NNN REIT, INC. - Quarter Report: 2023 June (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 June 30, 2023
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
|
NNN REIT, 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 ☒
As of July 28, 2023, the registrant had 182,408,264 shares of common stock, $0.01 par value, outstanding.
TABLE OF CONTENTS
|
|
PAGE REFERENCE |
Part I – Financial Information |
|
|
Item 1. |
|
|
|
1 |
|
|
Condensed Consolidated Statements of Income and Comprehensive Income |
2 |
|
3 |
|
|
7 |
|
|
9 |
|
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
20 |
Item 3. |
30 |
|
Item 4. |
31 |
|
Part II – Other Information |
|
|
Item 1. |
32 |
|
Item 1A. |
32 |
|
Item 2. |
32 |
|
Item 3. |
32 |
|
Item 4. |
32 |
|
Item 5. |
32 |
|
Item 6. |
32 |
|
33 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NNN REIT, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
|
|
June 30, |
|
|
December 31, |
|
||
|
|
(unaudited) |
|
|
|
|
||
ASSETS |
|
|
|
|
|
|
||
Real estate portfolio, net of accumulated depreciation and amortization |
|
$ |
8,221,192 |
|
|
$ |
8,020,814 |
|
Cash and cash equivalents |
|
|
2,281 |
|
|
|
2,505 |
|
Restricted cash and cash held in escrow |
|
|
2,971 |
|
|
|
4,273 |
|
Receivables, net of allowance of $686 and $708, respectively |
|
|
2,246 |
|
|
|
3,612 |
|
Accrued rental income, net of allowance of $3,861 and $3,836, respectively |
|
|
28,422 |
|
|
|
27,795 |
|
Debt costs, net of accumulated amortization of $22,807 and $21,663, respectively |
|
|
4,333 |
|
|
|
5,352 |
|
Other assets |
|
|
84,490 |
|
|
|
81,694 |
|
Total assets |
|
$ |
8,345,935 |
|
|
$ |
8,146,045 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
||
Liabilities: |
|
|
|
|
|
|
||
Line of credit payable |
|
$ |
332,500 |
|
|
$ |
166,200 |
|
Mortgages payable, including unamortized premium and net of unamortized debt costs |
|
|
— |
|
|
|
9,964 |
|
Notes payable, net of unamortized discount and unamortized debt costs |
|
|
3,742,012 |
|
|
|
3,739,890 |
|
Accrued interest payable |
|
|
24,779 |
|
|
|
23,826 |
|
Other liabilities |
|
|
96,410 |
|
|
|
82,663 |
|
Total liabilities |
|
|
4,195,701 |
|
|
|
4,022,543 |
|
|
|
|
|
|
|
|
||
Equity: |
|
|
|
|
|
|
||
Stockholders’ equity: |
|
|
|
|
|
|
||
Common stock, $0.01 par value. Authorized 375,000,000 shares; 182,407,911 and |
|
|
1,825 |
|
|
|
1,815 |
|
Capital in excess of par value |
|
|
4,963,808 |
|
|
|
4,928,034 |
|
Accumulated deficit |
|
|
(804,040 |
) |
|
|
(793,765 |
) |
Accumulated other comprehensive income (loss) |
|
|
(11,359 |
) |
|
|
(12,582 |
) |
Total stockholders’ equity of NNN |
|
|
4,150,234 |
|
|
|
4,123,502 |
|
Total liabilities and equity |
|
$ |
8,345,935 |
|
|
$ |
8,146,045 |
|
See accompanying notes to condensed consolidated financial statements.
1
NNN REIT, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(dollars in thousands, except per share data)
(unaudited)
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Rental income |
|
$ |
202,426 |
|
|
$ |
190,536 |
|
|
$ |
406,056 |
|
|
$ |
380,299 |
|
Interest and other income from real estate transactions |
|
|
214 |
|
|
|
247 |
|
|
|
692 |
|
|
|
763 |
|
|
|
|
202,640 |
|
|
|
190,783 |
|
|
|
406,748 |
|
|
|
381,062 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
General and administrative |
|
|
10,740 |
|
|
|
9,740 |
|
|
|
22,991 |
|
|
|
20,782 |
|
Real estate |
|
|
6,836 |
|
|
|
6,173 |
|
|
|
13,682 |
|
|
|
13,371 |
|
Depreciation and amortization |
|
|
59,875 |
|
|
|
57,444 |
|
|
|
119,023 |
|
|
|
110,124 |
|
Leasing transaction costs |
|
|
52 |
|
|
|
76 |
|
|
|
127 |
|
|
|
164 |
|
Impairment losses – real estate, net of recoveries |
|
|
34 |
|
|
|
4,618 |
|
|
|
2,674 |
|
|
|
6,250 |
|
Executive retirement costs |
|
|
309 |
|
|
|
2,655 |
|
|
|
732 |
|
|
|
6,249 |
|
|
|
|
77,846 |
|
|
|
80,706 |
|
|
|
159,229 |
|
|
|
156,940 |
|
Gain on disposition of real estate |
|
|
13,930 |
|
|
|
775 |
|
|
|
20,230 |
|
|
|
4,767 |
|
Earnings from operations |
|
|
138,724 |
|
|
|
110,852 |
|
|
|
267,749 |
|
|
|
228,889 |
|
Other expenses (revenues): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest and other income |
|
|
(74 |
) |
|
|
(52 |
) |
|
|
(107 |
) |
|
|
(87 |
) |
Interest expense |
|
|
40,094 |
|
|
|
36,739 |
|
|
|
78,985 |
|
|
|
73,438 |
|
|
|
|
40,020 |
|
|
|
36,687 |
|
|
|
78,878 |
|
|
|
73,351 |
|
Net earnings |
|
|
98,704 |
|
|
|
74,165 |
|
|
|
188,871 |
|
|
|
155,538 |
|
Loss attributable to noncontrolling interests |
|
|
— |
|
|
|
6 |
|
|
|
— |
|
|
|
5 |
|
Net earnings attributable to common stockholders |
|
$ |
98,704 |
|
|
$ |
74,171 |
|
|
$ |
188,871 |
|
|
$ |
155,543 |
|
Net earnings per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
0.54 |
|
|
$ |
0.42 |
|
|
$ |
1.04 |
|
|
$ |
0.89 |
|
Diluted |
|
$ |
0.54 |
|
|
$ |
0.42 |
|
|
$ |
1.04 |
|
|
$ |
0.89 |
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
|
181,092,031 |
|
|
|
174,956,856 |
|
|
|
180,969,809 |
|
|
|
174,867,049 |
|
Diluted |
|
|
181,627,857 |
|
|
|
175,107,914 |
|
|
|
181,544,275 |
|
|
|
175,021,871 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net earnings attributable to NNN |
|
$ |
98,704 |
|
|
$ |
74,171 |
|
|
$ |
188,871 |
|
|
$ |
155,543 |
|
Amortization of interest rate hedges |
|
|
616 |
|
|
|
592 |
|
|
|
1,223 |
|
|
|
1,175 |
|
Comprehensive income attributable to NNN |
|
|
99,320 |
|
|
|
74,763 |
|
|
|
190,094 |
|
|
|
156,718 |
|
Comprehensive loss attributable to |
|
|
— |
|
|
|
(6 |
) |
|
|
— |
|
|
|
(5 |
) |
Total comprehensive income |
|
$ |
99,320 |
|
|
$ |
74,757 |
|
|
$ |
190,094 |
|
|
$ |
156,713 |
|
See accompanying notes to condensed consolidated financial statements.
