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NNN REIT, INC. - Quarter Report: 2022 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to

Commission file number 001-11290

NATIONAL RETAIL PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

Maryland

56-1431377

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

450 South Orange Avenue, Suite 900

Orlando, Florida 32801

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (407) 265-7348

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of exchange on which registered

Common Stock, $0.01 par value

NNN

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.

178,732,789 shares of common stock, $0.01 par value, outstanding as of October 28, 2022.

 


 

TABLE OF CONTENTS

 

 

 

PAGE

REFERENCE

Part I – Financial Information

 

Item 1.

Financial Statements:

 

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Income and Comprehensive Income

2

 

Condensed Consolidated Statements of Cash Flows

7

 

Notes to Condensed Consolidated Financial Statements

9

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4.

Controls and Procedures

36

Part II – Other Information

 

Item 1.

Legal Proceedings

37

Item 1A.

Risk Factors

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

Item 3.

Defaults Upon Senior Securities

37

Item 4.

Mine Safety Disclosures

37

Item 5.

Other Information

37

Item 6.

Exhibits

37

Signatures

38

 

 

 


 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

 

 

September 30,
2022

 

 

December 31,
2021

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

Real estate portfolio

 

$

7,826,292

 

 

$

7,449,846

 

Cash and cash equivalents

 

 

3,277

 

 

 

171,322

 

Receivables, net of allowance of $664 and $782, respectively

 

 

2,978

 

 

 

3,154

 

Accrued rental income, net of allowance of $3,924 and $4,587, respectively

 

 

28,231

 

 

 

31,942

 

Debt costs, net of accumulated amortization of $21,085 and $19,377, respectively

 

 

5,858

 

 

 

7,443

 

Other assets

 

 

85,211

 

 

 

87,347

 

Total assets

 

$

7,951,847

 

 

$

7,751,054

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Line of credit payable

 

$

47,500

 

 

$

 

Mortgages payable, including unamortized premium and net of unamortized debt costs

 

 

10,151

 

 

 

10,697

 

Notes payable, net of unamortized discount and unamortized debt costs

 

 

3,738,843

 

 

 

3,735,769

 

Accrued interest payable

 

 

57,384

 

 

 

23,923

 

Other liabilities

 

 

91,037

 

 

 

79,002

 

Total liabilities

 

 

3,944,915

 

 

 

3,849,391

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.01 par value. Authorized 375,000,000 shares; 178,731,891 and
    
175,635,792 shares issued and outstanding, respectively

 

 

1,788

 

 

 

1,757

 

Capital in excess of par value

 

 

4,804,856

 

 

 

4,662,714

 

Accumulated deficit

 

 

(786,526

)

 

 

(747,853

)

Accumulated other comprehensive income (loss)

 

 

(13,186

)

 

 

(14,956

)

Total stockholders’ equity of NNN

 

 

4,006,932

 

 

 

3,901,662

 

Noncontrolling interests

 

 

 

 

 

1

 

Total equity

 

 

4,006,932

 

 

 

3,901,663

 

Total liabilities and equity

 

$

7,951,847

 

 

$

7,751,054

 

See accompanying notes to condensed consolidated financial statements.

1


 

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(dollars in thousands, except per share data)

(unaudited)

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

193,102

 

 

$

180,024

 

 

$

573,401

 

 

$

537,226

 

Interest and other income from real estate transactions

 

 

369

 

 

 

333

 

 

 

1,132

 

 

 

1,920

 

 

 

 

193,471

 

 

 

180,357

 

 

 

574,533

 

 

 

539,146

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

10,124

 

 

 

11,077

 

 

 

30,906

 

 

 

34,693

 

Real estate

 

 

5,875

 

 

 

6,521

 

 

 

19,246

 

 

 

20,865

 

Depreciation and amortization

 

 

56,388

 

 

 

50,976

 

 

 

166,512

 

 

 

151,831

 

Leasing transaction costs

 

 

96

 

 

 

86

 

 

 

260

 

 

 

146

 

Impairment losses – real estate, net of recoveries

 

 

971

 

 

 

4,781

 

 

 

7,221

 

 

 

14,647

 

Executive retirement costs

 

 

556

 

 

 

 

 

 

6,805

 

 

 

 

 

 

 

74,010

 

 

 

73,441

 

 

 

230,950

 

 

 

222,182

 

Gain on disposition of real estate

 

 

5,889

 

 

 

9,473

 

 

 

10,656

 

 

 

17,935

 

Earnings from operations

 

 

125,350

 

 

 

116,389

 

 

 

354,239

 

 

 

334,899

 

Other expenses (revenues):

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

(33

)

 

 

(61

)

 

 

(120

)

 

 

(159

)

Interest expense

 

 

36,962

 

 

 

33,518

 

 

 

110,400

 

 

 

101,190

 

Loss on early extinguishment of debt

 

 

 

 

 

 

 

 

 

 

 

21,328

 

 

 

 

36,929

 

 

 

33,457

 

 

 

110,280

 

 

 

122,359

 

Net earnings

 

 

88,421

 

 

 

82,932

 

 

 

243,959

 

 

 

212,540

 

Loss attributable to noncontrolling interests

 

 

 

 

 

1

 

 

 

5

 

 

 

3

 

Net earnings attributable to NNN

 

 

88,421

 

 

 

82,933

 

 

 

243,964

 

 

 

212,543

 

Series F preferred stock dividends

 

 

 

 

 

(4,485

)

 

 

 

 

 

(13,455

)

Net earnings attributable to common stockholders

 

$

88,421

 

 

$

78,448

 

 

$

243,964

 

 

$

199,088

 

Net earnings per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.50

 

 

$

0.45

 

 

$

1.39

 

 

$

1.14

 

Diluted

 

$

0.50

 

 

$

0.45

 

 

$

1.38

 

 

$

1.14

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

176,900,786

 

 

 

174,629,442

 

 

 

175,542,356

 

 

 

174,610,026

 

Diluted

 

 

177,367,710

 

 

 

174,738,903

 

 

 

175,993,907

 

 

 

174,716,053

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to NNN

 

$

88,421

 

 

$

82,933

 

 

$

243,964

 

 

$

212,543

 

Amortization of interest rate hedges

 

 

595

 

 

 

565

 

 

 

1,770

 

 

 

2,494

 

Fair value of forward starting swaps

 

 

 

 

 

(1,584

)

 

 

 

 

 

(1,584

)

Comprehensive income attributable to NNN

 

 

89,016

 

 

 

81,914

 

 

 

245,734

 

 

 

213,453

 

Comprehensive loss attributable to noncontrolling interests

 

 

 

 

 

(1

)

 

 

(5

)

 

 

(3

)

Total comprehensive income

 

$

89,016

 

 

$

81,913

 

 

$

245,729

 

 

$

213,450

 

 

See accompanying notes to condensed consolidated financial statements.

2


 

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

Quarter Ended September 30, 2022

(dollars in thousands, except per share data)

(unaudited)

 

 

 

Common
Stock

 

 

Capital in
  Excess of
Par Value

 

 

Accumulated
Deficit

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Total
 Stockholders’
Equity of NNN

 

 

Noncontrolling
Interests

 

 

Total
Equity

 

Balances at June 30, 2022

 

$

1,767

 

 

$

4,705,479

 

 

$

(777,939

)

 

$

(13,781

)

 

$

3,915,526

 

 

$

 

 

$

3,915,526

 

Net earnings

 

 

 

 

 

 

 

 

88,421

 

 

 

 

 

 

88,421

 

 

 

 

 

 

88,421

 

Dividends declared and paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.5500 per share of common stock

 

 

 

 

 

715

 

 

 

(97,008

)

 

 

 

 

 

(96,293

)

 

 

 

 

 

(96,293

)

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,740 shares – director compensation

 

 

 

 

 

318

 

 

 

 

 

 

 

 

 

318

 

 

 

 

 

 

318

 

1,949 shares – stock purchase plan

 

 

 

 

 

88

 

 

 

 

 

 

 

 

 

88

 

 

 

 

 

 

88

 

2,084,305 shares – ATM equity program

 

 

21

 

 

 

97,535

 

 

 

 

 

 

 

 

 

97,556

 

 

 

 

 

 

97,556

 

12,800 restricted shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issuance costs

 

 

 

 

 

(1,304

)

 

 

 

 

 

 

 

 

(1,304

)

 

 

 

 

 

(1,304

)

Amortization of deferred compensation

 

 

 

 

 

2,025

 

 

 

 

 

 

 

 

 

2,025

 

 

 

 

 

 

2,025

 

Amortization of interest rate hedges

 

 

 

 

 

 

 

 

 

 

 

595

 

 

 

595

 

 

 

 

 

 

595

 

Balances at September 30, 2022

 

$

1,788

 

 

$

4,804,856

 

 

$

(786,526

)

 

$

(13,186

)

 

$

4,006,932

 

 

$

 

 

$

4,006,932

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

3


 

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY – CONTINUED

Quarter Ended September 30, 2021

(dollars in thousands, except per share data)

(unaudited)

 

 

 

