National Retail Properties, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. The filing identifies the registrant as National Retail Properties, Inc.; the request metadata refers to NNN REIT, Inc. NNN is a Maryland REIT focused primarily on acquiring, owning, developing and investing in retail properties leased under long-term net leases.
Business Context
- Portfolio at June 30, 2012: 1,506 properties, approximately 17.8 million square feet, across 47 states.
- Approximately 98% of properties were leased; the weighted-average remaining lease term was 12 years.
- Convenience stores represented 22.6% of annualized base rent, and full-service restaurants represented 11.4%.
- NNN reported one operating segment after the previously reported inventory-assets segment ceased to be significant.
Financial Performance and Position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Continuing-operations revenue | $82.8 million | $61.9 million | $161.4 million | $123.3 million |
| Earnings from operations | $50.3 million | $38.0 million | $98.7 million | $75.6 million |
| Net earnings attributable to NNN | $33.5 million | $21.3 million | $63.3 million | $42.1 million |
| Net earnings attributable to common stockholders | $27.6 million | $19.6 million | $52.3 million | $38.7 million |
| Diluted earnings per common share | $0.26 | $0.23 | $0.49 | $0.46 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $99.8 million | $77.9 million |
- Continuing-operations revenue increased 33.8% in the quarter and 30.8% year to date, primarily from property acquisitions and related rental income.
- Rental income increased 34.9% in the quarter and 31.7% year to date.
- Operating margin was approximately 60.7% in Q2 2012, compared with approximately 61.5% in Q2 2011, based on earnings from operations divided by continuing-operations revenue.
- Interest expense rose 10.7% in the quarter and 11.0% year to date. Depreciation and amortization increased 38.3% in the quarter and 36.6% year to date.
- Q2 and year-to-date earnings included $2.7 million of other-than-temporary impairment on commercial mortgage residual interests, compared with $0.3 million and $0.4 million, respectively, in the prior-year periods.
- Discontinued operations contributed $2.2 million in Q2 and $2.8 million year to date, including gains on property dispositions of $2.4 million and $2.8 million, respectively.
Cash Flow, Debt and Liquidity
- Six-month cash flow: $99.8 million provided by operations, $281.3 million used in investing activities and $182.3 million provided by financing activities. Cash increased to $2.9 million from $2.1 million at year-end 2011.
- Total debt was $1.375 billion at June 30, 2012, up from $1.339 billion at December 31, 2011. Debt consisted primarily of $1.203 billion of unsecured notes and convertible notes, $142.6 million drawn on the credit facility and $29.3 million of mortgages.
- The $450 million unsecured revolving credit facility matured in May 2015, with an option to extend to May 2016. Amount outstanding was $142.6 million, with $307.4 million available, excluding $3.8 million of undrawn letters of credit.
- NNN reported compliance with applicable debt covenants at June 30, 2012.
- Six-month property acquisitions totaled 94 properties and $313.0 million of investment, compared with 54 properties and $109.3 million in the prior-year period.
- NNN had $39.6 million of remaining commitments for improvements to 54 leased properties.
Material Changes and Capital Transactions
- In February 2012, NNN issued 11.5 million depositary shares representing 6.625% Series D preferred stock, generating approximately $277.6 million of net proceeds.
- In March 2012, NNN redeemed all 3.68 million Series C preferred depositary shares for approximately $92.0 million, plus accumulated dividends. The redemption produced a $3.1 million excess of redemption value over carrying value.
- In May 2012, NNN established an at-the-market program for up to 9.0 million common shares. Approximately 395,000 shares were issued during the quarter and six months, generating $10.5 million of net proceeds.
- NNN issued 1.9 million common shares through its dividend reinvestment and stock purchase plan during the first six months, generating $49.5 million of net proceeds.
- Property dispositions totaled 10 properties and $11.7 million of net proceeds year to date, generating a $2.8 million gain.
Outlook, Risks and Unusual Items
- Management expects rental income growth to come primarily from additional acquisitions and contractual rent increases. No quantitative earnings or acquisition guidance is provided.
- Management states that operating cash flow has historically been sufficient to fund distributions and expects obligations to be funded through operating cash flow, existing resources, the credit facility, debt or equity financing and asset sales.
- Key risks include tenant defaults or bankruptcies, vacancy and rent collection, tenant and geographic concentration, real estate illiquidity, access to capital, interest-rate movements, debt covenant compliance, environmental liabilities, valuation changes in commercial mortgage residual interests and maintaining REIT qualification.
- NNN held 35 vacant, unleased properties, representing less than 2% of the portfolio.
- Commercial mortgage residual interests declined to $12.4 million from $15.3 million at year-end 2011 and remain sensitive to prepayment speeds, loan losses, delinquencies and interest rates.
- NNN had no derivatives outstanding at June 30, 2012. A further $0.2 million of deferred hedge losses was expected to be reclassified into interest expense over the following 12 months.
- In July 2012, NNN declared a common dividend of $0.395 per share, payable in August 2012.
Investor Verification Items
- Verify the effect of continued acquisition activity and equity issuance on per-share earnings, leverage and dividend coverage.
- Review debt maturities, refinancing requirements and the terms of the convertible notes, including the 2028 notes’ June 2013 put option.
- Assess tenant, industry and geographic concentration, particularly convenience stores and restaurants.
- Monitor impairment assumptions and valuation changes for the commercial mortgage residual interests.
- Reconcile reported earnings with recurring cash-flow measures such as funds from operations; the filing text provided does not include an FFO calculation in the supplied excerpt.
- Confirm continued compliance with debt covenants and REIT distribution and qualification requirements.