National Retail Properties, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. The filing identifies the registrant as National Retail Properties, Inc., a Maryland REIT; the provided metadata refers to NNN REIT, Inc.
Business context
NNN owns and operates primarily retail properties leased under long-term net leases. At September 30, 2016, the portfolio comprised 2,485 properties totaling approximately 26.6 million square feet across 48 states, with a weighted-average remaining lease term of 11.5 years. Approximately 99% of properties were leased.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $134.5 million | $123.1 million | $392.4 million | $356.5 million |
| Net earnings attributable to NNN | $50.8 million | $55.2 million | $173.4 million | $155.4 million |
| Net earnings attributable to common stockholders | $41.9 million | $46.3 million | $146.8 million | $128.8 million |
| Diluted earnings per share | $0.28 | $0.34 | $1.02 | $0.96 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $314.2 million | $278.0 million |
Quarterly earnings from operations were $70.6 million, producing an operating margin of approximately 52.5%, compared with approximately 61.8% in the prior-year quarter. Net earnings margin was approximately 37.7%, compared with 44.8%.
- Rental income increased 9.9% in the quarter and 10.4% for the nine months, primarily from property acquisitions.
- Operating expenses increased 35.8% in the quarter and 18.0% for the nine months. The increases reflected higher depreciation, real estate impairments and commercial mortgage residual-interest impairments.
- Interest expense increased 10.3% in the quarter and 9.9% for the nine months.
- Cash and cash equivalents were $5.9 million at September 30, 2016, compared with $13.7 million at December 31, 2015.
- Total debt was $2.16 billion, compared with $1.98 billion at December 31, 2015. This included $184.2 million outstanding under the $650 million revolving credit facility, with $465.8 million available, excluding $0.2 million of undrawn letters of credit.
- Common dividends were $0.455 per share for the quarter and $1.325 per share for the nine months, compared with $0.435 and $1.275, respectively, in the comparable 2015 periods.
Material changes versus the prior comparable period
- NNN acquired 38 properties in the third quarter and 249 properties during the first nine months, investing $127.8 million and $596.5 million, respectively. The nine-month acquisition count increased from 190 in 2015, while the initial cash yield declined to 6.9% from 7.2%.
- NNN sold seven properties in the quarter and 24 during the first nine months, generating nine-month net proceeds of $83.1 million and a $22.6 million gain, compared with $33.6 million of proceeds and a $9.1 million gain in 2015.
- Four commercial mortgage securitizations exercised clean-up call options in September 2016, terminating future distributions on those residual interests. NNN recorded $6.0 million of residual-interest impairment in the quarter and $6.8 million for the nine months. Remaining residual interests declined to $0.2 million from $11.1 million at year-end 2015.
- Real estate and other impairment losses were $4.9 million in the quarter and $10.9 million for the nine months, compared with negligible quarterly losses and $3.7 million for the nine months in 2015.
- Common shares outstanding increased to approximately 147.1 million at October 28, 2016, partly reflecting $265.7 million of net proceeds from the issuance of 5.7 million shares under the ATM program.
- Management disclosed a retirement and transition agreement with Chairman and CEO Craig Macnab and an amended employment agreement with Julian Whitehurst, both dated September 29, 2016.
Outlook, risks and unusual items
Management expects rental income growth to come primarily from additional acquisitions and contractual rent increases. The filing does not provide a clear quantitative earnings, revenue or acquisition forecast.
- NNN had 25 properties subject to construction commitments totaling $85.4 million; $51.0 million had been funded and $34.3 million remained, with completion generally expected within 12 months.
- There were 26 vacant properties, representing less than 1% of the portfolio. Approximately 1% of the portfolio was leased to five tenants that had filed Chapter 11 bankruptcy petitions.
- Key risks include tenant concentration in convenience stores and restaurants, geographic concentration in the South and Southeast, tenant defaults or bankruptcies, property illiquidity, access to debt and equity capital, interest-rate exposure, covenant compliance, impairment risk and continued REIT qualification.
- NNN had two forward-starting interest-rate swaps with an aggregate notional amount of $180 million. A 1% increase in rates on variable-rate debt would have increased nine-month interest expense by less than 1%, according to the filing.
- After quarter-end, on October 11, 2016, NNN issued $345.0 million of 5.20% Series F preferred depositary shares, incurring approximately $10.7 million of issuance costs. Net proceeds of approximately $334.3 million were used to repay all outstanding borrowings under the credit facility and for acquisitions and general corporate purposes.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Investor verification points
- Verify the effect of the Series F preferred issuance and credit-facility repayment on subsequent-quarter leverage, liquidity and preferred dividend obligations.
- Assess whether acquisition volume and yields support future rental-income growth without excessive equity dilution or leverage.
- Review the sustainability of dividend coverage using operating cash flow and the company’s non-GAAP measures; the provided filing text does not provide a clear FFO or AFFO value.
- Monitor tenant concentration, bankruptcy exposure, occupancy and renewal performance, particularly in convenience-store and restaurant categories.
- Evaluate the residual-interest impairment and remaining Level 3 valuation exposure, including sensitivity to prepayments, defaults, loss severity and interest rates.
- Review near-term debt maturities, credit-facility covenants and the approximately $34.3 million of remaining construction commitments.