NNN REIT, INC. 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 ofNational Retail Properties, Inc. for the year endedDecember 31, 2019 ("2019 Annual Report"). The terms "NNN" and the "Company" refer toNational Retail Properties, Inc. and all of its consolidated subsidiaries. Forward-Looking Statements The information herein contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 (the "Exchange Act"). Also, when NNN uses any of the words "anticipate," "assume," "believe," "estimate," "expect," "intend," or similar expressions, NNN is making forward-looking statements. Although management believes that the expectations reflected in such forward-looking statements are based upon present expectations and reasonable assumptions, NNN's actual results could differ materially from those set forth in the forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and NNN undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law. The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statement: • Changes in financial and economic conditions may have an adverse impact on
NNN, its tenants, and commercial real estate in general;
• Loss of rent from tenants would reduce NNN's cash flow;
• A significant portion of NNN's annual base rent is concentrated in
specific industry classifications, tenants and geographic locations;
• NNN may not be able to successfully execute its acquisition or development
strategies;
• NNN may not be able to dispose of properties consistent with its operating
strategy;
• Certain provisions of NNN's leases or loan agreements may be unenforceable;
• Competition from numerous other REITs, commercial developers, real estate
limited partnerships and other investors may impede NNN's ability to grow;
• NNN's loss of key management personnel could adversely affect performance
and the value of its securities;
• Uninsured losses may adversely affect NNN's operating results and asset
values;
• NNN's ability to fully control the management of its net-leased properties
may be limited;
• Vacant properties or bankrupt tenants could adversely affect NNN's
business or financial condition;
• NNN's failure to maintain effective internal control over financial
reporting could have a material adverse effect on its business, operating
results and the market value of NNN's securities;
• Cybersecurity risks and cyber incidents could adversely affect NNN'sbusiness, disrupt operations and expose NNN to liabilities to tenants,
employees, capital providers, and other third parties;
• Future investment in international markets could subject NNN to additional
risks.
• NNN may suffer a loss in the event of a default of or bankruptcy of a
tenant or a borrower;
• Property ownership through joint ventures and partnerships could limit
NNN's control of those investments;
• Acts of violence, terrorist attacks or war may affect the markets in which
NNN operates and NNN's results of operations;
• Changes in accounting pronouncements could adversely impact NNN's or NNN's
tenants' reported financial performance;
• NNN may be unable to obtain debt or equity capital on favorable terms, if
at all;
• The amount of debt NNN has and the restrictions imposed by that debt could
adversely affect NNN's business and financial condition;
• NNN is obligated to comply with financial and other covenants in its debt
instruments that could restrict its operating activities, and the failure
to comply with such covenants could result in defaults that accelerate the
payment of such debt;
• The market value of NNN's equity and debt securities is subject to various
factors that may cause significant fluctuations or volatility;
• NNN's ability to pay dividends in the future is subject to many factors;
• The phase-out of LIBOR could affect interest rates under NNN's variable
rate debt;
• Owning real estate and indirect interests in real estate carries inherent
risks;
• NNN's real estate investments are illiquid;
• NNN may be subject to known or unknown environmental liabilities and
hazardous materials on Properties owned by NNN;
20--------------------------------------------------------------------------------
• The cost of complying with changes in governmental laws and regulations
may adversely affect NNN's results of operations;
• NNN's failure to qualify as a REIT for federal income tax purposes could
result in significant tax liability;
• Even if NNN remains qualified as a REIT, NNN faces other tax liabilities
that reduce operating results and cash flow;
• Adverse legislative or regulatory tax changes could reduce NNN's earnings
and cash flow and the market value of NNN's securities;
• Compliance with REIT requirements, including distribution requirements,
may limit NNN's flexibility and may negatively affect NNN's operating
decisions;
• The share ownership restrictions of the Internal Revenue Code for REITs
and the 9.8% share ownership limit in NNN's charter may inhibit market
activity in NNN's shares of stock and restrict NNN's business combination
opportunities;
• Non-compliance with Title III of the Americans with Disabilities Act of
1990 could have an adverse effect on NNN's business and operating results;
and
• An epidemic or pandemic (such as the outbreak and worldwide spread of
COVID-19), and the measures that international, federal, state and localgovernments, agencies, law enforcement and/or health authorities implement
to address it, may precipitate or materially exacerbate one or more of the
above-mentioned risks, and may significantly disrupt or prevent NNN from
operating its business in the ordinary course for an extended period.
