NNN REIT, INC. This section generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this annual report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2018 filed with theSecurities and Exchange Commission (the "Commission") onFebruary 12, 2019 . The term "NNN" or the "Company" refers toNational Retail Properties, Inc. and all of its consolidated subsidiaries. NNN may elect to treat certain subsidiaries as taxable real estate investment trust subsidiaries, ("TRS"). Forward-Looking Statements The following discussion and analysis should be read in conjunction with "Item 6. Selected Financial Data," and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. NNN makes statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this report entitled "Forward-Looking Statements." Certain risks may cause NNN's actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see "Item 1A. Risk Factors." Overview NNN, aMaryland corporation, is a fully integrated real estate investment trust ("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"). NNN owned 3,118 Properties with an aggregate gross leasable area of approximately 32,460,000 square feet, located in 48 states, with a weighted average remaining lease term of 11.2 years as ofDecember 31, 2019 . Approximately 99 percent of the Properties were leased as ofDecember 31, 2019 . NNN's management team focuses on certain key indicators to evaluate the financial condition and operating performance of NNN. The key indicators for NNN include items such as: the composition of the Property Portfolio (such as tenant, geographic and line of trade diversification), the occupancy rate of the Property Portfolio, certain financial performance ratios and profitability measures, industry trends and industry performance compared to that of NNN. NNN evaluates the creditworthiness of its current and prospective tenants. This evaluation may include reviewing available financial statements, store level financial performance, press releases, public credit ratings from major credit rating agencies, industry news publications and financial market data (debt and equity pricing). NNN may also evaluate the business and operations of its tenants, including past payment history and periodically meeting with senior management of certain tenants. NNN continues to maintain its diversification by tenant, geography and tenant's line of trade. NNN's largest lines of trade concentrations are the convenience store and restaurant (including full and limited service) 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 southeastUnited 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. As ofDecember 31, 2019 , 2018 and 2017, the Property Portfolio has remained at least 98 percent leased. As ofDecember 31, 2019 , the average remaining lease term of the Property Portfolio was 11.2 years, which was consistent with the past three years. High occupancy levels coupled with a net lease structure, provides enhanced probability of maintaining operating earnings. 22 -------------------------------------------------------------------------------- Critical Accounting Policies and Estimates The preparation of NNN's consolidated financial statements in conformance with accounting principles generally accepted inthe United States of America 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 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 financial statements. A summary of NNN's accounting policies and procedures are included in Note 1 of NNN's consolidated financial statements. Management believes the following critical accounting policies, among others, affect its more significant estimates and assumptions used in the preparation of NNN's consolidated financial statements. 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. Purchase Accounting for Acquisition of Real Estate. In accordance with theFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 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 value of in-place leases, as applicable, based on their respective fair values. Lease Accounting. EffectiveJanuary 1, 2019 , NNN adopted FASB Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)," ("ASC 842") using the modified retrospective approach in which the cumulative effect of applying the new standard was recognized at the date of initial application with an immaterial positive adjustment to NNN's opening balance of accumulated deficit. The modified retrospective approach provides a method for recording existing leases upon adoption which in comparative periods approximates the results of a full retrospective approach. NNN elected the package of practical expedients permitted under the transition guidance (which included: (i) an entity need not reassess whether any expired or existing contracts are or contain leases, (ii) an entity need not reassess the lease classification for any expired or existing leases, and (iii) an entity need not reassess initial direct costs for any existing leases), the land easement practical expedient to carry forward existing accounting treatment on existing land easements, and the lease and non-lease component combined practical expedient. 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 probable collection. At the point NNN deems the collection of lease payments not probable, a bad debt is recognized for any outstanding receivable and any related accrued rent and, subsequently, any lease revenue is only recognized when cash receipts are received. Adoption of the new standard resulted in the recording of right-of-use ("ROU") assets and operating lease liabilities of approximately$7,735,000 and$10,155,000 respectively, as ofJanuary 1, 2019 . Additional disclosures are included in Note 3 - Right-Of-Use Assets and Operating Lease Liabilities. The consolidated financial statements for the year endedDecember 31, 2019 are presented under the new standard, while comparative periods presented are not adjusted and continue to be reported in accordance with NNN's historical accounting policy. ASC 842 did not materially impact NNN's financial position or results of operations and had no impact on cash flows. 