National Retail Properties, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. The filing identifies the registrant as National Retail Properties, Inc.; the request metadata refers to NNN REIT, Inc. The company is a fully integrated REIT focused primarily on acquiring, owning and developing retail properties leased under long-term net leases.
Business Context and Portfolio
- Owned 1,850 properties totaling approximately 20.3 million square feet across 47 states at September 30, 2013, compared with 1,622 properties and 19.2 million square feet at December 31, 2012.
- Approximately 98% of properties were leased; the weighted-average remaining lease term was 12 years.
- Primary annual base-rent concentrations were convenience stores at 19.9%, full-service restaurants at 9.8%, automotive service at 7.6% and limited-service restaurants at 5.4%.
- Acquired 261 properties for approximately $570.3 million during the first nine months of 2013, compared with 124 properties for $452.6 million in the prior-year period.
Financial Performance and Key Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue from continuing operations | $100.6 million | $84.4 million | $289.1 million | $243.1 million |
| Net earnings attributable to NNN | $44.4 million | $38.0 million | $115.9 million | $101.4 million |
| Net earnings attributable to common stockholders | $34.8 million | $33.3 million | $96.8 million | $85.6 million |
| Basic EPS | $0.29 | $0.31 | $0.82 | $0.80 |
| Operating earnings | $62.8 million | $51.4 million | $177.2 million | $148.3 million |
| Net cash provided by operating activities | Not provided for the quarter | Not provided for the quarter | $215.1 million | $172.5 million |
- Rental income, including direct financing lease income and percentage rent, increased 19.8% year over year in Q3 and 19.9% for the first nine months, primarily from property acquisitions.
- Operating earnings margin was approximately 62.4% in Q3 2013 versus 60.9% in Q3 2012. Total operating expenses were 37.6% of revenue versus 39.1% in the prior-year quarter.
- Depreciation and amortization increased 50.0% in Q3 to $25.9 million and 34.6% for the nine months to $72.1 million, reflecting the expanded property portfolio.
- Interest expense declined 13.2% in Q3 to $20.0 million but increased 4.5% for the nine months to $65.2 million.
- Discontinued operations generated $1.2 million in Q3 2013 versus a $2.8 million loss in Q3 2012; nine-month earnings were $2.8 million versus $2.2 million.
Balance Sheet, Debt and Liquidity
- Total assets increased to $4.44 billion at September 30, 2013 from $3.99 billion at December 31, 2012. Operating real estate, net, increased to $4.22 billion from $3.79 billion.
- Total debt was $1.52 billion, down from $1.59 billion at year-end 2012. The company had no outstanding balance on its $500 million revolving credit facility and had the full $500 million available.
- Notes payable, net, increased to $1.51 billion from $1.17 billion, primarily following the issuance of $350 million of 3.300% senior notes due 2023.
- Cash and cash equivalents were $6.5 million, compared with $2.1 million at December 31, 2012.
- Cash flow from operations of $215.1 million was more than the $139.9 million of common dividends paid during the nine months. Investing activities used $508.3 million, primarily for property acquisitions, and financing activities provided $297.7 million.
- Real estate improvement commitments covered 51 properties, with $37.2 million remaining of total commitments of $147.1 million.
- Debt fair value was approximately $1.57 billion, including $1.56 billion of notes payable and $9.8 million of mortgages payable.
Material Changes Versus the Prior Comparable Period
- Portfolio growth accelerated: 261 properties were acquired in the first nine months of 2013 versus 124 in the comparable 2012 period.
- Common shares outstanding increased to approximately 121.9 million from 111.6 million at year-end 2012, reflecting ATM, DRIP and conversion-related issuances.
- NNN issued $350 million of 3.300% notes due 2023 and used proceeds partly to manage its capital structure.
- The remaining convertible notes were settled: approximately $15.5 million of 2026 notes in January and approximately $223.0 million of 2028 notes during 2013, including cash payments and 2.4 million common shares issued.
- NNN issued $287.5 million of 5.700% Series E preferred stock in May 2013. Series D and Series E preferred stock totaled $575 million at September 30, 2013.
- The revolving credit facility balance declined from $174.2 million at year-end 2012 to zero at September 30, 2013.
- Real estate impairments from continuing operations declined to $2.0 million for the nine months from $3.3 million in the prior-year period; commercial mortgage residual-interest impairment declined to $16,000 from $2.7 million.
Guidance, Outlook, Risks and Unusual Items
- Management expects rental income growth to continue through additional acquisitions and contractual rent increases but does not provide specific earnings or revenue guidance.
- Management expects long-term net leases to limit property-level capital requirements, although vacant properties and uncollectible rents could materially reduce liquidity and operating results. Thirty-six properties, or approximately 2% of the portfolio, were vacant and unleased.
- Key risks include tenant defaults or bankruptcies, concentration in convenience stores and restaurants and in southern and southeastern markets, real estate illiquidity, acquisition and disposition execution, access to debt and equity capital, interest-rate changes, debt covenants, environmental liabilities and maintenance of REIT tax status.
- Commercial mortgage residual interests were valued using Level 3 assumptions, including 20% or 25% discount rates, prepayment speeds and default estimates. The residual portfolio had a carrying value of $14.8 million and generated a $1.6 million unrealized gain in other comprehensive income for the nine months.
- NNN had no derivatives outstanding at September 30, 2013. Approximately $8.5 million related to prior interest-rate hedges remained in accumulated other comprehensive income, with an estimated $703,000 expected to be reclassified to interest expense over the next 12 months.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material legal proceedings or changes to previously disclosed risk factors were reported.
- In October 2013, NNN declared a common dividend of $0.405 per share, payable in November 2013.
Important Facts for Investors to Verify
- Reconcile reported net earnings and EPS with non-GAAP REIT measures such as funds from operations, which are not provided in the supplied filing text.
- Assess whether acquisition-driven revenue growth is sustainable relative to depreciation, financing costs and dilution from common and preferred equity issuance.
- Review tenant, industry and geographic concentrations, lease expirations, occupancy and tenant credit quality.
- Review the maturity schedule, interest rates and covenants for the $1.52 billion debt balance, including refinancing needs and exposure to higher interest rates.
- Evaluate the $37.2 million remaining property-improvement commitments and the company’s liquidity after dividends and acquisitions.
- Examine the sensitivity of the $14.8 million commercial mortgage residual-interest valuation to prepayment, default, loss-severity and discount-rate assumptions.
- Confirm the tax and distribution requirements necessary to maintain REIT status and the priority of Series D and Series E preferred dividends over common-stock dividends.