2
NNN REIT, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Quarter Ended June 30, 2023
(dollars in thousands, except per share data)
(unaudited)
|
|
Common |
|
|
Capital in |
|
|
Accumulated |
|
|
Accumulated |
|
|
Total |
|
|
Noncontrolling |
|
|
Total |
|
|||||||
Balances at March 31, 2023 |
|
$ |
1,822 |
|
|
$ |
4,948,024 |
|
|
$ |
(802,999 |
) |
|
$ |
(11,975 |
) |
|
$ |
4,134,872 |
|
|
$ |
— |
|
|
$ |
4,134,872 |
|
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
98,704 |
|
|
|
— |
|
|
|
98,704 |
|
|
|
— |
|
|
|
98,704 |
|
Dividends declared and paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
$0.550 per share of common stock |
|
|
— |
|
|
|
731 |
|
|
|
(99,745 |
) |
|
|
— |
|
|
|
(99,014 |
) |
|
|
— |
|
|
|
(99,014 |
) |
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
7,623 shares – director compensation |
|
|
— |
|
|
|
270 |
|
|
|
— |
|
|
|
— |
|
|
|
270 |
|
|
|
— |
|
|
|
270 |
|
1,444 shares – stock purchase plan |
|
|
— |
|
|
|
62 |
|
|
|
— |
|
|
|
— |
|
|
|
62 |
|
|
|
— |
|
|
|
62 |
|
300,326 shares – ATM equity program |
|
|
3 |
|
|
|
12,779 |
|
|
|
— |
|
|
|
— |
|
|
|
12,782 |
|
|
|
— |
|
|
|
12,782 |
|
Stock issuance costs |
|
|
— |
|
|
|
(264 |
) |
|
|
— |
|
|
|
— |
|
|
|
(264 |
) |
|
|
— |
|
|
|
(264 |
) |
Amortization of deferred compensation |
|
|
— |
|
|
|
2,206 |
|
|
|
— |
|
|
|
— |
|
|
|
2,206 |
|
|
|
— |
|
|
|
2,206 |
|
Amortization of interest rate hedges |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
616 |
|
|
|
616 |
|
|
|
— |
|
|
|
616 |
|
Balances at June 30, 2023 |
|
$ |
1,825 |
|
|
$ |
4,963,808 |
|
|
$ |
(804,040 |
) |
|
$ |
(11,359 |
) |
|
$ |
4,150,234 |
|
|
$ |
— |
|
|
$ |
4,150,234 |
|
See accompanying notes to condensed consolidated financial statements.
3
NNN REIT, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY – CONTINUED
Quarter Ended June 30, 2022
(dollars in thousands, except per share data)
(unaudited)
|
|
Common |
|
|
Capital in |
|
|
Accumulated |
|
|
Accumulated |
|
|
Total |
|
|
Noncontrolling |
|
|
Total |
|
|||||||
Balances at March 31, 2022 |
|
$ |
1,759 |
|
|
$ |
4,669,590 |
|
|
$ |
(759,232 |
) |
|
$ |
(14,373 |
) |
|
$ |
3,897,744 |
|
|
$ |
2 |
|
|
$ |
3,897,746 |
|
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
74,171 |
|
|
|
— |
|
|
|
74,171 |
|
|
|
(6 |
) |
|
|
74,165 |
|
Dividends declared and paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
$0.530 per share of common stock |
|
|
— |
|
|
|
647 |
|
|
|
(92,878 |
) |
|
|
— |
|
|
|
(92,231 |
) |
|
|
— |
|
|
|
(92,231 |
) |
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
8,040 shares – director compensation |
|
|
— |
|
|
|
304 |
|
|
|
— |
|
|
|
— |
|
|
|
304 |
|
|
|
— |
|
|
|
304 |
|
1,394 shares – stock purchase plan |
|
|
— |
|
|
|
60 |
|
|
|
— |
|
|
|
— |
|
|
|
60 |
|
|
|
— |
|
|
|
60 |
|
717,473 shares – ATM equity program |
|
|
7 |
|
|
|
31,586 |
|
|
|
— |
|
|
|
— |
|
|
|
31,593 |
|
|
|
— |
|
|
|
31,593 |
|
66,651 restricted shares – net of forfeitures |
|
|
1 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock issuance costs |
|
|
— |
|
|
|
(510 |
) |
|
|
— |
|
|
|
— |
|
|
|
(510 |
) |
|
|
— |
|
|
|
(510 |
) |
Amortization of deferred compensation |
|
|
— |
|
|
|
4,085 |
|
|
|
— |
|
|
|
— |
|
|
|
4,085 |
|
|
|
— |
|
|
|
4,085 |
|
Amortization of interest rate hedges |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
592 |
|
|
|
592 |
|
|
|
— |
|
|
|
592 |
|
Distributions to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(278 |
) |
|
|
(278 |
) |
Other |
|
|
— |
|
|
|
(282 |
) |
|
|
— |
|
|
|
— |
|
|
|
(282 |
) |
|
|
282 |
|
|
|
— |
|
Balances at June 30, 2022 |
|
$ |
1,767 |
|
|
$ |
4,705,479 |
|
|
$ |
(777,939 |
) |
|
$ |
(13,781 |
) |
|
$ |
3,915,526 |
|
|
$ |
— |
|
|
$ |
3,915,526 |
|
See accompanying notes to condensed consolidated financial statements.
4
NNN REIT, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY – CONTINUED
Six Months Ended June 30, 2023
(dollars in thousands, except per share data)
(unaudited)
|
|
Common |
|
|
Capital in |
|
|
Accumulated Deficit |
|
|
Accumulated |
|
|
Total |
|
|
Noncontrolling |
|
|
Total |
|
|||||||
Balances at December 31, 2022 |
|
$ |
1,815 |
|
|
$ |
4,928,034 |
|
|
$ |
(793,765 |
) |
|
$ |
(12,582 |
) |
|
$ |
4,123,502 |
|
|
$ |
— |
|
|
$ |
4,123,502 |
|
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
188,871 |
|
|
|
— |
|
|
|
188,871 |
|
|
|
— |
|
|
|
188,871 |
|
Dividends declared and paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
$1.100 per share of common stock |
|
|
— |
|
|
|
1,455 |
|
|
|
(199,146 |
) |
|
|
— |
|
|
|
(197,691 |
) |
|
|
— |
|
|
|
(197,691 |
) |
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
15,806 shares – director compensation |
|
|
— |
|
|
|
539 |
|
|
|
— |
|
|
|
— |
|
|
|
539 |
|
|
|
— |
|
|
|
539 |
|
3,576 shares – stock purchase plan |
|
|
— |
|
|
|
160 |
|
|
|
— |
|
|
|
— |
|
|
|
160 |
|
|
|
— |
|
|
|
160 |
|
650,135 shares – ATM equity program |
|
|
7 |
|
|
|
29,143 |
|
|
|
— |
|
|
|
— |
|
|
|
29,150 |
|
|
|
— |
|
|
|
29,150 |
|
255,667 restricted shares – net of forfeitures |
|
|
3 |
|
|
|
(3 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock issuance costs |
|
|
— |
|
|
|
(558 |
) |
|
|
— |
|
|
|
— |
|
|
|
(558 |
) |
|
|
— |
|
|
|
(558 |
) |
Amortization of deferred compensation |
|
|
— |
|
|
|
5,038 |
|
|
|
— |
|
|
|
— |
|
|
|
5,038 |
|
|
|
— |
|
|
|
5,038 |
|
Amortization of interest rate hedges |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,223 |
|
|
|
1,223 |
|
|
|
— |
|
|
|
1,223 |
|
Balances at June 30, 2023 |
|
$ |
1,825 |
|
|
$ |
4,963,808 |
|
|
$ |
(804,040 |
) |
|
$ |
(11,359 |
) |
|
$ |
4,150,234 |
|
|
$ |
— |
|
|
$ |
4,150,234 |
|
See accompanying notes to condensed consolidated financial statements.
5
NNN REIT, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY – CONTINUED
Six Months Ended June 30, 2022
(dollars in thousands, except per share data)
(unaudited)
|
|
Common |
|
|
Capital in |
|
|
Accumulated Deficit |
|
|
Accumulated |
|
|
Total |
|
|
Noncontrolling |
|
|
Total |
|
|||||||
Balances at December 31, 2021 |
|
$ |
1,757 |
|
|
$ |
4,662,714 |
|
|
$ |
(747,853 |
) |
|
$ |
(14,956 |
) |
|
$ |
3,901,662 |
|
|
$ |
1 |
|
|
$ |
3,901,663 |
|
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
155,543 |
|
|
|
— |
|
|
|
155,543 |
|
|
|
(5 |
) |
|
|
155,538 |
|
Dividends declared and paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
$1.060 per share of common stock |
|
|
— |
|
|
|
1,343 |
|
|
|
(185,629 |
) |
|
|
— |
|
|
|
(184,286 |
) |
|
|
— |
|
|
|
(184,286 |
) |
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
16,469 shares – director compensation |
|
|
— |
|
|
|
609 |
|
|
|
— |
|
|
|
— |
|
|
|
609 |
|
|
|
— |
|
|
|
609 |
|
2,567 shares – stock purchase plan |
|
|
— |
|
|
|
112 |
|
|
|
— |
|
|
|
— |
|
|
|
112 |
|
|
|
— |
|
|
|
112 |
|
717,473 shares – ATM equity program |
|
|
7 |
|
|
|
31,586 |
|
|
|
— |
|
|
|
— |
|
|
|
31,593 |
|
|
|
— |
|
|
|
31,593 |
|
219,951 restricted shares – net of forfeitures |
|
|
3 |
|
|
|
(3 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock issuance costs |
|
|
— |
|
|
|
(575 |
) |
|
|
— |
|
|
|
— |
|
|
|
(575 |
) |
|
|
— |
|
|
|
(575 |
) |
Amortization of deferred compensation |
|
|
— |
|
|
|
9,975 |
|
|
|
— |
|
|
|
— |
|
|
|
9,975 |
|
|
|
— |
|
|
|
9,975 |
|
Amortization of interest rate hedges |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,175 |
|
|
|
1,175 |
|
|
|
— |
|
|
|
1,175 |
|
Distributions to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(278 |
) |
|
|
(278 |
) |
Other |
|
|
— |
|
|
|
(282 |
) |
|
|
— |
|
|
|
— |
|
|
|
(282 |
) |
|
|
282 |
|
|
|
— |
|
Balances at June 30, 2022 |
|
$ |
1,767 |
|
|
$ |
4,705,479 |
|
|
$ |
(777,939 |
) |
|
$ |
(13,781 |
) |
|
$ |
3,915,526 |
|
|
$ |
— |
|
|
$ |
3,915,526 |
|
See accompanying notes to condensed consolidated financial statements.
