Business Context and Reporting Period
National Retail Properties, Inc. is a Maryland-based, fully integrated REIT that owns and invests in primarily retail properties leased under long-term net leases. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2013, with comparisons to the corresponding 2012 periods.
- Portfolio at June 30, 2013: 1,838 properties, approximately 20.2 million square feet, across 47 states.
- Approximately 98% of properties were leased; weighted-average remaining lease term was 12 years.
- Common shares outstanding at July 30, 2013: 121.2 million.
Financial Metrics
| Metric | Quarter Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Continuing-operations revenue | $96.1 million, up 18.4% | $188.6 million, up 19.0% |
| Earnings from operations | $59.7 million | $114.5 million |
| Net earnings attributable to NNN | $37.5 million | $71.6 million |
| Net earnings attributable to common stockholders | $32.7 million | $62.0 million |
| Diluted earnings per common share | $0.27 | $0.52 |
| Cash flow from operating activities | Not separately provided | $124.2 million |
- Rental income increased 19.0% in the quarter and 20.1% for the six-month period, primarily due to recent acquisitions.
- Operating margin, measured as earnings from operations divided by continuing-operations revenue, was approximately 62.1% for the quarter versus 60.6% in the prior-year quarter.
- Interest expense increased 19.5% in the quarter and 14.8% for the six-month period. General and administrative expense increased 34.0% and 20.8%, respectively.
- Cash used in investing activities was $466.8 million, principally reflecting $485.2 million of additions to operating real estate.
- Total debt was $1.75 billion at June 30, 2013, compared with $1.59 billion at December 31, 2012. The $500 million revolving credit facility had no outstanding balance and was fully available at quarter-end.
- Cash and cash equivalents were $236.9 million, compared with $2.1 million at year-end 2012.
- Total assets were $4.65 billion and total equity was $2.80 billion at June 30, 2013.
- Common dividends paid during the first six months were $90.9 million, or $0.790 per share. A $0.405 per-share dividend was declared in July 2013.
Material Changes Versus the Prior Comparable Period
- Acquisitions increased substantially: 209 properties for $437.7 million in the second quarter and 226 properties for $480.3 million in the first six months, versus 27 and 94 properties, respectively, in the comparable 2012 periods.
- Property count increased from 1,506 at June 30, 2012, to 1,838 at June 30, 2013, while gross leasable area increased from 17.8 million to 20.2 million square feet.
- In April 2013, NNN issued $350 million of 3.300% senior unsecured notes due April 2023 and received approximately $344.3 million of net proceeds.
- In May 2013, NNN issued $287.5 million of 5.700% Series E preferred stock, generating approximately $277.6 million of net proceeds after issuance costs.
- Common equity issuance generated approximately $238.7 million of net ATM proceeds and $15.9 million through the dividend reinvestment plan during the first six months.
- The revolving credit facility balance declined from $174.2 million at December 31, 2012, to zero at June 30, 2013.
- Continuing-operations impairment losses declined to $1.96 million for the first six months from $35,000 in the prior-year period, while the prior-year period included a $2.72 million impairment of commercial mortgage residual interests.
- Discontinued-operations earnings declined to $1.3 million for the first six months from $5.2 million, despite gains on property dispositions of $3.2 million versus $2.8 million.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide specific quantitative earnings or acquisition guidance. Management expects rental income to continue to benefit from property acquisitions and contractual rent increases.
- Management states that operating cash flow has been sufficient to fund distributions and expects obligations to be met through operating cash flow, existing liquidity, the credit facility, debt or equity offerings, and property dispositions.
- NNN had $34.3 million of remaining commitments for improvements to leased properties at June 30, 2013.
- NNN had 35 vacant, unleased properties, representing approximately 2% of the portfolio. Vacancies, tenant bankruptcies, rent collection issues and tenant concentration could reduce cash flow.
- Portfolio exposure is concentrated in convenience stores and restaurants, and geographically in the South and Southeast. Convenience stores represented 19.9% of annual base rent.
- The company remains exposed to real estate market conditions, interest rates, financing availability, debt covenants, property illiquidity, environmental liabilities and changes in REIT tax requirements.
- All outstanding 5.125% convertible notes due 2028 were called for redemption on July 11, 2013. Subsequent to quarter-end, $130,000 of principal was settled at par plus accrued interest, while holders of the remaining $222.814 million elected conversion into cash and common shares.
- NNN terminated four forward-starting swaps in connection with the 2023 notes issuance and had no derivative instruments outstanding at June 30, 2013.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes to previously disclosed risk factors or material legal proceedings were reported.
Investor Verification Priorities
- Verify the post-quarter-end settlement and share issuance resulting from the 2028 convertible note conversions.
- Assess whether acquisition volume and equity/debt financing can support portfolio growth without excessive dilution or leverage.
- Review debt maturities, fixed-rate exposure, covenant compliance and the availability of the revolving credit facility.
- Evaluate tenant, industry and geographic concentration, particularly convenience stores, restaurants and the South/Southeast markets.
- Reconcile dividend payments with recurring operating cash flow and review the impact of preferred-stock dividends on common-stock coverage.
- Monitor vacant properties, held-for-sale assets, impairment assumptions and the $34.3 million of remaining property improvement commitments.