NNN 2019 Third-Quarter Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. The filing identifies the registrant as National Retail Properties, Inc. (NYSE: NNN), a fully integrated Maryland REIT focused primarily on owning and developing retail properties leased under long-term net leases.
Business Context and Portfolio
- Owned 3,057 properties totaling approximately 32.2 million square feet across 48 states.
- Approximately 99% of properties were leased; weighted average remaining lease term was 11.2 years.
- Largest annual base-rent concentrations were convenience stores at 17.5%, full-service restaurants at 11.3%, automotive service at 9.3%, and limited-service restaurants at 8.8%.
- Acquired 131 properties for $509.6 million during the first nine months, at an initial cash yield of 6.9%.
- Sold 43 properties for net proceeds of $94.8 million and recognized gains of $25.5 million during the first nine months.
Financial Results and Key Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenues | $168.6 million | $155.3 million | $497.1 million | $463.7 million |
| Rental income | $168.2 million | $154.7 million | $495.8 million | $462.6 million |
| Earnings from operations | $96.2 million | $109.0 million | $312.8 million | $336.6 million |
| Net earnings attributable to NNN | $66.7 million | $82.0 million | $225.4 million | $255.9 million |
| Net earnings attributable to common stockholders | $58.1 million | $73.5 million | $199.6 million | $230.1 million |
| Diluted earnings per share | $0.35 | $0.47 | $1.22 | $1.48 |
| Operating cash flow | Not separately provided | Not separately provided | $399.0 million | $365.5 million |
- Q3 revenue increased 8.5%; nine-month revenue increased 7.2%, primarily from property acquisitions and contractual rent increases.
- Q3 operating margin was approximately 57.1%, compared with 70.2% in the prior-year quarter. The decline primarily reflected higher depreciation and impairment losses and lower disposition gains.
- Q3 net margin was approximately 39.5%, compared with 52.8% in Q3 2018. Nine-month net earnings declined 11.8% despite revenue growth.
- Real estate impairment losses increased to $10.7 million in Q3 from $3.6 million and to $21.1 million for the nine months from $9.7 million.
- Interest expense increased 10.1% in Q3 and 10.9% for the nine months, reflecting the company’s debt structure and prior debt issuances.
Balance Sheet, Debt and Liquidity
- Total assets were $7.63 billion at September 30, 2019, compared with $7.10 billion at December 31, 2018.
- Total debt was $2.85 billion, consisting primarily of $2.84 billion of notes payable; debt was substantially unchanged from year-end 2018.
- Cash and cash equivalents increased to $353.7 million from $114.3 million at December 31, 2018.
- The $900 million unsecured revolving credit facility had no outstanding balance and was fully available at quarter-end. It matures in January 2022, with an option to extend to January 2023.
- Operating cash flow of $399.0 million exceeded cash dividends paid to common and preferred stockholders of $271.3 million during the first nine months.
- Investing activities used $409.0 million, principally for $505.7 million of real estate additions, partly offset by property-sale proceeds.
- Financing activities provided $249.4 million, including $539.3 million of common-stock issuance proceeds.
Material Changes Versus the Prior Comparable Period
- Property count increased to 3,057 from 2,847 at September 30, 2018; gross leasable area increased to 32.2 million square feet from 29.7 million.
- Acquisition volume was similar by property count but substantially larger by square footage: 2.65 million square feet acquired in the first nine months of 2019 versus 1.27 million in 2018.
- Disposition gains declined materially to $25.5 million from $57.1 million for the first nine months.
- Operating expenses increased 13.9% for the first nine months, led by higher depreciation, real estate expenses, and impairment losses.
- Common dividends increased to $0.515 per share in Q3 2019 from $0.500 per share.
- In September 2019, NNN issued 7.0 million common shares at $56.50 per share and received net proceeds of $379.4 million.
- Effective January 1, 2019, NNN adopted ASC 842 lease accounting. Management stated that adoption did not materially affect financial position, results of operations, or cash flows.
Guidance, Outlook, Risks and Unusual Items
- Management expects future revenue growth primarily from additional acquisitions and contractual rent increases; no specific quantitative earnings or revenue guidance was provided.
- NNN had 28 vacant properties, approximately 1% of the portfolio. Less than 1% of the portfolio was leased to a tenant that had filed for Chapter 11 bankruptcy.
- Construction commitments covered 12 properties with a total commitment of $53.7 million, of which $28.8 million remained unfunded.
- Contractual cash obligations totaled $3.92 billion, including $2.89 billion of debt principal and $1.02 billion of stated debt interest.
- NNN had three forward-starting interest-rate swaps with a total notional amount of $200 million. The swaps had a $11.7 million fair-value liability at September 30, 2019.
- Key risks include tenant defaults or bankruptcies, property vacancies, geographic and industry concentration, interest-rate changes, access to capital, real estate valuation declines, environmental liabilities, debt covenants, cybersecurity, and maintenance of REIT qualification.
- After quarter-end, NNN redeemed all 11.5 million depositary shares representing its 5.700% Series E Preferred Stock on October 5, 2019. The company expects to record a $9.9 million preferred-stock redemption charge in Q4 2019.
- Management reported effective disclosure controls and no material changes in internal control other than implementation-related changes associated with ASC 842.
Most Important Facts for Investors to Verify
- Whether acquisition-driven revenue growth can offset higher depreciation, interest expense, impairment charges, and lower disposition gains.
- Tenant credit quality, vacancy trends, and exposure to convenience-store and restaurant tenants.
- Debt maturities, refinancing requirements, interest-rate sensitivity, and compliance with debt covenants.
- The effect of the Series E preferred-stock redemption, including the expected $9.9 million charge and reduced preferred-dividend burden.
- Future acquisition yields, disposition proceeds, remaining construction commitments, and the sustainability of common dividends.
- Non-GAAP REIT measures such as funds from operations and adjusted funds from operations, which are not provided in the supplied filing text and should be reviewed separately.