Series F
Preferred
Stock

 

 

Common
Stock

 

 

Capital in
  Excess of
Par Value

 

 

Accumulated
Deficit

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Total
 Stockholders’
Equity of NNN

 

 

Noncontrolling
Interests

 

 

Total
Equity

 

Balances at June 30, 2021

 

$

345,000

 

 

$

1,757

 

 

$

4,644,593

 

 

$

(705,958

)

 

$

(14,516

)

 

$

4,270,876

 

 

$

2

 

 

$

4,270,878

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

82,933

 

 

 

 

 

 

82,933

 

 

 

(1

)

 

 

82,932

 

Dividends declared and paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.3250 per depositary share of Series F
    preferred stock

 

 

 

 

 

 

 

 

 

 

 

(4,485

)

 

 

 

 

 

(4,485

)

 

 

 

 

 

(4,485

)

$0.5300 per share of common stock

 

 

 

 

 

 

 

 

634

 

 

 

(92,731

)

 

 

 

 

 

(92,097

)

 

 

 

 

 

(92,097

)

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,443 shares – director compensation

 

 

 

 

 

 

 

 

306

 

 

 

 

 

 

 

 

 

306

 

 

 

 

 

 

306

 

1,811 shares – stock purchase plan

 

 

 

 

 

 

 

 

86

 

 

 

 

 

 

 

 

 

86

 

 

 

 

 

 

86

 

Stock issuance costs

 

 

 

 

 

 

 

 

(51

)

 

 

 

 

 

 

 

 

(51

)

 

 

 

 

 

(51

)

Amortization of deferred compensation

 

 

 

 

 

 

 

 

3,593

 

 

 

 

 

 

 

 

 

3,593

 

 

 

 

 

 

3,593

 

Amortization of interest rate hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

565

 

 

 

565

 

 

 

 

 

 

565

 

Fair value of forward starting swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,584

)

 

 

(1,584

)

 

 

 

 

 

(1,584

)

Balances at September 30, 2021

 

$

345,000

 

 

$

1,757

 

 

$

4,649,161

 

 

$

(720,241

)

 

$

(15,535

)

 

$

4,260,142

 

 

$

1

 

 

$

4,260,143

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY – CONTINUED

Nine Months Ended September 30, 2022

(dollars in thousands, except per share data)

(unaudited)

 

 

 

Common
Stock

 

 

Capital in
  Excess of
Par Value

 

 

Accumulated Deficit

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Total
 Stockholders’
Equity of NNN

 

 

Noncontrolling
Interests

 

 

Total
Equity

 

Balances at December 31, 2021

 

$

1,757

 

 

$

4,662,714

 

 

$

(747,853

)

 

$

(14,956

)

 

$

3,901,662

 

 

$

1

 

 

$

3,901,663

 

Net earnings

 

 

 

 

 

 

 

 

243,964

 

 

 

 

 

 

243,964

 

 

 

(5

)

 

 

243,959

 

Dividends declared and paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$1.6100 per share of common stock

 

 

 

 

 

2,058

 

 

 

(282,637

)

 

 

 

 

 

(280,579

)

 

 

 

 

 

(280,579

)

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24,209 shares – director compensation

 

 

 

 

 

927

 

 

 

 

 

 

 

 

 

927

 

 

 

 

 

 

927

 

4,516 shares – stock purchase plan

 

 

 

 

 

200

 

 

 

 

 

 

 

 

 

200

 

 

 

 

 

 

200

 

2,801,778 shares – ATM equity program

 

 

28

 

 

 

129,121

 

 

 

 

 

 

 

 

 

129,149

 

 

 

 

 

 

129,149

 

232,751 restricted shares – net of forfeitures

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issuance costs

 

 

 

 

 

(1,879

)

 

 

 

 

 

 

 

 

(1,879

)

 

 

 

 

 

(1,879

)

Amortization of deferred compensation

 

 

 

 

 

12,000

 

 

 

 

 

 

 

 

 

12,000

 

 

 

 

 

 

12,000

 

Amortization of interest rate hedges

 

 

 

 

 

 

 

 

 

 

 

1,770

 

 

 

1,770

 

 

 

 

 

 

1,770

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(278

)

 

 

(278

)

Other

 

 

 

 

 

(282

)

 

 

 

 

 

 

 

 

(282

)

 

 

282

 

 

 

 

Balances at September 30, 2022

 

$

1,788

 

 

$

4,804,856

 

 

$

(786,526

)

 

$

(13,186

)

 

$

4,006,932

 

 

$

 

 

$

4,006,932

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


 

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY – CONTINUED

Nine Months Ended September 30, 2021

(dollars in thousands, except per share data)

(unaudited)

 

 

 

Series F
Preferred
Stock

 

 

Common
Stock

 

 

Capital in
  Excess of
Par Value

 

 

Accumulated Deficit

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Total
 Stockholders’
Equity of NNN

 

 

Noncontrolling
Interests

 

 

Total
Equity

 

Balances at December 31, 2020

 

$

345,000

 

 

$

1,753

 

 

$

4,633,771

 

 

$

(644,779

)

 

$

(16,445

)

 

$

4,319,300

 

 

$

4

 

 

$

4,319,304

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

212,543

 

 

 

 

 

 

212,543

 

 

 

(3

)

 

 

212,540

 

Dividends declared and paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.9750 per depositary share of Series F
    preferred stock

 

 

 

 

 

 

 

 

 

 

 

(13,455

)

 

 

 

 

 

(13,455

)

 

 

 

 

 

(13,455

)

$1.5700 per share of common stock

 

 

 

 

 

 

 

 

1,841

 

 

 

(274,550

)

 

 

 

 

 

(272,709

)

 

 

 

 

 

(272,709

)

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,642 shares – director compensation

 

 

 

 

 

 

 

 

840

 

 

 

 

 

 

 

 

 

840

 

 

 

 

 

 

840

 

5,543 shares – stock purchase plan

 

 

 

 

 

 

 

 

251

 

 

 

 

 

 

 

 

 

251

 

 

 

 

 

 

251

 

30,000 shares – ATM equity program

 

 

 

 

 

1

 

 

 

1,233

 

 

 

 

 

 

 

 

 

1,234

 

 

 

 

 

 

1,234

 

287,207 restricted shares – net of forfeitures

 

 

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issuance costs

 

 

 

 

 

 

 

 

(253

)

 

 

 

 

 

 

 

 

(253

)

 

 

 

 

 

(253

)

Amortization of deferred compensation

 

 

 

 

 

 

 

 

11,481

 

 

 

 

 

 

 

 

 

11,481

 

 

 

 

 

 

11,481

 

Amortization of interest rate hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,494

 

 

 

2,494

 

 

 

 

 

 

2,494

 

Fair value of forward starting swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,584

)

 

 

(1,584

)

 

 

 

 

 

(1,584

)

Balances at September 30, 2021

 

$

345,000

 

 

$

1,757

 

 

$

4,649,161

 

 

$

(720,241

)

 

$

(15,535

)

 

$

4,260,142

 

 

$

1

 

 

$

4,260,143

 

 

See accompanying notes to condensed consolidated financial statements.

 

6


 

 

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings

 

$

243,959

 

 

$

212,540

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

166,512

 

 

 

151,831

 

Impairment losses – real estate, net of recoveries

 

 

7,221

 

 

 

14,647

 

Loss on early extinguishment of debt

 

 

 

 

 

21,328

 

Amortization of notes payable discount

 

 

1,262

 

 

 

1,718

 

Amortization of debt costs

 

 

3,533

 

 

 

4,022

 

Amortization of mortgages payable premium

 

 

(65

)

 

 

(65

)

Amortization of interest rate hedges

 

 

1,770

 

 

 

2,494

 

Settlement of forward starting swaps

 

 

 

 

 

(1,584

)

Gain on disposition of real estate

 

 

(10,656

)

 

 

(17,935

)

Performance incentive plan expense

 

 

14,000

 

 

 

12,371

 

Performance incentive plan payment

 

 

(103

)

 

 

(721

)

Change in operating assets and liabilities, net of assets acquired and liabilities assumed:

 

 

 

 

 

 

Decrease in receivables

 

 

1,264

 

 

 

2,210

 

Decrease in accrued rental income

 

 

3,298

 

 

 

19,091

 

Increase in other assets

 

 

(822

)

 

 

(167

)

Increase in accrued interest payable

 

 

33,461

 

 

 

33,402

 

Increase (decrease) in other liabilities

 

 

641

 

 

 

(1,782

)

Other

 

 

(4

)

 

 

(250

)

Net cash provided by operating activities

 

 

465,271

 

 

 

453,150

 

Cash flows from investing activities:

 

 

 

 

 

 

Proceeds from the disposition of real estate

 

 

50,919

 

 

 

71,805

 

Additions to real estate

 

 

(576,188

)

 

 

(454,743

)

Principal payments received on mortgages and notes receivable

 

 

412

 

 

 

386

 

Other

 

 

(1,951

)

 

 

(1,604

)

Net cash used in investing activities

 

 

(526,808

)

 

 

(384,156

)

 

See accompanying notes to condensed consolidated financial statements.

