Business Context and Reporting Period
National Retail Properties, Inc. (NYSE: NNN) filed its Form 10-K for the fiscal year ended December 31, 2012. NNN is a fully integrated REIT focused primarily on acquiring, developing and owning single-tenant retail properties under long-term net leases. At year-end, the portfolio included 1,622 properties totaling approximately 19.2 million square feet across 47 states, with approximately 98% leased and an average remaining lease term of 12 years.
The filing reports one operating segment. Properties are concentrated in convenience stores, restaurants and other retail categories, with Texas representing 21.8% of annualized base rent and convenience stores representing 19.8%.
Financial Performance and Key Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Gross revenues | $342.1 million | $271.7 million | 25.9% |
| Continuing-operations revenues | $331.8 million | $259.9 million | 27.6% |
| Rental income | $315.2 million | $244.6 million | 28.9% |
| Earnings from continuing operations | $128.5 million | $86.5 million | 48.6% |
| Net earnings attributable to NNN | $142.0 million | $92.3 million | 53.8% |
| Net earnings attributable to common stockholders | $121.5 million | $85.5 million | 42.0% |
| Diluted earnings per common share | $1.11 | $0.96 | 15.6% |
| Diluted FFO available to common stockholders | $193.6 million | $139.7 million | 38.6% |
| Common dividends per share | $1.56 | $1.53 | 2.0% |
| Cash flow from operating activities | $228.1 million | $182.9 million | 24.7% |
Continuing-operations earnings margin was approximately 38.7% of continuing-operations revenue, compared with approximately 33.3% in 2011. Interest expense increased to $82.5 million from $74.8 million, while total operating expenses increased to $134.6 million from $102.2 million. The filing does not present a separately labeled quarterly operating margin.
Cash used in investing activities was $601.8 million, primarily reflecting $684.9 million of additions to operating real estate, partly offset by $81.4 million of property-sale proceeds. Financing activities provided $373.6 million. Year-end cash and cash equivalents were $2.1 million.
Total assets increased to $4.0 billion from $3.4 billion. Total debt was $1.587 billion, compared with $1.339 billion, and total stockholders’ equity was $2.296 billion, compared with $2.002 billion. Total liabilities were approximately 39% of gross assets before accumulated depreciation; secured debt was less than 1% of gross assets; and debt to total market capitalization was approximately 31%.
Material Changes Versus the Prior Comparable Period
- NNN acquired 232 properties in 2012 for approximately $707.2 million, compared with 218 properties acquired for approximately $772.5 million in 2011.
- The portfolio expanded from 1,422 to 1,622 properties and from 16.4 million to 19.2 million square feet. Occupancy increased from 97% to 98%.
- NNN sold 34 properties for net proceeds of $81.1 million and recognized a $11.0 million gain, compared with eight properties sold for $12.6 million of proceeds and a $0.5 million gain in 2011.
- In February 2012, NNN issued $287.5 million of Series D preferred depositary shares and redeemed all $92.0 million of Series C preferred stock in March 2012.
- NNN issued $325.0 million of 3.80% notes due 2022, repaid $50.0 million of 7.75% notes, repaid an $18.5 million mortgage and paid $164.6 million to settle conversions of $123.2 million of 3.95% convertible notes.
- The unsecured revolving credit facility was increased from $450.0 million to $500.0 million. At year-end, $174.2 million was outstanding and $325.8 million was available, excluding $3.8 million of undrawn letters of credit.
- Real estate impairment charges increased materially to $10.3 million, including $8.4 million from continuing operations and $1.9 million from discontinued operations, versus $0.4 million in 2011.
- Interest income on commercial mortgage residual interests declined to $2.7 million from $3.1 million, and other-than-temporary valuation impairment increased to $2.8 million from $1.0 million.
Guidance, Outlook, Risks and Unusual Items
Management expects future rental-income growth to come primarily from additional property acquisitions and contractual rent increases. Management also expects long-term liquidity needs to be funded through operating cash flow, the revolving facility, property dispositions and additional debt or equity offerings. No quantitative earnings or acquisition guidance is provided.
- Liquidity and refinancing risk remain important because debt maturities and balloon payments extend from 2013 through 2022. Total contractual cash obligations were approximately $1.600 billion, including $1.424 billion of long-term debt and $174.2 million drawn on the credit facility.
- NNN had $37.2 million of remaining commitments for construction and tenant improvements on 54 properties.
- Tenant and sector concentration remains a risk: approximately 49% of annual base rent came from five retail lines of trade, 24% from five tenants and 46% from five states.
- NNN owned 34 vacant properties, approximately 2% of the portfolio. Less than 1% of gross leasable area was leased to tenants that had filed Chapter 11 bankruptcy petitions as of January 31, 2013.
- Environmental exposure is material to the business. As of February 15, 2013, 67 properties were subject to some level of remediation or monitoring. Environmental insurance on certain properties was scheduled to expire in August 2013 and may not fully cover potential liabilities.
- NNN recorded a $6.9 million income-tax benefit in 2012, including the reversal of valuation allowances on deferred tax assets. Management characterized the related prior-period errors as immaterial.
- Subsequent to year-end, the remaining $15.5 million principal balance of the 2026 convertible notes was converted, with approximately $20.7 million paid in January 2013.
- The company was in compliance with its credit-facility and debt covenants at December 31, 2012. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most Important Facts for Investors to Verify
- Confirm the sustainability of FFO and operating cash flow relative to common and preferred dividend obligations.
- Review the timing and refinancing plan for debt maturities, particularly the 2013-2017 obligations and the variable-rate credit facility.
- Assess acquisition yields, funding sources and leverage following the substantial 2012 portfolio expansion.
- Monitor occupancy, tenant credit quality, bankruptcy exposure and lease expirations, including the 1.7% of annual base rent expiring in 2013.
- Evaluate the effect of the $10.3 million real estate impairment charge and the assumptions supporting property valuations.
- Review environmental remediation obligations, insurance renewal status and potential unrecorded liabilities.
- Reconcile reported GAAP earnings, discontinued operations, FFO and the 2012 deferred-tax benefit when assessing recurring performance.