Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report on Form 10-K of National Retail Properties, Inc. for the year ended December 31, 2021 ("2021 Annual Report"). The terms “NNN” and the “Company” refer to National Retail Properties, Inc. and all of its consolidated subsidiaries.
Forward-Looking Statements
The information herein contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 (the “Exchange Act”). Also, when NNN uses any of the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” or similar expressions, NNN is making forward-looking statements. Although management believes that the expectations reflected in such forward-looking statements are based upon present expectations and reasonable assumptions, NNN’s actual results could differ materially from those set forth in the forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and NNN undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law. The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statement:
•Changes in financial and economic conditions may have an adverse impact on NNN, its tenants, and commercial real estate in general;
•An epidemic or pandemic (such as the outbreak and worldwide spread of a novel strain of coronavirus, and its variants ("COVID-19")), and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it, may precipitate or materially exacerbate one or more of the other risks, and may significantly disrupt NNN's tenants' ability to operate their businesses and/or pay rent to NNN or prevent NNN from operating its business in the ordinary course for an extended period;
•Loss of rent from tenants would reduce NNN's cash flow;
•A significant portion of NNN's annual base rent is concentrated in specific industry classifications, tenants and geographic locations;
•NNN may not be able to successfully execute its acquisition or development strategies;
•NNN may not be able to dispose of properties consistent with its operating strategy;
•Certain provisions of NNN's leases or loan agreements may be unenforceable;
•Competition from numerous other real estate investment trusts (“REIT”), commercial developers, real estate limited partnerships and other investors may impede NNN’s ability to grow;
•Uninsured losses may adversely affect NNN's operating results and asset values;
•NNN's ability to fully control the management of its net-leased properties may be limited;
•Vacant properties or bankrupt tenants could adversely affect NNN's business or financial condition;
•Cybersecurity risks and cyber incidents could adversely affect NNN's business, disrupt operations and expose NNN to liabilities to tenants, employees, capital providers, and other third parties;
•Future investment in international markets could subject NNN to additional risks;
•NNN may suffer a loss in the event of a default of or bankruptcy of a tenant or a borrower;
•Property ownership through joint ventures and partnerships could limit NNN's control of those investments;
•NNN may be unable to obtain debt or equity capital on favorable terms, if at all;
•The amount of debt NNN has and the restrictions imposed by that debt could adversely affect NNN's business and financial condition;
•NNN is obligated to comply with financial and other covenants in its debt instruments that could restrict its operating activities, and the failure to comply with such covenants could result in defaults that accelerate the payment of such debt;
•NNN's ability to pay dividends in the future is subject to many factors;
•Owning real estate and indirect interests in real estate carries inherent risks;
•NNN's real estate investments are illiquid;
•NNN may be subject to known or unknown environmental liabilities and risks, including but not limited to liabilities and risks resulting from the existence of hazardous materials on or under properties owned by NNN;
•NNN's failure to qualify as a REIT for federal income tax purposes could result in significant tax liability;
•Compliance with REIT requirements, including distribution requirements, may limit NNN's flexibility and may negatively affect NNN's operating decisions;
•The share ownership restrictions of the Internal Revenue Code of 1986, as amended (the "Code"), for REITs and the 9.8% share ownership limit in NNN's charter may inhibit market activity in NNN's shares of stock and restrict NNN's business combination opportunities;
19
•The cost of complying with changes in governmental laws and regulations may adversely affect NNN's results of operations;
•Non-compliance with Title III of the Americans with Disabilities Act of 1990 could have an adverse effect on NNN's business and operating results;
•NNN's loss of key management personnel could adversely affect performance and the value of its securities;
•NNN's failure to maintain effective internal control over financial reporting could have a material adverse effect on its business, operating results and the market value of NNN's securities;
•Acts of violence, terrorist attacks or war may affect NNN's properties, the markets in which NNN operates and NNN's results of operations;
•Changes in accounting pronouncements could adversely impact NNN's or NNN's tenants' reported financial performance;
•The market value of NNN's equity and debt securities is subject to various factors that may cause significant fluctuations or volatility;
•The phase-out of the London Interbank Offered Rate ("LIBOR") could affect interest rates under NNN's variable rate debt;
•Even if NNN remains qualified as a REIT, NNN faces other tax liabilities that reduce operating results and cash flow; and
•Adverse legislative or regulatory tax changes could reduce NNN's earnings and cash flow and the market value of NNN's securities.
Additional information related to these risks and uncertainties are included in "Item 1A. Risk Factors" of NNN's 2021 Annual Report.
These risks and uncertainties may cause NNN's actual future results to differ materially from expected results, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. NNN undertakes no obligation to update or revise such forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
NNN, a Maryland corporation, is a fully integrated REIT formed in 1984. NNN's assets are primarily real estate assets. NNN acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and are primarily held for investment ("Properties" or "Property Portfolio", or individually a "Property").
