NNN REIT, Inc. (formerly National Retail Properties, Inc.) — Fiscal 2016 Form 10-K
Business context and reporting period
The filing covers the fiscal year ended December 31, 2016, with fourth-quarter information included in the annual filing. NNN is a fully integrated equity REIT focused primarily on acquiring, developing, owning and leasing single-tenant retail properties under long-term net leases.
- Portfolio: 2,535 properties totaling approximately 27.2 million square feet across 48 states.
- Occupancy: approximately 99% leased at year-end; weighted-average remaining lease term of 11.6 years.
- 2016 acquisitions: 313 properties; $846.9 million invested; initial cash yield of 6.9%.
- 2016 dispositions: 38 properties; $103.2 million of net sales proceeds; $27.2 million gain after tax.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenues from continuing operations | $533.6 million | $482.9 million | +10.5% |
| Net earnings attributable to NNN | $239.5 million | $197.8 million | +21.1% |
| Net earnings attributable to common stockholders | $200.9 million | $162.4 million | +23.7% |
| Diluted earnings per share | $1.38 | $1.20 | +15.0% |
| FFO available to common stockholders | $330.5 million | $289.2 million | +14.3% |
| Common dividends per share | $1.78 | $1.71 | +4.1% |
| Cash flow from operating activities | $415.3 million | $341.1 million | +21.8% |
| Total assets | $6.33 billion | $5.46 billion | +16.0% |
| Total debt | $2.31 billion | $1.98 billion | +17.0% |
Operating earnings were $309.1 million, implying an operating margin of approximately 57.9%. Net earnings attributable to NNN imply a margin of approximately 44.9%, while FFO was approximately $2.29 per diluted common share based on the reported FFO and diluted share count. These are derived metrics and may not be directly comparable with non-GAAP measures reported by other REITs.
- Rental income increased 10.9% to $516.0 million, primarily from the 2016 and 2015 acquisitions.
- Operating expenses increased 15.6% to $224.6 million, led by higher depreciation and amortization and impairment charges.
- Interest expense increased 7.0% to $96.4 million.
- Cash and cash equivalents increased to $294.5 million from $13.7 million.
- Capital expenditures and acquisitions drove investing cash outflows of $779.9 million, funded substantially through debt and equity financing.
Debt, liquidity and capital resources
- Total outstanding debt was $2.31 billion, consisting of $2.30 billion of unsecured notes and $13.9 million of mortgages payable.
- Debt represented approximately 30% of gross assets before accumulated depreciation and amortization and approximately 22% of total market capitalization.
- Secured debt was less than 1% of gross assets.
- The $650 million unsecured revolving credit facility had no balance outstanding at year-end and $650 million available, excluding $230,000 of undrawn letters of credit. The facility matures in January 2019, with an extension option to January 2020.
- 2016 financing included $350 million of 3.6% notes due 2026, $345 million of Series F preferred stock, and $265.7 million of net proceeds from the at-the-market common equity program.
- Contractual obligations totaled approximately $2.95 billion, including $2.34 billion of debt principal and $606.1 million of stated-rate interest. Debt principal maturities include $250.5 million in 2017 and $300.6 million in 2021.
- NNN reported compliance with its credit facility and note covenants at December 31, 2016.
Material changes versus the prior comparable period
- The property portfolio expanded from 2,257 to 2,535 properties, and gross leasable area increased from 25.0 million to 27.2 million square feet.
- Revenue, operating cash flow, net earnings and FFO all increased, primarily due to acquisitions and rent growth under existing leases.
- Debt increased by approximately $335.7 million, while equity also increased through common and preferred stock issuances.
- Real estate impairment charges increased to $8.0 million from $4.0 million, and commercial mortgage residual-interest impairment increased to $6.8 million from $0.5 million.
- Five of seven commercial mortgage residual-interest securitizations were subject to clean-up calls, substantially reducing the residual-interest balance from $11.1 million to $36,000.
- Common dividends increased for the 27th consecutive year, from $1.71 to $1.78 per share.
- NNN issued $345 million of Series F preferred stock in October 2016. Series D preferred stock was called for redemption in January 2017.
Guidance, outlook, commentary and risks
Management expects future rental-income growth to come primarily from additional property acquisitions and contractual rent increases. The filing does not provide a specific quantitative earnings, FFO or acquisition outlook.
- Management expects operating cash flow, available liquidity, property dispositions and future debt or equity issuance to fund dividends, acquisitions, development, capital expenditures and debt obligations.
- NNN has committed $114.2 million for construction on 21 properties, of which $59.4 million remained unfunded at year-end.
- Management announced a planned leadership transition: CEO and Chairman Craig Macnab was to retire effective April 28, 2017, with President and COO Julian Whitehurst becoming President and CEO.
- Key risks include tenant defaults or bankruptcies, retail-sector disruption and e-commerce, geographic and industry concentration, interest-rate changes, capital-market access, refinancing of balloon maturities, property impairments, vacancies and declining re-leasing rates.
- Five tenants generated approximately 20.1% of annual base rent; five retail lines of trade generated approximately 48.6%; and five states generated approximately 43.6%. Texas alone represented 18.4% of annual base rent.
- NNN reported 27 vacant properties at year-end and less than 1% of gross leasable area leased to tenants with Chapter 11 bankruptcy petitions as of January 31, 2017.
- As of February 6, 2017, 76 properties were subject to some level of environmental remediation or monitoring. Environmental insurance covering substantially all properties was scheduled to expire in August 2018.
- Subsequent events included the planned redemption of Series D preferred stock and entry into a $125 million forward-starting interest-rate swap in February 2017.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded that disclosure controls and internal controls were effective.
Most important facts for investors to verify
- Whether the approximately 99% occupancy rate and 11.6-year lease term remain stable as leases expire and tenants face retail-sector pressure.
- Tenant, industry and geographic concentration, particularly exposure to convenience stores, restaurants, Texas and the five largest tenants.
- Debt-refinancing plans for the $250.5 million of 2017 maturities and later balloon payments, including the 2019 revolving-credit-facility maturity.
- Coverage of common and preferred dividends by recurring operating cash flow and FFO after acquisitions, development commitments and debt service.
- Actual performance and funding requirements for the $59.4 million of remaining construction commitments.
- Environmental remediation obligations, insurance renewal terms and potential uninsured liabilities.
- Effects of the Series D redemption, the leadership transition and any subsequent equity or debt issuance on per-share results.