NNN REIT Stock: High-Yielder Reported Strong Q3 Results & Raised Guidance
December 15, 2023
Why NNN Stock Is Compelling at the Moment
Real estate investment trusts like NNN REIT Inc (NYSE:NNN) have faced headwinds from the Federal Reserve’s aggressive interest rate policy.
Since March 2022, the Fed has raised its rates 11 times.
Why was that bad for REITs? Higher interest rates make it more expensive for them to borrow money and service their existing debts. It also weighs down their profitability. On the plus side, higher inflation increases the value of their properties.
The outlook for REITs of all stripes got a little rosier on November 1, though. That was when the Fed announced it was pausing its interest rate hikes.
Coincidently, it was also the day NNN REIT Inc, formerly called National Retail Properties Inc., reported tremendous third-quarter financial results and increased its full-year guidance.
When will the Fed start to actually cut its interest rates?
James Knightley, an analyst at ING Economics, believes that the first rate cut will come in early 2024, followed by as many as five more cuts before the end of that year. The analyst forecasts that the interest rate cuts will extend into 2025 as the U.S. economy slows. (Source: “The Federal Reserve Will Cut Interest Rates 6 Times in 2024 as the Economy Shows Clear Signs of Cooling Down, ING Says,” Business Insider, November 30, 2023.)
That should be a financial lifeline for well-run REITs like NNN REIT Inc.
The company acquires, invests in, and develops high-quality properties and leases them to retailers under long-term (15–20 years) triple net leases. (Source: “Our Portfolio,” NNN REIT Inc, last accessed December 7, 2023.)
With a triple net lease, the tenant is responsible for all expenses, including taxes, insurance, maintenance, and utilities. In essence, NNN REIT banks the base rent and has no obligation to spend money on its properties.
Why would any tenant sign up for a triple net lease? Since the tenant covers most of the property’s costs, the property owner can charge lower rent. Don’t shed a tear for NNN REIT Inc, though; it builds rent increases into its leases.
The company’s real estate portfolio is made up of 3,511 properties across 49 states. It leases its properties to 395 tenants in more than 30 lines of trade. The portfolio’s aggregate gross leasable area is approximately 35.8 million square feet, which is equal to about 622 NFL football fields.
The top 10 lines of trade in NNN REIT Inc’s tenant base are as follows:
- Convenience Stores: 16.9% of the portfolio
- Automotive Services: 14.5%
- Full-Service Restaurants: 8.9%
- Limited-Service Restaurants: 8.8%
- Family Entertainment Centers: 5.7%
- Health and Fitness: 4.7%
- Theaters: 4.3%
- Recreational Vehicle Dealers, Parts, and Accessories: 4.2%
- Equipment Rental: 3.0%
NNN REIT Inc’s tenants include 7-Eleven, Dave & Buster’s Entertainment Inc (NASDAQ:PLAY), Mister Car Wash Inc (NYSE:MCW), Sunoco LP (NYSE:SUN), Walgreens Boots Alliance Inc (NASDAQ:WBA), and Wendy’s Co (NYSE:WEN).
Despite the challenges for brick-and-mortar retailers during the COVID-19 pandemic, NNN REIT Inc’s occupancy rate was excellent during that period. In fact, from 2003 to Q3 2021, its occupancy rate never fell below 96.4%. Over the same time frame, the REIT industry’s average occupancy rate never rose above 93.7%.
NNN REIT Inc Reported Great Q3 Results & Raised Guidance
Thanks to its diverse real estate portfolio, NNN REIT generates high earnings.
For the third quarter, the company announced that its revenues increased by six percent year-over-year to $205.1 million. Its net income went up by 20.7% year-over-year to $106.7 million, or $0.59 per share. (Source: “Third Quarter 2023 Operating Results and Increased 2023 Guidance Announced by NNN REIT, Inc.” NNN REIT Inc, November 1, 2023.)
Its funds from operations (FFO) climbed in the quarter by 5.3% year-over-year to $147.2 million, or $0.81 per share. Its core FFO went up by five percent year-over-year to $147.2 million, or $0.81 per share. Its adjusted FFO advanced 3.7% year-over-year to $148.2 million, or $0.82 per share.
During the third quarter, the company maintained an occupancy rate of 99.2%, with a weighted average remaining lease term of 10.1 years.
Also during the quarter, NNN REIT Inc made $212.5 million in property investments, including the acquisition of 46 properties with an aggregate gross leasable area of about 449,000 square feet at an initial cash cap rate of 7.4%. It also sold 13 properties for $49.0 million.
The REIT has a solid balance sheet with $98.3 million in cash and no amount drawn on its $1.1-billion bank credit facility.
Steve Horn, NNN REIT Inc’s CEO, commented: “As macroeconomic headwinds continue to create challenging capital market conditions, our free cash flow generation and $1.1 billion line of credit position NNN to finish 2023 and begin 2024 strong.” (Source: Ibid.)
Following a record 2022, management expects to report an even better 2023.
It increased its core FFO guidance for full-year 2023 from the range of $3.17–$3.22 per share to $3.19–$3.23 per share. For 2022, the REIT reported core FFO of $3.14 per share. Management also estimates that the company’s full-year AFFO will be in the range of $3.22–$3.26 per share, up from $3.21 in 2022.
34 Consecutive Years of Dividend Growth
NNN REIT Inc is one of only three publicly traded REITs to have increased their dividends for 34 or more consecutive years. It has the third-longest streak of dividend increases of all public REITs and 97% of all NYSE-listed companies.
Moreover, NNN REIT stock’s five-year average annual dividend growth rate is three percent.
NNN REIT Inc’s history of steady, consistent income has supported its dividend growth, as well as mid-single-digit growth of its FFO per share. This positions NNN stock well for any economic environment.
In October, the company’s board announced a quarterly dividend of $0.565 per share, for a yield of 5.42%. (Source: “Dividends,” NNN REIT Inc, last accessed December 7, 2023.)
Chances are good that the REIT will increase its dividend for the 35th consecutive year in 2024. Not only did the company increase its guidance, but it has maintained a conservative payout ratio of 68% of its AFFO.
NNN REIT Stock Has Ripped Higher
The combination of superb financial results, increased guidance, and a dovish Federal Reserve has helped juice NNN stock’s value.
Since the start of November, NNN REIT Inc’s share price has rallied by an impressive 14% (as of this writing). NNN REIT stock is still in the red on an annual basis, however, down by 4.4% year-to-date and 4.6% year-over-year.
The outlook for NNN stock is solid, though, with Wall Street analysts providing a 12-month share-price target in the range of $47.00 to $52.00. This points to potential gains of approximately 13% to 25%.
The higher projection would put NNN REIT Inc’s share price above its February 2020 pre-pandemic record high of about $50.00 per share.
With dividends reinvested, buy-and-hold shareholders have enjoyed a 30-year average annual return of 11.1% from NNN REIT stock.
Chart courtesy of StockCharts.com
The Lowdown on NNN REIT Inc
When it comes to REITs, the location of their properties is important, but even more important is the quality of their tenants.
That’s what makes NNN REIT Inc stand out. The company has a high-quality, broadly diverse real estate portfolio (that avoids malls, including strip malls), a strong acquisition strategy, a continued high occupancy rate, high rent-collection numbers, and reliable cash flow.
This helps it provide safe and growing high-yield dividends and significant stock market gains. Management has raised NNN stock’s dividends for the last 34 consecutive years.
With dividends reinvested over the past 30 years, NNN REIT stock has provided average annual returns of 11.1% and total returns of 2,119%.
