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; •An epidemic or pandemic (such as the outbreak and worldwide spread of COVID-19), and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it, may precipitate or materially exacerbate one or more of the other risks, and may significantly disrupt NNN's tenants' ability to operate their businesses and/or pay rent to NNN or prevent NNN from operating its business in the ordinary course for an extended period; •Loss of rent from tenants would reduce NNN's cash flow; •A significant portion of NNN's annual base rent is concentrated in specific industry classifications, tenants and geographic locations; •NNN may not be able to successfully execute its acquisition or development strategies; •NNN may not be able to dispose of properties consistent with its operating strategy; •Certain provisions of NNN's leases or loan agreements may be unenforceable; •Competition from numerous other 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's business, disrupt operations and expose NNN to liabilities to tenants, employees, capital providers, and other third parties; •Future investment in international markets could subject NNN to additional risks; •NNN may suffer a loss in the event of a default of or bankruptcy of a tenant or a borrower; •Property ownership through joint ventures and partnerships could limit NNN's control of those investments; •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; 18 -------------------------------------------------------------------------------- •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; •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; and •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. 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 ofSeptember 30, 2020 , NNN owned 3,114 Properties, with an aggregate gross leasable area of approximately 32,421,000 square feet, located in 48 states, with a weighted average remaining lease term of 10.7 years. Approximately 98 percent of the Properties were leased as ofSeptember 30, 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. 19 -------------------------------------------------------------------------------- Impact of COVID-19 on NNN's Business Overview OnMarch 11, 2020 , theWorld Health Organization declared a novel strain of coronavirus ("COVID-19") a pandemic, and onMarch 13, 2020 ,the United States declared a national emergency with respect to COVID-19. As a result, the COVID-19 pandemic is negatively affecting almost every industry directly or indirectly. Although various states have lifted certain restrictions, the initial 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. As a result, these economic hardships have had a negative effect on NNN's financial results, including increased accounts receivables and related allowances. NNN has materially curtailed new property investments in 2020 in order to better gauge the impact of the economic downturn on retailers, retail real estate, capital markets and investment returns. NNN is actively working with its tenants that have been impacted by the COVID-19 pandemic. As ofOctober 28, 2020 , NNN had collected approximately 90% of rent originally due in the quarter endedSeptember 30, 2020 and 94% of rent originally due inOctober 2020 . As a result of the COVID-19 pandemic, as ofSeptember 30, 2020 , NNN entered into rent deferral lease amendments with certain tenants representing approximately 6% of the annual rent originally due for the year endingDecember 31, 2020 . On average, 2.7 months of rent was deferred with approximately 77% of deferred rent originally due in the second quarter of 2020 and 23% originally due in the third quarter of 2020. Approximately 66% of this deferred rent is due to be paid to NNN byJune 30, 2021 and 89% is due byDecember 31, 2021 . 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. Rental revenues received as ofOctober 28, 2020 as a percentage of annualized base rent for the quarter endedSeptember 30, 2020 : % of
Total Annual
Base Rent(1) % of Rent Collected
1. Convenience stores 18.2 % 99.9 %
2. Restaurants - full service 10.5 % 76.2 %
3. Automotive service 10.2 % 100.0 %
4. Restaurants - limited service 8.8 % 73.6 %
5. Family entertainment centers 6.7 % 85.2 %
6. Health and fitness 5.3 % 84.9 %
7. Theaters 4.5 % 32.9 %
8. Recreational vehicle dealers, parts and accessories 3.5 % 99.7 %
9. Automotive parts 3.1 % 100.0 %
10. Equipment rental 2.6 % 100.0 %
11. Home improvement 2.6 % 99.0 %
12. Wholesale clubs 2.6 % 99.6 %
13. Medical service providers 2.2 % 98.8 %
14. General merchandise 1.7 % 99.9 %
15. Furniture 1.7 % 96.9 %
16. Home furnishings 1.6 % 99.2 %
17. Consumer electronics 1.5 % 100.0 %
18. Travel plazas 1.5 % 100.0 %
19. Drug stores 1.5 % 100.0 %
20. Bank 1.3 % 100.0 %
Other 8.4 % 98.5 %
Total 100.0 % 90.1 %
(1) Based on annualized base rent for all leases in place as of
20
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Rent collections may continue below amounts required under the leases until
economic activity materially improves. Rent collections for the quarter and nine
months ended September 30, 2020 , may not be indicative of rent collections in
the future. Depending upon the duration of impact on tenants and the overall
economic downturn, NNN may find deferred rents difficult to collect.