6
NNN REIT, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
|
|
Six Months Ended June 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net earnings |
|
$ |
188,871 |
|
|
$ |
155,538 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
119,023 |
|
|
|
110,124 |
|
Impairment losses – real estate, net of recoveries |
|
|
2,674 |
|
|
|
6,250 |
|
Amortization of notes payable discount |
|
|
869 |
|
|
|
837 |
|
Amortization of debt costs |
|
|
2,401 |
|
|
|
2,349 |
|
Amortization of mortgages payable premium |
|
|
(21 |
) |
|
|
(43 |
) |
Amortization of interest rate hedges |
|
|
1,223 |
|
|
|
1,175 |
|
Gain on disposition of real estate |
|
|
(20,230 |
) |
|
|
(4,767 |
) |
Performance incentive plan expense |
|
|
6,290 |
|
|
|
10,837 |
|
Performance incentive plan payment |
|
|
(916 |
) |
|
|
(103 |
) |
Change in operating assets and liabilities, net of assets acquired and liabilities assumed: |
|
|
|
|
|
|
||
Decrease in receivables |
|
|
550 |
|
|
|
542 |
|
Decrease (increase) in accrued rental income |
|
|
(1,003 |
) |
|
|
2,643 |
|
Increase in other assets |
|
|
(721 |
) |
|
|
(1,369 |
) |
Increase (decrease) in accrued interest payable |
|
|
953 |
|
|
|
(745 |
) |
Decrease in other liabilities |
|
|
(721 |
) |
|
|
(8,008 |
) |
Other |
|
|
52 |
|
|
|
51 |
|
Net cash provided by operating activities |
|
|
299,294 |
|
|
|
275,311 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
||
Proceeds from the disposition of real estate |
|
|
40,450 |
|
|
|
29,203 |
|
Additions to real estate |
|
|
(327,739 |
) |
|
|
(357,460 |
) |
Principal payments received on mortgages and notes receivable |
|
|
324 |
|
|
|
306 |
|
Other |
|
|
(1,144 |
) |
|
|
(1,505 |
) |
Net cash used in investing activities |
|
|
(288,109 |
) |
|
|
(329,456 |
) |
See accompanying notes to condensed consolidated financial statements.
7
NNN REIT, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED
(dollars in thousands)
(unaudited)
|
|
Six Months Ended June 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Cash flows from financing activities: |
|
|
|
|
|
|
||
Proceeds from line of credit payable |
|
$ |
513,500 |
|
|
$ |
126,000 |
|
Repayment of line of credit payable |
|
|
(347,200 |
) |
|
|
(86,000 |
) |
Repayment of mortgages payable |
|
|
(9,947 |
) |
|
|
(328 |
) |
Payment of debt issuance costs |
|
|
(125 |
) |
|
|
(126 |
) |
Proceeds from issuance of common stock |
|
|
30,765 |
|
|
|
33,048 |
|
Stock issuance costs |
|
|
(558 |
) |
|
|
(575 |
) |
Payment of common stock dividends |
|
|
(199,146 |
) |
|
|
(185,629 |
) |
Noncontrolling interests distributions |
|
|
— |
|
|
|
(278 |
) |
Net cash used in financing activities |
|
|
(12,711 |
) |
|
|
(113,888 |
) |
Net decrease in cash, cash equivalents and restricted cash |
|
|
(1,526 |
) |
|
|
(168,033 |
) |
Cash, cash equivalents and restricted cash at beginning of period(1) |
|
|
6,778 |
|
|
|
171,322 |
|
Cash, cash equivalents and restricted cash at end of period(1) |
|
$ |
5,252 |
|
|
$ |
3,289 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
||
Interest paid, net of amount capitalized |
|
$ |
74,686 |
|
|
$ |
70,139 |
|
Supplemental disclosure of noncash investing and financing activities: |
|
|
|
|
|
|
||
Change in other comprehensive income |
|
$ |
1,223 |
|
|
$ |
1,175 |
|
Right-of-use asset recorded in connection with lease liability |
|
$ |
6,401 |
|
|
$ |
— |
|
Work in progress accrual balance at end of period |
|
$ |
21,149 |
|
|
$ |
14,707 |
|
(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. As of June 30, 2023, NNN had restricted cash of $2,971. NNN did not have restricted cash and cash held in escrow as of June 30, 2022. |
See accompanying notes to condensed consolidated financial statements.
8
NNN REIT, INC.
and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
Note 1 – Organization and Summary of Significant Accounting Policies:
Organization and Nature of Business – NNN REIT, Inc., a Maryland corporation, formerly known as National Retail Properties, Inc., is a fully integrated real estate investment trust (“REIT”) formed in 1984. The term "NNN" or the "Company" refers to NNN REIT, Inc. and all of its consolidated subsidiaries. NNN may elect to treat certain subsidiaries as taxable REIT subsidiaries. On May 1, 2023, National Retail Properties, Inc. changed its name to NNN REIT, Inc.
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").
|
|
June 30, 2023 |
|
|
Property Portfolio: |
|
|
|
|
Total Properties |
|
|
3,479 |
|
Gross leasable area (square feet) |
|
|
35,492,000 |
|
States |
|
|
49 |
|
Weighted average remaining lease term (years) |
|
|
10.2 |
|
NNN's operations are reported within one operating segment in the condensed consolidated financial statements and all properties are considered part of the Properties or Property Portfolio. As such, property counts and calculations involving property counts reflect all NNN Properties.
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 six months ended June 30, 2023, may not be indicative of the results that may be expected for the year ending December 31, 2023. Amounts as of December 31, 2022, 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, 2022.
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 $1,126,000 and $274,000 in capitalized interest during the development period for the six months ended June 30, 2023 and 2022, respectively, of which $721,000 and $176,000 was recorded during the quarters ended June 30, 2023 and 2022, respectively.
Purchase Accounting for Acquisition of Real Estate – 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 value 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.
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.
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 as a reduction to rental income 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.
10
As a result of the review of lease payments collectability, NNN recorded a write-off of $348,000 of outstanding receivables and related accrued rent for certain tenants reclassified to cash basis for accounting purposes during the six months ended June 30, 2023. No such outstanding receivables and related accrued rent were written off during the six months ended June 30, 2022.
The following table summarizes those tenants classified as cash basis for accounting purposes as of June 30:
|
|
2023 |
|
|
2022 |
|
||
Number of tenants |
|
|
9 |
|
|
|
8 |
|
Cash basis tenants as a percent of: |
|
|
|
|
|
|
||
Total Properties |
|
|
5.0 |
% |
|
|
5.3 |
% |
Total annual base rent(1) |
|
|
7.1 |
% |
|
|
7.2 |
% |
Total gross leasable area |
|
|
6.8 |
% |
|
|
6.9 |
% |
(1) |
Based on annualized base rent for all leases in place for each respective period. |
During the six months ended June 30, 2023 and 2022, NNN recognized $30,088,000 and $31,285,000, respectively, of rental income from certain tenants classified as cash basis for accounting purposes, of which $14,523,000 and $15,499,000 was recognized during the quarters ended June 30, 2023 and 2022, respectively.