Additional information related to these risks and uncertainties are included in "Item 1A. Risk Factors" of NNN's 2019 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, 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"). As ofMarch 31, 2020 , NNN owned 3,125 Properties, with an aggregate gross leasable area of approximately 32,500,000 square feet, located in 48 states, with a weighted average remaining lease term of 11.1 years. Approximately 99 percent of the Properties were leased as ofMarch 31, 2020 . 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. Impact of COVID-19 on NNN's Business Overview A novel strain of coronavirus was reported to have surfaced inWuhan, China inDecember 2019 , and has since spread globally, including to every state inthe United States . OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a 21 -------------------------------------------------------------------------------- pandemic, and onMarch 13, 2020 ,the United States declared a national emergency. As a result, the COVID-19 pandemic is negatively affecting almost every industry directly or indirectly. The actions taken by the government to mitigate the spread of COVID-19 by ordering closure of many businesses and ordering residents to generally stay at home has resulted in the loss of revenue for many of NNN's tenants and challenged their ability to pay rent. NNN expects these economic hardships to have a negative effect on its financial results particularly beginning the quarter endingJune 30, 2020 . Generally, NNN leases do not allow tenants to withhold rent as a result of such closings or reduced operations by tenants. NNN is actively working with its tenants that have been impacted by the mandated closures or other social-distancing guidelines resulting from the COVID-19 pandemic to understand the implications that the COVID-19 has had on the tenants' operations. As ofApril 29, 2020 , NNN has collected approximately 52% of annualized base rent originally due inApril 2020 . As ofApril 29, 2020 , certain tenants, representing approximately 37% of annualized base rent, have requested adjustments to their lease terms, primarily consisting of short-term rent deferrals of 30 to 90 days. NNN is negotiating terms with these tenants that would require the deferred rental revenues to be paid at a later time in the lease term, typically over 3 to 18 months beginning in fourth quarter 2020. Rent collections may continue below amounts required under the leases until economic activity materially improves. April rent collections and rent relief requests to-date may not be indicative of rent collections and requests in the future. Depending upon the duration of impact on tenants and the overall economic downturn resulting from the COVID-19 pandemic, NNN may find deferred rents difficult to collect. A prolonged imposition of mandated closures or other social-distancing guidelines may adversely impact NNN's tenants' ability to generate sufficient revenues, and could force tenants to default on their leases, or result in the bankruptcy or insolvency of tenants, which would diminish the rental revenue NNN receives under its leases. Additionally, an increase in the number of vacant properties would increase NNN's real estate expenses, including expenses associated with ongoing maintenance and repairs, utilities, property taxes and property and liability insurance. NNN is currently deferring material new property investments until there is more visibility on how and when the economy and capital markets might begin to recover from the COVID-19 pandemic. As ofMarch 31, 2020 , NNN has$217,383,000 of cash and cash equivalents and$900,000,000 available for borrowings under its unsecured revolving credit facility. While the impacts of COVID-19 are unknown, NNN currently expects these combined resources, in addition to the cash provided by NNN's operations to be sufficient to meet NNN's demand for funds. Business Continuity The extent of the effects of COVID-19 on NNN's business, results of operations, cash flows, and growth prospects is highly uncertain and will ultimately depend on future developments, none of which can be predicted with any certainty. See "Item 1A. Risk Factors." NNN was able to transition a large portion of its employees to work remotely and does not anticipate any adverse impact on its ability to continue to operate its business nor have any material adverse impact on NNN's financial reporting systems, internal controls over financial reporting or disclosure controls and procedures. The rapid development and fluidity of the pandemic precludes any prediction as to the ultimate adverse impact on NNN. Nevertheless, COVID-19 presents material uncertainty and risk with respect to NNN's performance, business or financial condition, results from operations and cash flows. 22 -------------------------------------------------------------------------------- Results of Operations Property Analysis General. The following table summarizes the Property Portfolio: March 31, 2020 December 31, 2019 March 31, 2019 Properties Owned: Number 3,125 3,118 2,984 Total gross leasable area (square feet) 32,500,000 32,460,000
30,698,000
Properties:
Leased and unimproved land 3,088 3,086 2,931 Percent of Properties - leased and unimproved land 99 % 99 % 98 % Weighted average remaining lease term (years) 11.1 11.2 11.4 Total gross leasable area (square feet) - leased 31,910,000 31,818,000 29,618,000
The following table summarizes the diversification of the Property Portfolio based on the top 10 lines of trade:
% of Annual Base Rent (1)
Lines of Trade March 31, 2020 December 31, 2019 March 31, 2019
1. Convenience stores 18.1 % 18.2 % 17.8 %
2. Restaurants - full service 11.0 % 11.1 % 11.3 %
3. Automotive service 9.9 % 9.6 % 8.9 %
4. Restaurants - limited service 8.7 % 8.8 % 9.0 %
5. Family entertainment centers 6.7 % 6.7 % 7.1 %
6. Health and fitness 5.2 % 5.2 % 5.5 %
7. Theaters 4.7 % 4.7 % 4.9 %8. Recreational vehicle dealers, parts
and accessories 3.4 % 3.4 % 3.5 %
9. Automotive parts 3.1 % 3.1 % 3.4 %
10. Equipment rental 2.6 % 2.6 % 1.9 %
Other 26.6 % 26.6 % 26.7 %
100.0 % 100.0 % 100.0 %
(1) Based on annualized base rent for all leases in place for each respective period.
