3 Things to Watch in National Retail Properties’ Earnings Report

National Retail Properties (NYSE: NNN  ) is set to report its second quarter earnings on Monday, July 28, and investors are hoping for another solid quarter.

With REITs like National Retail Properties, earnings per share are not the best way to determine how well the company is doing. In fact, the $0.27 per share expected by the market fails to cover the company's dividend payment. So, why did National Retail Properties just increase its dividend by about 4% if its earnings won't cover it?

Here are three things to watch from National Retail Properties' second-quarter earnings that will give you an accurate picture of how the company is performing, and whether or not it will be able to keep up its performance in the future.

Funds from operations guidance that covers the growing dividend
By far, Funds From Operations (FFO) is the most telling number when determining the performance of a REIT. FFO takes a company's net earnings (the number we normally hear in earnings releases), and adds back depreciation and amortization of real estate assets.

General Accepted Accounting Principles (GAAP) require REITs to depreciate their properties over time. However, real estate tends to increase in value over time, so the depreciation makes REIT earnings look much lower than they really are, hence the higher dividend than you might expect.

National Retail Properties FFO for the first quarter was $0.51 per share, which is more than enough to cover the company's recently increased dividend, which now stands at $0.42 per quarter. REITs are required to pay at least 90% of their taxable income to shareholders, so in order to support a $1.68 annual dividend; the company needs FFO of at least $1.87 for the year.

Last quarter, National Retail Properties issued FFO guidance of $1.95 to $2.00, so as long as this number stays where it is, not only is the dividend safe, but further increases are likely in the future.

The occupancy rate needs to stay high
A sign of the tremendously improved economy, National Retail's investment properties have an extremely high occupancy rate of 98.2%, which has gradually increased from a low of 96.4% in 2009.

This may not sound like a big difference, but think of it this way: Currently, about 1.8% of National Retail Properties' portfolio is vacant. Since 2009, the vacancy rate has been cut in half. When a company like this, which aims for a return on its investments of about 7% per year, small changes in the vacancy rate can make a big difference.

So, pay attention to the vacancy rate. If it's holding steady or even improving, it's a very positive sign for the company's future.

Investments and dispositions
During the first quarter, National Retail Properties made $94 million in new property investments which are expected to produce an initial cash yield of 7.7%. And, this yield is expected to rise over time as tenants' rent increases. The company also sold $11.2 million of property at a profit of $1.2 million, indicating a nice rise in the value of the trust's real estate holdings.

However, the $94 million in acquisitions is actually rather slow for the company. During 2013, National Retail Properties acquired $630 million in new properties, or an average of about $158 million per quarter.

So, while the company's yield from its investment is very good, I'd like to see it pick up a bit for the rest of the year.

One of the best in breed
There are plenty of reasons to love National Retail Properties as an investment, and with this earnings release, we just want to make sure those reasons continue. For example, we mentioned the occupancy rate of 98.2%.

Well, the industry average is about 92%. So, the company simply needs to maintain its performance to remain an industry leader.

I am very confident that Nation Retail Properties will perform incredibly well for the rest of 2014 and beyond, and great numbers in the three areas I mentioned will only bolster my confidence even more.

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