REITs often attract a great deal of investors because of their strong cash flows and dividends, and those investors often overlook other parts of the business, choosing to analyze the company under a different set of criteria than companies in other sectors.  This can create a problem in that it becomes difficult to compare a REIT to an industrial, which is fine if you use the typical top-down approach to stock selection; however, a top-down approach invites speculation in the fact that you are theorizing which sector will perform well going forward.  Benjamin Graham taught that we should avoid speculation as much as possible, which is why it is critical to develop a system for analyzing companies that will allow them to be compared across industries.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another investment opportunity.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how National Retail Properties Inc. (NNN) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): National Retail Properties, Inc. is a real estate investment trust (REIT). The Company acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and are held for investment. As of December 31, 2014, the Company owned 2,054 Properties with a gross leasable area of approximately 22,479,000 square feet, located in 47 states. Approximately 99% of the properties were leased as of December 31, 2014. The Company’s portfolio include convenience stores, restaurants, automotive service, restaurants-limited service, theaters, family entertainment centers, automotive parts and banks, among others. It has operations in Texas, Florida, North Carolina, Illinois, Georgia, Indiana and California, among others. As of December 31, 2014, The Company owned 29 vacant, un-leased Properties, which accounted for approximately 1% of total Properties.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -Â FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years -Â PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
Valuation Summary
Key Data:
| Recent Price | $36.87 |
| MG Value | $33.73 |
| MG Opinion | Fairly Valued |
| Value Based on 3% Growth | $21.60 |
| Value Based on 0% Growth | $12.66 |
| Market Implied Growth Rate | 8.13% |
| Net Current Asset Value (NCAV) | -$14.09 |
| PEmg | 24.76 |
| Current Ratio | 0.52 |
| PB Ratio | 1.56 |
Balance Sheet -Â March 2015
| Current Assets | $36,700,000 |
| Current Liabilities | $71,200,000 |
| Total Debt | $1,740,900,000 |
| Total Assets | $5,020,800,000 |
| Intangible Assets | $0 |
| Total Liabilities | $1,897,600,000 |
| Outstanding Shares | 132,100,000 |
Earnings Per Share
| 2015 (estimate) | $2.18 |
| 2014 | $1.24 |
| 2013 | $1.10 |
| 2012 | $1.11 |
| 2011 | $0.96 |
| 2010 | $0.80 |
| 2009 | $0.60 |
| 2008 | $1.56 |
| 2007 | $2.26 |
| 2006 | $3.05 |
| 2005 | $1.56 |
Earnings Per Share – ModernGraham
| 2015 (estimate) | $1.49 |
| 2014 | $1.11 |
| 2013 | $1.00 |
| 2012 | $0.97 |
| 2011 | $1.01 |
| 2010 | $1.24 |
Dividend History
Free Cash Flow
Conclusion:
National Retail Properties Inc. is not suitable for either the Enterprising Investor or the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and the high PEmg ratio.  The Enterprising Investor is concerned with the high level of debt relative to the current assets.  As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.  From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.01 in 2011 to an estimated $1.49 for 2015.  This level of growth supports the market’s implied estimate of 8.13% annual earnings growth over the next 7-10 years, leading the ModernGraham valuation model to return an estimate of intrinsic value falling within a margin of safety relative to the current price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on National Retail Properties Inc. (NNN)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: Â The author did not hold a position in any company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from wikipedia; this article is not affiliated with the company in any manner.
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