Business Context and Reporting Period
National Retail Properties, Inc. (NYSE: NNN) filed this Form 10-K for the fiscal year ended December 31, 2017. The filing is an annual report rather than a quarterly filing, although it includes unaudited fourth-quarter data. NNN is an integrated REIT that acquires, owns, develops and leases primarily retail properties under long-term net leases.
At year-end, NNN owned 2,764 properties totaling approximately 29.1 million square feet across 48 states. Approximately 99% of properties were leased, and the weighted-average remaining lease term was 11.5 years.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenues | $584.9 million | $533.6 million | +9.6% |
| Rental income | $568.1 million | $516.0 million | +10.1% |
| Earnings from operations | $337.5 million | $309.1 million | +9.2% |
| Earnings before income taxes | $228.7 million | $212.3 million | +7.7% |
| Net earnings attributable to NNN | $265.0 million | $239.5 million | +10.6% |
| Net earnings attributable to common stockholders | $217.2 million | $200.9 million | +8.1% |
| Diluted earnings per common share | $1.45 | $1.38 | +5.1% |
| FFO available to common stockholders | $359.2 million | $330.5 million | +8.7% |
| Cash flow from operating activities | $421.6 million | $415.3 million | +1.5% |
| Total assets | $6.56 billion | $6.33 billion | +3.6% |
| Total debt | $2.58 billion | $2.31 billion | +11.6% |
| Common dividends declared | $1.86 per share | $1.78 per share | +4.5% |
Reported earnings from operations before income taxes represented approximately 39.1% of total revenues. Net earnings attributable to NNN represented approximately 45.3% of total revenues, including a $36.7 million gain on property dispositions. FFO is a non-GAAP measure and should not be viewed as a substitute for GAAP net earnings or operating cash flow.
Cash and cash equivalents were $1.4 million at year-end, compared with $294.5 million at year-end 2016. NNN had $120.5 million outstanding under its $900 million unsecured revolving credit facility and $779.5 million available, excluding $0.2 million of undrawn letters of credit.
Total debt consisted primarily of $2.45 billion of unsecured notes, $120.5 million drawn on the revolving facility and $13.3 million of mortgages. Debt represented approximately 35% of total gross assets and approximately 27% of total market capitalization. Secured debt was less than 1% of total gross assets.
Material Changes Versus the Prior Comparable Period
- NNN acquired 276 properties in 2017 for total investment of approximately $754.9 million, compared with 313 properties and $846.9 million in 2016. Initial cash yield was 6.9% in both years.
- NNN sold 48 properties in 2017 for net proceeds of $96.8 million and recognized a $36.7 million gain, compared with 38 properties, $103.2 million of proceeds and a $27.2 million gain in 2016.
- The property portfolio expanded to 2,764 properties from 2,535, and gross leasable area increased to 29.1 million square feet from 27.2 million square feet. Occupancy remained approximately 99%.
- Operating expenses increased 10.2%, primarily because depreciation and amortization rose to $173.7 million from $149.1 million. A $7.8 million retirement and severance charge primarily related to the retirement of CEO Craig Macnab was recorded in 2017.
- Interest expense increased to $109.1 million from $96.4 million, reflecting additional debt and higher revolving-facility borrowings. NNN issued $400 million of 3.5% notes due 2027 and repaid $250 million of 6.875% notes due in October 2017.
- NNN increased its revolving credit facility capacity from $650 million to $900 million in October 2017, with an accordion feature allowing expansion up to $1.6 billion subject to lender approval.
- NNN redeemed all outstanding Series D preferred stock for approximately $287.5 million in February 2017. Series E and Series F preferred stock remained outstanding at year-end.
- Common shares issued through the at-the-market program generated $243.8 million of net proceeds in 2017, contributing to the increase in common shares outstanding.
- Cash used in investing activities decreased to $625.6 million from $779.9 million, while financing activities used $89.2 million in 2017 compared with providing $644.9 million in 2016.
Outlook, Risks, Contingencies and Unusual Items
Management expects rental income to continue to be supported by acquisitions and contractual rent increases. NNN expects short-term liquidity needs to be funded through operating cash flow and its revolving credit facility, with longer-term needs funded through debt, equity, property dispositions and internally generated funds. The filing does not provide formal earnings or FFO guidance.
- Debt maturities are concentrated from 2021 through 2027, including substantial balloon principal payments. Management expects to refinance or otherwise fund these obligations, but cautions that capital may be unavailable or more expensive.
- NNN relies on retail tenants, with exposure to consumer spending, e-commerce, tenant bankruptcies, changing retail preferences and industry-specific weakness. Five tenants generated approximately 20.6% of annual base rent; the largest tenant, Sunoco, generated approximately 5.1%.
- Five retail lines of trade generated approximately 51.1% of annual base rent, and properties in five states generated approximately 42.7% of annual base rent. Texas represented 18.2% and Florida 8.7% of annual base rent.
- NNN owned 24 vacant, unleased properties at year-end, representing approximately 1% of the portfolio. As of January 31, 2018, less than 1% of properties was leased to two Chapter 11 bankruptcy filers.
- NNN had construction commitments on 27 properties totaling $129.9 million, of which $67.7 million had been funded and $62.2 million remained.
- As of February 6, 2018, 77 properties were subject to some level of environmental remediation or monitoring. The environmental insurance policy covering substantially all properties was scheduled to expire in August 2018.
- Interest-rate risk primarily arises from the variable-rate revolving facility. NNN had no derivatives outstanding at December 31, 2017; a 1% increase in variable-rate debt costs would have increased 2017 interest expense by less than 1%.
- NNN reported no material legal proceedings, was in compliance with debt covenants and received unqualified audit opinions. Management and Ernst & Young concluded that internal control over financial reporting was effective.
- In February 2018, NNN entered into $250 million of forward-starting swaps to hedge interest-related cash outflows associated with a potential long-term debt issuance.
Most Important Facts for Investors to Verify
- Whether the approximately 99% occupancy rate and 11.5-year lease term remain stable, particularly as leases representing 2.0% of annual base rent expire in 2018.
- Tenant credit quality and concentration, including Sunoco, Camping World, Mister Car Wash, LA Fitness and AMC Theatres.
- Refinancing plans and interest-rate exposure for debt maturities beginning in 2021, including the January 2022 revolving-facility maturity.
- Coverage of the $62.2 million remaining construction commitments and the expected returns from those projects.
- Progress on the 77 properties subject to environmental remediation or monitoring and renewal or replacement of environmental insurance.
- Whether operating cash flow and FFO continue to cover common and preferred dividends after capital spending, acquisitions and debt service.
- The effect of property acquisitions, dispositions, impairment charges, severance costs and other nonrecurring items on recurring earnings and FFO.
- The filing identifies the registrant as National Retail Properties, Inc.; investors should verify the issuer name and ticker against the requested NNN REIT metadata.