LAUREN RUDD: REITS — National Retail Properties exceeding revenue estimates

By Lauren Rudd
 |  Sarasota Herald-Tribune

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.

However, remember that market direction in the short-term is both uncertain and unpredictable. However, a company’s prior accomplishments are ascertainable with a degree of certainty, thereby enabling a determination future performance with a reasonable degree of probability.

For example, a company that has been derided by many, primarily because of the industry in which it resides, and yet has an excellent record of past performance is National Retail Properties (NNN), a real estate investment trust (REIT).

Yes, the COVID-19 virus has decimated many businesses with the result that they are unable to meet rental commitments to their landlords. And since REITs are often landlords, their revenues are also affected.

A cursory review of National Retail points out that it 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%.

During the first half of 2020, the company invested $74.1 million, that included the acquisition of 21 properties with an aggregate 284,000 square feet of gross leasable area with an initial cash yield of 6.9%.

It also sold 22 properties for $40.1 million producing $13.5 million of gains on sales and raised $53.3 million net proceeds from the issuance of 1,451,223 common shares. National Retail issued $400 million of 2.50% notes due 2030, generating net proceeds of $395.1 million.

In addition, it issued $300 million of 3.10% notes due 2050 generating net proceeds of $290.5 million. It also paid off $325 million of 3.800% notes due 2022.

When I last wrote about National Retail Properties a year ago, my FFO earnings estimate was $2.74 or about $1.64 per share with a 12-month forecast share price of $59 per share. So how did the company do?

The company’s FFO came in at 2.76, with earnings of $1.56 per share. However, the shares recently closed at $34.84. 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.

National Retail Properties posted an FFO of $0.65 per share for the second quarter, versus a consensus estimate of $0.60 per share. This was slightly less than its FFO of $0.68 per share for the same period a year ago, adjusted for non-recurring items.

For the second quarter ended last June, National Retail chalked up revenues of $163.48 million. This compares to year-ago revenues of $164.60 million. The company has exceeded consensus revenue estimates four times over the last four quarters.

National Retail is actively working with its tenants that have been impacted by the COVID-19 pandemic. As of July 30, NNN had collected approximately 69% of rent due for the quarter ended June 30, and approximately 84% of rent originally due in July.

During the second quarter, the company enjoined rent deferral lease amendments with certain tenants representing approximately 21% of rent due for the quarter ended June 30.

On average, 2.4 months of rent was deferred with approximately 86% of deferred rent originally due in the second quarter of 2020 and 14% originally due in the third quarter of 2020. Approximately 66% of this deferred rent is due to be paid to NNN by June 30, 2021 and 94% is due by December 31, 2021.

My 2020 FFO estimate is $2.50 per share, or about $1.70 per share for 2020 with a 12-month forecasted share price of $38 per share yielding about a 6% capital gain. There is also an indicated dividend yield of 5.97 percent.

Lauren Rudd is president of Rudd International, an asset management firm. Neither Lauren Rudd nor his employees have plans to purchase any shares discussed within 30 days, nor is there any intended inducement to buy or sell any security. You can write to Lauren Rudd at [email protected] or call him at 941-706-3449. For back columns go to

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