Market Overview

Baird Drops NNN Price Target 10% - Here's The Scoop

Share:
Baird Drops NNN Price Target 10% - Here's The Scoop

On Tuesday, Baird Equity Research issued a research note updating National Retail Properties, Inc. (NYSE: NNN), a leader in the triple-net lease REIT space, after NNN's Q1 earnings release and conference call.

The single-tenant, net-lease REIT business model is so solid and simple to understand that it is often viewed as being "bond-like," and that is essentially where Baird sees the potential headwinds for NNN shares coming into play.

These REITs lease well-located operational and key support facilities to credit-worthy customers – such as drugstores, auto supply, restaurants and dollar stores – on a long-term basis where, in addition to monthly rent, tenants pay the taxes, insurance and vast majority of property maintenance expenses.

Related Link: Oppenheimer Likes This Mortgage LP - A "Tax Advantaged" Yield Over 12%

Baird coverage of NNN's net-lease REIT sector peers includes:

  • Realty Income Corp (NYSE: O): Neutral, $10.9 billion cap, 4.84 percent yield.
  • Spirit Realty Capital, Inc (New) (NYSE: SRC): Neutral, $$4.9 billion cap, 6.1 percent yield.
  • Store Capital Corp (NYSE: STOR): Outperform, $2.5 billion cap, 4.65 percent yield.
  • National Retail Properties: Neutral, $5.1 billion cap, 4.4 percent yield.

Tale Of The Tape – Past Year

nnn_-_ychart_baird_may_13.jpg

Notably, NNN has increased its dividend for 24 consecutive years, and the current dividend remains well covered by a healthy mid-80s AFFO payout ratio.

Why REITs Are Not Like Bonds

Investors should keep in mind that as the economy improves, rents tend to rise – one of the reasons that commercial real estate has historically been a good hedge against inflation.

Many long-term leases contain contractual rent increases based upon CPI, or a fixed percentage vs. a bond fixed coupon rate. REITs are also able to grow accretively by purchasing future properties at cap rates that historically also increase in a rising rate environment.

Related Link: Wall Street Is Lending To House Flippers, Should You?

Retail Sharpshooter Approach

nnn_strategy_for_ffo_growth_june_2014.jpg

Baird–NNN: Maintain Neutral, Lower PT $44 To $40

The Baird's new $40 price target represents a potential 6.7 percent upside from the NNN close on Wednesday, or $37.48 per share.

The Baird $40 PT was derived from 17.2x its 2016E AFFO of $2.32 per share.

Baird–NNN: Q1 Earnings Takeaways

  • NNN reported Q1 FFO of $0.54 per share, in line with Baird and consensus estimates.
  • NNN raised the lower end of its FY 2015 FFO guidance a penny to $2.14 per share with high end remaining at $2.17 vs. consensus, which stands at $2.20 per share.
  • NNN is ahead of schedule YTD on acquisitions and Q1 acquisition cap rates are also running higher than Baird's expected, coming in at 7.3 percent vs. NNN guidance of 7 percent and Baird's 6.9 percent estimate.
  • Baird noted that NNN's "one-of" acquisition approach, which levers existing relationships, gives NNN a competitive advantage; NNN management feels it's an approximate 100 bps edge on cap rates vs. the premium paid for larger portfolios.

Baird–NNN: Risk Factors

While NNN appears to be hitting on all operational cylinders, Baird remains concerned about the macro risk of rising interest rates.

Baird noted that, "Since February, the 10-yr Treasury Bond yield has risen ~60bps, with the RMZ down 8 percent and shares of NNN down 11 percent."

The Bottom Line

Baird's top pick in the net-lease space remains Store Capital Corp.

The current Baird price target for Store Capital shares is $26, which represents a potential 21.3 percent upside from the Wednesday close of $21.43 per share, or a total return of approximately 26 percent, including the 4.65 dividend yield.

However, Baird expects the overall net-lease sector "to underperform the REIT index if rates continue to move higher in the short term."

Image Credit: Public Domain

Latest Ratings for NNN

DateFirmActionFromTo
Dec 2020Raymond JamesUpgradesMarket PerformStrong Buy
Dec 2020Morgan StanleyMaintainsEqual-Weight
Dec 2020Wells FargoDowngradesOverweightEqual-Weight

View More Analyst Ratings for NNN
View the Latest Analyst Ratings

 

Related Articles (NNN + STOR)

View Comments and Join the Discussion!

Posted-In: Baird Equity ResearchAnalyst Color Long Ideas REIT Crowdsourcing Analyst Ratings Trading Ideas Real Estate Best of Benzinga

Latest Ratings

StockFirmActionPT
WKHSRoth CapitalMaintains15.0
HCKTRoth CapitalMaintains22.0
ARECRoth CapitalInitiates Coverage On7.5
SLABWells FargoMaintains180.0
PENWells FargoMaintains310.0
View the Latest Analytics Ratings
Don't Miss Any Updates!
News Directly in Your Inbox
Subscribe to:
Benzinga Premarket Activity
Get pre-market outlook, mid-day update and after-market roundup emails in your inbox.
Market in 5 Minutes
Everything you need to know about the market - quick & easy.
Fintech Focus
A daily collection of all things fintech, interesting developments and market updates.
SPAC
Everything you need to know about the latest SPAC news.
Thank You

Thank you for subscribing! If you have any questions feel free to call us at 1-877-440-ZING or email us at vipaccounts@benzinga.com