REIT’s Strategy Results in Higher Occupancy and Lower Volatility
National Retail Properties (NYSE: NNN), a real estate investment trust, invests primarily in high-quality retail properties subject to long-term leases. New President and CEO Steve Horn talks to Advisor Access about the company’s strategy that has led to 32 successive years of dividend growth.
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Advisor Access: National Retail Properties just released First Quarter 2022 earnings. What are some of the financial highlights and to what do you attribute NNN’s extraordinary track record of 32 consecutive annual dividend increases?
Steve Horn: We’ve had a strong start to 2022 with approximately $210 million invested in 59 new properties at an average initial capitalization (cap) rate of 6.2% and an average lease duration of 17 years. [Note: Capitalization rate is the rate of return on a REIT property based on the income that the property is expected to generate.] Our finance team kept the balance sheet in great shape, ending Q1 with $54 million of cash in the bank, zero balance on our $1.1 billion line of credit, and no material debt maturities until 2024. We also sold 10 properties, generating about $20 million of proceeds, which will be reinvested into accretive acquisitions. We sit in a good position to fund our 2022 acquisition target.
The track record of 32 consecutive annual dividend increases is a residual of applying a multi-year view to everything we do and staying true to our long-term strategy: creating consistent, mid-single-digit per share growth on a multi-year basis by owning a broadly diversified portfolio of well-located real estate acquired at reasonable prices and leased to strong regional and national tenants at reasonable rents, all supported by a low-leveraged balance sheet and a long-tenured staff of industry experts.
AA: You recently took over as President and Chief Executive Officer when Jay Whitehurst retired. How were your 19 prior years with the company, at one point as Chief Acquisition Officer and then Chief Operating Officer, important in helping make a smooth transition?
SH: NNN has long done a good job of supporting associates at all levels and positioning them for growth, whether that is in the form of changing positions or expanding their training and experience in their current role. Having been personally involved in more than $5 billion of acquisitions, I worked hand in hand with all areas of the company. And that isn’t exclusive to me: more than half of our associates have been here more than 10 years, so there is a high level of institutional knowledge that is shared among departments and it helps us run more efficiently. We have a strong senior management team that has an average tenure of 21 years with the company. As a group, we have a mutual confidence that enabled me to step in and continue executing the longstanding business model of NNN without missing a beat.
AA: NNN owns 3,271 properties in 48 states, leased to 370+ clients in 37 lines of trade, and boasts an occupancy rate of 99.2%, above your 25-year average of 98%. Are there any areas of your portfolio that are a cause for concern, particularly with respect to inflation potentially impacting shopping habits?
SH: Applying a multi-year view to everything we do has enabled NNN to remain steady and consistent through the years. We don’t get overly excited over one or two great quarters and we don’t panic when short-term hiccups arise. Our portfolio is leased to a wide breadth of strong regional or national operators. The majority of our tenants average near or more than 1,000 units each in their systems. They’ve learned and adapted through a variety of situations, especially over the last few years. Most of our top tenants, particularly in industries like convenience stores or quick-serve restaurants, are finding a way to reasonably pass inflation costs through, and it hasn’t gotten out of control to the point where their customers aren’t accepting it. The one area where you might see a bit of a consumer pullback would be bigger ticket items, such as RVs. But overall, we haven’t see a lot of change in consumer behavior despite the fact that prices are rising. We don’t feel that there is any real, notable pressure on the rent paying ability of our tenants.
AA: For several quarters, and predominantly last quarter, cap rates have been lower. Are there any worries about rising interest rates impacting cap rates?
SH: In an environment where cap rates have remained at an all-time low, we’ve continued to be very thoughtful with our underwriting and primarily pursue sale-leaseback transactions with our relationship tenants. While our first quarter acquisition average cap rate was a historic low for us, most of those deals were priced in January and December and they’ve now cleared the market. We have noticed with the rise in interest rates that some private equity companies are now turning to a wait-and-see approach, so we’re not feeling as much competitive pressure from that sector at the moment. It feels like cap rates have bottomed out, and, for the moment, cap rate compression might be behind us. We think that perhaps in the second half of this year, cap rates may start to creep back up.
AA: Is there anything else that you would like investors to know about NNN?
SH: NNN is sitting in a great position. We’re well-capitalized with long-term debt locked in at attractive fixed rates that aren’t impacted by interest rate increases. We maintain a deep pool of relationship tenants that have generated about two-thirds of our new property acquisition opportunities with repeat customers. We have a strong roster of long-tenured associates at all levels of the company. And we’re continuing with the execution of our longstanding business model: identifying, underwriting and acquiring well-located real estate with the right operators, all while delivering consistent year-over-year Core Funds from Operations (FFO) growth. That all sets us up to prolong our 32-years-and-counting annual dividend increase track record.
AA: Thank you, Steve.
Stephen (Steve) A. Horn, Jr. has served as President and Chief Executive Officer of National Retail Properties since April 2022. Previously, Steve served as Executive Vice President and Chief Operating Officer since August 2020, overseeing the acquisitions, underwriting, asset management, dispositions, legal and human resources departments. He had previously served as Chief Acquisition Officer since January 2014. Since that time, he has overseen the acquisition of approximately $5.1 billion of new investment properties as the company’s portfolio grew to more than 3,200 properties. Steve previously served as Senior Vice President of Acquisitions for the Company from June 2008 to December 2013, and as Vice President of Acquisitions of the Company from 2003 to 2008. Prior to 2003, he worked in the mergers and acquisitions group at A.G. Edwards & Sons in St. Louis, Mo. He is a member of the National Association of Real Estate Investment Trusts and the International Council of Shopping Centers.
Investors and others should note that National Retail Properties posts important financial information, including non-GAAP reconciliations, using the investor relations section of the National Retail Properties website, www.nnnreit.com, and Securities and Exchange Commission filings.
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