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| NNN > SEC Filings for NNN > Form 10-Q/A on 5-Nov-2008 | All Recent SEC Filings |
5-Nov-2008
Quarterly Report
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, as amended, of National Retail Properties, Inc. for the
year ended December 31, 2007. 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. These statements
generally are characterized by the use of terms such as "believe," "expect" and
"may."
The term "NNN" or the "Company" refers to National Retail Properties, Inc. and its majority owned and controlled subsidiaries including taxable real estate investment trust ("REIT") subsidiaries, and their majority owned and controlled subsidiaries (collectively, the "TRS").
Overview
NNN's operations are divided into two primary business segments: (i) investment assets, including real estate assets, mortgages and notes receivable (including structured finance investments) and commercial mortgage residual interests (collectively, "Investment Assets"), and (ii) inventory real estate assets ("Inventory Assets"). NNN acquires, owns, invests in, manages and develops properties that are leased primarily to retail tenants under long-term net leases ("Investment Properties" or "Investment Portfolio"). As of September 30, 2008, NNN owned 990 Investment Properties, with an aggregate gross leasable area of approximately 11,144,000 square feet, located in 44 states. Approximately 97 percent of NNN's Investment Portfolio was leased as of September 30, 2008. In addition to the Investment Properties, as of September 30, 2008, NNN had $66,646,000 and $22,496,000 in mortgages and notes receivables (including structured finance investments) and commercial mortgage residuals interests, respectively.
The TRS, directly and indirectly, through investment interests, acquires and/or develops real estate primarily for the purpose of resale ("Inventory Properties" or "Inventory Portfolio"). The TRS acquires two types of properties, land for development ("Development Properties" or "Development Portfolio") and improved properties ("Exchange Properties" or "Exchange Portfolio"). As of September 30, 2008, the TRS held 38 Inventory Properties, of which 22 were Development Properties (12 completed inventory, two under construction and eight land parcels) and 16 were Exchange Properties.
NNN's management team focuses on certain key indicators to evaluate the financial condition and operating performance of NNN. The key indicators for NNN may include items such as: the composition of NNN's Investment Portfolio (such as tenant, geographic and lines of trade diversification), the occupancy rate of NNN's Investment Portfolio, certain financial performance ratios and profitability measures, and industry trends and performance compared to that of NNN.
NNN continues to maintain its diversification by tenant, line of trade and geographic concentration. NNN's highest line of trade concentrations are the convenience store and restaurant sector. These sectors represent a large part of the free-standing retail property marketplace and any financial hardship within these sectors could have an adverse effect on the financial condition and operating performance of NNN. NNN has some geographic concentration in the south and southeast which NNN believes are generally areas of above-average population growth.
NNN formed a joint venture with an institutional investor in September 2007 in which NNN owns a 15 percent equity interest. The joint venture is focused on acquiring real estate assets leased to convenience store operators.
Results of Operations
Property Analysis - Investment Portfolio
General. The following table summarizes NNN's Investment Portfolio:
September 30, December 31, September 30,
2008 2007 2007
Investment Properties Owned:
Number 990 908 876
Total gross leasable area (square
feet) 11,144,000 10,610,000 10,386,000
Investment Properties Leased:
Number 959 892 860
Total gross leasable area (square
feet) 10,822,000 10,355,000 10,097,000
Percent of total gross leasable area -
leased 97 % 98 % 98 %
Weighted average remaining lease term
(years) 13 13 14
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The following table summarizes the diversification of NNN's Investment Portfolio based on the top 10 lines of trade:
% of Annual Base Rent (1)
September 30, December 31, September 30,
Lines of Trade 2008 2007 2007
1. Convenience Stores 25.5 % 23.9 % 23.8 %
2. Restaurants - Full Service 8.8 % 10.3 % 10.3 %
3. Automotive Service 8.1 % 5.2 % 3.7 %
4. Theaters 6.2 % 4.2 % 4.1 %
5. Automotive Parts 4.8 % 4.9 % 1.5 %
6. Drug Stores 4.0 % 5.0 % 5.5 %
7. Books 4.0 % 4.4 % 4.7 %
8. Consumer Electronics 3.7 % 4.3 % 4.6 %
9. Restaurants - Limited Service 3.4 % 3.7 % 3.9 %
10. Sporting Goods 3.2 % 3.9 % 4.4 %
Other 28.3 % 30.2 % 33.5 %
100.0 % 100.0 % 100.0 %
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(1) Based on the annualized base rent for all leases in place as of the end of the respective period.
