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| NNN > SEC Filings for NNN > Form 10-Q on 6-May-2009 | All Recent SEC Filings |
6-May-2009
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 of National Retail Properties, Inc. for the year ended December 31, 2008. 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 all of its consolidated subsidiaries. NNN has elected to treat certain subsidiaries as taxable real estate investment trust ("REIT") subsidiaries. These subsidiaries and their majority owned and controlled subsidiaries are collectively referred to as the "TRS."
Overview
NNN's operations are divided into two primary business segments: (i) investment
assets, including real estate assets, mortgages and notes receivable 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 March 31, 2009, NNN owned 1,002 Investment Properties, with
an aggregate gross leasable area of approximately 11,295,000 square feet,
located in 44 states. Approximately 97 percent of total properties in NNN's
Investment Portfolio were leased as of March 31, 2009. In addition, as of
March 31, 2009, NNN had $60,887,000 in mortgages and notes receivables and
$22,617,000 commercial mortgage residuals interests.
The TRS primarily owns, directly and indirectly, through investment interests, real estate for the purpose of selling the real estate ("Inventory Properties" or "Inventory Portfolio"). The TRS typically owns two types of properties, property for development ("Development Properties" or "Development Portfolio") and improved properties ("Exchange Properties" or "Exchange Portfolio"). As of March 31, 2009, the TRS held 31 Inventory Properties, of which 18 were Development Properties (10 completed inventory, two under construction and six land parcels) and 13 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 include items such as: the composition of NNN's Investment Portfolio (such as tenant, geographic and line 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, geography and line of trade. NNN's highest lines of trade concentrations are the convenience store and restaurant (including full and limited service) sectors. These sectors represent a large part of the free standing retail property marketplace which NNN believes represent an area of attractive investment opportunity. However, 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 areas of above-average population growth.
Results of Operations
Property Analysis - Investment Portfolio
General. The following table summarizes NNN's Investment Portfolio:
March 31, December 31, March 31,
2009 2008 2008
Investment Properties Owned:
Number 1,002 1,005 931
Total gross leasable area (square feet) 11,295,000 11,251,000 10,962,000
Investment Properties Leased:
Number 969 972 911
Total gross leasable area (square feet) 10,650,000 10,728,000 10,652,000
Percent of total gross leasable area - leased 94 % 97 % 98 %
Weighted average remaining lease term (years) 13 13 13
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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)
March 31, December 31, March 31,
Lines of Trade 2009 2008 2008
1. Convenience Stores 25.4 % 25.7 % 23.0 %
2. Automotive Service 8.9 % 8.9 % 8.1 %
3. Restaurants - Full Service 8.8 % 8.7 % 9.6 %
4. Theaters 6.0 % 6.1 % 6.4 %
5. Automotive Parts 6.0 % 5.1 % 4.7 %
6. Drug Stores 4.0 % 4.0 % 4.3 %
7. Books 3.9 % 4.0 % 4.1 %
8. Restaurants - Limited Service 3.3 % 3.3 % 3.5 %
9. Sporting Goods 3.3 % 3.3 % 3.7 %
10. Family Entertainment Centers 3.0 % 3.0 % 2.0 %
Other 27.4 % 27.9 % 30.6 %
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 March 31,
2009 2008
Acquisitions:
Number of Investment Properties - 27
Gross leasable area (square feet) - 390,000
Total dollars invested (1) $ 7,643 $ 150,575
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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 March 31,
2009 2008
Number of properties 3 4
Gross leasable area (square feet) 61,000 38,000
Net sales proceeds $ 4,121 $ 10,302
Net gain $ 1,032 $ 3,877
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NNN typically uses the proceeds from property sales either to pay down the outstanding indebtedness of NNN's revolving 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:
March 31, December 31, March 31,
2009 2008 2008
Development Portfolio:
Completed Inventory Properties 10 11 8
Properties under construction 2 1 7
Land parcels 6 7 7
18 19 22
Exchange Portfolio:
Inventory Properties 13 13 32
Total Inventory Properties 31 32 54
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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 March 31,
2009 2008
Development Portfolio:
Number of properties acquired - 2
Dollars invested (1) $ 2,115 $ 3,800
Exchange Portfolio:
Number of properties acquired - 3
Dollars invested (1) $ 74 $ 19,033
Total dollars invested $ 2,189 $ 22,833
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(1) Includes dollars invested in projects currently under construction or tenant improvements 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 March 31,
2009 2008
# of # of
Properties Gain Properties Gain
Development (1) 1 $ 546 4 $ 4,768
Exchange - - 4 865
1 $ 546 8 $ 5,633
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(1) Net of noncontrolling interests.
