- By Nathan Parsh
National Retail Properties Inc. (NYSE:NNN) was the subject of one of my very first articles here on GuruFocus. At that time, I said I liked the real estate investment trust's diversified tenant portfolio and dividend growth streak, but not the stock's valuation. Shares are down about 28% since that article was published.
Like many other REITs, the Covid-19 pandemic has weighted on results. The trust still enjoys an extremely high occupancy rate and the dividend remains intact, but National Retail's valuation trades much closer to its historical average and below its GF Value. This makes the stock a much more attractive then it was at the beginning of 2020.
National Retail reported third-quarter results on Nov. 2. The trust's funds from operation, or FFO, declined 8 cents, or 11.4%, to 62 cents, which was 4 cents lower than Wall Street analysts had expected. Revenue fell 5.9% to $158.6 million, which was $6.2 million below estimates.
While the top and bottom lines were down from the previous year, there was still plenty to like the from quarter. National Retail collected 90% of tenant rent due during the quarter, which was an improvement from the second quarter where the trust had collected 69% of rent due. Business closures in the second quarter related to the pandemic had made it difficult for a sizeable portion of the trust's tenants to pay rent. As restrictions were eased, this headwind subsided.
It may be that National Retail's tenants are seeing some stabilization in their business because the trust's rent collection improved to 94% in the month of October, which is the first month of the fourth quarter.
National Retail also came to rent deferral agreements with tenants that account for approximately 6% of annual base rents. These rent deferments averaged 2.7 months, with slightly more than three-quarters of the rent originally due in the second quarter and the remainder originally due in the third quarter.
Of the trust's more than 3,110 properties, 98.4% were occupied at the end of the quarter, which was a 30-basis point decline from the second quarter and 40 basis points below the prior-year quarter. Despite the small sequential and year-over-year decline, this is an incredibly strong figure, better than even what peer Federal Realty Investment Trust (NYSE:FRT) had at the end of its most recent quarter. National Retail's weighted average remaining lease term is almost 11 years.
According to analysts surveyed by Seeking Alpha, National Retail is expected to produce $2.62 of funds from operations in 2020. This would be a 5.1% decline from the previous year. This mid-single-digit decline doesn't seem that extreme given the substantial impact from Covid-19 on the trust's tenants. Analysts expect growth to return next year as funds from operations is seen as rising 4.2% to $2.73. This is within striking distance of National Retail's compound annual growth rate of 4.5% that it experienced from 2015 through 2019. The market appears to expect that the trust's growth will more or less resume as normal in 2021.
National Retail's financial position remain solid. The trust had $294.9 million in cash on its balance sheet and had not drawn on its $900 million bank credit facility.
Shares of the trust closed Monday's trading session at $39.92, giving National Retail a forward price-FFO ratio of 15.2 based off of 2020 estimates. This is above the price-FFO ratio of 14.4 that the stock has averaged since 2010. This is much improved, however, from the beginning of the year when the stock was trading with a funds from operations multiple above 20.
GuruFocus believes that National Retail is currently trading below its intrinsic value.
National Retail's GF Value is $45.16. Using the current share price, the stock has a price-to GF Value of 0.88 today. This earns the stock a rating of modestly undervalued. Reaching the GF Value would result in a price increase of 13.1% from current levels. Add in the annualized dividend of $2.08 and shareholders could receive a total return of almost 18% if shares of National Retail were to trade with its GF Value.
Shares of National Retail have declined significantly since I looked at the trust in mid-January. I said at the time that I preferred to see a pullback in the stock before purchasing. With shares down 28% since this time, the pullback has occurred, mostly thanks to the impact from the Covid-19 pandemic on the business.
Rent collection for the third quarter was much improved from the second quarter of the year. That trend continued in to at least the start of the fourth quarter. The occupancy rate did decline compared to the previous year and quarter, but remains extremely high overall.
National Retail's valuation has improved dramatically following the steep selloff in the stock. Shares offer a 5.2% dividend today and the trust has raised its dividend for 31 consecutive years. Only two other REITs have a longer history of dividend growth.
The stock also trades below its GF Value. If reached, then shareholders would enjoy a high double-digit return. Improving rent collection, a generous yield and potential for high returns make shares of National Retail a buy.
Disclosure: The author has no positions in any stocks mentioned in this article.
This article first appeared on GuruFocus.