NNN includes an allowance for doubtful accounts in rental income on the Condensed Consolidated Statements of Income and Comprehensive Income.
Right-Of-Use ("ROU") Assets and Operating Lease Liabilities – In accordance with ASC 842, NNN records ROU assets and operating lease liabilities as lessee under operating lease.
NNN is a lessee for three ground lease arrangements and for its headquarters office lease. NNN recognizes a ROU asset (recorded in other assets on the Condensed Consolidated Balance Sheets) and an operating lease liability (recorded in other liabilities on the Condensed Consolidated Balance Sheets) for the present value of the minimum lease payments. NNN uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of the lease payments. NNN gives consideration to the Company's debt issuances, as well as, publicly available data for secured instruments with similar characteristics when calculating its incremental borrowing rates.
In January 2023, NNN amended its headquarters office lease and extended the lease term until March 31, 2034. The amendment resulted in an increase in the ROU asset and operating lease liability of approximately $6,401,000.
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 June 30, 2023 and December 31, 2022, NNN had recorded real estate held for sale of $1,904,000 (two Properties) and $786,000 (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, 2022 were sold during the six months ended June 30, 2023.
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 using the full accrual method 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.
Credit Losses on Financial Instruments – FASB ASU 2016-13, “Financial Instruments – Credit Losses (Topic 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 held mortgages receivable, including accrued interest, of $1,224,000 and $1,530,000 included in other assets on the Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022, respectively, net of $78,000 and $98,000 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.
Cash and Cash Equivalents – NNN considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash and money market accounts. Cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash accounts maintained on behalf of NNN in demand deposits at commercial banks and money market funds may exceed federally insured levels or may be held in accounts without any federal insurance or any other insurance or guarantee. However, NNN has not experienced any losses in such accounts.
Restricted Cash and Cash Held in Escrow – Restricted cash and cash held in escrow include (i) cash proceeds from the sale of assets held by qualified intermediaries in anticipation of the acquisition of replacement properties in tax-free exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended (the "Code"), (ii) cash that has been placed in escrow for the future funding of construction commitments, or (iii) cash that is not immediately available to NNN. As of June 30, 2023 and December 31, 2022, NNN held $2,971,000 and $4,273,000, respectively, in escrow and other restricted accounts.
Valuation of Trade Receivables – NNN estimates the collectability of its accounts receivable related to rents, expense reimbursements and other revenues. NNN analyzes accounts receivable and historical bad debt levels, tenant credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-petition claims.
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 defined below) 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. NNN had debt costs of $38,145,000, included in notes payable on the Condensed Consolidated Balance Sheets, as of June 30, 2023 and December 31, 2022, net of accumulated amortization of $12,946,000 and $11,693,000, 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.
12
The core principle of ASU 2014-09, “Revenue from Contracts with Customers" (Topic 606), 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. NNN determined the key revenue stream impacted by ASU 2014-09 is gain on disposition of real estate reported on the Condensed Consolidated Statements of Income and Comprehensive Income. In accordance with ASU 2014-09, NNN evaluates any separate contracts or performance obligations to determine proper timing and/or amount of revenue recognition, as well as transaction price allocation.
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 June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Basic and Diluted Earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net earnings available to NNN’s common stockholders |
|
$ |
98,704 |
|
|
$ |
74,171 |
|
|
$ |
188,871 |
|
|
$ |
155,543 |
|
Less: Earnings allocated to unvested restricted shares |
|
|
(162 |
) |
|
|
(165 |
) |
|
|
(295 |
) |
|
|
(319 |
) |
Net earnings used in basic and diluted earnings per share |
|
$ |
98,542 |
|
|
$ |
74,006 |
|
|
$ |
188,576 |
|
|
$ |
155,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic and Diluted Weighted Average Shares Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of shares outstanding |
|
|
182,123,555 |
|
|
|
175,989,323 |
|
|
|
181,923,011 |
|
|
|
175,813,456 |
|
Less: Unvested restricted shares |
|
|
(295,441 |
) |
|
|
(310,844 |
) |
|
|
(267,861 |
) |
|
|
(300,810 |
) |
Less: Unvested contingent restricted shares |
|
|
(736,083 |
) |
|
|
(721,623 |
) |
|
|
(685,341 |
) |
|
|
(645,597 |
) |
Weighted average number of shares outstanding used in |
|
|
181,092,031 |
|
|
|
174,956,856 |
|
|
|
180,969,809 |
|
|
|
174,867,049 |
|
Other dilutive securities |
|
|
535,826 |
|
|
|
151,058 |
|
|
|
574,466 |
|
|
|
154,822 |
|
Weighted average number of shares outstanding used in |
|
|
181,627,857 |
|
|
|
175,107,914 |
|
|
|
181,544,275 |
|
|
|
175,021,871 |
|
Income Taxes – NNN has made an election to be taxed as a REIT under Sections 856 through 860 of the Code, and related regulations. NNN generally will not be subject to federal income taxes 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 June 30, 2023, 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:
Accumulated Other Comprehensive Income (Loss) – The following table outlines the changes in accumulated other comprehensive income (loss) for the six months ended June 30, 2023 (dollars in thousands):
|
|
Gain (Loss) on |
|
|
|
Beginning balance, December 31, 2022 |
|
$ |
(12,582 |
) |
|
Reclassifications from accumulated other comprehensive income to net earnings |
|
|
1,223 |
|
(2) |
Ending balance, June 30, 2023 |
|
$ |
(11,359 |
) |
|
(1) |
Additional disclosure is included in Note 6 – Notes Payable and Derivatives. |
(2) |
Recorded in interest expense on the Condensed Consolidated Statements of Income and Comprehensive Income. |
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 which 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 purchase accounting for acquisition of real estate, 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.
14
Note 2 – Real Estate:
Real Estate – Portfolio
Leases – At June 30, 2023, NNN’s real estate portfolio had a weighted average remaining lease term of 10.2 years and consisted of 3,492 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 (iii) to a lesser extent, 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):
|
|
June 30, |
|
|
December 31, |
|
||
Land and improvements(1) |
|
$ |
2,765,263 |
|
|
$ |
2,669,498 |
|
Buildings and improvements |
|
|
7,166,833 |
|
|
|
6,985,394 |
|
Leasehold interests |
|
|
355 |
|
|
|
355 |
|
|
|
|
9,932,451 |
|
|
|
9,655,247 |
|
Less accumulated depreciation and amortization |
|
|
(1,766,177 |
) |
|
|
(1,660,308 |
) |
|
|
|
8,166,274 |
|
|
|
7,994,939 |
|
Work in progress and improvements |
|
|
49,823 |
|
|
|
21,737 |
|
Accounted for using the operating method |
|
|
8,216,097 |
|
|
|
8,016,676 |
|
Accounted for using the direct financing method |
|
|
3,191 |
|
|
|
3,352 |
|
Classified as held for sale |
|
|
1,904 |
|
|
|
786 |
|
|
|
$ |
8,221,192 |
|
|
$ |
8,020,814 |
|
(1) |
Includes $63,991 and $22,356 in land for Properties under construction at June 30, 2023 and December 31, 2022, respectively. |
15
NNN recognized the following revenues in rental income (dollars in thousands):
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Rental income from operating leases |
|
$ |
197,629 |
|
|
$ |
185,791 |
|
|
$ |
395,812 |
|
|
$ |
370,102 |
|
Earned income from direct financing leases |
|
|
143 |
|
|
|
150 |
|
|
|
287 |
|
|
|
301 |
|
Percentage rent |
|
|
291 |
|
|
|
295 |
|
|
|
1,054 |
|
|
|
996 |
|
Real estate expense reimbursement from tenants |
|
|
4,363 |
|
|
|
4,300 |
|
|
|
8,903 |
|
|
|
8,900 |
|
|
|
$ |
202,426 |
|
|
$ |
190,536 |
|
|
$ |
406,056 |
|
|
$ |
380,299 |
|
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.
During 2021 and 2020, as a result of the COVID-19 pandemic, NNN entered into rent deferral lease amendments with certain tenants in the Property Portfolio, for an aggregate $4,722,000 and $51,723,000 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. As of June 30, 2023, an aggregate of approximately 92 percent of deferred rent has been repaid with $2,172,000 and $8,062,000 of deferred rent repaid during the six months ended June 30, 2023 and 2022, respectively, of which $486,000 and $4,005,000 of deferred rent was repaid during the quarters ended June 30, 2023 and 2022, respectively. The remaining deferred rents are substantially due by December 31, 2023.
