NNN REIT, Inc. (National Retail Properties, Inc.) — Q1 2016 Form 10-Q Summary
Business context and reporting period
Unaudited results for the quarter ended March 31, 2016. NNN is an integrated REIT that acquires, owns and develops primarily single-tenant retail properties leased under long-term net leases. At quarter-end, the portfolio included 2,293 properties totaling approximately 25.4 million square feet across 47 states, with a weighted-average remaining lease term of 11.3 years and approximately 99% of properties leased.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenues | $127.0 million | $116.2 million | 9.3% increase |
| Earnings from operations | $77.5 million | $69.7 million | 11.3% increase |
| Net earnings attributable to NNN | $70.7 million | $54.0 million | 31.0% increase |
| Net earnings available to common stockholders | $61.8 million | $45.1 million | 37.0% increase |
| Diluted earnings per share | $0.44 | $0.34 | Increase |
| Operating margin | 61.0% | 60.0% | Improved |
| Net cash provided by operating activities | $102.4 million | $97.1 million | 5.4% increase |
Revenue growth was primarily driven by property acquisitions. Rental income increased 9.3% to $122.5 million. Operating expenses rose 6.3% to $49.5 million, including depreciation and amortization of $34.7 million. Interest expense increased 8.3% to $23.6 million. Net earnings benefited from a $16.9 million gain on the disposition of real estate, compared with $7.2 million in the prior-year quarter.
Cash flow from investing activities used $118.8 million, including $126.6 million of additions to real estate, partly offset by $50.9 million of disposition proceeds. Financing activities provided $10.9 million, including $87.0 million of net common-stock proceeds, offset by $61.2 million of common dividends and preferred dividends totaling $8.9 million. Cash and cash equivalents ended at $8.2 million, while restricted cash and escrow balances were $43.1 million.
Total debt was $2.0 billion at March 31, 2016, consisting of $17.1 million of mortgages and $1.95 billion of notes payable. The $650 million revolving credit facility had no outstanding balance at quarter-end and was fully available, subject to its terms. The facility matures in January 2019, with an option to extend to January 2020. The filing states that a 1% increase in variable interest rates would have increased quarterly interest expense by less than 1%.
Material changes versus the prior comparable period
- Portfolio size increased to 2,293 properties from 2,104 at March 31, 2015; gross leasable area increased from approximately 23.1 million to 25.4 million square feet.
- NNN acquired 46 properties for $125.2 million at an initial cash yield of 7.0%, compared with 56 properties for $155.2 million at a 7.3% initial yield in Q1 2015.
- NNN sold 10 properties for $52.8 million of net proceeds and recognized a $16.9 million gain, compared with six properties, $23.3 million of proceeds and a $7.2 million gain in Q1 2015.
- Common dividends increased to $0.435 per share from $0.420 per share.
- Common shares issued through the ATM program increased to 1.9 million from 1.2 million, generating $82.1 million of net proceeds versus $47.6 million.
- Operating cash flow increased, while the ending cash balance also increased versus the prior-year quarter despite continued acquisition spending.
Outlook, commentary, risks and unusual items
Management expects rental income growth to come from additional acquisitions and contractual rent increases. It expects property-related capital demands to remain modest because tenants generally pay property taxes, maintain the properties and carry insurance. Management expects to fund obligations through operating cash flow, available capital, the credit facility, debt or equity offerings and property dispositions.
NNN had 19 construction commitments totaling $63.5 million, of which $40.1 million had been funded and $23.3 million remained. One property was classified as held for sale at March 31, 2016; five properties held for sale at year-end 2015 were sold during the quarter.
Unusual or judgment-sensitive items included a $572,000 net real estate impairment charge, a $220,000 valuation impairment on commercial mortgage residual interests, and a $16.9 million disposition gain. The residual interests were carried at $10.8 million and are valued using Level 3 discounted cash flow assumptions. NNN had no derivatives outstanding at quarter-end, and $24.4 million of deferred hedge losses remained in accumulated other comprehensive income.
Principal risks include tenant concentration and tenant defaults or bankruptcies, geographic and industry concentration, property vacancies, real estate valuation and liquidity risk, access to capital, leverage and debt covenant compliance, interest-rate changes, environmental liabilities, REIT qualification and dividend requirements, cybersecurity, and changes in accounting or tax rules. NNN reported 21 vacant properties, approximately 1% of the portfolio. No material changes to previously disclosed risk factors or material legal proceedings were reported. Management stated that disclosure controls and procedures were effective.
Important facts for investors to verify
- Reconcile reported earnings growth with the $16.9 million property-disposition gain and the absence of a filing-provided FFO or AFFO measure in this summary.
- Review tenant, industry and geographic concentrations, particularly convenience stores and restaurants, and assess the effect of any major tenant distress.
- Evaluate the $1.97 billion debt balance, maturities, fixed-rate exposure, debt covenants and refinancing requirements.
- Confirm the availability and terms of the $650 million revolving credit facility and the remaining $23.3 million of construction commitments.
- Assess dilution from the ATM and DRIP share issuances relative to per-share earnings and dividends.
- Monitor the valuation assumptions and potential volatility of the commercial mortgage residual interests and real estate impairment estimates.
- Confirm continued REIT qualification and the capacity of operating cash flow to support common and preferred dividends.