NNN REIT, Inc. — 2023 Q1 Form 10-Q Summary
Business context and reporting period
NNN REIT, Inc., formerly National Retail Properties, Inc., is an integrated REIT that owns, develops and invests in primarily retail properties leased under long-term net leases. The company changed its name effective May 1, 2023. This unaudited report covers the quarter ended March 31, 2023, with comparisons to the quarter ended March 31, 2022.
At March 31, 2023, the portfolio included 3,449 properties totaling approximately 35.3 million square feet across 49 states. Approximately 99% of properties were leased, and the weighted average remaining lease term was 10.3 years.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenues | $204.1 million | $190.3 million | 7.3% increase |
| Rental income | $203.6 million | $189.8 million | 7.3% increase |
| Earnings from operations | $129.0 million | $118.0 million | 9.3% increase |
| Net earnings attributable to common stockholders | $90.2 million | $81.4 million | 10.8% increase |
| Basic and diluted EPS | $0.50 | $0.46 | 8.7% increase |
| Cash provided by operating activities | $180.8 million | $164.3 million | 10.0% increase |
| Operating margin | 63.2% | 62.0% | Improved |
| Net earnings margin | 44.2% | 42.8% | Improved |
Real estate portfolio, net, was $8.11 billion at March 31, 2023, compared with $8.02 billion at December 31, 2022. Total assets were $8.24 billion, while stockholders’ equity was $4.13 billion.
Cash, cash equivalents and restricted cash totaled $5.3 million at quarter-end, including $3.2 million of unrestricted cash and $2.1 million of restricted cash. Operating cash flow covered the $99.4 million of dividends paid during the quarter.
Debt, liquidity and capital activity
- Total outstanding debt was $4.0 billion, consisting of $209.0 million drawn on the revolving credit facility, $9.8 million of mortgages and $3.74 billion of notes payable.
- The $1.1 billion revolving credit facility had $891.0 million available at March 31, 2023. It matures in June 2025, with options to extend to June 2026, and permits an increase to $2.0 billion subject to lender approval.
- The credit facility’s weighted average outstanding balance was $182.4 million and its weighted average interest rate was 5.35% during the quarter.
- NNN was in compliance with its debt covenants. The company had no outstanding derivatives at quarter-end.
- NNN issued 349,809 shares under its ATM program for net proceeds of $16.1 million and issued 17,760 shares under its dividend reinvestment and stock purchase plan for net proceeds of $0.8 million.
- The quarterly dividend was $0.550 per share, compared with $0.530 in the prior-year quarter. In April 2023, the company declared another $0.550-per-share dividend payable in May 2023.
Material changes versus the prior comparable period
- Revenue growth primarily reflected a partial quarter of income from 43 properties acquired in 2023 and a full quarter of income from 223 properties acquired in 2022.
- Q1 2023 acquisitions totaled $156.2 million for 43 properties, compared with $210.8 million for 59 properties in Q1 2022. The weighted average acquisition cap rate increased to 7.0% from 6.2%.
- Depreciation and amortization increased 12.3% to $59.1 million, primarily because of portfolio growth.
- Interest expense increased 6.0% to $38.9 million, primarily because the revolving credit facility had borrowings during Q1 2023 but no weighted average balance in Q1 2022.
- Executive retirement costs declined to $0.4 million from $3.6 million in the prior-year period.
- Real estate impairment losses increased to $2.6 million from $1.6 million, affecting four properties.
- NNN sold six properties for net proceeds of $11.9 million and recognized a $6.3 million gain, compared with ten properties sold and a $4.0 million gain in Q1 2022.
- Cash used in investing activities declined to $142.3 million from $189.6 million, while financing cash use declined to $39.9 million from $92.3 million.
Outlook, commentary, risks and unusual items
Management did not provide specific earnings or acquisition guidance in the filing. Management expects to fund liquidity needs through operating cash flow, cash on hand, borrowings under the credit facility, debt or equity offerings and property dispositions. Acquisition spending is discretionary and can be reduced if necessary.
NNN had commitments to fund construction on 32 properties. Total commitments were $253.1 million, of which $100.4 million had been funded, leaving $152.7 million outstanding. Management expects to satisfy these commitments through operating cash flow, existing capital resources, credit facility borrowings, financing transactions and asset dispositions.
- Tenant and rent-collection risk remains important. Ten cash-basis tenants represented 7.1% of annual base rent, and NNN recorded a $0.2 million write-off of receivables and accrued rent during the quarter.
- Twenty properties were vacant and unleased at March 31, 2023, representing less than 1% of the portfolio and gross leasable area. Less than 1% of properties and gross leasable area was leased to two tenants in Chapter 11 bankruptcy as of April 27, 2023.
- Restaurant, convenience store and automotive service tenants accounted for 17.9%, 16.3% and 14.4% of annual base rent, respectively. The portfolio also has geographic concentration in the southern and southeastern United States.
- Interest-rate risk is concentrated in the variable-rate credit facility. Management estimates that a 1% increase in rates on variable-rate debt would have increased quarterly interest expense by approximately 1%.
- Approximately $1.5 billion of unsecured notes mature during 2024 through 2028, including $350 million in 2024 and $400 million in 2025. NNN subsequently repaid the remaining $9.8 million mortgage balance in April 2023.
- COVID-19-related deferred rents were approximately 91% repaid as of March 31, 2023; substantially all remaining deferred rents were due periodically by December 31, 2023.
- Management identified no material changes to previously disclosed risk factors, and disclosure controls and procedures were considered effective.
Facts investors should verify
- Whether rent collections, occupancy and tenant credit quality remain stable, particularly among the largest industry concentrations and bankruptcy-affected tenants.
- The refinancing strategy and cost of capital for the $1.5 billion of near- to medium-term note maturities.
- Progress, funding needs and expected returns on the $152.7 million of remaining construction commitments.
- The effect of higher SOFR-based borrowing costs on interest expense, cash flow and dividend coverage.
- Whether acquisition volume, disposition activity and portfolio growth support future rental income growth.
- The company’s ability to maintain REIT qualification, debt covenant compliance and its current dividend policy.