As of March 31, 2022, NNN owned 3,271 Properties, with an aggregate gross leasable area of approximately 33,545,000 square feet, located in 48 states, with a weighted average remaining lease term of 10.6 years. Approximately 99 percent of the Properties were leased as of March 31, 2022.
NNN’s management team focuses on certain key indicators to evaluate the financial condition and operating performance of NNN. The key indicators for NNN include items such as: the composition of the Property Portfolio (such as tenant, geographic and line of trade diversification), the occupancy rate of the Property Portfolio, certain financial performance ratios and profitability measures, industry trends and industry performance compared to that of NNN.
NNN evaluates the creditworthiness of its current and prospective tenants. This evaluation may include reviewing available financial statements, store level financial performance, press releases, public credit ratings from major credit rating agencies, industry news publications and financial market data (debt and equity pricing). NNN may also evaluate the business and operations of its tenants, including past payment history and periodically meeting with senior management of certain tenants.
NNN continues to maintain its diversification by tenant, geography and tenant's line of trade. NNN’s largest line of trade concentrations are the convenience store (17.5%), automotive service (12.6%) and restaurant (including full and limited service) (18.9%) sectors. These sectors represent a large part of the freestanding retail property marketplace and NNN’s management believes these sectors present attractive investment opportunities. The Property Portfolio is geographically concentrated in the south and southeast United States, which are regions of historically above-average population growth. Given these concentrations, any financial hardship within these sectors or geographic regions could have a material adverse effect on the financial condition and operating performance of NNN.
As of March 31, 2022 and 2021, the Property Portfolio remained at least 98 percent leased and had a weighted average remaining lease term of approximately 11 years. High occupancy levels coupled with a net lease structure, provides enhanced probability of maintaining operating earnings.
Additional information related to NNN is included in "Item 1. Business" of NNN's 2021 Annual Report.
20
Impact of COVID-19 on NNN’s Business
NNN and certain of NNN's tenants were impacted by the COVID-19 pandemic which resulted in the loss of revenue for certain tenants and challenged their ability to pay rent.
As a result, during 2021 and 2020, NNN entered into rent deferral lease amendments with certain tenants for rent originally due for the years ending December 31, 2021 and 2020, which require the deferred rents to be repaid at a later time during the lease term. Substantially all remaining deferred rent will come due periodically by December 31, 2023.
The following table outlines the rent deferred and corresponding scheduled repayment of the COVID-19 rent deferral lease amendments (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
Scheduled Repayment |
|
|
|
|
Accrual Basis |
|
|
Cash Basis |
|
|
Total |
|
|
% of Total |
|
|
|
Accrual Basis |
|
|
Cash Basis |
|
|
Total |
|
|
% of Total |
|
|
Cumulative Total |
|
2020 |
|
|
$ |
33,594 |
|
|
$ |
18,425 |
|
|
$ |
52,019 |
|
|
|
91.7 |
% |
|
|
$ |
3,239 |
|
|
$ |
20 |
|
|
$ |
3,259 |
|
|
|
5.7 |
% |
|
|
5.7 |
% |
2021 |
|
|
|
990 |
|
|
|
3,768 |
|
|
|
4,758 |
|
|
|
8.3 |
% |
|
|
|
25,935 |
|
|
|
5,841 |
|
|
|
31,776 |
|
|
|
56.0 |
% |
|
|
61.7 |
% |
2022 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
5,391 |
|
|
|
9,135 |
|
|
|
14,526 |
|
|
|
25.6 |
% |
|
|
87.3 |
% |
2023 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
19 |
|
|
|
3,334 |
|
|
|
3,353 |
|
|
|
5.9 |
% |
|
|
93.2 |
% |
2024 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
1,932 |
|
|
|
1,932 |
|
|
|
3.4 |
% |
|
|
96.6 |
% |
2025 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
1,931 |
|
|
|
1,931 |
|
|
|
3.4 |
% |
|
|
100.0 |
% |
|
|
|
$ |
34,584 |
|
|
$ |
22,193 |
|
|
$ |
56,777 |
|
|
|
|
|
|
$ |
34,584 |
|
|
$ |
22,193 |
|
|
$ |
56,777 |
|
|
|
|
|
|
|
While NNN's rent collections have returned to pre-pandemic levels, NNN's operations and those of NNN's tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence.
Historical rent collections and rent relief requests may not be indicative of collections and requests in the future. Depending on macroeconomic conditions and their impact on a tenant's business and operations, deferred rents may be difficult to collect.
