NNN REIT, Inc. (NYSE:NNN) is a real estate investment trust (REIT) that has carved out a niche for itself as a leading owner and operator of high-quality, single-tenant retail properties leased to creditworthy tenants under long-term, net lease agreements. With a focus on essential retail sectors and a disciplined approach to portfolio management, NNN REIT has consistently delivered strong financial performance and rewarded shareholders through a steadily growing dividend.
Business Overview and Detailed History
NNN REIT, Inc. is a fully integrated real estate investment trust (REIT) that was formed in 1984. The company acquires, owns, invests in and develops properties that are primarily leased to retail tenants under long-term net leases. Over its nearly 40-year history, NNN has grown its portfolio significantly. As of September 30, 2024, the company owned 3,549 properties across 49 states, with a total gross leasable area of approximately 36.55 million square feet and a weighted average remaining lease term of 10 years.
The company's portfolio is diversified across a range of essential retail sectors, including automotive service (16.8% of annual base rent), convenience stores (15.9%), and restaurants (16.7%). This diversification has allowed NNN REIT to mitigate risk and maintain high occupancy levels, with the portfolio 99.3% leased as of the end of the third quarter of 2024.
NNN REIT's focus on net lease properties, where tenants are responsible for property-level expenses such as taxes, insurance, and maintenance, has proven to be a successful strategy. This model provides the company with a stable and predictable cash flow, enabling it to consistently pay and grow its dividend. In fact, NNN REIT is one of only three publicly traded REITs to have increased its annual dividend for 35 or more consecutive years, a remarkable achievement.
Throughout its history, NNN has faced some challenges, including tenant bankruptcies and vacancies. In 2023, the company dealt with bankruptcy filings from tenants like Badcock Furniture and Frisch's Big Boy. NNN worked diligently to resolve these issues, including pursuing the Franchise Group guarantee on the Badcock Furniture leases. The company also actively managed its portfolio, selling off vacant or underperforming properties.
Despite these challenges, NNN has maintained a diversified portfolio focused on high-quality retail properties. The company's largest industry concentrations are in the automotive service, convenience store, and restaurant sectors - all of which have historically been attractive investment opportunities. Geographically, NNN's portfolio is concentrated in the Southeast (26.2%) and South (23.2%) regions of the United States, which have seen above-average population growth.
Financial Performance and Ratios
NNN REIT has demonstrated strong financial performance over the years. For the nine months ended September 30, 2024, the company reported total revenues of $650.78 million, up 6.4% from the same period in 2023. Net earnings for the nine-month period were $298.94 million, or $1.63 per diluted share.
The company's core funds from operations (Core FFO), a key metric for REITs, was $2.50 per diluted share for the first nine months of 2024, an increase of 3.7% compared to the same period in 2023. Adjusted funds from operations (AFFO), which adjusts for certain non-cash items, was $2.51 per diluted share, up 2.4% year-over-year.
For the most recent quarter ended September 30, 2024, NNN reported revenue of $218.56 million, representing a 6.5% increase from $205.13 million in the same quarter of 2023. Net income for the quarter was $97.90 million, down 8.3% from $106.79 million in Q3 2023. The company's core FFO for Q3 2024 was $0.84 per share, up $0.03 or 3.7% from the prior year quarter, while AFFO was also $0.84 per share, up $0.02 or 2.4% year-over-year.
It's worth noting that NNN reported higher than average lease termination fee income of $10.2 million in the first nine months of 2024, compared to $2.4 million in the same period of 2023. The company's AFFO dividend payout ratio for the first nine months of 2024 was 67.4%, indicating a well-covered dividend.
For the full fiscal year 2023, NNN reported total revenue of $828.11 million and net income of $392.34 million. The company generated operating cash flow (OCF) and free cash flow (FCF) of $612.41 million in 2023.
Financials
NNN REIT's balance sheet remains robust, with a net debt to gross book assets ratio of 39.6% as of September 30, 2024. The company's weighted average debt maturity stood at 12.3 years, providing ample flexibility to navigate the current interest rate environment. Additionally, the company had no outstanding balance on its $1.2 billion unsecured revolving credit facility as of the end of the third quarter.
