NNN REIT, Inc. — Q3 2023 Form 10-Q Summary
Business context and reporting period
NNN REIT, Inc., formerly National Retail Properties, Inc., is a fully integrated Maryland REIT that acquires, owns, develops and invests in retail properties primarily leased under long-term net leases. The filing covers the quarter and nine months ended September 30, 2023. The company changed its name to NNN REIT, Inc. effective May 1, 2023.
- Portfolio: 3,511 properties totaling approximately 35.8 million square feet across 49 states.
- Approximately 99% of properties were leased; weighted average remaining lease term was 10.1 years.
- Largest annual base-rent concentrations were convenience stores at 16.8%, automotive service at 14.7%, and full- and limited-service restaurants at 8.8% each.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Total revenues | $205.1 million | $193.5 million | 6.0% increase |
| Rental income | $204.9 million | $193.1 million | 6.1% increase |
| Operating expenses | $77.5 million | $74.0 million | 4.7% increase |
| Earnings from operations | $147.7 million | $125.4 million | 17.8% increase |
| Net earnings attributable to common stockholders | $106.8 million | $88.4 million | 20.8% increase |
| Basic and diluted EPS | $0.59 | $0.50 | 18.0% increase |
Operating margin was approximately 72.0% in Q3 2023 versus 64.8% in Q3 2022, while net margin was approximately 52.1% versus 45.7%. The improvement benefited from higher rental income and a larger gain on property dispositions.
| Metric | Nine months 2023 | Nine months 2022 | Change |
|---|---|---|---|
| Total revenues | $611.9 million | $574.5 million | 6.5% increase |
| Earnings from operations | $415.4 million | $354.2 million | 17.3% increase |
| Net earnings attributable to common stockholders | $295.7 million | $244.0 million | 21.2% increase |
| Basic EPS | $1.63 | $1.39 | 17.3% increase |
| Cash provided by operating activities | $490.8 million | $465.3 million | 5.5% increase |
- Q3 gain on disposition of real estate was $20.0 million versus $5.9 million in the prior-year quarter. For the nine-month period, gains were $40.2 million versus $10.7 million.
- Interest expense increased 12.3% in Q3 and 9.2% for the nine-month period, primarily due to the new 2033 notes and higher average credit-facility borrowings and rates.
- Real estate impairment losses were $1.0 million in Q3 and $3.7 million for the nine-month period, compared with $7.2 million for the prior-year nine-month period.
Balance sheet, debt and liquidity
- Real estate portfolio, net, was $8.35 billion at September 30, 2023, up from $8.02 billion at December 31, 2022.
- Total assets were $8.56 billion and stockholders’ equity was $4.16 billion.
- Total debt was $4.23 billion, compared with $3.92 billion at year-end 2022. All outstanding debt consisted of unsecured notes at quarter-end.
- NNN issued $500.0 million of 5.600% senior unsecured notes due October 2033, receiving approximately $483.9 million of net proceeds after issuance costs. The effective interest rate is 5.905%.
- The $1.1 billion revolving credit facility had no balance outstanding at September 30, 2023, leaving $1.1 billion available. NNN was in compliance with its financial covenants.
- Cash, cash equivalents and restricted cash totaled $98.3 million, including $21.1 million of restricted cash and escrow balances.
- Near-term note maturities include $350.0 million in 2024, $400.0 million in 2025, $350.0 million in 2026 and $400.0 million in 2027. Total contractual cash obligations, including estimated interest and the headquarters lease, were $6.31 billion.
Material changes versus the prior comparable period
- Revenue, earnings from operations, net earnings and EPS increased, supported primarily by property acquisitions and disposition gains.
- The property portfolio expanded to 3,511 properties from 3,349 at September 30, 2022 and 3,411 at December 31, 2022.
- Nine-month acquisitions declined to 125 properties costing $550.0 million from 154 properties costing $587.7 million, but the reported acquisition cap rate increased to 7.2% from 6.2%.
- Nine-month dispositions remained at 26 properties, while net sales proceeds increased to $89.2 million from $49.2 million and net gains increased to $40.2 million from $10.7 million.
- Operating cash flow increased by $25.5 million, while investing cash use declined to $436.3 million from $526.8 million.
- NNN repaid its remaining $9.8 million of mortgage principal in April 2023 and repaid $166.2 million of revolving credit borrowings on a net basis.
- ATM equity issuance declined to 650,135 shares generating $28.3 million of net proceeds from 2.8 million shares generating $127.3 million in the prior-year period.
- Dividends increased to $0.5650 per share in Q3 from $0.5500 per share. In October 2023, the company declared another $0.5650 per-share dividend payable in November 2023.
Guidance, outlook, commentary and risks
The filing does not provide a clear quantitative earnings or acquisition outlook. Management expects liquidity needs to be funded through operating cash flow, cash on hand, the revolving credit facility, debt or equity issuance, and property dispositions. Management states that acquisition funding is discretionary and that these resources are expected to meet long-term obligations, although financing may become more expensive or unavailable.
- NNN had construction commitments for 57 properties totaling $391.6 million, of which $184.2 million remained unfunded at September 30, 2023. Completion was generally expected within 12 to 18 months.
- Twenty-seven properties were vacant and unleased, representing less than 1% of properties and approximately 1% of gross leasable area.
- Less than 1% of properties and gross leasable area was leased to a tenant in Chapter 11 bankruptcy as of October 27, 2023.
- Approximately 93% of pandemic-related deferred rent had been repaid by September 30, 2023. Eight tenants remained classified on a cash basis, representing 6.9% of annual base rent.
- Key risks include tenant defaults or bankruptcies, industry and geographic concentration, inflation and economic conditions, higher interest rates, refinancing and covenant risk, property impairments, vacancy, construction obligations, access to capital, cybersecurity, environmental liabilities and continued REIT qualification.
- NNN had no outstanding derivative instruments at quarter-end. Approximately $2.3 million of previously deferred hedge losses were expected to be reclassified into interest expense over the next 12 months.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile reported earnings growth with the unusually large increase in property-disposition gains and assess recurring operating performance excluding gains.
- Review debt maturities, refinancing plans and exposure to higher rates, particularly the $1.5 billion of note principal maturing from 2024 through 2027.
- Evaluate the $184.2 million of remaining construction commitments against operating cash flow and available credit.
- Monitor tenant credit quality, cash-basis tenants, the Chapter 11 tenant and the company’s retail-sector concentrations.
- Assess dividend coverage using recurring funds from operations or similar non-GAAP measures; those measures are not included in the supplied filing text.
- Verify future acquisition volume, disposition activity and financing costs, as the filing provides no clear quantitative full-year guidance.