 

7


 

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED

(dollars in thousands)

(unaudited)

 

 

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from line of credit payable

 

$

344,000

 

 

$

 

Repayment of line of credit payable

 

 

(296,500

)

 

 

 

Repayment of mortgages payable

 

 

(494

)

 

 

(469

)

Proceeds from notes payable

 

 

 

 

 

881,172

 

Repayment of notes payable

 

 

 

 

 

(350,000

)

Payment for early extinguishment of debt

 

 

 

 

 

(21,328

)

Payment of debt issuance costs

 

 

(127

)

 

 

(17,125

)

Proceeds from issuance of common stock

 

 

131,407

 

 

 

3,325

 

Stock issuance costs

 

 

(1,879

)

 

 

(274

)

Payment of Series F preferred stock dividends

 

 

 

 

 

(13,455

)

Payment of common stock dividends

 

 

(282,637

)

 

 

(274,550

)

Noncontrolling interests distributions

 

 

(278

)

 

 

 

Net cash provided by (used in) financing activities

 

 

(106,508

)

 

 

207,296

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

(168,045

)

 

 

276,290

 

Cash, cash equivalents and restricted cash at beginning of period(1)

 

 

171,322

 

 

 

267,236

 

Cash, cash equivalents and restricted cash at end of period(1)

 

$

3,277

 

 

$

543,526

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Interest paid, net of amount capitalized

 

$

70,986

 

 

$

59,834

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

Change in other comprehensive income

 

$

1,770

 

 

$

910

 

Work in progress accrual balance at end of period

 

$

19,102

 

 

$

6,264

 

 

(1)

Cash, cash equivalents and restricted cash is the aggregate of cash and cash equivalents and restricted cash and cash held in escrow from the Condensed Consolidated Balance Sheets. NNN had no restricted cash and cash held in escrow at September 30, 2022 and 2021.

 

 

See accompanying notes to condensed consolidated financial statements.

8


 

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

 

Note 1 – Organization and Summary of Significant Accounting Policies:

Organization and Nature of Business – National Retail Properties, Inc., a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) formed in 1984. The terms "NNN" or the "Company" refer to National Retail Properties, Inc. and all of its consolidated subsidiaries.

NNN's assets primarily include real estate assets. NNN acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and primarily held for investment ("Properties", "Property Portfolio", or individually a "Property").

 

 

September 30, 2022

 

Property Portfolio:

 

 

 

Total Properties

 

 

3,349

 

Gross leasable area (square feet)

 

 

34,265,000

 

States

 

 

48

 

Weighted average remaining lease term (years)

 

 

10.4

 

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. Operating results for the quarter and nine months ended September 30, 2022, may not be indicative of the results that may be expected for the year ending December 31, 2022. Amounts as of December 31, 2021, included in the condensed consolidated financial statements have been derived from the audited consolidated financial statements as of that date. The unaudited condensed consolidated financial statements, included herein, should be read in conjunction with the consolidated financial statements and notes thereto as well as Management's Discussion and Analysis of Financial Condition and Results of Operations in NNN's Form 10-K for the year ended December 31, 2021.

COVID-19 Pandemic – During 2020 and 2021, NNN and its tenants were impacted by the novel strain of coronavirus and its variants ("COVID-19") pandemic which resulted in the loss of revenue for certain tenants and challenged their ability to pay rent. As a result, NNN entered into rent deferral lease amendments with certain tenants (See "Note 2 – Real Estate").

Principles of Consolidation – NNN’s condensed consolidated financial statements include the accounts of each of the respective majority owned and controlled affiliates, including transactions whereby NNN has been determined to be the primary beneficiary in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codifications ("ASC") guidance included in Consolidation. All significant intercompany account balances and transactions have been eliminated.

Real Estate Portfolio – NNN records the acquisition of real estate at cost, including acquisition and closing costs. The cost of Properties developed or funded by NNN includes direct and indirect costs of construction, property taxes, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. NNN recorded $547,000 and $215,000 in capitalized interest during the development period for the nine months ended September 30, 2022 and 2021, respectively, of which $273,000 and $87,000 was recorded during the quarters ended September 30, 2022 and 2021, respectively.

Purchase Accounting for Acquisition of Real Estate Subject to a Lease – In accordance with the FASB guidance on business combinations, consideration for the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and, if applicable, to identified intangible assets and liabilities, consisting of the value of above-market and below-market leases and the value of in-place leases, as applicable, based on their respective fair values.

 

 

9


 

The fair value estimate is sensitive to significant assumptions, such as establishing a range of relevant market assumptions for land, building and rent and where the acquired property falls within that range. These market assumptions for land, building and rent use the most relevant comparable properties for an acquisition. The final range relies upon ranking comparable properties' attributes from most to least similar.

The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to land, building and tenant improvements based on the determination of their fair values.

In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded as other assets or liabilities based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases, and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the lease and the renewal option terms if it is probable that the tenant will exercise options. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term unless the Company believes that it is likely that the tenant will renew the lease for an option term whereby the Company amortizes the value attributable to the renewal over the renewal period.

The aggregate value of other acquired intangible assets, consisting of in-place leases, is valued by comparing the purchase price paid for a property after adjusting for existing in-place leases to the estimated fair value of the property as-if-vacant, determined as set forth above. This intangible asset is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off in that period. The value of tenant relationships is reviewed on individual transactions to determine if future value was derived from the acquisition.

Lease Accounting – NNN records its leases on the Property Portfolio in accordance with FASB Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)," ("ASC 842"). In addition, NNN records right-of-use assets and operating lease liabilities as lessee under operating leases in accordance with ASC 842.

NNN's real estate is generally leased to tenants on a net lease basis, whereby the tenant is responsible for all operating expenses relating to the Property, including property taxes, insurance, maintenance, repairs and capital expenditures. The leases on the Property Portfolio are predominantly classified as operating leases and are accounted for as follows:

Operating method – Properties with leases accounted for using the operating method are recorded at the cost of the real estate and depreciated on the straight-line method over their estimated remaining useful lives, which generally range from 20 to 40 years for buildings and improvements and 15 years for land improvements. Leasehold interests are amortized on the straight-line method over the terms of their respective leases. Revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Accrued rental income is the aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis.

In April 2020, the FASB issued interpretive guidance relating to the accounting for lease concessions provided as a result of COVID-19. In this guidance, entities can elect not to apply lease modification accounting with respect to such lease concessions and instead, treat the concession as if it was a part of the existing contract. This guidance is only applicable to COVID-19 related lease concessions that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. NNN elected to make this policy election for COVID-19 lease concessions, including the rent deferral lease amendments effective during the years ended December 31, 2021 and 2020.

During 2021 and 2020, NNN entered into rent deferral lease amendments with certain tenants, for an aggregate $4,758,000 and $52,019,000 of rent originally due for the years ended December 31, 2021 and 2020, respectively. The rent deferral lease amendments require the deferred rents to be repaid at a later time during the lease term. Approximately $31,776,000 of deferred rent was repaid in 2021 and approximately $11,561,000 of deferred rent was repaid during the nine months ended September 30, 2022. An additional $2,965,000 is due during the quarter ended December 31, 2022, with substantially all deferred rent due periodically by December 31, 2023.

Collectability – In accordance with ASC 842, NNN reviews the collectability of its rental income on an ongoing basis. NNN considers collectability indicators when analyzing accounts receivable (and accrued rent) and historical bad debt levels, tenant credit-worthiness and current economic trends, all of which assists in evaluating the probability of outstanding and future rental income collections. In addition, tenants in bankruptcy are analyzed and considerations are made in connection with the expected recovery of pre-petition and post-petition bankruptcy claims.

 

10


 

When NNN deems the collection of rental income from a tenant not probable, uncollected previously recognized rental revenue and any related accrued rent are reversed and, subsequently, any rental income is only recognized when cash receipts are received. At this point, a tenant is deemed cash basis for accounting purposes.

As a result of the review of rental income collectability, no outstanding receivables and related accrued rent were written off during the nine months ended September 30, 2022 and 2021, and no additional tenants were deemed as cash basis for accounting purposes.

The following table summarizes those tenants classified as cash basis for accounting purposes as of:

 

 

September 30,

 

 

 

2022

 

 

2021

 

Number of tenants

 

 

8

 

 

 

11

 

Cash basis tenants as a percent of:

 

 

 

 

 

 

Total Properties

 

 

5.2

%

 

 

5.6

%

Total annual base rent(1)

 

 

7.1

%

 

 

7.1

%

Total gross leasable area

 

 

6.8

%

 

 

7.4

%

 

(1)

Based on annualized base rent for all leases in place for each respective period.

During the nine months ended September 30, 2022 and 2021, NNN recognized $46,631,000 and $37,999,000, respectively, of rental income from the tenants classified as cash basis for accounting purposes, of which $15,346,000 and $13,630,000 was recognized during the quarters ended September 30, 2022 and 2021, respectively.

