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| NNN > SEC Filings for NNN > Form 10-Q on 4-Aug-2009 | All Recent SEC Filings |
4-Aug-2009
Quarterly Report
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes included in the Current
Report on Form 8-K of National Retail Properties, Inc. dated June 24, 2009. 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 June 30, 2009, NNN owned 999 Investment Properties (including
12 properties that NNN operates), with an aggregate gross leasable area of
approximately 11,375,000 square feet, located in 44 states. Approximately 97
percent of total properties in NNN's Investment Portfolio were leased or
operated as of June 30, 2009. In addition, as of June 30, 2009, NNN had
$49,774,000 in mortgages and notes receivables and $25,525,000 commercial
mortgage residuals interests.
The TRS, directly and indirectly, through investment interests, acquires and/or develops real estate primarily 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 June 30, 2009, the TRS held 30 Inventory Properties, of which 18 were Development Properties (11 completed inventory, one under construction and six land parcels) and 12 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:
June 30, December 31, June 30,
2009 2008 2008
Investment Properties Owned:
Number 999 1,005 959
Total gross leasable area (square feet) 11,375,000 11,251,000 11,053,000
Investment Properties:
Leased 954 972 943
Operated 12 - -
Total gross leasable area (square feet) 10,643,000 10,728,000 10,809,000
Percent of total gross leasable area - leased
and operated 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)
June 30, December 31, June 30,
Lines of Trade 2009 2008 2008
1. Convenience Stores 26.4% 25.7% 25.7%
2. Restaurants - Full Service 9.2% 8.7% 9.2%
3. Theaters 6.3% 6.1% 6.2%
4. Automotive Parts 6.3% 5.1% 4.8%
5. Automotive Service 5.5% 8.9% 8.0%
6. Drug Stores 4.2% 4.0% 4.2%
7. Books 4.1% 4.0% 4.0%
8. Restaurants - Limited Service 3.5% 3.3% 3.4%
9. Sporting Goods 3.2% 3.3% 3.6%
10. Grocery 2.9% 2.6% 2.7%
Other 28.4% 28.3% 28.2%
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 June 30, Six Months Ended June 30,
2009 2008 2009 2008
Acquisitions:
Number of Investment Properties - 34 - 61
Gross leasable area (square feet) - 208,000 - 598,000
Total dollars invested (1) $ 11,939 $ 103,247 $ 19,582 $ 253,822
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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 June 30, Six Months Ended June 30,
2009 2008 2009 2008
Number of properties 3 7 6 11
Gross leasable area (square feet) 46,000 70,000 107,000 108,000
Net sales proceeds $ 5,584 $ 26,458 $ 9,705 $ 36,760
Net gain $ 600 $ 2,709 $ 1,632 $ 6,586
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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 (the "Credit Facility") or reinvest in real estate.
Property Analysis - Inventory Portfolio
General. The following table summarizes the number of properties held for sale
in NNN's Inventory Portfolio:
June 30, 2009 December 31, 2008 June 30, 2008
Development Portfolio:
Completed Inventory Properties 11 11 13
Properties under construction 1 1 2
Land parcels 6 7 7
18 19 22
Exchange Portfolio:
Inventory Properties 12 13 24
Total Inventory Properties 30 32 46
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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 June 30, Six Months Ended June 30,
2009 2008 2009 2008
Development Portfolio:
Number of properties acquired - - - 2
Dollars invested (1) $ - $ 1,900 $ 2,116 $ 5,700
Exchange Portfolio:
Number of properties acquired - - - 3
Dollars invested (1) $ - $ - $ 74 $ 19,033
Total dollars invested $ - $ 1,900 $ 2,190 $ 24,733
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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 June 30, Six Months Ended June 30,
2009 2008 2009 2008
# of # of # of # of
Properties Gain Properties Gain Properties Gain Properties Gain
Development (1) - $ - - $ (210 ) 1 $ 546 4 $ 4,558
Exchange 1 12 7 1,127 1 12 11 1,992
1 $ 12 7 $ 917 2 $ 558 15 $ 6,550
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(1) Net of noncontrolling interest.
Revenue from Continuing Operations Analysis
General. During the quarter and six months ended June 30, 2009, NNN's revenue increased primarily due to rental income from properties acquired during the six months ended June 30, 2008, as well as rent settlement fees received during the quarter and six months ended June 30, 2009.
