NNN REIT, Inc. (National Retail Properties, Inc.) — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended June 30, 2011. NNN is a fully integrated REIT focused primarily on acquiring, owning, developing and leasing retail properties under long-term net leases. At June 30, 2011, the Investment Portfolio comprised 1,248 properties totaling approximately 13.6 million square feet across 46 states, with 97% leased or operated and a weighted-average remaining lease term of 12 years. NNN also owned 16 Inventory Properties.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue from continuing operations | $62.5 million | $56.4 million | $124.5 million | $112.9 million |
| Earnings from operations | $38.5 million | $36.5 million | $76.4 million | $68.3 million |
| Net earnings attributable to NNN | $21.3 million | $21.2 million | $42.1 million | $37.6 million |
| Net earnings available to common stockholders | $19.6 million | $19.5 million | $38.7 million | $34.2 million |
| Basic and diluted EPS | $0.23 | $0.23 | $0.46 | $0.41 |
| Net cash provided by operating activities | Not separately presented | Not separately presented | $77.9 million | $110.3 million |
- Q2 revenue increased 10.8%; six-month revenue increased 10.2%, primarily from acquisitions completed in 2010 and 2011.
- Q2 earnings from operations represented approximately 61.5% of continuing-operations revenue, compared with approximately 64.7% in the prior-year quarter. Six-month operating margin was approximately 61.4%, compared with 60.5% in 2010.
- Interest expense increased 9.2% in Q2 and 9.8% for the six months, principally because of higher average Credit Facility borrowings.
- Cash and cash equivalents were $3.6 million at June 30, 2011, compared with $2.0 million at December 31, 2010 and $51.8 million at June 30, 2010.
- Total assets were $2.80 billion, compared with $2.71 billion at December 31, 2010. Stockholders’ equity attributable to NNN was $1.56 billion.
Debt, liquidity and capital resources
- Total outstanding debt was $1.195 billion at June 30, 2011, compared with $1.134 billion at December 31, 2010. Debt consisted primarily of $951.8 million of unsecured notes, including convertible notes, $219.2 million drawn on the revolving Credit Facility and $23.7 million of mortgages.
- In May 2011, the unsecured revolving Credit Facility was increased from $400 million to $450 million. At June 30, $219.2 million was outstanding and $230.8 million was available, excluding $57,000 of undrawn letters of credit. The facility matures in May 2015, with a one-year extension option.
- Six-month investing cash outflows were $114.9 million, including $111.7 million of additions to operating-method real estate. NNN acquired 54 Investment Properties for total investments of $109.3 million.
- Financing cash inflows included $58.2 million of net Credit Facility borrowings and $56.4 million of common-stock proceeds under the Dividend Reinvestment and Stock Purchase Plan. The company paid $63.9 million of common dividends and $3.4 million of Series C preferred dividends.
- Remaining construction and land funding commitments were $37.0 million at June 30, 2011.
Material changes versus the prior comparable period
- Investment Portfolio properties increased to 1,248 from 1,014 at June 30, 2010 and 1,195 at December 31, 2010. Gross leasable area increased to 13.6 million square feet from 11.4 million square feet one year earlier.
- Rental income increased 11.3% in Q2 and 10.9% for the six months, while real estate expense reimbursements increased 38.1% and 35.3%, respectively.
- General and administrative expense increased 13.7% in Q2 and 16.3% for the six months, primarily due to higher incentive compensation. Depreciation and amortization increased 16.3% and 15.4%, respectively, reflecting property acquisitions.
- Commercial mortgage residual-interest impairment declined to $0.4 million for the six months from $3.8 million in the prior-year period, although Q2 impairment increased to $0.3 million from $0.2 million.
- Operating cash flow declined by $32.5 million year over year, primarily because the 2010 period included substantially higher proceeds from dispositions of Inventory Properties.
- Common dividends paid increased to $0.760 per share for the six months from $0.750 per share in 2010. A $0.385-per-share common dividend was declared in July 2011.
Guidance, outlook, risks and unusual items
- The filing does not provide formal quantitative earnings or revenue guidance. Management expects obligations to be funded through operating cash flow, existing capital resources, the Credit Facility, debt or equity offerings and asset dispositions.
- In July 2011, NNN completed a $300 million offering of 5.500% senior unsecured notes due July 2021 at a 5.688% yield. Net proceeds were used to repay all outstanding Credit Facility borrowings, with the remainder intended for acquisitions and general corporate purposes.
- In June 2011, NNN terminated two treasury locks with aggregate notional amounts of $150 million, paying $5.3 million. NNN had no outstanding derivatives at June 30, 2011; $6.0 million remained in accumulated other comprehensive income related to interest-rate hedges.
- Thirty-nine Investment Properties were vacant and unleased, representing approximately 3% of the portfolio. Four tenants in Chapter 11 bankruptcy represented less than 1% of total gross leasable area; those tenants may reject or affirm their leases.
- Key risks include tenant defaults or bankruptcies, property vacancies, tenant and geographic concentration, limited real-estate liquidity, difficulty accessing capital, interest-rate exposure, debt covenant compliance, environmental liabilities, valuation changes in commercial mortgage residual interests and maintenance of REIT qualification.
- The filing states that disclosure controls were effective and that no material changes occurred in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Confirm the July 2011 senior-notes issuance and full repayment of the Credit Facility, including the resulting interest expense and debt maturity profile.
- Assess whether acquisition-driven rental growth offsets higher interest, depreciation, incentive compensation and property expenses.
- Monitor occupancy, the 39 vacant properties and the bankruptcy status of the four tenants.
- Review sensitivity of the $16.2 million commercial mortgage residual-interest valuation to prepayments, defaults, loss severity and interest rates.
- Reconcile dividend requirements and coverage against operating cash flow, particularly given the decline in six-month operating cash flow.
- Evaluate the impact of the $37.0 million remaining construction commitments and planned future acquisitions on leverage and liquidity.