National Retail Properties, Inc. — Form 10-Q Summary
Business context and reporting period
National Retail Properties, Inc. (the filing identifies the company as NNN) is a fully integrated REIT that acquires, owns, develops and invests in primarily retail properties leased under long-term net leases. The report covers the quarter ended March 31, 2013, and was filed May 2, 2013.
- Property portfolio: 1,636 properties totaling approximately 19.3 million square feet across 47 states.
- Approximately 98% of properties were leased and operated; weighted-average remaining lease term was 12 years.
- Common shares outstanding at April 29, 2013: 118.4 million.
Financial performance and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Continuing-operations revenue | $92.6 million | $77.4 million | 19.6% increase |
| Rental income | $88.6 million | $73.1 million | 21.2% increase |
| Earnings from operations | $54.8 million | $47.6 million | 15.2% increase |
| Operating margin | 59.2% | 61.5% | Lower |
| Net earnings attributable to NNN | $34.1 million | $29.8 million | 14.2% increase |
| Net earnings available to common stockholders | $29.3 million | $24.8 million | 18.4% increase |
| Diluted earnings per common share | $0.25 | $0.23 | Increase |
| Cash provided by operating activities | $68.8 million | $50.6 million | 35.2% increase |
| Capital additions to operating real estate | $51.4 million | $191.7 million | Lower investment pace |
Continuing-operations revenue increased primarily from property acquisitions completed during 2012 and the first quarter of 2013. Operating expenses rose 26.0%, principally because of higher depreciation and amortization, while interest expense increased 10.1% to $21.8 million. The filing does not present funds from operations or adjusted funds from operations in the supplied financial statements.
Total assets were $4.00 billion at March 31, 2013, compared with $3.99 billion at December 31, 2012. Total debt was $1.46 billion, down from $1.59 billion at year-end. Cash and cash equivalents were $3.4 million. The $500 million revolving credit facility had $59.4 million outstanding and $440.6 million available at quarter-end.
Common dividends paid were $44.3 million, or $0.395 per share. Series D preferred dividends were $4.8 million. In April 2013, the company declared another $0.395 per common share dividend payable in May 2013.
Material changes versus the prior comparable period
- Acquisitions declined to 17 properties totaling $42.6 million, compared with 67 properties totaling $198.0 million in Q1 2012.
- Rental income benefited from 17 properties acquired in Q1 2013 and 232 properties acquired during 2012.
- Operating real estate increased to $3.80 billion from $3.79 billion at year-end 2012.
- Continuing-operations impairment losses increased to $1.8 million from $35,000; total impairment losses and other charges, including discontinued operations, were $2.9 million.
- Discontinued operations produced a $220,000 loss attributable to NNN, compared with $1.7 million of earnings in Q1 2012. Two properties were sold for net proceeds of $3.6 million and a $505,000 gain.
- The company issued approximately 4.6 million common shares through its 2012 at-the-market program for net proceeds of $150.3 million and issued 425,000 shares through its dividend reinvestment plan for $13.8 million.
- NNN settled the remaining $15.5 million principal amount of its 3.95% convertible notes due 2026 for approximately $20.6 million, reducing convertible debt.
- Line-of-credit borrowings declined by $114.8 million during the quarter, resulting in $59.4 million outstanding at March 31, 2013.
Guidance, outlook, risks and unusual items
Management stated that future rental-income growth is expected to come from additional acquisitions and contractual rent increases. Management also indicated that operating cash flow, capital resources, the credit facility, debt and equity offerings, and property dispositions are expected to fund dividends, acquisitions and other obligations. No quantified earnings or acquisition guidance was provided.
In April 2013, NNN issued $350 million of 3.300% senior unsecured notes due 2023 at a 3.388% yield. A portion of the proceeds was used to repay the credit facility; the remainder is intended for acquisitions and general corporate purposes.
- The 2028 convertible notes became convertible beginning April 1, 2013. Through May 2, approximately $91,000 of principal had been surrendered for conversion, with approximately $222.9 million remaining outstanding as of that date.
- NNN had $37.0 million of remaining property-improvement commitments at March 31, 2013.
- Four forward-starting swaps with an aggregate notional amount of $240 million were entered into to hedge a potential debt issuance. They were terminated in connection with the April 2023 notes issuance, resulting in a $3.2 million liability, of which $3.1 million was deferred in accumulated other comprehensive income.
- Key risks include tenant defaults or bankruptcies, property vacancies, concentration in convenience stores and restaurants and in the South and Southeast, real estate valuation and liquidity risk, access to capital, interest-rate exposure, debt covenants, environmental liabilities and maintaining REIT qualification.
- NNN reported 36 vacant, unleased properties, approximately 2% of the portfolio, at March 31, 2013.
- Commercial mortgage residual interests were valued at $13.7 million using Level 3 assumptions and generated an $869,000 unrealized gain in other comprehensive income.
- Management concluded that disclosure controls and procedures were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether acquisition activity accelerates after the relatively low $42.6 million invested in Q1 2013.
- The effect of the April 2023 notes issuance on credit-facility borrowings, leverage, interest expense and liquidity.
- Potential dilution and cash or equity settlement associated with the convertible 2028 notes.
- Tenant concentration, geographic concentration and trends in occupancy, lease renewals and vacant properties.
- The sustainability of dividends relative to recurring operating cash flow and any non-GAAP funds-from-operations measures.
- Changes in real estate impairments and the valuation assumptions supporting commercial mortgage residual interests.
- Compliance with debt covenants and the terms and availability of the revolving credit facility.