National Retail Properties, Inc. (NNN) — Fiscal 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; filed February 12, 2019. The filing is an annual report rather than a quarterly filing, although unaudited fourth-quarter data are included. NNN is a fully integrated REIT focused primarily on retail properties leased under long-term net leases.
Business Context and Portfolio
- Owned 2,969 properties totaling approximately 30.5 million square feet across 48 states.
- Approximately 98% of properties were leased, with a weighted-average remaining lease term of 11.5 years.
- No tenant represented 10% or more of rental income. The five largest tenants generated approximately 21.7% of annual base rent; the five largest states generated approximately 41.5%.
- Largest line-of-trade concentrations were convenience stores at 18.0% of annual base rent and full- and limited-service restaurants at 20.3% combined.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenues | $622.7 million | $584.9 million | 6.4% increase |
| Net earnings attributable to NNN | $292.4 million | $265.0 million | 10.4% increase |
| Net earnings available to common stockholders | $258.1 million | $217.2 million | 18.8% increase |
| Diluted earnings per share | $1.65 | $1.45 | 13.8% increase |
| Funds from operations available to common stockholders | $395.3 million | $359.2 million | 10.1% increase |
| Operating cash flow | $471.9 million | $421.6 million | 11.9% increase |
| Total assets | $7.10 billion | $6.56 billion | 8.3% increase |
| Total debt | $2.85 billion | $2.58 billion | 10.5% increase |
| Common dividends declared per share | $1.95 | $1.86 | 4.8% increase |
Operating expenses were $263.0 million, including $174.4 million of depreciation and amortization and $28.2 million of real-estate impairment losses. Earnings from operations were $424.8 million. Interest expense was $115.8 million, and the company recorded an $18.2 million loss on early extinguishment of debt.
Acquisition activity included 265 properties for total investment of $715.6 million at an initial cash yield of 6.8%. NNN sold 61 properties for net proceeds of $147.6 million and recognized a $65.1 million gain.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $114.3 million at December 31, 2018, compared with $1.4 million at year-end 2017.
- Cash flow from operations exceeded common and preferred dividends paid during the year.
- The $900.0 million unsecured revolving credit facility had no outstanding balance at year-end and was fully available, subject to covenants. The facility matures in January 2022, with an extension option to January 2023.
- Total debt to gross assets was approximately 35%, secured debt to gross assets was less than 1%, and total debt to market capitalization was approximately 25%.
- NNN issued $400.0 million of 4.300% notes due 2028 and $300.0 million of 4.800% notes due 2048. Proceeds helped fund acquisitions and redeem $300.0 million of 5.500% notes due 2021.
- Contractual cash obligations totaled approximately $4.00 billion, including $2.89 billion of long-term debt principal and $1.10 billion of stated interest. Approximately $325.7 million of principal was scheduled for 2022 and $359.9 million for 2023.
- NNN had $21.2 million of remaining commitments to fund construction on 19 properties.
Material Changes Versus Prior Period
- Revenue, net earnings, FFO and operating cash flow increased primarily from property acquisitions and rent increases under existing leases.
- The portfolio expanded from 2,764 to 2,969 properties and from approximately 29.1 million to 30.5 million square feet; occupancy remained approximately 98%.
- Real-estate impairment losses increased materially to $28.2 million from $5.0 million in 2017.
- Debt increased by approximately $271.2 million, while the revolving credit facility balance declined from $120.5 million to zero at year-end.
- NNN raised $328.2 million of net proceeds through its at-the-market common equity program and $13.3 million through its dividend reinvestment and stock purchase plan.
- The Series D preferred stock was no longer outstanding after its 2017 redemption; Series E and Series F preferred stock remained outstanding.
Outlook, Commentary, Risks and Unusual Items
- Management expects future rental-income growth to come primarily from additional acquisitions and contractual rent increases. No specific earnings or FFO guidance was provided in the filing text.
- The company expects short-term liquidity needs to be funded through operating cash flow and its revolving credit facility, with long-term needs funded through debt, equity, property sales and internally generated funds.
- Management cautions that financing may become unavailable or more expensive, and most debt is subject to balloon principal payments at maturity.
- NNN’s credit facility is indexed to USD-LIBOR; the filing discusses the potential transition to SOFR and related uncertainty.
- Key operating risks include tenant defaults or bankruptcies, e-commerce and changing consumer preferences, concentration in convenience-store and restaurant tenants, geographic concentration, interest-rate changes, property impairments, environmental liabilities and difficulty re-leasing vacant properties.
- NNN owned 52 vacant, un-leased properties at year-end, approximately 2% of the portfolio. Less than 1% of properties was leased to a tenant that had filed for Chapter 11 bankruptcy as of January 31, 2019.
- Seventy-four properties were subject to some level of environmental remediation or monitoring as of February 5, 2019. The company maintained environmental insurance scheduled to expire in August 2023.
- The filing reports an unqualified audit opinion and effective internal control over financial reporting. No material legal proceedings or reportable subsequent events were identified.
Most Important Facts for Investors to Verify
- Whether approximately 98% occupancy and the 11.5-year average lease term remain stable after 2018.
- Tenant credit quality and exposure to convenience stores, restaurants, automotive services and the five largest tenants.
- Upcoming debt maturities, refinancing requirements and compliance with leverage, coverage and distribution covenants.
- Whether the higher 2018 impairment charge indicates continuing weakness in specific properties or tenant categories.
- Progress on leasing or disposing of the 52 vacant properties and the 19 properties under construction commitments.
- The effect of interest-rate movements and the transition away from USD-LIBOR on borrowing costs.
- Coverage of common and preferred dividends by recurring operating cash flow and FFO, recognizing that FFO is a non-GAAP measure.