For the six months ended June 30, 2023 and 2022, NNN recognized $1,003,000 and ($2,643,000), respectively, of net straight-line accrued rental income, net of reserves, of which $534,000 and ($1,547,000) of such income, net of reserves was recorded during the quarters ended June 30, 2023 and 2022, respectively.
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 six months ended June 30, 2023 and 2022, NNN recorded ($19,000) and ($3,509,000), respectively, of net straight-line accrued rental income related to such amendments, of which ($10,000) and ($1,729,000) was recorded during the quarters ended June 30, 2023 and 2022, respectively.
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):
|
|
June 30, |
|
|
December 31, |
|
||
Intangible lease assets (included in other assets): |
|
|
|
|
|
|
||
Above-market in-place leases |
|
$ |
15,356 |
|
|
$ |
15,356 |
|
Less: accumulated amortization |
|
|
(11,816 |
) |
|
|
(11,477 |
) |
Above-market in-place leases, net |
|
$ |
3,540 |
|
|
$ |
3,879 |
|
|
|
|
|
|
|
|
||
In-place leases |
|
$ |
123,468 |
|
|
$ |
124,198 |
|
Less: accumulated amortization |
|
|
(82,845 |
) |
|
|
(79,675 |
) |
In-place leases, net |
|
$ |
40,623 |
|
|
$ |
44,523 |
|
|
|
|
|
|
|
|
||
Intangible lease liabilities (included in other liabilities): |
|
|
|
|
|
|
||
Below-market in-place leases |
|
$ |
41,267 |
|
|
$ |
41,371 |
|
Less: accumulated amortization |
|
|
(28,634 |
) |
|
|
(28,121 |
) |
Below-market in-place leases, net |
|
$ |
12,633 |
|
|
$ |
13,250 |
|
16
The amounts amortized as a net increase to rental income for above-market and below-market in-place leases for the six months ended June 30, 2023 and 2022, were $234,000 and $280,000, respectively, of which $122,000 and $140,000 were recorded for the quarters ended June 30, 2023 and 2022, respectively. The value of in-place leases amortized to expense for the six months ended June 30, 2023 and 2022, was $3,527,000 and $3,544,000, respectively, of which $1,767,000 and $1,771,000 was recorded for the quarters ended June 30, 2023 and 2022, respectively.
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 June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||||||||||
|
|
# of Sold |
|
Net |
|
|
# of Sold |
|
Net |
|
|
# of Sold |
|
Net |
|
|
# of Sold |
|
Net |
|
||||
Gain on disposition of real estate |
|
7 |
|
$ |
13,930 |
|
|
8 |
|
$ |
775 |
|
|
13 |
|
$ |
20,230 |
|
|
18 |
|
$ |
4,767 |
|
Real Estate – Commitments
NNN has committed to fund construction on 39 Properties. The improvements on such Properties are estimated to be completed within 12 months. These construction commitments, as of June 30, 2023, are outlined in the table below (dollars in thousands):
Total commitment(1) |
|
$ |
268,159 |
|
Less amount funded |
|
|
(113,814 |
) |
Remaining commitment |
|
$ |
154,345 |
|
(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.
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 June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Total real estate impairments, net of recoveries |
|
$ |
34 |
|
|
$ |
4,618 |
|
|
$ |
2,674 |
|
|
$ |
6,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Number of Properties: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Vacant |
|
|
— |
|
|
|
3 |
|
|
|
3 |
|
|
|
6 |
|
Occupied |
|
|
— |
|
|
|
3 |
|
|
|
1 |
|
|
|
5 |
|
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:
NNN's $1,100,000,000 revolving credit facility (the "Credit Facility") had a weighted average outstanding balance of $228,576,000 and a weighted average interest rate of 5.67% during the six months ended June 30, 2023. In December 2022, NNN entered into an amendment to the Credit Facility, to change the base interest rate from the London Interbank Offer Rate ("LIBOR") to the Secured Overnight Financing Rate ("SOFR") plus a SOFR adjustment of 10 basis points ("Adjusted SOFR"). The Credit Facility bears interest at Adjusted SOFR 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 matures in June 2025, unless the Company exercises its options to extend maturity to June 2026. 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 June 30, 2023, $332,500,000 was outstanding and $767,500,000 was available for future borrowings under the Credit Facility, and NNN was in compliance with each of the financial covenants.
Note 4 – Mortgages Payable:
In April 2023, NNN repaid the remaining mortgages payable principal balance of $9,774,000.
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.
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 June 30, 2023 |
|
|
7,722,511 |
|
The following table outlines the common stock issuances pursuant to NNN's ATM equity program (dollars in thousands, except per share data):
|
|
Six Months Ended June 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Shares of common stock |
|
|
650,135 |
|
|
|
717,473 |
|
Average price per share (net) |
|
$ |
43.98 |
|
|
$ |
43.23 |
|
Net proceeds |
|
$ |
28,592 |
|
|
$ |
31,018 |
|
Stock issuance costs(1) |
|
$ |
558 |
|
|
$ |
575 |
|
(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):
|
|
Six Months Ended June 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Shares of common stock |
|
|
35,922 |
|
|
|
34,396 |
|
Net proceeds |
|
$ |
1,615 |
|
|
$ |
1,456 |
|
18
Dividends – The following table outlines the dividends declared and paid for NNN's common stock (dollars in thousands, except per share data):
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Dividends |
|
$ |
99,745 |
|
|
$ |
92,878 |
|
|
$ |
199,146 |
|
|
$ |
185,629 |
|
Per share |
|
|
0.550 |
|
|
|
0.530 |
|
|
|
1.100 |
|
|
|
1.060 |
|
In July 2023, NNN declared a dividend of $0.5650 per share, which is payable in August 2023 to its common stockholders of record as of July 31, 2023.
Note 6 – Notes Payable and Derivatives:
Information related to NNN's notes payable and derivatives is included in NNN's Annual Report on Form 10-K for the year ended December 31, 2022.
As of June 30, 2023, $11,359,000 remained in accumulated other comprehensive income (loss) related to NNN’s previously terminated interest rate hedges. During the six months ended June 30, 2023 and 2022, NNN reclassified out of accumulated other comprehensive income (loss) $1,223,000 and $1,175,000, respectively, of which $616,000 and $592,000 was reclassified during the quarters ended June 30, 2023 and 2022, respectively, as an increase in interest expense. Over the next 12 months, NNN estimates that an additional $2,490,000 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 June 30, 2023.
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 December 31, 2022 approximate fair value based upon current market prices of comparable instruments (Level 3). NNN had no mortgages payable outstanding at June 30, 2023. At June 30, 2023 and December 31, 2022, the fair value of NNN’s notes payable excluding unamortized discount and debt costs was $3,135,564,000 and $3,140,774,000, 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.
19
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 NNN REIT, Inc. for the year ended December 31, 2022 ("2022 Annual Report"). The term “NNN” or the “Company” refers to NNN REIT, Inc. and all of its consolidated subsidiaries. Effective May 1, 2023, National Retail Properties, Inc. changed its name to NNN REIT, Inc.
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 NNN's actual results to differ materially from those presented in NNN's forward-looking statement:
20
Additional information related to these risks and uncertainties are included in "Item 1A. Risk Factors" of NNN's 2022 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 June 30, 2023, NNN owned 3,479 Properties, with an aggregate gross leasable area of approximately 35,492,000 square feet, located in 49 states, with a weighted average remaining lease term of 10.2 years. Approximately 99 percent of the Properties were leased as of June 30, 2023.
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 significant 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 significant 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) (17.7%), convenience store (16.9%), and automotive service (14.5%) 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.
21
As of June 30, 2023 and 2022, 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 and the Property Portfolio is included in NNN's 2022 Annual Report.