A prolonged continuation of business closures or other social-distancing
practices may adversely impact NNN's tenants' ability to generate sufficient
revenues to meet financial obligations, and could force tenants to default on
their leases, or result in the bankruptcy 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 has materially curtailed new property investments in 2020 in order to better
gauge the impact of the economic downturn on retailers, retail real estate,
capital markets and investment returns. As of September 30, 2020 , NNN had
$294,860,000 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 still unfolding, 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 full extent of the effects of the economic downturn 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."
As a result of the COVID-19 pandemic, NNN has transitioned a large portion of
its employees to work remotely without any adverse impact on its ability to
continue to operate its business nor did this transition 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 economic downturn precludes any
prediction as to the ultimate adverse impact on NNN, but presents material
uncertainty and risk with respect to NNN's performance, business, financial
condition, results from operations and cash flows.
21
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Results of Operations
Property Analysis
General. The following table summarizes the Property Portfolio:
September 30, 2020 December 31, 2019 September 30, 2019
Properties Owned:
Number 3,114 3,118 3,057
Total gross leasable area (square feet) 32,421,000 32,460,000 32,209,000
Properties:
Leased and unimproved land 3,063 3,086 3,029 Percent of Properties - leased and unimproved land 98 % 99 % 99 % Weighted average remaining lease term (years) 10.7 11.2 11.2 Total gross leasable area (square feet) - leased 31,549,000 31,818,000 31,651,000
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 September
30, 2020
1. Convenience stores 18.2 % 18.2 % 17.5 %
2. Restaurants - full service 10.5 % 11.1 % 11.3 %
3. Automotive service 10.2 % 9.6 % 9.3 %
4. Restaurants - limited service 8.8 % 8.8 % 8.8 %
5. Family entertainment centers 6.7 % 6.7 % 6.8 %
6. Health and fitness 5.3 % 5.2 % 5.3 %
7. Theaters 4.5 % 4.7 % 4.8 %
8. Recreational vehicle dealers, parts and
accessories 3.5 % 3.4 % 3.5 %
9. Automotive parts 3.1 % 3.1 % 3.2 %
10. Equipment rental 2.6 % 2.6 % 2.7 %
11. Home improvement 2.6 % 2.6 % 2.6 %
12. Wholesale clubs 2.6 % 2.5 % 2.6 %
13. Medical service providers 2.2 % 2.1 % 2.2 %
14. General merchandise 1.7 % 1.8 % 1.8 %
15. Furniture 1.7 % 1.6 % 1.6 %
16. Home furnishings 1.6 % 1.7 % 1.7 %
17. Consumer electronics 1.5 % 1.5 % 1.5 %
18. Travel plazas 1.5 % 1.6 % 1.6 %
19. Drug stores 1.5 % 1.6 % 1.6 %
20. Bank 1.3 % 1.3 % 1.4 %
Other 8.4 % 8.3 % 8.2 %
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 September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Acquisitions:
Number of Properties - 27 21 131
Gross leasable area (square feet)(1) 15,000 533,000 299,000 2,645,000
Initial cash yield - 6.8 % 6.8 % 6.9 %
Total dollars invested(2) $ 3,880 $ 116,801 $ 77,971 $ 509,598
(1) Includes additional square footage from completed construction on existing
Properties.
(2) Includes dollars invested in projects under construction or tenant
improvements for each respective 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.
