NNN REIT (NNN 2.05%) has been a wealth-building machine over the years. The real estate investment trust (REIT) has increased its high-yielding dividend (currently 5.8%) for 35 straight years. That steadily rising income stream has enabled the REIT to deliver strong total returns over the past few decades.
Its total shareholder return has averaged 11.1% annually during the last 30 years, exceeding the S&P 500's (SNPINDEX:^GSPC) 10.5% return. That has enabled the REIT to grow a $1,000 investment made three decades ago into over $23,400.
Here's a closer look at this enriching REIT.
NYSE: NNN
Key Data Points
Keeping it simple
NNN REIT has a very low-risk investment strategy that delivers very consistent growth. The REIT focuses on investing in single-tenant net lease retail properties. It typically buys smaller properties (they average about 11,000 square feet of space and cost around $3 million) on main street locations that would be in high demand even if the current tenant doesn't renew its lease.
NNN's top tenant lines of trade currently are automotive service (16.8% of its annual base rent), convenience stores (15.9%), and restaurants (8.4% from limited service and 8.3% from full service). The company signs long-term net leases with tenants (it currently has a weighted average remaining lease term of 9.9 years). Those leases provide it with very stable rental income because the tenants cover all operating costs, including routine maintenance, building insurance, and real estate taxes. The leases typically escalate rental rates by around 1.5% each year, supplying the REIT with a steadily growing stream of rental income.
NNN REIT also has a very conservative financial profile. It has a low dividend payout ratio for a REIT (around 67.5% of its adjusted funds from operations this year). That will allow it to retain about $200 million in free cash flow that it can use to acquire additional properties. NNN REIT also has a conservative investment-grade balance sheet with a low leverage ratio and primarily low-cost, long-term, fixed-rate debt (it has a sector-leading 12.1-year weighted average debt maturity).
A steady grower
NNN REIT has steadily grown its real estate portfolio by acquiring additional income-generating retail properties. Last year, the REIT invested $565.5 million into 75 properties with an average initial cap rate of 7.7% and a weighted average remaining lease term of 18.5 years. It funded those properties with its post-dividend free cash flow, the sale of 41 noncore properties for $148.7 million (a $42.3 million gain), raising $214.3 million in equity via stock sales, and new long-term debt.
The REIT has now built a portfolio of over 3,565 high-quality retail properties across 49 states, leased to over 375 tenants in more than 35 lines of trade. It primarily relies on those existing tenants to drive its growth. It has acquired over $10 billion of properties since 2007, with more than 70% of its volumes coming from existing relationships.
NNN REIT will typically acquire additional properties in sale-leaseback transactions with existing tenants as they expand their retail footprints. Those deals provide its tenants with capital to continue growing, which offers future investment opportunities for the REIT.
With its robust post-dividend free cash flow, conservative financial profile, and strong tenant relationships, NNN REIT should be able to continue growing its portfolio, FFO per share, and dividend. That growth should enable the REIT to continue generating strong total returns for investors over the long term.
A low-risk, wealth-building machine
NNN REIT has been a model of consistency over the last few decades. It has stuck to its low-risk investment strategy, which has helped steadily grow the wealth of its investors. The REIT is in an excellent position to continue growing shareholder value in the future. Because of that, it's a great long-term investment opportunity, especially for those looking for a lucrative, low-risk passive income stream that should steadily rise each year.
