NNN REIT, Inc. (National Retail Properties, Inc.) — Q2 2021 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the quarter and six months ended June 30, 2021. NNN is an integrated Maryland REIT that acquires, owns, develops and invests in primarily single-tenant retail properties leased under long-term net leases.
- Portfolio: 3,173 properties, approximately 32.7 million square feet, across 48 states.
- Approximately 98% of properties were leased; weighted-average remaining lease term was 10.6 years.
- Largest annual base-rent concentrations were convenience stores at 18.0%, automotive service at 11.4%, full-service restaurants at 9.9% and limited-service restaurants at 9.2%.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Change |
|---|---|---|---|
| Total revenues | $179.0 million | $163.7 million | +9.4% |
| Rental income | $178.0 million | $163.5 million | +8.9% |
| Earnings from operations | $106.1 million | $77.9 million | +36.1% |
| Net earnings attributable to NNN | $73.0 million | $46.3 million | +57.9% |
| Net earnings attributable to common stockholders | $68.5 million | $41.8 million | +64.0% |
| Diluted earnings per share | $0.39 | $0.24 | +62.5% |
| Net margin | 40.8% | 28.3% | Improved |
| Metric | Six months ended June 30, 2021 | Six months ended June 30, 2020 | Change |
|---|---|---|---|
| Total revenues | $358.8 million | $338.8 million | +5.9% |
| Earnings from operations | $218.5 million | $193.3 million | +13.0% |
| Net earnings attributable to NNN | $129.6 million | $111.4 million | +16.3% |
| Net earnings attributable to common stockholders | $120.6 million | $102.5 million | +17.7% |
| Diluted earnings per share | $0.69 | $0.60 | +15.0% |
| Net cash provided by operating activities | $280.8 million | $187.7 million | +49.6% |
Q2 operating margin was approximately 59.3%, compared with 47.6% in Q2 2020. Six-month operating margin was approximately 60.9%, compared with 57.0% in the prior-year period. These calculated margins use earnings from operations divided by total revenues.
Cash flow, liquidity and debt
- Cash and cash equivalents were $249.6 million at June 30, 2021, compared with $267.2 million at December 31, 2020.
- Six-month investing cash outflow was $167.2 million, including $207.8 million of real estate additions and $41.3 million of disposition proceeds.
- Six-month financing cash outflow was $131.2 million, primarily reflecting $350.0 million of note repayments, a $21.3 million early-extinguishment payment and $190.8 million of common and preferred dividends, partly offset by $441.6 million of new note proceeds.
- Total debt was $3.31 billion at June 30, 2021, consisting of $3.30 billion of notes payable and $11.0 million of mortgages payable.
- The unsecured revolving credit facility was amended in June 2021, increasing capacity from $900.0 million to $1.1 billion. It had no outstanding balance, and the full $1.1 billion was available at quarter-end. NNN was in compliance with its financial covenants.
- NNN issued $450.0 million of 3.500% senior notes due April 2051, receiving approximately $436.4 million of net proceeds, and redeemed $350.0 million of 3.300% notes due April 2023.
- Common dividends were $0.5200 per share in Q2 2021, versus $0.5150 in Q2 2020. Preferred dividends were $0.3250 per depositary share.
Material changes versus the prior comparable period
- Revenue growth reflected scheduled CPI-based rent increases, acquisitions completed in 2020 and the first half of 2021, and changes in receivables reserves.
- Impairment losses declined to $7.7 million in Q2 2021 from $21.9 million in Q2 2020, and to $9.9 million for the six months from $27.4 million.
- General and administrative expense increased 26.3% in Q2 and 21.1% for the six months, primarily due to higher long-term incentive compensation.
- Interest expense increased 4.2% in Q2 and 3.4% for the six months. Six-month results included a $21.3 million loss on early extinguishment of debt, compared with $16.7 million in the prior-year period.
- Acquisitions increased to 29 properties and $102.9 million invested in Q2 2021, compared with no acquisitions and $6.9 million invested in Q2 2020. For the six months, acquisitions totaled 58 properties and $208.6 million.
- Six-month operating cash flow improved substantially, aided by higher earnings and favorable changes in receivables and accrued rental income.
Guidance, outlook, risks and unusual items
- The filing does not provide a specific quantitative earnings or acquisition guidance range.
- COVID-19 continued to affect certain tenants and rent collections. Rent deferral amendments covered $51.8 million of rent originally due in 2020 and $4.8 million originally due in 2021. Approximately $21.2 million was repaid during the first six months of 2021, with $10.9 million additionally due in 2021 and remaining amounts due periodically through December 2025.
- As of July 28, 2021, NNN had collected approximately 99% of rent originally due in Q2 and 99% of rent originally due in July. Management cautioned that future collections and rent-relief requests may differ materially.
- Approximately 6% of properties and 8% of gross leasable area were leased to 11 tenants for which revenue was recognized on a cash basis. Cash-basis rental income was $24.4 million for the first six months of 2021.
- NNN had 53 vacant properties, approximately 2% of the portfolio, at June 30, 2021; no tenants were in Chapter 11 bankruptcy as of July 29, 2021.
- There were 11 properties held for sale with a carrying value of $12.7 million and $13.5 million of cumulative impairment recorded against those properties.
- NNN had $10.5 million of remaining commitments on 11 property construction projects and total contractual cash obligations of approximately $5.0 billion, including debt principal and interest.
- Key risks include tenant defaults or bankruptcies, continued pandemic effects, retail-sector and geographic concentration, interest-rate and LIBOR transition risk, refinancing and capital-market availability, property impairments, vacancies, REIT qualification and compliance with debt covenants.
Most important facts for investors to verify
- Whether rent collections remain near the reported 99% level and whether deferred rents are repaid as scheduled.
- The sustainability of revenue growth after accounting for acquisitions, CPI increases, reserve changes and cash-basis revenue recognition.
- Future impairment charges, vacancy trends and tenant exposure in restaurants, convenience stores, automotive service, entertainment and health and fitness.
- Debt maturities, refinancing requirements, interest-rate exposure and continued compliance with credit-facility covenants.
- Whether operating cash flow continues to cover common and preferred dividends, acquisitions, development commitments and debt obligations.
- The impact of the $21.3 million early debt-extinguishment charge and the economics of the 2051 notes issued to refinance shorter-dated debt.