NNN REIT, Inc. (National Retail Properties, Inc.) — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended September 30, 2010, filed November 5, 2010. NNN is a fully integrated REIT focused primarily on acquiring, owning and developing retail properties leased under long-term net leases. At September 30, 2010, the portfolio included 1,037 investment properties totaling approximately 11.7 million square feet across 43 states, with 97% leased or operated. NNN also owned 17 inventory properties.
Financial performance and key metrics
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Continuing-operations revenue | $56.7 million | $57.1 million | $169.7 million | $173.4 million |
| Earnings from operations | $36.5 million | $37.3 million | $104.8 million | $111.3 million |
| Net earnings attributable to NNN | $21.2 million | $22.4 million | $58.8 million | $67.3 million |
| Net earnings available to common stockholders | $19.5 million | $20.7 million | $53.7 million | $62.2 million |
| Diluted earnings per share | $0.23 | $0.26 | $0.65 | $0.78 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $161.9 million | $126.0 million |
Calculated continuing-operations margins were approximately 64.4% for Q3 and 61.7% for the first nine months, compared with approximately 65.4% and 64.2%, respectively, in the prior comparable periods. Net margin attributable to NNN was approximately 37.4% in Q3 and 34.6% for the first nine months.
- Total assets were $2.61 billion at September 30, 2010, compared with $2.59 billion at December 31, 2009.
- Total debt was $1.01 billion, including $37.1 million outstanding under the revolving credit facility, $24.5 million of mortgages, $348.0 million of convertible notes and $598.8 million of other notes.
- The $400 million revolving credit facility had $362.9 million available, excluding $647,000 of undrawn letters of credit. It matures in November 2012, with an option to extend to November 2013.
- Cash and cash equivalents declined to $4.0 million from $15.2 million at year-end 2009.
- Operating cash flow exceeded common and preferred dividends paid during the nine months. Common dividends paid were $93.8 million, or $1.130 per share; Series C preferred dividends were $5.1 million.
- Investment property acquisitions totaled $127.4 million for 35 properties during the first nine months, compared with $29.3 million for five properties in the prior year.
Material changes versus the prior comparable period
- Continuing-operations revenue decreased 0.8% in Q3 and 2.1% for the first nine months, primarily because of lower tenant expense reimbursements and lower interest and other income from real estate transactions.
- Rental income remained broadly stable, while interest income from commercial mortgage residual interests declined because of loan prepayments and scheduled amortization.
- Operating expenses increased 6.3% in Q3 and 7.5% for the first nine months. General and administrative expense increased primarily from higher noncash long-term incentive compensation.
- Interest expense increased 6.1% in Q3 and 4.5% for the first nine months, partly because of higher loan-fee amortization and other debt-related items.
- NNN recorded a $3.8 million other-than-temporary valuation impairment on commercial mortgage residual interests during the first nine months of 2010; no comparable charge was recorded in 2009.
- Net earnings attributable to NNN declined 5.5% in Q3 and 12.7% for the first nine months. Prior-year results included a $3.4 million gain on extinguishment of debt and a $7.8 million loss related to a note receivable and property foreclosures.
- Investment property acquisitions increased substantially, while investment property dispositions increased to 13 properties for the first nine months from six in the prior year.
Outlook, risks, contingencies and unusual items
- Management expects to fund operating needs, dividends, acquisitions, development and debt obligations through operating cash flow, existing cash resources, the credit facility, debt or equity financing and asset dispositions.
- Remaining development funding commitments were $23.1 million for 24 investment properties. Management stated that no other material contractual cash obligations were outstanding beyond those disclosed.
- NNN had 28 vacant, unleased investment properties, approximately 3% of the investment portfolio. Prolonged vacancies could adversely affect liquidity and operating results.
- The portfolio is concentrated in convenience stores and restaurants and is geographically concentrated in the South and Southeast. Financial stress in these tenant sectors or regions could materially affect performance.
- TitleMax exited bankruptcy after assuming its leases in January 2010; management stated that the proceeding did not materially affect NNN. Majestic Liquor Stores and related principals filed for bankruptcy in June 2010, and Majestic rejected four leases and one related property loan; management did not expect a material adverse effect.
- NNN had no derivatives outstanding at September 30, 2010. A 1% increase in rates on variable-rate debt would have increased nine-month interest expense by less than 1%, according to the filing.
- In October 2010, NNN declared a $0.38 per-share common dividend payable in November 2010. The filing provides no formal full-year earnings or funds-from-operations guidance.
- The 2009 comparative nine-month results were retrospectively adjusted for the final valuation of assets acquired from a defaulting tenant; adjusted 2009 diluted EPS was $0.78 versus $0.89 as originally reported.
Most important facts for investors to verify
- Reconcile operating cash flow, dividends and the sharp decline in year-end cash, including the extent of reliance on the revolving credit facility.
- Review debt maturities, including the earliest put options on the 2026 convertible notes in September 2011 and the credit facility maturity in November 2012.
- Assess the valuation sensitivity of the $15.3 million commercial mortgage residual interests to defaults, losses, prepayments and interest rates.
- Monitor occupancy, tenant concentration and the financial condition of convenience-store, restaurant and other major tenant sectors.
- Evaluate whether the increased acquisition pace and $23.1 million of remaining development commitments are adequately supported by liquidity and financing capacity.
- Confirm the effect of discontinued operations, property dispositions and other nonrecurring items when assessing recurring earnings and dividend coverage.