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 costs to sell. Impairment - Real Estate. Based upon certain events or changes in circumstances, management periodically assesses its Properties for possible impairment whenever the carrying value of the asset, including accrued rental income, may not be recoverable through operations. Events or circumstances that may occur include significant changes in real estate market conditions or the ability of NNN to re-lease or sell properties that are currently vacant or become vacant in a reasonable period of time. 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. 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. 23 -------------------------------------------------------------------------------- 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 the FASB guidance included in Leases, based on the terms of the lease of the leased asset. 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. InMay 2014 , the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606). The core principle of ASU 2014-09, is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Certain contracts are excluded from ASU 2014-09, including lease contracts within the scope of the FASB guidance included in Leases (Topic 842). NNN determined the key revenue stream impacted by ASU 2014-09 is gain on disposition of real estate reported on the Consolidated Statements of Income and Comprehensive Income. NNN evaluates any separate contracts or performance obligations to determine proper timing and/or amount of revenue recognition, as well as, transaction price allocation. New Accounting Pronouncements. Refer to Note 1 of theDecember 31, 2019 , Consolidated Financial Statements for a summary and the anticipated impact of each accounting pronouncement on NNN's financial position or results of operations. Results of Operations Property Analysis General. The following table summarizes the Property Portfolio as ofDecember 31 : 2019 2018 2017 Properties Owned: Number 3,118 2,969 2,764 Total gross leasable area (square feet) 32,460,000 30,487,000 29,093,000 Properties: Leased and unimproved land 3,086 2,917
2,740
Percent of Properties - leased and unimproved land 99 % 98 % 99 % Weighted average remaining lease term (years) 11.2 11.5
11.5
Total gross leasable area (square feet) - leased 31,818,000 29,439,000 28,703,000
The following table summarizes the lease expirations, assuming none of the
tenants exercise renewal options, of the Property Portfolio for each of the next
10 years and then thereafter in the aggregate as of
% of Gross % of Gross
Annual # of Leasable Annual # of Leasable
Base Rent(1) Properties Area(2) Base Rent(1) Properties Area(2)
2020 1.7% 66 688,000 2026 4.5% 174 1,672,000
2021 3.5% 115 1,253,000 2027 7.1% 194 2,582,000
2022 5.5% 123 1,634,000 2028 4.5% 153 1,158,000
2023 2.9% 118 1,471,000 2029 3.0% 75 1,030,000
2024 3.7% 100 1,600,000 Thereafter 58.3% 1,799 16,880,000
2025 5.3% 167 1,850,000
(1) Based on the annualized base rent for all leases in place as of
December 31, 2019.
(2) Approximate square feet.
24
--------------------------------------------------------------------------------The following table summarizes the diversification of the Property Portfolio based on the top 10 lines of trade:
% of Annual Base Rent(1)
Top 10 Lines of Trade 2019 2018 2017
1. Convenience stores 18.2% 18.0% 18.1%
2. Restaurants - full service 11.1% 11.4% 12.1%
3. Automotive service 9.6% 8.6%
6.9%
4. Restaurants - limited service 8.8% 8.9%
7.6%
5. Family entertainment centers 6.7% 7.1% 6.4% 6. Health and fitness 5.2% 5.6% 5.6% 7. Theaters 4.7% 5.0% 4.8%
8. Recreational vehicle dealers, parts and
accessories 3.4% 3.4% 3.4%
9. Automotive parts 3.1% 3.4% 3.6%
10. Equipment rental 2.6% 1.9% 2.0%
Other 26.6% 26.7% 29.5%
100.0% 100.0% 100.0%
(1) Based on annualized base rent for all leases in place as of
December 31 of the respective year.
The following table summarizes the diversification of the Property Portfolio by
state as of
State # of Properties % of Annual Base Rent(1)
1. Texas 502 17.6%
2. Florida 230 8.8%
3. Ohio 199 5.8%
4. Illinois 142 5.0%
5. Georgia 151 4.5%
6. North Carolina 156 4.5%
7. Indiana 146 4.0%
8. Tennessee 142 3.8%
9. Virginia 117 3.6%
10. California 65 3.3%
Other 1,268 39.1%
3,118 100.0%
(1) Based on annualized base rent for all leases in place as of
December 31, 2019.
Property Acquisitions. The following table summarizes the Property acquisitions
for each of the years ended
2019 2018 2017
Acquisitions:
Number of Properties 210 265 276 Gross leasable area (square feet) 3,164,000 2,167,000 2,243,000 Initial cash yield 6.9 % 6.8 % 6.9 % Total dollars invested(1)$ 752,497 $ 715,572 $ 754,892 (1) Includes dollars invested in projects under construction or tenant improvements for each respective year. NNN typically funds Property acquisitions either through borrowings under NNN's unsecured revolving credit facility (the "Credit Facility") or by issuing its debt or equity securities in the capital markets. 25 --------------------------------------------------------------------------------
Property Dispositions. The following table summarizes the Properties sold by NNN
for each of the years ended
2019 2018 2017
Number of properties 59 61 48
Gross leasable area (square feet) 1,113,000 686,000 346,000 Net sales proceeds
$ 126,194 $ 147,646 $ 96,757
Gain on disposition of real estate
5.9 % 5.1 % 6.0 %
NNN typically uses the proceeds from a Property disposition to either pay down
the Credit Facility or reinvest in real estate.