During the nine months ended September 30, 2022, three tenants were reclassified to accrual basis for accounting purposes due to their improved qualitative and/or quantitative credit factors. The impact of the reclassification was immaterial.

NNN includes an allowance for doubtful accounts in rental income on the Condensed Consolidated Statements of Income and Comprehensive Income.

Real Estate – Held for Sale – Real estate held for sale is not depreciated and is recorded at the lower of cost or fair value, less cost to sell. On a quarterly basis, the Company evaluates its Properties for held for sale classification based on specific criteria as outlined in ASC 360, Property, Plant and Equipment, including management’s intent to commit to a plan to sell the asset. NNN anticipates the disposition of Properties classified as held for sale to occur within 12 months. At September 30, 2022 and December 31, 2021, NNN had recorded real estate held for sale of $4,181,000 (one property) and $5,557,000 (two properties), respectively in real estate portfolio on the Condensed Consolidated Balance Sheets. The two properties classified as held for sale as of December 31, 2021 were sold during the nine months ended September 30, 2022.

Real Estate Dispositions – When real estate is disposed, the related cost, accumulated depreciation or amortization and any accrued rental income from operating leases and the net investment from direct financing leases are removed from the accounts, and gains and losses from the dispositions are reflected in income. Gains from the disposition of real estate are generally recognized in accordance FASB, ASC 610-20, "Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets" ("ASC 610-20"), provided that various criteria relating to the terms of the sale and any subsequent involvement by NNN with the real estate sold are met.

 

11


 

Impairment – Real Estate – 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 COVID-19 alone was determined not to be an indicator of impairment.

Credit Losses on Financial Instruments – FASB ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326),” (“ASC 326”) requires entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financings. The guidance requires a lifetime credit loss expected at inception and requires pooling of assets, which share similar risk characteristics. NNN is required to evaluate current economic conditions, as well as, make future expectations of economic conditions. In addition, the measurement of the expected credit loss is over the asset’s contractual term.

NNN had mortgages receivable of $1,633,000 and $2,023,000 included in other assets on the Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021, respectively, net of $104,000 and $129,000 allowance for credit loss, respectively. NNN measures the allowance for credit loss based on the fair value of the collateral and the historical collectability trend analysis over 15 years.

Debt Costs – Line of Credit Payable Debt costs incurred in connection with NNN's $1,100,000,000 unsecured revolving line of credit have been deferred and are being amortized to interest expense over the term of the loan commitment using the straight-line method, which approximates the effective interest method. NNN has recorded debt costs associated with the credit facility as an asset, in debt costs on the Condensed Consolidated Balance Sheets.

Debt Costs – Notes Payable Debt costs incurred in connection with the issuance of NNN’s notes payable have been deferred and are being amortized to interest expense over the term of the respective debt obligation using the effective interest method. These costs of $38,145,000, as of September 30, 2022 and December 31, 2021, are included in notes payable on the Condensed Consolidated Balance Sheets net of accumulated amortization of $11,075,000 and $9,262,000, respectively.

Revenue Recognition – Rental revenues for properties under construction commence upon completion of construction of the leased asset and delivery of the leased asset to the tenant. Rental revenues for non-development real estate assets are recognized when earned in accordance with ASC 842, based on the terms of the lease of the leased asset. Leasehold interests are amortized on the straight-line method over the terms of their respective leases. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Lease termination fees are recognized when collected subsequent to the related lease that is cancelled and NNN no longer has continuing involvement with the former tenant with respect to that property.

The core principle of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"), is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Certain contracts are excluded from ASU 2014-09, including lease contracts within the scope of ASC 842.

 

 

12


 

Earnings Per Share – Earnings per share have been computed pursuant to the FASB guidance included in Earnings Per Share. The guidance requires classification of the Company’s unvested restricted share units, which carry rights to receive nonforfeitable dividends, as participating securities requiring the two-class method of computing earnings per share. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted average shares outstanding during the period.

The following table is a reconciliation of the numerator and denominator used in the computation of basic and diluted earnings per common share using the two-class method (dollars in thousands):

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Basic and Diluted Earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to NNN

 

$

88,421

 

 

$

82,933

 

 

$

243,964

 

 

$

212,543

 

Less: Series F preferred stock dividends

 

 

 

 

 

(4,485

)

 

 

 

 

 

(13,455

)

Net earnings available to NNN’s common stockholders

 

 

88,421

 

 

 

78,448

 

 

 

243,964

 

 

 

199,088

 

Less: Earnings allocated to unvested restricted shares

 

 

(135

)

 

 

(180

)

 

 

(471

)

 

 

(509

)

Net earnings used in basic and diluted earnings per share

 

$

88,286

 

 

$

78,268

 

 

$

243,493

 

 

$

198,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Weighted Average Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

177,881,613

 

 

 

175,607,905

 

 

 

176,510,417

 

 

 

175,530,702

 

Less: Unvested restricted shares

 

 

(246,116

)

 

 

(340,725

)

 

 

(292,433

)

 

 

(323,808

)

Less: Unvested contingent restricted shares

 

 

(734,711

)

 

 

(637,738

)

 

 

(675,628

)

 

 

(596,868

)

Weighted average number of shares outstanding used in
    basic earnings per share

 

 

176,900,786

 

 

 

174,629,442

 

 

 

175,542,356

 

 

 

174,610,026

 

Other dilutive securities

 

 

466,924

 

 

 

109,461

 

 

 

451,551

 

 

 

106,027

 

Weighted average number of shares outstanding used in
    diluted earnings per share

 

 

177,367,710

 

 

 

174,738,903

 

 

 

175,993,907

 

 

 

174,716,053

 

 

Income Taxes – NNN has made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. NNN generally will not be subject to federal income tax on income it distributes to stockholders, providing it distributes 100 percent of its REIT taxable income and meets certain other requirements for qualifying as a REIT. As of September 30, 2022, NNN believes it has qualified as a REIT. Notwithstanding NNN’s qualification for taxation as a REIT, NNN is subject to certain state and local income, franchise and excise taxes.

 

13


 

Fair Value Measurement – NNN’s estimates of fair value of financial and non-financial assets and liabilities are based on the framework established in the fair value accounting guidance. The framework specifies a hierarchy of valuation inputs which was established to increase consistency, clarity and comparability in fair value measurements and related disclosures. The guidance describes a fair value hierarchy based upon three levels of inputs that may be used to measure fair value, two of which are considered observable and one that is considered unobservable. The following describes the three levels:

Level 1 – Valuation is based upon quoted prices in active markets for identical assets or liabilities.
Level 2 – Valuation is based upon inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include option pricing models, discounted cash flow models and similar techniques.

Accumulated Other Comprehensive Income (Loss) – The following table outlines the changes in accumulated other comprehensive income (loss) for the nine months ended September 30, 2022 (dollars in thousands):

 

 

 

Gain (Loss) on
Cash Flow Hedges
(1)

 

 

Beginning balance, December 31, 2021

 

$

(14,956

)

 

Reclassifications from accumulated other comprehensive income to net earnings

 

 

1,770

 

 (2)

Ending balance, September 30, 2022

 

$

(13,186

)

 

 

(1)

Additional disclosure is included in Note 6 – Derivatives.

(2)

Recorded in interest expense on the Condensed Consolidated Statements of Income and Comprehensive Income.

New Accounting Pronouncements – ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”) contains practical expedients for reference rate reform-related activities, including the transition away from the London Interbank Offered Rate ("LIBOR"), that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. In 2021, NNN elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. NNN continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

NNN had no derivative financial instruments outstanding as of September 30, 2022.

Use of Estimates – Additional critical accounting policies of NNN include management’s estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities and are required to prepare the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Significant accounting policies include management’s estimates of the recoverability of the carrying value of long-lived assets and management's evaluation of the probability of outstanding and future lease payment collections. Actual results could differ from those estimates.

Reclassification – Certain items in the prior year's consolidated financial statements and notes to consolidated financial statements have been reclassified to conform the 2022 presentation.

 

 

14


 

Note 2 – Real Estate:

Real Estate – Portfolio

Leases – At September 30, 2022, NNN’s real estate portfolio had a weighted average remaining lease term of 10.4 years and consisted of 3,370 leases classified as operating leases and an additional five leases accounted for as direct financing leases.

The following is a summary of the general structure of the leases in the Property Portfolio, although the specific terms of each lease can vary significantly. Generally, the Property leases provide for initial terms of 10 to 20 years. The Properties are generally leased under net leases, pursuant to which the tenant typically bears responsibility for substantially all property costs and expenses associated with ongoing maintenance, repair, replacement and operation of the property, including utilities, property taxes and property and liability insurance. Certain Properties are subject to leases under which NNN retains responsibility for specific costs and expenses of the Property. NNN's leases provide for annual base rental payments (generally payable in monthly installments), and generally provide for limited increases in rent as a result of (i) increases in the Consumer Price Index, (ii) fixed increases, or, to a lesser extent, (iii) increases in the tenant’s sales volume.

