July 06, 2016 - 3:23am EST by
2016 2017
Price: 52.80 EPS 1.46 1.4
Shares Out. (in M): 144 P/E 36.2 37.7
Market Cap (in $M): 7,587 P/FCF 0 0
Net Debt (in $M): 2,516 EBIT 324 346
TEV (in $M): 10,103 TEV/EBIT 31.2 29.2
Borrow Cost: General Collateral

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Investment Thesis
Macro factors, exacerbated by last month’s Brexit, have driven the stock to a really
expensive level.
A properly hedged bearish position in NNN should provide attractive upside with
limited downside.
Company Description
National Retail Properties (NNN) is a triple-net lease REIT that is exclusively retail focus.
The real estate portfolio is about 25.4m sf and spans 47 States.
Triple-Net Lease REIT Overview
Long term lease with fixed or CPI-linked rent escalators. Lease term often exceeds
10 years.
Tenants are responsible for operating expense, real estate tax and insurance. The
risk for the landlord is credit risk.
All else being equal, properties leased to investment grade (IG) tenants trade at a
lower cap rate than non-IG tenant properties.
Bond-like cash flow, hence triple-net REITs trade on dividend yield or FFO multiples,
not NAV
Excluding acquisition, organic, same store growth is 0 2%.
Company Overview
100% Retail Focus
Other triple-net REITs are diversified by property type (office, industrial, retail).
NNN is retail only
Strong balance sheet metric: Net Debt/EBITDA = 4.2x, Net Debt/TEV = 21% relative
to peer avg of 5.4x and 31% respectively. Peer group consists of O, SRC, GPT,
Negligible 2016 debt maturities:$6mm
Unique Underwriting
Favor non-IG tenants. Management believes the higher cap rate outweighs the
incremental credit risk
Focus on small investment: $2 4mm/property. They believe there is less
competition because institutional capital is uninterested to underwrite small deals.
Strong Fundamentals
Occupancy is at 99.1%
Despite the company retail focus, it is only exposed to Sports Authority which
represents 0.5% of annualized base rent.
Chains like PacSun, Aeropostale, Sports Chalet, Tailored Brands, Sears have
announced bankruptcies or store closures. It has so far avoided store with the
exception of Sports Authority. This is strong evidence that NNN’s underwriting
is sound.
Recent Acquisition
Bob Evans Farms transaction exemplifies NNN acquisition
Direct, non-marketed deal leads to above market cap rate 6.8%.
$160.8mm, $1.4mm/box. Initial lease term is 20 years, with 5 year renewal option.
Accretive deal as the stock is trading at 5% implied cap rate.
Non-rated credit with established franchise.
Bullish Thesis
Great fundamentals, great strategy.
Management team is capable and above average, in my opinion
Favorable macro tailwind: the market expected the Fed to hike rates multiple times
at the start of this year and now some participants expect a rate cut. 10 year US
treasury has declined to 1.35%, a historic low.
The company can continue to issue new stock as currency to make accretive
acquisitions. NAV is $34 36 and stock is at $52. Issuing equity at 5% cap rate
and buying properties is highly accretive and fun, until the music stops.
Accretive refinancing potential: the preferred D and $250mm of unsecured debt is
due next year and could likely be refinanced at lower rates that may provide some
upside to earnings.
Bearish Thesis
Macro factors completely out of management’s control has driven the stock to a very
expensive level. How do I know this?
Several sovereign government bonds have negative yield
How much would you pay for a stock that has organic growth of 1 2%? If you
require 10% returns, dividend yield should be 8 9%. If your required return is
high single digit, it should yield 5 6%. NNN is yielding 3.3%.
The 5 yr avg spread between NNN dividend yield and the yield of an index of US BBB
REIT 10 yr bonds is 62.5 bps, it’s now negative 11.4 bps. NNN is BBB rated. The
dividend yield should always be above a diversified basket of BBB REIT bonds.
Pair Trade Suggestion
1. Long a basket of BBB US REIT bonds and short NNN.
The least riskiest with 70 bps of correction.
If bond price don’t move, this means NNN would trade down to $43.5.
2. Long SIR and short NNN.
the spread in dividend should compressed to negative 2% from the current
SIR introduces company specific risk. It is highly levered and has external
manager issues (RMR).
Both are triple-net REITs. Equity market risk and interest rate risk are
3. Long a basket of Apartment (AVB, PPS, UDR) and Self-Storage (SSS, PSA, EXR)
REITs and short NNN
This trade is also a spread trade. You are taking on sector risk. (i.e. new
supply risk in Apartments)
Equity market risk and interest rate risk are hedged.
Fundamentally, similar to NNN, apartments and self-storage are both
insulated from the global economy.
Duration risk. Apartment and self-storage have short lease terms, thus are
much more sensitive to the domestic economy. If you believe the U.S.
economy will continue to do well in the next 2 years, this is the suitable trade
because dividend growth in the long basket will be much higher than NNN.
The long basket has a dividend yield of low 3%, similar to NNN. Organic,
dividend growth for the long basket should be 3 5% vs 1 2%
I am against a pure short of NNN (see above bullish thesis).
There is no immediate catalyst for the short case.
I am not comfortable making a call in interest rate
I have learned painfully that the market can stay irrational than one can stay


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Passage of time.

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