National Retail Properties, Inc. (NNN): A Conservative REIT with 26 Straight Years of Dividend Growth

Importantly, National Retail has not had to discount its leases or make substantial improvements to its properties to get tenants to stay. The chart below shows the company’s lease renewals by year. From 2007-2015, National Retail renewed 86% of its leases, and 58% of renewals were at rates about the prior rent (14% were at the prior rent, and 28% were below the prior rent).

Importantly, National Retail only invested $338k in capital expenditures on these properties while renewing nearly $40 million in rent over this time period, highlighting the benefits of its triple-net leases (the company doesn’t have to “buy” higher rent with capital investments because tenants are on the hook for maintenance).

Source: National Retail Properties Investor Presentation

We believe National Retail Properties, Inc. (NYSE:NNN) has achieved these strong results for several reasons. First, the company intentionally owns properties with no anchor or co-tenancy issues. By owning single-tenant properties, tenants are unable to pool their bargaining power together to try and reduce their rent. National Retail’s main street locations also provide a strong market for replacement tenants and rent growth over time.

Finally, consumer-focused retailers also face more switching costs than an office or industrial customer because they are more location-driven; they don’t want to risk disrupting their established customer base to save a bit on rent, resulting in stronger renewal rates.

The company has also done a great job managing its lease renewal schedule. As seen below, over 60% of leases are not up for renewal before 2025, and fewer than 10% of leases are due for renewal any single year until then. This protects National Retail from being forced to renew a substantial portion of its leases during a down market. The company’s average remaining lease term is also 11.4 years, providing good cash flow visibility.

Source: National Retail Properties Investor Presentation

By now, it might not come as a surprise to learn that the company generates a strong capitalization rate on its properties. As seen below, National Retail has enjoyed an average cap rate of 8.1% since 2010. While the cost of debt for all REITs is currently cheap, National Retail appears to be very well positioned to continue earning a positive spread on its acquisitions if interest rates begin to rise thanks to its healthy cap rate.

Source: National Retail Properties Investor Presentation