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Florida-based NNN REIT Inc. (NYSE:NNN) is a retail-focused real estate investment trust with triple-net-leased properties across 49 states in the US. A triple-net lease is when the tenant agrees to pay maintenance costs, taxes, building insurance, and other additional costs.
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The company recently increased its quarterly dividend by 2.7% to $0.58 per share. This marks the 35th consecutive annual dividend hike, a feat few could match in the REIT industry. As of July 16, the stock’s dividend yield was over 5%.
The stock has gained about 5.5% over the past year. But is there more room for growth? Let’s analyze the company’s business and fundamentals to find out.
NNN REIT’s Portfolio and Occupancy Rate
NNN REIT’s properties are mostly in the Sun Belt, and tenants include major retail companies such as 7-Eleven, Camping World, LA Fitness, Dave & Buster’s, Walgreens, United Rentals, and Best Buy. Over the past two decades, the company has maintained an average occupancy rate of 98.1%, and currently, the metric stands at over 99%, much higher than the industry average.
Having purely triple-net properties in its portfolio gives the company a huge advantage. It signs long-term leases with predictable income and lower expenses. During the March quarter, the company’s average remaining lease term was 10 years. NNN’s operating expenses fell to $81.9 million during the first quarter from $83.8 million in the previous quarter. G&A expenses jumped 2.7% year over year to $12.6 million but aligned with the company’s expectations. Property-level expenses were just 3.3% of rental revenue.
During the first quarter, NNN REIT’s rental revenue jumped 5.5% year over year to $214.8 million. Core FFO per share in the period was $0.83, above the consensus estimate of $0.82. For 2024, the company continues to expect FFO in the $3.25-$3.31 range, compared with the consensus estimate of $3.31.
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Business Expansion
NNN REIT is also expanding its business with acquisitions. During the first quarter, the company spent $125 million on 20 new property acquisitions. The company also sold six properties to raise $19 million in proceeds, which it plans to use to fund new acquisitions. NNN management said during the first quarter earnings call that based on its ongoing discussions and pipeline, it’s on a path to exceed full-year acquisition guidance of $400 million to $500 million.
Dividend Safety and Future Growth
At the midpoint of its FFO guidance range, the stock has a payout ratio of about 70%, which is attractive compared to the REIT industry and gives the company ample space for growth. Since NNN REIT has 35 years of consistent dividend increases and a healthy business, the odds of further dividend increases are high. Ned Davis Research, which tracked stocks from 1972 through 2016, shows that dividend growers post higher returns than companies that do not increase dividends.
Risks
Despite strong business growth and dividends, NNN REIT’s U.S. business comprises retail properties. Since most of NNN’s tenants are nonessential businesses (consumer discretionary companies), they are exposed to inflation and higher rates. If interest rates remain elevated and consumer spending keeps taking a hit amid high inflation, the company’s growth prospects could face headwinds in the coming months.
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