Property Dispositions. The following table summarizes the Properties sold by NNN
(dollars in thousands):
Nine Months Ended September
Quarter Ended September 30, 30,
2020 2019 2020 2019
Number of properties 3 13 25 43
Gross leasable area (square feet) 26,000 360,000 315,000 853,000
Net sales proceeds $ 2,414 $ 33,469 $ 42,498 $ 94,828
Net gain $ 148 $ 2,061 $ 13,637 $ 25,508
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 September 30, 2020 , total revenues decreased
as compared to the same period in 2019, but remained flat for the nine months
ended September 30, 2020 , as compared to the same period in 2019. The decrease
is primarily due to the impact of recording revenue on a cash basis from certain
tenants.
The following table summarizes NNN's revenues (dollars in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
Percent Percent
Increase Increase
2020 2019 (Decrease) 2020 2019 (Decrease)
Rental Revenues(1) $ 154,146 $ 164,207 (6.1%) $ 483,073 $ 483,981 (0.2%)
Real estate expense reimbursement
from tenants 3,719 4,017 (7.4)% 12,818 11,865 8.0%
Rental income 157,865 168,224 (6.2%) 495,891 495,846 -
Interest and other income from
real estate transactions 768 383 100.5% 1,506 1,265 19.1%
Total revenues $ 158,633 $ 168,607 (5.9%) $ 497,397 $ 497,111 0.1%
(1)Includes rental income from operating leases, earned income from direct
financing leases and percentage rent ("Rental Revenues").
Quarter and Nine Months Ended September 30, 2020 versus Quarter and Nine Months
Ended September 30, 2019
Rental Income. Rental income decreased for the quarter ended September 30, 2020 ,
but remained flat for the nine months ended September 30, 2020 , as compared to
the same periods in 2019. The decrease for the quarter ended September 30, 2020 ,
is primarily due to the write-off of $14,758,000 of receivables due to
reclassifying certain tenants as cash basis for accounting purposes during the
quarter and nine months ended September 30, 2020 .
23
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Analysis of Expenses
General. Operating expenses decreased for the quarter ended September 30, 2020 ,
as compared to the same period in 2019, primarily due to the decrease in
impairment losses recognized on real estate. Operating expenses increased for
the nine months ended September 30, 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 September 30, Nine Months Ended September 30,
2020 2019 Percent Increase (Decrease) 2020 2019 Percent Increase (Decrease)
General and administrative $ 9,419 $ 8,726 7.9% $ 28,914 $ 27,524 5.1%
Real estate 6,345 6,706 (5.4)% 20,304 20,398 (0.5)%
Depreciation and amortization 49,404 48,348 2.2% 147,528 140,769 4.8%
Leasing transaction costs - 51 (100.0)% 36 178 (79.8)%
Impairment losses - real estate,
net of recoveries 5,695 10,692 (46.7)% 33,062 21,124 56.5%
Total operating expenses $ 70,863 $ 74,523 (4.9)% $ 229,844 $ 209,993 9.5%
Interest and other income $ (74) $ (501) (85.2)% $ (345) $ (2,912) (88.2)%
Interest expense 31,924 29,948 6.6% 97,347 89,716 8.5%
Loss on early extinguishment of
debt - - - 16,679 - N/C (1)
Total other expenses $ 31,850 $ 29,447 8.2% $ 113,681 $ 86,804 31.0%
As a percentage of total revenues:
General and administrative 5.9 % 5.2 % 5.8% 5.5 %
Real estate 4.0 % 4.0 % 4.1% 4.1 %
(1) Not calculable ("N/C")
Quarter and Nine Months Ended September 30, 2020 versus Quarter and Nine Months
Ended September 30, 2019
General and Administrative. General and administrative expenses increased in
amount and as a percentage of total revenues for the quarter and nine months
ended September 30, 2020 , as compared to the same periods in 2019. The increase
is primarily attributable to an increase in compensation costs.
Real Estate. Real estate expenses decreased in amount for the quarter ended
September 30, 2020 , but remained flat for the nine months ended September 30,
2020 , as compared to the same periods in 2019. Real estate expenses remained
unchanged as a percentage of total revenues for the quarter and nine months
ended September 30, 2020 , as compared to the same periods in 2019. The decrease
is primarily attributable to the disposition of vacant properties during the
year ended December 31, 2019 and the nine months ended September 30, 2020 . The
decrease in real estate expenses was partially offset by an increase in
reimbursable expenses during the quarter and nine months ended September 30,
2020 , as compared to the same periods in 2019.
