Business Context and Reporting Period
Company: Commercial Net Lease Realty, Inc. (NNN REIT, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2002
Business Overview: A fully integrated, self-administered REIT owning 346 freestanding properties leased to major retail businesses under long-term commercial net leases. As of June 30, 2002, approximately 93% of the gross leasable area was leased.
Key Financial Metrics
| Metric | Quarter Ended June 30, 2002 | Six Months Ended June 30, 2002 |
|---|---|---|
| Total Revenues | $23,149,000 | $47,137,000 |
| Net Earnings | $13,512,000 | $26,261,000 |
| Net Earnings Available to Common Stockholders | $12,632,000 | $24,256,000 |
| Earnings Per Share (Diluted) | $0.31 | $0.60 |
| Net Cash Provided by Operating Activities | N/A | $30,354,000 |
| Total Assets | $994,646,000 | $994,646,000 |
| Total Liabilities | $440,444,000 | $440,444,000 |
| Cash and Cash Equivalents | $4,218,000 | $4,218,000 |
| Debt Obligations (Line of Credit, Mortgages, Notes) | $419,606,000 (Principal) | $419,606,000 (Principal) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 20.1% for the quarter and 18.3% for the six months compared to the prior year periods. This was driven by rental income from properties acquired in the Captec merger (completed Dec 2001) and non-recurring lease termination fees ($2.076M in 2002 vs. $1.0M in 2001).
- Expense Increases: Operating expenses (excluding interest) rose due to higher depreciation from new properties, increased real estate expenses from vacant properties, and personnel costs. However, the company incurred no expenses related to acquiring its advisor in 2002, unlike the prior year.
- Interest Expense: Increased to $6.406M (quarter) and $12.973M (six months) due to new term notes and the issuance of $50M in 7.75% notes in June 2002, partially offset by lower rates on the credit facility.
- Discontinued Operations: The company reclassified results from 12 properties sold in 2002 to discontinued operations per FAS 144. This resulted in a gain on disposition of $859,000 for the six months ended June 30, 2002.
- Equity in Earnings: Equity in earnings of unconsolidated affiliates improved significantly to $1.777M (six months 2002) from a loss of $2.209M in the prior year, driven by increased real estate dispositions by affiliates.
Guidance, Outlook, Risks, and Unusual Items
- Capital Markets Activity: In June 2002, the company issued $50 million of 7.75% notes due 2012 and entered into a $21 million fixed-rate mortgage. Proceeds were used to pay down credit facility indebtedness.
- Dividends: The company declared and paid common stock dividends of $0.63 per share for the six months ended June 30, 2002. A quarterly dividend of $0.32 per share was declared in July 2002.
- Vacancy Risk: As of July 2002, 23 properties (6.8% of portfolio) were vacant. Additionally, 2% of the portfolio is leased to tenants in Chapter 11 bankruptcy, creating risk of lease rejection.
- Legal Contingencies:
- Appraisal Action: Dissenting Captec stockholders filed a petition for appraisal. The company recorded a liability of $13.278 million for the fair value of shares and cash consideration owed to dissenters.
- Class Action: A lawsuit (Calapasas Action) alleges misrepresentation of asset values in 2000-2001. Management cannot currently assess the likelihood or amount of potential damages.
- Market Risk: The company is exposed to interest rate fluctuations on its variable-rate credit facility and term note. No derivatives were outstanding as of June 30, 2002.
Investor Verification Checklist
- Debt Maturity Profile: Verify the ability to refinance $72.8M in line of credit maturing in 2003 and $120M in long-term debt maturing in 2004.
- Vacancy Rates: Monitor the re-leasing or sale of the 23 vacant properties (6.8% of portfolio) and the status of the 4 tenants in bankruptcy.
- Legal Liabilities: Track the resolution of the Captec appraisal action ($13.3M liability) and the Calapasas class action lawsuit.
- Dividend Coverage: Confirm that funds from operations continue to cover the $0.63 per share annual dividend rate.
- Related Party Transactions: Review the $153.5M aggregate borrowing capacity with affiliates and the terms of the $750,000 partnership interest purchase in CNL Plaza.