Results of Operations
Property Analysis
General. The following table summarizes the Property Portfolio:
|
|
June 30, |
|
|
December 31, 2022 |
|
|
June 30, |
|
|||
Properties Owned: |
|
|
|
|
|
|
|
|
|
|||
Number |
|
|
3,479 |
|
|
|
3,411 |
|
|
|
3,305 |
|
Total gross leasable area (square feet) |
|
|
35,492,000 |
|
|
|
35,010,000 |
|
|
|
33,758,000 |
|
Properties: |
|
|
|
|
|
|
|
|
|
|||
Leased and unimproved land |
|
|
3,457 |
|
|
|
3,390 |
|
|
|
3,275 |
|
Percent of Properties – leased and unimproved land |
|
|
99 |
% |
|
|
99 |
% |
|
|
99 |
% |
Weighted average remaining lease term (years) |
|
|
10.2 |
|
|
|
10.4 |
|
|
|
10.6 |
|
Total gross leasable area (square feet) – leased |
|
|
35,252,000 |
|
|
|
34,829,000 |
|
|
|
33,526,000 |
|
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 |
|
June 30, |
|
December 31, |
|
June 30, |
1. |
|
Convenience stores |
|
16.9% |
|
16.5% |
|
17.0% |
2. |
|
Automotive service |
|
14.5% |
|
13.7% |
|
13.1% |
3. |
|
Restaurants – full service |
|
8.9% |
|
9.1% |
|
9.6% |
4. |
|
Restaurants – limited service |
|
8.8% |
|
8.9% |
|
9.2% |
5. |
|
Family entertainment centers |
|
5.7% |
|
5.9% |
|
6.2% |
6. |
|
Health and fitness |
|
4.7% |
|
4.9% |
|
5.0% |
7. |
|
Theaters |
|
4.3% |
|
4.3% |
|
4.3% |
8. |
|
Recreational vehicle dealers, parts and accessories |
|
4.2% |
|
4.1% |
|
4.2% |
9. |
|
Equipment rental |
|
3.0% |
|
3.1% |
|
3.2% |
10. |
|
Wholesale clubs |
|
2.5% |
|
2.6% |
|
2.4% |
11. |
|
Automotive parts |
|
2.5% |
|
2.6% |
|
2.9% |
12. |
|
Drug stores |
|
2.5% |
|
2.6% |
|
1.2% |
13. |
|
Home improvement |
|
2.3% |
|
2.3% |
|
2.4% |
14. |
|
Furniture |
|
2.1% |
|
2.3% |
|
2.4% |
15. |
|
Medical service providers |
|
1.8% |
|
1.9% |
|
2.0% |
16. |
|
Home furnishings |
|
1.5% |
|
1.4% |
|
1.5% |
17. |
|
General merchandise |
|
1.5% |
|
1.6% |
|
1.6% |
18. |
|
Consumer electronics |
|
1.4% |
|
1.4% |
|
1.5% |
19. |
|
Travel plazas |
|
1.3% |
|
1.4% |
|
1.5% |
20. |
|
Automobile auctions, wholesale |
|
1.2% |
|
1.3% |
|
1.2% |
|
|
Other |
|
8.4% |
|
8.1% |
|
7.6% |
|
|
|
|
100.0% |
|
100.0% |
|
100.0% |
(1) |
Based on annualized base rent for all leases in place for each respective period. |
22
Property Acquisitions. The following table summarizes the Property acquisitions (dollars in thousands):
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Number of Properties |
|
|
36 |
|
|
|
43 |
|
|
|
79 |
|
|
|
102 |
|
Gross leasable area (square feet)(1) |
|
|
278,000 |
|
|
|
348,000 |
|
|
|
553,000 |
|
|
|
1,227,000 |
|
Cap rate(2) |
|
|
7.2 |
% |
|
|
6.2 |
% |
|
|
7.1 |
% |
|
|
6.2 |
% |
Total dollars invested(3) |
|
$ |
181,296 |
|
|
$ |
153,769 |
|
|
$ |
337,541 |
|
|
$ |
364,592 |
|
(1) |
Includes additional square footage from completed construction on existing Properties. |
(2) |
The cap rate is a weighted average, calculated as the initial cash annual base rent divided by the total purchase price of the Properties. |
(3) |
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.
Property Dispositions. The following table summarizes the properties sold by NNN (dollars in thousands):
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Number of properties |
|
|
7 |
|
|
|
8 |
|
|
|
13 |
|
|
|
18 |
|
Gross leasable area (square feet) |
|
|
37,000 |
|
|
|
94,000 |
|
|
|
54,000 |
|
|
|
175,000 |
|
Net sales proceeds |
|
$ |
28,233 |
|
|
$ |
7,905 |
|
|
$ |
40,158 |
|
|
$ |
27,979 |
|
Net gain on disposition of real estate |
|
$ |
13,930 |
|
|
$ |
775 |
|
|
$ |
20,230 |
|
|
$ |
4,767 |
|
Cap rate(1) |
|
|
5.1 |
% |
|
|
7.9 |
% |
|
|
5.6 |
% |
|
|
6.2 |
% |
(1) |
The cap rate is a weighted average of properties occupied at disposition, calculated as the cash annual base rent divided by the total sales price of the properties. |
NNN typically uses the disposition proceeds to either pay down the Credit Facility or reinvest in real estate.
Analysis of Revenue
The following table summarizes NNN’s revenues (dollars in thousands):
|
|
Quarter Ended |
|
|
Percent |
|
|
Six Months Ended |
|
|
Percent |
|
||||||||||||
|
|
2023 |
|
|
2022 |
|
|
(Decrease) |
|
|
2023 |
|
|
2022 |
|
|
(Decrease) |
|
||||||
Rental Revenues(1) |
|
$ |
198,063 |
|
|
$ |
186,236 |
|
|
|
6.4 |
% |
|
$ |
397,153 |
|
|
$ |
371,399 |
|
|
|
6.9 |
% |
Real estate expense reimbursement |
|
|
4,363 |
|
|
|
4,300 |
|
|
|
1.5 |
% |
|
|
8,903 |
|
|
|
8,900 |
|
|
|
0.0 |
% |
Rental income |
|
|
202,426 |
|
|
|
190,536 |
|
|
|
6.2 |
% |
|
|
406,056 |
|
|
|
380,299 |
|
|
|
6.8 |
% |
Interest and other income from real estate |
|
|
214 |
|
|
|
247 |
|
|
|
(13.4 |
)% |
|
|
692 |
|
|
|
763 |
|
|
|
(9.3 |
)% |
Total revenues |
|
$ |
202,640 |
|
|
$ |
190,783 |
|
|
|
6.2 |
% |
|
$ |
406,748 |
|
|
$ |
381,062 |
|
|
|
6.7 |
% |
(1) |
Includes rental income from operating leases, earned income from direct financing leases and percentage rent ("Rental Revenues"). |
Rental Income. Rental income increased for the quarter and six months ended June 30, 2023, as compared to the same periods in 2022. The increase is primarily due to the Rental Revenues from NNN's recent Property acquisitions (see "Results of Operations – Property Analysis – Property Acquisitions").
23
Analysis of Expenses
The following table summarizes NNN’s expenses (dollars in thousands):
|
|
Quarter Ended |
|
|
Percent Increase |
|
|
Six Months Ended |
|
|
Percent Increase |
|
||||||||||||
|
|
2023 |
|
|
2022 |
|
|
(Decrease) |
|
|
2023 |
|
|
2022 |
|
|
(Decrease) |
|
||||||
General and administrative |
|
$ |
10,740 |
|
|
$ |
9,740 |
|
|
|
10.3 |
% |
|
$ |
22,991 |
|
|
$ |
20,782 |
|
|
|
10.6 |
% |
Real estate |
|
|
6,836 |
|
|
|
6,173 |
|
|
|
10.7 |
% |
|
|
13,682 |
|
|
|
13,371 |
|
|
|
2.3 |
% |
Depreciation and amortization |
|
|
59,875 |
|
|
|
57,444 |
|
|
|
4.2 |
% |
|
|
119,023 |
|
|
|
110,124 |
|
|
|
8.1 |
% |
Leasing transaction costs |
|
|
52 |
|
|
|
76 |
|
|
|
(31.6 |
)% |
|
|
127 |
|
|
|
164 |
|
|
|
(22.6 |
)% |
Impairment losses – real estate, net of |
|
|
34 |
|
|
|
4,618 |
|
|
|
(99.3 |
)% |
|
|
2,674 |
|
|
|
6,250 |
|
|
|
(57.2 |
)% |
Executive retirement costs |
|
|
309 |
|
|
|
2,655 |
|
|
|
(88.4 |
)% |
|
|
732 |
|
|
|
6,249 |
|
|
|
(88.3 |
)% |
Total operating expenses |
|
$ |
77,846 |
|
|
$ |
80,706 |
|
|
|
(3.5 |
)% |
|
$ |
159,229 |
|
|
$ |
156,940 |
|
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest and other income |
|
$ |
(74 |
) |
|
$ |
(52 |
) |
|
|
42.3 |
% |
|
$ |
(107 |
) |
|
$ |
(87 |
) |
|
|
23.0 |
% |
Interest expense |
|
|
40,094 |
|
|
|
36,739 |
|
|
|
9.1 |
% |
|
|
78,985 |
|
|
|
73,438 |
|
|
|
7.6 |
% |
Total other expenses |
|
$ |
40,020 |
|
|
$ |
36,687 |
|
|
|
9.1 |
% |
|
$ |
78,878 |
|
|
$ |
73,351 |
|
|
|
7.5 |
% |
As a percentage of total revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
5.3% |
|
5.1% |
|
|
|
5.7% |
|
5.5% |
|
|
Real estate |
|
3.4% |
|
3.2% |
|
|
|
3.4% |
|
3.5% |
|
|
General and Administrative. General and administrative expense increased for the quarter and six months ended June 30, 2023, as compared to the same periods in 2022. The increase is primarily attributable to an increase in long-term incentive compensation costs.
