NNN 10-Q Summary: Third Quarter 2018
Business Context and Reporting Period
National Retail Properties, Inc. is a fully integrated REIT that acquires, develops and owns primarily single-tenant retail properties leased under long-term net leases. This Form 10-Q covers the quarter and nine months ended September 30, 2018. The portfolio comprised 2,847 properties totaling approximately 29.7 million square feet across 48 states, with a weighted average remaining lease term of 11.4 years and approximately 99% occupancy.
Financial Results and Key Metrics
- Third-quarter revenue: $155.3 million, up 5.2% from $147.7 million.
- Nine-month revenue: $463.7 million, up 6.7% from $434.7 million.
- Third-quarter net earnings attributable to NNN: $82.0 million, compared with $61.1 million.
- Nine-month net earnings attributable to NNN: $255.9 million, compared with $192.8 million.
- Common-stock earnings per share: $0.47 basic and diluted for the quarter, versus $0.35; $1.49 basic and $1.48 diluted for nine months, versus $1.03 for both measures.
- Operating margin: Earnings from operations were $94.7 million in the quarter and $279.5 million for nine months. Operating expenses represented 39.0% and 39.7% of revenue, respectively, compared with 41.7% and 41.5% in the comparable periods.
- Interest expense: $27.2 million for the quarter and $80.9 million for nine months, down 3.6% and 1.4%, respectively.
- Cash flow: Nine-month cash provided by operating activities was $365.5 million, compared with $330.2 million. Investing activities used $293.7 million, while financing activities provided $534.5 million.
- Liquidity: Cash and cash equivalents were $607.7 million at September 30, 2018, compared with $1.4 million at December 31, 2017. The $900 million revolving credit facility had no outstanding balance, with $900 million available, excluding $58,000 of undrawn letters of credit.
- Debt: Total debt was $3.15 billion, compared with $2.58 billion at year-end 2017. Notes payable increased to $3.14 billion, primarily following the issuance of new long-term notes.
- Dividends: Common dividends were $0.50 per share for the quarter and $1.45 per share for nine months, compared with $0.475 and $1.385, respectively, in 2017. Series E and Series F preferred dividends totaled $4.1 million and $4.5 million for the quarter.
Material Changes Versus the Prior Comparable Period
- Rental income increased 4.9% in the quarter and 6.6% for nine months, primarily from property acquisitions and contractual rent increases.
- NNN acquired 18 properties during the quarter and 129 during the first nine months, investing $78.6 million and $396.1 million, respectively. The initial cash yield was 6.9% for both periods.
- NNN sold 18 properties during the quarter and 46 during the first nine months, generating gains of $14.3 million and $57.1 million, respectively, compared with $3.2 million and $20.9 million in 2017.
- Impairment losses increased materially to $3.6 million for the quarter and $9.7 million for nine months, versus $0.1 million and $1.2 million, respectively, in 2017.
- General and administrative expense increased 16.2% in the quarter, primarily due to higher compensation costs. Retirement and severance costs declined substantially for the nine-month period.
- Common shares outstanding increased, reflecting equity issuance. The ATM program generated $208.6 million of net proceeds from 4.9 million shares, and the DRIP generated $9.1 million from 225,481 shares.
- In September, NNN issued $400 million of 4.300% notes due 2028 and $300 million of 4.800% notes due 2048, receiving net proceeds of approximately $393.5 million and $292.4 million.
Guidance, Outlook, Risks and Unusual Items
- Management expects future rental-income growth to come primarily from additional acquisitions and rent increases under existing leases. No specific earnings or acquisition guidance was provided in the filing.
- In October 2018, NNN redeemed $300 million of 5.500% notes due 2021 at par plus an $18.2 million make-whole payment and accrued interest.
- Construction commitments totaled $48.9 million, of which $29.6 million had been funded; the remaining commitment was $19.3 million.
- NNN had 38 vacant properties, representing less than 1% of the portfolio. Less than 2% of the portfolio was leased to six tenants that had filed Chapter 11 petitions as of October 31, 2018.
- Key risks include tenant bankruptcies and rent loss, concentration in convenience stores and restaurants and in the southern and southeastern United States, property-market conditions, access to capital, leverage and debt covenants, interest-rate changes, impairment risk, environmental liabilities, cybersecurity, REIT qualification and dividend requirements.
- NNN had no outstanding derivatives at September 30, 2018. Management estimated that a 1% increase in variable interest rates would have increased nine-month interest expense by less than 2%.
- The company adopted ASC 606 using the cumulative catch-up method; management stated that the adoption had no material effect on financial position or results of operations. The potential effects of the forthcoming lease-accounting standard and updated fair-value disclosures remained under evaluation.
- Management concluded that disclosure controls and procedures were effective and reported no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile the increase in debt with the October redemption of the 2021 notes and assess the resulting maturity profile and interest burden.
- Evaluate whether acquisition-driven rental growth offsets dilution from common-stock issuance and higher leverage.
- Review the causes, valuation assumptions and potential recurrence of the $9.7 million in year-to-date impairment losses.
- Monitor the financial condition and lease status of bankrupt tenants and the company’s vacant properties.
- Assess tenant, industry and geographic concentration, particularly convenience stores, restaurants and the southern and southeastern markets.
- Compare cash flow available for distribution with common and preferred dividends, debt service and remaining construction commitments.