Results of Operations
Property Analysis
General. The following table summarizes the Property Portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
|
March 31, 2021 |
|
Properties Owned: |
|
|
|
|
|
|
|
|
|
Number |
|
|
3,271 |
|
|
|
3,223 |
|
|
|
3,161 |
|
Total gross leasable area (square feet) |
|
|
33,545,000 |
|
|
|
32,753,000 |
|
|
|
32,717,000 |
|
Properties: |
|
|
|
|
|
|
|
|
|
Leased and unimproved land |
|
|
3,245 |
|
|
|
3,191 |
|
|
|
3,106 |
|
Percent of Properties – leased and unimproved land |
|
|
99 |
% |
|
|
99 |
% |
|
|
98 |
% |
Weighted average remaining lease term (years) |
|
|
10.6 |
|
|
|
10.6 |
|
|
|
10.6 |
|
Total gross leasable area (square feet) – leased |
|
|
33,258,000 |
|
|
|
32,395,000 |
|
|
|
31,910,000 |
|
21
The following table summarizes the diversification of the Property Portfolio based on the top 20 lines of trade:
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Annual Base Rent(1) |
|
|
Lines of Trade |
|
March 31, 2022 |
|
December 31, 2021 |
|
March 31, 2021 |
1. |
|
Convenience stores |
|
17.5% |
|
17.9% |
|
18.0% |
2. |
|
Automotive service |
|
12.6% |
|
12.3% |
|
10.7% |
3. |
|
Restaurants – full service |
|
9.7% |
|
9.8% |
|
10.2% |
4. |
|
Restaurants – limited service |
|
9.2% |
|
9.4% |
|
9.5% |
5. |
|
Family entertainment centers |
|
6.2% |
|
5.9% |
|
6.0% |
6. |
|
Health and fitness |
|
5.0% |
|
5.2% |
|
5.2% |
7. |
|
Theaters |
|
4.4% |
|
4.5% |
|
4.4% |
8. |
|
Recreational vehicle dealers, parts and accessories |
|
4.1% |
|
3.9% |
|
3.5% |
9. |
|
Equipment rental |
|
3.1% |
|
3.2% |
|
3.1% |
10. |
|
Automotive parts |
|
3.0% |
|
3.0% |
|
3.1% |
11. |
|
Home improvement |
|
2.4% |
|
2.5% |
|
2.6% |
12. |
|
Wholesale clubs |
|
2.4% |
|
2.5% |
|
2.5% |
13. |
|
Furniture |
|
2.4% |
|
1.7% |
|
1.7% |
14. |
|
Medical service providers |
|
2.0% |
|
2.0% |
|
2.1% |
15. |
|
General merchandise |
|
1.6% |
|
1.7% |
|
1.7% |
16. |
|
Home furnishings |
|
1.5% |
|
1.5% |
|
1.6% |
17. |
|
Consumer electronics |
|
1.5% |
|
1.5% |
|
1.5% |
18. |
|
Travel plazas |
|
1.5% |
|
1.5% |
|
1.5% |
19. |
|
Automobile auctions, wholesale |
|
1.3% |
|
1.3% |
|
1.1% |
20. |
|
Drug stores |
|
1.2% |
|
1.3% |
|
1.4% |
|
|
Other |
|
7.4% |
|
7.4% |
|
8.6% |
|
|
|
|
100.0% |
|
100.0% |
|
100.0% |
|
|
(1) |
Based on annualized base rent for all leases in place for each respective period. |
Property Acquisitions. The following table summarizes the Property acquisitions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Acquisitions: |
|
|
|
|
|
|
Number of Properties |
|
|
59 |
|
|
|
29 |
|
Gross leasable area (square feet)(1) |
|
|
879,000 |
|
|
|
355,000 |
|
Initial cash yield |
|
|
6.2 |
% |
|
|
6.4 |
% |
Total dollars invested(2) |
|
$ |
210,823 |
|
|
$ |
105,626 |
|
|
|
(1) |
Includes additional square footage from completed construction on existing Properties. |
(2) |
Includes dollars invested in projects under construction or tenant improvements for each respective year. |
NNN typically funds Property acquisitions either through borrowings under the Credit Facility or by issuing its debt or equity securities in the capital markets.
22
Property Dispositions. The following table summarizes the Properties sold by NNN (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Number of properties |
|
|
10 |
|
|
|
11 |
|
Gross leasable area (square feet) |
|
|
81,000 |
|
|
|
96,000 |
|
Net sales proceeds |
|
$ |
20,074 |
|
|
$ |
17,575 |
|
Net gain |
|
$ |
3,992 |
|
|
$ |
4,281 |
|
NNN typically uses the proceeds from a Property disposition to either pay down the Credit Facility or reinvest in real estate.
Analysis of Revenue
General. During the quarter ended March 31, 2022, total revenues increased as compared to the same period in 2021, primarily due to scheduled rent increases and to the income generated from recently acquired Properties (See "Results of Operations - Property Analysis - Property Acquisitions").
