NNN REIT(NNN) - 2020 Q3 - Quarterly Report

Part I - Financial Information This section presents the company's financial information, including statements, management's discussion, market risk disclosures, and controls Financial Statements This section presents the unaudited condensed consolidated financial statements, reflecting initial COVID-19 impacts on revenue recognition, rent deferrals, and impairment losses Condensed Consolidated Balance Sheets Total assets increased to $7.63 billion, driven by cash, while liabilities rose to $3.35 billion due to notes payable, and equity slightly decreased to $4.29 billion Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2020 (unaudited) | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $7,634,697 | $7,434,867 | | Cash and cash equivalents | $294,860 | $1,112 | | Real estate portfolio, net | $7,167,992 | $7,287,374 | | Accrued rental income, net | $61,754 | $28,897 | | Total Liabilities | $3,347,488 | $3,103,185 | | Line of credit payable | $— | $133,600 | | Notes payable, net | $3,208,533 | $2,842,698 | | Total Equity | $4,287,209 | $4,331,682 | Condensed Consolidated Statements of Income and Comprehensive Income Net earnings attributable to common stockholders decreased to $51.6 million for Q3 2020 and $154.1 million for the nine months, impacted by lower rental income and higher impairment losses Income Statement Highlights (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Rental Income | $157,865 | $168,224 | $495,891 | $495,846 | | Earnings from operations | $87,918 | $96,145 | $281,190 | $312,626 | | Net earnings attributable to common stockholders | $51,584 | $58,111 | $154,057 | $199,648 | | Diluted EPS | $0.30 | $0.35 | $0.89 | $1.22 | - Impairment losses on real estate were $5.7 million for Q3 2020, a decrease from $10.7 million in Q3 2019, while for the nine-month period, impairments increased to $33.1 million in 2020 from $21.1 million in 2019[13] - A loss on early extinguishment of debt of $16.7 million was recognized in the first nine months of 2020, with no comparable loss in 2019[13] Condensed Consolidated Statements of Cash Flows Net cash from operating activities decreased to $348.8 million, investing activities significantly decreased to $48.6 million, and financing activities used $6.5 million Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $348,824 | $399,032 | | Net cash used in investing activities | ($48,569) | ($409,022) | | Net cash provided by (used in) financing activities | ($6,507) | $249,411 | | Net increase in cash | $293,748 | $239,421 | - Additions to real estate accounted for using the operating method decreased substantially to $89.4 million in the first nine months of 2020, compared to $505.7 million in the same period of 2019[26] - Financing activities in 2020 included $692.6 million in proceeds from new notes payable and the repayment of $325.0 million of other notes, compared to no similar activity in 2019, while proceeds from common stock issuance dropped to $65.4 million from $539.3 million in the prior year period[29] Notes to Condensed Consolidated Financial Statements Notes detail COVID-19 impacts, including rent deferrals, $14.8 million receivable write-offs, $700 million new notes, and subsequent rent collections of 90% for Q3 and 94% for October - Due to the COVID-19 pandemic, NNN entered into rent deferral lease amendments with tenants representing approximately 6% of annual rent, with an average of 2.7 months of rent deferred and 89% due to be repaid by December 31, 2021[66][67] - The company wrote off $14.8 million of receivables and accrued rent during Q3 2020 after reclassifying certain tenants to a cash basis for accounting purposes, with approximately 4% of properties leased to tenants on a cash basis as of September 30, 2020[48][49] - In March 2020, NNN issued $400 million of 2.500% notes due 2030 and $300 million of 3.100% notes due 2050, concurrently redeeming its $325 million 3.800% notes due 2022 and incurring a $16.7 million make-whole payment[79][84] - As of October 28, 2020, NNN had collected approximately 90% of rent originally due for Q3 2020 and 94% of rent due for October 2020[98] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses COVID-19's impact on tenants and financials, leading to rent deferrals, curtailed investments, and a 5.9% Q3 revenue decrease, while strengthening liquidity with $700 million in new notes - The company materially curtailed new property investments in 2020 to assess the impact of the economic downturn, with total investment for the first nine months of 2020 at $78.0 million, compared to $509.6 million in the same period of 2019[111][121] Rent Collection by Top Lines of Trade (Q3 2020) | Line of Trade | % of Total Annual Base Rent | % 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% | | Total | 100.0% | 90.1% | - Rental income for Q3 2020 decreased primarily due to a $14.8 million write-off of receivables from reclassifying certain tenants to a cash basis for accounting[123] - As of September 30, 2020, the company had $294.9 million in cash and no outstanding balance on its $900 million credit facility, positioning it with strong liquidity[132][149] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, mitigated by no outstanding variable-rate credit facility balance, with a hypothetical 1% rate increase having minimal impact on interest expense - As of September 30, 2020, NNN had no outstanding balance on its variable-rate Credit Facility, minimizing its exposure to interest rate fluctuations[163] Fair Value of Debt Obligations (in thousands) | Debt Type | Fair Value at Sep 30, 2020 | Fair Value at Dec 31, 2019 | | :--- | :--- | :--- | | Mortgages Payable | $11,608 | $12,116 | | Unsecured Debt | $3,437,058 | $3,074,538 | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[165] - No material changes to the company's internal control over financial reporting occurred during the most recent fiscal quarter[166] Part II - Other Information This section provides other required information, including legal proceedings, updated risk factors related to COVID-19, and various disclosures Legal Proceedings No material legal proceedings are reported for the period - Not applicable[169] Risk Factors A new risk factor details the material adverse effects of the COVID-19 pandemic, including tenant defaults, capital access disruptions, and economic decline, with uncertain full impact - 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 cash flows[170] - Specific risks cited include tenant inability to meet obligations, potential defaults or bankruptcies, reduced access to capital markets, and a decline in demand for real estate transactions[174] - The company acknowledges that the full impact of the pandemic is highly uncertain and depends on future developments, including the duration and severity of the outbreak and related containment measures[173] Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable for the reporting period - Not applicable[176] Defaults Upon Senior Securities This item is not applicable for the reporting period - Not applicable[177] Mine Safety Disclosures This item is not applicable for the reporting period - Not applicable[177] Other Information This item is not applicable for the reporting period - Not applicable[177] Exhibits This section lists exhibits filed, including CEO and CFO certifications and the Interactive Data File (XBRL) - Exhibits filed include CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906, and the Interactive Data File (XBRL)[177]