NNN REIT, Inc. (National Retail Properties, Inc.) — 2018 Q2 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the quarter and six months ended June 30, 2018. NNN is a fully integrated REIT that acquires, owns, develops and invests in primarily retail properties leased under long-term net leases. At June 30, 2018, the portfolio comprised 2,846 properties totaling approximately 29.4 million square feet across 48 states, with a weighted average remaining lease term of 11.5 years and approximately 98% occupancy.
Financial performance, cash flow and capitalization
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $155.5 million | $145.6 million | $308.4 million | $287.0 million |
| Earnings from operations | $93.6 million | $82.6 million | $184.8 million | $168.1 million |
| Net earnings attributable to NNN | $70.6 million | $58.0 million | $173.9 million | $131.7 million |
| Net earnings attributable to common stockholders | $62.0 million | $49.4 million | $156.7 million | $101.1 million |
| Diluted EPS | $0.40 | $0.33 | $1.02 | $0.68 |
| Net cash from operating activities | Not separately provided | Not separately provided | $228.2 million | $215.1 million |
- Revenue increased 6.8% in the quarter and 7.4% year to date, primarily from property acquisitions and contractual rent increases.
- Operating margin was approximately 60.2% in Q2 and 60.0% for the six-month period, compared with approximately 56.7% and 58.6%, respectively, in the prior-year periods.
- Six-month investing cash flow was negative $241.2 million, reflecting $325.1 million of additions to operating real estate, partly offset by $83.7 million of disposition proceeds.
- At June 30, total debt was $2.63 billion, including $166.7 million drawn on the $900 million unsecured revolving credit facility. Approximately $733.3 million remained available, excluding $58,000 of undrawn letters of credit.
- Cash and cash equivalents were $1.9 million at June 30, 2018, compared with $1.4 million at December 31, 2017.
- Stockholders’ equity was $4.0 billion. Common shares outstanding increased to approximately 157.0 million from 153.6 million at year-end 2017.
- Common dividends were $0.475 per share for Q2 and $0.950 per share for the first six months, compared with $0.455 and $0.910, respectively, in 2017.
Material changes versus the prior comparable period
- Q2 acquisitions declined to 59 properties totaling $140.5 million from 140 properties totaling $299.5 million in Q2 2017. Six-month acquisitions declined to 111 properties and $317.5 million from 164 properties and $407.4 million.
- Q2 dispositions increased to 13 properties with $11.9 million of net proceeds from eight properties with $9.3 million of proceeds. Six-month disposition proceeds increased to $83.5 million from $48.3 million, and disposition gains increased to $42.7 million from $17.7 million.
- Impairment losses increased to $3.8 million in Q2 and $6.1 million year to date, compared with a $39,000 recovery in Q2 2017 and $1.2 million of losses year to date in 2017.
- Retirement severance costs declined materially to $260,000 in Q2 and $521,000 year to date from $7.4 million in each 2017 comparison period.
- Six-month common equity issuance generated $130.5 million of net proceeds through the DRIP and ATM programs, compared with $73.6 million in 2017.
- The Series D preferred stock redemption was completed in February 2017; only Series E and Series F preferred dividends were paid in 2018.
- NNN adopted the revenue recognition standard ASU 2014-09 using the cumulative catch-up method. Management reported no material impact on financial position or results of operations.
Guidance, outlook, risks and unusual items
Management expects rental income growth to continue through additional acquisitions and contractual rent increases, but the filing does not provide formal earnings or acquisition guidance. Management stated that operating cash flow has been sufficient to fund distributions and expects obligations to be funded through operating cash flow, available liquidity, debt or equity financing and asset dispositions.
- Construction commitments covered 17 properties with total commitments of $134.7 million; $109.4 million had been funded, leaving $25.3 million to be funded within approximately 12 months.
- NNN had 44 vacant, unleased properties, representing less than 2% of the portfolio. Less than 1% of the portfolio was leased to two tenants that had filed Chapter 11 petitions.
- Key risks include tenant defaults or bankruptcies, rent loss, geographic and industry concentration, property-market conditions, access to capital, leverage and debt covenants, interest-rate increases, illiquidity of real estate, impairment risk, REIT qualification and dividend requirements, cybersecurity and regulatory changes.
- The largest annual base-rent concentrations were convenience stores at 18.8%, full-service restaurants at 12.1%, limited-service restaurants at 7.9% and automotive service at 7.7%.
- A 1% increase in rates on variable-rate debt would have increased six-month interest expense by less than 2%. NNN had two forward-starting swaps with a total notional amount of $250 million to hedge potential future debt issuance.
- The filing reports no material changes to previously disclosed risk factors, no applicable legal proceedings and effective disclosure controls as of June 30, 2018.
Important facts for investors to verify
- Reconcile net earnings growth with the $42.7 million of six-month disposition gains and assess recurring operating performance separately.
- Review leverage, debt maturities, fixed versus variable-rate exposure and the availability and terms of the revolving credit facility.
- Evaluate tenant, industry and geographic concentration, particularly convenience stores and restaurant tenants.
- Monitor impairments, vacant properties, tenant bankruptcies and the remaining $25.3 million of construction commitments.
- Confirm dividend sustainability using recurring cash flow measures; the supplied filing text does not provide a clear FFO or AFFO value.
- Assess the impact of continued ATM and DRIP equity issuance on per-share results and ownership dilution.