NNN REIT, INC. annual report, FY2013

National Retail Properties, Inc. (NYSE: NNN) — FY2013 Form 10-K Summary

Business context and reporting period

The filing is an annual report for the fiscal year ended December 31, 2013, filed February 19, 2014. The source identifies the registrant as National Retail Properties, Inc.; it is a fully integrated REIT focused primarily on single-tenant retail properties leased under long-term net leases. The filing is annual rather than a standalone fourth-quarter report.

Portfolio: 1,860 properties, approximately 20.4 million square feet, across 47 states.
Occupancy: approximately 98% leased at year-end; weighted average remaining lease term of approximately 12 years.
Largest annual base-rent concentrations: convenience stores at 19.7%; Texas at 20.4%; five tenants together at 22.7%.

Financial performance and key metrics

Metric	2013	2012	Change
Gross revenues	$397.0 million	$342.1 million	16.1%
Continuing-operations revenues	$392.3 million	$331.5 million	18.3%
Net earnings attributable to NNN	$160.1 million	$142.0 million	12.8%
Continuing-operations earnings	$155.0 million	$133.2 million	16.4%
FFO available to common stockholders	$229.5 million	$193.7 million	18.5%
Basic net earnings per share	$1.11	$1.13	Down $0.02
Diluted net earnings per share	$1.10	$1.11	Down $0.01
Operating cash flow	$274.4 million	$228.1 million	20.3%
Capital investment in acquisitions and development	$629.9 million	$707.2 million	Down 10.9%
Dividends declared per common share	$1.60	$1.56	2.6%

Continuing-operations operating expenses were $153.1 million, including $99.2 million of depreciation and amortization. Interest expense was $85.3 million versus $83.2 million in 2012. Approximate continuing-operations earnings before interest, taxes, depreciation and amortization, calculated from reported earnings from operations plus depreciation and amortization, were $338.5 million; this is an analytical measure and is not presented as a company-defined metric in the filing.

2013 acquisitions: 275 properties for $629.9 million, with an initial cash yield of 7.8%.
2013 dispositions: 35 properties, generating $61.0 million of net sales proceeds and a $6.3 million gain.
Total assets increased to $4.45 billion from $3.99 billion; stockholders’ equity increased to $2.78 billion from $2.30 billion.
Cash and cash equivalents were $1.5 million at year-end versus $2.1 million in 2012.

Debt, liquidity and capital structure

Total debt was $1.570 billion versus $1.587 billion in 2012.
Debt comprised $1.514 billion of unsecured notes, $46.4 million drawn on the revolving credit facility and $9.5 million of mortgages.
The $500 million unsecured revolving credit facility had $453.6 million available at year-end, matures in October 2016 with an extension option to October 2017, and bears interest at LIBOR plus 107.5 basis points, subject to rating-based adjustments.
Total debt was approximately 32% of total gross assets and approximately 28% of total market capitalization; secured debt was less than 1% of gross assets.
2013 financing included issuance of $350 million of 3.300% notes due 2023, $287.5 million of Series E preferred stock, $238.6 million of common stock through the ATM program and $25.4 million through the DRIP.
NNN settled all outstanding convertible notes during 2013, including $15.5 million of 2026 Notes and approximately $223.0 million of 2028 Notes. The 2028 settlement included issuance of 2.4 million common shares.
Contractual debt maturities include $151.1 million in 2014, $151.2 million in 2015, $53.2 million in 2016 and $250.1 million in 2017, based on principal cash flows disclosed in the filing.

Material changes versus the prior comparable period

Portfolio size increased from 1,622 to 1,860 properties and from 19.2 million to 20.4 million square feet.
Revenue and operating cash flow grew substantially, primarily from the full-year contribution of 2012 acquisitions and partial-year contribution from 2013 acquisitions.
FFO increased faster than net earnings, while reported per-share earnings declined modestly because of common-share issuance and preferred-stock distributions.
Acquisition volume declined in dollars and square footage, but the number of properties acquired increased from 232 to 275 and the initial cash yield declined from 8.3% to 7.8%.
Depreciation and amortization increased to $99.2 million from $73.7 million, reflecting portfolio expansion.
Commercial mortgage residual interests declined in fair value to $11.7 million from $13.1 million. The company recorded a $1.2 million other-than-temporary impairment versus $2.8 million in 2012.
The company issued Series E preferred stock in May 2013 and redeemed or settled its remaining convertible notes.
Prior-period presentation was revised because properties sold or held for sale were classified as discontinued operations. Total net earnings available to common stockholders were not affected, but prior continuing-operations figures were restated.

Guidance, outlook, risks and unusual items

Management did not provide a formal numerical earnings or acquisition outlook in the provided filing text. Management expects future rental-income growth primarily from additional acquisitions and contractual rent increases and expects short-term liquidity needs to be funded by operating cash flow and the revolving credit facility. Long-term capital needs may be funded through debt, equity, preferred securities, asset sales and retained operating cash.

Key risks include tenant defaults or bankruptcies, changes in consumer spending and e-commerce, retail-sector concentration, geographic concentration, interest-rate changes, capital-market access and refinancing risk.
Approximately 45.6% of annual base rent was generated by five states, including Texas and Florida; approximately 47.7% was generated by five retail lines of trade.
NNN had 33 vacant, unleased properties at year-end, representing approximately 2% of the portfolio. Less than 1% of gross leasable area was leased to tenants that had filed Chapter 11 as of January 31, 2014.
The company had 48 construction commitments totaling $145.8 million, of which $99.0 million had been funded and $46.8 million remained.
Seventy properties were under some level of environmental remediation or monitoring as of February 12, 2014. NNN maintained environmental insurance covering substantially all properties, with the policy expiring in August 2018.
Real estate impairment charges totaled $4.1 million in 2013, including $2.0 million in continuing operations and $2.1 million in discontinued operations.
Commercial mortgage residual values depend on unobservable assumptions such as discount rates, prepayment speeds and expected credit losses.
The company stated that it remained in compliance with debt covenants, had effective disclosure controls and internal control over financial reporting, and received unqualified audit opinions from Ernst & Young LLP.
Subsequent to year-end, NNN entered into three forward-starting interest-rate swaps with total notional amounts of $225 million to hedge potential long-term debt issuance.

Most important facts for an investor to verify

Reconcile the reported annual results with the requested “2013 Q4” period; the filing is a full-year 10-K, while fourth-quarter figures appear only in the unaudited quarterly table.
Confirm the effect of discontinued-operations reclassifications on continuing-operations revenue, earnings and margins.
Assess FFO quality and its reconciliation to GAAP earnings, including the effect of property gains, impairments, depreciation and share issuance.
Review the 2014–2017 debt maturities and the company’s refinancing plan, including reliance on the revolving credit facility and capital markets.
Evaluate tenant, industry and geographic concentrations, especially convenience stores, restaurants, Texas and Florida.
Monitor occupancy, lease expirations, vacant properties, tenant bankruptcies and renewal or re-leasing economics.
Review remaining construction commitments, environmental remediation exposure and the assumptions supporting the $11.7 million residual-interest valuation.