As a real estate investor, one problem with long-term net leases during rising-interest-rate periods is that rates are pre-set, but the financing is variable, so the cost of debt rises in sync with interest rates but not with revenues, potentially causing economic losses. Furthermore, if interest rates rise, the economy is supposedly heated, and rent prices can exceed inflation, so lease contracts do not capture that upside.
This concern is always present in one of the most widely recognized public net lease REITs, National Retail Properties (NYSE:NNN), which aims to close lease contracts between 15 and 20 years and whose weighted average remaining lease term is 11.4 years. This explains why, in the next ten years, no single year has a major expiration concentration; in fact, the portion of expiring annualized base rates fluctuates between 0.5 and 6.7 percent.
NNN borrows at both variable and fixed rates on its long-term debt; most of its debt, however, is fixed-rate, with little floating. Regarding fixed-rate leases, the upside may be limited since NNN explains to its shareholders that there are limited rent increases owing to fixed increases and increases in the Consumer Price Index and the tenants’ sales volume.
Internal growth being limited (NNN has not released same-property NOI for Q2), external growth becomes more important for keeping FFO and dividends increasing. During Q2, NNN invested $148 million in 37 properties and sold 3 for $2.2 million. It should also be good news that NNN raised its acquisition target for 2015, considering they will be selective and disciplined.
Management said cap rates for the retail markets have been flat — and also clarified that they have so far had no exposure to some of the retail bankruptcies that had been incurred. NNN has limited exposure to the apparel category, where many retailers have recently experienced challenges. Portfolio occupancy remains at a robust 98.8 percent.
Q2 adjusted FFO per share $0.56 is 10 percent up from $0.51 a year ago. Full-year FFO guidance has been boosted $0.02 up to $2.16-$2.19. AFFO is expected to be $2.21-$2.24. NNN is currently trading at 4.7 percent, and price-to-FFO of 17.3 is not too different from that of Realty Income (NYSE:O).
Source: NNN, Fast Graphs
Written by Heli Brecailo
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