NNN REIT, INC. annual report, FY2023

NNN REIT, Inc. 2023 Form 10-K Summary

Business context and reporting period

NNN REIT, Inc., formerly National Retail Properties, Inc., is a fully integrated Maryland REIT focused primarily on acquiring, owning, developing and investing in retail properties leased under long-term net leases. The filing covers the fiscal year ended December 31, 2023, with comparisons to 2022 and 2021.

Portfolio: 3,532 properties in 49 states totaling approximately 35.97 million square feet.
Occupancy: approximately 99% leased; weighted average remaining lease term of 10.1 years, compared with 10.4 years in 2022.
Annualized base rent: $818.7 million, up from $772.0 million in 2022.
Major rent concentrations include convenience stores, automotive service and restaurants. The five largest tenants represented 19.0% of annual base rent, while Texas represented 16.8%.

Financial performance and key metrics

Metric	2023	2022	Change
Total revenues	$828.1 million	$773.1 million	7.1%
Rental income	$826.1 million	$771.6 million	7.1%
Earnings from operations	$555.1 million	$482.5 million	15.0%
Net earnings attributable to NNN	$392.3 million	$334.6 million	17.3%
Net earnings attributable to common stockholders	$392.3 million	$334.6 million	17.3%
Basic and diluted EPS	$2.16	$1.89	14.3%
Cash flow from operating activities	$612.4 million	$578.4 million	5.9%
Common dividends paid	$404.5 million	$380.5 million	6.3%

Based on reported figures, net earnings margin was approximately 47.4% of total revenues in 2023, versus approximately 43.3% in 2022. Earnings from operations represented approximately 67.0% of revenue, compared with 62.4% in 2022. The filing does not provide a clear 2023 funds from operations figure in the supplied text.

Operating expenses increased 4.1% to $320.5 million. Depreciation and amortization increased 6.6% to $238.6 million, primarily because of portfolio growth.
Interest expense increased 10.7% to $163.9 million, reflecting the 5.600% notes issued in 2023 and greater, higher-cost Credit Facility borrowings.
Real estate impairment losses declined to $6.0 million from $8.3 million.
Gain on real estate dispositions increased to $47.5 million from $17.4 million.
Acquisitions totaled $819.7 million across 165 properties at a 7.3% weighted average cap rate, compared with $847.7 million across 223 properties at a 6.4% cap rate in 2022.
Dispositions totaled 45 properties with $115.7 million of net sales proceeds, compared with 33 properties and $65.2 million in 2022.

Cash flow, debt and liquidity

Cash provided by operating activities was $612.4 million and exceeded common dividends paid of $404.5 million.
Investing activities used $680.7 million, primarily for $795.8 million of additions to real estate, partially offset by $116.3 million of disposition proceeds.
Year-end cash, cash equivalents and restricted cash totaled $5.2 million, including $4.0 million of restricted cash or escrow funds.
Total debt was $4.36 billion at year-end, up from $3.92 billion. Debt consisted of $4.23 billion of unsecured notes and $132.0 million drawn on the revolving Credit Facility; no secured debt was outstanding.
Total debt was approximately 42% of gross assets and 36% of total market capitalization.
The $1.1 billion Credit Facility matures in June 2025, with extension options to June 2026. $968.0 million was available at year-end, and the Company was in compliance with its covenants.
In August 2023, NNN issued $500.0 million of 5.600% notes due October 2033, generating approximately $483.9 million of net proceeds.
Unsecured note principal maturities over the next five years total $1.9 billion, including $350.0 million in 2024 and $400.0 million in 2025. Management stated that the 2024 maturity is expected to be funded through the Credit Facility and/or potential debt or equity offerings.
NNN had committed $379.7 million to construction of 53 properties, of which $139.1 million remained unfunded at December 31, 2023.

Material changes versus the prior comparable period

Revenue, operating earnings, net earnings and EPS increased, supported primarily by property acquisitions and portfolio expansion.
The portfolio increased from 3,411 to 3,532 properties and from 35.0 million to 36.0 million square feet.
Debt increased by approximately $444.5 million, primarily due to the 2033 notes issuance, while mortgages payable were fully repaid in April 2023.
Interest expense increased as the Credit Facility had a higher average balance and average interest rate: $169.6 million at 5.86% in 2023 versus $39.2 million at 4.13% in 2022.
Common dividends increased to $2.230 per share from $2.160 per share. NNN reported 34 consecutive years of annual dividend increases.
NNN changed its name to NNN REIT, Inc. effective May 1, 2023.

Guidance, outlook, commentary and risks

The filing does not provide specific quantitative earnings or acquisition guidance. Management expects operating cash flow, cash resources, Credit Facility borrowings, property dispositions and access to debt or equity markets to fund obligations and future investments. Acquisition activity can be reduced and dispositions increased if capital conditions require.

Management believes high occupancy and the triple-net lease structure support stable operating earnings. Leases generally require tenants to pay property taxes, insurance, maintenance and other operating costs.
Inflation may pressure tenants and may outpace the limited fixed or CPI-based rent increases permitted under many leases.
Higher interest rates increase borrowing costs and may affect property values, acquisition returns, refinancing capacity and dividend flexibility.
Tenant credit and concentration remain key risks. Five retail lines of trade generated 55.6% of annual base rent, and five tenants generated 19.0%.
As of December 31, 2023, NNN owned 18 vacant properties, representing less than 1% of properties and gross leasable area. As of January 31, 2024, less than 1% of the portfolio was leased to a tenant in Chapter 11 bankruptcy.
COVID-related deferred rent was approximately $56.4 million originally; approximately 93% had been repaid by year-end, leaving approximately $3.8 million outstanding, expected to be repaid by December 31, 2025. Management notes that collection is not assured.
There were 68 properties under some level of environmental remediation or monitoring as of January 31, 2024, although responsible parties generally bear the remediation costs.
Other material risks include tenant bankruptcies, retail-sector disruption and e-commerce, natural disasters and uninsured losses, cybersecurity incidents, environmental liabilities, covenant compliance, refinancing risk and possible loss of REIT qualification.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of December 31, 2023.

Important facts for investors to verify

Ability to refinance or repay the $350.0 million 2024 note maturity and manage the $1.9 billion of maturities through 2028.
Future Credit Facility utilization, interest rates, covenant compliance and the June 2025 maturity, including extension decisions.
Tenant rent collections, bankruptcy exposure, remaining deferred rent and changes in cash-basis tenants.
Renewal and re-leasing outcomes for leases representing 1.7% of annual base rent expiring in 2024 and 5.1% expiring in 2025.
Execution and funding of the $139.1 million remaining construction commitment.
Impact of interest rates, inflation and retail-sector conditions on acquisition cap rates, property valuations, impairments and financing costs.
Reported non-GAAP measures, including funds from operations and adjusted funds from operations, because the supplied filing text does not provide those figures.