NNN REIT, INC. annual report, FY2021

NNN REIT, Inc. 2021 Form 10-K Summary

Business context and reporting period

National Retail Properties, Inc. (NYSE: NNN) is an integrated Maryland REIT that acquires, owns, develops and invests primarily in retail properties leased under long-term net leases. This filing covers the fiscal year ended December 31, 2021, including fourth-quarter 2021 operating and rent-collection information.

Portfolio: 3,223 properties totaling approximately 32.8 million square feet across 48 states.
Occupancy: approximately 99%; 32 vacant properties represented less than 1% of the portfolio.
Weighted average remaining lease term: 10.6 years, compared with 10.7 years in 2020.
Major concentrations: convenience stores, automotive service and restaurants represented 39.4% of annual base rent; Texas represented 16.9% and Florida 8.6%.

Financial performance and key metrics

Metric	2021	2020	Change
Total revenues	$726.4 million	$660.7 million	9.9%
Rental income	$723.9 million	$658.8 million	9.9%
Earnings from operations	$449.1 million	$374.5 million	19.9%
Net earnings attributable to NNN	$290.1 million	$228.8 million	26.8%
Net earnings attributable to common stockholders	$264.2 million	$210.9 million	25.3%
Basic and diluted EPS	$1.51	$1.22	23.8%
Cash flow from operating activities	$568.4 million	$450.2 million	26.3%
Common dividends per share	$2.10	$2.07	1.4%

Revenue growth reflected lower receivables reserves, CPI-based rent increases and contributions from acquired properties. Operating expenses were $300.4 million, down 0.7%, primarily because real estate impairment losses declined to $22.0 million from $37.4 million. Depreciation and amortization increased 4.4% to $205.2 million, general and administrative expense increased 17.0% to $44.6 million, and interest expense increased 6.5% to $137.9 million.

Reported earnings included a $21.3 million loss on early extinguishment of debt related to redemption of $350.0 million of 3.3% notes due 2023. Net gain on property dispositions was $23.1 million, compared with $16.2 million in 2020.

Acquisitions: 156 properties for $555.4 million, compared with 63 properties for $180.0 million in 2020; initial cash yield was 6.5%.
Dispositions: 74 properties generating $122.0 million of net sales proceeds, compared with 38 properties and $54.5 million in 2020.
Real estate portfolio carrying value: $7.44 billion, up from $7.21 billion.
Total assets: $7.75 billion; total equity: $3.90 billion.

Cash flow, debt and liquidity

Operating cash flow was $568.4 million and exceeded common dividends paid of $367.3 million.
Investing activities used $432.2 million, primarily for $553.3 million of real estate additions, partly offset by property-sale proceeds.
Financing activities used $232.2 million, including $345.0 million to redeem all Series F preferred stock and $367.3 million of common dividends.
Cash and cash equivalents were $171.3 million at year-end, compared with $267.2 million in 2020.
Total debt was $3.75 billion, including $3.74 billion of unsecured notes and $10.7 million of mortgages; debt increased from $3.22 billion.
Total debt was approximately 40% of gross assets and approximately 30% of total market capitalization; secured debt was less than 1% of gross assets.
The unsecured revolving credit facility was increased from $900 million to $1.1 billion. No balance was outstanding at year-end, and the full $1.1 billion was available. The facility matures in June 2025, with extension options to June 2026.
Debt principal obligations totaled $3.81 billion, including $350 million due in 2024, $400 million in 2025 and $350 million in 2026. Estimated principal and interest obligations totaled $5.77 billion.
NNN was in compliance with applicable debt covenants at December 31, 2021.

Material changes versus the prior comparable period

Portfolio size increased to 3,223 properties from 3,143, while gross leasable area increased to 32.75 million square feet from 32.46 million.
Acquisition activity accelerated materially, with invested capital increasing to $555.4 million from $180.0 million.
Rent collection and reported earnings recovered from the principal COVID-19 disruption in 2020. No outstanding receivables and related accrued rent were written off in 2021, compared with a $21.8 million write-off in 2020.
NNN redeemed all 13.8 million depositary shares representing its 5.2% Series F preferred stock in October 2021. No preferred stock remained outstanding at year-end.
NNN issued $900 million principal amount of long-term notes in 2021: $450 million of 3.5% notes due 2051 and $450 million of 3.0% notes due 2052. It redeemed $350 million of 3.3% notes due 2023.
Common dividends increased for the 32nd consecutive year, to $2.10 per share from $2.07.

Outlook, commentary, risks and unusual items

Management expects cash and cash equivalents, operating cash flow and the available credit facility to satisfy near-term funding needs, including property investments, dividends, debt service and construction commitments. NNN had a remaining commitment of $24.7 million for 13 properties under construction.

As of January 31, 2022, NNN had collected 99.4% of rent originally due for the fourth quarter of 2021 and 98.8% for the full year, excluding repayments of previously deferred rent. COVID-19 rent deferrals totaled $56.8 million for amounts originally due in 2020 and 2021; $31.8 million was repaid in 2021, $14.5 million was scheduled for repayment in 2022, and substantially all remaining amounts were expected by December 31, 2023, although the filing states that collection remains uncertain.

COVID-19, tenant defaults, bankruptcies, vacancies and reduced consumer spending could reduce rental revenue and cash flow.
Five tenants generated 20.2% of annual base rent, and concentration in convenience stores, automotive service, restaurants, Texas and Florida creates exposure to industry or regional weakness.
Interest-rate increases could affect refinancing costs and the variable-rate credit facility. LIBOR, the facility’s reference rate, was expected to cease publication after June 30, 2023.
Debt maturities, covenant restrictions and reliance on capital markets could constrain acquisitions, distributions or refinancing flexibility.
Real estate values and impairment charges depend on market rents, capitalization rates, tenant credit quality and other subjective assumptions.
NNN reported 73 properties under some level of environmental remediation or monitoring as of February 2, 2022. Management reported no material ADA non-compliance and no Chapter 11 tenants as of that date.
Material risks also include competition for acquisitions, illiquidity of real estate, uninsured losses, cybersecurity incidents, regulatory and tax changes, and maintaining REIT qualification.

Ernst & Young LLP issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of December 31, 2021.

Important facts for investors to verify

Reconcile reported earnings with recurring REIT measures such as funds from operations and adjusted funds from operations; those measures are not provided in the supplied filing text.
Assess the collectability and repayment schedule of the remaining COVID-19 rent deferrals, particularly the $14.5 million scheduled for 2022.
Review tenant, industry and geographic concentration, including the exposure to restaurants, convenience stores, automotive service, Texas and Florida.
Evaluate the $1.1 billion credit facility, LIBOR-to-SOFR transition, debt covenants and the $3.81 billion principal maturity schedule.
Review acquisition underwriting assumptions, impairment sensitivity to market rents and capitalization rates, and the valuation of the $7.44 billion real estate portfolio.
Confirm the sustainability of the common dividend in relation to operating cash flow, debt service, acquisition spending and REIT distribution requirements.