NNN REIT, Inc. (National Retail Properties, Inc.) — Q1 2021 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the quarter ended March 31, 2021, compared with the quarter ended March 31, 2020. NNN is a fully integrated REIT that acquires, owns, develops and invests in primarily retail properties leased under long-term net leases. At March 31, 2021, the portfolio included 3,161 properties totaling approximately 32.7 million square feet across 48 states, with a 98% leased rate and a 10.6-year weighted-average remaining lease term.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenues | $179.8 million | $175.1 million | 2.7% increase |
| Rental income | $179.2 million | $174.5 million | 2.7% increase |
| Earnings from operations | $112.4 million | $115.4 million | 2.5% decrease |
| Net earnings attributable to NNN | $56.6 million | $65.2 million | 13.2% decrease |
| Net earnings attributable to common stockholders | $52.1 million | $60.7 million | 14.2% decrease |
| Diluted EPS | $0.30 | $0.35 | Decrease |
| Cash provided by operating activities | $161.2 million | $128.1 million | 25.8% increase |
Net earnings attributable to common stockholders represented approximately 29.0% of revenue, compared with 34.7% in the prior-year quarter. Earnings from operations represented approximately 62.5% of revenue, compared with 65.9% in Q1 2020. The decline in reported earnings primarily reflects a $21.3 million loss on early extinguishment of debt and lower gains on property dispositions.
- Cash and cash equivalents were $311.2 million at March 31, 2021, up from $267.2 million at December 31, 2020.
- Total debt was $3.31 billion, including $3.30 billion of notes payable and $11.2 million of mortgages payable, compared with $3.22 billion at year-end 2020.
- The $900 million unsecured revolving credit facility had no outstanding balance and was fully available at quarter-end; NNN was in compliance with its financial covenants.
- Total assets were $7.71 billion and total equity was $4.29 billion at March 31, 2021.
- Common dividends declared and paid were $0.5200 per share, compared with $0.5150 in Q1 2020. Series F preferred dividends were $4.5 million, or $0.3250 per depositary share.
- NNN acquired 29 properties for $105.6 million at an initial cash yield of 6.4%, versus 21 properties for $67.2 million at a 6.9% initial yield in Q1 2020.
- NNN sold 11 properties for $17.6 million of net proceeds and recognized a $4.3 million gain, compared with 14 properties, $36.3 million of proceeds and a $12.8 million gain in Q1 2020.
Material changes versus the prior comparable period
- Revenue increased 2.7%, primarily from scheduled rent increases and properties acquired during 2020 and Q1 2021.
- Operating expenses declined 1.2% to $71.6 million, principally because real estate impairment losses fell to $2.1 million from $5.5 million. General and administrative expense increased 16.3% to $11.7 million, primarily due to higher long-term incentive compensation.
- Interest expense increased 2.7% to $34.6 million, while the loss on early extinguishment of debt increased to $21.3 million from $16.7 million.
- Operating cash flow increased $33.1 million, partly reflecting changes in accrued rental income and accrued interest payable.
- NNN issued $450 million of 3.500% senior unsecured notes due April 2051, receiving approximately $436.4 million of net proceeds, and redeemed $350 million of 3.300% notes due April 2023. The refinancing increased outstanding debt but extended maturities.
- COVID-19-related rent deferral amendments covered $51.3 million of rent originally due in 2020 and $4.7 million originally due in 2021. Approximately $10.8 million of deferred rent was repaid in Q1 2021; an additional $21.1 million was due during 2021, with remaining amounts scheduled for collection through December 2025.
Guidance, outlook, risks and unusual items
Management did not provide a specific earnings or acquisition outlook in the filing. Management expects cash, operating cash flow and available borrowing capacity to satisfy short-term liquidity needs, while longer-term needs may be funded through debt, equity, property dispositions and the credit facility.
- As of April 28, 2021, NNN had collected approximately 97% of rent originally due in Q1 2021 and 98% of rent originally due in April 2021.
- Approximately 6% of properties and 8% of gross leasable area were leased to 12 tenants for which revenue was being recognized on a cash basis.
- NNN had 55 vacant properties, representing approximately 2% of the portfolio. Less than 1% of properties and gross leasable area was leased to a tenant in Chapter 11 bankruptcy as of April 28, 2021.
- Key risks include continued COVID-19 effects on tenant operations and rent collections, tenant concentration in convenience stores and restaurants, geographic concentration in the South and Southeast, vacancies and tenant bankruptcies, access to capital, debt covenant compliance, interest-rate and LIBOR-transition risk, property valuation and impairment risk, and the ability to maintain REIT qualification and dividends.
- Construction commitments totaled $12.1 million, of which $6.6 million had been funded and $5.4 million remained at March 31, 2021.
- NNN had no outstanding derivative instruments at quarter-end. Approximately $15.1 million remained in accumulated other comprehensive loss from previously terminated interest-rate hedges, with an estimated $2.3 million expected to be reclassified to interest expense over the next 12 months.
Investor verification points
- Verify the sustainability and collectability of deferred rent, particularly the $21.1 million scheduled for collection during 2021 and amounts due through 2025.
- Review tenant exposure to theaters, restaurants, health and fitness, and other sectors most affected by pandemic-related restrictions.
- Assess leverage, maturity timing and refinancing needs, including the $350 million debt maturity shown for 2024 and $400 million shown for 2025.
- Evaluate whether the 2051 debt issuance and redemption of 2023 notes improve long-term financing flexibility despite the $21.3 million early-extinguishment charge.
- Monitor occupancy, bankruptcies, cash-basis tenants, impairment assumptions and future property dispositions.
- Confirm future dividend coverage from recurring operating cash flow and the company’s continued compliance with REIT distribution and qualification requirements.