Business Context and Reporting Period
Company: National Retail Properties, Inc. (NNN REIT, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: NNN is a fully integrated Real Estate Investment Trust (REIT) owning and managing single-tenant retail properties leased primarily under long-term net leases. Operations are divided into two segments: Investment Assets (operating leases, mortgages, residual interests) and Inventory Assets (properties held for sale). As of September 30, 2009, the company owned 1,004 Investment Properties with approximately 11.4 million square feet of gross leasable area, with an occupancy rate of 94%.
Key Financial Metrics
| Metric (in thousands) | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Total Revenues (Continuing Ops) | $57,035 | $58,496 | $173,313 | $169,404 |
| Net Earnings (Attributable to NNN) | $22,443 | $28,766 | $76,200 | $90,271 |
| Net Earnings Available to Common | $20,747 | $27,070 | $71,111 | $85,182 |
| Earnings Per Share (Diluted) | $0.26 | $0.37 | $0.89 | $1.16 |
| Cash from Operating Activities | N/A | N/A | $125,974 | $210,782 |
| Cash and Cash Equivalents | $23,251 | $2,514 | $23,251 | $2,514 |
| Total Debt Outstanding | $986,078 | $1,027,391 | $986,078 | $1,027,391 |
| Line of Credit Balance | $0 | $26,500 | $0 | $26,500 |
Note: Q3 cash flow data is not explicitly provided in the summary tables; 9-month data is used for liquidity analysis.
Material Changes vs. Prior Period
- Revenue Decline (Q3): Total revenues from continuing operations decreased 2.5% to $57.0 million in Q3 2009 compared to $58.5 million in Q3 2008. This was primarily due to the absence of $1.46 million in rent settlement fees recorded in 2008 and an increase in uncollectible rent.
- Revenue Growth (9 Months): Revenues increased 2.3% to $173.3 million for the nine months ended September 30, 2009, driven by acquisitions made in 2008 and lease termination fees of $5.1 million.
- Net Earnings Decline: Net earnings attributable to NNN decreased 22% in Q3 and 16% for the nine-month period compared to 2008. This decline is attributed to lower gains on property dispositions, higher real estate expenses, and restructuring costs of $731,000 in 2009.
- Discontinued Operations: Earnings from discontinued operations dropped significantly. In Q3 2009, discontinued operations contributed a loss of $70,000 from the Investment Portfolio, compared to earnings of $2.96 million in Q3 2008. This reflects a sharp reduction in property sales activity.
- Liquidity Improvement: Cash and cash equivalents increased from $2.6 million at year-end 2008 to $23.3 million at September 30, 2009, aided by a net increase in cash of $20.6 million during the nine-month period.
Guidance, Outlook, and Risks
- Dividends: NNN declared a common stock dividend of $0.375 per share in October 2009, payable in November. Series C Preferred Stock dividends of $1.3828 per share were paid during the nine-month period.
- Debt Management: On November 3, 2009, NNN entered into a new $400 million credit facility (New Facility) replacing the expiring one. The New Facility matures in November 2012 with an option to extend to 2013 and includes an accordion feature to increase capacity to $500 million.
- Bankruptcy Risks: Approximately 1% of the gross leasable area is leased to tenants in Chapter 11 bankruptcy (e.g., Titlemax Holdings). Additionally, Uni-Mart, Inc. filed for Chapter 11 in 2008; NNN has re-leased 15 of 16 properties rejected by Uni-Mart and recorded $3.4 million in rent settlement income related to the bankruptcy.
- Valuation Adjustments: Commercial mortgage residual interests (Level 3 assets) saw valuation adjustments due to changes in market conditions, specifically increased loan delinquencies and decreased prepayment speeds. No other-than-temporary impairment was recorded in 2009, compared to $758,000 in 2008.
- Acquisition Activity: Acquisition activity slowed significantly in 2009 compared to 2008. Only 5 Investment Properties were acquired in the first nine months of 2009 versus 97 in the same period in 2008.
Investor Verification Checklist
- Occupancy Trends: Verify the re-leasing status of the 37 vacant Investment Properties (approx. 4% of portfolio) and the impact of tenant bankruptcies on future rental income.
- Debt Refinancing: Confirm the terms and interest rate implications of the new $400 million credit facility entered into in November 2009.
- Residual Interest Valuation: Review the independent valuation assumptions for Commercial Mortgage Residual Interests, specifically regarding default rates and loss severity, which are Level 3 inputs.
- Discontinued Operations: Assess the sustainability of earnings given the significant reduction in gains from property dispositions in 2009 compared to 2008.
- Restructuring Costs: Monitor the impact of the $731,000 workforce reduction costs on future operating efficiency and general and administrative expenses.