Generally, NNN's leases provide the tenant with one or more multi-year renewal options, subject to generally the same terms and conditions provided under the initial lease term, including rent increases. NNN’s lease term is based on the non-cancellable base term unless economic incentives make it reasonably certain that an option period to extend the lease will be exercised, in which event NNN includes the renewal options. Some of the leases also provide that in the event NNN wishes to sell the Property subject to that lease, NNN first must offer the lessee the right to purchase the Property on the same terms and conditions as any offer which NNN intends to accept for the sale of the Property.

Real Estate Portfolio – NNN's real estate consisted of the following at (dollars in thousands):

 

 

 

September 30,
2022

 

 

December 31,
2021

 

Land and improvements(1)

 

$

2,616,920

 

 

$

2,527,483

 

Buildings and improvements

 

 

6,779,242

 

 

 

6,375,583

 

Leasehold interests

 

 

355

 

 

 

355

 

 

 

 

9,396,517

 

 

 

8,903,421

 

Less accumulated depreciation and amortization

 

 

(1,610,018

)

 

 

(1,470,062

)

 

 

 

7,786,499

 

 

 

7,433,359

 

Work in progress for buildings and improvements

 

 

32,183

 

 

 

7,277

 

Accounted for using the operating method

 

 

7,818,682

 

 

 

7,440,636

 

Accounted for using the direct financing method

 

 

3,429

 

 

 

3,653

 

Classified as held for sale

 

 

4,181

 

 

 

5,557

 

 

 

$

7,826,292

 

 

$

7,449,846

 

 

(1)

Includes $21,543 and $8,979 in land for Properties under construction at September 30, 2022 and December 31, 2021, respectively.

 

 

15


 

NNN recognized the following revenues in rental income (dollars in thousands):

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Rental income from operating leases

 

$

188,840

 

 

$

175,833

 

 

$

558,942

 

 

$

522,787

 

Earned income from direct financing leases

 

 

148

 

 

 

154

 

 

 

449

 

 

 

469

 

Percentage rent

 

 

235

 

 

 

195

 

 

 

1,231

 

 

 

530

 

Real estate expense reimbursement from tenants

 

 

3,879

 

 

 

3,842

 

 

 

12,779

 

 

 

13,440

 

 

 

$

193,102

 

 

$

180,024

 

 

$

573,401

 

 

$

537,226

 

Some leases provide for a free rent period or scheduled rent increases throughout the lease term. Such amounts are recognized on a straight-line basis over the terms of the leases.

For the nine months ended September 30, 2022 and 2021, NNN recognized ($3,298,000) and ($19,091,000), respectively, of net straight-line accrued rental income, net of reserves, of which ($655,000) and ($3,400,000) of such income, net of reserves was recorded during the quarters ended September 30, 2022 and 2021.

Included in accrued rental income are the net impacts of the rent deferred and corresponding scheduled repayments from the lease amendments NNN entered into as a result of the COVID-19 pandemic. During the nine months ended September 30, 2022 and 2021, NNN recorded ($4,710,000) and ($21,996,000), respectively, of net straight-line accrued rental income related to such amendments, of which ($1,201,000) and ($4,294,000) was recorded during the quarters ended September 30, 2022 and 2021.

Real Estate – Intangibles

In accordance with purchase accounting for the acquisition of real estate subject to a lease, NNN has recorded intangible assets and lease liabilities that consisted of the following at (dollars in thousands):

 

 

 

September 30,
2022

 

 

December 31,
2021

 

Intangible lease assets (included in other assets):

 

 

 

 

 

 

Above-market in-place leases

 

$

15,410

 

 

$

15,335

 

Less: accumulated amortization

 

 

(11,339

)

 

 

(10,821

)

Above-market in-place leases, net

 

$

4,071

 

 

$

4,514

 

 

 

 

 

 

 

 

In-place leases

 

$

124,310

 

 

$

122,069

 

Less: accumulated amortization

 

 

(77,992

)

 

 

(73,345

)

In-place leases, net

 

$

46,318

 

 

$

48,724

 

 

 

 

 

 

 

 

Intangible lease liabilities (included in other liabilities):

 

 

 

 

 

 

Below-market in-place leases

 

$

41,371

 

 

$

41,705

 

Less: accumulated amortization

 

 

(27,830

)

 

 

(27,447

)

Below-market in-place leases, net

 

$

13,541

 

 

$

14,258

 

The amounts amortized as a net increase to rental income for above-market and below-market in-place leases for the nine months ended September 30, 2022 and 2021, were $410,000 and $430,000, respectively, of which $130,000 and $156,000 was recorded for the quarters ended September 30, 2022 and 2021, respectively. The value of in-place leases amortized to expense for the nine months ended September 30, 2022 and 2021, was $5,337,000 and $5,451,000, respectively, of which $1,793,000 and $1,840,000 was recorded for the quarters ended September 30, 2022 and 2021, respectively.

 

 

16


 

Real Estate – Dispositions

The following table summarizes the Properties sold and the corresponding gain recognized on the disposition of Properties (dollars in thousands):

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

# of Sold
Properties

 

Net
Gain

 

 

# of Sold
Properties

 

Net
Gain

 

 

# of Sold
Properties

 

Net
Gain

 

 

# of Sold
Properties

 

Net
Gain

 

Gain on disposition of real estate

 

8

 

$

5,889

 

 

27

 

$

9,473

 

 

26

 

$

10,656

 

 

53

 

$

17,935

 

 

 

Real Estate – Commitments

NNN has committed to fund construction on 19 Properties. The improvements on such Properties are estimated to be completed within 12 months. These construction commitments, as of September 30, 2022, are outlined in the table below (dollars in thousands):

 

Total commitment(1)

 

$

103,875

 

Less amount funded

 

 

(53,726

)

Remaining commitment

 

$

50,149

 

 

(1)

Includes land, construction costs, tenant improvements, lease costs and capitalized interest.

Real Estate – Impairments

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.

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Total real estate impairments, net of recoveries

 

$

971

 

 

$

4,781

 

 

$

7,221

 

 

$

14,647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Properties:

 

 

 

 

 

 

 

 

 

 

 

 

Vacant

 

 

2

 

 

 

5

 

 

 

8

 

 

 

19

 

Occupied

 

 

1

 

 

 

2

 

 

 

6

 

 

 

10

 

The valuation of impaired assets is determined using widely accepted valuation techniques including discounted cash flow analysis, income capitalization, analysis of recent comparable sales transactions, actual sales negotiations and bona fide purchase offers received from third parties, which are Level 3 inputs. NNN may consider a single valuation technique or multiple valuation techniques, as appropriate, when estimating the fair value of its real estate.

 

17


 

Note 3 – Line of Credit Payable:

In June 2021, NNN amended and restated its credit agreement to increase the borrowing capacity under its unsecured revolving credit facility from $900,000,000 to $1,100,000,000 and amended certain other terms under the former revolving credit facility (as the context requires, the previous and new revolving credit facility, the "Credit Facility"). The Credit Facility had a weighted average outstanding balance of $21,592,000 and a weighted average interest rate of 3.01% during the nine months ended September 30, 2022. The Credit Facility matures in 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 September 30, 2022, $47,500,000 was outstanding and $1,052,500,000 was available for future borrowings under the Credit Facility, and NNN was in compliance with each of the financial covenants.

 

Note 4 – Notes Payable:

In 2021, NNN filed prospectus supplements to the prospectus contained in its August 2020 shelf registration statement (see "Note 5 – Stockholders' Equity") 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

 

March 2021

 

$

450,000

 

 

$

8,406

 

 

$

441,594

 

 

 

3.500

%

 

 

3.602

%

 

April 2051

2052 Notes (3)

 

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 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.

Each series of Notes is a senior unsecured obligation of NNN and is subordinated to all secured debt of NNN and to the debt and other liabilities of NNN's subsidiaries. Each series of 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, up to 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.

In March 2021, NNN redeemed the $350,000,000 3.300% notes payable that were due in April 2023. The notes were redeemed at a price equal to 100% of the principal amount, plus (i) a make-whole amount of $21,328,000 which is included in loss on early extinguishment of debt on the Condensed Consolidated Statement of Income and Comprehensive Income, and (ii) accrued and unpaid interest.

 

18


 

 

Note 5 – Stockholders' Equity:

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.

Preferred StockIn 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 ($345,000,000), 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.

At-The-Market Offerings – Under NNN's shelf registration statement, NNN has established an at-the-market equity program ("ATM") 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 September 30, 2022

 

 

4,401,082

 

The following table outlines the common stock issuances pursuant to NNN's ATM equity program (dollars in thousands, except per share data):

 

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Shares of common stock

 

 

2,801,778

 

 

 

30,000

 

Average price per share (net)

 

$

45.42

 

 

$

35.35

 

Net proceeds

 

$

127,270

 

 

$

1,061

 

Stock issuance costs(1)

 

$

1,879

 

 

$

173

 

 

(1)

Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting fees.

