NNN REIT, Inc. (National Retail Properties, Inc.) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015; comparative periods ended September 30, 2014. The filing identifies the registrant as National Retail Properties, Inc., a Maryland REIT focused primarily on acquiring, owning and developing retail properties leased under long-term net leases.
Business Context and Portfolio
- Owned 2,231 properties totaling approximately 24.5 million square feet across 47 states at September 30, 2015.
- Approximately 99% of properties were leased; weighted average remaining lease term was 11.5 years.
- Acquired 190 properties during the first nine months for total investment of $566.8 million at a 7.2% initial cash yield, compared with 202 properties and $531.5 million at a 7.4% yield in the prior-year period.
- Sold 14 properties for net proceeds of $33.6 million and a $9.1 million gain during the first nine months.
Financial Performance and Key Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenues | $123.1 million | $109.9 million | $356.5 million | $319.5 million |
| Revenue growth | 12.1% | — | 11.6% | — |
| Earnings from operations | $76.1 million | $67.4 million | $213.1 million | $194.5 million |
| Operating margin | 61.8% | 61.3% | 59.8% | 60.9% |
| Net earnings attributable to NNN | $55.2 million | $47.9 million | $155.4 million | $136.8 million |
| Net earnings attributable to common stockholders | $46.3 million | $39.1 million | $128.8 million | $110.3 million |
| Diluted earnings per share | $0.34 | $0.31 | $0.96 | $0.89 |
| Net cash from operating activities | — | — | $278.0 million | $231.8 million |
- Rental income increased 12.6% in the quarter and 12.3% for the first nine months, primarily from property acquisitions and contractual rent increases. The quarter included $1.95 million of rental revenue from a settlement with a former tenant.
- Depreciation and amortization increased 12.9% in the quarter and 16.5% year to date, reflecting portfolio growth.
- Year-to-date real estate impairment losses increased to $3.7 million from $0.6 million in the prior-year period. Q3 2015 included a net impairment recovery of $3,000.
- Interest expense increased 2.8% year to date to $65.5 million, while real estate acquisition costs declined 24.7% to $0.9 million.
Balance Sheet, Debt and Liquidity
- Total assets were $5.35 billion at September 30, 2015, up from $4.93 billion at December 31, 2014. Real estate accounted for using the operating method was $5.16 billion.
- Total outstanding debt was $2.02 billion, compared with $1.74 billion at year-end 2014. Debt consisted of $282.4 million under the revolving credit facility, $24.5 million of mortgages and $1.72 billion of notes payable.
- The $650 million revolving credit facility had $282.4 million outstanding and $367.6 million available at quarter-end. It matures in January 2019, with an option to extend to January 2020, and had a nine-month weighted average interest rate of 1.1%.
- Cash and cash equivalents declined to $2.6 million from $10.6 million at December 31, 2014.
- Operating cash flow of $278.0 million funded dividends, while investing cash flow was negative $495.4 million, principally due to property acquisitions. Financing activities provided $209.4 million.
- Common stock dividends paid during the first nine months were $169.7 million, or $1.275 per share, compared with $151.3 million, or $1.230 per share, in the prior-year period. A $0.435 per-share dividend was declared in October 2015.
Material Changes and Unusual Items
- Portfolio growth increased property count to 2,231 from 2,054 at December 31, 2014 and 2,038 at September 30, 2014.
- NNN issued 2.9 million shares under its 2015 at-the-market program for net proceeds of $111.7 million and issued 147,614 shares through its dividend reinvestment plan for $5.4 million.
- Four forward-starting swaps with a total notional amount of $300 million were outstanding at September 30, 2015 and had a $10.3 million liability recorded in other liabilities and accumulated other comprehensive income.
- After quarter-end, NNN issued $400 million of 4.00% senior unsecured notes due November 2025 at a 4.029% effective yield. Net proceeds were approximately $395.3 million, intended primarily to repay credit-facility borrowings and fund acquisitions. The related swaps were terminated, creating a $13.4 million amount deferred in other comprehensive income for future amortization to interest expense.
- Construction commitments covered 35 properties with total commitments of $165.8 million, of which $93.5 million had been funded and $72.3 million remained.
Outlook, Commentary and Risks
- Management expects future rental income growth to come primarily from additional acquisitions and contractual rent increases. The filing does not provide a specific quantitative earnings or acquisition forecast.
- Management expects operating cash flow, existing capital resources, the credit facility, debt and equity financing, and property dispositions to fund obligations and investment activity.
- Key risks include tenant defaults or bankruptcies, property vacancies, concentration in convenience stores and restaurant tenants, geographic concentration in the South and Southeast, interest-rate increases, debt covenants and refinancing risk, access to capital, real estate valuation risk, impairment of commercial mortgage residual interests, environmental liabilities and the requirement to maintain REIT qualification.
- NNN had 21 vacant, unleased properties, approximately 1% of the portfolio, at September 30, 2015.
- Management concluded that disclosure controls and procedures were effective, with no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Investor Verification Checklist
- Verify the effect of the October 2015 $400 million note issuance and credit-facility repayment on leverage, interest expense and liquidity.
- Assess acquisition volume, cash yields and underwriting discipline as the portfolio expands.
- Monitor tenant, industry and geographic concentration, particularly convenience stores and restaurants.
- Review impairment trends, residual-interest valuations and assumptions regarding loan losses, prepayments and interest rates.
- Compare recurring operating cash flow and funds available for distribution with common and preferred dividend obligations.
- Review debt maturities, variable-rate exposure, covenant compliance and the impact of future interest-rate changes.