NNN REIT, Inc. (National Retail Properties, Inc.) — Q1 2022 Form 10-Q
Business context and reporting period
Unaudited quarterly report for the period ended March 31, 2022. NNN is a fully integrated REIT that acquires, owns, develops and invests in primarily retail properties leased under long-term net leases. The portfolio comprised 3,271 properties totaling approximately 33.5 million square feet across 48 states, with approximately 99% leased and a 10.6-year weighted average remaining lease term.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenues | $190.3 million | $179.8 million | 5.8% increase |
| Rental income | $189.8 million | $179.2 million | 5.9% increase |
| Earnings from operations | $118.0 million | $112.4 million | 5.0% increase |
| Operating margin | 62.0% | 62.5% | Down approximately 50 bps |
| Net earnings attributable to NNN | $81.4 million | $56.6 million | 43.8% increase |
| Net earnings attributable to common stockholders | $81.4 million | $52.1 million | 56.2% increase |
| Diluted EPS | $0.46 | $0.30 | Increase of $0.16 |
| Net margin attributable to common stockholders | 42.8% | 29.0% | Improved primarily due to lower nonrecurring debt-extinguishment costs and no preferred dividends |
| Cash flow from operating activities | $164.3 million | $161.2 million | 1.9% increase |
| Capital expenditures and real estate additions | $209.5 million | $106.5 million | Nearly doubled |
| Dividends paid to common stockholders | $92.8 million | $90.8 million | 2.1% increase |
At March 31, 2022, total assets were $7.77 billion, total debt was $3.75 billion, stockholders’ equity was $3.90 billion and cash and cash equivalents were $53.7 million. Reported debt was approximately 0.96 times stockholders’ equity. NNN had no outstanding balance on its $1.1 billion unsecured revolving credit facility, leaving the full facility available, and was in compliance with its covenants.
Material changes versus the prior comparable period
- Rental income increased primarily from scheduled rent increases, including CPI-based increases, and contributions from property acquisitions completed in 2021 and early 2022.
- NNN acquired 59 properties totaling approximately 879,000 square feet for $210.8 million, compared with 29 properties and $105.6 million in Q1 2021. The initial cash yield on 2022 acquisitions was 6.2% versus 6.4% in the prior-year period.
- NNN sold 10 properties for $20.1 million of net proceeds and recognized a $4.0 million gain, compared with 11 properties, $17.6 million of proceeds and a $4.3 million gain in Q1 2021.
- Operating expenses increased 6.4% to $76.2 million. Depreciation and amortization rose 5.4% due primarily to acquisitions, and $3.6 million of executive retirement costs were recorded in connection with the planned retirement of CEO Julian Whitehurst.
- Interest expense increased 6.1% to $36.7 million, primarily reflecting the 2021 issuance of the 2051 and 2052 senior unsecured notes. The prior-year period included a $21.3 million loss on early extinguishment of debt; no comparable charge was recorded in 2022.
- The Series F preferred stock was redeemed in October 2021. Accordingly, Q1 2022 included no preferred dividends, compared with $4.5 million in Q1 2021.
- Cash declined by $117.6 million during the quarter to $53.7 million, primarily because real estate additions and common dividends exceeded operating cash flow and disposition proceeds.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide explicit quantitative earnings or acquisition guidance. Management stated that rent collections had returned to pre-pandemic levels, but future operating results remain subject to macroeconomic conditions and tenant performance. Approximately $56.8 million of COVID-19-related rent deferrals remained scheduled for repayment, with substantially all remaining amounts due periodically by December 31, 2023.
- Construction commitments covered 13 properties with total commitments of $38.9 million, of which $19.0 million remained unfunded at March 31, 2022.
- Contractual long-term debt principal totaled $3.81 billion, with scheduled maturities of $350 million in 2024, $400 million in 2025 and $350 million in 2026; $2.70 billion was scheduled thereafter. Estimated contractual interest obligations totaled $1.92 billion.
- CEO Julian Whitehurst was scheduled to retire on April 28, 2022, as part of the company’s succession planning. The filing was signed by Stephen A. Horn, Jr. as CEO and President on May 3, 2022.
- NNN had 26 vacant, unleased properties, approximately 1% of the portfolio, and reported no tenants in Chapter 11 bankruptcy as of April 28, 2022.
- Key risks include tenant defaults or bankruptcies, rent collection and deferred-rent recovery, concentration in convenience stores, automotive service and restaurants, geographic concentration in the South and Southeast, interest-rate and LIBOR transition risk, property impairments, access to capital, debt covenant compliance, cybersecurity and REIT qualification.
- NNN had no derivative instruments outstanding at March 31, 2022. A further $2.4 million of accumulated hedge losses was expected to be reclassified into interest expense over the following 12 months.
- Management concluded that disclosure controls and procedures were effective, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether portfolio occupancy, tenant rent collections and repayment of COVID-19-related deferred rent remain stable.
- Whether acquisition volume and approximately 6.2% initial cash yields can be sustained without increasing leverage or diluting shareholders.
- The timing and refinancing strategy for the $1.1 billion of debt maturities scheduled from 2024 through 2026 and the larger maturities thereafter.
- The impact of rising interest rates and the transition away from LIBOR on the revolving credit facility and future financing costs.
- The financial and operational effects of the CEO transition and the $3.6 million executive retirement charge.
- Funds from operations, adjusted funds from operations, payout ratios and same-store operating metrics; these values are not clearly provided in the supplied filing text.