Revenue from Continuing Operations Analysis
General. During the quarter ended March 31, 2009, NNN's revenue increased primarily due to rental income from properties acquired subsequent to March 31, 2008, as well as rent settlement fees received during the quarter ended March 31, 2009.
The following summarizes NNN's revenues from continuing operations (dollars in thousands):
Quarter Ended March 31, Percent
Increase
2009 2008 2009 2008 (Decrease)
Percent of Total
Rental income(1) $ 53,722 $ 49,858 92.7 % 92.3 % 7.8 %
Real estate expense reimbursement
from tenants 2,353 1,560 4.1 % 2.9 % 50.8 %
Interest and other income from real
estate transactions 834 1,235 1.4 % 2.3 % (32.5 )%
Interest income on commercial
mortgage residual interests 1,054 1,356 1.8 % 2.5 % (22.3 )%
Total revenues from continuing
operations $ 57,963 $ 54,009 100.0 % 100.0 % 7.3 %
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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 Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").
Rental Income. Rental income increased for the quarter ended March 31, 2009, as compared to the same period last year, but remained relatively stable as a percent of the total revenues from continuing operations. The increase is due to the acquisition of 109 Investment Properties with aggregate gross leasable area of 868,000 square feet during the year ended December 31, 2008. Additionally, NNN recorded $2,785,000 and $404,000 in lease termination fees during the quarters ended March 31, 2009 and 2008, respectively. The increase in rental income was partially offset by an increase in the allowance for receivables.
Real Estate Expense Reimbursements from Tenants. Real estate expense reimbursements from tenants increased for the quarter ended March 31, 2009, as compared to the same period last year and remained fairly consistent as a percentage of total revenues from continuing operations. The increase is largely attributable to a full year of reimbursements from certain properties acquired in 2008.
Interest and Other Income from Real Estate Transactions. Interest and other income from real estate transactions decreased for the quarter ended March 31, 2009, as compared to the quarter ended March 31, 2008, primarily due to a lower weighted average principal balance on NNN's mortgages receivable and structured finance investments during the quarter ended March 31, 2009. For the quarters ended March 31, 2009 and 2008, the weighted average outstanding principal balance on NNN's mortgages receivable and structured finance investments was $26,099,000 and $50,966,000, respectively.
Interest Income on Commercial Mortgage Residual Interests. Interest income on commercial mortgage residual interests ("Residuals") decreased for the quarter ended March 31, 2009, as compared to the same period last year, but remained relatively stable as a percent of total revenues from continuing operations. The decrease in interest income on Residuals is primarily the result of the amortization of the underlying notes.
