National Retail Properties, Inc. — 2010 Form 10-K Summary
Business context and reporting period
Filed February 24, 2011, for the fiscal year ended December 31, 2010. National Retail Properties, Inc. is an integrated REIT focused primarily on single-tenant retail properties leased under long-term net leases. Operations comprise Investment Assets and Inventory Assets.
- Investment portfolio: 1,195 properties totaling approximately 12.97 million square feet across 46 states.
- Approximately 97% of investment properties were leased or operated; weighted-average remaining lease term was approximately 12 years.
- Inventory portfolio: 17 properties, including 10 completed projects and seven land parcels.
- No tenant represented at least 10% of rental and earned income; the five largest tenants represented approximately 29% of annual base rent.
Financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Gross revenues | $237.1 million | $243.9 million | Decrease |
| Continuing-operations revenues | $229.1 million | $230.8 million | (0.8%) |
| Rental income | $215.1 million | $213.7 million | 0.7% increase |
| Earnings from continuing operations | $71.2 million | $56.1 million | Increase |
| Net earnings attributable to NNN | $73.0 million | $54.8 million | Increase |
| Net earnings per diluted common share | $0.80 | $0.60 | Increase |
| Diluted FFO available to common stockholders | $108.3 million | $89.5 million | 21.0% increase |
| Cash flow from operating activities | $187.9 million | $149.5 million | 25.7% increase |
| Cash flow from investing activities | $(220.3) million | $(28.1) million | Higher investment |
| Cash flow from financing activities | $19.2 million | $(108.8) million | Improved |
| Year-end cash and equivalents | $2.0 million | $15.2 million | Decrease |
| Total assets | $2.714 billion | $2.591 billion | Increase |
| Total debt | $1.134 billion | $987.3 million | Increase |
| Total stockholders’ equity | $1.527 billion | $1.564 billion | Decrease |
Continuing-operations earnings margin was approximately 31.1% in 2010 versus 24.3% in 2009, based on reported continuing-operations revenues. Operating expenses declined to $96.1 million from $119.3 million, primarily because 2010 had no real estate impairment charge compared with $28.9 million in 2009. Interest expense increased to $65.2 million from $62.2 million.
- Common dividends declared: $125.4 million, or $1.51 per share, compared with $120.3 million, or $1.50 per share, in 2009.
- Series C preferred dividends: $6.8 million, or $1.84375 per depositary share.
- Acquisitions: 194 investment properties for approximately $256.1 million, compared with eight properties for $36.3 million in 2009.
- Investment-property dispositions: 14 properties generating $16.0 million of net proceeds and a $1.1 million gain.
- Commercial mortgage residual interests had a fair value of $15.9 million, down from $20.2 million, after a $4.0 million other-than-temporary valuation impairment.
Debt and liquidity
- Total liabilities were $1.185 billion; liabilities represented approximately 40% of total gross assets before accumulated depreciation.
- Debt-to-total-market-capitalization was approximately 34%; secured debt was approximately 2% of total gross assets.
- The $400 million unsecured revolving credit facility had $161 million outstanding and $239 million available at year-end, excluding $647,000 of undrawn letters of credit. It matures in November 2012, with an option to extend to November 2013.
- Debt consisted principally of $948.4 million of unsecured notes and $24.3 million of mortgage debt, in addition to the revolving facility.
- Contractual cash obligations totaled $1.151 billion, including $986.0 million of long-term debt, $161.0 million under the credit facility and $3.7 million of operating leases.
- NNN had $68.7 million of construction commitments for 28 investment properties; $50.2 million had been funded and $18.6 million remained.
- Management reported compliance with debt covenants and maintained investment-grade senior unsecured debt ratings.
Material changes versus the prior comparable period
- Portfolio growth accelerated substantially, with 194 investment-property acquisitions in 2010 versus eight in 2009; year-end investment properties increased from 1,015 to 1,195.
- Occupancy improved to 97% from 96%, while the average remaining lease term remained approximately 12 years.
- Net earnings, FFO and operating cash flow increased materially, despite relatively flat continuing-operations revenue.
- Operating expenses declined by 19.4%, primarily because 2009 included $28.9 million of real estate impairments and $731,000 of restructuring costs; neither item recurred in the same form in 2010.
- Interest expense increased as credit-facility borrowings and the weighted-average credit-facility rate rose; the rate increased from 1.19% in 2009 to 3.80% in 2010.
- Debt increased by approximately $146.3 million, primarily reflecting $161 million outstanding under the new revolving credit facility at year-end.
- Mortgages and notes receivable declined to $30.3 million from $42.0 million, partly because of loan repayments and defaults.
- NNN acquired the remaining 21.1% noncontrolling interest in OAMI for $1.6 million, making OAMI wholly owned.
Outlook, risks, contingencies and unusual items
Management expects future rental-income growth primarily from additional property acquisitions and contractual rent increases. It expects to fund future investments through operating cash flow, the revolving facility, long-term debt, common or preferred equity, and asset dispositions. The filing does not provide a specific earnings, FFO or acquisition-volume forecast.
- Economic weakness, retail-sector stress, capital-market disruption, higher interest rates and reduced property values could affect tenant credit, occupancy, financing access and asset values.
- Five retail lines of trade generated approximately 53% of annual base rent, five tenants generated approximately 29%, and five states generated approximately 47%; Texas represented 18.7% and Florida 10.0%.
- There were 37 vacant, unleased investment properties, approximately 3% of the investment portfolio.
- As of January 31, 2011, approximately 1% of gross leasable area was leased to four tenants in Chapter 11 proceedings. Subsequent bankruptcy developments included Borders rejecting three of five leases and retaining the right to reject two more, and Robb & Stucky filing for reorganization.
- NNN recorded a $5.625 million valuation reserve related to a loan to Majestic Principals. Majestic rejected four leases but assumed nine remaining leases and exited bankruptcy in December 2010.
- Fifty-nine investment properties were undergoing some level of environmental remediation as of February 15, 2011. Management generally expected sellers, tenants or adjacent landowners to bear the costs, but environmental liabilities may remain with NNN.
- Commercial mortgage residual values depend on unobservable assumptions, including discount rates, prepayment speeds, defaults and loss severity. The filing reports a $4.0 million 2010 impairment.
- NNN had no outstanding derivatives at December 31, 2010. A 1% increase in variable-rate debt costs would have increased 2010 interest expense by less than 1%.
- The company believes it qualified as a REIT for each year in the three-year period ended December 31, 2010. Loss of REIT status could result in substantial tax liability and restrict dividends.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded disclosure controls and internal controls were effective.
Important facts for investors to verify
- Reconcile the increase in FFO and earnings to relatively flat continuing-operations revenue and the reduction in impairment charges.
- Review the maturity and refinancing exposure of the $1.134 billion debt balance, particularly 2011–2014 maturities and the credit facility’s November 2012 maturity.
- Assess tenant concentration, bankruptcy exposure, vacancy trends and the ability to re-lease properties at comparable rents.
- Evaluate the sustainability of the $1.51 common dividend against FFO, operating cash flow, capital commitments and debt service.
- Review the $5.625 million loan reserve, the $4.0 million residual-interest impairment and the valuation assumptions supporting the remaining $15.9 million residual balance.
- Quantify potential environmental remediation costs and confirm the scope and limitations of related insurance and indemnities.
- Confirm the effect of the 2010 property acquisitions on same-store operating performance, leverage and future capital requirements.