NNN REIT, Inc. (National Retail Properties, Inc.) — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended September 30, 2020. The filing identifies the registrant as National Retail Properties, Inc., a fully integrated REIT that owns and develops primarily retail properties leased under long-term net leases.
- Portfolio: 3,114 properties, approximately 32.4 million square feet, across 48 states.
- Occupancy: approximately 98%; weighted average remaining lease term of 10.7 years.
- Largest annual base-rent categories: convenience stores 18.2%, full-service restaurants 10.5%, automotive service 10.2%, limited-service restaurants 8.8%, and family entertainment centers 6.7%.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Total revenues | $158.6 million | $168.6 million | (5.9%) |
| Rental income | $157.9 million | $168.2 million | (6.2%) |
| Earnings from operations | $87.9 million | $96.1 million | (8.6%) |
| Net earnings attributable to NNN | $56.1 million | $66.7 million | (15.9%) |
| Net earnings attributable to common stockholders | $51.6 million | $58.1 million | (11.2%) |
| Diluted EPS | $0.30 | $0.35 | (14.3%) |
Q3 net margin was approximately 35.3%, compared with 39.6% in the prior-year quarter. Earnings from operations represented approximately 55.4% of revenue, compared with 57.0% in Q3 2019.
| Metric | Nine months 2020 | Nine months 2019 | Change |
|---|---|---|---|
| Total revenues | $497.4 million | $497.1 million | 0.1% |
| Net cash provided by operating activities | $348.8 million | $399.0 million | (12.6%) |
| Net earnings attributable to NNN | $167.5 million | $225.4 million | (25.7%) |
| Net earnings attributable to common stockholders | $154.1 million | $199.6 million | (22.9%) |
| Diluted EPS | $0.89 | $1.22 | (27.0%) |
Nine-month net margin was approximately 33.7%, compared with 45.4% in 2019. Cash flow from operations covered the $279.8 million of common and Series F preferred dividends paid during the period.
Balance sheet, debt and liquidity
- Total assets were $7.63 billion at September 30, 2020, versus $7.43 billion at December 31, 2019.
- Cash and cash equivalents were $294.9 million, compared with $1.1 million at year-end 2019.
- Total debt was $3.22 billion, up from $2.99 billion; notes payable represented 99.6% of total debt.
- The $900 million unsecured revolving credit facility had no outstanding balance and was fully available, subject to facility terms. NNN was in compliance with its financial covenants.
- In March 2020, NNN issued $400 million of 2.500% notes due 2030 and $300 million of 3.100% notes due 2050, and redeemed $325 million of 3.800% notes due 2022, incurring a $16.7 million early-extinguishment loss.
- Stockholders’ equity was $4.29 billion, down from $4.33 billion at December 31, 2019.
Material changes versus the prior comparable period
- COVID-19 materially affected collections and revenue recognition. NNN wrote off $14.8 million of receivables and related accrued rent and recognized $2.2 million of Q3 revenue on a cash basis from certain tenants.
- Accrued rental income, net of allowance, increased to $61.8 million from $28.9 million at December 31, 2019; the allowance increased to $8.0 million from $1.8 million.
- During the nine months, real estate acquisitions fell to 21 properties and $78.0 million invested, from 131 properties and $509.6 million in 2019. Management materially curtailed investment activity.
- Real estate impairment losses increased to $33.1 million for the nine months, from $21.1 million in 2019, although Q3 impairment losses declined to $5.7 million from $10.7 million.
- Interest expense increased 8.5% for the nine months to $97.3 million, reflecting the new notes and higher average credit-facility borrowings.
- Common dividends increased to $0.520 per share in Q3 2020 from $0.515 per share in Q3 2019. Series E preferred stock was redeemed in October 2019; Series F preferred dividends remained $0.325 per depositary share for the quarter.
Guidance, outlook, risks and unusual items
- No formal earnings or acquisition guidance is provided in the supplied filing.
- As of October 28, 2020, NNN had collected approximately 90% of rent originally due for Q3 and 94% of rent originally due in October 2020.
- Rent deferral amendments covered approximately 6% of annual rent originally due for 2020. Approximately 66% of deferred rent was expected to be paid by June 30, 2021, and 89% by December 31, 2021.
- As of September 30, 2020, 51 properties were vacant, representing approximately 2% of the portfolio. As of October 28, 2020, properties leased to five Chapter 11 tenants represented approximately 3% of total properties and gross leasable area.
- Management expected cash, the undrawn credit facility and operating cash flow to be sufficient for near-term funding needs, while acknowledging material uncertainty from COVID-19 and the broader economic downturn.
- Seven construction projects had total commitments of $47.4 million, of which $11.0 million remained unfunded.
- Contractual obligations totaled $4.53 billion, including $3.26 billion of debt principal and $1.25 billion of stated debt interest.
- Key risks include tenant defaults or bankruptcies, reduced collections, property vacancies, impairment, concentration in retail and certain geographic regions, access to capital, debt covenant compliance, interest-rate and LIBOR-transition risk, and the ability to maintain dividends and REIT qualification.
Important facts for investors to verify
- Whether rent collections and deferred-rent repayments improved after October 28, 2020, and whether additional tenants moved to cash-basis accounting.
- The recoverability of the $61.8 million accrued-rent balance and the adequacy of related allowances.
- Exposure to tenants in bankruptcy, especially theaters, restaurants, entertainment, and health-and-fitness operators.
- Future impairment charges, vacancy trends, and the effect of curtailed acquisitions on long-term portfolio growth.
- Debt maturities, refinancing needs, credit-facility availability, covenant headroom, and the impact of interest-rate or LIBOR changes.
- The sustainability of common and preferred dividends relative to recurring cash flow, particularly if collections remain below contractual rent.