National Retail Properties, Inc. — Form 10-Q Summary
Business context and reporting period
National Retail Properties, Inc. is a fully integrated REIT that acquires, owns, develops and invests in properties leased primarily to retail tenants under long-term net leases. This report covers the quarter and nine months ended September 30, 2017; financial statements are unaudited.
- Portfolio: 2,687 properties totaling approximately 28.25 million square feet across 48 states.
- Occupancy: approximately 99%; 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.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Change |
|---|---|---|---|
| Total revenues | $147.7 million | $134.5 million | 9.8% increase |
| Earnings from operations | $86.1 million | $70.6 million | 21.9% increase |
| Net earnings attributable to NNN | $61.1 million | $50.8 million | 20.3% increase |
| Net earnings attributable to common stockholders | $52.5 million | $41.9 million | 25.3% increase |
| Basic and diluted EPS | $0.35 | $0.29 basic; $0.28 diluted | Increased |
| Operating margin | 58.3% | 52.5% | Improved |
| Net margin attributable to NNN | 41.4% | 37.7% | Improved |
For the nine months ended September 30, 2017, revenue was $434.7 million versus $392.4 million, earnings from operations were $254.2 million versus $223.2 million, and net earnings attributable to NNN were $192.8 million versus $173.4 million. Common-stockholder earnings were $153.6 million, or $1.03 per basic and diluted share, versus $146.8 million, or $1.02 per share, in the prior-year period.
- Rental income increased 10.1% in the quarter and 11.3% for the nine months, primarily from property acquisitions and contractual rent increases.
- Quarterly operating expenses declined 3.6% to $61.6 million, primarily because of lower incentive compensation. Depreciation and amortization increased 24.2% to $48.4 million.
- Interest expense increased 16.3% in the quarter and 14.1% for the nine months, reflecting additional debt and higher weighted-average borrowing costs.
- Common dividends were $0.475 per share for the quarter and $1.385 per share for the nine months, compared with $0.455 and $1.325, respectively, in 2016.
Cash flow, debt and liquidity
| Metric | Nine months ended September 30, 2017 | Nine months ended September 30, 2016 |
|---|---|---|
| Cash provided by operating activities | $330.2 million | $314.2 million |
| Cash used in investing activities | $415.2 million | $555.4 million |
| Cash provided by financing activities | $44.7 million | $232.9 million |
| Cash and cash equivalents at period end | $254.3 million | $5.9 million |
- Property acquisitions totaled 182 properties and $497.5 million of investment, compared with 249 properties and $596.5 million in 2016. The initial cash yield was 6.9% in both periods.
- Property dispositions totaled 31 properties, producing $55.8 million of net sales proceeds and a $20.9 million gain.
- Total debt was $2.709 billion at September 30, 2017, up from $2.312 billion at December 31, 2016. Notes payable represented 99.5% of total debt.
- The $650 million unsecured revolving credit facility had no outstanding balance at quarter-end, with $650 million available, excluding $230,000 of undrawn letters of credit.
- NNN issued $400 million of 3.50% senior unsecured notes due October 2027 and received approximately $394.7 million of net proceeds.
- Construction commitments covered 26 properties, with $175.8 million of total commitments, $89.2 million funded and $86.6 million remaining.
Material changes versus the prior comparable period
- Revenue, operating earnings and net earnings increased, primarily due to the larger property portfolio and related rental income.
- Quarterly general and administrative expense declined 19.3%; however, nine-month operating expenses increased 6.6% because of higher depreciation and $7.7 million of retirement severance costs, primarily related to the CEO’s retirement.
- Real estate impairment losses declined to $1.2 million for the nine months from $7.7 million in 2016; the prior-year period also included a $6.8 million impairment of commercial mortgage residual interests.
- NNN redeemed its $287.5 million Series D preferred stock in February 2017. Series F preferred stock dividends increased the preferred dividend burden versus 2016.
- Common shares outstanding increased to 151.6 million at September 30, 2017 from 147.1 million at December 31, 2016, primarily reflecting ATM and DRIP issuances.
Guidance, outlook, commentary and risks
The filing does not provide formal quantitative earnings or acquisition guidance. Management expects rental income growth to continue from additional acquisitions and contractual rent increases and states that operating cash flow has been sufficient to fund distributions. Management expects capital needs to be funded through operating cash flow, cash on hand, the credit facility, debt or equity offerings and property dispositions.
- In October 2017, the credit facility was amended to increase capacity to $900 million and extend maturity to January 2022, with extension options to January 2023. The accordion feature increased potential capacity to $1.6 billion, subject to lender approval.
- In October 2017, NNN repaid the $250 million of 6.875% notes due that month.
- NNN had 31 vacant properties, approximately 1% of the portfolio. Less than 2% of the portfolio was leased to four tenants that had filed for Chapter 11 bankruptcy, including Gander Mountain.
- Key risks include tenant defaults or bankruptcies, geographic and industry concentration, property illiquidity, adverse economic and real estate conditions, refinancing and interest-rate risk, access to capital, debt covenant compliance, impairment risk, regulatory and tax changes, REIT qualification, cybersecurity incidents and uninsured losses.
- NNN had no derivatives outstanding at September 30, 2017. Approximately $15.2 million remained in accumulated other comprehensive income from terminated interest-rate hedges, of which approximately $2.1 million was expected to be reclassified to interest expense over the following 12 months.
- NNN planned to adopt the new revenue recognition standard on January 1, 2018 using the cumulative catch-up method and expected no material impact on financial position or results of operations. The filing states that the potential impact of the new lease standard was still being evaluated.
Important facts for investors to verify
- Reconcile rental-income growth and portfolio expansion with tenant credit quality, lease expirations, renewal assumptions and concentration by tenant, industry and geography.
- Assess leverage, fixed-rate maturities, interest expense sensitivity and the effect of the October 2017 refinancing and repayment transactions.
- Evaluate dividend coverage using recurring operating cash flow and the REIT’s applicable funds-from-operations measures; the provided filing text does not include an FFO or AFFO table.
- Monitor bankruptcy-related lease decisions, vacant properties and potential impairment charges.
- Review the $86.6 million remaining construction commitment and the funding sources available for acquisitions and development.
- Confirm the effect of common-stock issuance and preferred-stock redemption on per-share earnings, dividend obligations and future equity dilution.