The company's debt-to-equity ratio was 1.00 as of December 31, 2023, indicating a balanced capital structure. NNN's current ratio and quick ratio both stood at 2.33 as of the same date, suggesting strong short-term liquidity.
Liquidity
NNN REIT's strong liquidity position is evidenced by its undrawn $1.2 billion unsecured revolving credit facility. This significant available liquidity provides the company with flexibility to pursue attractive investment opportunities and manage any potential short-term challenges. The credit facility bears interest at Adjusted SOFR plus 77.5 basis points and matures in April 2028, with options to extend to April 2029.
As of September 30, 2024, NNN had $173.53 million in cash on its balance sheet, further bolstering its liquidity position.
Disciplined Capital Allocation and Portfolio Management
NNN REIT's success can be attributed to its disciplined approach to capital allocation and portfolio management. The company has maintained a selective acquisition strategy, focusing on high-quality, mission-critical properties leased to creditworthy tenants. During the first nine months of 2024, NNN REIT invested $350 million in 44 properties at a weighted average cash cap rate of 7.8%.
In addition to its acquisition efforts, NNN REIT has also been proactive in managing its portfolio, selectively disposing of underperforming or non-core assets. In the third quarter of 2024, the company sold 9 properties for $20 million at a 4.4% cap rate, reinvesting the proceeds into higher-yielding acquisitions.
This active portfolio management, coupled with the company's strong balance sheet and liquidity position, has allowed NNN REIT to navigate the current economic environment effectively. The company has maintained its high occupancy levels and continued to grow its dividend, further solidifying its position as a reliable income-generating investment.
Risks and Challenges
While NNN REIT has demonstrated resilience, the company is not without its risks. The retail sector, in general, has faced headwinds in recent years due to the rise of e-commerce and evolving consumer preferences. However, NNN REIT's focus on essential, necessity-based retail has helped mitigate some of these challenges.
Additionally, the company is exposed to tenant credit risk, as the failure or bankruptcy of a significant tenant could impact its rental income and cash flows. NNN REIT closely monitors the financial health of its tenants and has proactively worked to address any issues, such as the recent challenges faced by Frisch's Big Boy and Badcock Furniture. The company is assuming more than 100 basis points of rent loss in Q4 2024 due to these tenant issues, which could impact its near-term financial performance.
The company is also susceptible to broader macroeconomic conditions, including changes in interest rates, inflation, and consumer spending patterns. NNN REIT's ability to navigate these challenges will be crucial in maintaining its strong financial performance and delivering consistent returns to shareholders.
Guidance and Outlook
NNN REIT has provided updated guidance for the full year 2024. The company has tightened its core FFO per share guidance to a range of $3.28 to $3.32, and its AFFO per share guidance to a range of $3.31 to $3.35. This reflects the company's confidence in its ability to deliver solid results despite the challenges posed by tenant issues.
Furthermore, NNN has raised its 2024 acquisition guidance midpoint by 22% to $550 million, indicating an optimistic outlook on investment opportunities in the market. The company's management has stated that even with the assumed rent loss from Frisch's and Badcock, they expect to remain in the middle of their guidance range for 2024.
Looking ahead to 2025, NNN has indicated that it may assume more than 100 basis points of rent loss in its guidance, as the situations with Frisch's and Badcock become clearer in Q4 2024. This conservative approach demonstrates the company's prudent management and commitment to transparency with investors.
Conclusion
NNN REIT has established itself as a leading net lease REIT, with a well-diversified portfolio of high-quality, single-tenant retail properties. The company's focus on essential retail sectors, disciplined capital allocation, and proactive portfolio management have enabled it to deliver consistent financial results and steadily grow its dividend over the past 35 consecutive years.
Despite the challenges facing the retail industry and specific tenant issues, NNN REIT's resilient business model and strong balance sheet position the company well to continue creating value for its shareholders. The company's updated guidance and raised acquisition targets for 2024 demonstrate management's confidence in NNN's ability to navigate the current market environment successfully.
As investors seek reliable income streams in the current market environment, NNN REIT's combination of a high-yielding dividend, proven track record of performance, and strong liquidity position makes it a compelling investment opportunity. With its focus on essential retail sectors and long-term net leases, NNN REIT is well-positioned to weather economic uncertainties and continue delivering value to its shareholders in the years to come.