Net lease real estate investment trust (REIT) National Retail Properties (NYSE: NNN) has an incredible history. To put just one number on that, it's increased its dividend annually for more than three decades. That includes a dividend hike in 2020, despite the heavy impact of the coronavirus pandemic. Before you jump aboard in 2021, however, step back and think about what you're reading when it reports quarterly earnings this year.
A very tough time
When the pandemic started to spread in early 2020, the U.S. government forced nonessential businesses to shut down. Although many of National Retail's lessees were considered essential, there was a lot of strain throughout the retail sector because customers were avoiding going out unless absolutely necessary.
The trouble showed up quickly. When the REIT reported first-quarter earnings last year, it noted that rent collections in April were just 52%. That's a disastrous figure, and the stock sold off sharply.
To be fair, the market as a whole was in bear territory, so a lot of stocks were being dumped at the time. But there was a very real concern at National Retail Properties that helped to cut the stock price in half. Even today, more than a year after the pandemic started to spread, National Retail's stock remains more than 20% below where it was before the pandemic. It's even lagging slightly behind some of its major peers in the net lease sector.
When the year came to an end, National Retail Properties' top line was off by about 1.5%. That's not too bad, but adjusted funds from operations (FFO), which is a REIT metric similar to earnings for an industrial concern, was lower by a hefty 10%. That's a terrible year for a REIT that's basically known for providing slow, steady growth.
A critical look at 2021
National Retail Properties' impressive history of slow and steady growth is a fact investors need to keep in mind in 2021. The REIT is currently projecting an adjusted FFO range of $2.77 to $2.84 per share in 2021. Adjusted FFO in 2020 was $2.51 per share. So the 2021 range suggests year-over-year adjusted FFO growth will fall between 10% and 13%. Those are huge numbers for this REIT.
Investors might look at that and think National Retail Properties has picked things up a notch. But 2020 was an aberration thanks to the pandemic. In 2019, the REIT's adjusted FFO was $2.80 per share. So, at the low end of the projected range in 2021, adjusted FFO could actually be lower by about 1% compared to pre-pandemic levels. At the high end, adjusted FFO would grow just 1.4%. That's much less impressive.
This isn't meant to suggest National Retail Properties is a bad REIT -- that's clearly not true. In fact, its ability to muddle through 2020 in relative stride is proof of how well-run the company is. Notably, the dividend increase during the year was a sign of how important returning value to shareholders via distributions is to management. But as 2021 progresses, it's important not to read the wrong things into the adjusted FFO numbers National Retail Properties puts up. It's still working back from the hit it took in 2020, even though the year-over-year results will look pretty impressive.
It's all relative
The proper comparison point for National Retail Properties' results in 2021 is really 2019, before it had to deal with the pandemic shock. On that basis, 2021 will not be nearly as good a year as it will seem if you only look back to 2020. National Retail Properties is still a great REIT, but 2021 is best viewed as a recovery year, not a growth year, as some might mistakenly think if they make the wrong comparisons.