Analysis of Expenses from Continuing Operations
General. Operating expenses from continuing operations increased for the quarter
ended March 31, 2009, primarily due to the increase in depreciation related to
the 2008 real estate acquisitions. The following summarizes NNN's expenses from
continuing operations for the quarters ended March 31 (dollars in thousands):
Percent of
Revenues from
Percent Percentage of Continuing
Increase Total Operations
2009 2008 (Decrease) 2009 2008 2009 2008
General and administrative $ 5,305 $ 7,560 (29.8 )% 24.8 % 36.5 % 9.2 % 14.0 %
Real estate 3,587 2,390 50.1 % 16.7 % 11.6 % 6.2 % 4.4 %
Depreciation and amortization 11,819 9,970 18.5 % 55.1 % 48.2 % 20.4 % 18.5 %
Impairment - commercial mortgage
residual interests valuation
adjustment - 758 (100.0 )% - 3.7 % - 1.4 %
Restructuring charges 731 - N/C (1) 3.4 % - 1.3 % -
Total operating expenses $ 21,442 $ 20,678 3.7 % 100.0 % 100.0 % 37.1 % 38.3 %
Interest and other income $ (347 ) $ (1,221 ) (71.6 )% (2.3 )% (7.7 )% (0.6 )% (2.3 )%
Interest expense 15,431 16,186 (4.7 )% 102.3 % 102.6 % 26.6 % 30.0 %
Loss on interest rate hedge - 804 (100.0 )% - 5.1 % - 1.5 %
Total other expenses (revenues) $ 15,084 $ 15,769 (4.3 )% 100.0 % 100.0 % 26.0 % 29.2 %
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(1) Not calculable ("N/C")
General and Administrative Expenses. General and administrative expenses decreased for quarter ended March 31, 2009, as compared to the same period in 2008, both as a percentage of total operating expenses and as a percentage of revenues from continuing operations. The decrease in general and administrative expenses for the quarter ended March 31, 2009, is primarily attributable to a decrease in expenses related to personnel compensation and a decrease in lost pursuit costs.
Real Estate. Real estate expenses increased for the quarter ended March 31, 2009, as compared to the same period in 2008, primarily due to an increase in tenant reimbursable real estate expenses from 2008 acquisitions, as well as an increase in expenses related to vacant properties.
Depreciation and Amortization. For the quarter ended March 31, 2009, depreciation and amortization expenses increased both as a percentage of revenues from continuing operations and as a percentage of total operating expense. The increase is primarily a result of the depreciation recognized on the 109 Investment Properties with aggregate gross leasable area of 868,000 square feet which were acquired in 2008.
Impairment - Commercial Mortgage Residual Interests Valuation Adjustment. In connection with the independent valuations of the Residuals' fair value, during the quarter ended March 31, 2009, NNN did not record an other than temporary valuation adjustment.
Restructuring Costs. During the quarter ended March 31, 2009, NNN recorded restructuring costs of $731,000 in connection with a workforce reduction. No such costs were incurred during 2008.
Interest Expense. Interest expense decreased for the quarter ended March 31, 2009, as compared to the quarter ended March 31, 2008.
The following represents the primary changes in debt that have impacted interest expense:
(i) repurchase of $8,500,000 of convertible notes payable with an effective interest rate of 7.192% in February 2009,
(ii) repurchase of $3,800,000, $5,000,000 and $25,000,000 of convertible notes payable with an effective interest rate of 5.840% in March 2009, January 2009 and November 2008, respectively,
(iii) issuance of $234,035,000 of convertible notes payable in March 2008, with an effective interest rate of 5.125%, due June 2028,
(iv) payoff of the $100,000,000 7.125% notes payable in March 2008,
(v) payoff of the $12,000,000 secured note payable with stated interest rate of 10.00% in February 2008,
(vi) the decrease of $118,285,000 in the weighted average debt outstanding on the revolving credit facility for the quarter ended March 31, 2009, as compared to the same period in 2008, and
(vii) the decrease in weighted average interest rate on the revolving credit facility from 4.51% for the quarter ended March 31, 2008, to 1.21% for the quarter ended March 31, 2009.
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, its leasehold interests that were terminated and any Investment Properties that were held for sale at March 31, 2009. NNN also classified as discontinued operations the revenues and expenses of its Inventory Properties that generated revenues. 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 March 31 (dollars in thousands):
2009 2008
# of Sold # of Sold
Properties Gain Earnings Properties Gain Earnings
Investment Assets 3 $ 1,032 $ 2,040 4 $ 3,877 $ 5,963
Inventory Assets, net of
noncontrolling interests 1 546 444 7 9,128 4,948
4 $ 1,578 $ 2,484 11 $ 13,005 $ 10,911
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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.
Liquidity
General. 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) origination of mortgages and notes receivable;
(iv) capital expenditures; (v) payment of principal and interest on its
outstanding indebtedness; and (vi) other investments.