Property Acquisitions. The following table summarizes the Property acquisitions
(dollars in thousands):
Quarter Ended March 31,
2020 2019
Acquisitions:
Number of Properties 21 33Gross leasable area (square feet) 217,000 434,000 Initial cash yield
6.9 % 7.0 %
Total dollars invested(1)
(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") (see "Debt - Line of
Credit Payable") or by issuing its debt or equity securities in the capital
markets.
23
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Property Dispositions. The following table summarizes the Properties sold by NNN
(dollars in thousands):
Quarter Ended March 31,
2020 2019
Number of properties 14 17
Gross leasable area (square feet) 176,000 180,000
Net sales proceeds $ 36,266 $ 19,389
Net gain $ 12,770 $ 10,445
NNN typically uses the proceeds from a Property disposition to either pay down
the Credit Facility or reinvest in real estate.
Analysis of Revenue
General. During the quarter ended March 31, 2020 , total revenues increased, as
compared to the same period in 2019, primarily due to the income generated from
Properties acquired during the year ended December 31, 2019 and quarter ended
March 31, 2020 (See "Results of Operations - Property Analysis - Property
Acquisitions").
The following table summarizes NNN's revenues (dollars in thousands):
Quarter Ended March 31,
Percent
Increase
2020 2019 (Decrease)
Rental Revenues(1) $ 169,300 $ 159,033 6.5%Real estate expense reimbursement from tenants 5,247 3,993
31.4%
Rental income 174,547 163,026
7.1%
Interest and other income from real estate transactions 516 686 (24.8%) Total revenues$ 175,063 $ 163,712 6.9%
(1) Includes rental income from operating leases, earned income from direct
financing leases and percentage rent ("Rental Revenues").
Quarter EndedMarch 31, 2020 versus Quarter EndedMarch 31, 2019 Rental Income. Rental income increased for the quarter endedMarch 31, 2020 , as compared to the same period in 2019. The increase for the quarter endedMarch 31, 2020 , is primarily due to a partial year of rental income received as a result of the acquisition of 21 properties with aggregate gross leasable area of approximately 217,000 square feet during 2020 and a full year of rental income received as a result of the acquisition of 210 properties with a gross leasable area of approximately 3,164,000 square feet in 2019. 24
-------------------------------------------------------------------------------- Analysis of Expenses General. Operating expenses increased for the quarter endedMarch 31, 2020 , as compared to the same period in 2019, primarily due to the increase in depreciation expense and impairment losses recognized on real estate. The following table summarizes NNN's expenses (dollars in thousands): Quarter Ended March 31, Percent Increase 2020 2019 (Decrease) General and administrative$ 10,100 $ 9,521 6.1% Real estate 7,635 7,093 7.6% Depreciation and amortization 49,188 46,180 6.5% Leasing transaction costs 36 52 (30.8)% Impairment losses - real estate, net of recoveries 5,513 3,245 69.9% Total operating expenses$ 72,472 $ 66,091 9.7% Interest and other income$ (164 ) $ (1,924 ) (91.5)% Interest expense 33,670 29,957 12.4% Loss on early extinguishment of debt 16,679 - N/C Total other expenses$ 50,185 $ 28,033 79.0% As a percentage of total revenues: General and administrative 5.8 % 5.8 % Real estate 4.4 % 4.3 % (1) Not calculable ("N/C") Quarter EndedMarch 31, 2020 versus Quarter EndedMarch 31, 2019 General and Administrative. General and administrative expenses increased in amount but remained flat as a percentage of total revenues for the quarter endedMarch 31, 2020 , as compared to the same period in 2019. The increase in general and administrative expenses for quarter endedMarch 31, 2020 , is primarily attributable to an increase in compensation costs. Real Estate. Real estate expenses increased in amount and as a percentage of total revenues for the quarter endedMarch 31, 2020 , as compared to the same period in 2019. The increase is primarily attributable to the increase in reimbursable expenses and partially offset by the decrease in expenses from certain properties that became vacant during the quarter endedMarch 31, 2020 , and during the year endedDecember 31, 2019 . Depreciation and Amortization. Depreciation and amortization expenses increased in amount for the quarter endedMarch 31, 2020 , as compared to the same period in 2019. The increase is primarily due to the acquisition of 21 properties with an aggregate gross leasable area of approximately 217,000 square feet in 2020 and 210 properties with an aggregate gross leasable area of approximately 3,164,000 square feet during 2019. Impairment Losses - real estate, 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.