The following table summarizes NNN’s revenues (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, |
|
|
Percent Increase |
|
|
|
2022 |
|
|
2021 |
|
|
(Decrease) |
|
Rental Revenues(1) |
|
$ |
185,163 |
|
|
$ |
173,845 |
|
|
|
6.5 |
% |
Real estate expense reimbursement from tenants |
|
|
4,600 |
|
|
|
5,353 |
|
|
|
(14.1 |
)% |
Rental income |
|
|
189,763 |
|
|
|
179,198 |
|
|
|
5.9 |
% |
Interest and other income from real estate transactions |
|
|
516 |
|
|
|
580 |
|
|
|
(11.0 |
)% |
Total revenues |
|
$ |
190,279 |
|
|
$ |
179,778 |
|
|
|
5.8 |
% |
|
|
(1) |
Includes rental income from operating leases, earned income from direct financing leases and percentage rent ("Rental Revenues"). |
Quarter Ended March 31, 2022 versus Quarter Ended March 31, 2021
Rental Income. Rental income increased for the quarter ended March 31, 2022, as compared to the same period in 2021. The increase is primarily due to scheduled rent increases based on increases in the Consumer Price Index and the income generated from Property acquisitions:
•a partial period of Rental Revenue from NNN's 2022 acquisition of 59 Properties with an aggregate gross leasable area of approximately 879,000 square feet, and
•a full period of Rental Revenue from NNN's 2021 acquisition of 156 Properties with aggregate gross leasable area of approximately 1,341,000 square feet.
23
Analysis of Expenses
General. Operating expenses increased for the quarter ended March 31, 2022, as compared to the same period in 2021, primarily due to the increase in executive retirement costs and depreciation and amortization. The following table summarizes NNN’s expenses (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, |
|
|
Percent Increase |
|
|
|
2022 |
|
|
2021 |
|
|
(Decrease) |
|
General and administrative |
|
$ |
11,042 |
|
|
$ |
11,748 |
|
|
|
(6.0 |
)% |
Real estate |
|
|
7,198 |
|
|
|
7,725 |
|
|
|
(6.8 |
)% |
Depreciation and amortization |
|
|
52,680 |
|
|
|
49,980 |
|
|
|
5.4 |
% |
Leasing transaction costs |
|
|
88 |
|
|
|
38 |
|
|
|
131.6 |
% |
Impairment losses – real estate, net of recoveries |
|
|
1,632 |
|
|
|
2,131 |
|
|
|
(23.4 |
)% |
Executive retirement costs |
|
|
3,594 |
|
|
|
— |
|
|
N/C |
|
Total operating expenses |
|
$ |
76,234 |
|
|
$ |
71,622 |
|
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
|
|
Interest and other income |
|
$ |
(35 |
) |
|
$ |
(65 |
) |
|
|
(46.2 |
)% |
Interest expense |
|
|
36,699 |
|
|
|
34,587 |
|
|
|
6.1 |
% |
Loss on early extinguishment of debt |
|
|
— |
|
|
|
21,328 |
|
|
|
(100.0 |
)% |
Total other expenses |
|
$ |
36,664 |
|
|
$ |
55,850 |
|
|
|
(34.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenues: |
|
|
|
|
|
|
|
|
General and administrative |
|
|
5.8 |
% |
|
|
6.5 |
% |
|
|
Real estate |
|
|
3.8 |
% |
|
|
4.3 |
% |
|
|
Quarter Ended March 31, 2022 versus Quarter Ended March 31, 2021
Depreciation and Amortization. Depreciation and amortization expenses increased for the quarter ended March 31, 2022, as compared to the same periods in 2021, primarily due to Property acquisitions subsequent to March 31, 2021.
Impairment Losses – real estate, net of recoveries. NNN periodically assesses its long-lived real estate assets for possible impairment whenever certain events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. These indicators include, but are not limited to: changes in real estate market conditions, the ability of NNN to re-lease properties that are currently vacant or become vacant, properties reclassified as held for sale, persistent vacancies greater than one year, and properties leased to tenants in bankruptcy. Management evaluates whether an impairment in carrying value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), and the residual value of the real estate, with the carrying value of the individual asset. The future undiscounted cash flows are primarily driven by estimated future market rents. Future cash flow estimates are sensitive to the assumptions made by management regarding future market rents, which are affected by expectations about future market and economic conditions. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its estimated fair value. NNN's Properties are leased primarily to retail tenants under long-term net leases and primarily held for investment. Generally, NNN’s Property leases provide for initial terms of 10 to 20 years, with cash flows provided over the entire term. NNN generally intends to hold these assets for the long-term, therefore, a temporary change in cash flows due to the COVID-19 pandemic alone was determined not to be an indicator of impairment.
