Streetwise for Sunday, August 12, 2018

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).

The company invests primarily in high-quality retail properties subject generally to long-term, net leases.  As of June 30, 2018, the company owned 2,846 properties in 48 states with a gross leasable area of approximately 29.4 million square feet and with a weighted average remaining lease term of 11.5 years. 

When I last wrote about National Retail Properties a year ago, my funds from operations or FFO earnings estimate was $2.55 for 2017 with a 12-month forecasted share price of $45 per share, equating to a 10 percent capital gain. So how did the company do?

The company’s FFO came in at $2.52, while the shares recently closed at $45.83. That equates to earnings of $0.40 as compared to $0.33 per share for the same period a year ago. If the term FFO is new to you, read on it will all be explained.

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.

In its recently announced second quarter earnings report, National Realty reported FFO of 68 cents per share as compared to $0.65 for the same period a year ago, exceeding the Street’s consensus of $0.66 and representing 15.3 percent increase.

Revenues for the second quarter were $155.5 million, its adjusted revenue was $155.2 million, which also exceed Street estimates. National Retail Properties expects full-year funds from operations in the range of $2.66 to $2.70 per share and the company’s shares have increased slightly more than 3 percent since the beginning of the year. The stock has climbed 12 percent in the last 12 months.

Occupancy rate was 98.5 percent as of June 30, slightly below the 99.2 percent on March 31, and 99.1 percent on December 31. The company invested $140.5 million in its properties, including the acquisition of 59 properties with an aggregate 336,000 square feet of gross leasable area, providing an initial cash yield of 7.1 percent.

National Retail also sold 13 properties for $11.9 million producing $4.1 million of gains on sales, while raising $129.2 million of net proceeds from the issuance of 3,136,802 common shares.

The company’s core FFO guidance for 2018 is $2.62 to $2.66 per share, which equates to net earnings of between $1.51 and $1.55 per share, plus $1.11 per share of expected real estate depreciation and amortization and excludes any gains from the sale of real estate and any charges for impairments and retirement severance costs.

National Retail’s current indicated dividend of $1.90 is up 2.2 percent from last year. The company has increased its dividend 28 times on a year-over-year basis for a five-year average annual rate of increase of 3.91 percent.

Of course, the company’s future dividend growth will depend on earnings growth as well as its payout ratio, which is the proportion of a company’s annual earnings per share that it pays out as a dividend.

National Retail’s current payout ratio is 73 percent, meaning it is currently paying out 73 percent of its trailing 12-month earnings per share in dividends.

My FFO earnings estimate is $2.65 or about $1.60 per share for 2018 with a 12-month forecasted share price of $49 per share resulting in approximately 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.RuddInternational.com.