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, which provide for cash flows over this term. NNN intends to hold these assets for the long-term, therefore, a temporary change in cash flows due to COVID-19 alone would not be an indicator of impairment. NNN recognized real estate impairments, net of recoveries of$5,513,000 and$3,245,000 for the quarter endedMarch 31, 2020 and 2019, respectively. 25 -------------------------------------------------------------------------------- Interest and Other Income. Interest and other income decreased in amount for the quarter endedMarch 31, 2020 , as compared to the same period in 2019. The decrease is primarily due to the gain of$1,331,000 on sale of equity investments during the quarter endedMarch 31, 2019 . Interest expense. Interest expense increased for the quarter endedMarch 31, 2020 , as compared to the same period in 2019. The following represents the primary changes in debt that have impacted interest expense (dollars in thousands): Transaction Effective Date Principal Stated Interest Rate Original Maturity Issuance 2030 Notes March 2020$ 400,000 2.500 % April 2030 Issuance 2050 Notes March 2020 300,000 3.100 % April 2050 Redemption 2022 Notes March 2020 (325,000 )
3.800 %
Interest expense for the quarter endedMarch 31, 2020 , was also impacted by the increase of$75,996,000 in the weighted average outstanding balance on the Credit Facility. The Credit Facility had no weighted average outstanding balance atMarch 31, 2019 . In addition, interest expense for the quarter endedMarch 31, 2020 , includes$2,291,000 in connection with the early redemption of the 2022 Notes. Loss on Early Extinguishment of Debt. OnMarch 20, 2020 , NNN redeemed the$325,000,000 3.800% notes payable dueOctober 2022 . The notes were redeemed at a price equal to 100% of the principal amount, plus (i) a make-whole amount of$16,679,000 , and (ii) accrued and unpaid interest.
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. As ofMarch 31, 2020 , NNN has$217,383,000 of cash and cash equivalents and$900,000,000 available for borrowings under its Credit Facility. While the impacts of COVID-19 are unknown, NNN currently expects these combined resources, in addition to the cash provided by NNN's operations to be sufficient to meet NNN's demand for funds. NNN is currently deferring material new property investments until there is more visibility on how and when the economy and capital markets might begin to recover from the COVID-19 pandemic (see "Impact of COVID-19 on NNN's Business"). Cash and Cash Equivalents. NNN's cash and cash equivalents includes the aggregate of cash and cash equivalents and restricted cash and cash held in escrow from the Condensed Consolidated Balance Sheets. NNN did not have restricted cash or cash held in escrow as ofMarch 31, 2020 andDecember 31, 2019 . The table below summarizes NNN's cash flows (dollars in thousands): Quarter Ended March 31, 2020 2019 Cash and cash equivalents: Provided by operating activities$ 128,084 $ 143,376 Used in investing activities (30,654 ) (93,030 )
Provided by (used in) financing activities 118,841 (84,092 ) Increase (decrease)
216,271 (33,746 )
Net cash at beginning of period 1,112 114,267
Net cash at end of period $ 217,383 $ 80,521
Cash provided by operating activities represents cash received primarily from
Rental Revenue and interest income less cash used for general and administrative
expenses. NNN's cash flow from operating activities has been sufficient to pay
the distributions for each period presented. The change in cash provided by
operations for the quarter ended March 31, 2020 and 2019, 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 the
acquisitions and dispositions of Properties. NNN typically uses proceeds from
its Credit Facility to fund the acquisition of its Properties.