Analysis of Revenue
General. NNN's total revenues have increased for the year ended December 31,
2019 , as compared to the same periods ended in 2018 and 2017. This increase is
primarily due to the increase in rental income from Property acquisitions (See
"Results of Operations - Property Analysis - Property Acquisitions"). NNN
anticipates increases in rental income will continue to come from additional
Property acquisitions and increases in rents pursuant to existing lease terms.
The following summarizes NNN's revenues for each of the years ended December 31
(dollars in thousands):
2019 2018
Versus Versus
2018 2017
2019 2018 2017 Percent Percent
Rental Revenues(1)$ 652,220 $ 604,615 $
568,083 7.9 % 6.4 %
Real estate expense reimbursement from
tenants 16,789 16,784
15,512 - 8.2 %
Rental income 669,009 621,399
583,595 7.7 % 6.5 %
Interest and other income from real
estate transactions 1,478 1,262 1,338 17.1 % (5.7 )% Total revenues$ 670,487 $ 622,661 $ 584,933 7.7 % 6.4 %
(1) Includes rental income from operating leases, earned income from direct
financing leases and percentage rent ("Rental Revenues").
Comparison of Revenues - 2019 versus 2018 Rental Income. Rental income increased for the year endedDecember 31, 2019 , as compared to the same period in 2018 primarily due to Property acquisitions: (i) a partial year of Rental Revenue from 210 Properties with aggregate gross
leasable area of approximately 3,164,000 square feet acquired in 2019, and
(ii) a full year of Rental Revenue from 265 Properties with a gross leasable
area of approximately 2,167,000 square feet acquired in 2018.
Comparison of Revenues - 2018 versus 2017 Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of NNN's Annual Report on Form 10-K for the year endedDecember 31, 2018 filed with the Commission onFebruary 12, 2019 , for a detailed comparison of revenues for the years endedDecember 31, 2018 versusDecember 31, 2017 . 26 --------------------------------------------------------------------------------
Analysis of Expenses
General. Operating expenses increased primarily due to the increase in
depreciation expense resulting from the continued growth of NNN's Property
Portfolio during the year ended
2019 2018
Versus Versus
2018 2017
2019 2018 2017 Percent Percent
General and administrative $ 37,651 $ 34,248 $ 33,805 9.9 % 1.3 %
Real estate 27,656 25,099 23,105 10.2 % 8.6 %
Depreciation and amortization 188,871 174,398 173,720 8.3 % 0.4 %
Impairment losses - real
estate and other charges, net
of recoveries 31,992 28,211 8,955 13.4 % 215.0 %
Retirement severance costs - 1,013 7,845 (100.0 )% (87.1 )%
Total operating expenses $ 286,170 $ 262,969 $ 247,430 8.8 % 6.3 %
Interest and other income $ (3,112 ) $ (1,810 ) $ (322 ) 71.9 % 462.1 %
Interest expense 120,023 115,847 109,109 3.6 % 6.2 %
Leasing transaction costs 261 - - N/C (1) -
Loss on early extinguishment
of debt - 18,240 - (100.0 )% N/C (1)
Total other expenses
(revenues) $ 117,172 $ 132,277 $ 108,787 (11.4 )% 21.6 %
As a percentage of total
revenues:
General and administrative 5.6 % 5.5 % 5.8 %
Real estate 4.1 % 4.0 % 4.0 %
(1) Not calculable ("N/C")
Comparison of Expenses - 2019 versus 2018
General and Administrative Expenses. General and administrative expenses
increased in amount and remained relatively flat as a percentage of total
revenues for the year ended December 31, 2019 , as compared to the same period in
2018. The increase in general and administrative expenses for the year ended
December 31, 2019 , is primarily attributable to an increase in compensation
costs.
Real Estate. Real estate expenses increased in amount and remained relatively
flat as a percentage of revenues for the year ended December 31, 2019 , as
compared to the same period in 2018. NNN focuses on real estate expenses, net of
reimbursements from tenants. NNN's net real estate expenses for the years ended
December 31, 2019 and 2018 were $10,867,000 and $8,315,000 , respectively. The
increase is primarily attributable to expenses from certain properties that
became vacant during the years ended December 31, 2019 and 2018.
Depreciation and Amortization. Depreciation and amortization expenses increased
in amount for the year ended December 31, 2019 , as compared to the same period
in 2018. The increase in expenses is primarily due to the acquisition of 210
Properties with an aggregate gross leasable area of approximately 3,164,000
square feet in 2019 and 265 Properties with an aggregate gross leasable area of
approximately 2,167,000 square feet in 2018.
