National Retail Properties Has A Huge Yield And 45% Total Return Upside (NYSE:NNN)


National Retail Properties (NNN) is a triple net lease REIT as could be guessed by its stock ticker. Retail real estate has been getting a bad rap coming out of the pandemic due to store closures and the prediction for widespread retail bankruptcies. Thus far, NNN has proven naysayers wrong, delivering solid financial results. Shares yield 5.6%, which appears generous on account of the strong balance sheet and promising long term outlook. I rate shares a buy with 45% total return upside.

NNN Stands For Virus-Proof

NNN has dramatically underperformed the broader market by nearly 4,000 basis points:

(Yahoo Finance)

While NNN has shown some financial strain from the pandemic, the results thus far are solid and I expect shares to bounce back.

NNN collected 69% of second-quarter rent and 84% of July rent. Another 21% of rent was attributable to rent deferral agreements. If NNN can collect all deferred rent, then 90% of second-quarter rent has been accounted for.

AFFO per share declined 29% year over year, but that is because AFFO typically ignores straight-line rent which includes the deferred rent mentioned above. Including deferred rent, AFFO came in at $0.66 per share, down only 4% YOY. All in all, these are solid results, albeit lagging behind industry leader Realty Income (O).

I was surprised to see that NNN has not acquired many properties this year – investment spend came in at less than 10% of 2019:

(2020 Q2 Presentation)

The 6.9% cap rate on acquisitions in 2020 is consistent with the 6.9% cap rate in 2019. I would have thought that demand for sale and leaseback transactions would have been at a peak during the pandemic due to the financial strain seen all around. I guess that the intuitive result sometimes varies from the actual result. NNN’s strong balance sheet suggests that it could increase its investment volume if it wishes, even in spite of the low valuation of its stock price.

Fortress Balance Sheet

NNN maintains a balance sheet rated BBB+ or equivalent by the credit rating issuers. NNN has a strong liquidity position with $224.6 million in cash on hand and $900 million in availability on its bank line. NNN has minimal near term debt maturities:

(2020 Q2 Presentation)

Because NNN’s tenants use triplet net leases, NNN’s capital expenditure requirements are minimal. As a result, the minimal near term debt maturities and free cash flow generative operating model means that NNN can opportunistically acquire additional properties, if possible. Debt to EBITDA stands around 5.5 times (including preferred stock), which is arguably conservative. NNN’s balance sheet is a source of strength in these difficult times.

Valuation And Price Target

NNN trades cheaply at 13.7 times TTM FFO and at a 5.6% dividend yield. Financial results over this 12-month span are guaranteed to be lumpy, but over the long term, the net lease business model still appears to be a reliable dividend growth engine. My 12-month price target is $51.50, representing a 4% dividend yield. That price target looks justified on account of long term projected dividend growth of 2-4%, and the current low yield environment. Shares have roughly 45% total return upside to that target.

Risks

  • There is no guarantee that NNN can collect deferred rent. Because deferred rent totaled 21% of second-quarter rent, this risk is primarily sizable for NNN. Investors shouldn’t consider deferred rent “paid” until it is officially collected by NNN. I expect protracted legal proceedings to occur between retail landlords and their tenants for quite some time.

  • NNN has underperformed O in terms of rent collection. I am optimistic that moving forward, rent collection should be strong as the extent of store closures is reduced. That said, there is no guarantee of that, and it is possible that individual operators in the NNN REIT space underperform the top tier.

  • If interest rates rise, then NNN’s borrowing costs would increase. NNN would not be able to re-lease its portfolio at higher cap rates until lease expirations, but at the same time, its borrowing costs also wouldn’t increase until the debt matures. NNN’s strong credit profile suggests that it would see less interest expense expansion in such a scenario than junk credits.

Conclusion

NNN’s 5.6% dividend yield does not seem to reflect its solid financial results in 2020. Rent collection rates have already improved sequentially, and NNN’s balance sheet can cover any shortfalls if necessary. NNN hasn’t been very active on the acquisition front this year, but that should change in the remainder of the year. I rate shares a buy with 45% total return upside.

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Disclosure: I am/we are long NNN, O. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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After U.S. tech gains, European stocks pause as ECB decision awaits


(FILES) This file photo taken on March 12, 2020 shows flags of the European Union fluttering in front of the headquarters of the European Central Bank (ECB) in Frankfurt am Main, western Germany.


daniel roland/Agence France-Presse/Getty Images

European stocks were steady on Thursday, ahead of a European Central Bank decision and press conference in which expectations are for the central bank to raise concerns about the rise of the euro.

Up 1.6% on Wednesday, the Stoxx Europe 600
SXXP,
+0.16%

was little moved at 369.70.

U.S. stocks, particularly in the tech sector, broke a losing run on Wednesday, as the Nasdaq Composite
COMP,
+2.70%

rallied 2.7%. U.S. stock futures
ES00,
+0.05%

were modestly higher Thursday.

The ECB decision is due at 1:45 p.m. Central European time (7:45 a.m. Eastern), though analysts are focusing on the press conference with President Christine Lagarde at 2:30 p.m.

