NNN REIT, Inc. (National Retail Properties, Inc.) — Form 10-Q Summary
Business context and reporting period
Quarterly report for the quarter and six months ended June 30, 2016. NNN is a fully integrated REIT that acquires, owns, develops and invests in primarily retail properties leased under long-term net leases.
- Portfolio: 2,452 properties totaling approximately 26.3 million square feet across 48 states.
- Approximately 99% of properties were leased; weighted average remaining lease term was 11.4 years.
- NNN revoked its taxable REIT subsidiary election effective December 31, 2015.
- Common shares outstanding were 147.0 million as of July 28, 2016.
Financial performance and key metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenues | $130.9 million | $117.2 million | $257.9 million | $233.4 million |
| Rental income | $126.9 million | $113.2 million | $249.4 million | $225.3 million |
| Earnings from operations | $75.0 million | $67.4 million | $152.5 million | $137.1 million |
| Net earnings attributable to NNN | $51.9 million | $46.2 million | $122.6 million | $100.2 million |
| Net earnings attributable to common stockholders | $43.1 million | $37.3 million | $104.9 million | $82.5 million |
| Diluted earnings per share | $0.30 | $0.28 | $0.73 | $0.62 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $187.6 million | $167.8 million |
- Q2 revenue increased 11.7%; six-month revenue increased 10.5%, primarily from property acquisitions.
- Operating expenses were $55.9 million in Q2, including $36.5 million of depreciation and amortization and $5.5 million of real estate and other impairment losses.
- Interest expense increased 11.1% in Q2 to $24.1 million and 9.7% for the six months to $47.7 million.
- Common dividends were $0.435 per share for Q2 and $0.870 per share for the first six months, compared with $0.420 and $0.840, respectively, in 2015.
Balance sheet, debt and liquidity
- Total assets were $5.785 billion at June 30, 2016, compared with $5.460 billion at December 31, 2015.
- Total debt was $2.118 billion, consisting of $147.3 million drawn on the revolving credit facility, $16.9 million of mortgages payable and $1.953 billion of notes payable.
- The $650 million revolving credit facility matures in January 2019, with a potential extension to January 2020. Amount outstanding was $147.3 million and availability was $502.7 million, excluding $0.2 million of letters of credit.
- Cash and cash equivalents were $2.4 million, down from $13.7 million at year-end 2015. Restricted cash was $0.2 million.
- Six-month cash flow was $187.6 million provided by operations, $413.8 million used in investing activities and $214.9 million provided by financing activities, resulting in an $11.3 million decrease in cash.
- Debt financing and equity issuance funded significant investment activity. NNN issued $209.7 million of net proceeds through its ATM program and $6.6 million through its DRIP during the first six months.
Material changes versus the prior comparable period
- NNN acquired 211 properties for total investment of $468.7 million in the first six months of 2016, compared with 93 properties and $303.0 million in the prior-year period. The initial cash yield was 6.9%, versus 7.2%.
- NNN sold 17 properties for $72.5 million of net proceeds and recognized an $18.1 million gain, compared with nine properties, $25.5 million of proceeds and a $7.2 million gain in the prior-year period.
- The property portfolio increased from 2,257 properties at December 31, 2015 and 2,138 properties at June 30, 2015 to 2,452 properties at June 30, 2016.
- Real estate and other impairment losses increased to $6.0 million for the first six months from $3.7 million. Q2 included a $3.3 million loss on a mortgage receivable.
- Common shares outstanding increased materially, driven by ATM and DRIP issuances. Weighted average diluted shares increased to 144.0 million in Q2 from 133.6 million.
- Total debt increased from $2.0 billion at year-end 2015, primarily because of the $147.3 million revolving credit balance.
Outlook, commentary, risks and unusual items
- Management expects rental income growth to come primarily from additional acquisitions and contractual rent increases. No formal earnings or acquisition guidance is provided in the filing.
- NNN had 21 construction commitments totaling $80.8 million, of which $44.2 million had been funded and $36.6 million remained at June 30, 2016.
- Management states that operating cash flow was sufficient to fund distributions in the periods presented and expects obligations to be funded through operations, existing resources, the credit facility, debt or equity offerings and asset dispositions.
- Two forward-starting swaps with a total notional amount of $180 million were outstanding to hedge potential future long-term debt issuance. A 1% increase in rates on variable-rate debt would have increased six-month interest expense by less than 1%.
- Key risks include tenant concentration and creditworthiness, geographic and industry concentration, vacancies, property valuation and impairment, access to debt and equity capital, interest-rate changes, debt covenant compliance, REIT qualification and dividend requirements.
- NNN had 22 vacant properties, approximately 1% of the portfolio, at June 30, 2016.
- Commercial mortgage residual interests declined to $10.6 million from $11.1 million at year-end 2015 and remain subject to Level 3 valuation assumptions, including prepayment speeds, loan losses and yield curves.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material legal proceedings or changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether acquisition volume and the 6.9% initial cash yield support continued earnings and dividend growth.
- Tenant, industry and geographic concentration, particularly convenience stores and restaurants and the South/Southeast regions.
- Liquidity after substantial acquisition spending, given only $2.4 million of cash and $147.3 million drawn on the revolving facility.
- Debt maturities, interest-rate exposure, credit facility covenants and refinancing requirements.
- The sustainability of the $0.455 per-share common dividend declared in July 2016 relative to recurring cash flow measures; the filing text does not provide a clear FFO or AFFO value.
- The causes and potential recurrence of the $6.0 million of six-month impairment losses, including the $3.3 million mortgage receivable loss.
- The impact of equity issuance and associated dilution on per-share results.