Property Acquisitions. The following table summarizes the Investment Property acquisitions (dollars in thousands):
Quarter Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Acquisitions:
Number of Investment Properties 36 30 97 193
Gross leasable area (square feet) 213,000 683,000 811,000 1,735,000
Total dollars invested (1) $ 68,110 $ 140,208 $ 321,932 $ 544,589
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(1) Includes dollars invested on projects currently under construction for each respective period.
Property Dispositions. The following table summarizes the Investment Properties sold by NNN (dollars in thousands):
Quarter Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Number of properties 6 13 17 27
Gross leasable area (square feet) 172,000 331,000 280,000 719,000
Net sales proceeds $ 19,712 $ 53,634 $ 56,472 $ 114,656
Net gain $ 2,644 $ 22,464 $ 9,230 $ 46,873
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NNN typically uses the proceeds from property sales either to pay down the outstanding indebtedness of NNN's credit facility or reinvest in real estate.
Property Analysis - Inventory Portfolio
General. The following summarizes the number of properties held for sale in
NNN's Inventory Portfolio:
September 30, December 31, September 30,
2008 2007 2007
Development Portfolio:
Completed inventory 12 8 9
Under construction 2 9 6
Land parcels 8 6 6
22 23 21
Exchange Portfolio:
Inventory Properties 16 33 15
Total Inventory Properties 38 56 36
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Property Acquisitions. The following table summarizes the property acquisitions and dollars invested in the Inventory Portfolio (dollars in thousands):
Quarter Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Development Portfolio:
Number of properties acquired 1 - 3 2
Dollars invested (1) $ 2,986 $ 15,568 $ 8,686 $ 40,360
Exchange Portfolio:
Number of properties acquired 1 - 4 3
Dollars invested $ 961 $ - $ 19,994 $ 6,649
Total dollars invested $ 3,947 $ 15,568 $ 28,680 $ 47,009
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(1) Includes dollars invested in projects currently under construction for each respective period.
Property Dispositions. The following table summarizes the number of Inventory Properties sold and the corresponding gain recognized from the disposition of real estate held for sale included in earnings from continuing and discontinued operations (dollars in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
2008 2007 2008 2007
# of # of # of # of
Properties Gain Properties Gain Properties Gain Properties Gain
Development (1) 1 $ 192 2 $ 825 5 $ 4,750 10 $ 3,461
Exchange 8 2,615 25 1,997 19 4,607 56 5,745
9 $ 2,807 27 $ 2,822 24 $ 9,357 66 $ 9,206
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(1) Net of minority interest.
Revenue from Continuing Operations Analysis
General. During the nine months ended September 30, 2008, NNN's revenue increased primarily due to the acquisition of Investment Properties (See "Results of Operations - Property Analysis - Investment Portfolio - Property Acquisitions") and base rent increases from existing Investment Properties. NNN anticipates any significant increase in rental income will continue to come primarily from additional Investment Property acquisitions.
The following summarizes NNN's revenues from continuing operations (dollars in thousands):
Quarter Ended September 30, Percent Nine Months Ended September 30, Percent
Increase Increase
2008 2007 2008 2007 (Decrease) 2008 2007 2008 2007 (Decrease)
Percent of Total Percent of Total
Rental income(1) $ 54,966 $ 42,701 93.8 % 91.7 % 28.7 % $ 157,697 $ 118,929 93.0 % 91.4 % 32.6 %
Real estate expense reimbursement
from tenants 1,456 1,339 2.5 % 2.9 % 8.7 % 4,478 4,034 2.6 % 3.1 % 11.0 %
Interest and other income from
real estate transactions 1,027 1,389 1.8 % 3.0 % (26.1 )% 3,669 3,636 2.2 % 2.8 % 0.9 %
Interest income on commercial
mortgage residual interests 1,124 1,135 1.9 % 2.4 % (1.0 )% 3,651 3,523 2.2 % 2.7 % 3.6 %
Total revenues from continuing
operations $ 58,573 $ 46,564 100.0 % 100.0 % 25.8 % $ 169,495 $ 130,122 100.0 % 100.0 % 30.3 %
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(1) Includes rental income from operating leases, earned income from direct financing leases and percentage rent from continuing operations ("Rental Income").
Revenue from Operations by Source of Income. NNN has identified two primary business segments, and thus, sources of revenue: (i) earnings from Investment Assets, and (ii) earnings from Inventory Assets. NNN's revenues from continuing operations come primarily from its Investment Assets. The revenues generated from NNN's Inventory Assets are typically classified as discontinued operations in accordance with FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").