Impairment Losses - Real Estate and Other Charges, Net of Recoveries. NNN
reviews long-lived assets for impairment whenever certain events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. Events or circumstances that may occur include changes in real
estate market conditions, the ability of NNN to re-lease properties that are
currently vacant or become vacant, and the ability to sell properties at a price
that exceeds NNN's carrying value. Management evaluates whether an impairment in
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 cost of the individual asset. If an impairment is indicated, a loss
will be recorded for the amount by which the carrying value of the asset exceeds
its fair value. During the years ended December 31, 2019 and 2018, NNN recorded
$31,992,000 and $28,211,000 , respectively, of real estate impairments.
27
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Interest Expense. Interest expense increased for the year ended December 31,
2019 , compared to the same period in 2018. The increase is attributable to an
increase in outstanding debt, including the following activity related to NNN's
notes payable (dollars in thousands):
Stated
Transaction Effective Date Principal Interest Rate Original Maturity
Issuance 2028 Notes September 2018 $ 400,000 4.300 % October 2028
Issuance 2048 Notes September 2018 300,000 4.800 % October 2048
Redemption 2021 Notes October 2018 (300,000 ) 5.500 % The increase in interest expense for 2019 is partially offset by a decrease of$97,529,000 in the weighted average outstanding balance on the Credit Facility, from$121,587,000 atDecember 31, 2018 to$24,058,000 atDecember 31, 2019 . Loss on Early Extinguishment of Debt. InOctober 2018 , NNN redeemed the$300,000,000 5.500% notes payable that were due inJuly 2021 . The notes were redeemed at a price equal to 100% of the principal amount, plus (i) a make-whole amount of$18,240,000 , and (ii) all accrued and unpaid interest. Comparison of Expenses - 2018 versus 2017 Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of NNN's Annual Report on Form 10-K for the year endedDecember 31, 2018 filed with the Commission onFebruary 12, 2019 , for a detailed comparison of expenses for the years endedDecember 31, 2018 versusDecember 31, 2017 . Impact of Inflation NNN's leases typically contain provisions to mitigate the adverse impact of inflation on NNN's results of operations. Tenant leases generally provide for limited increases in rent as a result of fixed increases, increases in the CPI, and/or, to a lesser extent, increases in the tenant's sales volume. During times when inflation is greater than increases in rent, rent increases will not keep up with the rate of inflation. Properties are leased to tenants under long-term, net leases which typically require the tenant to pay certain operating expenses for a Property, thus, NNN's exposure to inflation is reduced with respect to these expenses. Inflation may have an adverse impact on NNN's tenants.
Liquidity
General. NNN's demand for funds has been and will continue to be primarily for (i) payment of operating expenses and cash dividends; (ii) Property acquisitions and development; (iii) capital expenditures; (iv) payment of principal and interest on its outstanding indebtedness; and (v) other investments. NNN expects to meet short-term liquidity requirements through cash provided from operations and NNN's Credit Facility. As ofDecember 31, 2019 ,$133,600,000 was outstanding and$766,400,000 was available for future borrowings under the Credit Facility. NNN anticipates its long-term capital needs will be funded by the Credit Facility, cash provided from operations, the issuance of long-term debt or the issuance of common or preferred equity or other instruments convertible into or exchangeable for common or preferred equity. However, there can be no assurance that additional financing or capital will be available, or that the terms will be acceptable or advantageous to NNN. 28 -------------------------------------------------------------------------------- Cash and Cash Equivalents. NNN's cash and cash equivalents includes the aggregate of cash and cash equivalents and restricted cash and cash held in escrow from the Consolidated Balance Sheets. NNN did not have restricted cash or cash held in escrow as ofDecember 31, 2019 , 2018 and 2017. The table below summarizes NNN's cash flows for each of the years endedDecember 31 (dollars in thousands): 2019 2018 2017 Cash and cash equivalents: Provided by operating activities$ 501,727 $ 471,909 $
421,557
Used in investing activities (619,408 ) (609,371 ) (625,557 ) Provided by (used in) financing activities 4,526 250,365 (89,176 ) Increase (decrease) (113,155 ) 112,903 (293,176 ) Net cash at beginning of year 114,267 1,364 294,540 Net cash at end of year$ 1,112 $ 114,267 $ 1,364 Cash provided by operating activities represents cash received primarily from Rental Revenues 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 years endedDecember 31, 2019 , 2018 and 2017, 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. Changes in cash for investing activities are primarily attributable to acquisitions and dispositions of Properties. NNN typically uses proceeds from its Credit Facility to fund the acquisition of its Properties. NNN's financing activities for the year endedDecember 31, 2019 , included the following significant transactions: (i) Issuance of common stock resulted in the following net proceeds: •$379,410,000 from the issuance of 7,000,000 shares of common stock in September, •$19,442,000 from the issuance of 362,918 shares of common stock in connection with the Dividend Reinvestment and Stock Purchase Plan ("DRIP"), and •$125,905,000 from the issuance of 2,344,022 shares of common stock in connection with the at-the-market ("ATM") equity program.