Cash and Cash Equivalents. Below is a summary of NNN's cash flows for the quarters ended March 31 (dollars in thousands):
2009 2008
Cash and cash equivalents:
Provided by operating activities $ 48,784 $ 70,961
Provided by (used in) investing activities (10,009 ) (174,210 )
Provided by financing activities (39,543 ) 87,588
Increase (decrease) (768 ) (15,661 )
Net cash at beginning of period 2,626 27,499
Net cash at end of period $ 1,858 $ 11,838
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Cash provided by operating activities represents cash received primarily from rental income from tenants, proceeds from the disposition of Inventory Properties and interest income less cash used for general and administrative expenses, interest expense and the acquisition of Inventory Properties. NNN's cash flow from operating activities, net of the cash used in and provided by the acquisition and disposition of its Inventory Properties, has been sufficient to pay the dividends in each of the periods presented. NNN uses proceeds from its credit facility to fund the acquisition of its Inventory Properties. The change in cash provided by operations for the quarters ended March 31, 2009 and 2008 is primarily the result of changes in revenues and expenses as discussed in "Results of Operations."
Changes in cash for investing activities are primarily attributable to the acquisitions and dispositions of Investment Properties.
NNN's financing activities for the quarter ended March 31, 2009, include the following significant transactions:
• $6,539,000 in net payments on the repurchase of $8,500,000 of 5.125% of convertible notes payable June 2028,
• $6,994,000 in net payments on the repurchase of $8,800,000 of 3.95% of convertible notes payable September 2026,
• $29,313,000 in dividends paid to common stockholders,
• $1,696,000 in dividends paid to holders of the depositary shares of NNN's Series C Preferred Stock,
• $8,852,000 in net proceeds from the issuance of 602,112 shares of common stock in connection with the Dividend Reinvestment and Stock Purchase Plan ("DRIP"), and
• $3,600,000 in net payments on NNN's revolving credit facility.
Contractual Obligations and Commercial Commitments. As of March 31, 2009, NNN has agreed to fund construction commitments in connection with the development of additional properties as outlined below (dollars in thousands):
# of Total Amount Remaining
Properties Commitment (1) Funded Commitment
Investment Portfolio 15 $ 74,231 $ 58,382 $ 15,849
Inventory Portfolio 2 5,869 4,409 1,460
17 $ 80,100 $ 62,791 $ 17,309
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(1) Including construction and land costs.
As of March 31, 2009, NNN had outstanding letters of credit totaling $1,265,000 under its revolving credit facility.
As of March 31, 2009, NNN did not have any other material contractual cash obligations, such as purchase obligations, financing lease obligations or other long-term liabilities other than those reflected in the table. In addition to items reflected in the table, NNN has issued preferred stock with cumulative preferential cash distributions, as described below under "Dividends."
Management anticipates satisfying these obligations with a combination of NNN's current capital resources on hand, its revolving credit facility (the "Credit Facility"), debt or equity financings and asset dispositions.
The lost revenues and increased property expenses resulting from vacant properties or uncollectibility of lease revenues could have a material adverse effect on the liquidity and results of operations if NNN is unable to release the Investment Properties at comparable rental rates and in a timely manner. As of March 31, 2009, NNN owned 33 vacant, unleased Investment Properties (including vacant land parcels) which accounted for approximately three percent of the total Investment Properties held in NNN's Investment Portfolio. Additionally, as of April 30, 2009, approximately two percent of the total gross leasable area of NNN's Investment Portfolio is leased to tenants that have filed a voluntary petition for bankruptcy under Chapter 11 of the U. S. Bankruptcy Code. As a result, these tenants have the right to reject or affirm their leases with NNN.
In May 2008, one of NNN's tenants, Uni-Mart, Inc. ("Uni-Mart"), which leased 69 Investment Properties and eight Inventory Properties, filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In July 2008, Uni-Mart elected to reject the leases of 13 properties owned by NNN. Additionally, in December 2008, Uni-Mart elected to reject an additional three properties. NNN has re-leased 15 of the 16 properties as of March 31, 2009, and continues to market for re-lease or sale the remaining property. On April 1, . . .
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