NNN REIT, Inc. (NYSE:NNN) is a real estate investment trust (REIT) that has demonstrated remarkable consistency and resilience over the years. As one of only three publicly traded REITs to have increased its annual dividend for 35 or more consecutive years, NNN REIT has solidified its status as a true Dividend Aristocrat, providing shareholders with a steady stream of income alongside the potential for capital appreciation.
Company History and Evolution
Established in 1984 as a fully integrated real estate investment trust, NNN REIT primarily invests in high-quality retail properties subject to long-term, net leases. The company's journey began with a focus on acquiring, owning, investing in, and developing properties leased primarily to retail tenants under long-term net leases. In its early years, NNN established itself as a leading net lease REIT, growing its portfolio of high-quality retail properties across the United States.
Throughout its history, NNN REIT has demonstrated its ability to navigate challenging economic environments. The company weathered the savings and loan crisis and the bursting of the dot-com bubble in the 1990s and early 2000s by maintaining a disciplined investment approach and conservative balance sheet. This resilience was further tested during the Great Recession in the late 2000s, where NNN's diversified portfolio and strong tenant relationships allowed it to maintain occupancy levels above 95% throughout the downturn. The company also capitalized on market disruptions to selectively acquire high-quality assets at attractive prices.
In the 2000s, NNN REIT further solidified its position in the industry by executing strategic acquisitions and dispositions to optimize its portfolio. The company focused on convenience stores, automotive service, and restaurant tenants - sectors that have historically performed well through economic cycles. By 2010, NNN had expanded its portfolio to over 1,500 properties across 48 states, showcasing its successful growth strategy and market penetration.
Current Portfolio and Performance
As of December 31, 2024, the company owned 3,568 properties across 49 states, with a total gross leasable area of approximately 36.56 million square feet and a weighted average remaining lease term of 10 years. This diversified portfolio, coupled with the company's prudent investment strategy, has allowed NNN REIT to navigate various economic environments and deliver consistent financial performance.
The portfolio is well-diversified by tenant, line of trade, and geographic location. The top five lines of trade represented in the portfolio are convenience stores (17% of annualized base rent), automotive service (16.9%), limited-service restaurants (8.4%), full-service restaurants (7.8%), and family entertainment centers (7.2%). Geographically, the portfolio is concentrated in the southeast (25.5%) and south (24.7%) regions of the United States, with 41.3% of annual base rent coming from properties in Texas, Florida, Illinois, Georgia, and Ohio.
Financials
In 2024, NNN REIT reported total revenues of $869.27 million, a 5% increase from the previous year's $828.11 million. Net income for the year stood at $396.83 million, up from $392.34 million in 2023. The company's strong operational efficiency is reflected in its Core Funds from Operations (Core FFO) per share, which grew 1.8% to $3.32 in 2024, compared to $3.24 in the prior year. Furthermore, Adjusted Funds from Operations (AFFO) per share increased by 2.8% to $3.35 in 2024, up from $3.26 in 2023.
The growth in revenue was primarily driven by recent property acquisitions. Rental income, which includes rental income from operating leases and earned income from direct financing leases, increased 5% to $867.47 million. Operating expenses totaled $333.68 million, up 4.1% year-over-year, largely due to higher non-reimbursed real estate expenses, which rose 40.5% due to a minor increase in the number of vacant properties. Depreciation and amortization expense also increased 4.6% to $249.68 million, reflecting the growth in the property portfolio.
For the fourth quarter of 2024, NNN REIT reported revenue of $218.48 million and net income of $97.89 million, with year-over-year revenue growth of 1.0%.
Liquidity and Capital Management
NNN REIT's disciplined approach to capital allocation and balance sheet management has been a key driver of its success. In 2024, the company funded 61% of its $565 million in property acquisitions using free cash flow and proceeds from $149 million in asset dispositions, demonstrating its ability to strategically deploy capital and maintain a healthy financial position. As of December 31, 2024, NNN REIT's net debt to gross book assets ratio stood at 40.5%, down from 41.7% a year earlier, while its weighted average debt maturity was 12.1 years.
The company's strong balance sheet is further evidenced by its debt-to-equity ratio of 1.00 as of December 31, 2024. NNN REIT had $9.06 million in cash and cash equivalents, and $1.20 billion available for future borrowings under its unsecured revolving credit facility. The company's current ratio and quick ratio both stood at 1.86, indicating a solid short-term liquidity position.
Occupancy and Portfolio Strength
The company's focus on high-quality, net-leased retail properties has proven to be a winning strategy, as evidenced by its strong occupancy rates. Despite the challenges posed by the pandemic, NNN REIT maintained an impressive 98.5% occupancy rate at the end of 2024, showcasing the resilience of its portfolio and the strength of its tenant relationships.
Recent Challenges and Resolutions
One of the standout aspects of NNN REIT's performance in 2024 was its ability to efficiently manage and resolve two significant tenant issues. The company successfully navigated the Badcock Furniture bankruptcy and the Frisch's restaurant chain's operational difficulties, demonstrating its proactive approach to portfolio management. By quickly re-leasing or selling the affected properties, NNN REIT was able to minimize the impact on its overall financial results, with the potential downside limited to less than 1% of its per-share earnings.
Future Outlook
Looking ahead, NNN REIT has provided a guidance range for 2025 Core FFO of $3.33 to $3.38 per share and AFFO of $3.39 to $3.44 per share, reflecting the company's confidence in its ability to deliver continued growth. This guidance is supported by the company's plan to acquire $500 million to $600 million in new properties and dispose of $80 million to $120 million in assets during the year. Additional assumptions underlying the 2025 guidance include G&A expenses of $47 million to $48 million and property expenses net of reimbursement of $15 million to $16 million, which is higher than usual due to the Badcock and Frisch's vacancies.
Despite the competitive investment landscape, NNN REIT's strong relationships with its tenants and its disciplined underwriting process have allowed the company to maintain a steady pipeline of acquisition opportunities. In the fourth quarter of 2024, the company invested $217 million in 31 new properties at a weighted average initial cash cap rate of 7.6%, demonstrating its ability to source attractive deals even in a challenging market environment.
The company has expressed optimism about potentially increasing its FFO guidance as the year progresses, as it has done historically. This confidence is bolstered by NNN REIT's performance in 2024, where it delivered 1.8% core FFO growth, reaching the top of its previous guidance range.
Industry Trends and Market Position
NNN REIT operates in the retail net lease REIT industry, which has seen steady growth with a 5-year CAGR of 3.2% in total market size. The company's focus on high-quality, single-tenant, freestanding net lease retail properties has positioned it well within this growing sector. The properties are generally leased to tenants under triple-net leases, which require the tenant to pay all utilities, real estate taxes and assessments, and to maintain the interior and exterior of the property. This structure provides NNN REIT with stable and predictable cash flows, as evidenced by its weighted average remaining lease term of 10 years.
Potential Risks
Potential risks for NNN REIT include rising interest rates, which could impact the company's cost of capital and the valuations of its properties, as well as any potential economic downturns that could affect the financial health of its tenants. Additionally, the REIT industry's reliance on access to capital markets may expose NNN REIT to fluctuations in market conditions.
Conclusion
However, NNN REIT's track record of consistent performance, its focus on high-quality assets, and its prudent financial management have positioned the company well to navigate these challenges. With its status as a Dividend Aristocrat, NNN REIT continues to be an attractive option for investors seeking a reliable income stream and the potential for long-term capital appreciation. The company's ability to maintain high occupancy rates, successfully resolve tenant issues, and provide positive forward guidance underscores its resilience and operational excellence in the competitive real estate market.