National Retail Properties (NNN) is an American real estate operating company that manages high-quality retail properties across 48 states. The company has a portfolio of more than 3,000 assets with a weighted average lease term of 10.7 years (as of September 30, 2020), making it an excellent investment for those seeking diversified income. I am bullish on the stock.
The Economic Outlook
The economy has a direct pull on retail real estate stocks due to the business model’s reliance on the broader economy rather than a particular segment.
U.S. consumers tend to wear their problems very openly, but the economy is in much better shape than it looks. The nation’s real GDP has surged by 7% during the past year, only 0.87% less than the current inflation rate.
Push inflation factors will likely find calm shortly amid lockdown re-openings and general improvements in capacity utilization. In addition, the market could soon come to its senses and price non-core products (food & energy) more rationally, as I believe it has definitely overreacted to the implications of an ex-Russia supply.
In a nutshell, high real GDP growth and moderate to high inflation could spur on real estate stocks in the short run. After which sustained real GDP growth with a taper on inflation will likely aid real estate stocks even further.
Recent Performance
The company’s operations are as robust as can be, with its capacity utilization running at 99% during the past year. This is quite a feat considering the firm has more than 3200 properties across 48 states that have all faced pandemic-related headwinds.
National Retail’s fourth-quarter earnings reflected the firm’s operational success, as it beat analysts’ estimates by $2.89 million and also upended its forecast of funds from operations by 3 cents per share. Its outlook for 2022 is positive, with the firm’s management expecting funds from operations to come in at $2.93-$3.00 per share, which is an upwards revision versus the previous estimate of $2.90-$2.97.
The company ended its previous quarter with $171.3 million in cash with no amounts drawn from its $1.1 billion credit line and no maturities due until 2024. This suggests that the enterprise has sound liquidity, providing it with a platform to scale its operations in the near future.
What Would Higher Interest Rates Mean?
The current rising interest rate environment won’t necessarily be a headwind for National Retail, seeing as it could potentially bolster leasing demand and taper off retail property purchases.
There’s no debating the fact that the company will generally do better during higher inflation periods, as it benefits from higher rents paid and a higher percentage of tenant sales income. However, rising interest rates could bring the retail space back into equilibrium before consumer purchasing power diminishes, thus sustaining National Retail’s current income levels.
Higher interest rates could, however, slow-down National Retail’s plans to acquire between $550 million and $650 million worth of real estate this year. This isn’t necessarily a bad thing for investors, as acquisitions often dilute the value of a real estate stock and subsequently cause a draw on its stock price.
Dividend Safety
National Retail is undoubtedly a very reliable investment for those seeking consistent income. The company’s dividend has experienced 13 consecutive years of growth, with its latest quarterly dividend of 53 cents per share yielding 4.6%.
National Retail’s FFO interest coverage of 4.12x and its FFO-to-debt ratio of 0.15% means that the stock has the capacity to sustain its current level of dividend payments for the foreseeable future, indicating that the stock’s dividend safety is intact.
Valuation
National Retail is undervalued relative to its five-year average. The stock’s price/FFO ratio is at an 11.60% discount to its sector, meaning that stock market participants have underpriced the company’s organic income.
Additionally, National Retail’s price-to-adjusted-funds-from-operations ratio is trading at a 26% discount. This value gap suggests that the underlying entity’s economic value isn’t priced in by investors.
Wall Street’s Take
Turning to Wall Street, National Retail Properties stock earns a Hold consensus rating based on three Buys, four Holds, and one Sell assigned in the past three months. The average National Retail Properties price target of $48.67 implies 8.4% upside potential.
The Bottom Line
This isn’t a stock that will blow the roof off, but you’ll most likely receive solid dividend payments from it. In addition, the asset provides capital gains prospects with it trading at a discount relative to its intrinsic value.
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