24
As a result of NNN's review of long-lived assets, including identifiable intangible assets, NNN recognized real estate impairments, net of recoveries as summarized in the table below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Total real estate impairments, net of recoveries |
|
$ |
1,632 |
|
|
$ |
2,131 |
|
|
|
|
|
|
|
|
Number of Properties: |
|
|
|
|
|
|
Vacant |
|
|
3 |
|
|
|
6 |
|
Occupied |
|
|
2 |
|
|
|
1 |
|
For the quarters ended March 31, 2022 and 2021, real estate impairments, net of recoveries, was less than one percent of NNN's total assets for the respective periods as reported on the Condensed Consolidated Balance Sheets. Due to NNN's core business of investing in real estate leased primarily to retail tenants under long-term net leases, the inherent risks of owning commercial real estate, and unknown potential changes in financial and economic conditions that may impact NNN's tenants, NNN believes it is reasonably possible to incur real estate impairment charges in the future.
Executive retirement costs. In January 2022, as contemplated under the Company’s long-term executive succession planning process, NNN announced that Julian (“Jay”) Whitehurst will retire from employment with the Company as President and Chief Executive Officer on April 28, 2022. During the quarter ended March 31, 2022, NNN recorded executive retirement costs as a result of the accounting treatment for long-term incentive compensation related to Mr. Whitehurst’s Retirement and Transition Agreement.
Interest expense. Interest expense increased for the quarter ended March 31, 2022, as compared to the same periods in 2021. The following represents the primary changes in debt that have impacted interest expense (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction |
|
Effective Date |
|
Principal |
|
|
Stated Rate |
|
|
Original Maturity |
Issuance 2051 Notes |
|
March 2021 |
|
$ |
450,000 |
|
|
|
3.500 |
% |
|
April 2051 |
Redemption 2023 Notes |
|
March 2021 |
|
|
(350,000 |
) |
|
|
3.300 |
% |
|
April 2023 |
Issuance 2052 Notes |
|
September 2021 |
|
|
450,000 |
|
|
|
3.000 |
% |
|
April 2052 |
In addition, interest expense for the quarter ended March 31, 2021 includes $2,078,000 in connection with the early redemption of the 2023 Notes.
Loss on Early Extinguishment of Debt. As part of NNN's financing strategy, NNN may opt to redeem outstanding notes payable prior to the original maturity date. Upon an early redemption, notes are redeemed at a price equal to 100% of the principal amount, plus (i) a make-whole amount, and (ii) accrued and unpaid interest. In March 2021, NNN redeemed the $350,000,000 3.300% notes payable that were due in April 2023 with a make-whole amount of $21,328,000. The make-whole amount is included in loss on early extinguishment of debt on the Condensed Consolidated Statement of Income and Comprehensive Income.
Liquidity and Capital Resources
NNN’s demand for funds has been, and will continue to be, primarily for (i) payment of operating expenses and cash dividends; (ii) Property acquisitions and development; (iii) capital expenditures; (iv) payment of principal and interest on its outstanding indebtedness; and (v) other investments.
Financing Strategy. NNN’s financing objective is to manage its capital structure effectively in order to provide sufficient capital to execute its operating strategy while servicing its debt requirements, maintaining its investment grade credit rating, staggering debt maturities and providing value to NNN’s stockholders. NNN’s capital resources have and will continue to include, if available (i) proceeds from the issuance of public or private equity or debt capital market transactions; (ii) secured or unsecured borrowings from banks or other lenders; (iii) proceeds from the sale of Properties; and (iv) to a lesser extent, by internally generated funds as well as undistributed funds from operations. However, there can be no assurance that additional financing or capital will be available, or that the terms will be acceptable or advantageous to NNN.
NNN typically expects to fund short-term liquidity requirements, including investments in additional properties, with cash and cash equivalents, cash provided from operations and NNN's Credit Facility. As of March 31, 2022, NNN has $53,736,000 of cash and cash equivalents and $1,100,000,000 available for future borrowings under its Credit Facility.
25
Cash and Cash Equivalents. NNN's cash and cash equivalents includes the aggregate of cash and cash equivalents and restricted cash and cash held in escrow from the Condensed Consolidated Balance Sheets. NNN did not have restricted cash or cash held in escrow as of March 31, 2022 and December 31, 2021. The table below summarizes NNN’s cash flows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
Provided by operating activities |
|
$ |
164,338 |
|
|
$ |
161,170 |
|
Used in investing activities |
|
|
(189,643 |
) |
|
|
(88,512 |
) |
Used in financing activities |
|
|
(92,281 |
) |
|
|
(28,663 |
) |
Increase (decrease) |
|
|
(117,586 |
) |
|
|
43,995 |
|
Net cash at beginning of period |
|
|
171,322 |
|
|
|
267,236 |
|
Net cash at end of period |
|
$ |
53,736 |
|
|
$ |
311,231 |
|
Cash flow activities include:
Operating Activities. Cash provided by operating activities represents cash received primarily from Rental Revenue and interest income less cash used for general and administrative expenses. NNN’s cash flow from operating activities has been sufficient to pay the distributions for each period presented. The change in cash provided by operations for the quarters ended March 31, 2022 and 2021, is primarily the result of changes in revenues and expenses as discussed in “Results of Operations.” Cash generated from operations is expected to fluctuate in the future.