(ii) Dividends paid:
•
Cumulative Redeemable Preferred Stock (the "Series E Preferred Stock"),
•
Cumulative Redeemable Preferred Stock (the "Series F Preferred Stock"),
and
•
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 generally utilizes debt and equity security offerings, bank borrowings, proceeds from the disposition of certain properties, and to a lesser extent, internally generated funds to meet its capital needs. NNN typically funds its short-term liquidity requirements, including investments in additional Properties, with cash from its Credit Facility. As ofDecember 31, 2019 ,$133,600,000 was outstanding and$766,400,000 was available for future borrowings under the Credit Facility. As ofDecember 31, 2019 , NNN's ratio of total debt to total gross assets (before accumulated depreciation and amortization) was approximately 35 percent and the ratio of secured indebtedness to total gross assets was less than one percent. The ratio of total debt to total market capitalization was approximately 25 percent. Certain financial agreements to which NNN is a party contain covenants that limit NNN's ability to incur additional debt under certain circumstances. The organizational documents of NNN do not limit the absolute amount or percentage of indebtedness that NNN may incur. Additionally, NNN may change its financing strategy. 29 --------------------------------------------------------------------------------
Contractual Obligations and Commercial Commitments. The information in the
following table summarizes NNN's contractual obligations and commercial
commitments outstanding as of
Expected Maturity Date (dollars in thousands)
Total 2020 2021 2022 2023 2024 Thereafter
Long-term debt(1) $ 2,886,837 $ 596 $ 630 $ 325,664 $ 359,947 $ 350,000 $ 1,850,000
Long-term debt -
interest(2) 991,971 112,365 112,331 109,724 91,520 80,456 485,575 Credit Facility
133,600 - - 133,600 - - -
Headquarters office
lease 4,233 773 788 804 821 837 210
Ground leases 8,446 564 573 582 582 601 5,544
Total contractual cash
obligations $ 4,025,087 $ 114,298 $ 114,322 $
570,374
(1) Includes only principal amounts outstanding under mortgages payable and
notes payable and excludes unamortized mortgage
premiums, note discounts and note costs.
(2) Interest calculation based on stated rate of the principal amount.
In addition to the contractual obligations outlined above, NNN has committed to
fund construction on 19 Properties. The improvements on such Properties are
estimated to be completed within 12 months. These construction commitments, at
December 31, 2019 , are outlined in the table below (dollars in thousands):
Total commitment(1) $ 75,927
Less amount funded 44,368
Remaining commitment $ 31,559
(1) Includes land, construction costs, tenant improvements, lease
costs and capitalized interest
As of December 31, 2019 , NNN did not have any other material contractual cash
obligations, such as purchase obligations, financing lease obligations or other
long-term liabilities other than those reflected in the table. In addition to
items reflected in the table, NNN has issued preferred stock with cumulative
preferential cash distributions, as described below under "Dividends."
Management anticipates satisfying these obligations with a combination of NNN's
cash provided from operations, current capital resources on hand, its Credit
Facility, debt or equity financings and asset dispositions.
Generally the Properties are leased under long-term triple net leases, which
require the tenant to pay all property taxes and assessments, 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 uncollectibility of 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
December 31, 2019 , NNN owned 32 vacant, un -leased Properties which accounted for
approximately one percent of total Properties held in the Property Portfolio.
Additionally, as of February 10, 2020 , less than two percent of total
Properties, and less than one percent of aggregate gross leasable area held in
the Property Portfolio, was leased to two tenants that are currently in
bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, these
tenants have the right to reject or affirm their leases with NNN.
NNN generally monitors the financial performance of its significant tenants on
an ongoing basis.
Dividends. NNN has made an election to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and
related regulations and intends to continue to operate so as to remain qualified
as a REIT for federal income tax purposes. NNN generally will not be subject to
federal income tax on income that it distributes to its stockholders, provided
that it distributes 100 percent of its REIT taxable income and meets certain
other requirements
30
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for qualifying as a REIT. If NNN fails to qualify as a REIT in any taxable year,
it will be subject to federal income tax on its taxable income at regular
corporate rates and will not be permitted to qualify for treatment as a REIT for
federal income tax purposes for the four years following the year during which
qualification is lost. Such an event could materially adversely affect NNN's
income and ability to pay dividends. NNN believes it has been structured as, and
its past and present operations qualify NNN as, a REIT.
