NNN REIT, Inc. (National Retail Properties, Inc.) — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited quarterly report for the period ended March 31, 2017. NNN is a fully integrated REIT that acquires, owns, develops and invests in primarily retail properties leased under long-term net leases.
- Portfolio: 2,543 properties totaling approximately 27.3 million square feet across 48 states.
- Occupancy: approximately 99%; weighted-average remaining lease term of 11.4 years.
- Largest annual base-rent concentrations were convenience stores at 16.8%, full-service restaurants at 11.7%, limited-service restaurants at 7.5% and automotive service at 7.0%.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenues | $141.4 million | $127.0 million | Up 11.4% |
| Rental income | $137.3 million | $122.5 million | Up 12.1% |
| Earnings from operations | $85.5 million | $77.5 million | Up 10.3% |
| Net earnings attributable to NNN | $73.7 million | $70.7 million | Up 4.2% |
| Net earnings attributable to common stockholders | $51.6 million | $61.8 million | Down 16.5% |
| Basic and diluted EPS | $0.35 | $0.44 | Down $0.09 |
| Cash flow from operations | $117.2 million | $102.4 million | Up 14.4% |
- Operating margin was approximately 60.5%, compared with 61.0% in the prior-year quarter. Net earnings margin attributable to NNN was approximately 52.1%, compared with 55.7%.
- Operating expenses increased 13.0% to $55.9 million, primarily because depreciation and amortization increased 15.8% to $40.1 million and real estate impairments increased to $1.2 million from $0.6 million.
- Interest expense increased 12.8% to $26.6 million, largely reflecting $350 million of notes issued in December 2016 and higher Credit Facility usage and rates.
- Net cash used in investing activities was $58.8 million, including $98.1 million of real estate additions and $39.3 million of disposition proceeds.
- Net cash used in financing activities was $318.5 million, principally due to the $287.5 million redemption of Series D preferred stock and $66.8 million of common dividends. Period-end cash and cash equivalents were $34.4 million, compared with $294.5 million at December 31, 2016.
- Total debt was $2.312 billion at March 31, 2017, consisting primarily of $2.299 billion of notes payable. The $650 million unsecured revolving Credit Facility had no outstanding balance and $650 million available, excluding $0.2 million of undrawn letters of credit.
- Total assets were $6.115 billion and total equity was $3.675 billion at quarter-end.
Material changes versus the prior comparable period
- NNN acquired 24 properties for total investment of $107.9 million, compared with 46 properties and $125.2 million in Q1 2016. The initial cash yield was 6.9%, versus 7.0%.
- NNN sold 17 properties for net proceeds of $39.0 million and recognized a $14.6 million gain, compared with 10 properties, $52.8 million of proceeds and a $16.9 million gain in Q1 2016.
- The portfolio increased from 2,293 properties at March 31, 2016 to 2,543 properties at March 31, 2017, while leased square footage increased from 25.1 million to 26.9 million.
- Common shares issued through the ATM program generated $47.8 million of net proceeds from 1.1 million shares, compared with $82.1 million from 1.9 million shares in Q1 2016.
- Common dividends increased to $0.455 per share from $0.435. Series F preferred dividends were incurred for the first time in the comparable periods, while Series D preferred stock was fully redeemed in February 2017.
- Common-stock earnings and EPS declined despite higher net earnings attributable to NNN, primarily because of preferred dividends, the $9.9 million excess of redemption value over carrying value related to the Series D redemption, and increased share count.
Guidance, outlook, risks and unusual items
- The filing does not provide specific full-year earnings, acquisition or disposition guidance. Management expects rental income growth to come from additional acquisitions and contractual rent increases.
- Management expects operating cash flow to fund distributions and anticipates meeting obligations through operating cash flow, existing liquidity, the Credit Facility, debt or equity issuance and property dispositions.
- NNN had construction commitments on 25 properties totaling $111.0 million, of which $68.0 million had been funded and $43.0 million remained at March 31, 2017.
- Twenty-three properties were vacant and unleased, representing less than 1% of the portfolio. Approximately 3% of the portfolio was leased to four tenants, including Gander Mountain, that had filed Chapter 11 bankruptcy petitions; those tenants could reject or affirm their leases.
- Interest-rate risk primarily relates to variable-rate borrowings and future debt issuance. NNN had one $125 million forward-starting swap outstanding and no Credit Facility balance at quarter-end.
- Key risks include tenant concentration and bankruptcies, geographic and industry concentration, property illiquidity, adverse real estate or economic conditions, access to capital, interest rates, debt covenants, environmental liabilities, REIT qualification and dividend requirements.
- NNN plans to adopt the revenue recognition guidance in ASU 2014-09 and related amendments on January 1, 2018 using the cumulative catch-up transition method; the potential impact was still under evaluation.
- Management concluded that disclosure controls and procedures were effective, and reported no material change in internal control over financial reporting. No material changes to previously disclosed risk factors or reportable subsequent events were identified.
Important facts for investors to verify
- Reconcile common-stockholder earnings and EPS to preferred dividends, the Series D redemption charge and dilution.
- Monitor tenant exposure, particularly the bankruptcy-related leases and the convenience-store and restaurant concentrations.
- Assess the sustainability of the $0.455 quarterly common dividend against operating cash flow, capital commitments and future financing needs.
- Review debt maturities, refinancing requirements, interest-rate sensitivity and the availability of the revolving Credit Facility.
- Evaluate whether acquisition yields, occupancy and contractual rent increases support future revenue growth without excessive equity issuance.
- Confirm the eventual effects of the pending accounting standards, particularly revenue recognition and leases.