NNN REIT, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2012. The filing identifies the registrant as National Retail Properties, Inc., a Maryland REIT focused primarily on acquiring, owning and developing retail properties leased under long-term net leases. At March 31, 2012, the portfolio included 1,486 properties totaling approximately 17.0 million square feet across 47 states, with 98% of properties leased or operated and a weighted-average remaining lease term of 12 years.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Continuing-operations revenue | $78.7 million | $61.5 million | 27.8% increase |
| Rental income | $74.4 million | $57.9 million | 28.5% increase |
| Earnings from operations | $48.5 million | $37.7 million | 28.7% increase |
| Operating margin | 61.6% | 61.2% | Broadly stable |
| Net earnings attributable to NNN | $29.8 million | $20.8 million | 43.3% increase |
| Net earnings attributable to common stockholders | $24.8 million | $19.1 million | 29.4% increase |
| Basic/diluted earnings per share | $0.23/$0.23 | $0.23/$0.23 | Reported EPS unchanged |
| Operating cash flow | $50.6 million | $48.9 million | 3.5% increase |
Depreciation and amortization was $18.1 million, general and administrative expense was $7.6 million, real estate expense was $4.6 million, and interest expense was $19.6 million. Earnings from discontinued operations attributable to NNN were $0.5 million, including a $0.3 million gain on property dispositions. The filing does not provide a clear value for funds from operations or adjusted funds from operations.
Balance sheet and liquidity: Total assets were $3.61 billion, compared with $3.43 billion at December 31, 2011. Cash and cash equivalents were $3.0 million. Total outstanding debt was $1.30 billion, down from $1.34 billion at year-end. Debt consisted primarily of $895.1 million of non-convertible notes, $356.4 million of convertible notes, $22.9 million of mortgages and $26.2 million drawn on the revolving credit facility. The $450 million unsecured facility had $423.8 million available, excluding $3.9 million of undrawn letters of credit, and matures in May 2015 with an extension option to May 2016.
Cash used in investing activities was $190.7 million, principally reflecting $191.7 million of real estate additions. Financing activities provided $141.0 million, including $277.6 million of net proceeds from Series D preferred stock and $37.7 million from the dividend reinvestment plan, partly offset by $39.4 million of net revolver repayments, $92.0 million used to redeem Series C preferred stock and $40.4 million of common dividends. The company funded approximately $197.98 million of acquisitions involving 67 properties during the quarter.
Material changes versus the prior comparable period
- Property count increased to 1,486 from 1,223 at March 31, 2011, while gross leasable area increased to 17.0 million square feet from 13.3 million.
- Q1 2012 acquisitions increased substantially to 67 properties and $198.0 million invested, compared with 29 properties and $55.1 million in Q1 2011.
- Revenue and operating earnings increased primarily because of properties acquired during 2011 and Q1 2012.
- Interest expense rose 11.2%, mainly reflecting the $300 million of notes issued in July 2011, partly offset by lower average revolving-credit borrowings.
- Operating cash flow increased only modestly despite higher earnings, while investing cash outflows increased materially due to acquisition activity.
- NNN issued $287.5 million of Series D preferred stock at a 6.625% rate and redeemed all $92.0 million of Series C preferred stock in March 2012.
- The previously reported inventory-assets segment was no longer significant; operations are now reported in one business segment.
- No commercial mortgage residual-interest impairment was recorded in Q1 2012, compared with a $0.1 million impairment in Q1 2011.
Outlook, risks and unusual items
Management expects rental income growth to come primarily from additional property acquisitions and contractual rent increases. Management stated that operating cash flow, capital resources, the revolving facility, debt and equity offerings, and asset dispositions are expected to fund obligations and planned investments. A common dividend of $0.385 per share was declared in April 2012, payable in May 2012.
NNN had commitments to fund approximately $61.0 million of remaining construction and improvement costs for 60 properties. It owned 37 vacant, unleased properties, representing less than 3% of the portfolio. Less than 1% of gross leasable area was leased to three tenants that had filed Chapter 11 petitions as of April 27, 2012. Management stated that the company was in compliance with its debt covenants and had no derivatives outstanding at March 31, 2012.
Principal risks include tenant defaults or bankruptcies, property vacancies, geographic and tenant-line concentrations, interest-rate and refinancing risk, limited real-estate liquidity, dependence on access to debt and equity capital, potential impairment of commercial mortgage residual interests, environmental and uninsured losses, covenant breaches, competition, and the requirement to maintain REIT qualification and satisfy distribution requirements. The filing states that there were no material changes to the risk factors reported in the 2011 Form 10-K and no reportable subsequent events.
Investor verification points
- Reconcile acquisition spending, property additions and the resulting increase in rental income and net real estate assets.
- Assess debt maturities, particularly the $50 million of 7.75% notes due in June 2012, and the company’s refinancing plan.
- Evaluate recurring cash generation and dividend coverage; the filing does not present FFO or AFFO.
- Monitor occupancy, tenant concentration, convenience-store and restaurant exposure, and bankruptcy-related lease decisions.
- Review the effect of the Series D preferred issuance and Series C redemption on common-stockholder economics and future dividend obligations.
- Evaluate the remaining $61.0 million construction commitment and the company’s reliance on capital markets to fund acquisitions and obligations.
- Review valuation assumptions for the $15.0 million of Level 3 commercial mortgage residual interests.