Business Context and Reporting Period
National Retail Properties, Inc. (NYSE: NNN) filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The company is an integrated REIT focused primarily on acquiring, owning, developing and investing in single-tenant retail properties leased under long-term net leases.
At year-end, NNN owned 3,118 properties totaling approximately 32.46 million square feet across 48 states. Approximately 99% of properties were leased, with a weighted-average remaining lease term of 11.2 years. The filing also provides unaudited fourth-quarter 2019 data.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenues | $670.5 million | $622.7 million | +7.7% |
| Net earnings | $299.6 million | $292.5 million | +2.4% |
| Net earnings attributable to NNN | $299.2 million | $292.4 million | +2.3% |
| Net earnings available to common stockholders | $258.2 million | $258.1 million | Approximately flat |
| Diluted earnings per share | $1.56 | $1.65 | -5.5% |
| FFO available to common stockholders | $446.7 million | $395.3 million | +13.0% |
| Cash flow from operating activities | $501.7 million | $471.9 million | +6.3% |
| Total assets | $7.435 billion | $7.103 billion | +4.7% |
| Total debt | $2.988 billion | $2.851 billion | +4.8% |
| Common dividends declared | $333.7 million; $2.03 per share | $303.2 million; $1.95 per share | Per-share dividend +4.1% |
Net earnings represented approximately 44.7% of total revenues, while earnings from operations represented approximately 62.2% of total revenues. FFO is a non-GAAP REIT performance measure and should not be viewed as a substitute for GAAP earnings or operating cash flow.
Fourth-quarter 2019 revenue was $173.6 million, net earnings were $73.8 million and diluted EPS was $0.34, compared with fourth-quarter 2018 revenue of $160.5 million, net earnings of $36.6 million and diluted EPS of $0.17.
Liquidity, Debt and Capital Resources
- Operating cash flow of $501.7 million exceeded common and preferred dividends paid during the year.
- Investing activities used $619.4 million, primarily reflecting property acquisitions and capital improvements.
- NNN ended the year with $1.1 million of cash and $133.6 million drawn on its $900 million unsecured revolving credit facility, leaving $766.4 million available.
- Total debt was approximately 35% of total gross assets and approximately 25% of total market capitalization. Secured debt was less than 1% of total gross assets.
- Debt maturities are principally unsecured notes, with significant scheduled principal maturities beginning in 2022. The revolving credit facility matures in January 2022, subject to a potential extension to January 2023.
- NNN was in compliance with its debt covenants at December 31, 2019.
- The company committed to fund construction on 19 properties. Total commitments were $75.9 million, of which $31.6 million remained unfunded.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by additional properties acquired in 2019 and the full-year contribution from properties acquired in 2018.
- NNN acquired 210 properties for total investment of approximately $752.5 million, compared with 265 properties and $715.6 million in 2018. Initial cash yield was 6.9% in 2019 versus 6.8% in 2018.
- NNN sold 59 properties for net proceeds of $126.2 million and recognized a $32.5 million gain, compared with 61 properties, $147.6 million of proceeds and a $65.1 million gain in 2018.
- Impairment losses increased to $32.0 million from $28.2 million.
- Interest expense increased to $120.0 million from $115.8 million as outstanding debt increased, although lower average revolving-credit borrowings partially offset the increase.
- The 2018 period included an $18.2 million loss on early extinguishment of debt; no comparable charge was recorded in 2019.
- Common shares outstanding increased through a September 2019 offering of 7.0 million shares, ATM issuances and the dividend reinvestment plan. Weighted-average diluted shares increased to 165.1 million from 156.3 million, contributing to the decline in diluted EPS despite higher net earnings.
- NNN redeemed all 11.5 million depositary shares representing its 5.700% Series E Preferred Stock in October 2019 and retained its 5.200% Series F Preferred Stock.
- Effective January 1, 2019, NNN adopted ASC 842 lease accounting. The filing states that the adoption had no material effect on financial position, results of operations or cash flows.
Outlook, Commentary, Risks and Unusual Items
Management expects future rental-income growth to come primarily from additional property acquisitions and contractual rent increases. NNN intends to continue paying regular quarterly dividends, but future distributions remain subject to Board approval, operating cash flow, financial condition, capital requirements and REIT distribution requirements. A January 2020 dividend of $0.515 per common share was declared.
- Tenant and industry concentration remains relevant: approximately 54.4% of annual base rent came from five retail lines of trade, including convenience stores and restaurants.
- Five tenants generated approximately 21.0% of annual base rent; no individual tenant accounted for 10% or more of rental income.
- Five states generated approximately 41.7% of annual base rent, including Texas at 17.6% and Florida at 8.8%.
- NNN owned 32 vacant properties at year-end, representing approximately 1% of the portfolio. Two tenants in Chapter 11 bankruptcy leased less than 2% of properties and less than 1% of gross leasable area as of February 10, 2020.
- Environmental remediation or monitoring was ongoing at 73 properties as of February 4, 2020. Management generally expects responsible parties to bear the costs, but NNN may incur expenses or liabilities.
- Key risks include tenant defaults or bankruptcies, e-commerce and changing retail preferences, concentration by tenant and geography, competition for acquisitions, property impairment, interest-rate volatility, refinancing and capital-market access, debt-covenant compliance, LIBOR discontinuation, cybersecurity incidents, uninsured losses, environmental liabilities and continued REIT qualification.
- Three forward-starting interest-rate swaps with total notional value of $200 million were outstanding at year-end and had a fair value of $5.5 million. They were scheduled for mandatory cash settlement on April 15, 2020.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Important Facts for Investors to Verify
- Reconcile reported FFO growth with changes in recurring operating cash flow, dilution and property-level net operating income.
- Review the schedule and refinancing plan for the $1.025 billion of unsecured note principal maturities due in 2022 through 2026, plus the 2022 revolving-credit maturity.
- Assess whether tenant, industry and geographic concentrations remain appropriate, particularly exposure to convenience stores, restaurants, Texas and Florida.
- Monitor occupancy, lease expirations, re-leasing spreads and the performance of the 32 vacant properties and bankrupt tenants.
- Evaluate the assumptions supporting the $32.0 million of 2019 impairment losses and the carrying value of the real estate portfolio.
- Confirm the funding plan for the $31.6 million of remaining construction commitments and future acquisition spending.
- Assess dividend coverage after common-share dilution and the redemption of Series E preferred stock.
- Review the impact of interest rates, LIBOR transition and the company’s ability to access debt and equity markets on future financing costs.