NNN REIT, Inc. (National Retail Properties, Inc.) — Q1 2018 Form 10-Q Summary
Business Context and Reporting Period
National Retail Properties, Inc. is a Maryland REIT that acquires, owns, develops and invests in primarily retail properties leased under long-term net leases. The filing covers the quarter ended March 31, 2018. The portfolio comprised 2,800 properties totaling approximately 29.1 million square feet across 48 states, with a weighted-average remaining lease term of 11.4 years and approximately 99% of properties leased.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $152.8 million | $141.4 million | 8.1% increase |
| Rental income | $148.6 million | $137.3 million | 8.2% increase |
| Earnings from operations | $91.3 million | $85.5 million | 6.7% increase |
| Operating margin | 59.7% | 60.5% | Approx. 80 basis-point decrease |
| Net earnings | $103.3 million | $73.6 million | 40.2% increase |
| Net earnings attributable to common stockholders | $94.7 million | $51.6 million | 83.5% increase |
| Diluted earnings per share | $0.62 | $0.35 | Increase |
| Net cash from operating activities | $130.0 million | $117.2 million | 11.0% increase |
| Capital expenditures and real estate additions | $175.0 million | $98.1 million | Increase |
| Total debt | $2.637 billion | $2.580 billion | Increase of $56.7 million |
| Cash and cash equivalents | $4.0 million | $34.4 million | Period-end cash decreased |
Net earnings benefited materially from a $38.6 million gain on real estate dispositions, compared with $14.6 million in the prior-year quarter. Operating expenses were $61.6 million, including $44.5 million of depreciation and amortization, $2.2 million of impairment losses and $0.3 million of retirement severance costs. Interest expense was essentially unchanged at $26.6 million.
Material Changes Versus the Prior Comparable Period
- NNN acquired 52 properties for approximately $177.0 million, compared with 24 properties for $107.9 million in Q1 2017. The initial cash yield was 6.7%, versus 6.9%.
- NNN sold 15 properties for net proceeds of approximately $71.6 million and recognized a $38.6 million gain, compared with 17 properties sold and a $14.6 million gain in Q1 2017.
- Real estate additions increased substantially, driving higher depreciation and amortization expense.
- Impairment losses increased to $2.2 million from $1.2 million.
- Common dividends increased to $0.475 per share from $0.455 per share. Common dividends paid totaled $72.7 million.
- Common shares outstanding increased to approximately 153.8 million at March 31, 2018, from approximately 153.6 million at December 31, 2017. The DRIP generated $1.5 million of net proceeds; no ATM shares were issued during the quarter.
- The company adopted ASC 606 using the cumulative catch-up method. Management reported no material impact on financial position or results of operations.
Debt, Liquidity and Capital Resources
- The $900 million unsecured revolving credit facility had $176.4 million outstanding and $723.6 million available at March 31, 2018, excluding $58,000 of undrawn letters of credit. It matures in January 2022, with a possible one-year extension.
- The credit facility had a weighted-average outstanding balance of $145.4 million and a weighted-average interest rate of 2.5% during the quarter.
- Notes payable totaled $2.447 billion, or 92.8% of total debt. Mortgages payable totaled $13.1 million.
- Operating cash flow covered quarterly common and preferred dividends. Financing activities included $491.0 million of credit-facility borrowings and $435.1 million of repayments.
- NNN had construction commitments on 20 properties totaling $147.6 million, of which $105.2 million had been funded and $42.4 million remained committed.
Guidance, Outlook, Commentary and Risks
The filing does not provide explicit earnings or acquisition guidance. Management expects rental income growth to continue through additional acquisitions and contractual rent increases. Management also expects property-related capital needs to remain modest because most leases are net leases requiring tenants to pay property taxes, maintain the properties and carry insurance.
Key risks include tenant defaults or bankruptcies, vacancies, concentration in convenience stores and restaurant businesses, geographic concentration in the South and Southeast, dependence on access to debt and equity capital, interest-rate increases, refinancing and debt-covenant risks, real estate valuation and impairment risk, environmental liabilities, competition, REIT qualification requirements and cybersecurity risks. At March 31, 2018, NNN had 23 vacant properties, approximately 1% of the portfolio, and less than 1% of the portfolio was leased to three Chapter 11 bankruptcy tenants.
NNN entered into two forward-starting interest-rate swaps with a total notional amount of $250 million to hedge potential future debt issuance. The company stated that it does not use derivatives for trading or speculative purposes. The filing reported no material subsequent events and no material changes to previously disclosed risk factors.
Investor Verification Items
- Verify the sustainability of earnings excluding the $38.6 million real estate disposition gain and other nonrecurring items.
- Review recurring cash earnings and funds-from-operations measures, which are not provided in the supplied filing text.
- Assess acquisition yields, disposition gains and whether acquisition-driven revenue growth offsets higher depreciation and leverage.
- Monitor credit-facility usage, interest rates, refinancing requirements and compliance with debt covenants.
- Evaluate tenant and industry concentration, particularly convenience stores and restaurants, as well as the three bankruptcy-related tenants.
- Track the $42.4 million remaining construction commitment and the effect of vacant properties or future impairments on liquidity.
- Confirm the treatment and potential effect of the upcoming ASU 2016-02 lease-accounting adoption; the filing states that evaluation was ongoing.