Depreciation and Amortization. Depreciation and amortization expenses
increased in amount for the quarter and nine months ended September 30, 2020 , as
compared to the same periods in 2019. The increase is primarily due to the
acquisition of 21 properties with an aggregate gross leasable area of
approximately 299,000 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
24
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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 $33,062,000 and $21,124,000 for the nine months ended
September 30, 2020 and 2019, respectively of which $5,695,000 and $10,692,000
was recorded during the quarters ended September 30, 2020 and 2019,
respectively.
Interest and Other Income. Interest and other income decreased in amount for the
quarter and nine months ended September 30, 2020 , as compared to the same
periods in 2019. The decrease is primarily due to the gain of $1,331,000 on sale
of equity investments and $1,471,000 in interest income on cash balances
recognized during the nine months ended September 30, 2019 .
Interest expense. Interest expense increased for the quarter and nine months
ended September 30, 2020 , as compared to the same periods 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 % October 2022
Interest expense for the nine months ended September 30, 2020 was also impacted
by the increase of $16,796,000 in the weighted average outstanding balance on
the Credit Facility for the nine months ended September 30, 2020 , compared to
the same period in 2019. The Credit Facility had a weighted average outstanding
balance of $25,239,000 and $8,443,000 at September 30, 2020 and 2019,
respectively. In addition, interest expense for the nine months ended September
30, 2020 , includes $2,291,000 in connection with the early redemption of the
2022 Notes.
Loss on Early Extinguishment of Debt. In March 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.
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 ofSeptember 30, 2020 , NNN has$294,860,000 of cash and cash equivalents and$900,000,000 available for borrowings under its Credit Facility. While the total impacts of the economic downturn are unknown, NNN currently expects these combined resources, in addition to the cash provided by NNN's operations to be sufficient to meet NNN's demand for funds. NNN has materially curtailed new property investments in 2020 in order to better gauge the impact of the economic downturn on retailers, retail real estate, capital markets and investment returns. (See "Impact of COVID-19 on NNN's Business"). Cash and Cash Equivalents. NNN's cash and cash equivalents includes the aggregate of cash and cash equivalents and restricted cash and cash held in escrow from the Condensed Consolidated Balance Sheets. NNN did not have restricted cash or cash held in escrow as ofSeptember 30, 2020 andDecember 31, 2019 . The table below summarizes NNN's cash flows (dollars in thousands): Nine Months Ended September 30, 2020 2019 Cash and cash equivalents: Provided by operating activities$ 348,824 $ 399,032 Used in investing activities (48,569) (409,022) Provided by (used in) financing activities (6,507) 249,411 Increase 293,748 239,421 Net cash at beginning of period 1,112 114,267 Net cash at end of period$ 294,860 $ 353,688 25
-------------------------------------------------------------------------------- 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 and nine months endedSeptember 30, 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 cash on hand or proceeds from its Credit Facility to fund the acquisition of its Properties. NNN's financing activities for the nine months endedSeptember 30, 2020 , included the following significant transactions: •$395,062,000 in net proceeds from the issuance in March of the 2.500% notes payable due inApril 2030 , •$290,459,000 in net proceeds from the issuance in March of the 3.100% notes payable due inApril 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, •$4,458,000 in net proceeds from the issuance of 121,988 shares of common stock in connection with the Dividend Reinvestment and Stock Purchase Plan ("DRIP"), •$59,752,000 in net proceeds from the issuance of 1,634,350 shares of common stock in connection with the at-the-market ("ATM") equity program, •$13,455,000 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 •$266,365,000 in dividends paid to common stockholders. Contractual Obligations and Commercial Commitments. The information in the following table summarizes NNN's contractual obligations and commercial commitments outstanding as ofSeptember 30, 2020 . The table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as ofSeptember 30, 2020 .
