Business Context and Reporting Period
Company: Commercial Net Lease Realty, Inc. (NNN REIT, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1998
Business Overview: A fully integrated, self-administered Real Estate Investment Trust (REIT) that acquires, owns, develops, and manages freestanding properties leased to major retail businesses under long-term commercial net leases. As of September 30, 1998, the Company owned 263 properties (254 wholly-owned), substantially all leased to major retailers.
Key Financial Metrics
| Metric | Quarter Ended Sep 30, 1998 | Nine Months Ended Sep 30, 1998 | Nine Months Ended Sep 30, 1997 |
|---|---|---|---|
| Total Revenues | $15,821,000 | $46,447,000 | $36,373,000 |
| Net Earnings | $9,951,000 | $23,854,000 | $21,575,000 |
| Net Earnings Per Share (Diluted) | $0.34 | $0.82 | $0.93 |
| Net Cash from Operating Activities | N/A | $28,835,000 | $24,012,000 |
| Net Cash Used in Investing Activities | N/A | ($67,663,000) | ($127,657,000) |
| Net Cash from Financing Activities | N/A | $42,492,000 | $107,557,000 |
| Cash and Cash Equivalents (End of Period) | $5,824,000 | $5,824,000 | $5,322,000 |
| Total Liabilities | $229,822,000 | $229,822,000 | $174,870,000 |
| Stockholders' Equity | $382,276,000 | $382,276,000 | $362,144,000 |
Debt Profile:
- Line of Credit: $68.5 million outstanding (of $200 million facility); $131.5 million available.
- Notes Payable: $99.7 million (7.125% Notes due 2008 issued in March 1998).
- Mortgages Payable: $55.5 million.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 19.1% for the quarter and 27.7% for the nine-month period compared to 1997. This is primarily driven by the full-year contribution of properties acquired in 1997 and the acquisition of 23 new properties plus 8 completed buildings in the first nine months of 1998.
- Expense Increase: Operating expenses for the nine months ended September 30, 1998, were significantly higher than the prior year due to a one-time charge of $4.692 million related to the acquisition of the Company's advisor (CNL Realty Advisors, Inc.) in January 1998. Excluding this charge, operating expenses were $10.3 million (22.1% of gross revenues).
- EPS Decline: Diluted EPS for the nine months decreased from $0.93 in 1997 to $0.82 in 1998. This decline is attributed to the one-time advisor acquisition charge and increased share count, despite higher net earnings.
- Capital Structure: The Company issued $100 million in senior unsecured notes in March 1998 and raised approximately $17 million in equity. Proceeds were used to pay down the revolving credit facility.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook:
- Management expects rental income to increase as newly acquired properties (23 properties and 8 buildings) contribute full fiscal quarters in future periods.
- The Company plans to reinvest proceeds from property sales (five properties sold in September 1998 for a net gain of $1.288 million) into additional acquisitions.
- Capital resources, including cash on hand and borrowing capacity, are deemed sufficient for foreseeable liquidity needs.
Risks and Contingencies:
- Tenant Bankruptcy: HomePlace filed for Chapter 11 bankruptcy in January 1998 and rejected two leases in May 1998. As of September 30, 1998, HomePlace leases three properties representing 4% of total rental income. One rejected property was re-leased to Waccamaw Corporation.
- Vacancies: Three properties were vacant due to the bankruptcy of former tenant Luria's. Two have been re-leased (Sports Authority and Ross Dress for Less).
- Year 2000 Compliance: The Company is addressing Y2K issues for IT and facility systems. Estimated remedial costs are under $50,000, with completion expected by September 30, 1999. No comprehensive contingency plan is currently in place as significant risks are not foreseen.
- Commitments: The Company has agreements to purchase 10 additional properties ($7.6 million) and is constructing buildings on 9 land parcels ($15.3 million total cost, $9.9 million incurred).
Unusual Items:
- Advisor Merger: The Company became self-administered effective January 1, 1998, following a merger with CNL Realty Advisors. This resulted in the elimination of advisory fees but the incurrence of a $4.692 million acquisition charge and ongoing personnel costs.
- Dividends: Dividends declared for the nine months ended September 30, 1998, totaled $26.57 million ($0.92 per share). A subsequent dividend of $0.31 per share was declared in October 1998.
Investor Verification Checklist
- Advisor Acquisition Impact: Verify the sustainability of earnings excluding the $4.7 million one-time charge related to the advisor merger.
- Tenant Concentration & Bankruptcy: Monitor the status of HomePlace (4% of rental income) and the stability of re-leased properties previously occupied by bankrupt tenants.
- Debt Maturity & Covenants: Review the terms of the $100 million Notes due 2008 and the $200 million Credit Facility expiring June 30, 1999.
- Construction Commitments: Assess the funding requirements for the $5.4 million remaining construction costs on 9 land parcels and the $7.6 million in pending property acquisitions.
- Year 2000 Readiness: Confirm the completion of Y2K remediation for critical systems by the stated deadline of September 30, 1999.