NNN 2020 Form 10-K Summary
Business context and reporting period
National Retail Properties, Inc. (NYSE: NNN) is an integrated REIT that acquires, owns, develops and invests primarily in single-tenant retail properties leased under long-term, generally triple-net leases. The filing covers the fiscal year ended December 31, 2020; it is an annual filing rather than a standalone fourth-quarter report.
At year-end, NNN owned 3,143 properties totaling approximately 32.5 million square feet across 48 states. Approximately 99% of properties were leased, and the weighted-average remaining lease term was 10.7 years. The largest annual base-rent concentrations were convenience stores at 18.2%, full- and limited-service restaurants combined at 20.2%, Texas at 17.5%, and the five largest tenants at 21.4%.
Financial performance, cash flow and capitalization
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenues | $660.7 million | $670.5 million | (1.5%) |
| Rental income | $658.8 million | $669.0 million | (1.5%) |
| Earnings from operations | $374.5 million | $416.5 million | (10.1%) |
| Net earnings attributable to NNN | $228.8 million | $299.2 million | (23.5%) |
| Net earnings available to common stockholders | $210.9 million | $258.2 million | (18.3%) |
| Diluted earnings per common share | $1.22 | $1.56 | (21.8%) |
| Cash flow from operations | $450.2 million | $501.7 million | (10.3%) |
| Common dividends per share | $2.07 | $2.03 | 1.9% |
Approximate net earnings margin was 34.6% of total revenues in 2020 versus 44.6% in 2019. Earnings from operations margin was approximately 56.7% versus 62.1%. The filing does not provide a clear 2020 funds-from-operations value in the supplied text.
- Year-end cash and cash equivalents were $267.2 million, compared with $1.1 million at December 31, 2019.
- NNN had no borrowings outstanding under its $900 million unsecured revolving credit facility, leaving the full $900 million available at year-end. The facility matures in January 2022, with an option to extend to January 2023.
- Total debt was $3.221 billion, consisting of $3.210 billion of unsecured notes and $11.4 million of mortgages. Total debt was approximately 34% of gross assets and 29% of total market capitalization; secured debt was less than 1% of gross assets.
- Total assets were $7.638 billion and total equity was $4.319 billion at December 31, 2020.
- Cash flow from operations exceeded common and preferred dividends paid, which totaled approximately $374.3 million in 2020.
Material changes versus the prior comparable period
- COVID-19 reduced tenant revenues and rent-paying capacity, resulting in lower rent collections, increased receivables and allowances, cash-basis revenue recognition for certain tenants, and a $21.8 million write-off of outstanding receivables and accrued rent.
- Rental income declined 1.5% despite contributions from properties acquired in 2019 and 2020.
- Acquisition activity was substantially reduced: 63 properties and $180.0 million invested in 2020 versus 210 properties and $752.5 million in 2019. The 2020 initial cash yield was 6.5%, compared with 6.9% in 2019.
- Property dispositions declined to 38 properties with $54.5 million of net proceeds, compared with 59 properties and $126.2 million in 2019.
- Real estate impairment losses increased to $37.4 million from $32.0 million. Depreciation and amortization increased 4.1% to $196.6 million.
- Interest expense increased 7.8% to $129.4 million, and NNN recorded a $16.7 million loss on the early extinguishment of debt after redeeming $325 million of 3.8% notes due in 2022.
- NNN issued $400 million of 2.5% notes due 2030 and $300 million of 3.1% notes due 2050, while issuing common stock through its ATM program and DRIP for net proceeds of approximately $124.3 million.
- Common dividends increased for the 31st consecutive year to $2.07 per share.
Outlook, commentary, risks and unusual items
- As of January 31, 2021, NNN had collected approximately 96% of rent originally due for the fourth quarter of 2020 and approximately 95% of rent originally due in January 2021. Management cautioned that these collection levels may not be indicative of future results.
- Rent deferral amendments covered $50.7 million of 2020 rent and $1.4 million of 2021 rent. Approximately $3.3 million was repaid in 2020; $36.8 million was scheduled for repayment in 2021, $10.9 million in 2022 and $1.1 million in 2023.
- Management expected cash, the revolving facility and operating cash flow to meet short-term funding needs, but stated that the ultimate effects of COVID-19 remained materially uncertain. NNN planned to continue monitoring economic conditions when considering 2021 investments.
- As of December 31, 2020, 47 properties were vacant, representing approximately 1% of the portfolio. As of February 10, 2021, less than 2% of properties were leased to two Chapter 11 tenants.
- Key risks include tenant defaults and bankruptcies, concentration in restaurants, convenience stores and selected states, e-commerce and changing consumer behavior, property impairment, access to capital, debt maturities and covenants, interest-rate and LIBOR-transition risk, environmental liabilities, cybersecurity, uninsured losses and REIT qualification.
- NNN had 74 properties under some level of environmental remediation or monitoring as of February 4, 2021; management generally stated that responsible parties were liable for remediation costs.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The principal audit matters involved real estate acquisition valuation, impairment assessment and lease-payment collectability.
Important facts for investors to verify
- Whether rent collections and repayment of deferred rents improved after January 31, 2021, particularly for restaurant, theater, fitness and entertainment tenants.
- The effect of tenant bankruptcies, vacancies and cash-basis accounting on recurring rental revenue and adjusted operating cash flow.
- Upcoming debt maturities, including $350 million of notes due in 2023, $350 million in 2024 and $400 million in 2025, plus the January 2022 revolving-facility maturity.
- Whether NNN can maintain dividend growth while funding debt maturities, acquisitions, construction commitments and potential tenant-related shortfalls.
- The sustainability of portfolio occupancy, tenant and geographic concentration levels, and the valuation assumptions supporting the $7.2 billion held-and-used real estate balance.
- Future impairment charges, environmental remediation costs and any changes to the credit facility benchmark following the LIBOR transition.