Streetwise for Sunday, August 20, 2017:
Warren Buffett said in a 1999 Fortune magazine article that the key to investing is “…determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”
Let’s take what Buffett said one step further and add that investing is a one to three-year undertaking and the reason is simple; it takes time for the performance of a company’s shares to reflect a company’s financial performance.
Yes, the uncertainty and volatility of the financial markets can be unnerving. And yes, it is natural to lose faith when the day’s trading activity shows a sharp decline among the major equity indexes.
However, you need to remember that market direction in the short-term is always uncertain and unpredictable. At the same time, a company’s prior accomplishments are ascertainable with complete certainty.
One company that has shown some excellent performance and one that you might want to consider is National Retail Properties (NNN), a real estate investment trust (REIT).
When I last wrote about National Retail Properties a year ago, my funds from operations (FFO) estimate for 2016 was 2.35 per share with a 12-month forecasted share price of $55. So how did the company do?
The company’s FFO came in at $2.28, while the shares recently closed at $40.59. So now you are probably asking yourself if maybe you should skip the rest of column. My reply would be not to judge the efficacy of this company’s performance just yet.
When evaluating REITs, the metric Funds from Operations (FFO) is used in lieu of earnings per share. FFO is defined as net income less gains or losses from property sales plus depreciation of real estate and amortization of capital expenditures.
For its recently announced second quarter earnings report the Orlando, Florida-based REIT reported FFO of 65 cents per share. The Street’s consensus was for 62 cents per share.
Adjusted revenue for the quarter was $145.4 million, as compared to a consensus of $142.8 million. The company’s full-year guidance for FFO is in the range of $2.50 to $2.54 per share.
However, the company’s shares have declined 9.5 percent since the beginning of the year and 25 percent in the last 12 months. Could it be that the shares are on sale? Maybe.
National Retail acquires, owns, manages, and develops single-tenant properties, currently owning 2,650 properties in 48 states. The company focuses on purchasing and financing its growth strategy with “small-box single-tenant properties. The company’s current holdings are over 99 percent occupied.
The company’s marketplace lacks the depth of institutional investors, which provides a ripe arena for capturing above-average assets and returns.
On the negative side, the company owns 12 Gander Mountain properties and the privately-owned outdoor sports company filed bankruptcy last March. However, the company has a longstanding relationship Camping World who acquired the bankrupt Gander Mountain.
If Camping World does not ring a bell, it is run by Marcus Lamonis, the star of the television show, The Profit. Gander represents 2.2 percent the National Retail’s base rent.
Another troublesome property is AMC Theatres. With a projected 1.5 percent decline in revenue for the full year. AMC represents 3.5 percent of National Retail’s revenues.
However, the most part National Retail’s tenants are in good shape and the REIT is not exposed to some of the dangerous retail categories as represented by companies such as Sears.
Most of the company’s leases are between 15-20 years, and the average remaining lease term for the portfolio is 11.4 years. Retail properties are more likely to renew at the end of the lease term. In addition, most are “triple net,” meaning the tenant is responsible for taxes, insurance, and maintenance.
My FFO earnings estimate is $2.55 for 2017 with a 12-month forecasted share price of $45 per share for a 10 percent capital gain.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.
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