Business Context and Reporting Period
National Retail Properties, Inc. (NYSE: NNN), a fully integrated REIT, filed this Form 10-K for the fiscal year ended December 31, 2015. The company owns and develops primarily single-tenant retail properties leased under long-term net leases.
- Portfolio: 2,257 properties totaling approximately 24.964 million square feet across 47 states.
- Occupancy: approximately 99%; weighted average remaining lease term: 11.4 years.
- Top concentrations: convenience stores represented 16.7% of annual base rent; full- and limited-service restaurants represented 18.2%; Texas represented 19.7% and Florida 9.3%.
- No tenant accounted for 10% or more of rental income.
Financial Results and Key Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenues from continuing operations | $482.914 million | $434.847 million | 11.1% increase |
| Rental income | $465.282 million | $416.842 million | 11.6% increase |
| Earnings from continuing operations | $187.511 million | $179.777 million | 4.3% increase |
| Net earnings attributable to NNN | $197.836 million | $190.601 million | 3.8% increase |
| Diluted earnings per common share | $1.20 | $1.24 | Decrease |
| FFO available to common stockholders | $289.193 million | $260.902 million | 10.8% increase |
| Cash flow from operating activities | $341.095 million | $296.733 million | 15.0% increase |
| Total assets | $5.460 billion | $4.916 billion | 11.1% increase |
| Total debt | $1.976 billion | $1.730 billion | 14.2% increase |
| Common dividends per share | $1.710 | $1.650 | 3.6% increase |
Operating expenses from continuing operations were $194.259 million, including $134.798 million of depreciation and amortization, $3.970 million of real estate impairments, and $531,000 of commercial mortgage residual-interest impairment. Interest expense was $90.008 million. Earnings from continuing operations before income taxes were $197.829 million; income-tax expense was $10.318 million.
Cash flow was heavily investment-oriented: $644.544 million was used in investing activities, primarily for property additions, while $307.105 million was provided by financing activities. Year-end cash and cash equivalents were $14.260 million.
Material Changes Versus the Prior Comparable Period
- NNN acquired 221 properties in 2015 for total investment of $726.303 million, compared with 221 properties and $618.145 million in 2014. The 2015 initial cash yield was 7.2%, versus 7.5% in 2014.
- NNN sold 19 properties for net proceeds of $39.116 million and recognized a gain of $10.450 million, compared with 27 properties, $55.378 million of proceeds, and an $11.424 million gain in 2014.
- Portfolio size increased from 2,054 to 2,257 properties and from 22.479 million to 24.964 million square feet. Occupancy remained approximately 99%, while the weighted average lease term declined from 11.6 to 11.4 years.
- Operating expenses increased 15.2%, driven mainly by higher depreciation and amortization and increased impairment charges.
- Debt increased by approximately $246.1 million. NNN issued $400 million of 4.0% notes due 2025 and repaid $150 million of 6.15% notes due 2015.
- Common shares outstanding increased to 141.008 million at year-end from 132.010 million, reflecting ATM and other equity issuances. The ATM program generated $321.067 million of net proceeds in 2015.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management stated that future rental-income growth is expected to come primarily from additional property acquisitions and contractual rent increases. The filing does not provide formal earnings or FFO guidance.
- Liquidity: the $650 million unsecured revolving credit facility had no outstanding balance and was fully available at December 31, 2015. It matures in January 2019, with an option to extend to January 2020.
- Leverage: total debt was approximately 33% of total gross assets before accumulated depreciation and amortization; secured debt was less than 1% of gross assets; debt was approximately 25% of total market capitalization.
- Contractual obligations: long-term debt principal obligations totaled $1.998 billion, including $253.276 million due in 2017 and $1.736 billion due thereafter. Remaining construction commitments were $28.988 million for 27 leased properties.
- Tax item: NNN revoked its taxable REIT subsidiary election at December 31, 2015, resulting in approximately $9.607 million of additional 2015 tax expense. The tax provision also included an increased valuation allowance.
- Dividend record: NNN increased its common dividend for the 26th consecutive year and declared a $0.435 per-share dividend payable in February 2016.
- Risks include tenant defaults or bankruptcies, e-commerce pressure on retail tenants, geographic and industry concentration, interest-rate and refinancing risk, property valuation and impairment risk, environmental liabilities, uninsured losses, REIT qualification requirements, and access to capital markets.
- NNN owned 21 vacant, unleased properties, approximately 1% of the portfolio. Less than 1% of gross leasable area was leased to tenants that had filed Chapter 11 bankruptcy petitions as of January 31, 2016.
- There were 67 properties under some level of environmental remediation or monitoring as of January 28, 2016. Management generally expects sellers, prior owners, tenants, or adjacent owners to fund remediation, but disclosed that those parties may be unable to perform.
- Commercial mortgage residual interests had a fair value of $11.115 million, down from $11.626 million. These Level 3 valuations depend on assumptions including discount rates, prepayment speeds, defaults, losses, and yield curves.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective.
Important Facts for Investors to Verify
- Whether acquisition volume, initial yields, occupancy, and contractual rent increases remain sufficient to support FFO and dividend growth.
- The refinancing plan and available capital for debt maturities beginning in 2016 and continuing through 2025.
- Tenant exposure to convenience stores, restaurants, Texas, Florida, and the five largest tenants, which together generated 21.2% of annual base rent.
- The effect of the TRS revocation election and valuation allowance on future tax expense and cash available for distribution.
- The status and ultimate cost of the 67 properties subject to environmental remediation or monitoring.
- The recoverability of vacant properties, held-for-sale assets, and the $28.988 million of remaining construction commitments.
- The filing’s non-GAAP FFO measure and reconciliation, including the comparability of NNN’s methodology with other REITs.