NNN REIT, Inc. (National Retail Properties, Inc.) — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended June 30, 2014. NNN is a fully integrated REIT that acquires, owns, develops and invests in primarily retail properties leased under long-term net leases. At quarter-end, the portfolio included 1,927 properties totaling approximately 20.8 million square feet across 47 states, with approximately 98% of properties leased and a weighted average remaining lease term of 12 years.
Financial performance and key metrics
| Metric | Q2 2014 | Q2 2013 | Change |
|---|---|---|---|
| Revenue from continuing operations | $105.6 million | $96.3 million | 9.7% increase |
| Earnings from operations | $64.6 million | $59.7 million | 8.2% increase |
| Net earnings attributable to NNN | $45.6 million | $37.5 million | 21.6% increase |
| Net earnings available to common stockholders | $36.7 million | $32.7 million | 12.2% increase |
| Basic and diluted EPS | $0.30 | $0.28 basic; $0.27 diluted | Increase |
| Operating margin | 61.2% | 62.0% | Lower |
For the six months ended June 30, 2014, revenue from continuing operations was $209.7 million, up 11.1% year over year; net earnings attributable to NNN were $88.9 million, compared with $71.6 million; and diluted EPS was $0.58, compared with $0.52. Rental income increased primarily from property acquisitions. Depreciation and amortization increased 24.2% in the quarter and 21.1% for the six months, reflecting acquired properties.
Six-month operating cash flow was $137.0 million, compared with $121.2 million in 2013. Investing activities used $160.4 million, principally for $186.4 million of real estate additions, partly offset by $29.5 million of disposition proceeds. Financing activities provided $107.3 million. Cash and cash equivalents increased to $85.4 million from $1.5 million at December 31, 2013.
Total debt was $1.723 billion at June 30, 2014, up from $1.570 billion at year-end 2013. Notes payable represented $1.714 billion of total debt; the $500 million revolving credit facility had no outstanding balance and was fully available. The company’s notes payable fair value was $1.802 billion. Six-month interest expense declined to $42.0 million from $45.5 million.
Material changes versus the prior comparable period
- Revenue and earnings increased, driven primarily by the addition of properties acquired in 2013 and the first half of 2014.
- NNN acquired 81 properties in the first six months for total investment of approximately $186.0 million, compared with 226 properties and $480.3 million in the prior-year period.
- NNN issued $350.0 million of 3.900% senior unsecured notes due June 2024, receiving approximately $346.1 million of net proceeds.
- NNN repaid $150.0 million of 6.250% notes and reduced its revolving credit facility balance to zero.
- Common equity issuance declined from the prior year: the 2013 ATM generated $65.5 million of net proceeds in 2014 versus $86.3 million in 2013, and the 2012 ATM had no issuance in 2014.
- Property dispositions increased to 14 properties in the first six months from nine, generating $26.2 million of net proceeds and a $4.8 million net gain.
- Common dividends paid increased to $99.0 million from $90.9 million. Series E preferred dividends of $8.2 million were paid in 2014, whereas none were paid in the prior-year period.
- Real estate impairment charges declined to $0.5 million from $3.1 million for the six months. NNN also recorded a $0.2 million impairment related to commercial mortgage residual interests.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings guidance. Management expects rental income growth to continue from additional acquisitions and contractual rent increases. Management states that operating cash flow, capital resources, the credit facility, debt and equity financings, and asset dispositions are expected to fund obligations and planned investments.
NNN had 28 properties subject to construction commitments totaling $100.2 million; $62.5 million had been funded and $37.7 million remained. Contractual cash obligations totaled $1.741 billion, including $1.734 billion of long-term debt, excluding accrued interest of $18.5 million.
Key risks include tenant defaults or bankruptcies, vacancy and re-leasing risk, concentration in convenience stores and restaurants and in the South and Southeast, property-market conditions, limited real estate liquidity, access to capital, interest-rate exposure, debt covenants, environmental liabilities, valuation changes in commercial mortgage residual interests, and maintaining REIT qualification. Thirty properties were vacant and unleased at quarter-end, approximately 2% of the portfolio.
NNN early adopted ASU 2014-08 on discontinued operations. No additional properties were classified as discontinued operations after December 31, 2013. The company reported no material subsequent events, no material changes to previously disclosed risk factors, and effective disclosure controls and procedures.
Most important facts for investors to verify
- Whether acquisition activity and contractual rent increases can offset the effects of higher depreciation and future interest costs.
- Debt maturity timing, refinancing requirements and compliance with applicable debt covenants.
- The sustainability of common and preferred dividends relative to recurring operating cash flow and REIT distribution requirements.
- Tenant, industry and geographic concentration, particularly convenience stores, restaurants and the South/Southeast markets.
- Occupancy, tenant credit quality, lease expirations and the ability to re-lease vacant properties at comparable rents.
- The valuation assumptions and potential volatility of the $12.1 million commercial mortgage residual-interest portfolio.
- Funding requirements for the $37.7 million of remaining construction commitments and other capital expenditures.