26
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NNN's financing activities for the quarter ended March 31, 2020 , included the
following significant transactions:
• $395,062,000 in net proceeds from the issuance in March of the
2.500% notes payable due in April 2030,
• $290,459,000 in net proceeds from the issuance in March of the
3.100% notes payable due in April 2050,
• $325,000,000 payment for the early redemption of the 3.800% notes
payable in March,
• $16,679,000 payment of the make-whole amount from the early
redemption of the 3.800% notes payable in March,
• $696,000 in net proceeds from the issuance of 12,528 shares of
common stock in connection with the Dividend Reinvestment and Stock
Purchase Plan ("DRIP"),
• $4,485,000 in dividends paid to holders of the depositary shares of
NNN's 5.200% Series F Cumulative Redeemable Preferred Stock (the
"Series F Preferred Stock"), and
•
Contractual Obligations and Commercial Commitments. The information in the following table summarizes NNN's contractual obligations and commercial commitments outstanding as ofMarch 31, 2020 . The table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as ofMarch 31, 2020 . Expected Maturity Date
(dollars in thousands)
Total 2020 2021 2022 2023 2024 Thereafter
Long-term debt(1) $ 3,261,690 $ 449 $ 630 $ 664 $ 359,947 $ 350,000 $ 2,550,000
Long-term debt -
interest(2) 1,312,292 89,484 119,281 119,247 110,820 99,756 773,704 Headquarters office lease 4,043 583 788 804 821 837 210 Ground leases 8,305 423 573 582 582 601 5,544 Total contractual cash obligations$ 4,586,330 $ 90,939 $ 121,272 $
121,297
(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 17 Properties. The improvements on such Properties are
estimated to be completed within 12 months. These construction commitments, at
March 31, 2020 , are outlined in the table below (dollars in thousands):
Total commitment(1) $ 74,525
Less amount funded 56,055
Remaining commitment $ 18,470
(1) Includes land, construction costs, tenant improvements, lease costs and capitalized
interest.
As of March 31, 2020 , 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 tables above and
previously disclosed under Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations included in NNN's Annual Report on
Form 10-K for the year ended December 31, 2019 . In addition to items reflected
in the tables, 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 that the costs associated with these Properties, NNN's
vacant Properties or those Properties that become vacant will also be met with
funds from operations and working capital. NNN may be required to borrow under
its credit facility or use other sources of capital in the event of significant
capital expenditures.
27
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The lost revenues and increased property expenses resulting from vacant
Properties or uncollectability 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. NNN currently
expects a short-term decrease in cash from operations as its tenants are
impacted by the pandemic and, while contractually obligated, some have not paid
rent during April 2020 (see "Impact of COVID-19 on NNN's Business"). As of
March 31, 2020 , NNN owned 37 vacant, un-leased Properties which accounted for
approximately one percent of total Properties held in the Property Portfolio.
Additionally, as of April 29, 2020 , approximately one percent of total
Properties, and approximately one percent of aggregate gross leasable area held
in the Property Portfolio, was leased to four 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.
A prolonged imposition of mandated closures or other social-distancing
guidelines as a result of COVID-19 may adversely impact NNN's tenants' ability
to generate sufficient revenues, and could force tenants to default on their
leases, or result in the bankruptcy or insolvency of tenants, which would
diminish the rental revenue NNN receives under its leases. The rapid development
and fluidity of the pandemic precludes any prediction as to the ultimate adverse
impact on NNN (see "Impact of COVID-19 on NNN's Business").
Dividends. NNN has made an election to be taxed as a REIT under Sections 856
through 860 of the Code, as amended, 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 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, consistent with its policy of retaining
sufficient cash for reserves and working capital purposes and maintaining its
status as a REIT, is to distribute a substantial portion of its funds available
from operations to its stockholders in the form of dividends.
The following table outlines the dividends declared and paid for each issuance
of NNN's stock (dollars in thousands, except per share data):
Quarter Ended March 31,
2020 2019
Series E Preferred Stock(1):
Dividends $ - $ 4,097
Per depositary share - 0.356250
Series F Preferred Stock(2):
Dividends 4,485 4,485
Per depositary share 0.325000 0.325000
Common stock:
Dividends 88,148 80,566
Per share 0.515 0.500
(1) The 5.700% Series E Cumulative Redeemable Preferred Stock (the "Series E Preferred Stock")
was redeemed in October 2019 . The dividends paid in 2019 include accumulated and unpaid
dividends through, but not including, the redemption date.
(2) The Series F Preferred Stock has no maturity date and will remain outstanding unless
redeemed by NNN. The earliest redemption date for the Series F Preferred Stock is October 2021 .