Depreciation and Amortization. Depreciation and amortization expense increased for the quarter and six months ended June 30, 2023, as compared to the same periods in 2022. The increase is primarily due to the increase in NNN's Property Portfolio from recent acquisitions (see "Results of Operations – Property Analysis – Property Acquisitions").
Impairment Losses – Real Estate, Net of Recoveries. As a result of NNN's review of long-lived assets, including identifiable intangible assets, NNN recognized real estate impairments, net of recoveries for the quarter and six months ended June 30, 2023 and 2022, which were 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, the former President and Chief Executive Officer retired from employment, as contemplated under the Company’s long-term executive succession planning process and as previously announced in January 2022. During the quarter and six months ended June 30, 2023 and 2022, NNN recorded executive retirement costs in connection with the long-term incentive compensation related to the retirement and transition agreement.
Interest Expense. Interest expense increased for the quarter and six months ended June 30, 2023, as compared to the same periods in 2022. The increase is primarily due to the Credit Facility having a weighted average outstanding balance of $228,576,000 with a weighted average interest rate of 5.67% for the six months ended June 30, 2023 compared to a weighted average outstanding balance of $9,028,000 with a weighted average interest rate of 2.04% for the six months ended June 30, 2022.
24
Liquidity and Capital Resources
NNN’s demand for funds has been, and will continue to be, primarily for (i) payment of operating expenses and cash dividends; (ii) Property acquisitions and development; (iii) capital expenditures; (iv) payment of principal and interest on its outstanding indebtedness; and (v) other investments.
Financing Strategy. NNN’s financing objective is to manage its capital structure effectively in order to provide sufficient capital to execute its operating strategy while servicing its debt requirements, maintaining its investment grade credit rating, staggering debt maturities and providing value to NNN’s stockholders. NNN’s capital resources have and will continue to include, if available (i) proceeds from the issuance of public or private equity or debt capital market transactions; (ii) secured or unsecured borrowings from banks or other lenders; (iii) proceeds from the sale of Properties; and (iv) to a lesser extent, by internally generated funds as well as undistributed funds from operations. However, there can be no assurance that additional financing or capital will be available, or that the terms will be acceptable or advantageous to NNN.
NNN typically expects to fund both its short-term and long-term liquidity requirements, including investments in additional Properties, with cash and cash equivalents, cash provided from operations and advances from NNN's Credit Facility. As of June 30, 2023, NNN had $2,281,000 of cash and cash equivalents and $767,500,000 available for future borrowings under the Credit Facility. NNN may also fund liquidity requirements with new debt or equity issuances, although newly issued debt may be at higher interest rates than the rates on NNN's existing debt outstanding. NNN has the ability to limit future property acquisitions and strategically increase property dispositions. NNN expects these sources of liquidity and the discretionary nature of its property acquisition funding needs will allow NNN to meet its financial obligations over the long term.
Cash Flows. NNN had $2,281,000 in cash and cash equivalents and $2,971,000 in restricted cash or cash held in escrow at June 30, 2023. The table below summarizes NNN’s cash flows (dollars in thousands):
|
|
Six Months Ended June 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Cash and cash equivalents: |
|
|
|
|
|
|
||
Provided by operating activities |
|
$ |
299,294 |
|
|
$ |
275,311 |
|
Used in investing activities |
|
|
(288,109 |
) |
|
|
(329,456 |
) |
Used in financing activities |
|
|
(12,711 |
) |
|
|
(113,888 |
) |
Decrease |
|
|
(1,526 |
) |
|
|
(168,033 |
) |
Net cash at beginning of period |
|
|
6,778 |
|
|
|
171,322 |
|
Net cash at end of period |
|
$ |
5,252 |
|
|
$ |
3,289 |
|
Cash flow activities include:
Operating Activities. Cash provided by operating activities represents cash received primarily from rental income 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 six months ended June 30, 2023 and 2022, 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 six months ended June 30, 2023, included the following significant transactions:
25
Material Cash Requirements
NNN's material cash requirements include (i) long-term debt maturities; (ii) interest on long-term debt; (iii) common stock dividends (although all future distributions will be declared and paid at the discretion of the Board of Directors); and (iv) to a lesser extent, Property construction and other Property related costs that may arise.
The table below presents material cash requirements related to NNN's long-term obligations outstanding as of June 30, 2023 (see "Capital Structure") (dollars in thousands):
|
|
Date of Obligation |
|
|||||||||||||||||||||||||
|
|
Total |
|
|
2023 |
|
|
2024 |
|
|
2025 |
|
|
2026 |
|
|
2027 |
|
|
Thereafter |
|
|||||||
Long-term debt(1) |
|
$ |
3,800,000 |
|
|
$ |
— |
|
|
$ |
350,000 |
|
|
$ |
400,000 |
|
|
$ |
350,000 |
|
|
$ |
400,000 |
|
|
$ |
2,300,000 |
|
Long-term debt – interest(2) |
|
|
1,753,441 |
|
|
|
68,200 |
|
|
|
129,006 |
|
|
|
120,750 |
|
|
|
106,225 |
|
|
|
91,233 |
|
|
|
1,238,027 |
|
Credit Facility |
|
|
332,500 |
|
|
|
— |
|
|
|
— |
|
|
|
332,500 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Headquarters office lease |
|
|
10,515 |
|
|
|
412 |
|
|
|
837 |
|
|
|
210 |
|
|
|
981 |
|
|
|
1,005 |
|
|
|
7,070 |
|
Total contractual cash |
|
$ |
5,896,456 |
|
|
$ |
68,612 |
|
|
$ |
479,843 |
|
|
$ |
853,460 |
|
|
$ |
457,206 |
|
|
$ |
492,238 |
|
|
$ |
3,545,097 |
|
(1) |
Includes only principal amounts outstanding under notes payable and excludes unamortized note discounts and debt costs. |
(2) |
Interest calculation on notes payable based on stated rate of the principal amount. |
Property Construction. NNN has committed to fund construction on 39 Properties. The improvements of such Properties are estimated to be completed within 12 months. These construction commitments, at June 30, 2023, are outlined in the table below (dollars in thousands):
Total commitment(1) |
|
$ |
268,159 |
|
Less amount funded |
|
|
(113,814 |
) |
Remaining commitment |
|
$ |
154,345 |
|
(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 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 June 30, 2023, NNN owned 22 vacant, un-leased Properties which accounted for less than one percent of total Properties, and less than one percent of aggregate gross leasable area held in the Property Portfolio.
Additionally, as of July 31, 2023, less than one percent of total Properties, and less than one percent of aggregate gross leasable area held in the Property Portfolio, was leased to one tenant currently in bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, this tenant has the right to reject or affirm its lease with NNN.
NNN generally monitors the financial performance of its significant tenants on an ongoing basis.
26
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 NNN's common stock (dollars in thousands, except per share data):
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Dividends |
|
$ |
99,745 |
|
|
$ |
92,878 |
|
|
$ |
199,146 |
|
|
$ |
185,629 |
|
Per share |
|
|
0.550 |
|
|
|
0.530 |
|
|
|
1.100 |
|
|
|
1.060 |
|
In July 2023, NNN declared a dividend of $0.5650 per share which is payable in August 2023 to its common stockholders of record as of July 31, 2023.
