NNN REIT, Inc. — Form 10-Q Summary
Business context and reporting period
The filing is for National Retail Properties, Inc. (NYSE: NNN), a fully integrated REIT, for the quarter and six months ended June 30, 2020. NNN owned 3,117 primarily retail properties totaling approximately 32.5 million square feet across 48 states, with 99% occupancy and a 10.9-year weighted average remaining lease term. The filing identifies COVID-19 as a material source of operating and financial uncertainty.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenues | $163.7 million | $164.8 million | $338.8 million | $328.5 million |
| Rental income | $163.5 million | $164.6 million | $338.0 million | $327.6 million |
| Net earnings attributable to NNN | $46.3 million | $78.7 million | $111.4 million | $158.7 million |
| Net earnings attributable to common stockholders | $41.8 million | $70.1 million | $102.5 million | $141.5 million |
| Diluted EPS | $0.24 | $0.43 | $0.60 | $0.87 |
| Cash flow from operations | Not separately provided | Not separately provided | $187.7 million | $235.3 million |
- Q2 total revenue declined 0.7%, while six-month revenue increased 3.1%, primarily reflecting prior-year and early-2020 acquisitions.
- Q2 operating earnings declined to $77.9 million from $108.4 million. The implied operating margin was approximately 47.6%, compared with 65.8% in Q2 2019, principally due to higher impairment losses and depreciation.
- Net margin attributable to NNN common stockholders was approximately 25.5% in Q2 2020 versus 42.5% in Q2 2019.
- Real estate impairment losses increased to $21.9 million in Q2 and $27.4 million for the six-month period, compared with $7.2 million and $10.4 million, respectively, in the prior-year periods.
- Interest expense increased 6.5% in Q2 and 9.5% for the six months, reflecting additional debt issued in March 2020 and higher average credit-facility borrowings earlier in the period.
- At June 30, 2020, total assets were $7.63 billion, total debt was $3.22 billion, cash and cash equivalents were $224.6 million, and stockholders’ equity was $4.31 billion.
- Six-month investing cash flow was an outflow of $41.5 million, compared with $317.8 million in 2019, reflecting sharply lower acquisition activity.
Material changes versus the prior comparable period
- COVID-19 materially affected tenant rent payments and led to rent deferrals, increased receivables and allowances, and higher uncertainty regarding future collections.
- During Q2, NNN entered rent-deferral amendments with tenants representing approximately 21% of rent due for the quarter. Average deferral was 2.4 months; 66% of deferred rent was due by June 30, 2021 and 94% by December 31, 2021.
- As of July 30, 2020, NNN had collected approximately 69% of Q2 rent due and 84% of rent originally due in July.
- Acquisitions fell to zero in Q2 and 21 properties for the six-month period, compared with 71 and 104, respectively, in the prior-year periods. NNN deferred material new investments pending improved economic and capital-markets visibility.
- In March 2020, NNN issued $400 million of 2.5% notes due 2030 and $300 million of 3.1% notes due 2050. It used proceeds partly to redeem $325 million of 3.8% notes due 2022, incurring a $16.7 million early-extinguishment charge.
- Common stock issuance under the ATM program generated $52.0 million of net proceeds during the first six months, while common dividends paid increased to $176.4 million from $161.6 million.
- The Series E preferred stock was no longer outstanding; Series F preferred stock remained outstanding with $345 million of stated liquidation value.
Guidance, outlook, risks and unusual items
- Management did not provide quantitative earnings or revenue guidance in the filing. It expects cash, operating cash flow and available credit to meet near-term funding needs, but states that the ultimate COVID-19 impact cannot be predicted.
- NNN had $224.6 million of cash and $900 million available under its unsecured revolving credit facility at June 30, 2020. The facility matures in January 2022, with a potential one-year extension, and NNN was in compliance with its financial covenants.
- Major risks include tenant defaults or bankruptcies, prolonged closures, lower rent collections, increased vacancies, impaired property values, reduced access to capital, covenant pressure and possible effects on dividend capacity.
- NNN had 41 vacant properties, approximately 1% of the portfolio. Properties leased to six Chapter 11 tenants represented approximately 2% of total properties and 3% of gross leasable area.
- NNN had $13.97 million of remaining commitments on nine property construction projects, against total commitments of $52.5 million.
- The company had no outstanding derivatives at June 30, 2020. Approximately $17.7 million remained in accumulated other comprehensive loss related to terminated interest-rate hedges, with an estimated $2.6 million expected to be reclassified to interest expense over the next 12 months.
- Management reported effective disclosure controls and no material change in internal control over financial reporting.
Facts investors should verify
- Subsequent rent-collection trends, deferred-rent repayment performance and changes in tenant credit quality.
- Potential additional impairments, allowance increases or lease-accounting changes as COVID-19 effects continue.
- Debt maturities, refinancing capacity, covenant compliance and the availability of the revolving credit facility.
- Whether reduced acquisitions and development spending are temporary or indicate a longer-term change in portfolio growth.
- The sustainability of common and preferred dividends relative to recurring operating cash flow; the filing does not provide a clear FFO or AFFO measure in the supplied text.
- Exposure to restaurants, entertainment, theaters, health and fitness, and other economically sensitive tenant categories.