Dividend Reinvestment and Stock Purchase Plan – In February 2021, NNN filed a shelf registration statement that was automatically effective with the Commission for its Dividend Reinvestment and Stock Purchase Plan ("DRIP"), which permits NNN to issue up to 6,000,000 shares of common stock. The following table outlines the common stock issuances pursuant to NNN's DRIP (dollars in thousands):

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Shares of common stock

 

 

51,567

 

 

 

46,666

 

Net proceeds

 

$

2,258

 

 

$

2,012

 

 

 

19


 

Dividends – 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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Series F preferred stock(1):

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

$

 

 

$

4,485

 

 

$

 

 

$

13,455

 

Per depositary share

 

 

 

 

 

0.3250

 

 

 

 

 

 

0.9750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

 

97,008

 

 

 

92,731

 

 

 

282,637

 

 

 

274,550

 

Per share

 

 

0.5500

 

 

 

0.5300

 

 

 

1.6100

 

 

 

1.5700

 

 

(1)

The Series F preferred stock was redeemed in October 2021.

In October 2022, NNN declared a dividend of $0.5500 per share, which is payable in November 2022 to its common stockholders of record as of October 31, 2022.

 

Note 6 – Derivatives:

In accordance with the guidance on derivatives and hedging, NNN records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or a firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

NNN’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, NNN primarily uses treasury locks, forward starting swaps and interest rate swaps as part of its cash flow hedging strategy. Treasury locks and forward starting swaps are used to hedge forecasted debt issuances. Treasury locks designated as cash flow hedges lock in the yield/price of a treasury security. Forward starting swaps also lock the associated swap spread. Interest rate swaps designated as cash flow hedges are used to hedge the variable cash flows associated with floating rate debt and involve the receipt or payment of variable rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount.

For derivatives designated as cash flow hedges, the change in the fair value of the derivative is initially reported in other comprehensive income (loss) (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings.

NNN discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative expires or is sold, terminated or exercised, the derivative is re-designated as a hedging instrument or management determines that designation of the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued, NNN recognizes any changes in its fair value in earnings and continues to carry the derivative on the balance sheet or may choose to settle the derivative at that time with a cash payment or receipt. NNN records a cash settlement of forward starting swaps in the Condensed Consolidated Statements of Cash Flows as an operating activity.

 

20


 

The following table outlines NNN's terminated derivatives which were hedging the risk of changes in forecasted interest payments on forecasted issuance of long-term debt (dollars in thousands):

Notes Payable

 

Terminated

 

Description

 

Aggregate
Notional
Amount

 

 

Liability
(Asset) Fair
Value When
Terminated

 

 

Fair Value
Deferred In
Other
Comprehensive
Income
(1)

 

 2024

 

May 2014

 

Three forward starting swaps

 

$

225,000

 

 

$

6,312

 

 

$

6,312

 

 2025

 

October 2015

 

Four forward starting swaps

 

 

300,000

 

 

 

13,369

 

 

 

13,369

 

 2026

 

December 2016

 

Two forward starting swaps

 

 

180,000

 

 

 

(13,352

)

 

 

(13,345

)

 2027

 

September 2017

 

Two forward starting swaps

 

 

250,000

 

 

 

7,690

 

 

 

7,688

 

 2028

 

September 2018

 

Two forward starting swaps

 

 

250,000

 

 

 

(4,080

)

 

 

(4,080

)

 2030

 

March 2020

 

Three forward starting swaps

 

 

200,000

 

 

 

13,141

 

 

 

13,141

 

 2052

 

September 2021

 

Two forward starting swaps

 

 

120,000

 

 

 

1,584

 

 

 

1,584

 

 

(1)

The amount reported in accumulated other comprehensive income (loss) will be reclassified to interest expense as interest payments are made on the related notes payable.

As of September 30, 2022, $13,186,000 remained in other comprehensive income (loss) related to NNN’s previously terminated interest rate hedges. During the nine months ended September 30, 2022 and 2021, NNN reclassified out of other comprehensive income (loss) $1,770,000 and $2,494,000, respectively, of which $595,000 and $565,000 was reclassified during the quarters ended September 30, 2022 and 2021, respectively, as an increase in interest expense. Over the next 12 months, NNN estimates that an additional $2,447,000 will be reclassified as an increase in interest expense from these terminated derivatives. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on NNN’s long-term debt.

NNN does not use derivatives for trading or speculative purposes. NNN had no derivative financial instruments outstanding at September 30, 2022.

 

Note 7 – Fair Value of Financial Instruments:

NNN believes the carrying value of its Credit Facility approximates fair value based upon its nature, terms and variable interest rate. NNN believes that the carrying value of its mortgages payable at September 30, 2022 and December 31, 2021, approximate fair value based upon current market prices of comparable instruments (Level 3). At September 30, 2022 and December 31, 2021, the fair value of NNN’s notes payable excluding unamortized discount and debt costs was $3,113,546,000 and $4,032,757,000, respectively, based upon quoted market prices as of the close of the period, which is a Level 1 valuation since NNN's notes payable are publicly traded.

 

21


 

 

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;

 

22


 

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;
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 September 30, 2022, NNN owned 3,349 Properties, with an aggregate gross leasable area of approximately 34,265,000 square feet, located in 48 states, with a weighted average remaining lease term of 10.4 years. Approximately 99 percent of the Properties were leased as of September 30, 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 restaurant (including full and limited service) (18.4%), convenience store (16.7%), and automotive service (13.6%) 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.

 

23


 

As of September 30, 2022 and 2021, the Property Portfolio remained at least 99 percent leased and had a weighted average remaining lease term of approximately 10 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.

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 ended December 31, 2021 and 2020, which require the deferred rents to be repaid at a later time during the lease term. Substantially all 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:

 

 

September 30,
2022

 

 

December 31, 2021

 

 

September 30,
2021

 

Properties Owned:

 

 

 

 

 

 

 

 

 

Number

 

 

3,349

 

 

 

3,223

 

 

 

3,195

 

Total gross leasable area (square feet)

 

 

34,265,000

 

 

 

32,753,000

 

 

 

33,005,000

 

Properties:

 

 

 

 

 

 

 

 

 

Leased and unimproved land

 

 

3,328

 

 

 

3,191

 

 

 

3,149

 

Percent of Properties – leased and unimproved land

 

 

99

%

 

 

99

%

 

 

99

%

Weighted average remaining lease term (years)

 

 

10.4

 

 

 

10.6

 

 

 

10.6

 

Total gross leasable area (square feet) – leased

 

 

34,096,000

 

 

 

32,395,000

 

 

 

32,380,000

 

 

 

 

24


 

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

 

September 30,
2022

 

December 31,
2021

 

September 30,
2021

1.

 

Convenience stores

 

16.7%

 

17.9%

 

17.6%

2.

 

Automotive service

 

13.6%

 

12.3%

 

12.1%

3.

 

Restaurants – full service

 

9.4%

 

9.8%

 

9.9%

4.

 

Restaurants – limited service

 

9.0%

 

9.4%

 

9.0%

5.

 

Family entertainment centers

 

6.0%

 

5.9%

 

5.9%

6.

 

Health and fitness

 

4.9%

 

5.2%

 

5.1%

7.

 

Theaters

 

4.3%

 

4.5%

 

4.5%

8.

 

Recreational vehicle dealers, parts and accessories

 

4.1%

 

3.9%

 

4.0%

9.

 

Equipment rental

 

3.2%

 

3.2%

 

3.2%

10.

 

Automotive parts

 

2.9%

 

3.0%

 

3.1%

11.

 

Wholesale clubs

 

2.4%

 

2.5%

 

2.5%

12.

 

Home improvement

 

2.4%

 

2.5%

 

2.5%

13.

 

Furniture

 

2.3%

 

1.7%

 

1.7%

14.

 

Medical service providers

 

1.9%

 

2.0%

 

2.1%

15.

 

General merchandise

 

1.6%

 

1.7%

 

1.7%

16.

 

Consumer electronics

 

1.5%

 

1.5%

 

1.5%

17.

 

Home furnishings

 

1.5%

 

1.5%

 

1.5%

18.

 

Travel plazas

 

1.5%

 

1.5%

 

1.5%

19.

 

Automobile auctions, wholesale

 

1.3%

 

1.3%

 

1.3%

20.

 

Drug stores

 

1.2%

 

1.3%

 

1.3%

 

 

Other

 

8.3%

 

7.4%

 

8.0%

 

 

 

 

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

Number of Properties

 

 

52

 

 

 

49

 

 

 

154

 

 

 

107

 

Gross leasable area (square feet)(1)

 

 

613,000

 

 

 

561,000

 

 

 

1,840,000

 

 

 

1,090,000

 

Initial cash yield

 

 

6.3

%

 

 

6.4

%

 

 

6.2

%

 

 

6.5

%

Total dollars invested(2)

 

$

223,138

 

 

$

246,843

 

 

$

587,730

 

 

$

455,404

 

 

(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 period.

NNN typically funds Property acquisitions either through borrowings under NNN's unsecured revolving credit facility (the "Credit Facility") or by issuing its debt or equity securities in the capital markets.

