NNN REIT(NNN) - 2024 Q1 - Quarterly Report

Part I – Financial Information Item 1. Financial Statements (unaudited) This section presents NNN REIT's unaudited condensed consolidated financial statements for Q1 2024, including balance sheets, income statements, equity, cash flows, and detailed notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (dollars in thousands) | Item | March 31, 2024 | December 31, 2023 | Change | % Change | | :--------------------------------------- | :------------- | :---------------- | :----- | :------- | | Assets | | | | | | Real estate portfolio, net | $8,586,856 | $8,535,851 | $51,005 | 0.60% | | Cash and cash equivalents | $1,128 | $1,189 | $(61) | -5.13% | | Restricted cash and cash held in escrow | $— | $3,966 | $(3,966) | -100.00% | | Total assets | $8,705,742 | $8,661,968 | $43,774 | 0.51% | | Liabilities | | | | | | Line of credit payable | $116,200 | $132,000 | $(15,800) | -11.97% | | Notes payable, net | $4,229,933 | $4,228,544 | $1,389 | 0.03% | | Accrued interest payable | $75,487 | $34,374 | $41,113 | 119.61% | | Total liabilities | $4,530,884 | $4,504,511 | $26,373 | 0.59% | | Equity | | | | | | Total equity | $4,174,858 | $4,157,457 | $17,401 | 0.42% | | Total liabilities and equity | $8,705,742 | $8,661,968 | $43,774 | 0.51% | Condensed Consolidated Statements of Income and Comprehensive Income Condensed Consolidated Statements of Income and Comprehensive Income (dollars in thousands, except per share data) | Item | Quarter Ended March 31, 2024 | Quarter Ended March 31, 2023 | Change | % Change | | :--------------------------------------- | :--------------------------- | :--------------------------- | :----- | :------- | | Rental income | $214,825 | $203,630 | $11,195 | 5.50% | | Total revenues | $215,407 | $204,108 | $11,299 | 5.54% | | Total operating expenses | $81,907 | $81,383 | $524 | 0.64% | | Gain on disposition of real estate | $4,821 | $6,300 | $(1,479) | -23.48% | | Earnings from operations | $138,321 | $129,025 | $9,296 | 7.20% | | Interest expense | $44,069 | $38,891 | $5,178 | 13.31% | | Net earnings | $94,371 | $90,167 | $4,204 | 4.66% | | Basic net earnings per share | $0.52 | $0.50 | $0.02 | 4.00% | | Diluted net earnings per share | $0.52 | $0.50 | $0.02 | 4.00% | | Total comprehensive income | $95,003 | $90,774 | $4,229 | 4.66% | Condensed Consolidated Statements of Equity Condensed Consolidated Statements of Equity Highlights (dollars in thousands) | Item | Quarter Ended March 31, 2024 | Quarter Ended March 31, 2023 | | :--------------------------------------- | :--------------------------- | :--------------------------- | | Balances at December 31 | $4,157,457 | $4,123,502 | | Net earnings | $94,371 | $90,167 | | Dividends declared and paid | $(101,948) | $(98,677) | | Issuance of common stock (ATM equity program) | $20,925 | $16,368 | | Issuance of common stock (DRIP & director comp) | $352 | $367 | | Amortization of deferred compensation | $3,247 | $2,832 | | Amortization of interest rate hedges | $632 | $607 | | Balances at March 31 | $4,174,858 | $4,134,872 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (dollars in thousands) | Cash Flow Activity | Quarter Ended March 31, 2024 | Quarter Ended March 31, 2023 | Change | | :--------------------------------------- | :--------------------------- | :--------------------------- | :----- | | Net cash provided by operating activities | $190,715 | $180,822 | $9,893 | | Net cash used in investing activities | $(97,732) | $(142,346) | $44,614 | | Net cash used in financing activities | $(97,010) | $(39,928) | $(57,082) | | Net decrease in cash, cash equivalents and restricted cash | $(4,027) | $(1,452) | $(2,575) | | Cash, cash equivalents and restricted cash at end of period | $1,128 | $5,326 | $(4,198) | - Cash flows from operating activities increased by $9.9 million, primarily due to changes in revenues and expenses[20][23][112][113] - Investing activities used less cash, mainly due to