Investing Activities. Changes in cash for investing activities are primarily attributable to the acquisitions and dispositions of Properties as discussed in "Results of Operations - Property Analysis." NNN typically uses cash on hand or proceeds from its Credit Facility to fund the acquisition of its Properties.
Financing Activities. NNN’s financing activities for the quarter ended March 31, 2022, included the following significant transactions:
•$748,000 from the issuance of 17,571 shares of common stock in connection with the Dividend Reinvestment and Stock Purchase Plan ("DRIP"), and
•$92,751,000 in dividends paid to common stockholders.
Material Cash Requirements
NNN's material cash requirements include (i) long-term debt maturities; (ii) interest on long-term debt; (iii) to a lesser extent, Property construction and other Property related costs that may arise; and (iv) common stock dividends (although all future distributions will be declared and paid at the discretion of the Board of Directors).
The table below presents material cash requirements related to NNN's long-term debt outstanding as of March 31, 2022 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of Obligation |
|
|
|
Total |
|
|
2022 |
|
|
2023 |
|
|
2024 |
|
|
2025 |
|
|
2026 |
|
|
Thereafter |
|
Long-term debt(1) |
|
$ |
3,810,447 |
|
|
$ |
500 |
|
|
$ |
9,947 |
|
|
$ |
350,000 |
|
|
$ |
400,000 |
|
|
$ |
350,000 |
|
|
$ |
2,700,000 |
|
Long-term debt – interest(2) |
|
|
1,924,653 |
|
|
|
102,711 |
|
|
|
136,701 |
|
|
|
129,006 |
|
|
|
120,750 |
|
|
|
106,225 |
|
|
|
1,329,260 |
|
Total contractual cash obligations |
|
$ |
5,735,100 |
|
|
$ |
103,211 |
|
|
$ |
146,648 |
|
|
$ |
479,006 |
|
|
$ |
520,750 |
|
|
$ |
456,225 |
|
|
$ |
4,029,260 |
|
|
|
(1) |
Includes only principal amounts outstanding under mortgages payable and notes payable and excludes unamortized mortgage premiums, note discounts and note costs. See "Capital Structure". |
(2) |
Interest calculation on mortgage and notes payable based on stated rate of the principal amount. See "Capital Structure". |
26
Property Construction. NNN has committed to fund construction on 13 Properties. The improvements of such Properties are estimated to be completed within 12 months. These construction commitments, at March 31, 2022, are outlined in the table below (dollars in thousands):
|
|
|
|
|
Total commitment(1) |
|
$ |
38,889 |
|
Less amount funded |
|
|
19,881 |
|
Remaining commitment |
|
$ |
19,008 |
|
|
|
(1) |
Includes land, construction costs, tenant improvements, lease costs and capitalized interest. |
Management anticipates satisfying these obligations with a combination of NNN’s cash provided from operations, current capital resources on hand, its Credit Facility, debt or equity financings and asset dispositions.
Properties. Generally, the Properties are leased under long-term triple net leases, which require the tenant to pay all property taxes and assessments, utilities, to maintain the interior and exterior of the property, and to carry property and liability insurance coverage. Therefore, management anticipates that capital demands to meet obligations with respect to these Properties will be modest for the foreseeable future and can be met with funds from operations and working capital. Certain Properties are subject to leases under which NNN retains responsibility for specific costs and expenses associated with the Property. Management anticipates that the costs associated with these Properties, NNN's vacant Properties or those Properties that become vacant will also be met with funds from operations and working capital. NNN may be required to borrow under its Credit Facility or use other sources of capital in the event of significant capital expenditures or major repairs.
The lost revenues and increased property expenses resulting from vacant Properties or the inability to collect lease revenues could have a material adverse effect on the liquidity and results of operations if NNN is unable to re-lease the Properties at comparable rental rates and in a timely manner.
As of March 31, 2022, NNN owned 26 vacant, un-leased Properties which accounted for approximately one percent of total Properties held in the Property Portfolio.
Additionally, as of April 28, 2022, NNN had no tenants currently in bankruptcy under Chapter 11 of the U.S. Bankruptcy Code.
NNN generally monitors the financial performance of its significant tenants on an ongoing basis.
Dividends. One of NNN’s primary objectives is to distribute a substantial portion of its funds available from operations to its stockholders in the form of dividends, while retaining sufficient cash for reserves and working capital purposes, and maintaining its status as a REIT.