In
28
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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 (dollars in
thousands):
Percentage Percentage
March 31, 2020 of Total December 31, 2019 of Total
Line of credit payable $ - - $ 133,600 4.5 %
Mortgages payable 11,895 0.4 % 12,059 0.4 %
Notes payable 3,206,563 99.6 % 2,842,698 95.1 %
Total outstanding debt $ 3,218,458 100.0 % $ 2,988,357 100.0 %
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.
Line of Credit Payable. NNN's $900,000,000 unsecured revolving credit facility
(the "Credit Facility") had a weighted average outstanding balance of
$75,996,000 and a weighted average interest rate of 2.5% during the quarter
ended March 31, 2020 . The Credit Facility matures January 2022 , unless the
Company exercises its option to extend maturity to January 2023 . 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 which permits NNN
to increase the facility size up to $1,600,000,000 , subject to lender approval.
As of March 31, 2020 , there was no outstanding balance and $900,000,000 was
available for future borrowings under the Credit Facility.
Notes Payable. In February 2020 , NNN filed a prospectus supplement to the
prospectus contained in its February 2018 shelf registration statement and,
subsequently, in March 2020 , issued $400,000,000 aggregate principal amount of
2.500% notes due April 2030 (the "2030 Notes") and $300,000,000 aggregate
principal amount of 3.100% notes due April 2050 (the "2050 Notes" and, together
with the 2030 Notes, the "Notes").
The 2030 Notes were sold at a discount with an aggregate purchase price of
$398,712,000 with interest payable semi-annually commencing on October 15, 2020 .
The discount of $1,288,000 is being amortized to interest expense over the term
of the notes using the effective interest method. The effective interest rate
for the 2030 Notes after accounting for the note discount is 2.536%. NNN
previously entered into three forward starting swaps with an aggregate notional
amount of $200,000,000 . Upon issuance of the 2030 Notes, NNN terminated the
forward starting swaps resulting in a loss of $13,141,000 , which was deferred in
other comprehensive income. The gain is being amortized to interest expense over
the term of the 2030 Notes using the effective interest method.
The 2050 Notes were sold at a discount with an aggregate purchase price of
$293,934,000 with interest payable semi-annually commencing on October 15, 2020 .
The discount of $6,066,000 is being amortized to interest expense over the term
of the notes using the effective interest method. The effective interest rate
for the 2050 Notes after accounting for the note discount is 3.205%.
The Notes are senior unsecured obligations of NNN and are subordinated to all
secured indebtedness and to the indebtedness and other liabilities of NNN's
subsidiaries. Additionally, the Notes are each redeemable at NNN's option, in
whole or part anytime, for an amount equal to (i) the sum of the outstanding
principal balance of the notes being redeemed plus accrued interest thereon to
the redemption date, and (ii) the make-whole amount, if any, as defined in the
supplemental indenture dated February 18, 2020 , relating to the Notes.
NNN received approximately $395,062,000 and $290,459,000 of net proceeds in
connection with the issuance of the 2030 Notes and the 2050 Notes, respectively,
after incurring debt issuance costs consisting primarily of underwriting
discounts and commissions, legal and accounting fees, rating agency fees and
printing expenses, totaling $3,650,000 and $3,475,000 for the 2030 Notes and the
2050 Notes, respectively. NNN used the net proceeds from the issuance of the
Notes to repay all of the
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outstanding indebtedness under its credit facility, redeem all of its 3.800%
notes payable that were due 2022, fund future property acquisitions and for
general corporate purposes.
On March 20, 2020, NNN redeemed the $325,000,000 3.800% notes payable due
October 2022 . The notes were redeemed at a price equal to 100% of the principal
amount, plus (i) a make-whole amount of $16,679,000 , and (ii) accrued and unpaid
interest.
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.
Securities Offerings. In February 2018 , 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 Annual Report on Form 10-K for the year ended December 31,
2019 .
Dividend Reinvestment and Stock Purchase Plan. In February 2018 , NNN filed a
shelf registration statement which was automatically effective with the
Commission for its DRIP, which permits the issuance by NNN of up to 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
NNN's DRIP (dollars in thousands):
Quarter Ended March 31,
2020 2019
Shares of common stock 12,528 101,180
Net proceeds $ 696 $ 5,279
At-The-Market Offerings. NNN 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:
2018 ATM
Established date February 2018
Termination date February 2021
Total allowable shares 12,000,000
Total shares issued as of
There were no common stock issuances pursuant to NNN's ATM equity program for
the quarter ended
Recent Accounting Pronouncements
Refer to Note 1 to the
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