Rental Income. Rental income increased during the quarter and nine months ended September 30, 2008, as compared to the same periods in 2007, is primarily due to the acquisition of 36 Investment Properties with an aggregate gross leasable area of 213,000 square feet during the quarter ended September 30, 2008, and 97 Investment Properties with an aggregate gross leasable area of 811,000 square feet acquired during the nine months ended September 30, 2008. In addition, the increase in Rental Income is also attributable to the 235 Investment Properties with an aggregate gross leasable area of 2,205,000 square feet which were acquired during the year ended December 31, 2007. The Investment Portfolio occupancy
rate remained fairly consistent during each of the quarters and nine months ended September 30, 2008 and 2007. In addition, during the quarter ended September 30, 2008 NNN recorded $2,200,000 as a part of a bankruptcy damage claim.
Real Estate Expense Reimbursements from Tenants. Real estate expense reimbursements from tenants remained fairly stable as a percentage of total revenue from continuing operations, but increased for the quarter and nine months ended September 30, 2008, as compared to the same periods in 2007. The increase in real estate expense reimbursements from tenants is attributable to expense reimbursements from certain properties acquired during 2007 and 2008.
Interest and Other Income from Real Estate Transactions. Interest and other income from real estate transactions remained fairly consistent for the nine months ended September 30, 2008, but decreased for the quarter ended September 30, 2008, as compared to the same period in 2007. The decrease in interest and other income from real estate is primarily a result of a decrease in interest income on mortgages and notes receivable (including structured finance investments). For the quarter ended September 30, 2008 and 2007, the weighted average outstanding principal balance on NNN's mortgages and notes receivable was $36,547,000 and $52,270,000, respectively.
Interest Income on Commercial Mortgage Residual Interests. Interest income on commercial mortgage residual interests for the quarter ended September 30, 2008, as compared to the same period in 2007 was fairly stable. An increase in the discount rate from 17.00% to 25.00% during the third quarter of 2007 resulted in increased interest income recognition during the nine months ended September 30, 2008, which was partially offset by lower outstanding balances.
Analysis of Expenses from Continuing Operations
General. Operating expenses increased for the quarter and nine months ended
September 30, 2008. The following summarizes NNN's expenses from continuing
operations for the quarters ended September 30 (dollars in thousands):
Percent of
Revenues from
Percent Percentage of Continuing
Increase Total Operations
2008 2007 (Decrease) 2008 2007 2008 2007
General and administrative $ 5,242 $ 5,229 0.2 % 27.4 % 33.1 % 9.0 % 11.2 %
Real estate 2,359 1,778 32.7 % 12.3 % 11.2 % 4.0 % 3.8 %
Depreciation and amortization 11,559 8,048 43.6 % 60.3 % 50.9 % 19.7 % 17.3 %
Impairment - real estate, Inventory
Portfolio - 128 (100.0 )% - 0.8 % - 0.3 %
Impairment - commercial mortgage
residual interests valuation
adjustment - 638 (100.0 )% - 4.0 % - 1.4 %
Total operating expenses $ 19,160 $ 15,821 21.1 % 100.0 % 100.0 % 32.7 % 34.0 %
Interest and other income $ (818 ) $ (793 ) 3.2 % (5.9 )% (7.2 )% (1.4 )% (1.7 )%
Interest expense 14,791 11,833 25.0 % 105.9 % 107.2 % 25.3 % 25.4 %
Total other expenses (revenues) $ 13,973 $ 11,040 26.6 % 100.0 % 100.0 % 23.9 % 23.7 %
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The following summarizes NNN's expenses from continuing operations for the nine months ended September 30 (dollars in thousands):
Percent of
Revenues from
Percent Percentage of Continuing
Increase Total Operations
2008 2007 (Decrease) 2008 2007 2008 2007
General and administrative $ 18,842 $ 17,496 7.7 % 32.0 % 38.1 % 11.1 % 13.4 %
Real estate 6,972 5,426 28.5 % 11.8 % 11.8 % 4.1 % 4.2 %
Depreciation and amortization 32,382 22,186 46.0 % 54.9 % 48.4 % 19.1 % 17.1 %
Impairment - real estate, Inventory
Portfolio - 128 (100.0 )% - 0.3 % - 0.1 %
Impairment - commercial mortgage
residual interests valuation
adjustment 758 638 18.8 % 1.3 % 1.4 % 0.5 % 0.5 %
Total operating expenses $ 58,594 $ 45,874 28.5 % 100.0 % 100.0 % 34.8 % 35.3 %
Interest and other income $ (3,047 ) $ (3,120 ) (2.3 )% (7.2 )% (9.7 )% (1.8 )% (2.4 )%
Interest expense 44,823 35,377 26.7 % 105.3 % 109.7 % 26.4 % 27.2 %
Loss on interest rate hedge 804 - 100.0 % 1.9 % - 0.5 % -
Total other expenses (revenues) $ 42,580 $ 32,257 32.0 % 100.0 % 100.0 % 25.1 % 24.8 %
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General and Administrative Expenses. General and administrative expenses increased for the nine months ended September 30, 2008, as compared to the same period in 2007, but decreased both as a percentage of total operating expense and as a percentage of revenues from continuing operations. The increase in general and administrative expenses for the nine months ended September 30, 2008, is primarily attributable to an increase in lost pursuit costs.