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 for the years ended December 31 (dollars in thousands, except per share
data):
2019 2018 2017
Dividends $ 333,692 $ 303,164 $ 277,120
Per share 2.030 1.950 1.860
The following presents the characterizations for tax purposes of such common
stock dividends for the years ended
2019 2018 2017
Ordinary dividends $ 1.762899 86.8423 % (1) $ 1.658604 85.0566 % (1) $ 1.559781 83.8592 %
Capital gain - - % 0.015534 0.7966 % 0.035041 1.8839 %
Unrecaptured
Section 1250 Gain - - % 0.042818 2.1958 % 0.012194 0.6556 %
Nontaxable
distributions 0.267101 13.1577 % 0.233044 11.9510 % 0.252984 13.6013 %
$ 2.030000 100.0000 % $ 1.950000 100.0000 % $ 1.860000 100.0000 %
(1) Eligible for the 20% qualified business income deduction under section 199A
of the Code that was amended by the Tax Cuts and Jobs Act signed into law on
OnJanuary 15, 2020 , NNN declared a dividend of$0.515 per share, payableFebruary 14, 2020 , to its common stockholders of record as ofJanuary 31, 2020 . Holders of NNN's preferred stock issuances are entitled to receive, when and as authorized by the Board of Directors, cumulative preferential cash distributions based on the stated rate and liquidation preference per annum. The following table outlines the dividends declared and paid for NNN's preferred stock for the years endedDecember 31 (dollars in thousands, except per share data): 2019 2018 2017 Series D Preferred Stock(1): Dividends $ - $ -$ 3,598 Per share - - 0.312847 Series E Preferred Stock(2): Dividends 13,201 16,387 16,387 Per share 1.147917 1.425000 1.425000 Series F Preferred Stock(3): Dividends 17,940 17,940 17,940 Per share 1.300000 1.300000 1.300000 (1) The Series D Preferred Stock was redeemed inFebruary 2017 . The dividends paid in 2017 include accumulated and unpaid dividends through, but not including, the redemption date. (2) The Series E Preferred Stock was redeemed inOctober 2019 . The dividends paid in 2019 include accumulated and unpaid dividends through, but not including, the redemption date. (3) The Series F Preferred Stock was issued inOctober 2016 and has no maturity date and will remain outstanding unless redeemed by NNN. The earliest redemption date for the Series F Preferred Stock isOctober 2021 . 31
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The following presents the characterizations for tax purposes of such preferred
stock dividends for the years ended
Ordinary Unrecaptured
Dividends Capital Gain Section 1250 Gain Totals
2019
Percentage of Total 100.0000 % (3) - - 100.0000 %
Series E (2) $ 1.147917 $ - $ - $ 1.147917
Series F $ 1.300000 $ - $ - $ 1.300000
2018
Percentage of Total 96.6015 % (3) 0.9047 % 2.4938 % 100.0000 %
Series E $ 1.376571 $ 0.012892 $ 0.035537 $ 1.425000
Series F $ 1.255820 $ 0.011761 $ 0.032419 $ 1.300000
2017
Percentage of Total 97.0607 % 2.1804 % 0.7589 % 100.0000 %
Series D (1) $ 0.303652 $ 0.006821 $ 0.002374 $ 0.312847
Series E $ 1.383115 $ 0.031071 $ 0.010814 $ 1.425000
Series F $ 1.261789 $ 0.028345
accumulated and unpaid dividends through, but not including, the redemption date.
(2) The Series E Preferred Stock was redeemed in
accumulated and unpaid dividends through, but not including, the redemption date. (3) Eligible for the 20% qualified business income deduction under section 199A of the Code as amended by the
TCJA. Capital Resources Generally, cash needs for Property acquisitions, debt payments, capital expenditures, development and other investments have been funded by equity and debt offerings, bank borrowings, the sale of Properties and, to a lesser extent, by internally generated funds. Cash needs for operating and interest expenses and dividends have generally been funded by internally generated funds. If available, future sources of capital include proceeds from the public or private offering of NNN's debt or equity securities, secured or unsecured borrowings from banks or other lenders, proceeds from the sale of Properties, as well as undistributed funds from operations.
Debt
The following is a summary of NNN's total outstanding debt as of
Percentage Percentage
2019 of Total 2018 of Total
Line of credit payable$ 133,600 4.5 % $ - - % Mortgages payable 12,059 0.4 % 12,694 0.4 % Notes payable 2,842,698 95.1 % 2,838,701
99.6 %
Total outstanding debt
Indebtedness. NNN expects to use indebtedness primarily for property acquisitions and development of single-tenant retail properties, either directly or through investment interests. Additionally, indebtedness may be used to refinance existing indebtedness.
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Line of Credit Payable. In October 2017 , NNN amended its credit agreement to
increase the borrowing capacity under its Credit Facility from $650,000,000 to
$900,000,000 and amend certain other terms under the former Credit Facility. The
Credit Facility had a weighted average outstanding balance of $24,058,000 and a
weighted average interest rate of 2.8% for the year ended December 31, 2019 . The
Credit Facility matures January 2022 , unless the Company exercises its option to
extend maturity to January 2023 . As of December 31, 2019 , the Credit Facility
bears interest at LIBOR plus 87.5 basis points; however, such interest rate may
change pursuant to a tiered interest rate structure based on NNN's debt rating.
