Wells Fargo Securities
In the third quarter of 2011, National Retail Properties (NNN) acquired 53 properties containing 1.8 million square feet for $335 million at initial lease yields of what we estimate to range from 8.5-9.25 percent; 45 of these properties were previously announced. Given the size of this transaction and visibility into potential closures in Q4, management again increased its 2011 acquisition guidance to $600-700 million from $400-$500 million, previously.
Our current model assumes another $150 million of acquisitions in Q4 and $150 million in 2012 (in line with guidance). Recall, last year NNN provided initial 2011 acquisition guidance of $150 million as well. In Q3, NNN issued 9.2 million shares at $26.07 per share for net proceeds of about $229 million and floated $300 million 5.5 percent-senior unsecured notes due in 2021, netting the company $294 million in proceeds.
Year to date [in 2011], NNN has outperformed its net lease peers on a total return basis (+7.9 percent versus -0.3 percent for the group and +7.0 percent for the overall REIT group). We continue to believe that the cash dividend ($1.54 per share, 6.4 percent yield) is both attractive and safe.
Occupancy in the entire Kimco Realty (KIM) shopping center portfolio was up 10 basis points both year-over-year [in 3Q11] and sequentially at 93.0 percent. The national retailers continue to drive positive absorption in Kimco’s portfolio while leasing for the smaller mom and pop tenants remains challenged. Same-store cash NOI in the U.S. portfolio was up 1.6 percent over 3Q10 (3.3 percent in the total portfolio), the sixth quarterly increase in a row.
The company’s Canadian and Latin America exposure generated outsized same-store NOI growth, with Canada up 11.9 percent and Latin America up 17.6 percent (the majority of which came from development lease-up). Leasing continued to see increased activity in the portfolio, with Kimco signing 614 leases totaling 1.8 million square feet during the quarter.
Same-store leasing in the U.S. included 79 new leases for 374,000 square feet and 184 leases for renewals and options, totaling 775,000 square feet. Same-store rent spreads on new leases and renewals were 2.7 percent in the U.S., which was comprised of 1.1 percent on new leases and 3.5 percent on renewal leases.
National Retail Properties (NNN) management raised its 2011 funds from operations/per share guidance to $1.54-1.56 per share from $1.52-1.55 per share. The company also provided initial 2012 FFO guidance of $1.62-1.67/share. We are revising our 2011 and 2012 FFO/share estimates to $1.56 and $1.67, respectively, from $1.53 and $1.64 previously.
We believe that the market should view National Retail Properties’ cash flows as positioned between equities and fixed income given the long-term structure of the tenant leases, and therefore, we think the dividend discount model is the most appropriate methodology for valuing the stock. NNN is currently trading at a 10 percent premium to our dividend discount model value of $24.40, which assumes a 9.5 percent cost of capital and a 3.0 percent dividend growth rate.
Jerry L. Doctrow