NNN REIT, Inc. — Form 10-Q Summary
Business context and reporting period
National Retail Properties, Inc. is an integrated REIT that acquires, owns, develops and invests in retail properties leased primarily under long-term net leases. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022, filed August 3, 2022.
- Property portfolio: 3,305 properties totaling approximately 33.8 million square feet across 48 states.
- Approximately 99% of properties were leased at June 30, 2022.
- Weighted average remaining lease term was 10.6 years.
- Largest annual base-rent concentrations were restaurants, convenience stores and automotive service.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
| Total revenues | $190.8 million | $179.0 million | $381.1 million | $358.8 million |
| Rental income | $190.5 million | $178.0 million | $380.3 million | $357.2 million |
| Earnings from operations | $110.9 million | $106.1 million | $228.9 million | $218.5 million |
| Net earnings attributable to NNN | $74.2 million | $73.0 million | $155.5 million | $129.6 million |
| Net earnings attributable to common stockholders | $74.2 million | $68.5 million | $155.5 million | $120.6 million |
| Diluted EPS | $0.42 | $0.39 | $0.89 | $0.69 |
| Net cash from operating activities | Not separately provided | Not separately provided | $275.3 million | $280.8 million |
- Q2 revenue increased 6.6%; six-month revenue increased 6.2%.
- Q2 operating margin was approximately 58.1%, compared with 59.3% in the prior-year quarter. Six-month operating margin was approximately 60.1%, compared with 60.9%.
- Q2 net margin attributable to NNN was approximately 38.9%; six-month net margin was approximately 40.8%.
- Operating cash flow covered common dividends of $92.9 million in Q2 and $185.6 million for the first six months.
- Common dividends were $0.5300 per share in Q2 and $1.0600 per share for the first six months, compared with $0.5200 and $1.0400, respectively, in 2021.
Balance sheet, debt and liquidity
| Item | June 30, 2022 | December 31, 2021 |
| Total assets | $7.804 billion | $7.751 billion |
| Real estate portfolio | $7.675 billion | $7.444 billion |
| Total debt | $3.788 billion | $3.746 billion |
| Cash and cash equivalents | $3.3 million | $171.3 million |
| Total equity | $3.916 billion | $3.902 billion |
- The $1.1 billion unsecured revolving credit facility had $40.0 million outstanding and $1.060 billion available; NNN was in compliance with its financial covenants.
- Notes payable represented approximately 98.7% of total debt. Most unsecured debt carries fixed rates, while the revolving facility bears variable interest linked to LIBOR.
- Contractual cash obligations totaled $5.741 billion, including $3.810 billion of debt principal and $1.890 billion of scheduled interest, based on the filing’s assumptions.
- Debt maturities include $350 million in 2024, $400 million in 2025 and $350 million in 2026, with $2.7 billion thereafter.
Material changes versus the prior comparable period
- Rental income benefited from scheduled rent increases and contributions from property acquisitions completed in 2021 and 2022.
- NNN acquired 102 properties for $364.6 million during the first six months of 2022, versus 58 properties for $208.6 million in the prior-year period. The initial cash yield declined to 6.2% from 6.5%.
- Depreciation and amortization increased 9.2% for the first six months, primarily due to acquired properties.
- General and administrative expense declined 12.0% for the first six months, primarily due to lower compensation costs following executive retirement.
- Executive retirement costs of $6.2 million were recorded for the first six months, including $2.7 million in Q2, related to the retirement and transition agreement of former President and CEO Julian Whitehurst.
- Interest expense increased 8.5% for the first six months, partly reflecting the revolving credit facility and changes in the fixed-rate debt portfolio.
- The prior-year period included a $21.3 million loss on early extinguishment of debt; no such charge was recorded in 2022.
- Real estate impairment losses declined to $6.3 million from $9.9 million for the first six months.
- NNN issued 717,473 shares through its at-the-market program for net proceeds of $31.0 million and issued 34,396 shares through its dividend reinvestment plan for net proceeds of $1.5 million.
Outlook, commentary, risks and unusual items
- Management stated that rent collections had returned to pre-pandemic levels. However, approximately $56.8 million of COVID-19-related deferred rent remained scheduled for repayment, with substantially all remaining amounts due periodically by December 31, 2023 or later.
- Eight tenants, representing 7.2% of annual base rent, were classified as cash-basis tenants at June 30, 2022. No additional tenants were placed on cash-basis accounting during the six months.
- NNN had construction commitments on 15 properties totaling $81.3 million, of which $45.2 million remained unfunded.
- NNN owned 30 vacant properties, approximately 1% of the portfolio, and reported no tenants in Chapter 11 bankruptcy as of July 28, 2022.
- The revolving facility matures in June 2025, with extension options to June 2026. Its LIBOR-based pricing creates transition risk because USD LIBOR is expected to cease publication after June 30, 2023.
- Key risks include tenant defaults or bankruptcies, rent collection and concentration by industry and geography, interest-rate and refinancing risk, property impairments, access to capital, cybersecurity, regulatory and tax changes, and maintaining REIT qualification.
- Management did not provide explicit full-year financial guidance in the supplied filing text. The filing states that interim results may not be indicative of full-year results.
- In July 2022, NNN declared a $0.5500 per-share common dividend payable in August 2022.
Important facts for investors to verify
- Reconcile reported rental income, occupancy and tenant credit metrics with future rent collections and deferred-rent repayments.
- Review the concentration of annual base rent in restaurants, convenience stores, automotive service and the southeastern United States.
- Assess the debt maturity schedule, refinancing requirements and sensitivity to higher interest rates and LIBOR transition terms.
- Monitor whether acquisitions continue to generate acceptable yields as acquisition volume increases.
- Evaluate the remaining $45.2 million construction commitment and the company’s funding sources.
- Review impairment assumptions, including market rents, vacancy duration and property valuation inputs.
- Confirm dividend sustainability relative to operating cash flow, capital spending and debt obligations.
- Consider the effect of the executive retirement costs and other nonrecurring items when comparing earnings periods.