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National Retail Properties, Inc. is a US$8.6b mid-cap, real estate investment trust (REIT) based in Orlando, United States. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of NNN is unique and it has to adhere to different requirements compared to other non-REIT stocks. I’ll take you through some of the key metrics you should use in order to properly assess NNN.
REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of NNN’s daily operations. For NNN, its FFO of US$472m makes up 79% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether NNN has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take NNN to pay off its debt using its income from its main business activities, and gives us an insight into NNN’s ability to service its borrowings. With a ratio of 17%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take NNN 6.04 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.
Next, interest coverage ratio shows how many times NNN’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 4.07x, it’s safe to say NNN is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at NNN's valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. NNN's price-to-FFO is 18.25x, compared to the long-term industry average of 16.5x, meaning that it is slightly overvalued.
In this article, I've taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. National Retail Properties can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:
- Future Outlook: What are well-informed industry analysts predicting for NNN’s future growth? Take a look at our free research report of analyst consensus for NNN’s outlook.
- Valuation: What is NNN worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether NNN is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.