Streetwise for Sunday, August 11, 2019

Investing is a one to three-year undertaking and the reason is simple; it can take 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, such as we saw recently.

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 a degree certainty, thereby enabling you to project probable future performance with substantial confidence.

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).

National Retail has a broadly diversified portfolio of 3,043 single-tenant retail properties with an occupancy rate that is up 60 basis points to 98.8%.

Year-to-date, the company has invested almost $393 million to acquire 104 single-tenant retail properties at an initial cash yield of 6.9% and with an average lease duration of 17.5 years.

When I last wrote about National Retail Properties a year ago, my FFO earnings estimate was $2.65 and about $1.60 in earnings per share for 2018 with a 12-month forecasted share price of $49, resulting for a 10 percent capital gain. So how did National Retail do?

The company’s FFO came in at $2.53, with earnings of $1.65 per share, while the shares recently closed at $52.67. If the term FFO is new to you, read on.

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, National Retail’s FFO was $0.68 per share, as compared to an FFO of $0.68 per share a year ago, adjusted for non-recurring items. 

Three months ago, the consensus estimate was for an FFO of $0.67 per share, so the $0.68 delivered a surprise of 1.49%. Over the last four quarters, the company has surpassed consensus FFO estimates twice.

Second quarter ended June 2019, saw the company post revenues of $164.60 million, in line with the consensus estimates. This compares favorably to revenues for the same period a year ago of $155.15 million. The company has exceeded consensus revenue estimates twice over the past four quarters.

Although National Retail’s shares have underperformed the S&P 500 index so far this year, the question that comes to is what we can look forward to going forward. As with any company, there is no easy answer. However, if we look at the outlook for National Retail’s FFO going forward we derive a sense of confidence in the company.

The current consensus FFO estimate is $0.69 on $166.22 million in revenues for the coming quarter and the company is on track with its prior FFO guidance for the year of $2.71 to $2.76 per share, which is unchanged from the prior quarter and implies a 3.2% growth on $665.70 million in revenues this fiscal year.

This year will also mark the company’s 30th consecutive year of increased annual dividends, a feat matched by only 2 other REITs and by less than 90 public companies in the United States. 

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. With a dividend payout ratio at that level, the company is well positioned to be able to continue their dividend paying track record into 2020 and beyond.

My FFO earnings estimate is $2.74 or about $1.64 per share for 2019 with a 12-month forecasted share price of $59 per share for an approximate 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.