National Retail Properties: Lower Risk Profile With Steady Distributions Due To Being Out Of The Mall

National Retail Properties (NNN) offers a steady distribution fed by triple net leases outside the mall. 

National Retail Properties owns over 2,000 spanning 47 states. Of preference is the free-standing establishments that reside in the parking lots of the big regional malls. NNN utilizes triple net leases, which are usually for 15-20 years and generally require the tenant to pay all the property operating expenses including insurance, utilities, repairs and taxes. The average age of their remaining leases is 12 years, providing stability in earnings outlook. The top 5 customers account for 23% of 2014 revenues and include Mister Car Wash, 7-11 Stores, and LA Fitness. Sunoco LP is its largest tenant comprising almost 7% of companywide lease revenue. Texas and Florida comprise 30% of annual rents. 

NNN has a history of steady dividend growth. Over the previous 10-years, distributions have grown by an average of 2.6% a year and the annual payout is $1.68. The current yield is 4.5%.

NNN could be considered a more conservative operator as satellite commercial locations are seen as a bit less risky than the higher turnover stores inside the mall. The share prices apprear to be in line with its peers. Below is a list of similar sized REITs and their respective Price to FFO, or Funds from Operations, which is comparable to operating cash flow for corporations.

National Retail Properties 18.4
Realty Income   18.8
Tanger Factory Outlets 16.7
WP Carey  16.1

In other fundamental analysis, NNN is trading at a bit of a discount to its peers. For example, while operating margins are at a premium of 61% vs industry average of 43%, for a 50% outperformance, and net margins are 36%, for a 31% outperformance, net income growth over the previous 3-years has lagged its peers.

NNN generates an average return on invested capital compared to its peers do. ROIC is 3.9% vs 3.8% for the industry. However, the character of the returns offers a lower risk profile. For example, even though ROE is lower at 6.6% vs 10.8% for an industry average, NNN utilizes less than half the debt profile of its peers. Debt to Equity Ratio for NNN is 0.7 vs 1.8 for its peers. 

REITs are an anchor for income portfolios. NNN should be in the mix as a core income holding for long-term investors seeking steady and growing distributions, tied together with a reduced commercial real estate risk profile.        

Disclosure: Long NNN

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.