The Credit Facility also includes an accordion feature for NNN to increase the
facility size up to $1,600,000,000 , subject to lender approval. As of
December 31, 2019 , $133,600,000 was outstanding and $766,400,000 was available
for future borrowings under the Credit Facility.
In accordance with the terms of the Credit Facility, NNN is required to meet
certain restrictive financial covenants, which, among other things, require NNN
to maintain certain (i) leverage ratios, (ii) debt service coverage, (iii) cash
flow coverage, and (iv) investment limitations. At December 31, 2019 , NNN was in
compliance with those covenants. In the event that NNN violates any of these
restrictive financial covenants, it could cause the indebtedness under the
Credit Facility to be accelerated and may impair NNN's access to the debt and
equity markets and limit NNN's ability to pay dividends to its common and
preferred stockholders, each of which would likely have a material adverse
impact on NNN's financial condition and results of operations.
Mortgages Payable. As of December 31, 2019 and 2018, NNN had mortgages payable,
including unamortized premium and net of unamortized debt costs, of $12,059,000
and $12,694,000 respectively. The mortgages payable had an interest rate of
5.23% and matures July 2023 . The loan is secured by a first lien on five of the
Properties and the carrying value of the assets was $19,944,000 as of December
31, 2019 .
Notes Payable. Each of NNN's outstanding series of unsecured notes is summarized
in the table below (dollars in thousands):
Net Stated Effective Maturity
Notes(1) Issue Date Principal Discount(2) Price Rate Rate(3) Date
2022 August 2012 $ 325,000 $ 4,989 $ 320,011 3.800% 3.985% October 2022
2023 April 2013 350,000 2,594 347,406 3.300% 3.388% April 2023
2024 May 2014 350,000 707 349,293 3.900% 3.924% June 2024
2025 October 2015 400,000 964 399,036 4.000% 4.029% November 2025
2026 December 2016 350,000 3,860 346,140 3.600% 3.733% December 2026
2027 September 2017 400,000 1,628 398,372 3.500% 3.548% October 2027
2028 September 2018 400,000 2,848 397,152 4.300% 4.388% October 2028
2048 September 2018 300,000 4,239 295,761 4.800% 4.890% October 2048
(1) The proceeds from the note issuance were used to pay down outstanding
indebtedness of NNN's Credit Facility, fund future property acquisitions and
for general corporate purposes. Proceeds from the issuance of the 2028 Notes
and the 2048 Notes were also used to redeem all of the
payable that were due 2021.
(2) The note discounts are amortized to interest expense over the respective
term of each debt obligation using the effective interest method.
(3) Includes the effects of the discount at issuance.
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NNN entered into forward starting swaps which were hedging the risk of changes
in forecasted interest payments on the forecasted issuance of long-term debt.
Upon the issuance of a series of unsecured notes, NNN terminated such
derivatives as outlined in the following table (dollars in thousands):
Fair Value
Deferred In
Liability (Asset) Other
Aggregate Fair Value When Comprehensive
Notes Terminated Description Notional Amount Terminated (1) Income(2)
Four forward
2023
3,156 $ 3,141
Three forward
2024 May 2014 starting swaps 225,000 6,312 6,312
Four forward
2025 October 2015 starting swaps 300,000 13,369 13,369
Two forward starting
2026 December 2016 swaps 180,000 (13,352 ) (13,345 )
Two forward starting
2027 September 2017 swaps 250,000 7,690 7,688
Two forward starting
2028 September 2018 swaps 250,000 (4,080 ) (4,080 )
(1) The deferred liability (asset) is being amortized over the term of the
respective notes using the effective interest method.
(2) The amount reported in accumulated other comprehensive income will be
reclassified to interest expense as interest payments are made on the
related notes payable.