Attention also is in London, where an emergency meeting is being called on the U.K. decision to unilaterally amend its withdrawal agreement. Bloomberg News reported the European Union was considering a lawsuit.

Wm Morrison Supermarkets
MRW,
-3.51%

slumped 3.7% after reporting a 25% slump in first-half adjusted pretax profits, with the company flagging higher costs and reduced consumer demand for fuel. “Some traders will be wondering if Morrisons can’t post a rise in profit when a pandemic has driven up demand, when will they register a rise in earnings,” said David Madden, market analyst at CMC Markets UK.

Chemicals group Akzo Nobel
AKZA,
+3.47%

rose 4% as the company said revenue for the third quarter will be close to last year’s levels. It reported strong decorative paint demand in Europe and South America.

Games Workshop
GAW,
+13.92%
,
which makes miniature wartime figures, jumped 13% after saying its performance for the quarter ending Aug. 30 was ahead of its expectation



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Mall owners Simon, Brookfield close to buying J.C. Penney out of bankruptcy


A shopper heads into a J.C. Penney store in Seattle in 2017.


Associated Press

NEW YORK — Mall owners Simon Property Group and Brookfield Property Partners are close to a deal to buy department store chain J.C. Penney out of bankruptcy and keep the chain running.

Penney’s lawyer Josh Sussberg announced the tentative pact, which will save roughly 70,000 jobs and avoid liquidation, during a brief hearing in bankruptcy court Wednesday.

Sussberg said that the Penney
JCPNQ,
+108.25%

would have an enterprise value of $1.75 billion, including $300 million in cash from the two landlords and $500 million in new debt.

He noted that a letter of intent including more details of the pact will be filed with the bankruptcy court in the next day. Penney will be left with $1 billion in cash after the deal is completed, he said.

“We are all committed to moving this quickly and saving J.C. Penney,” Sussberg said during the court hearing.

The 118-year-old department store based in Plano, Texas, filed for Chapter 11 bankruptcy protection in mid-May, one of the biggest retailers to do so since the pandemic temporarily shut down non-essential stores around the country. As part of its bankruptcy reorganization, Penney said it planned to permanently close nearly a third of its 846 stores in the next two years. That would leave it with just over 600 locations.

More than 40 retailers have filed for Chapter 11 bankruptcy this year, including more than two dozen retailers since the coronavirus outbreak. Among the hardest hit have been department stores, which were already struggling to respond to shoppers’ shift to online shopping.

The tentative agreement between two big landlords and Penney is the latest example of mall owners’ increasing willingness to buy out their pandemic-hit tenants. Mall owners are facing big challenges as stores close or are unable to pay rent. The exit or closing of retailers also triggers a clause that would allow other tenants to break their leases or get a rent reduction without facing penalties.

In fact, a retail venture owned by licensing licensing company Authentic Brands Group and Simon agreed to purchase 200-year-old clothier Brooks Brothers for $325 million last month.

Neither Simon
SPG,
-1.69%

nor Brookfield
BPY,
+0.27%

responded to requests for comment regarding the tentative deal with Penney.



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B&M European Value Retail: Index Inclusion Is A Further Spur To Share Price Growth (OTCMKTS:BMRPF)


U.K. discount retailer B&M European Value Retail (BMRPF) has had a good year. At 460p, the shares are about 17% ahead of what they were when I recommended them in my June piece on Seeking Alpha, “Well-Poised Retailer For A Reopened U.K.: B&M European Value Retail.” They have recently tested higher levels, getting to 498p at one point. 500p may be a resistance point for now.

However, there is an upcoming stream of good news, which I think will help propel the shares higher.

FTSE Membership Will Help the Shares

It was announced that B&M will enter the FTSE-100 index of leading U.K. companies. The change will take effect from September 21.

First, it is worth noting that this in itself is a sign of a company in the ascendancy. The index is basically the hundred highest-capitalized listed companies on the London board. So, as with other such indices, getting added into it is indicative of a company whose capitalization is increasing, while falling out of it reflects a reversal of fortunes on that score. B&M will be replacing broadcaster ITV (ITVPF, ITVPY), which has been having a hard time of it in recent years.

As part of the index, there ought to be more buying by index tracker funds who buy the index components.

Academic research found that stocks exhibit positive abnormal long-run performance following their inclusion in the FTSE-100 index. The researchers also found that shares benefitted from short-term cumulative abnormal returns around the time of the promotion to the index. They speculated that that may be due to the aforementioned purchasing by index tracker funds, but the evidence for that was inconclusive. In any case, both short term and long term, inclusion in the index was positive for the share price.

Shares Will Have Additional Momentum Aside from the Index News

As I outlined in my piece “B&M: Strong Earnings Guidance Is A Clear Buy Signal,” the company has already guided the market to expect a near-doubling of adjusted EBITDA for the current six-month period, which ends on September 26.

I think some of that has been reflected in the run-up in shares of late. They have had a good year so far and despite some recent falls, the trend over the past several months has been clearly upwards.

