REITs

This retail REIT has a long track record of rising returns-in dividends and share price appreciation-says Kevin Habicht of National Retail Properties.

Nancy Zambell: My guest today is Kevin Habicht, the chief financial officer of National Retail Properties (NNN), which is a REIT. Kevin, thank you so much for joining me.

Kevin Habicht: Nancy, thank you for having us.

Nancy Zambell: You're welcome. You know, I hate to admit this Kevin, but you and I go back probably at least 15 years, back to when I came to visit you to write your company up in one of my newsletters.

You guys have been around for so long and have been a successful REIT, paying great dividends, acquiring wonderful property. And I know you go back further than that. So why don't you tell our viewers about NNN, what kind of a REIT you are, and then we'll talk about how you evaluate your properties.

Kevin Habicht: Thanks Nancy. Our longevity and long-term focus is an important part of the way we think philosophically.

NNN is focused on acquiring single-tenant net lease retail properties. Let me unpack that a little bit. Single tenant means that it's not a shopping mall or a shopping center, but it's the freestanding single-tenant retail locations that many retailers have gravitated toward over the last 20 years. Think restaurants or drug stores on good corners that have a signalized intersection with good traffic counts and good visibility.

It's lots of these kind of single-tenant properties leased to major national and regional retailers who typically operate-if not thousands of stores each-hundreds of stores each. They're leased to large retailers, not typically to local small mom-and-pop type retailers, generally.

Nancy Zambell: Who are some of your largest retailers?

Kevin Habicht: Our tenants would include large convenience store operators, publicly-traded companies like a company called Susser in south Texas or The Pantry in North Carolina, but also include LA Fitness (LFSA), 7-11, AMC Theatres, BJ's Wholesale Club (BJ), Best Buy (BBY), Pep Boys (PBY), and Outback Steakhouse.

Nancy Zambell: How long are your leases in general?

Kevin Habicht: Our leases are triple net leases. Hence, we get our NNN ticker symbol for triple net lease, and those leases typically are 15 to 20 years, originally.

The weighted average remaining lease term in our $4 billion-plus portfolio is 12 years remaining. Our average lease is a very long-term lease, and if you compare it to other kinds of property types, that's a very long average.

Triple net lease requires the tenant to pay for many of the property operating expenses-real estate taxes, the maintenance, insurance, and utilities-those are all expenses that the tenant pays for directly. So the rent they pay to us is fairly high profit margin.

Nancy Zambell: What do you see in terms of the market right now? Do you see the retail market improving, and are you getting more people interested in working with you?

Kevin Habicht: I think, in general, the bigger retailers are tending to get bigger. I think at the small end of the spectrum-the mom-and-pop-they've probably felt the brunt of the downturn. So I think there's been some market share shift from smaller retailers to larger retailers, which plays to our strength.

I'd say over the last 18 months or so, the credit profile of our tenants has improved-and the margin, too. For example, a big Chinese group called Wanda came in and made a significant investment and bought AMC Theatres. Bloomin' Brands (BLMN)-which is Outback Steakhouse-went public. So you've had a number of events like that that have supported improved credit profile of our tenants.

Nancy Zambell: When you go to look for possible acquisitions, I know you're more bottom-up than you are anything. Can you talk a little about that, and how you go about trying to find a good acquisition?

Kevin Habicht: Our approach-as you noted-really is not from a top-down vantage point, but more bottom-up. For example, we don't sit in the corner office here, and say we'd like to invest $500 million this year in these six states. We're driven by opportunities.

We source our acquisitions by calling on retailers who are our customers-our tenants. We maintain relationships with them, so that when there are opportunities to provide sale-leaseback financing for them, we can be positioned to take advantage of that and underwrite each and every opportunity when it comes.

 The things we're looking at primarily are real estate attributes, the location of the property, the underlying land value, the demographics, locations of competitors, access, ingress, egress, visibility, traffic counts, as well as the creditworthiness of the tenant and their ability to pay us rent.

Having said that, though, we do know that credit can be fleeting. Some retailers that were considered to be among the best are no longer with us. Circuit City was a Jim Collins "good to great" kind of company that no longer exists. Ten years ago, we would have been saluted for doing business with Borders Books, and they no longer exist.

Retailers come and go, and that's why while we underwrite tenant credit and care about it, the real estate attributes are really more enduring, and what we care about the most. When you have a vacancy, you're able to release that property fairly quickly because it's well located.

I think the proof's in the pudding. If you look over the last decade or so, our occupancy of our properties never dipped below 96.4%, which is high on an absolute basis, and high on a relative basis to other REITs.

Today, it's about 98%. Even in the downturn of 2009, the low point was 96.4%-which compared to others-is a very high occupancy. And we think that's a testimony to the strength of our tenants, as well as the strength of our locations.

Nancy Zambell: That's an amazing record. And speaking of amazing records, you have had a long history of paying very good dividends to your shareholders. What is your yield currently?

Kevin Habicht: We're just a little over 4%, 4.25%. We've had a dividend track record in which we've been able to increase our annual dividend for 23 consecutive years. It's a track record we intend to perpetuate, and one that's among an elite group of companies-not only REITs, but all publicly-traded companies.

We do believe dividends are a very important component of total return. And as a result of this consistent and growing dividend over such a long period of time, we've been able to produce total return for the last five-, ten-, 15-, and 20-year periods that averaged around 12% or 13% per year, total return. That's dividends plus change in share price.

We believe strongly that having a strong cash dividend that is safe and growing is a great first step to producing above-average total return.

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Tickers Mentioned: NNN, BBY, PBY, BLMN

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