NNN 2022 Q3 Form 10-Q Summary
Business Context and Reporting Period
National Retail Properties, Inc. (NYSE: NNN) is a fully integrated Maryland REIT that acquires, owns, develops and invests in primarily retail properties leased under long-term net leases. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022, and was filed November 2, 2022.
- Portfolio: 3,349 properties totaling approximately 34.3 million square feet across 48 states.
- Occupancy: approximately 99% leased, with a 10.4-year weighted average remaining lease term.
- Largest annual base-rent sectors: convenience stores, 16.7%; automotive service, 13.6%; full-service restaurants, 9.4%; and limited-service restaurants, 9.0%.
Financial Performance and Key Metrics
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Total revenues | $193.5 million | $180.4 million | Up 7.3% |
| Rental income | $193.1 million | $180.0 million | Up 7.3% |
| Earnings from operations | $125.4 million | $116.4 million | Up 7.7% |
| Net earnings attributable to NNN | $88.4 million | $82.9 million | Up 6.6% |
| Net earnings attributable to common stockholders | $88.4 million | $78.4 million | Up 12.7% |
| diluted EPS | $0.50 | $0.45 | Up $0.05 |
| Net margin | Approximately 45.7% | Approximately 46.0% | Modestly lower |
| Interest expense | $37.0 million | $33.5 million | Up 10.3% |
For the nine months ended September 30, 2022, total revenues were $574.5 million, up 6.6%; net earnings attributable to NNN were $244.0 million, up 14.8%; common-stockholder earnings were $244.0 million, up 22.5%; and diluted EPS was $1.38 versus $1.14.
- Operating expenses were $74.0 million in Q3, broadly stable year over year. Depreciation and amortization increased 10.6% to $56.4 million, primarily from property acquisitions.
- General and administrative expense declined 8.6% in Q3 and 10.9% for the nine months, primarily due to lower compensation costs associated with executive retirement.
- Real estate impairment losses declined to $1.0 million in Q3 and $7.2 million for the nine months, versus $4.8 million and $14.6 million, respectively, in the comparable periods.
- Q3 executive retirement costs were $0.6 million; nine-month costs were $6.8 million, related to former CEO Julian Whitehurst’s retirement and transition agreement.
Cash Flow, Capitalization and Liquidity
| Metric | September 30, 2022 | December 31, 2021 |
|---|---|---|
| Total assets | $7.95 billion | $7.75 billion |
| Real estate portfolio | $7.83 billion | $7.45 billion |
| Total debt | $3.80 billion | $3.75 billion |
| Total equity | $4.01 billion | $3.90 billion |
| Cash and cash equivalents | $3.3 million | $171.3 million |
- Nine-month operating cash flow was $465.3 million, compared with $453.2 million in 2021.
- Investing cash flow was negative $526.8 million, including $576.2 million of real estate additions and $50.9 million of disposition proceeds.
- Financing cash flow was negative $106.5 million, including $282.6 million of common dividends, net revolving-credit borrowings of $47.5 million and $127.3 million of ATM equity proceeds.
- The unsecured revolving credit facility had $47.5 million outstanding and $1.05 billion available at September 30, 2022. It matures in June 2025, with extension options to June 2026, and the company was in compliance with its financial covenants.
- Debt was composed primarily of notes payable, representing 98.5% of total debt. Contractual debt principal and interest obligations totaled $5.71 billion, excluding common dividends and construction commitments.
- NNN committed $103.9 million for construction on 19 properties, of which $50.1 million remained unfunded.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by acquisitions and, to a lesser extent, scheduled CPI-based rent increases. NNN acquired 154 properties for $587.7 million during the first nine months, compared with 107 properties for $455.4 million in 2021.
- The portfolio expanded to 3,349 properties from 3,195 at September 30, 2021, while leased square footage increased to 34.1 million from 32.4 million.
- Interest expense increased as a result of the 2021 issuance of long-term notes and borrowings under the revolving credit facility.
- Common dividends increased to $0.5500 per share in Q3 2022 from $0.5300. The Series F preferred stock was fully redeemed in October 2021, eliminating preferred dividends in 2022.
- NNN issued 2.8 million common shares through its ATM program for net proceeds of $127.3 million during the first nine months of 2022, compared with 30,000 shares and $1.1 million in 2021.
- Property dispositions declined to 26 properties and $49.2 million of net proceeds during the first nine months, compared with 53 properties and $71.0 million in 2021.
- COVID-19 rent deferrals continued to be collected. Approximately $11.6 million was repaid during the first nine months of 2022; $3.0 million was scheduled for repayment in Q4 2022, with substantially all remaining deferred rent due periodically by December 31, 2023.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or acquisition guidance. Management expects to fund near-term liquidity needs through operating cash flow, cash on hand, the revolving credit facility, debt or equity offerings and property dispositions.
- Management states that rent collections had returned to pre-pandemic levels, but future collections and recovery of deferred rent remain subject to tenant performance and macroeconomic conditions.
- Key risks include tenant bankruptcies or defaults, sector and geographic concentration, vacancies, real estate valuation declines, higher interest rates, refinancing and capital-market access, covenant compliance, cybersecurity, environmental liabilities, and the phase-out of LIBOR after June 30, 2023.
- Twenty-one properties were vacant and unleased at September 30, 2022, representing approximately 1% of the portfolio. Less than 1% of properties and gross leasable area was leased to two Chapter 11 tenants as of October 28, 2022.
- The company had no outstanding derivative instruments at September 30, 2022. Approximately $2.4 million of previously deferred hedge-related amounts are expected to be reclassified into interest expense over the next 12 months.
- Management concluded that disclosure controls and procedures were effective, and reported no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the approximately 99% occupancy rate, tenant diversification and long lease term remain stable as leases mature and tenants face economic pressure.
- The collectability and timing of the remaining COVID-19 deferred rent, particularly amounts due through 2023 and thereafter.
- Exposure to the revolving facility’s variable LIBOR-based rate, the transition to a replacement benchmark, and upcoming debt maturities beginning in 2024.
- Funding sources for the $50.1 million of remaining construction commitments, acquisitions, dividends and scheduled debt obligations.
- Tenant concentration and credit quality in convenience stores, automotive service and restaurant sectors, as well as exposure to bankrupt or financially stressed tenants.
- The effect of future interest rates on debt costs, property valuations, acquisition yields and the market value of fixed-rate notes.