Real Estate. Real estate expenses increased for the quarter and nine months ended September 30, 2008, as compared to the same periods in 2007, but remained fairly stable as a percentage of revenues from continuing operations. The increase in real estate expenses for the quarter and nine months ended September 30, 2008, is primarily attributable to an increase in tenant reimbursable expenses as well as an increase in expenses related to vacant properties.
Depreciation and Amortization. For the quarter and nine months ended September 30, 2008, the increase in depreciation and amortization expenses is primarily attributable to the depreciation on (i) the 97 Investment Properties with an aggregate gross leasable area of 811,000 square feet which were acquired during the nine months ended September 30, 2008, and (ii) the 235 Investment Properties with an aggregate gross leasable area of 2,205,000 square feet which were acquired during the year ended December 31, 2007.
Impairment - Commercial Mortgage Residual Interests Valuation Adjustment. In connection with the independent valuations of the Residuals' fair value, during the nine months ended September 30, 2008 and 2007, NNN recorded an other than temporary valuation adjustment of $758,000 and $638,000, respectively, as a reduction of earnings from operations, of which $638,000 was recorded during the quarter ended September 30, 2007. NNN did not recognize an other than temporary valuation adjustment for the quarter ended September 30, 2008.
Interest Expense. Interest expense increased for the quarter and nine months ended September 30, 2008, as compared to the same periods in 2007, but remained fairly stable as a percentage of revenues from continuing operations.
The following represents the primary changes in debt that have impacted interest expense:
(i) issuance of $234,035,000 of convertible notes payable in March 2008, with an effective interest rate of 5.125%, due June 2028,
(iii) payoff of the $12,000,000 secured note payable with stated interest rate of 10.00% in February 2008,
(iv) payoff of $26,041,000 10-year financing lease obligation with interest rate of 5.00% in November 2007,
(v) payoff of the $10,500,000 secured note payable with stated interest rate of 10.00% in November 2007,
(vi) payoff of the $20,800,000 variable rate term note in October 2007,
(vii) repayment of mortgage in September 2007, with balance of $7,305,000 at December 31, 2006, and an interest rate of 7.37%,
(viii) issuance of $250,000,000 of notes payable in September 2007, with an effective interest rate of 6.92% due in October 2017,
(ix) increase of $8,304,000 in the weighted average debt outstanding on the revolving credit facility during the nine months ended from September 30, 2008, as compared to the same period in 2007, and
(x) decrease in weighted average interest rate on the revolving credit facility from 6.31% for the nine months ended September 30, 2007, to 3.87% for the nine months ended September 30, 2008.
Earnings from Discontinued Operations
In accordance with SFAS 144, NNN classified as discontinued operations the revenues and expenses related to its Investment Properties that were sold and its leasehold interests that expired as well as the revenues and expenses related to any Investment Property that was held for sale at September 30, 2008. NNN also classified as discontinued operations the revenues and expenses of its revenue-generating Inventory Properties that were sold as well as the revenues and expenses related to its revenue-generating Inventory Properties held for sale as of September 30, 2008. NNN records discontinued operations by its identified segments: (i) Investment Assets and (ii) Inventory Assets. The following table summarizes the earnings from discontinued operations for each of the quarters ended September 30 (dollars in thousands):
2008 2007
# of Sold # of Sold
Properties Gain Earnings Properties Gain Earnings
Investment Assets 6 $ 2,644 $ 2,997 13 $ 22,464 $ 24,377
Inventory Assets, net of minority
interest 9 2,807 196 26 2,822 1,911
15 $ 5,451 $ 3,193 39 $ 25,286 $ 26,288
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The following table summarizes the earnings from discontinued operations for the nine months September 30 (dollars in thousands):
2008 2007
# of Sold # of Sold
Properties Gain Earnings Properties Gain Earnings
Investment Assets 18 $ 9,230 $ 12,626 27 $ 46,873 $ 56,013
Inventory Assets, net of
minority interest 23 9,347 6,598 64 8,874 7,462
41 $ 18,577 $ 19,224 91 $ 55,747 $ 63,475
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NNN periodically sells Investment Properties and may reinvest the sale proceeds to purchase additional properties. NNN evaluates its ability to pay dividends to stockholders by considering the combined effect of income from continuing and discontinued operations.
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