The following table summarizes NNN's revenues from continuing operations (dollars in thousands):
Quarter Ended June 30, Percent Six Months Ended June 30, Percent
Increase Increase
2009 2008 2009 2008 (Decrease) 2009 2008 2009 2008 (Decrease)
Percent of Total Percent of Total
Rental income(1) $ 54,592 $ 52,368 93.0% 92.9% 4.3% $ 108,321 $ 102,262 92.8% 92.6% 5.9%
Real estate expense
reimbursement from tenants 2,109 1,423 3.6% 2.5% 48.2% 4,456 2,977 3.8% 2.7% 49.7%
Interest and other income
from real estate
transactions 980 1,407 1.7% 2.5% (30.3)% 1,814 2,642 1.6% 2.4% (31.3)%
Interest income on
commercial mortgage
residual interests 1,000 1,171 1.7% 2.1% (14.6)% 2,054 2,527 1.8% 2.3% (18.7)%
Total revenues from
continuing operations $ 58,681 $ 56,369 100.0% 100.0% 4.1% $ 116,645 $ 110,408 100.0% 100.0% 5.6%
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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 and six months ended June 30, 2009, as compared to the same periods in 2008, but remained relatively stable as a percent of the total revenues from continuing operations. The increase is primarily 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 of which 61 properties with aggregate gross leasable area of 598,000 square feet were acquired during the six months ended June 30, 2008. Additionally, NNN recorded $4,976,000 and $404,000 in lease termination fees and rent settlement during the six months ended June 30, 2009 and 2008, respectively, of which $2,190,000 was recorded for the quarter ended June 30, 2009.
Real Estate Expense Reimbursements from Tenants. Real estate expense reimbursements from tenants increased for the quarter and six months ended June 30, 2009, as compared to the same periods in 2008 and remained fairly consistent as a percentage of total revenues from continuing operations. The increase is attributable to reimbursements from certain properties acquired in 2008 as well as reimbursements resulting from the releasing of existing vacancies.
Interest and Other Income from Real Estate Transactions. Interest and other income from real estate transactions decreased for the quarter and six months ended June 30, 2009, as compared to the quarter and six months ended June 30, 2008, primarily due to a lower weighted average principal balance on NNN's mortgages receivable and structured finance investments during the six months ended June 30, 2009. For the six months ended June 30, 2009 and 2008, the weighted average outstanding principal balance on NNN's mortgages receivable and structured finance investments was $26,184,000 and $49,853,000, respectively.
Interest Income on Commercial Mortgage Residual Interests. Interest income on commercial mortgage residual interests ("Residuals") decreased for the quarter and six months ended June 30, 2009, as compared to the same periods 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 decrease in loan prepayment speeds and an increase in the loan delinquencies.
Analysis of Expenses from Continuing Operations
General. Operating expenses from continuing operations increased for the quarter
and six months ended June 30, 2009, primarily due to the increase in
depreciation related to the 2008 real estate acquisitions and other expenses
related to real estate. The following table summarizes NNN's expenses from
continuing operations for the quarters ended June 30 (dollars in thousands):
Percent of
Revenues from
Percent Percentage of Continuing
` Increase Total Operations
2009 2008 (Decrease) 2009 2008 2009 2008
General and administrative $ 5,784 $ 6,041 (4.3 )% 26.0 % 31.7 % 9.9 % 10.7 %
Real estate 3,241 2,247 44.2 % 14.6 % 11.8 % 5.5 % 4.0 %
Depreciation and amortization 12,121 10,787 12.4 % 54.6 % 56.5 % 20.7 % 19.1 %
Impairment - real estate 1,064 - N/C (1) 4.8 % - 1.8 % -
Total operating expenses $ 22,210 $ 19,075 16.4 % 100.0 % 100.0 % 37.9 % 33.8 %
Interest and other income $ (416 ) $ (1,008 ) (58.7 )% (2.8 )% (6.6 )% (0.7 )% (1.8 )%
Interest expense 15,436 16,281 (5.2 )% 102.8 % 106.6 % 26.3 % 28.9 %
Total other expenses (revenues) $ 15,020 $ 15,273 (1.7 )% 100.0 % 100.0 % 25.6 % 27.1 %
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(1) Not calculable ("N/C")
The following table summarizes NNN's expenses from continuing operations for the six months ended June 30 (dollars in thousands):
Percent of
Revenues from
Percent Percentage of Continuing
Increase Total Operations
2009 2008 (Decrease) 2009 2008 2009 2008
General and administrative $ 11,090 $ 13,601 (18.5 )% 25.4 % 34.2 % 9.5 % 12.3 %
Real estate 6,828 4,627 47.6 % 15.7 % 11.6 % 5.9 % 4.2 %