 

 

25


 

Property Dispositions. The following table summarizes the Properties sold by NNN (dollars in thousands):

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Number of properties

 

 

8

 

 

 

27

 

 

 

26

 

 

 

53

 

Gross leasable area (square feet)

 

 

96,000

 

 

 

220,000

 

 

 

271,000

 

 

 

523,000

 

Net sales proceeds

 

$

21,195

 

 

$

30,522

 

 

$

49,174

 

 

$

70,971

 

Net gain

 

$

5,889

 

 

$

9,473

 

 

$

10,656

 

 

$

17,935

 

 

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 and nine months ended September 30, 2022, total revenues increased as compared to the same periods in 2021, primarily due 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
September 30,

 

 

Percent
Increase

 

 

Nine Months Ended
September 30,

 

 

Percent
Increase

 

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

2022

 

 

2021

 

 

(Decrease)

 

Rental Revenues(1)

 

$

189,223

 

 

$

176,182

 

 

 

7.4

%

 

$

560,622

 

 

$

523,786

 

 

 

7.0

%

Real estate expense reimbursement
     from tenants

 

 

3,879

 

 

 

3,842

 

 

 

1.0

%

 

 

12,779

 

 

 

13,440

 

 

 

(4.9

)%

Rental income

 

 

193,102

 

 

 

180,024

 

 

 

7.3

%

 

 

573,401

 

 

 

537,226

 

 

 

6.7

%

Interest and other income from real estate
     transactions

 

 

369

 

 

 

333

 

 

 

10.8

%

 

 

1,132

 

 

 

1,920

 

 

 

(41.0

)%

Total revenues

 

$

193,471

 

 

$

180,357

 

 

 

7.3

%

 

$

574,533

 

 

$

539,146

 

 

 

6.6

%

 

(1)

Includes rental income from operating leases, earned income from direct financing leases and percentage rent ("Rental Revenues").

Quarter and Nine Months Ended September 30, 2022 versus Quarter and Nine Months Ended September 30, 2021

Rental Income. Rental income increased for the quarter and nine months ended September 30, 2022, as compared to the same periods in 2021. The increase is primarily due to income generated from Property acquisitions and, to a lesser extent, scheduled rent increases based on increases in the Consumer Price Index. Property acquisitions include:

a partial period of Rental Revenue from NNN's 2022 acquisition of 154 Properties with an aggregate gross leasable area of approximately 1,840,000 square feet, and
a full period of Rental Revenue from NNN's 2021 acquisition of 156 Properties with an aggregate gross leasable area of approximately 1,341,000 square feet.

 

 

26


 

Analysis of Expenses

General. Operating expenses increased for the quarter and nine months ended September 30, 2022, as compared to the same periods in 2021. The following table summarizes NNN’s expenses (dollars in thousands):

 

 

 

Quarter Ended
September 30,

 

 

Percent Increase

 

 

Nine Months Ended
September 30,

 

 

Percent Increase

 

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

2022

 

 

2021

 

 

(Decrease)

 

General and administrative

 

$

10,124

 

 

$

11,077

 

 

 

(8.6

)%

 

$

30,906

 

 

$

34,693

 

 

 

(10.9

)%

Real estate

 

 

5,875

 

 

 

6,521

 

 

 

(9.9

)%

 

 

19,246

 

 

 

20,865

 

 

 

(7.8

)%

Depreciation and amortization

 

 

56,388

 

 

 

50,976

 

 

 

10.6

%

 

 

166,512

 

 

 

151,831

 

 

 

9.7

%

Leasing transaction costs

 

 

96

 

 

 

86

 

 

 

11.6

%

 

 

260

 

 

 

146

 

 

 

78.1

%

Impairment losses – real estate, net of
     recoveries

 

 

971

 

 

 

4,781

 

 

 

(79.7

)%

 

 

7,221

 

 

 

14,647

 

 

 

(50.7

)%

Executive retirement costs

 

 

556

 

 

 

 

 

NC

 

 

 

6,805

 

 

 

 

 

NC

 

Total operating expenses

 

$

74,010

 

 

$

73,441

 

 

 

0.8

%

 

$

230,950

 

 

$

222,182

 

 

 

3.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

$

(33

)

 

$

(61

)

 

 

(45.9

)%

 

$

(120

)

 

$

(159

)

 

 

(24.5

)%

Interest expense

 

 

36,962

 

 

 

33,518

 

 

 

10.3

%

 

 

110,400

 

 

 

101,190

 

 

 

9.1

%

Loss on early extinguishment of debt

 

 

 

 

 

 

 

NC

 

 

 

 

 

 

21,328

 

 

 

(100.0

)%

Total other expenses

 

$

36,929

 

 

$

33,457

 

 

 

10.4

%

 

$

110,280

 

 

$

122,359

 

 

 

(9.9

)%

 

As a percentage of total revenues:

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

5.2%

 

6.1%

 

 

 

5.4%

 

6.4%

 

 

Real estate

 

3.0%

 

3.6%

 

 

 

3.3%

 

3.9%

 

 

 

Quarter and Nine Months Ended September 30, 2022 versus Quarter and Nine Months Ended September 30, 2021

General and Administrative. General and administrative expenses decreased in amount and as a percentage of total revenues for the quarter and nine months ended September 30, 2022, as compared to the same periods in 2021. The decrease is primarily attributable to a decrease in compensation costs resulting from executive retirement.

Real Estate. Real estate expenses decreased primarily due to owning fewer vacant properties for the quarter and nine months ended September 30, 2022, as compared to the same periods in 2021.

Depreciation and Amortization. Depreciation and amortization expenses increased for the quarter and nine months ended September 30, 2022, as compared to the same periods in 2021, primarily due to Property acquisitions subsequent to September 30, 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.

 

 

27


 

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Total real estate impairments, net of recoveries

 

$

971

 

 

$

4,781

 

 

$

7,221

 

 

$

14,647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Properties:

 

 

 

 

 

 

 

 

 

 

 

 

Vacant

 

 

2

 

 

 

5

 

 

 

8

 

 

 

19

 

Occupied

 

 

1

 

 

 

2

 

 

 

6

 

 

 

10

 

For the quarter and nine months ended September 30, 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 April 2022, Julian (“Jay”) Whitehurst retired from employment with the Company as President and Chief Executive Officer, as contemplated under the Company’s long-term executive succession planning process and as previously announced in January 2022. During the quarter and nine months ended September 30, 2022, NNN recorded executive retirement costs in connection with the long-term incentive compensation related to Mr. Whitehurst’s retirement and transition agreement.

Interest Expense. Interest expense increased for the quarter and nine months ended September 30, 2022, as compared to the same periods in 2021. The following represents the primary changes in fixed rate long-term debt that 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

Interest expense for the nine months ended September 30, 2021 also includes $2,078,000 in connection with the early redemption of the 2023 Notes.

In addition to the transactions outlined in the table above, the Credit Facility had a weighted average outstanding balance of $21,592,000 with a weighted average interest rate of 3.01% for the nine months ended September 30, 2022 compared to no weighted average outstanding balance for the nine months ended September 30, 2021.

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.

 

28


 

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 September 30, 2022, NNN had $3,277,000 of cash and cash equivalents and $1,052,500,000 available for future borrowings under its Credit Facility.

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 September 30, 2022 and December 31, 2021. The table below summarizes NNN’s cash flows (dollars in thousands):

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Cash and cash equivalents:

 

 

 

 

 

 

Provided by operating activities

 

$

465,271

 

 

$

453,150

 

Used in investing activities

 

 

(526,808

)

 

 

(384,156

)

Provided by (used in) financing activities

 

 

(106,508

)

 

 

207,296

 

Increase (decrease)

 

 

(168,045

)

 

 

276,290

 

Net cash at beginning of period

 

 

171,322

 

 

 

267,236

 

Net cash at end of period

 

$

3,277

 

 

$

543,526

 

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 nine months ended September 30, 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 nine months ended September 30, 2022, included the following significant transactions:

$47,500,000 in net borrowings from NNN's Credit Facility, and
$127,270,000 from the issuance of 2,801,778 shares of common stock in connection with the at-the-market ("ATM") equity program, and
$2,258,000 from the issuance of 51,567 shares of common stock in connection with the Dividend Reinvestment and Stock Purchase Plan ("DRIP"), and
$282,637,000 in dividends paid to common stockholders.

 

 

29


 

 

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 September 30, 2022 (dollars in thousands):

 

 

Date of Obligation

 

 

 

Total

 

 

2022

 

 

2023

 

 

2024

 

 

2025

 

 

2026

 

 

Thereafter

 

Long-term debt(1)

 

$

3,810,117

 

 

$

170

 

 

$

9,947

 

 

$

350,000

 

 

$

400,000

 

 

$

350,000

 

 

$

2,700,000

 

Long-term debt – interest(2)

 

 

1,856,175

 

 

 

34,233

 

 

 

136,701

 

 

 

129,006

 

 

 

120,750

 

 

 

106,225

 

 

 

1,329,260

 

Credit Facility

 

 

47,500

 

 

 

 

 

 

 

 

 

 

 

 

47,500

 

 

 

 

 

 

 

Total contractual cash obligations

 

$

5,713,792

 

 

$

34,403

 

 

$

146,648

 

 

$

479,006

 

 

$

568,250

 

 

$

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 debt costs. See "Capital Structure".