Each series of notes represents senior, unsecured obligations of NNN and is subordinated to all secured indebtedness of NNN. The notes are 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 note offerings, NNN incurred debt issuance costs totaling$26,932,000 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 are being amortized over the term of the respective notes using the effective interest method. In October 2018, NNN redeemed the$300,000,000 5.500% notes payable that were due inJuly 2021 . The notes were redeemed at a price equal to 100% of the principal amount, plus (i) a make-whole amount of$18,240,000 , and (ii) all accrued and unpaid interest. 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. AtDecember 31, 2019 , NNN was in compliance with those covenants. NNN's failure to comply with certain of its debt covenants could result in defaults that accelerate the payment under such debt and limit the dividends paid to NNN's common and preferred stockholders which would likely have a material adverse impact on NNN's financial condition and results of operations. In addition, these defaults could impair its access to the debt and equity markets. During the year endedDecember 31, 2019 , NNN entered into three forward starting swaps with a total notional amount of$200,000,000 to hedge the risk of changes in the interest-related cash outflows associated with the potential issuance of long-term debt. The outstanding forward swaps were designated as cash flow hedges, and as ofDecember 31, 2019 , had a fair value of$5,524,000 included in other liabilities and accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. These derivative financial instruments were still outstanding as ofDecember 31, 2019 . 34 -------------------------------------------------------------------------------- Debt and Equity Securities NNN has used, and expects to use in the future, issuances of debt and equity securities primarily to pay down its outstanding indebtedness and to finance acquisitions. InFebruary 2018 , NNN filed a shelf registration statement with the Commission which was automatically effective and permits the issuance by NNN of an indeterminate amount of debt and equity securities. A description of NNN's outstanding series of publicly held notes is found under "Debt - Notes Payable" above. NNN completed the following underwritten public offering of cumulative redeemable preferred stock that is still outstanding ("Preferred Stock Shares") (dollars in thousands, except per share data): Depositary Stock Dividend Per Earliest Dividend Shares Gross Issuance Depositary Redemption Series Rate(1) Issued Outstanding(2) Proceeds Costs(3) Share Date October Series F(4) 5.200 % October 2016 13,800,000$ 345,000 $ 10,897 $ 1.300000 2021 (1) Holders are entitled to receive, when and as authorized by the Board of Directors, cumulative preferential cash dividends. (2) Representing 1/100th of a preferred share. Series F issuance included 1,800,000 depositary shares in connection with the underwriters' over-allotment. (3) Consisting primarily of underwriting commissions and fees, rating agency fees, legal and accounting fees and printing expenses. (4) NNN used the net proceeds from the offering to repay outstanding indebtedness under its Credit Facility, fund property acquisitions and for general corporate purposes. The Preferred Stock Shares underlying the depositary shares rank senior to NNN's common stock with respect to dividend rights and rights upon liquidation, dissolution or winding up of NNN. The Preferred Stock Shares have no maturity date and will remain outstanding unless redeemed. In addition, upon a change of control, as defined in the articles supplementary fixing the rights and preferences of the Preferred Stock Shares, NNN may redeem the Preferred Stock Shares underlying the depositary shares at a redemption price of$2,500.00 per share (or$25.00 per depositary share), plus all accumulated and unpaid dividends, and in limited circumstances the holders of depositary shares may convert some or all of their Preferred Stock Shares into shares of NNN's common stock at conversion rates provided in the related articles supplementary. As ofFebruary 11, 2020 , the Series F Preferred Stock Shares were not redeemable. InOctober 2019 , NNN redeemed all outstanding depositary shares (11,500,000) representing interests in its 5.700% Series E Preferred Stock. The Series E Preferred Stock was redeemed at$25.00 per depositary share, plus all accrued and unpaid dividends through, but not including, the redemption date, for an aggregate redemption price of$25.079167 per depositary share. The excess carrying amount of preferred stock redeemed over the cash paid to redeem the preferred stock was$9,856,000 of issuance costs. Common Stock Issuances. InSeptember 2019 , NNN filed a prospectus supplement to the prospectus contained in itsFebruary 2018 shelf registration statement and issued 7,000,000 shares of common stock at a price of$56.50 per share and received net proceeds of$379,410,000 . In connection with this offering, NNN incurred stock issuance costs totaling approximately$16,090,000 , consisting primarily of underwriters' fees and commissions, legal and accounting fees and printing expenses. NNN used the net proceeds from this offering to redeem the Series E Preferred Stock, repay outstanding indebtedness under the Credit Facility, to fund property acquisitions, and for general corporate purposes. 35 -------------------------------------------------------------------------------- Dividend Reinvestment and Stock Purchase Plan. InFebruary 2018 , NNN filed a shelf registration statement with the Commission for its DRIP which permits the issuance by NNN of 10,000,000 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 the DRIP for the years endedDecember 31 (dollars in thousands): 2019 2018 2017
Shares of common stock 362,918 311,048 229,696 Net proceeds
$ 19,442 $ 13,264 $ 9,391 At-The-Market Offerings. NNN has established an ATM which allows NNN to sell shares of common stock from time to time. The following table outlines NNN's active ATM programs for the three years endedDecember 31, 2019 : 2018 ATM 2016 ATM Established date February 2018 March 2016 Termination date February 2021 February 2018 Total allowable shares 12,000,000 12,000,000
Total shares issued as of
The following table outlines the common stock issuances pursuant to NNN's ATM equity programs for the years endedDecember 31 (dollars in thousands, except per share data): 2019 2018 2017
Shares of common stock 2,344,022 7,378,163 5,821,366
Average price per share (net)
$ 125,905 $ 328,196 $ 243,822
Stock issuance costs(1)
(1) Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting fees.
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