Depreciation and amortization 23,965 20,770 15.4 % 54.8 % 52.3 % 20.5 % 18.8 %
Impairment - real estate 1,064 - N/C (1) 2.4 % - 0.9 % -
Impairment - commercial mortgage
residual interests valuation
adjustment - 758 (100.0 )% - 1.9 % - 0.7 %
Restructuring costs 731 - N/C (1) 1.7 % - 0.6 % -
Total operating expenses $ 43,678 $ 39,756 9.9 % 100.0 % 100.0 % 37.4 % 36.0 %
Interest and other income $ (763 ) $ (2,229 ) (65.8 )% (2.5 )% (7.2 )% (0.7 )% (2.1 )%
Interest expense 30,866 32,467 (4.9 )% 102.5 % 104.6 % 26.5 % 29.4 %
Loss on interest rate hedge - 804 (100.0 )% - 2.6 % - 0.8 %
Total other expenses (revenues) $ 30,103 $ 31,042 (3.0 )% 100.0 % 100.0 % 25.8 % 28.1 %
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(1) Not calculable ("N/C")
General and Administrative Expenses. General and administrative expenses decreased for quarter and six months ended June 30, 2009, as compared to the same periods 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 and six months ended June 30, 2009, is primarily attributable to a decrease in expenses related to compensation of personnel, a decrease in technology expenses and a decrease in lost pursuit costs.
Real Estate. Real estate expenses increased for the quarter and six months ended June 30, 2009, as compared to the same periods in 2008. The increase in real estate is 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 and six months ended June 30, 2009, depreciation and amortization expenses increased both as a percentage of revenues from continuing operations. 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, of which 61 properties with aggregate gross leasable area of 598,000 square feet were acquired during the six months ended June 30, 2008. The increase is also attributable to the additional amortization in connection with the termination of certain leases.
Impairment - Real Estate. Impairments are measured as the amount by which the current book value of the asset exceeds the estimated fair value of the asset. As a result of the Company's review of long-lived assets for impairments, for the quarter and six months ended June 30, 2009, NNN recorded $1,064,000 of impairments.
Impairment - Commercial Mortgage Residual Interests Valuation Adjustment. In connection with the independent valuations of the Residuals' fair value, during the six months ended June 30, 2009. NNN recorded $758,000 as an other than temporary valuation adjustment during the six months ended June 30, 2008. No other than temporary valuation adjustment was required during the six months ended June 30, 2009.
Restructuring Costs. During the six months ended June 30, 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 and six months ended June 30, 2009, as compared to the quarter and six months ended June 30, 2008.
The following represents the primary changes in debt that have impacted interest expense:
(i) repurchase of $2,500,000 and $8,500,000 of convertible notes payable June 2028 with an effective interest rate of 7.192% in May 2009 and February 2009, respectively,
(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 in March 2008 of $234,035,000 of convertible notes payable in June 2028, with an effective interest rate of 5.125%,
(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 $118,970,000 in the weighted average debt outstanding on the Credit Facility for the six months ended June 30, 2009, as compared to the same period in 2008, and
(vii) the decrease in weighted average interest rate on the Credit Facility from 3.99% for the six months ended June 30, 2008, to 1.19% for the six months ended June 30, 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 June 30, 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 June 30 (dollars in thousands):
2009 2008
# of Sold # of Sold
Properties Gain Earnings Properties Gain Earnings
Investment Assets 3 $ 600 $ 2,762 7 $ 2,709 $ 4,178
Inventory Assets, net of
noncontrolling interests 1 12 222 7 917 1,451
4 $ 612 $ 2,984 14 $ 3,626 $ 5,629
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The following table summarizes the earnings from discontinued operations for the six months ended June 30 (dollars in thousands):
2009 2008
# of Sold # of Sold
Properties Gain Earnings Properties Gain Earnings
Investment Assets 6 $ 1,632 $ 4,809 11 $ 6,586 $ 10,120
Inventory Assets, net of
noncontrolling interests 2 558 663 14 6,539 6,397
8 $ 2,190 $ 5,472 25 $ 13,125 $ 16,517
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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 . . .
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