Despite the company retail focus, it is only exposed to Sports Authority which
represents 0.5% of annualized base rent.
Chains like PacSun, Aeropostale, Sports Chalet, Tailored Brands, Sears have
announced bankruptcies or store closures. It has so far avoided store with the
exception of Sports Authority. This is strong evidence that NNN’s underwriting
Bob Evans Farms transaction exemplifies NNN acquisition
Direct, non-marketed deal leads to above market cap rate 6.8%.
$160.8mm, $1.4mm/box. Initial lease term is 20 years, with 5 year renewal option.
Accretive deal as the stock is trading at 5% implied cap rate.
Non-rated credit with established franchise.
Great fundamentals, great strategy.
Management team is capable and above average, in my opinion
Favorable macro tailwind: the market expected the Fed to hike rates multiple times
at the start of this year and now some participants expect a rate cut. 10 year US
treasury has declined to 1.35%, a historic low.
The company can continue to issue new stock as currency to make accretive
acquisitions. NAV is $34 – 36 and stock is at $52. Issuing equity at 5% cap rate
and buying properties is highly accretive and fun, until the music stops.
Accretive refinancing potential: the preferred D and $250mm of unsecured debt is
due next year and could likely be refinanced at lower rates that may provide some
upside to earnings.
Macro factors completely out of management’s control has driven the stock to a very
expensive level. How do I know this?
Several sovereign government bonds have negative yield
How much would you pay for a stock that has organic growth of 1 – 2%? If you
require 10% returns, dividend yield should be 8 – 9%. If your required return is
high single digit, it should yield 5 – 6%. NNN is yielding 3.3%.
The 5 yr avg spread between NNN dividend yield and the yield of an index of US BBB
REIT 10 yr bonds is 62.5 bps, it’s now negative 11.4 bps. NNN is BBB rated. The
dividend yield should always be above a diversified basket of BBB REIT bonds.