National Retail Properties, Inc. (NNN) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012; filed November 5, 2012. NNN is a fully integrated REIT focused primarily on single-tenant retail properties leased under long-term net leases. At quarter-end, the portfolio included 1,530 properties totaling approximately 18.3 million square feet across 47 states, with 98% leased and operated and a 12-year weighted-average remaining lease term.
Financial Highlights
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Continuing-operations revenue | $85.0 million | $66.6 million | $244.9 million | $188.7 million |
| Earnings from operations | $47.8 million | $41.2 million | $145.3 million | $115.9 million |
| Net earnings attributable to NNN | $38.0 million | $22.6 million | $101.4 million | $64.8 million |
| Net earnings attributable to common stockholders | $33.3 million | $20.9 million | $85.6 million | $59.7 million |
| Diluted earnings per share | $0.30 | $0.24 | $0.79 | $0.69 |
| Net cash provided by operating activities | Not provided for quarter | Not provided for quarter | $171.6 million | $139.1 million |
Continuing-operations revenue increased 27.6% in the quarter and 29.7% for the nine months, primarily from property acquisitions and rent increases under existing leases. Rental income increased 28.9% in the quarter and 30.8% for the nine months.
Operating expenses increased 41.9% in the quarter and 34.5% for the nine months. Continuing-operations operating expenses were 43.8% of revenue in the quarter versus 39.5% in the prior-year quarter, reflecting higher depreciation and amortization and $7.3 million of real-estate impairment losses and other charges. Interest expense increased 13.8% in the quarter and 12.0% for the nine months.
Reported earnings benefited from a $7.7 million income-tax benefit related to correction of previously identified immaterial deferred-tax errors and reversal of a valuation allowance. The filing states that the correction was not material to previously reported periods. Nine-month earnings also included a $2.7 million impairment of commercial mortgage residual interests.
Balance Sheet, Cash Flow and Capitalization
- Total assets were $3.93 billion at September 30, 2012, up from $3.43 billion at December 31, 2011.
- Cash and cash equivalents were $141.4 million, compared with $2.1 million at year-end 2011.
- Total debt was $1.53 billion, up from $1.34 billion at year-end 2011. Debt comprised $1.17 billion of notes payable, $358.6 million of convertible notes and $10.9 million of mortgages. No borrowings were outstanding under the revolving credit facility at quarter-end.
- Net cash used in investing activities was $381.2 million, including $414.8 million of additions to operating real estate.
- Net cash provided by financing activities was $349.0 million, including proceeds from debt and equity offerings, partially offset by dividends and debt repayments.
- Common-stock dividends paid during the nine months totaled $124.1 million, or $1.165 per share. An October 2012 dividend of $0.395 per share was declared for payment in November 2012.
- NNN had $450.0 million available under its credit facility at September 30, 2012, excluding $3.8 million of undrawn letters of credit.
Material Changes Versus the Prior Comparable Period
- NNN acquired 124 properties for approximately $452.6 million during the first nine months, compared with 107 properties for $445.3 million in the prior-year period. It sold 18 properties for net proceeds of $32.1 million, versus five properties and $9.1 million previously.
- The portfolio grew from 1,298 properties at September 30, 2011 to 1,530 properties at September 30, 2012. Leased and operated properties increased from 1,261 to 1,497.
- In August 2012, NNN issued $325.0 million of 3.80% senior notes due October 2022, receiving approximately $317.1 million net of issuance costs.
- NNN issued $287.5 million of Series D preferred stock and redeemed all $92.0 million of Series C preferred stock. Series D carries a 6.625% cumulative dividend and has no maturity date.
- NNN issued approximately $65.4 million through its ATM common-stock program and $52.8 million through its dividend reinvestment plan during the nine months.
- Discontinued operations contributed $4.7 million for the nine months, compared with $2.9 million in the prior-year period, including a $4.4 million gain on property dispositions.
Guidance, Outlook, Risks and Unusual Items
Management expects rental income growth to continue primarily through additional property acquisitions and contractual rent increases. Management stated that operating cash flow, available cash, the credit facility, debt and equity financing, and property dispositions are expected to fund acquisitions, development, dividends and other obligations. The filing does not provide formal earnings or acquisition guidance.
- Remaining construction and improvement commitments totaled $37.6 million across 54 properties.
- There were 33 vacant, unleased properties, representing approximately 2% of the portfolio.
- Key risks include tenant defaults or bankruptcies, concentration in convenience stores and restaurants and in southern and southeastern markets, property illiquidity, acquisition and disposition execution, interest-rate exposure, debt covenant compliance, access to capital, valuation changes in commercial mortgage residual interests, environmental liabilities and maintenance of REIT qualification.
- NNN had no outstanding derivatives at September 30, 2012. A 1% increase in interest rates on variable-rate debt would have increased nine-month interest expense by less than 1%.
- After quarter-end, the 2026 convertible notes became convertible. Through November 2, 2012, approximately $100.6 million of principal had been surrendered for conversion, leaving approximately $38.1 million outstanding.
- On October 31, 2012, NNN amended its revolving facility, increasing capacity to $500.0 million, reducing pricing to LIBOR plus 117.5 basis points at its then-current rating, and extending maturity to October 2016 with an extension option to October 2017.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2012, with no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile reported earnings growth with the $7.7 million tax benefit, impairments, discontinued-operations gains and other nonrecurring items.
- Assess leverage after the 2022 notes issuance, the preferred-stock offering and subsequent 2026 convertible-note conversions.
- Review debt maturities, including the 2014 and 2015 notes, the 2026 and 2028 convertible notes, and applicable covenant headroom.
- Evaluate whether portfolio growth and 98% occupancy support sustainable cash flow and dividend coverage.
- Monitor tenant and industry concentrations, especially convenience stores and restaurants, and geographic exposure to the South and Southeast.
- Review assumptions underlying the $12.5 million commercial mortgage residual-interest valuation, including prepayment speeds, defaults, loss severity and the 25% discount rate.
- Confirm the effect of the 2026 note conversions and amended credit facility in subsequent filings.