 375 tenants and 35 lines of trade. As shown below, properties are diversified across the U.S. with the majority being east of the Rocky Mountains. Investor Presentation Having a strong balance sheet pays off for NNN, especially in a higher interest rate environment when there is less competition for deals and when higher leveraged owners are motivated to sell. This is reflected by NNN's BBB+ credit rating from S&P, with safe net debt to EBITDA of 5.5x, sitting comfortably below the 6.0x level generally considered safe for REITs. It also has $1.2 billion of liquidity on its bank credit line and carries a robust 4.2x fixed charge coverage ratio and well laddered debt maturities, with 0% to 4.3% of its debt maturing annually through 2032, as shown below. Investor Presentation Having a strong balance sheet with a weighted average interest rate of 4.1% has enabled NNN to transact in an accretive manner at a healthy investment spread. As shown below, cap rates on acquisitions have ranged from 6.5% to 8.0% over the past 10 years, with transactions in 2024 hitting the high end of this range at 8%. Investor Presentation Meanwhile, NNN continues to demonstrate strong fundamentals, with occupancy being at 99.3% in Q2 2024. During the quarter, NNN purchased 16 properties for $111 million at a 7.9% initial cap rate with a weighted average remaining lease term of 16 years. This was funded in part by the disposition of 14 properties for $67 million with an $18 million gain at a 7.7% cap rate and with the remainder of funding coming from free cash flow without the need to tap external funding. Management raised full year guidance for Core FFO per share from $3.28 previously to $3.30 at the midpoint of range, which would represent 1.2% growth from $3.26 achieved for the full year 2023. This is supported by $400 to $500 million worth of acquisitions planned for the full year, with particular focus on the convenience store and auto service sectors, which are e-commerce and recession resilient. Notably, management does not see an immediate need to raise equity, and will only do so opportunistically when the pricing of NNN shares become favorable. Importantly for income investors, NNN currently yields a respectable 4.8% and the dividend is well-protected by a 67% AFFO payout ratio. The dividend was raised by 2.7% this year and comes with 35 consecutive years of growth, as mentioned earlier. I continue to see value in NNN at the current price of $48.15 with a forward P/FFO of 14.5. As shown below, this sits below NNN's historical P/FFO of 16.1. FAST Graphs While analysts expect just 2-3% annual FFO per share growth in the near term, that could be due to uncertainty over the direction of interest rate. This headwind could subside with potential for further rate cuts and over the long-run, I believe NNN could achieve a 5% FFO/share annual growth rate, with ~2% annual rent escalators coupled with 2-3% FFO/share growth coming from external acquisitions. Combined with the near-5% dividend yield, NNN could deliver market-level returns, all with a higher yield. Risks to the thesis include potential for economic volatility, which could give rise to higher bad debt expense (from tenants unable to pay rent). NNN could also see secular risks in full-service restaurants, which comprise 9% of annual base rent, should consumers choose to pull back on spending in a recession. Moreover, sticky high interest rates could also impact NNN's cost of debt and weigh on investment spreads on property acquisitions. Investor Takeaway  NNN REIT continues to be an attractive option for income-focused investors, offering a solid 4.8% dividend yield backed by a conservative 67% AFFO payout ratio and 35 consecutive years of dividend growth. With a strong balance sheet, a diversified portfolio of 3,500+ properties, and accretive acquisitions, NNN is well-positioned to weather economic and interest rate uncertainties. While near-term FFO growth may be modest, potential rate cuts and steady rent escalations offer long-term growth prospects, making NNN a reliable choice for 'buy and hold' investors seeking stable, income-generating stocks.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"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":"4.28.3","shortVersion":"4.28.3","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/2471506850"}