Business Context and Reporting Period
National Retail Properties, Inc. (NNN REIT, Inc.) filed this unaudited Form 10-Q for the quarter ended March 31, 2019. NNN is a fully integrated REIT that acquires, owns, develops and invests in primarily retail properties leased under long-term net leases.
- Portfolio: 2,984 properties totaling approximately 30.7 million square feet across 48 states.
- Occupancy: approximately 98%; weighted average remaining lease term of 11.4 years.
- Largest annual base-rent concentrations were convenience stores, full-service restaurants, limited-service restaurants and automotive service.
Financial Performance and Position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenues | $163.7 million | $152.8 million | 7.1% increase |
| Lease income | $163.0 million | Comparative presentation differs | 2019 reported under ASC 842 |
| Operating expenses | $66.0 million | $61.6 million | 7.3% increase |
| Gain on real estate dispositions | $10.4 million | $38.6 million | 72.9% decrease |
| Earnings from operations | $108.1 million | $129.9 million | 16.7% decrease |
| Net earnings attributable to NNN | $80.0 million | $103.3 million | 22.5% decrease |
| Net earnings available to common stockholders | $71.4 million | $94.7 million | 24.5% decrease |
| Basic and diluted EPS | $0.44 | $0.62 | 29.0% decrease |
| Cash flow from operations | $143.4 million | $130.0 million | 10.3% increase |
Calculated net earnings margins were approximately 48.9% of revenue in Q1 2019 versus 67.6% in Q1 2018. Earnings from operations represented approximately 66.0% of revenue versus 85.0% in the prior-year quarter. The decline primarily reflects the substantially lower gain on property dispositions and higher operating and interest expenses. The filing does not provide a clear GAAP operating margin or funds from operations figure in the supplied text.
- Operating lease rental income increased 7.1% to $158.4 million, primarily from acquisitions completed in 2018 and 2019.
- Interest expense increased 12.6% to $30.0 million.
- Real estate impairment losses increased to $3.2 million from $2.2 million.
- Total assets were $7.14 billion at March 31, 2019, compared with $7.10 billion at December 31, 2018.
- Total debt was $2.85 billion, consisting primarily of $2.84 billion of notes payable. Debt was substantially unchanged from year-end.
- The $900 million unsecured revolving credit facility had no outstanding balance and was fully available at quarter-end. It matures in January 2022, with an option to extend to January 2023.
- Cash and cash equivalents were $80.5 million, down from $114.3 million at December 31, 2018.
Cash Flow, Investment and Dividends
- Investing activities used $93.0 million, including $112.1 million of additions to operating real estate and $16.9 million of proceeds from property dispositions.
- NNN acquired 33 properties for approximately $117.0 million at an initial cash yield of 7.0%.
- NNN sold 17 properties for net proceeds of approximately $19.4 million and recorded a $10.4 million gain.
- Financing activities used $84.1 million, driven primarily by $80.6 million of common dividends and $8.6 million of preferred dividends.
- Common dividends increased to $0.50 per share from $0.475 per share in the prior-year quarter. Series E and Series F preferred dividends were $4.1 million and $4.5 million, respectively.
Material Changes Versus the Prior Comparable Period
- Revenue increased due to portfolio growth, while earnings and EPS declined because the prior-year quarter included a much larger property-disposition gain.
- Acquisition volume declined to 33 properties and $117.0 million from 52 properties and $177.0 million.
- Operating cash flow improved despite lower net earnings, partly because of noncash depreciation, impairment and the timing of accrued interest payable.
- Real estate expenses increased 21.0%, primarily because certain properties became vacant during the quarter or in 2018.
- Common shares outstanding increased, with 161.1 million basic weighted-average shares versus 153.0 million.
- NNN adopted ASC 842 on January 1, 2019. It recorded approximately $7.7 million of right-of-use assets and $10.2 million of operating lease liabilities. Management stated that the adoption did not materially affect financial position, results of operations or cash flows; prior-year periods were not recast.
Outlook, Risks and Unusual Items
Management expects future revenue growth to come primarily from additional property acquisitions and contractual rent increases. Management stated that operating cash flow has historically been sufficient to fund distributions and expects obligations to be met through operating cash flow, existing liquidity, the credit facility, debt or equity financings and property dispositions.
- Construction commitments totaled $58.6 million, of which $28.3 million remained unfunded at March 31, 2019.
- Contractual cash obligations totaled $4.0 billion, including $2.9 billion of debt principal and $1.1 billion of estimated debt interest.
- NNN had 53 vacant, unleased properties, representing less than 2% of the portfolio.
- Less than 1% of the portfolio was leased to a tenant that had filed for Chapter 11 bankruptcy; that tenant could reject or affirm its leases.
- Key risks include tenant bankruptcies and rent loss, property vacancies, tenant and geographic concentration, interest-rate exposure, access to debt and equity capital, compliance with debt covenants, property impairments, environmental liabilities and maintaining REIT qualification.
- NNN had no outstanding derivatives at quarter-end and no outstanding balance on its variable-rate credit facility, limiting current direct exposure to floating-rate debt.
- Management reported effective disclosure controls and no material changes in internal control other than additions associated with ASC 842 implementation. No material legal proceedings or changes to previously disclosed risk factors were reported.
Investor Verification Items
- Reconcile the year-over-year earnings decline to the lower property-disposition gain and assess recurring rental-income performance separately from gains on sales.
- Verify funds from operations, adjusted funds from operations, payout ratios and other non-GAAP REIT metrics, which are not clearly provided in the supplied filing text.
- Review debt maturities, refinancing requirements, covenant headroom and the availability and terms of the $900 million revolving facility.
- Monitor vacancy, tenant credit quality and exposure to convenience stores, restaurants, automotive service and the Southeast and Southern regions.
- Assess whether acquisition volume, construction commitments and future asset sales support the stated revenue and dividend outlook.
- Confirm the effect of ASC 842 on comparability between 2019 and 2018 reported lease-income categories.