NNN REIT, INC. quarterly report, Q3 FY2014

Business Context and Reporting Period

National Retail Properties, Inc. (the filing identifies the registrant as NNN; request metadata refers to NNN REIT, Inc.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. NNN is a fully integrated REIT that owns and develops primarily retail properties leased under long-term net leases.

Portfolio: 2,038 properties totaling approximately 22.1 million square feet in 47 states.
Approximately 99% of properties were leased; weighted-average remaining lease term was 12 years.
Common shares outstanding at October 30, 2014: 126.4 million.

Financial Performance and Position

Metric	Q3 2014	Q3 2013	Nine Months 2014	Nine Months 2013
Revenue from continuing operations	$109.9 million	$100.8 million	$319.5 million	$289.5 million
Earnings from operations	$66.4 million	$62.4 million	$193.3 million	$175.8 million
Net earnings attributable to NNN	$47.9 million	$44.4 million	$136.8 million	$115.9 million
Net earnings attributable to common stockholders	$39.1 million	$34.8 million	$110.3 million	$96.8 million
Diluted earnings per common share	$0.31	$0.29	$0.89	$0.81
Net cash provided by operating activities	Not separately provided	Not separately provided	$231.8 million	$211.9 million

Revenue increased 9.0% in the quarter and 10.4% for the nine months. Earnings from operations represented approximately 60.4% of quarterly continuing-operations revenue, compared with approximately 61.9% in the prior-year quarter. Operating expenses increased 13.3% in the quarter and 11.0% year to date, primarily because of higher depreciation from acquired properties.

Cash and cash equivalents at September 30, 2014: $4.9 million, compared with $1.5 million at December 31, 2013.
Total assets: $4.87 billion, compared with $4.45 billion at year-end 2013.
Total debt: $1.86 billion, compared with $1.57 billion at year-end 2013.
Debt consisted primarily of $1.71 billion of notes payable, $134.9 million drawn on the revolving credit facility, and $11.6 million of mortgages payable.
Credit facility availability at September 30, 2014: $365.1 million under the $500 million facility.
Total equity: $2.88 billion; preferred stock liquidation value totaled $575 million.
Common dividends paid during the first nine months: $151.3 million, or $1.23 per share. A $0.420 per-share common dividend was declared in October 2014.

Cash Flow, Investment and Financing Activity

Operating cash flow increased to $231.8 million from $211.9 million.
Investing activities used $477.7 million, including $525.4 million of additions to operating real estate and $44.7 million of disposition proceeds.
Financing activities provided $249.4 million, including net credit-facility borrowings, $349.3 million of proceeds from 2024 notes, and $147.0 million from common-stock issuances, partially offset by debt repayments and dividends.
NNN acquired 202 properties for approximately $531.5 million during the first nine months, at an initial cash yield of 7.4%.
NNN sold 24 properties for $41.4 million of net proceeds and recognized $8.3 million of net gain.
Construction commitments covered 22 properties with $84.8 million of total commitments, of which $40.9 million remained unfunded.

Material Changes Versus the Prior Comparable Period

Portfolio growth was significant: properties increased to 2,038 from 1,850 at September 30, 2013, and gross leasable area increased to 22.1 million from 20.3 million square feet.
Rental income increased 9.2% in the quarter and 10.6% year to date, mainly from property acquisitions.
General and administrative expense rose 19.5% in the quarter, primarily due to higher acquisition costs, and increased 3.1% year to date, partly due to higher stock-based incentive compensation.
Depreciation and amortization increased 15.2% in the quarter and 19.0% year to date.
Interest expense increased 7.5% in the quarter but declined 2.9% year to date, reflecting the issuance of new lower-rate notes, repayment of $150 million of 6.25% notes, and the absence of 2028 convertible-note expense.
NNN issued $350 million of 3.900% notes due June 2024 and used approximately $150 million to repay 6.25% notes.
Common equity issuance increased the share base and provided $135.0 million of net ATM proceeds during the first nine months; 3.76 million shares were issued under the 2013 ATM program.
Discontinued-operations earnings declined to $0.1 million year to date from $4.1 million, largely because prior-year results included more property-sale gains.

Guidance, Outlook, Risks and Unusual Items

Management did not provide explicit quantitative earnings or acquisition guidance in the supplied filing. Management expects rental income growth to continue through additional acquisitions and contractual rent increases and expects property-related capital needs to remain modest because most leases are net leases requiring tenants to pay taxes, maintenance and insurance.

On October 28, 2014, after quarter-end, the credit facility was amended: capacity increased to $650 million, the maturity was extended to January 2019 with an extension option to January 2020, and the initial spread was reduced to LIBOR plus 92.5 basis points.
NNN had 24 vacant properties, approximately 1% of the portfolio. Tenant bankruptcies, vacancies, rent losses and inability to re-lease properties could reduce cash flow.
Portfolio exposure is concentrated in convenience stores, restaurants and automotive-related businesses and is geographically concentrated in the South and Southeast.
Key risks include real estate illiquidity, tenant and borrower defaults, access to debt and equity capital, leverage and debt covenants, interest-rate movements, environmental liabilities, competition, REIT qualification and dividend requirements.
NNN had no derivatives outstanding at September 30, 2014. A 1% increase in variable-rate debt rates would have increased interest expense by less than 1% for the nine months.
Commercial mortgage residual interests were $12.1 million and are valued using Level 3 assumptions, including prepayment speeds, loan losses and yield curves.
Other-than-temporary valuation impairment on residual interests was $0.3 million year to date. Total real estate impairment charges were $0.6 million, down from $4.0 million in the prior-year period.
NNN early adopted the revised discontinued-operations guidance and was evaluating the potential effect of later accounting standards on revenue, stock compensation and going-concern disclosures.

Investor Verification Items

Verify the registrant name and whether the requested NNN REIT designation corresponds to National Retail Properties, Inc.
Reconcile reported earnings with non-GAAP REIT measures such as funds from operations; the supplied filing text does not provide a clear FFO value.
Assess whether acquisition-driven revenue growth and the 7.4% initial cash yield justify the higher leverage and increased depreciation expense.
Review debt maturities, covenant compliance and the post-quarter-end amended credit facility terms.
Evaluate tenant, industry and geographic concentration, particularly convenience stores, restaurants and the South/Southeast markets.
Monitor the $40.9 million of remaining construction commitments and the ability to fund them while maintaining dividends.
Review the valuation sensitivity of the $12.1 million of Level 3 commercial mortgage residual interests and the effect of interest-rate changes on the variable-rate credit facility.