National Retail Properties, Inc. (NNN) — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. The filing presents unaudited interim results and should be read with the 2018 Form 10-K. NNN is a fully integrated REIT focused primarily on acquiring, owning, developing and investing in retail properties leased under long-term net leases.
Business context and portfolio
- At June 30, 2019, NNN owned 3,043 properties totaling approximately 32.1 million square feet across 48 states.
- Approximately 99% of properties were leased, with a weighted-average remaining lease term of 11.4 years.
- The largest annual base-rent concentrations were convenience stores at 17.7%, full-service restaurants at 11.1%, automotive service at 9.1% and limited-service restaurants at 8.8%.
- During the six months, NNN acquired 104 properties for total investment of $392.8 million, with an initial cash yield of 6.9%.
Financial performance and key metrics
| Metric | Quarter ended June 30, 2019 | Quarter ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Total revenues | $164.8 million | $155.5 million | $328.5 million | $308.4 million |
| Rental income | $164.6 million | $155.2 million | $327.6 million | $307.9 million |
| Earnings from operations | $108.5 million | $97.7 million | $216.6 million | $227.5 million |
| Net earnings attributable to NNN | $78.7 million | $70.6 million | $158.7 million | $173.9 million |
| Net earnings attributable to common stockholders | $70.1 million | $62.0 million | $141.5 million | $156.7 million |
| Basic and diluted earnings per share | $0.43 | $0.40 | $0.87 | $1.02 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $235.3 million | $228.2 million |
- Quarterly operating margin was approximately 65.8%, based on earnings from operations divided by total revenues. The filing does not provide a comparable non-GAAP margin or FFO measure in the supplied text.
- Quarterly common-stockholder earnings margin was approximately 42.5%; six-month margin was approximately 43.1%.
- At June 30, 2019, total assets were $7.25 billion and total equity was $4.22 billion.
- Cash and cash equivalents were $2.2 million, compared with $114.3 million at December 31, 2018.
- Total outstanding debt was $2.92 billion, comprising $63.2 million drawn on the revolving credit facility, $12.4 million of mortgages and $2.84 billion of notes payable.
- The $900 million unsecured revolving credit facility had $836.8 million available at June 30, 2019, and matures in January 2022, with a potential one-year extension.
Material changes versus the prior comparable period
- Second-quarter revenue increased 6.0%, primarily from property acquisitions and contractual rent increases. Six-month revenue increased 6.5%.
- Second-quarter net earnings attributable to NNN increased 11.5%, while six-month earnings declined 8.7%, largely because the prior-year period included substantially higher gains on property dispositions.
- Six-month earnings from operations declined 4.8%, despite higher rental income, reflecting increased depreciation, real estate expenses and impairment losses.
- Interest expense increased 10.0% in the quarter and 11.3% for the six months, reflecting additional long-term debt and higher borrowing costs, partly offset by lower average revolving-credit borrowings.
- Real estate impairment losses increased to $7.2 million in the quarter and $10.4 million for the six months, compared with $3.8 million and $6.1 million, respectively, in the prior-year periods.
- Property dispositions generated $61.4 million of net proceeds and $23.4 million of gains for the six months, compared with $83.5 million of proceeds and $42.7 million of gains in 2018.
- Operating cash flow increased 3.1% to $235.3 million, while investing cash use increased to $317.8 million, primarily due to higher real estate additions.
- Common dividends increased to $0.50 per share for the quarter and $1.00 per share for the six months, versus $0.475 and $0.95, respectively, in 2018.
Guidance, outlook, risks and unusual items
- Management expects revenue growth to continue from additional acquisitions and contractual rent increases, but the filing does not provide specific annual earnings or acquisition guidance.
- Management stated that operating cash flow has been sufficient to fund distributions and expects obligations to be met through operating cash flow, existing resources, the credit facility, debt or equity financing and property dispositions.
- NNN had committed $75.2 million for construction on 16 properties; $32.4 million had been funded, leaving $42.8 million of remaining commitments.
- NNN reported 37 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.
- Key risks include tenant defaults or bankruptcies, concentration in convenience-store and restaurant tenants and in the South and Southeast, interest-rate movements, access to debt and equity capital, property impairment, vacancies, illiquidity of real estate, environmental liabilities, competition, cybersecurity and REIT qualification requirements.
- NNN adopted ASC 842 lease accounting on January 1, 2019. The adoption recorded approximately $7.7 million of right-of-use assets and $10.2 million of operating lease liabilities and did not materially affect financial position, results of operations or cash flows.
- During the quarter, NNN entered into a $90 million forward-starting interest-rate swap. In July 2019, it entered into an additional $110 million forward-starting swap.
- In July 2019, NNN declared a common dividend of $0.515 per share, payable in August 2019.
- Management reported that disclosure controls and procedures were effective as of June 30, 2019, and reported no material changes in internal control other than implementation-related changes for ASC 842.
Important facts for investors to verify
- Whether acquisition activity, tenant occupancy and rent growth support continued revenue growth without further increases in impairment losses or property expenses.
- The sustainability of common and preferred dividends relative to recurring operating cash flow and any applicable REIT distribution requirements.
- Debt maturities, refinancing needs, interest-rate exposure and compliance with debt covenants, particularly as the revolving facility approaches its 2022 maturity.
- Tenant and geographic concentration, including exposure to convenience stores, restaurants, automotive tenants and the South and Southeast markets.
- The impact of vacancies, tenant bankruptcies and lease renewals on cash collections and property values.
- The filing’s non-GAAP operating measures, including funds from operations and adjusted funds from operations, which are not included in the supplied text.