The following table outlines the dividends declared and paid for each issuance of NNN's stock (dollars in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Series F preferred stock(1): |
|
|
|
|
|
|
Dividends |
|
$ |
— |
|
|
$ |
4,485 |
|
Per depositary share |
|
|
— |
|
|
|
0.3250 |
|
|
|
|
|
|
|
|
Common stock: |
|
|
|
|
|
|
Dividends |
|
|
92,751 |
|
|
|
90,848 |
|
Per share |
|
|
0.5300 |
|
|
|
0.5200 |
|
|
|
(1) |
The Series F preferred stock was redeemed in October 2021. |
In April 2022, NNN declared a dividend of $0.5300 per share which is payable in May 2022 to its common stockholders of record as of April 29, 2022.
27
Capital Structure
NNN has used, and expects to use in the future, various forms of debt and equity securities primarily to pay down or refinance its outstanding debt, to finance property acquisitions and to fund construction on its Properties.
The following is a summary of NNN’s total outstanding debt as of (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
|
Percentage of Total |
|
|
December 31, 2021 |
|
|
Percentage of Total |
|
Mortgages payable |
|
$ |
10,515 |
|
|
|
0.3 |
% |
|
$ |
10,697 |
|
|
|
0.3 |
% |
Notes payable |
|
|
3,736,781 |
|
|
|
99.7 |
% |
|
|
3,735,769 |
|
|
|
99.7 |
% |
Total outstanding debt |
|
$ |
3,747,296 |
|
|
|
100.0 |
% |
|
$ |
3,746,466 |
|
|
|
100.0 |
% |
Line of Credit Payable. In June 2021, NNN amended and restated its credit agreement to increase the borrowing capacity under its Credit Facility from $900,000,000 to $1,100,000,000 and amended certain other terms under the former Credit Facility. The Credit Facility had no weighted average outstanding balance during the quarter ended March 31, 2022. The Credit Facility matures June 2025, unless the Company exercises its options to extend maturity to June 2026. The Credit Facility bears interest at LIBOR plus 77.5 basis points; however, such interest rate may change pursuant to a tiered interest rate structure based on NNN's debt rating. Additionally, as part of NNN's environmental, social and governance ("ESG") initiative, pricing may be reduced if specified ESG metrics are achieved. The Credit Facility also includes an accordion feature which permits NNN to increase the facility size up to $2,000,000,000, subject to lender approval. In connection with the Credit Facility, loan costs are classified as debt costs on the Condensed Consolidated Balance Sheets. As of March 31, 2022, there was no outstanding balance and $1,100,000,000 was available for future borrowings under the Credit Facility, and NNN was in compliance with each of the financial covenants.
LIBOR is used as a reference rate for NNN’s revolving Credit Facility. On March 5, 2021, the Financial Conduct Authority (“FCA”) announced that USD LIBOR will no longer be published after June 30, 2023. This announcement has several implications, including setting the spread that may be used to automatically convert contracts from LIBOR to the Secured Overnight Financing Rate ("SOFR"). Additionally, as of December 31, 2021, banks have ceased issuance of any new LIBOR based debt. NNN anticipates that LIBOR will continue to be available until June 30, 2023. For a discussion of the phase-out of LIBOR and its impact to NNN, see NNN's Annual Report on Form 10-K for the year ended December 31, 2021.
Universal Shelf Registration Statement. In August 2020, NNN filed a shelf registration statement with the Securities and Exchange Commission (the "Commission") which was automatically effective and permits the issuance by NNN of an indeterminate amount of debt and equity securities. Information related to NNN's publicly held debt and equity securities is included in NNN's Annual Report on Form 10-K for the year ended December 31, 2021.
