NNN 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report, not a standalone fourth-quarter filing. The registrant is National Retail Properties, Inc. (NYSE: NNN), a fully integrated REIT formed in 1984.
Business Context
NNN owns, acquires and develops primarily single-tenant retail properties leased under long-term net leases. At December 31, 2022, the portfolio comprised 3,411 properties totaling approximately 35.0 million square feet across 48 states, with approximately 99% occupancy and a 10.4-year weighted average remaining lease term.
- Major annual base-rent concentrations included convenience stores at 16.5%, automotive service at 13.7%, full-service restaurants at 9.1% and limited-service restaurants at 8.9%.
- The five largest tenants represented 19.5% of annual base rent; the five largest states represented 41.0%.
- Texas was the largest state exposure at 17.1% of annual base rent.
- NNN reported one operating segment and stated that it qualified as a REIT for the three-year period ended December 31, 2022.
Financial Performance and Key Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenues | $773.1 million | $726.4 million | 6.4% |
| Rental income | $771.6 million | $723.9 million | 6.6% |
| Earnings from operations | $482.5 million | $449.1 million | 7.4% |
| Net earnings attributable to NNN | $334.6 million | $290.1 million | 15.3% |
| Net earnings attributable to common stockholders | $334.6 million | $264.2 million | 26.6% |
| Basic and diluted EPS | $1.89 | $1.51 | 25.2% |
| Cash provided by operating activities | $578.4 million | $568.4 million | 1.7% |
| Dividends paid to common stockholders | $380.5 million | $367.3 million | 3.6% |
- Approximate total-revenue operating margin was 62.4%, compared with 61.8% in 2021. Approximate net margin attributable to NNN was 43.3%, compared with 39.9% in 2021.
- Interest expense increased 7.4% to $148.1 million, primarily reflecting higher borrowings and the Credit Facility’s outstanding balance.
- Depreciation and amortization increased 9.1% to $223.8 million due to portfolio growth.
- Real estate impairment losses declined to $8.3 million from $22.0 million.
- NNN recorded $7.5 million of executive retirement costs in 2022 related to the former CEO’s retirement and transition agreement.
- The filing text does not provide a clear funds-from-operations or adjusted funds-from-operations value.
Portfolio Growth and Capital Allocation
- NNN acquired 223 properties in 2022 for total dollars invested of $847.7 million, compared with 156 properties and $555.4 million in 2021.
- NNN sold 33 properties for net proceeds of $65.2 million and recognized a $17.4 million gain, versus 74 properties, $122.0 million of proceeds and a $23.1 million gain in 2021.
- Real estate portfolio assets, net of accumulated depreciation and amortization, increased to $8.02 billion from $7.45 billion.
- Common dividends increased to $2.16 per share from $2.10 per share. NNN stated that it had increased its annual dividend for 33 consecutive years.
Cash Flow, Debt and Liquidity
| Balance or obligation | December 31, 2022 |
|---|---|
| Cash and cash equivalents | $2.5 million |
| Restricted cash and escrow | $4.3 million |
| Total debt | $3.916 billion |
| Credit Facility outstanding | $166.2 million |
| Credit Facility availability | $933.8 million |
| Notes payable | $3.740 billion |
| Mortgages payable | $10.0 million |
| Total debt to gross assets | Approximately 40% |
| Total debt to market capitalization | Approximately 33% |
- Operating cash flow covered common dividends paid during the year.
- Investing activities used $777.6 million, primarily for property acquisitions and improvements.
- Financing activities provided $34.7 million, including $166.2 million of net Credit Facility borrowings and $247.1 million of net ATM equity proceeds.
- The unsecured revolving Credit Facility has $1.1 billion of capacity, matures in June 2025, and may be extended to June 2026. It was amended in December 2022 to transition from LIBOR to SOFR-based pricing.
- Debt principal maturities include approximately $9.9 million in 2023, $350.0 million in 2024, $400.0 million in 2025, $350.0 million in 2026 and $400.0 million in 2027, excluding interest.
- NNN was in compliance with its debt covenants at December 31, 2022.
Material Changes Versus 2021
- Portfolio size increased from 3,223 to 3,411 properties, while gross leasable area increased from 32.8 million to 35.0 million square feet.
- Revenue and earnings increased, supported by acquisitions, scheduled rent increases and CPI-linked rent provisions.
- Operating cash flow increased modestly despite substantially higher acquisition spending.
- Total debt increased from $3.746 billion to $3.916 billion, primarily because of Credit Facility borrowings.
- Interest expense increased, while the 2021 loss on early extinguishment of debt of $21.3 million did not recur.
- The Series F preferred stock had been fully redeemed in 2021; NNN had no preferred stock outstanding at the end of 2022.
- COVID-19 rent deferrals continued to be repaid. Approximately 87% of deferred rent had been repaid by December 31, 2022, leaving scheduled repayments through 2025 according to the MD&A table.
Outlook, Risks and Unusual Items
Management did not provide a specific numerical earnings, acquisition or dividend outlook in the filing. Management expects liquidity needs to be funded through operating cash flow, cash, the Credit Facility, debt or equity issuance and property dispositions, while retaining the ability to reduce acquisitions or increase dispositions if necessary.
- Key risks include inflation, higher interest rates, capital-market access, refinancing risk, tenant defaults or bankruptcies, retail-sector disruption, geographic and industry concentration, property valuation declines and competition for acquisitions.
- NNN had 21 vacant, unleased properties at December 31, 2022, representing approximately 1% of the portfolio.
- As of January 30, 2023, less than 1% of properties and gross leasable area was leased to a tenant in Chapter 11 bankruptcy.
- Seventy-one properties were under some level of environmental remediation or monitoring as of January 30, 2023; management stated that responsible parties generally bear remediation costs.
- NNN had committed $117.6 million to fund construction of 19 properties, of which $73.5 million remained unfunded at year-end.
- Interest-rate exposure principally relates to the variable-rate Credit Facility. A 1% increase in variable borrowing rates would have increased 2022 interest expense by less than 1%, according to the filing.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The critical audit matters were real estate acquisition valuation and impairment testing.
Important Facts for Investors to Verify
- Reconcile the 2022 acquisition spending of approximately $847.7 million, including the distinction between acquisitions, construction commitments and improvements.
- Review the 2023–2027 debt maturities and the refinancing plan for the $350.0 million 2024 notes, $400.0 million 2025 notes and the Credit Facility maturity.
- Assess tenant, industry and geographic concentration, particularly the restaurant, convenience-store and automotive-service exposures and Texas concentration.
- Evaluate rent-collection trends, remaining COVID-19 deferred rent and the credit quality of cash-basis or financially distressed tenants.
- Review the assumptions underlying real estate acquisition valuations, impairment testing and the $8.02 billion net real estate carrying value.
- Confirm the sustainability of common dividends relative to operating cash flow, debt service, acquisition commitments and capital-market conditions.
- Monitor environmental remediation, vacant properties, tenant bankruptcy exposure and the remaining $73.5 million of construction commitments.