(2)

Interest calculation on mortgage and notes payable based on stated rate of the principal amount. See "Capital Structure".

Property Construction. NNN has committed to fund construction on 19 Properties. The improvements of such Properties are estimated to be completed within 12 months. These construction commitments, at September 30, 2022, are outlined in the table below (dollars in thousands):

 

Total commitment(1)

 

$

103,875

 

Less amount funded

 

 

(53,726

)

Remaining commitment

 

$

50,149

 

 

(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 September 30, 2022, NNN owned 21 vacant, un-leased Properties which accounted for approximately one percent of total Properties held in the Property Portfolio.

Additionally, as of October 28, 2022, approximately less than one percent of total properties, and approximately less than one percent of aggregate gross leasable area held in the Property Portfolio, was leased to two tenants currently in 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.

NNN generally monitors the financial performance of its significant tenants on an ongoing basis.

 

 

30


 

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Series F preferred stock(1):

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

$

 

 

$

4,485

 

 

$

 

 

$

13,455

 

Per depositary share

 

 

 

 

 

0.3250

 

 

 

 

 

 

0.9750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

 

97,008

 

 

 

92,731

 

 

 

282,637

 

 

 

274,550

 

Per share

 

 

0.5500

 

 

 

0.5300

 

 

 

1.6100

 

 

 

1.5700

 

 

(1)

The Series F preferred stock was redeemed in October 2021.

In October 2022, NNN declared a dividend of $0.5500 per share which is payable in November 2022 to its common stockholders of record as of October 31, 2022.

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):

 

 

September 30,
2022

 

 

Percentage
of Total

 

 

December 31, 2021

 

 

Percentage
of Total

 

Line of credit payable

 

$

47,500

 

 

 

1.2

%

 

$

 

 

 

 

Mortgages payable

 

 

10,151

 

 

 

0.3

%

 

 

10,697

 

 

 

0.3

%

Notes payable

 

 

3,738,843

 

 

 

98.5

%

 

 

3,735,769

 

 

 

99.7

%

Total outstanding debt

 

$

3,796,494

 

 

 

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 a weighted average outstanding balance of $21,592,000 and a weighted average interest rate of 3.01% during the nine months ended September 30, 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 September 30, 2022, $47,500,000 was outstanding and $1,052,500,000 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 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 2021 Annual Report.

 

31


 

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 2021 Annual Report.

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.

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.

 

32


 

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 ($345,000,000), 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 September 30, 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 September 30, 2022

 

      4,401,082

The following table outlines the common stock issuances pursuant to NNN's ATM equity program (dollars in thousands, except per share data):

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Shares of common stock

 

 

2,801,778

 

 

 

30,000

 

Average price per share (net)

 

$

45.42

 

 

$

35.35

 

Net proceeds

 

$

127,270

 

 

$

1,061

 

Stock issuance costs(1)

 

$

1,879

 

 

$

173

 

 

(1)

Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting fees.

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):

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Shares of common stock

 

 

51,567

 

 

 

46,666

 

Net proceeds

 

$

2,258

 

 

$

2,012

 

 

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.

 

33


 

Recent Accounting Pronouncements

 

Refer to Note 1 to the September 30, 2022, condensed consolidated financial statements.

 

 

34


 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

NNN is exposed to interest rate risk primarily as a result of its variable rate Credit Facility and its fixed rate long-term debt which is used to finance NNN’s Property acquisitions and development activities, as well as for general corporate purposes. NNN’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to reduce overall borrowing costs. To achieve its objectives, NNN borrows at both fixed and variable rates on its long-term debt and periodically uses derivatives to hedge the interest rate risk of future borrowings. As of September 30, 2022, NNN had no outstanding derivatives.

As of September 30, 2022, NNN's variable rate Credit Facility had $47,500,000 outstanding, a weighted average outstanding balance of $21,592,000 and a weighted average interest rate of 3.01% compared to no weighted average outstanding balance for the same period in 2021.

The information in the table below summarizes NNN’s market risks associated with its debt obligations outstanding. The table presents, by year of expected maturity, principal payments and related interest rates for debt obligations outstanding as of September 30, 2022. The table incorporates only those debt obligations that existed as of September 30, 2022, and it does not consider those debt obligations or positions which could arise after this date and therefore has limited predictive value. As a result, NNN’s ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, NNN’s hedging strategies at that time and interest rates. If interest rates on NNN's variable rate debt increased by one percent, NNN's interest expense would have increased by less than one percent for the nine months ended September 30, 2022.

 

Debt Obligations (dollars in thousands)

 

 

 

 

Variable Rate Debt

 

 

Fixed Rate Debt

 

 

 

 

Credit Facility

 

 

Mortgages(1)

 

 

Unsecured Debt(2)

 

 

 

 

Debt
Obligation

 

Weighted
Average
Interest Rate

 

 

Principal
Debt
Obligation

 

 

Weighted
Average
Interest Rate

 

 

Principal
Debt
Obligation

 

 

Effective
Interest
Rate

 

 

2022

 

$

 

 

 

 

$

170

 

 

 

5.23

%

 

$

 

 

 

 

 

2023

 

 

 

 

 

 

 

9,947

 

 

 

5.23

%

 

 

 

 

 

 

 

2024

 

 

 

 

 

 

 

 

 

 

 

 

 

350,000

 

 

 

3.92

%

 

2025

 

 

47,500

 

 

3.01

%

 

 

 

 

 

 

 

 

400,000

 

 

 

4.03

%

 

2026

 

 

 

 

 

 

 

 

 

 

 

 

 

350,000

 

 

 

3.73

%

 

Thereafter

 

 

 

 

 

 

 

 

 

 

 

 

 

2,700,000

 

 

 

3.57

%

(3)

Total

 

$

47,500

 

 

3.01

%

 

$

10,117

 

 

 

5.23

%

 

$

3,800,000

 

 

 

3.69

%

 

Fair Value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2022

 

$

47,500

 

 

 

 

$

10,117

 

 

 

 

 

$

3,113,546

 

 

 

 

 

December 31, 2021

 

$

 

 

 

 

$

10,611

 

 

 

 

 

$

4,032,757

 

 

 

 

 

 

(1)

NNN's mortgages payable represent principal payments by year and exclude both unamortized premiums and debt costs.

(2)

Includes NNN’s notes payable, each exclude unamortized discounts and debt costs. The fair value is based upon quoted market prices as of the close of the period, which is a Level 1 valuation since NNN's notes payable are publicly traded on the over-the-counter market.

(3)

Weighted average effective interest rate for periods after 2026.

 

 

 

35


 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. An evaluation was performed under the supervision and with the participation of NNN's management, including NNN's Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer ("NNN's Chief Officers"), of the effectiveness as of September 30, 2022, of the design and operation of NNN's disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, NNN's Chief Officers concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting. There has been no change in NNN's internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, NNN's internal control over financial reporting.

 

 

36


 

PART II. OTHER INFORMATION

 

 

Item 1A. Risk Factors.

There were no material changes in NNN's risk factors disclosed in Item 1A. Risk Factors in NNN's Annual Report on Form 10-K for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Not applicable.

Item 3. Defaults Upon Senior Securities. Not applicable.

Item 4. Mine Safety Disclosures. Not applicable.

Item 5. Other Information. Not applicable.

Item 6. Exhibits

The following exhibits are filed as a part of this report.

 

31.

Section 302 Certifications(1)

 

 

 

 

 

 

 

 

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

 

 

 

 

 

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

 

 

 

32.

Section 906 Certifications(1)

 

 

 

 

 

 

 

 

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

 

 

 

 

 

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

 

 

 

101.

Interactive Data File

 

 

 

 

 

 

 

 

101.1

The following materials from National Retail Properties, Inc. Quarterly Report on Form 10-Q for the period ended September 30, 2022, are formatted in Inline Extensible Business Reporting Language ("Inline XBRL"): (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of income and comprehensive income, (iii) condensed consolidated statements of cash flows, and (iv) notes to condensed consolidated financial statements.

 

 

 

 

 

 

104.

Cover Page Interactive Data File

 

 

 

 

 

 

104.1

The cover page XBRL tags are embedded within the Inline XBRL document and included in Exhibit 101.

 

(1)

In accordance with Item 601(b)(32) of Regulation S-K, this exhibit is not deemed "filed" for purposes of section 18 of the exchange act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the securities act or the exchange act, except to the extent that the registrant specifically incorporates it by reference.

 

 

37


 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATED this 2nd day of November, 2022.

 

NATIONAL RETAIL PROPERTIES, INC.

 

 

By:

/s/ Stephen A. Horn, Jr.

 

 

Stephen A. Horn, Jr.

 

 

Chief Executive Officer, President and Director

 

 

 

 

By:

/s/ Kevin B. Habicht

 

 

Kevin B. Habicht

 

 

Chief Financial Officer, Executive Vice President and Director

 

 

 

 

38