NNN REIT, Inc. (National Retail Properties, Inc.) — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the quarter and nine months ended September 30, 2021, filed November 2, 2021. NNN is a fully integrated REIT that acquires, develops, owns and invests in retail properties leased primarily under long-term net leases. At September 30, 2021, the portfolio included 3,195 properties totaling approximately 33.0 million square feet across 48 states, with a 10.6-year weighted-average remaining lease term and approximately 99% of properties leased.
Key financial metrics
Amounts below are in thousands, except per-share data.
| Metric | Q3 2021 | Q3 2020 | Change | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|---|
| Total revenues | $180,357 | $158,633 | 13.7% | $539,146 | $497,397 |
| Rental income | $180,024 | $157,865 | 14.0% | $537,226 | $495,891 |
| Earnings from operations | $116,389 | $87,918 | 32.4% | $334,899 | $281,190 |
| Net earnings attributable to NNN | $82,933 | $56,069 | 47.9% | $212,543 | $167,512 |
| Net earnings attributable to common stockholders | $78,448 | $51,584 | 52.1% | $199,088 | $154,057 |
| Basic and diluted EPS | $0.45 | $0.30 | 50.0% | $1.14 | $0.89 |
| Operating margin | 64.5% | 55.4% | +9.1 pts | 62.1% | 56.5% |
| Net margin attributable to common stockholders | 43.5% | 32.5% | +11.0 pts | 36.9% | 31.0% |
Net cash provided by operating activities was $453,150 for the nine months, compared with $348,824 in the prior-year period. Investing activities used $384,156, primarily reflecting $454,743 of real estate additions, partly offset by $71,805 of disposition proceeds. Financing activities provided $207,296, principally from net debt issuance proceeds, after dividends and debt repayments. Cash and cash equivalents increased to $543,526 from $267,236 at December 31, 2020.
Total assets were $8.13 billion at September 30, 2021, including a $7.44 billion real estate portfolio. Total debt was $3.75 billion, consisting primarily of $3.73 billion of notes payable. Stockholders’ equity was $4.26 billion. The unsecured revolving credit facility was increased from $900 million to $1.1 billion; it had no outstanding balance, was fully available at quarter-end, and NNN was in compliance with its covenants.
Material changes versus the prior comparable period
- Revenue increased primarily from acquisitions, scheduled CPI-based rent increases and changes in receivable reserves. NNN acquired 107 properties for $455.4 million during the nine months, versus 21 properties for $78.0 million in the prior-year period.
- Operating earnings increased 32.4% in the quarter and 19.1% for the nine months. General and administrative expense increased 17.6% in the quarter and 20.0% for the nine months, primarily due to higher incentive compensation.
- Real estate impairment losses declined to $4.8 million in the quarter and $14.6 million for the nine months, compared with $5.7 million and $33.1 million, respectively, in the prior-year periods.
- NNN sold 53 properties for $71.0 million of net proceeds in the first nine months, recognizing a $17.9 million gain, compared with 25 properties, $42.5 million of proceeds and a $13.6 million gain in the prior-year period.
- NNN issued $450 million of 3.5% notes due April 2051 and $450 million of 3.0% notes due April 2052. It redeemed $350 million of 3.3% notes due April 2023 and recorded a $21.3 million early-extinguishment loss.
- Common dividends increased to $0.5300 per share in the third quarter from $0.5200. Nine-month common dividends were $274.6 million, compared with $266.4 million in 2020.
Guidance, outlook, risks and unusual items
The filing does not provide specific earnings or acquisition guidance. Management expects cash, operating cash flow and the available credit facility to satisfy current funding needs, while longer-term capital needs may be funded through debt, equity, property dispositions and operating cash flow.
- COVID-19 continued to affect certain tenants’ operations and rent collections. Rent deferral amendments covered $4.8 million of rent originally due in 2021 and $52.0 million originally due in 2020. Approximately $27.1 million of deferred rent was repaid during the first nine months of 2021; $4.7 million was scheduled to be repaid during the remainder of 2021, with the balance due periodically through December 2025.
- As of October 27, 2021, NNN had collected approximately 99% of rent originally due in the third quarter and 99% of rent originally due in October. Management cautioned that historical collection rates may not predict future results.
- NNN had 46 vacant, unleased properties, approximately 1% of the portfolio, and no Chapter 11 tenants as of October 27, 2021. Risks include tenant defaults or bankruptcies, geographic and industry concentration, vacancies, real estate impairments, capital-market access, interest rates, covenant compliance, cybersecurity and REIT qualification.
- NNN had $21.7 million of remaining commitments on construction projects and total contractual cash obligations of $5.81 billion, including principal and interest on debt.
- All outstanding Series F preferred stock was redeemed on October 16, 2021. NNN expects to record a $10.9 million preferred-stock redemption charge in the fourth quarter of 2021. Preferred dividends ceased accruing after the redemption date.
- There were no outstanding derivatives at September 30, 2021. Approximately $15.5 million remained in accumulated other comprehensive loss related to terminated interest-rate hedges, with an estimated $2.3 million expected to be reclassified to interest expense over the following 12 months.
Important facts for investors to verify
- Whether rent collections, deferred-rent repayments and tenant credit quality remain consistent with the reported 99% collection rates.
- The sustainability of revenue growth and margins after acquisition activity, changes in receivable reserves and reduced impairment charges.
- Leverage, upcoming debt maturities, refinancing costs and access to the $1.1 billion revolving facility.
- The effect of the Series F preferred-stock redemption, including the fourth-quarter $10.9 million charge and future dividend requirements.
- Exposure to convenience stores, automotive service, restaurants and other concentrated tenant or geographic categories.
- Progress and funding requirements for the remaining $21.7 million of construction commitments and the planned use of future debt or equity proceeds.