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):
|
|
June 30, |
|
|
Percentage |
|
|
December 31, 2022 |
|
|
Percentage |
|
||||
Line of credit payable |
|
$ |
332,500 |
|
|
|
8.2 |
% |
|
$ |
166,200 |
|
|
|
4.2 |
% |
Mortgages payable(1) |
|
|
— |
|
|
|
— |
|
|
|
9,964 |
|
|
|
0.3 |
% |
Notes payable |
|
|
3,742,012 |
|
|
|
91.8 |
% |
|
|
3,739,890 |
|
|
|
95.5 |
% |
Total outstanding debt |
|
$ |
4,074,512 |
|
|
|
100.0 |
% |
|
$ |
3,916,054 |
|
|
|
100.0 |
% |
(1) |
In April 2023, NNN repaid the remaining mortgages payable principal balance of $9,774. |
Line of Credit Payable. NNN's $1,100,000,000 Credit Facility had a weighted average outstanding balance of $228,576,000 and a weighted average interest rate of 5.67% during the six months ended June 30, 2023. In December 2022, NNN entered into an amendment to the Credit Facility, to change the base interest rate from LIBOR to the Secured Overnight Financing Rate ("SOFR") plus a SOFR adjustment of 10 basis points ("Adjusted SOFR"). The Credit Facility bears interest at Adjusted SOFR 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 matures in June 2025, unless the Company exercises its options to extend maturity to June 2026. 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 June 30, 2023, $332,500,000 was outstanding and $767,500,000 was available for future borrowings under the Credit Facility, and NNN was in compliance with each of the financial covenants.
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 2022 Annual Report.
27
Debt Securities – Notes Payable. Each of NNN’s outstanding series of unsecured notes is summarized in the table below (dollars in thousands):
Notes |
|
Issue Date |
|
Principal |
|
|
Discount(1) |
|
|
Net |
|
|
Stated |
|
Effective |
|
Maturity Date |
|||
2024(3) |
|
May 2014 |
|
$ |
350,000 |
|
|
$ |
707 |
|
|
$ |
349,293 |
|
|
3.900% |
|
3.924% |
|
June 2024(4) |
2025(3) |
|
October 2015 |
|
|
400,000 |
|
|
|
964 |
|
|
|
399,036 |
|
|
4.000% |
|
4.029% |
|
November 2025(4) |
2026(3) |
|
December 2016 |
|
|
350,000 |
|
|
|
3,860 |
|
|
|
346,140 |
|
|
3.600% |
|
3.733% |
|
December 2026(4) |
2027(3) |
|
September 2017 |
|
|
400,000 |
|
|
|
1,628 |
|
|
|
398,372 |
|
|
3.500% |
|
3.548% |
|
October 2027(4) |
2028(3) |
|
September 2018 |
|
|
400,000 |
|
|
|
2,848 |
|
|
|
397,152 |
|
|
4.300% |
|
4.388% |
|
October 2028 |
2030(3) |
|
March 2020 |
|
|
400,000 |
|
|
|
1,288 |
|
|
|
398,712 |
|
|
2.500% |
|
2.536% |
|
April 2030 |
2048 |
|
September 2018 |
|
|
300,000 |
|
|
|
4,239 |
|
|
|
295,761 |
|
|
4.800% |
|
4.890% |
|
October 2048 |
2050 |
|
March 2020 |
|
|
300,000 |
|
|
|
6,066 |
|
|
|
293,934 |
|
|
3.100% |
|
3.205% |
|
April 2050 |
2051 |
|
March 2021 |
|
|
450,000 |
|
|
|
8,406 |
|
|
|
441,594 |
|
|
3.500% |
|
3.602% |
|
April 2051 |
2052(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 starting swaps which were hedging the risk of changes in forecasted interest payments on forecasted issuance of long-term debt. Upon the issuance of a series of unsecured notes, NNN terminated such derivatives, and the resulting fair value was deferred in other comprehensive income. The deferred liability (asset) is being amortized over the term of the respective notes using the effective interest method. Additional disclosure is included in Note 6 – Notes Payable and Derivatives. |
(4) |
The aggregate principal balance of the unsecured note maturities for the next five years is $1,500,000. |
Each series of the notes represents senior, unsecured obligations of NNN and is subordinated to all secured debt of NNN. Each of the notes is redeemable at the option of NNN, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the notes being redeemed plus all accrued and unpaid interest thereon through the redemption date and (ii) the make-whole amount, if any, as defined in the applicable supplemental indenture relating to the notes.
In connection with the outstanding debt offerings, NNN incurred debt issuance costs totaling $38,145,000 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 accordance with the terms of the indentures, pursuant to which NNN’s notes have been issued, NNN is required to meet certain restrictive financial covenants, which, among other things, require NNN to maintain (i) certain leverage ratios and (ii) certain interest coverage. At June 30, 2023, NNN was in compliance with those covenants.
28
Equity Securities
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 June 30, 2023 |
|
7,722,511 |
The following table outlines the common stock issuances pursuant to NNN's ATM equity program (dollars in thousands, except per share data):
|
|
Six Months Ended June 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Shares of common stock |
|
|
650,135 |
|
|
|
717,473 |
|
Average price per share (net) |
|
$ |
43.98 |
|
|
$ |
43.23 |
|
Net proceeds |
|
$ |
28,592 |
|
|
$ |
31,018 |
|
Stock issuance costs(1) |
|
$ |
558 |
|
|
$ |
575 |
|
(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):
|
|
Six Months Ended June 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Shares of common stock |
|
|
35,922 |
|
|
|
34,396 |
|
Net proceeds |
|
$ |
1,615 |
|
|
$ |
1,456 |
|
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 is included in NNN’s 2022 Annual Report. NNN has not made any material changes to these policies during the periods covered by this Quarterly Report on Form 10-Q.
29
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 June 30, 2023, NNN had no outstanding derivatives.
As of June 30, 2023, NNN's variable rate Credit Facility had $332,500,000 outstanding, a weighted average outstanding balance of $228,576,000 with a weighted average interest rate of 5.67% compared to a weighted average outstanding balance of $9,028,000 with a weighted average interest rate of 2.04% for the same period in 2022.
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 June 30, 2023. The table incorporates only those debt obligations that existed as of June 30, 2023, 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 approximately one percent for the six months ended June 30, 2023.
Debt Obligations (dollars in thousands) |
|
|
|||||||||||||||
|
|
Variable Rate Debt |
|
|
Fixed Rate Debt |
|
|
||||||||||
|
|
Credit Facility |
|
|
Unsecured Debt(1) |
|
|
||||||||||
|
|
Debt |
|
|
Weighted |
|
|
Principal |
|
|
Effective |
|
|
||||
2023 |
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
2024 |
|
|
— |
|
|
|
— |
|
|
|
350,000 |
|
|
|
3.92 |
% |
|
2025 |
|
|
332,500 |
|
|
|
5.67 |
% |
|
|
400,000 |
|
|
|
4.03 |
% |
|
2026 |
|
|
— |
|
|
|
— |
|
|
|
350,000 |
|
|
|
3.73 |
% |
|
2027 |
|
|
— |
|
|
|
— |
|
|
|
400,000 |
|
|
|
3.55 |
% |
|
Thereafter |
|
|
— |
|
|
|
— |
|
|
|
2,300,000 |
|
|
|
3.58 |
% |
(2) |
Total |
|
$ |
332,500 |
|
|
|
5.67 |
% |
|
$ |
3,800,000 |
|
|
|
3.67 |
% |
|
Fair Value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
June 30, 2023 |
|
$ |
332,500 |
|
|
|
|
|
$ |
3,135,564 |
|
|
|
|
|
||
December 31, 2022 |
|
$ |
166,200 |
|
|
|
|
|
$ |
3,140,774 |
|
|
|
|
|
(1) |
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. |
(2) |
Weighted average effective interest rate for periods after 2027. |
30
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 June 30, 2023, 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.
31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Not applicable.
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, 2022.
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.
|
3. |
Articles of Incorporation and By-laws |
||
|
|
|
||
|
|
|
3.1 |
|
|
|
|
||
|
|
|
3.2 |
|
|
31. |
Section 302 Certifications(1) |
||
|
|
|
|
|
|
|
|
31.1 |
|
|
|
|
|
|
|
|
|
31.2 |
|
|
|
|
|
|
|
32. |
Section 906 Certifications(1) |
||
|
|
|
|
|
|
|
|
32.1 |
|
|
|
|
|
|
|
|
|
32.2 |
|
|
|
|
|
|
|
101. |
Interactive Data File |
||
|
|
|
|
|
|
|
|
101.1 |
The following materials from NNN REIT, Inc. Quarterly Report on Form 10-Q for the period ended June 30, 2023, 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. |
32
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 August, 2023.
NNN REIT, 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 |
|
33