NNN REIT(NNN) - 2020 Q2 - Quarterly Report

Part I - Financial Information Financial Statements The unaudited financial statements reflect the initial impact of the COVID-19 pandemic on the company's performance Condensed Consolidated Balance Sheets Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $7,632,928 | $7,434,867 | | Real estate portfolio, net | $7,221,418 | $7,289,048 | | Cash and cash equivalents | $224,560 | $1,112 | | Total Liabilities | $3,322,128 | $3,103,185 | | Line of credit payable | $0 | $133,600 | | Notes payable, net | $3,207,545 | $2,842,698 | | Total Equity | $4,310,800 | $4,331,682 | - Total assets increased to $7.63 billion, driven by a significant rise in cash and cash equivalents to $224.6 million from $1.1 million, and an increase in notes payable[9] Condensed Consolidated Statements of Income and Comprehensive Income Income Statement Highlights (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $163,701 | $164,792 | $338,764 | $328,504 | | Impairment losses – real estate | $21,854 | $7,187 | $27,367 | $10,432 | | Net earnings attributable to NNN | $46,265 | $78,678 | $111,443 | $158,701 | | Diluted EPS | $0.24 | $0.43 | $0.60 | $0.87 | - Net earnings for Q2 2020 decreased significantly to $46.3 million from $78.7 million in Q2 2019, primarily due to a large increase in real estate impairment losses, which rose to $21.9 million from $7.2 million year-over-year[12] Condensed Consolidated Statements of Cash Flows Cash Flow Summary - Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $187,717 | $235,341 | | Net cash used in investing activities | ($41,472) | ($317,836) | | Net cash provided by (used in) financing activities | $77,203 | ($29,563) | | Net increase (decrease) in cash | $223,448 | ($112,058) | - Cash from operations decreased in the first six months of 2020 compared to 2019, while cash used in investing activities decreased significantly due to lower additions to real estate[26][29] - Financing activities provided cash in 2020, driven by new debt issuance, a reversal from 2019[26][29] Notes to Condensed Consolidated Financial Statements - The COVID-19 pandemic negatively affected tenants' ability to pay rent, leading NNN to negotiate short-term rent deferrals of 30 to 90 days[37][38] - In Q2 2020, NNN entered into rent deferral agreements with tenants representing approximately 21% of rent due for the quarter[68][69] - The company recognized significant real estate impairment losses of $21.9 million for Q2 2020 and $27.4 million for the six months ended June 30, 2020, a substantial increase from the prior year periods[77] - In March 2020, NNN issued $400 million of 2.500% notes and $300 million of 3.100% notes, using proceeds to redeem $325 million of 3.800% notes, resulting in a $16.7 million loss on early extinguishment of debt[80][85] Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes the COVID-19 pandemic's impact on operations, liquidity, and financing activities Impact of COVID-19 on NNN's Business - As of July 30, 2020, NNN had collected approximately 69% of rent due for Q2 2020 and 84% of rent originally due in July 2020, indicating a severe impact on collections from the pandemic[116] Q2 2020 Rent Collection by Line of Trade (as of July 30, 2020) | Line of Trade | % of Total Annual Base Rent | % of Rent Collected | | :--- | :--- | :--- | | Convenience stores | 18.1% | 99.0% | | Restaurants – full service | 10.6% | 40.5% | | Automotive service | 10.2% | 53.8% | | Family entertainment centers | 6.7% | 8.6% | | Theaters | 4.7% | 2.2% | | Total | 100.0% | 68.9% | - Due to economic uncertainty, NNN is deferring material new property investments until there is more visibility on economic and capital market recovery[122] Results of Operations - Property acquisitions slowed significantly, with only 21 properties acquired in the first six months of 2020 for $74.1 million, compared to 104 properties for $392.8 million in the same period of 2019[128] - Total revenues for Q2 2020 were $163.7 million, a slight decrease of 0.7% from Q2 2019; for the six-month period, revenues increased 3.1% to $338.8 million[130] - Operating expenses for Q2 2020 increased 24.7% year-over-year, primarily due to a 204.1% increase in impairment losses on real estate[132] - In March 2020, the company redeemed its $325 million 3.800% notes due 2022, incurring a make-whole payment of $16.7 million, recorded as a loss on early extinguishment of debt[138] Liquidity and Capital Resources - As of June 30, 2020, NNN maintained a strong liquidity position with $224.6 million in cash and full availability of its $900 million unsecured revolving credit facility[139] - Significant financing activities included issuing $700 million in new notes, redeeming $325 million in existing notes, and raising $52.0 million through its ATM equity program[141][145] - As of June 30, 2020, approximately 2% of total properties were leased to six tenants currently in Chapter 11 bankruptcy[149] - In July 2020, NNN declared a quarterly dividend of $0.52 per common share, an increase from the previous quarter, continuing its history of dividend payments[155] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is interest rate fluctuations on its debt - NNN's primary market risk exposure is to interest rate changes, which the company aims to limit by using a mix of fixed and variable rate debt[171] - As of June 30, 2020, the $900 million variable-rate Credit Facility had no outstanding balance, minimizing near-term exposure to rising interest rates[172] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of the quarter's end - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[176] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[177] Part II - Other Information Legal Proceedings The company reports no material legal proceedings - Not applicable; the company reports no material pending legal proceedings[180] Risk Factors This section details new risks posed by the COVID-19 pandemic on tenants, capital, and financials - A new risk factor was added to address the material and adverse effects of the COVID-19 pandemic on the company's business, financial condition, and results of operations[181] - Key risks from the pandemic include tenant defaults and bankruptcies, inability to access capital markets on favorable terms, and a significant reduction in cash flows that could impact dividend payments[183][185] Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities - Not applicable; the company did not have any unregistered sales of equity securities during the period[187] Exhibits This section lists filed exhibits, including CEO/CFO certifications and material contracts - The report includes exhibits such as CEO/CFO certifications, an amendment to the credit agreement, and interactive data files for financial statements[190][192]