NNN REIT: An Attractive Alternative For Income Investors In Retail REITs

Core Viewpoint - NNN REIT is positioned as a balanced option among retail REITs, offering a sustainable dividend yield of 4.97% and a diversified portfolio that includes both high-quality and higher-return tenants, making it an attractive choice for income-focused investors [1][10][13] Company Overview - NNN REIT has a market capitalization of $8.6 billion and a projected NTM dividend yield of 4.97%, which is competitive compared to its peers [1] - The company has maintained a historical occupancy rate of over 98.2% since 2004, with a Q2 2023 rate of 99.3%, significantly above the industry average of 89.7% [4] Portfolio Diversification - NNN's portfolio is diversified across various sectors, with significant exposure to automotive services (16.7% of base rent), convenience stores (16.2%), and limited-service restaurants (8.5%) [2][3] - The tenant mix is also diversified, with only two tenants (7-Eleven and Mister Car Wash) representing more than 4% of the rent base, which helps mitigate risks associated with individual tenants [3][4] Financial Performance - NNN has a strong track record of dividend increases, with 35 consecutive annual increases, and a total return of approximately 11% over the last three decades [5][4] - The company’s FFO per share has shown stability, with a mean of $0.676 and dividends per share averaging $0.51, indicating a sustainable payout ratio [5][6] Investment Strategy - NNN primarily engages in relationship-based acquisitions, achieving an average cap rate of 7.5% on these investments, which helps mitigate competition and enhance returns [6][7] - Recent acquisitions included 16 properties for approximately $110 million at a cap rate of 7.9%, funded entirely through free cash flow, reinforcing its financial strength [7] Valuation Metrics - NNN's price-to-FFO ratio stands at 12.79x, which is slightly higher than Realty Income (12.3x) and lower than EPRT (14.65x), making it an attractive option for income investors [10][11] - The NTM dividend yield of 4.97% is in line with its historical averages, and the free cash flow yield is 4.8%, indicating robust financial health [11][12] Future Outlook - The company is expected to maintain a sustainable pace of shareholder value generation, with a plausible annual dividend growth rate of 4% [12][13] - NNN's diversified portfolio and solid capital allocation strategy position it well for continued growth and stability in the retail REIT sector [13]