Business Context and Reporting Period
Company: National Retail Properties, Inc. (NNN REIT, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: NNN is a fully integrated REIT owning and managing single-tenant retail properties leased primarily under long-term net leases. Operations are divided into Investment Assets (operating leases, mortgages, residual interests) and Inventory Assets (properties held for sale via Taxable REIT Subsidiaries). As of March 31, 2009, the company owned 1,002 Investment Properties with approximately 11.3 million square feet of gross leasable area, with an occupancy rate of 94%.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues (Continuing Ops) | $57,963 | $54,009 |
| Net Earnings | $26,804 | $32,239 |
| Net Earnings Available to Common Stockholders | $25,108 | $30,543 |
| Diluted EPS (Common) | $0.32 | $0.42 |
| Net Cash Provided by Operating Activities | $48,784 | $70,961 |
| Total Assets | $2,638,765 | $2,649,471 |
| Total Liabilities | $1,063,010 | $1,080,525 |
| Total Stockholders' Equity | $1,573,655 | $1,566,860 |
| Cash and Cash Equivalents | $1,858 | $2,626 |
| Total Outstanding Debt | $1,008,805 | $1,027,391 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues from continuing operations increased 7.3% to $57.96 million, driven by rental income from properties acquired in 2008 and lease termination fees ($2.79 million in Q1 2009 vs. $0.40 million in Q1 2008).
- Net Earnings Decline: Net earnings decreased 16.9% to $26.80 million. This decline was primarily due to a significant reduction in earnings from discontinued operations (down from $10.91 million in Q1 2008 to $2.48 million in Q1 2009) and restructuring charges of $0.73 million in Q1 2009.
- Expense Management: General and administrative expenses decreased 29.8% to $5.31 million due to reduced personnel compensation and lost pursuit costs. However, depreciation and amortization increased 18.5% to $11.82 million due to 2008 acquisitions.
- Debt Reduction: Total outstanding debt decreased by approximately $18.6 million. The company repurchased $33.8 million of 2026 Convertible Notes and $8.5 million of 2028 Convertible Notes, resulting in a gain on extinguishment of debt of $2.42 million.
- Discontinued Operations: Earnings from discontinued operations dropped significantly as the company sold fewer Inventory Properties (1 property in Q1 2009 vs. 8 in Q1 2008) and Investment Properties (3 in Q1 2009 vs. 4 in Q1 2008).
Outlook, Risks, and Management Commentary
- Dividends: The company declared a common stock dividend of $0.375 per share (payable May 2009) and a Series C Preferred Stock dividend of $0.4609 per share. NNN intends to maintain its REIT status by distributing at least 90% of taxable income.
- Liquidity: Cash and cash equivalents decreased to $1.86 million. The company maintains a $400 million revolving credit facility with $377.1 million available. Management anticipates funding obligations through current resources, the credit facility, and asset dispositions.
- Tenant Bankruptcies:
- Uni-Mart, Inc.: Filed Chapter 11 in May 2008. As of April 2009, Uni-Mart assumed remaining leases or assigned subleases to NNN. Management does not believe this will have a material adverse effect.
- Titlemax Holdings, LLC: Filed Chapter 11 on April 20, 2009, leasing 30 Investment Properties. Management does not believe this will have a material adverse effect.
- Restructuring: The company recorded $0.73 million in restructuring costs related to workforce reduction in Q1 2009.
- Market Risk: NNN is exposed to interest rate risk via its variable rate credit facility. A 1% increase in rates would increase interest expense by less than 1% for the quarter. The company had no outstanding derivatives as of March 31, 2009.
Investor Verification Checklist
- Discontinued Operations Volatility: Verify the sustainability of earnings given the sharp decline in gains from property dispositions in discontinued operations compared to the prior year.
- Debt Repurchase Gains: Confirm the impact of the $2.42 million gain on extinguishment of debt on net earnings and whether this is a recurring source of income.
- Bankruptcy Exposure: Monitor the status of Uni-Mart and Titlemax leases to ensure rent collection remains stable despite Chapter 11 filings.
- Liquidity Position: Assess the adequacy of the $1.86 million cash balance relative to upcoming dividend payments and construction commitments ($17.3 million remaining).
- Occupancy Trends: Track the re-leasing of the 33 vacant Investment Properties (3% of portfolio) to ensure rental rates remain comparable to previous leases.