Expected Maturity Date (dollars in thousands)
Total 2020 2021 2022 2023 2024 Thereafter
Long-term debt(1) $ 3,261,394 $ 153 $ 630 $ 664 $ 359,947 $ 350,000 $ 2,550,000
Long-term debt - interest(2) 1,252,633 29,825 119,281 119,247 110,820 99,756 773,704
Headquarters office lease 3,655 195 788 804 821 837 210
Ground leases 8,023 141 573 582 582 601 5,544
Total contractual cash obligations
(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 seven Properties. The improvements on such Properties are estimated to be completed within 12 months. These construction commitments, atSeptember 30, 2020 , are outlined in the table below (dollars in thousands): Total commitment(1)$ 47,424 Less amount funded 36,471 Remaining commitment$ 10,953 (1) Includes land, construction costs, tenant improvements, lease costs and capitalized interest. As ofSeptember 30, 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 endedDecember 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." 26 -------------------------------------------------------------------------------- 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. 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 all rent amounts due (See "Impact of COVID-19 on NNN's Business"). As ofSeptember 30, 2020 , NNN owned 51 vacant, un-leased Properties which accounted for approximately two percent of total Properties held in the Property Portfolio. Additionally, as ofOctober 28, 2020 , approximately three percent of total Properties, and approximately three percent of aggregate gross leasable area held in the Property Portfolio, was leased to five tenants that are currently in bankruptcy under Chapter 11 of theU.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 continuation of business closures or other social-distancing practices as a result of COVID-19 may adversely impact NNN's tenants' ability to generate sufficient revenues to meet financial obligations, and could force tenants to default on their leases, or result in the bankruptcy 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. 27 --------------------------------------------------------------------------------
The following table outlines the dividends declared and paid for each issuance of NNN's stock (dollars in thousands, except per share data):
Quarter Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Series E Preferred Stock(1):
Dividends $ - $ 4,097 - 12,291
Per depositary share - 0.356250 - 1.068750
Series F Preferred Stock(2):
Dividends 4,485 4,485 13,455 13,455
Per depositary share 0.325000 0.325000 0.975000 0.975000 Common stock: Dividends 89,947 83,935 266,365 245,574 Per share 0.520 0.515 1.550 1.515
(1) The 5.700% Series E Cumulative Redeemable Preferred Stock (the "Series E Preferred Stock") was redeemed in
In
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):
September 30, Percentage December 31, Percentage
2020 of Total 2019 of Total
Line of credit payable $ - - $ 133,600 4.5 %
Mortgages payable 11,565 0.4 % 12,059 0.4 %
Notes payable 3,208,533 99.6 % 2,842,698 95.1 %
Total outstanding debt $ 3,220,098 100.0 % $ 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
(as amended by the 2020 Amendment (as defined below), the "Credit Facility") had
a weighted average outstanding balance of $25,239,000 and a weighted average
interest rate of 2.6% during the nine months ended September 30, 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. In May 2020 , NNN amended
its Credit Facility to include the addition of new terms and definitions, and to
restate certain other definitions under the former unsecured revolving credit
agreement, some of which modified the financial covenant calculations (the "2020
Amendment"). As of September 30, 2020 , there was no outstanding balance and
$900,000,000 was available for future borrowings under the Credit Facility, and
NNN was in compliance with each of the financial covenants.
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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 loss 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 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.
In March 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 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 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):
Nine Months Ended September 30,
2020 2019
Shares of common stock 121,988
309,127
Net proceeds $ 4,458 $ 16,481
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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 programs:
2020 ATM 2018 ATM
Established date August 2020 February 2018
Termination date August 2023 August 2020
Total allowable shares 17,500,000 12,000,000
Total shares issued as of
The following table outlines the common stock issuances pursuant to NNN's ATM (dollars in thousands, except per share data):
Nine Months Ended
2020 2019
Shares of common stock 1,634,350 2,344,022
Average price per share (net) $ 36.56 $ 53.73
Net proceeds $ 59,752 $ 125,946
Stock issuance costs(1) $ 1,151 $ 1,390
(1) Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting
fees.
Recent Accounting Pronouncements
Refer to Note 1 to the
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