National Retail Properties, Inc. — Form 10-Q Summary
Business context and reporting period
The filing is National Retail Properties, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2015. The company is a Maryland REIT that acquires, owns, develops and invests in primarily retail properties leased under long-term net leases. At quarter-end, the portfolio included 2,104 properties totaling approximately 23.1 million square feet across 47 states, with a weighted average remaining lease term of 11.5 years and approximately 99% of properties leased. The filing text identifies the registrant as National Retail Properties, Inc.; it does not use the name “NNN REIT, Inc.”
Financial performance and key metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenues | $116.2 million | $104.1 million | 11.6% |
| Rental income | $112.1 million | $99.6 million | 12.5% |
| Earnings from operations | $69.7 million | $62.5 million | 11.5% |
| Net earnings attributable to NNN | $54.0 million | $43.3 million | 24.6% |
| Net earnings available to common stockholders | $45.1 million | $34.5 million | 30.9% |
| Diluted earnings per share | $0.34 | $0.28 | 21.4% |
| Net cash provided by operating activities | $97.1 million | $79.8 million | 21.7% |
| Capital additions to operating real estate | $151.3 million | $89.9 million | 68.4% |
Operating margin, measured as earnings from operations divided by total revenues, was approximately 60.0% in Q1 2015 versus 60.0% in Q1 2014. Net earnings attributable to NNN represented approximately 46.5% of revenue, compared with 41.6% in the prior-year quarter. Results benefited from property acquisitions and a $7.2 million gain on real estate dispositions, compared with a $1.8 million gain in Q1 2014.
Operating expenses increased 11.8% to $46.5 million, primarily due to higher depreciation and amortization and increased impairment charges. Interest expense increased 7.4% to $21.8 million. General and administrative expense declined 1.2% to $8.6 million.
Cash flow, debt and liquidity
- Operating activities generated $97.1 million of cash, which management stated was sufficient to fund distributions for the periods presented.
- Investing activities used $128.9 million, principally reflecting $151.3 million of real estate additions, partly offset by $22.7 million of disposition proceeds.
- Financing activities provided $25.6 million. Common equity issuances generated approximately $49.4 million of proceeds, while common and preferred dividends paid totaled approximately $64.2 million.
- Cash and cash equivalents declined from $10.6 million at December 31, 2014 to $4.5 million at March 31, 2015.
- Total debt was $1.783 billion at quarter-end, compared with $1.741 billion at year-end 2014. Notes payable represented 96.1% of total debt.
- The $650 million revolving credit facility had $41.9 million outstanding and $608.1 million available at March 31, 2015. It matures in January 2019, subject to an extension option to January 2020, and had a 1.1% weighted average interest rate during the quarter.
- Contractual cash obligations totaled $1.800 billion, excluding $29.3 million of accrued interest. Construction commitments covered 30 properties, with $62.8 million remaining to be funded.
Material changes versus the prior comparable period
- NNN acquired 56 properties totaling approximately 782,000 square feet for $155.2 million in Q1 2015, compared with 47 properties and $94.0 million invested in Q1 2014. The initial cash yield was 7.3% versus 7.7%.
- NNN sold six properties for $23.3 million of net proceeds and recognized a $7.2 million gain, compared with four properties, $11.2 million of proceeds and a $1.8 million gain in Q1 2014.
- The portfolio increased from 1,903 properties at March 31, 2014 to 2,104 properties at March 31, 2015. Gross leasable area increased from 20.6 million to 23.1 million square feet.
- Common dividends increased to $0.420 per share from $0.405 per share. In April 2015, the company declared another $0.420 per-share common dividend payable in May 2015.
- NNN issued 977,973 shares under its new 2015 at-the-market program and received $39.0 million of net proceeds; it also issued 31,854 shares under its dividend reinvestment plan for $1.1 million of net proceeds.
- Real estate impairment charges increased to $1.0 million from $0.4 million. No impairment was recorded for commercial mortgage residual interests in Q1 2015, compared with $0.2 million in Q1 2014.
Outlook, risks and unusual items
Management expects rental income growth to come primarily from additional acquisitions and contractual rent increases. It expects to fund obligations through operating cash flow, available cash, the revolving credit facility, debt and equity financings, and property dispositions. Management stated that long-term net leases generally require tenants to pay property taxes, maintain properties and carry insurance, limiting anticipated capital demands; however, vacant properties and uncollectible rents could materially reduce liquidity and operating results.
- NNN had 25 vacant, unleased properties, approximately 1% of the portfolio.
- The portfolio has notable exposure to convenience stores, full-service and limited-service restaurants, automotive services, and theaters, and is concentrated in the southern and southeastern United States.
- Key risks include tenant defaults or bankruptcies, industry and geographic concentration, real estate illiquidity, interest-rate movements, access to debt and equity capital, debt covenant compliance, environmental liabilities, impairment of real estate or commercial mortgage residual interests, and maintaining REIT qualification.
- The company had no derivatives outstanding at March 31, 2015. A 1% increase in interest rates on variable-rate debt would have increased quarterly interest expense by less than 1%, according to the filing.
- The company reported no material changes to previously disclosed risk factors, no applicable legal proceedings, and no reportable subsequent events after March 31, 2015.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2015, with no material change in internal control over financial reporting during the quarter.
Facts investors should verify
- Reconcile acquisition spending, disposition proceeds and equity issuance proceeds with the increase in total debt and the decline in cash.
- Assess whether the 7.3% initial cash yield on Q1 acquisitions adequately compensates for acquisition, financing and operating risks.
- Review debt maturities, particularly the $151.3 million scheduled for 2015 and the $253.4 million scheduled for 2017, and confirm refinancing capacity.
- Monitor occupancy, tenant concentration, vacant properties and rent-collection trends, especially in convenience-store and restaurant categories.
- Evaluate the remaining $62.8 million of construction commitments and their effect on future liquidity.
- Confirm the sustainability of the $0.420 common dividend against operating cash flow, required REIT distributions and future acquisition funding needs.
- Review fair-value assumptions for the $11.1 million of commercial mortgage residual interests and potential sensitivity to loan losses, prepayments and interest rates.