NNN REIT, Inc. — Form 10-Q Summary
Business Context and Reporting Period
National Retail Properties, Inc. is a fully integrated REIT that owns and develops primarily retail properties leased under long-term net leases. For the quarter ended March 31, 2020, NNN owned 3,125 properties totaling approximately 32.5 million square feet across 48 states, with a weighted average remaining lease term of 11.1 years and approximately 99% occupancy.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $175.1 million | $163.7 million | 6.9% increase |
| Rental income | $174.5 million | $163.0 million | 7.1% increase |
| Earnings from operations | $115.4 million | $108.1 million | 6.8% increase |
| Net earnings attributable to NNN | $65.2 million | $80.0 million | 18.6% decrease |
| Net earnings attributable to common stockholders | $60.7 million | $71.4 million | 15.1% decrease |
| Basic and diluted EPS | $0.35 | $0.44 | Decrease |
| Cash flow from operations | $128.1 million | $143.4 million | 10.7% decrease |
Operating expenses were $72.5 million, up 9.7%, including $49.2 million of depreciation and amortization and $5.5 million of real estate impairment losses. Earnings were reduced by a $16.7 million loss on early extinguishment of debt. Approximate operating expense and total revenue margins were 41.4% and 65.9%, respectively; the filing does not provide a clearly defined non-GAAP operating margin or funds-from-operations measure in the supplied text.
Cash and cash equivalents were $217.4 million at March 31, 2020, compared with $1.1 million at December 31, 2019. The $216.3 million increase in cash primarily reflected debt financing activity. Investing activities used $30.7 million, including $64.2 million of real estate additions and $33.4 million of disposition proceeds. Financing activities provided $118.8 million.
Total debt was $3.218 billion at March 31, 2020, compared with $2.988 billion at December 31, 2019. The $900 million unsecured revolving credit facility had no outstanding balance and was fully available at quarter-end. Notes payable were $3.207 billion, and mortgages payable were $11.9 million. Contractual obligations included $3.262 billion of debt principal and $1.312 billion of stated interest, excluding certain unamortized debt items.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily from properties acquired in 2019 and the first quarter of 2020. NNN acquired 21 properties for $67.2 million, compared with 33 properties for $117.0 million in Q1 2019.
- Interest expense increased 12.4% to $33.7 million, reflecting newly issued debt and a weighted average revolving-credit balance of $76.0 million during the quarter.
- NNN issued $400 million of 2.500% notes due 2030 and $300 million of 3.100% notes due 2050, receiving approximately $685.5 million of combined net proceeds.
- NNN redeemed $325 million of 3.800% notes due 2022 and paid a $16.7 million make-whole amount, producing the reported early-extinguishment loss.
- Real estate impairment losses increased from $3.2 million to $5.5 million.
- Common dividends increased to $0.515 per share from $0.500 per share. Series E preferred stock was redeemed in October 2019; Series F preferred dividends remained $0.325 per depositary share.
- Properties sold decreased to 14 from 17, while net disposition proceeds increased to $36.3 million from $19.4 million.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management did not provide quantitative earnings guidance in the supplied filing. NNN stated that it was deferring material new property investments pending greater visibility into the economic and capital-markets recovery from COVID-19.
COVID-19 was expected to have a more significant effect beginning in the quarter ending June 30, 2020. As of April 29, 2020, NNN had collected approximately 52% of annualized base rent originally due for April. Tenants representing approximately 37% of annualized base rent had requested lease adjustments, primarily 30-to-90-day rent deferrals, generally repayable over three to 18 months beginning in the fourth quarter of 2020.
Management expected cash on hand, the available credit facility and operating cash flow to meet near-term funding needs, but warned that prolonged closures could result in rent deferrals, defaults, tenant bankruptcies, vacancies, higher property expenses, weaker cash flow and reduced dividend capacity. As of March 31, 2020, NNN had 37 vacant properties, approximately 1% of the portfolio. As of April 29, 2020, approximately 1% of properties and gross leasable area was leased to four tenants in Chapter 11 bankruptcy.
NNN had no outstanding derivatives at quarter-end. Interest-rate, refinancing, tenant concentration, geographic concentration, capital-market access, debt covenant, REIT qualification and pandemic-related risks remain material. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Subsequent rent collections, deferrals, concessions, tenant defaults and bankruptcy developments following April 29, 2020.
- The effect of COVID-19 on second-quarter and full-year rental income, cash flow, impairments, liquidity and dividend coverage.
- Whether the $900 million revolving credit facility remains fully available and whether debt covenants remain satisfied.
- Refinancing and maturity exposure, including the debt principal and interest obligations disclosed in the filing.
- Completion and funding of the remaining $18.5 million commitment for 17 properties under construction.
- Future impairment charges and the collectability of accrued or deferred rental income.