Source: Google Finance

That is indicative of the fact that the company’s barnstorming performance during the COVID-19 pandemic is not only impressive in itself, it is also impressive when set against the general trend for retailers such as supermarkets, who have struggled to translate the pandemic sales surge into a profits surge.

Although there has been upwards price movement, I still don’t think the current share price fully factors in the strength of B&M’s performance this year. Additionally, with the economy in recession, the medium-term investment case for discount retailers such as B&M has strengthened, in my opinion.

I expect a pop in the share price in September or October, as the shares benefit from the dual impact of increased demand due to the FTSE inclusion and the market’s full appreciation of the B&M growth story when the first-half results are revealed.

Conclusion: B&M Has Further Upside

With a current P/E around 23 and a recent run-up in its price, I don’t think B&M is cheap. However, the stream of good news continues for now, and I expect that to have a positive impact on the shares. While I understand taking profits now, I think there is further upside for the retailer in the short term based on the positive news stream and index buying. I expect to see it test 550p in the coming six months versus 460p today.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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U.S. Defense Department reaffirms $10 billion cloud deal to Microsoft


The Force appears to be finally with Microsoft Corp. in its epic duel with Amazon.com Inc. for JEDI.

The Department of Defense on Friday said it has completed its re-evaluation of the hotly-contested $10 billion cloud-computing deal and reaffirmed its award to Microsoft. “Microsoft’s proposal continues to represent the best value to the government,” the DoD said in a statement.

“The JEDI Cloud contract is a firm-fixed-price, indefinite-delivery/indefinite-quantity contract that will make a full range of cloud computing services available to the DoD,” the statement continued. “While contract performance will not begin immediately due to the Preliminary Injunction Order issued by the Court of Federal Claims on February 13, 2020, DoD is eager to begin delivering this capability to our men and women in uniform.”

The announcement came shortly before the markets closed. In another brutal day for tech stocks Friday, shares of Microsoft
MSFT,
-1.40%

dropped 1.4% in trading; Amazon
AMZN,
-2.17%

shares declined 2.2%.

“We appreciate that after careful review, the DoD confirmed that we offered the right technology and the best value. We’re ready to get to work and make sure that those who serve our country have access to this much needed technology,” a Microsoft spokesperson told MarketWatch.

Amazon vowed to “protest this politically corrupted contract award” in a strongly worded blog post.

“[Amazon Web Services] remains deeply concerned that the JEDI contract award creates a dangerous precedent that threatens the integrity of the federal procurement system and the ability of our nation’s warfighters and civil servants to access the best possible technologies,” Amazon said. “Others have raised similar concerns around a growing trend where defense officials act based on a desire to please the President, rather than do what’s right.”

“This was illustrated by the refusal to cooperate with the DoD Inspector General, which sought to investigate allegations that the President interfered in the JEDI procurement in order to steer the award away from AWS,” Amazon continued. “Instead of cooperating, the White House exerted a ‘presidential communications privilege’ that resulted in senior DoD officials not answering questions about JEDI communications between the White House and DoD. This begs the question, what do they have to hide?”

The Defense Department’s Joint Enterprise Defense Infrastructure (JEDI) cloud-computing deal over 10 years is considered a plum government contract. The Pentagon initially awarded JEDI to Microsoft in October over the objections of co-finalist Amazon, which filed suit in protest in November. In April, a federal judge gave the Pentagon permission to reevaluate bids from Microsoft and Amazon.

Read more: Amazon files suit, challenging Pentagon’s $10 billion cloud contract to Microsoft

Anticipating a win, Microsoft has been signing similar deals with foreign governments for cloud-infrastructure services, according to a report by CNBC last month.

For years, Microsoft and co-finalist Amazon have engaged in behind-the-scenes lobbying and subterfuge over the deal as they battle for supremacy in the cloud market. And at times, the competition has taken on almost a cartoonish quality, evoking Mad magazine’s Spy vs. Spy comic strip.

Adding to the political intrigue is the future of TikTok, a video-sharing social networking service owned by ByteDance, a Beijing-based Internet company. Microsoft is the leading candidate to acquire TikTok, though Oracle Corp.
ORCL,
-2.39%

and Twitter Inc.
TWTR,
-4.22%

have also been mentioned as suitors. Alphabet Inc.’s
GOOGL,
-2.96%

GOOG,
-3.09%

Google was part of a group that explored a bid before dropping the idea, according to a Bloomberg report.

Microsoft is believed to be the favorite to acquire TikTok, published reports suggest, because it has been in close contact with the Trump administration. The software giant was initially awarded JEDI in October because of the president’s disdain for Amazon Chief Executive Jeff Bezos, who also owns the Trump-baiting Washington Post, say two people closely aligned to Amazon who are not authorized to speak publicly on the matter.

Amazon Web Services commanded 47% of the cloud infrastructure market in 2019, while Microsoft had 13%, according to estimates from market researcher IDC.

“This is a game changer for Microsoft as JEDI will have a ripple effect for the company’s cloud business for years to come, and speaks to a new chapter of Redmond winning in the cloud vs. Amazon in our opinion on the next $1 trillion of cloud spending expected to happen over the next decade,” Wedbush Securities analyst Daniel Ives said in a note late Friday.



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