Business Context and Reporting Period
National Retail Properties, Inc. (now identified in the request as NNN REIT, Inc.) filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The company is a fully integrated REIT focused primarily on acquiring, owning and developing retail properties leased under long-term net leases.
- Investment Portfolio: 1,298 properties totaling approximately 15.3 million square feet across 47 states.
- Occupancy: approximately 97% of investment properties leased or operated.
- Weighted-average remaining lease term: 12 years.
- Inventory Portfolio: 16 properties held primarily for sale.
Financial Performance and Position
| Metric | Q3 2011 | Q3 2010 | Change |
|---|---|---|---|
| Revenue from continuing operations | $67.5 million | $56.3 million | Up 19.8% |
| Earnings from operations | $41.9 million | $36.3 million | Up 15.3% |
| Earnings from continuing operations | $22.3 million | $20.1 million | Up 11.0% |
| Net earnings attributable to NNN | $22.6 million | $21.2 million | Up 6.7% |
| Net earnings available to common stockholders | $20.9 million | $19.5 million | Up 7.3% |
| Diluted earnings per share | $0.24 | $0.23 | Up $0.01 |
| Metric | Nine months 2011 | Nine months 2010 | Change |
|---|---|---|---|
| Revenue from continuing operations | $191.2 million | $168.4 million | Up 13.5% |
| Earnings from operations | $117.8 million | $104.1 million | Up 13.2% |
| Earnings from continuing operations | $63.7 million | $56.5 million | Up 12.7% |
| Net earnings attributable to NNN | $64.8 million | $58.8 million | Up 10.2% |
| Diluted earnings per share | $0.69 | $0.65 | Up $0.04 |
- Continuing-operations earnings-from-operations margin was approximately 62.0% in the quarter and 61.6% for the nine months.
- Interest expense increased to $20.1 million in the quarter from $16.5 million and to $55.3 million for the nine months from $48.5 million.
- Cash provided by operating activities was $139.1 million for the nine months, compared with $161.9 million in the prior-year period.
- Cash used in investing activities was $432.0 million, principally reflecting $434.5 million of additions to operating-method investment real estate.
- Cash provided by financing activities was $310.4 million, compared with cash used of $74.6 million in the prior-year period.
- Cash and cash equivalents were $19.7 million at September 30, 2011, compared with $2.0 million at December 31, 2010.
- Total assets were $3.15 billion, compared with $2.71 billion at December 31, 2010.
- Total outstanding debt was $1.27 billion, compared with $1.13 billion at December 31, 2010.
- Stockholders’ equity increased to $1.78 billion from $1.53 billion at December 31, 2010.
Material Changes Versus the Prior Comparable Period
- Acquisition activity accelerated: 53 investment properties totaling $335.3 million were acquired in Q3 2011, compared with 25 properties totaling $88.8 million in Q3 2010. For the first nine months, acquisitions totaled 107 properties and $444.5 million, versus 35 properties and $127.4 million.
- Rental income increased 19.8% in Q3 and 14.0% for the nine months, primarily from properties acquired in 2010 and 2011.
- Operating expenses increased 28.0% in Q3 and 13.6% for the nine months, driven by higher depreciation, reimbursable property expenses and incentive compensation.
- Commercial mortgage residual-interest impairment declined to $396,000 for the nine months from $3.8 million in the prior-year period.
- In May 2011, the unsecured revolving credit facility was increased from $400 million to $450 million. No amount was outstanding at September 30, 2011, and $450 million was available, excluding $57,000 of undrawn letters of credit.
- In July 2011, the company issued $300 million of 5.50% senior notes due 2021 and received $292.956 million of net proceeds.
- In September 2011, the company issued 9.2 million common shares at $26.07 per share and received $229.451 million of net proceeds. It also issued 2.4 million shares under its dividend reinvestment plan for $59.7 million of net proceeds during the nine months.
- Common dividends paid increased to $96.9 million from $93.8 million for the comparable nine-month period. An October 2011 dividend of $0.385 per common share was declared for payment in November 2011.
- Investment property dispositions declined to four properties and $8.1 million of net proceeds for the nine months, compared with 13 properties and $12.8 million in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a specific quantitative earnings, revenue or acquisition outlook. Management states that operating results for the interim periods may not be indicative of full-year results and expects to fund future needs through operating cash flow, available credit, debt or equity offerings, property dispositions and other capital resources.
- In November 2011, NNN entered into two real estate purchase and sale contracts totaling approximately $200 million. Management expected to fund these obligations through cash on hand, operating cash flow, the credit facility, debt or equity financing and asset dispositions.
- Remaining investment-property construction commitments were $28.8 million at September 30, 2011.
- Thirty-seven investment properties were vacant, representing approximately 3% of the portfolio. Vacancy-related lost revenue and property costs could adversely affect liquidity and results.
- Less than 1% of total gross leasable area was leased to three tenants that had filed Chapter 11 bankruptcy petitions as of October 28, 2011.
- Key risks include tenant defaults or bankruptcies, concentration in convenience stores and restaurants and in southern and southeastern markets, real estate illiquidity, access to capital, debt covenants, interest-rate exposure, property and environmental risks, REIT qualification requirements and valuation risk related to commercial mortgage residual interests.
- NNN had no outstanding derivatives at September 30, 2011. It terminated two treasury locks with a total notional amount of $150 million in connection with the 2021 notes issuance; $5.218 million was deferred in other comprehensive income.
- Accumulated other comprehensive income declined to a loss of $3.0 million, primarily reflecting the fair value effect of treasury locks.
- The filing reports no material legal proceedings, no material changes to previously disclosed risk factors and effective disclosure controls as of September 30, 2011.
Important Facts for Investors to Verify
- Reconcile acquisition-driven revenue growth with the increase in debt, equity issuance and interest expense.
- Assess the sustainability of dividends relative to operating cash flow, REIT distribution requirements and future acquisition funding needs.
- Review maturity dates, interest rates and covenant requirements for the $1.27 billion debt balance, including convertible notes and debt maturing in 2012 through 2015.
- Monitor the $200 million of subsequent purchase contracts and the company’s intended financing sources.
- Evaluate tenant concentration, geographic concentration, vacant properties and bankruptcy exposure.
- Review assumptions underlying the $16.3 million commercial mortgage residual-interest valuation, including prepayment speeds, default rates, loss severity and the 25% discount rate.
- Confirm the effect of discontinued operations and property dispositions when comparing reported earnings across periods.