Debt Securities – Notes Payable. In 2021, NNN filed prospectus supplements to the prospectus contained in its August 2020 shelf registration statement and issued $450,000,000 aggregate principal amount of 3.500% notes due April 2051 (the “2051 Notes”) and $450,000,000 aggregate principal amount of 3.000% notes due April 2052 (the "2052 Notes" and, together with the 2051 Notes, the "Notes"). Each note issuance is summarized in the table below (dollar in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes |
|
Issue Date |
|
Principal |
|
|
Discount (1) |
|
|
Net Price |
|
|
Stated Rate |
|
|
Effective Rate (2) |
|
|
Maturity Date |
2051 Notes (3) |
|
March 2021 |
|
$ |
450,000 |
|
|
$ |
8,406 |
|
|
$ |
441,594 |
|
|
|
3.500 |
% |
|
|
3.602 |
% |
|
April 2051 |
2052 Notes (4)(5) |
|
September 2021 |
|
|
450,000 |
|
|
|
10,422 |
|
|
|
439,578 |
|
|
|
3.000 |
% |
|
|
3.118 |
% |
|
April 2052 |
|
|
(1) |
The note discounts are amortized to interest expense over the respective term of each debt obligation using the effective interest method. |
(2) |
Includes the effects of the discount at issuance. |
(3) |
NNN used the net proceeds from the issuance of the 2051 Notes to redeem all of its 3.300% notes payable that were due 2023, fund future property acquisitions and for general corporate purposes. |
(4) |
In October 2021, NNN used the net proceeds from the issuance of the 2052 Notes to redeem all of its 13,800,000 outstanding depositary shares, each representing a 1/100th interest in a share of its Series F preferred stock, with the remainder of the net proceeds used to fund property acquisitions and for general corporate purposes. |
(5) |
NNN entered into forward swaps which were hedging the risk of changes in forecasted interest payments on forecasted issuance of long-term debt. Upon the issuance of the 2052 Notes, NNN terminated such derivatives, and the resulting fair value was deferred in accumulated other comprehensive income (loss) and is being amortized over the term of the respective notes using the effective interest method. Additional disclosure is included in Note 6 – Derivatives. |
28
Each series of Notes is senior, unsecured obligations of NNN and is subordinated to all secured debt of NNN and to the debt and other liabilities of NNN's subsidiaries. Each of the Notes is redeemable at NNN's option, at any time, in whole or in part, at a redemption price equal to (i) the sum of the outstanding principal amount of the notes being redeemed plus accrued interest thereon, but not including the redemption date, and (ii) the make-whole amount, if any, as defined in the applicable supplemental indenture related to the notes.
In connection with the Notes, NNN incurred debt issuance costs totaling $10,144,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. Debt issuance costs for all note issuances have been deferred and presented as a reduction to notes payable and are being amortized over the term of the respective notes using the effective interest method.
As a part of NNN's financing strategy, NNN may opt to redeem outstanding notes payable prior to the original maturity date. Upon early redemption, notes are redeemed at a price equal to 100% of the principal amount, plus (i) a make-whole amount, and (ii) accrued and unpaid interest. In March 2021, NNN redeemed the $350,000,000 3.300% notes payable that were due in April 2023 with a make-whole amount of $21,328,000. The make-whole amount is included in loss on early extinguishment of debt on the Condensed Consolidated Statement of Income and Comprehensive Income.
Equity Securities
Preferred Stock. In October 2021, NNN redeemed all outstanding depositary shares (13,800,000) representing interests in its 5.200% Series F preferred stock. The Series F preferred stock was redeemed at $25.00 per depositary share, plus all accrued and unpaid dividends through, but not including, the redemption date, for an aggregate redemption price of $25.111944 per depositary share. The excess carrying amount of the Series F preferred stock redeemed over the cash paid to redeem the Series F preferred stock was $10,897,000, representing issuance costs which is reflected as a reduction to earnings attributable to common stockholders.
As of March 31, 2022, NNN had no outstanding shares of preferred stock.
At-The-Market Offerings. Under NNN's shelf registration statement, NNN established an ATM equity program which allows NNN to sell shares of common stock from time to time. The following outlines NNN's ATM program:
|
|
|
|
|
2020 ATM |
Established date |
|
August 2020 |
Termination date |
|
August 2023 |
Total allowable shares |
|
17,500,000 |
Total shares issued as of March 31, 2022 |
|
1,599,304 |
The following table outlines the common stock issuances pursuant to NNN's ATM equity program for the quarter ended March 31, 2021 (dollars in thousands, except per share data):
|
|
|
|
|
Shares of common stock |
|
|
30,000 |
|
Average price per share (net) |
|
$ |
38.59 |
|
Net proceeds |
|
$ |
1,158 |
|
Stock issuance costs(1) |
|
$ |
75 |
|
|
|
(1) |
Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting fees. |
There were no common stock issuances pursuant to NNN's ATM equity program for the quarter ended March 31, 2022.
Dividend Reinvestment and Stock Purchase Plan. In February 2021, NNN filed a shelf registration statement that was automatically effective with the Commission for its DRIP, which permits NNN to issue up to 6,000,000 shares of common stock. NNN’s DRIP provides an economical and convenient way for current stockholders and other interested new investors to invest in NNN’s common stock. The following outlines the common stock issuances pursuant to NNN’s DRIP (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Shares of common stock |
|
|
17,571 |
|
|
|
15,769 |
|
Net proceeds |
|
$ |
748 |
|
|
$ |
569 |
|
29
Critical Accounting Estimates
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by U.S. generally accepted accounting principles. The unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The preparation of NNN’s condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as other disclosures in the condensed consolidated financial statements. On an ongoing basis, management evaluates its estimates and assumptions; however, actual results may differ from these estimates and assumptions, which in turn could have a material impact on NNN’s consolidated financial statements. A summary of NNN’s critical accounting estimates are included in NNN’s 2021 Annual Report. NNN has not made any material changes to these policies during the periods covered by this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
Refer to Note 1 to the March 31, 2022, condensed consolidated financial statements.
30