Is this unsinkable REIT a buy?

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Dividend investors are always looking for stocks that have a habit of increasing their payouts, regardless of economic conditions. The most stable and consistent of these are called Dividend Aristocrats, members of the S&P 500 who have increased their payout for at least 25 consecutive years.

But it’s not just the components of the S&P 500 that have proven their reliability. A stock outside the index that has increased its dividend for 32 consecutive years is National Retail Properties (NYSE: NNN).

Two of the main factors that made National Retail Properties’ dividend-boosting sequence possible are the company’s focus on triple-net lease single-tenant retail properties and its diversification both geographically and globally. industry perspective. Let’s take a look at both and see why National Retail Properties is one of the top dividend paying stocks.

Image source: Getty Images.

The business model has proven itself

National Retail Properties is a triple net leasehold real estate investment trust (REIT) that specializes in acquiring single tenant commercial properties valued between $ 2-4 million.

A triple net lease is a rental agreement in which a tenant pays all expenses of the property, such as taxes, insurance, utilities and maintenance, as well as the base rent. The base rent amount is almost entirely allocated to the owner’s bottom line, as he only has to pay general and administrative expenses such as office staff salaries. Tenants with a triple net lease often enjoy greater freedom in customizing their space according to their brand image. Landlords also perceive a reliable source of income (leases are often 10 to 15 years with contractual rent increases built in) without having to take an active role in monitoring the property.

And the advantage of acquiring single-tenant commercial buildings is that, unlike multi-unit buildings (e.g., shopping malls), there is no flagship store that has increased leverage over the landlord in the base rent negotiations. When a flagship store is doing well, it draws traffic to a specific property, which in turn spurs activity for smaller tenants and helps them pay their rent. Conversely, if a flagship store goes bankrupt or moves, it can hurt smaller tenants.

Despite the most difficult operating environment in recent times last year, National Retail Properties has weathered the onset of the COVID-19 pandemic fairly well and is well positioned to return to pre-pandemic growth this year. year.

Even though National Retail Properties’ 89.7% cash-out rate for last year was well below its historic rate of nearly 100%, it didn’t impact the business as much as it did. might be expected. National Retail Properties’ adjusted operating funds (AFFO, the REIT’s earnings equivalent) fell 10.4% from $ 2.80 per share in 2019 to $ 2.51 per share in 2020. Q2 2020 to 99% in Q2 2021 amid better business conditions for tenants such as cinemas and family entertainment centers, the company expects its AFFO per share to increase from $ 2.95 to $ 3.00 this year – 5% to 7% compared to the pre-Pandemic Year of 2019.

A diversified real estate portfolio

Even though National Retail Properties’ portfolio is fully concentrated in retail, the second strength of the company has primarily been able to overcome concentration risk at the height of the COVID-related disruptions in the second quarter of 2020.

National Retail Properties had 3,117 properties in 48 states in Q2 2020 (up from 3,173 in Q2 2021), meaning the company is geographically diverse to protect against weak regional economies, natural disasters in some areas, etc. While COVID cases have increased and resulted in lockdowns in some states last year, other states have not been hit as badly and have partially offset the negative economic impact.

In addition to being geographically diverse, National Retail Properties is also diversified across industries, with convenience stores accounting for 18% of annualized base rent (ABR) in the second quarter of 2021 and automotive services accounting for an additional 11.4%.

Even though cinemas and family entertainment centers must have seen their rent deferred last year, National Retail Properties has weathered the pandemic very well. If the business has managed to overcome the challenges of last year to rebound this year, I think it’s fair to say that there aren’t too many events that could make this business insolvent.

Pure retail play fits seamlessly into a diverse REIT portfolio

While some investors may prefer to invest in more diversified REITs, such as WP Carey and avoid a pure retail REIT like National Retail Properties, I think there is as much room in a diverse REIT portfolio for the latter as there is for the former.

National Retail Properties benefits from economic reopening as more Americans are vaccinated. And even though the Delta variant at some point prompts a reintroduction of social distancing restrictions and guidelines, National Retail Properties has already proven once it can emerge stronger from such an event.

National Retail Properties’ 4.5% return at Friday prices is roughly in line with its 13-year median return of 4.6%. The 4.5% return is secure, as the AFFO payout ratio is going to be 70% to 71% for this year based on the company’s current directions, suggesting that National Retail Properties could be a good buy. for long-term investors.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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