NNN REIT, INC. quarterly report, Q2 FY2015

NNN REIT, Inc. (National Retail Properties, Inc.) — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2015. The filing identifies the registrant as National Retail Properties, Inc., a Maryland REIT focused primarily on acquiring, owning and developing retail properties under long-term net leases. As of June 30, 2015, the portfolio contained 2,138 properties totaling approximately 23.7 million square feet across 47 states, with a weighted average remaining lease term of 11.4 years and approximately 99% occupancy.

Financial performance and position

Metric	Q2 2015	Q2 2014	Six months 2015	Six months 2014
Total revenues	$117.2 million	$105.6 million	$233.4 million	$209.7 million
Net earnings attributable to NNN	$46.2 million	$45.6 million	$100.2 million	$88.9 million
Net earnings available to common stockholders	$37.3 million	$36.7 million	$82.5 million	$71.2 million
Basic and diluted EPS	$0.28	$0.30	$0.62	$0.58
Net cash provided by operating activities	Not separately provided	Not separately provided	$167.8 million	$138.3 million

Q2 revenue increased 11.0%; six-month revenue increased 11.3%, primarily from property acquisitions. Rental income increased 11.7% in Q2 and 12.1% for the six-month period.
Q2 earnings from operations were $67.4 million versus $64.6 million. The implied operating margin was approximately 57.5%, compared with 61.2% in the prior-year quarter, reflecting higher depreciation and impairment charges.
Q2 net margin attributable to NNN was approximately 39.4%, compared with 43.2% in Q2 2014. Six-month net earnings attributable to NNN increased 12.7%, while weighted average basic shares increased approximately 8.6%, contributing to lower Q2 EPS despite higher net earnings.
Operating expenses increased 21.6% in Q2 and 16.6% for the six-month period. Q2 depreciation and amortization rose 22.1% to $34.2 million, while impairment losses rose to $2.7 million from $0.1 million.
Total assets were $5.132 billion at June 30, 2015, up from $4.927 billion at December 31, 2014. Operating real estate, net, increased to $4.935 billion from $4.716 billion.
Total debt was $1.868 billion, compared with $1.741 billion at year-end 2014. Debt consisted primarily of $1.715 billion of notes payable, $127.5 million drawn on the revolving credit facility and $25.1 million of mortgages.
The $650 million revolving credit facility matures in January 2019, with a potential one-year extension. At June 30, $522.5 million was available and the weighted average interest rate for the first six months was 1.1%.
Cash and cash equivalents declined to $2.4 million from $10.6 million at year-end. Six-month investing cash outflows were $259.9 million, primarily for real estate additions, partly funded by $168.0 million of operating cash flow and $84.0 million of financing cash flow.
Common stock dividends paid during the first six months totaled $111.4 million, or $0.84 per share, compared with $98.96 million, or $0.81 per share, in 2014. A July 2015 dividend of $0.435 per share was declared for payment in August 2015.

Material changes versus the prior comparable period

NNN acquired 37 properties in Q2 and 93 properties in the first six months, investing $147.8 million and $303.0 million, respectively. The six-month acquisition count and investment increased from 81 properties and $186.0 million in 2014.
Property dispositions declined to three properties in Q2 and nine properties in the first six months, versus 10 and 14, respectively, in the prior-year periods. Six-month net sales proceeds were $25.5 million, generating a $7.2 million gain.
The portfolio expanded from 1,927 properties at June 30, 2014 to 2,138 at June 30, 2015, while leased occupancy increased from 98% to 99%. The weighted average remaining lease term decreased from 11.7 to 11.4 years.
NNN issued approximately 2.125 million common shares through its ATM programs and DRIP activity generated $3.0 million of net proceeds during the first six months. Share count growth diluted per-share earnings.
Impairment charges increased materially: six-month real estate impairments were $3.7 million versus $0.5 million in 2014, and commercial mortgage residual-interest impairment was $0.4 million versus $0.2 million.

Outlook, risks and unusual items

Management expects future rental-income growth to come primarily from additional acquisitions and contractual rent increases. The filing does not provide formal full-year earnings, acquisition or disposition guidance.
NNN had construction commitments for 28 leased properties totaling $160.0 million, of which $82.3 million had been funded and $77.6 million remained as of June 30, 2015.
Five properties were classified as held for sale, with expected dispositions within 12 months. Real estate held for sale had a carrying value of $3.8 million.
There were 25 vacant, unleased properties, representing approximately 1% of the portfolio. Vacancies, tenant bankruptcies, rent collection issues and tenant concentration could adversely affect cash flow.
Annual base rent was concentrated in convenience stores, full-service restaurants, automotive service, limited-service restaurants and family entertainment centers. Geographic exposure was concentrated in the South and Southeast.
Interest-rate risk remains relevant because of the variable-rate credit facility and fixed-rate debt. Management reported that a 1% increase in variable borrowing rates would have increased six-month interest expense by less than 1%. No derivatives were outstanding at June 30; in July 2015, NNN entered into three forward-starting swaps totaling $225 million.
Commercial mortgage residual interests declined to $10.8 million from $11.6 million at year-end and are valued using Level 3 assumptions, including prepayment speeds, loan losses and yield curves.
Management stated that operating cash flow had been sufficient to fund distributions and expects to meet obligations through operating cash flow, available credit, debt and equity financings, and asset dispositions. The filing cautions that results may fluctuate and that actual outcomes may differ from forward-looking statements.
Management concluded that disclosure controls and procedures were effective as of June 30, 2015, with no material change in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.

Most important facts for investors to verify

Whether acquisition-driven revenue growth continues to exceed the growth in depreciation, interest expense and common shares outstanding.
Leasing occupancy, tenant credit quality and exposure to convenience-store and restaurant tenants and Southern/Southeastern markets.
Availability and pricing under the revolving credit facility, debt maturities, covenant compliance and refinancing requirements.
Progress on the $77.6 million of remaining construction commitments and the timing and proceeds of planned property dispositions.
Whether the higher impairment activity reflects broader deterioration in property values or tenant conditions.
The sustainability of dividends relative to operating cash flow, taxable income and future acquisition funding needs.
The effect of the July 2015 forward-starting swaps and any subsequent debt issuance on interest expense and liquidity.