lower additions to real estate[20][23][112][113] - Financing activities used significantly more cash, driven by increased net repayments of the Credit Facility and higher dividend payments[20][23][112][113] Notes to Condensed Consolidated Financial Statements Note 1 – Organization and Summary of Significant Accounting Policies NNN REIT operates as a fully integrated REIT, detailing its organization, significant accounting policies, and key financial practices - NNN REIT, Inc. operates as a fully integrated REIT, focusing on acquiring, owning, investing in, and developing properties leased primarily to retail tenants under long-term net leases[26][27] Property Portfolio Snapshot (March 31, 2024) | Metric | Value | | :-------------------------------- | :---------- | | Total Properties | 3,546 | | Gross leasable area (square feet) | 36,137,000 | | States of operation | 49 | | Weighted average remaining lease term | 10.0 years | - The company recorded $1,859,000 in capitalized interest during the development period for the quarter ended March 31, 2024, a significant increase from $405,000 in the prior year period[32] - NNN reclassified $444,000 of outstanding receivables and accrued rent to cash basis for accounting purposes in Q1 2024, compared to $232,000 in Q1 2023, indicating a higher amount of uncollectible rent in the current period[42] Cash Basis Tenants as of March 31 | Metric | 2024 | 2023 | | :-------------------------------- | :--- | :--- | | Number of tenants | 10 | 10 | | As a percent of Total Properties | 3.5% | 5.0% | | As a percent of Total annual base rent | 5.1% | 7.1% | | As a percent of Total gross leasable area | 4.9% | 6.7% | - Real estate held for sale increased significantly to $22,239,000 (five properties) at March 31, 2024, from $4,573,000 (one property) at December 31, 2023, indicating a strategic increase in planned dispositions[44] - NNN estimates an additional $1,980,000 will be reclassified as an increase in interest expense over the next 12 months from previously terminated interest rate hedges[76] Note 2 – Real Estate This note details NNN's real estate portfolio composition, accounting, lease structures, dispositions, construction commitments, and impairment losses Real Estate Portfolio (dollars in thousands) | Item | March 31, 2024 | December 31, 2023 | | :--------------------------------------- | :------------- | :---------------- | | Land and improvements | $2,888,657 | $2,878,400 | | Buildings and improvements | $7,459,462 | $7,368,873 | | Total real estate (gross) | $10,348,474 | $10,247,628 | | Less accumulated depreciation and amortization | $(1,913,861) | $(1,863,451) | | Work in progress and improvements | $127,025 | $144,068 | | Classified as held for sale | $22,239 | $4,573 | | Total real estate portfolio, net | $8,586,856 | $8,535,851 | Rental Income Breakdown (dollars in thousands) | Item | Quarter Ended March 31, 2024 | Quarter Ended March 31, 2023 | | :--------------------------------------- | :--------------------------- | :--------------------------- | | Rental income from operating leases | $209,084 | $198,183 | | Earned income from direct financing leases | $119 | $144 | | Percentage rent | $888 | $763 | | Real estate expense reimbursement from tenants | $4,734 | $4,540 | | Total rental income | $214,825 | $203,630 | Real Estate Dispositions (dollars in thousands) | Item | Quarter Ended March 31, 2024 | Quarter Ended March 31, 2023 | | :--------------------------------------- | :--------------------------- | :--------------------------- | | Number of Sold Properties | 6 | 6 | | Net Gain on disposition of real estate | $4,821 | $6,300 | Real Estate Impairments (dollars in thousands) | Item | Quarter Ended March 31, 2024 | Quarter Ended March 31, 2023 | | :--------------------------------------- | :--------------------------- | :--------------------------- | | Total real estate impairments, net of recoveries | $1,204 | $2,640 | | Number of Properties (Occupied) | 3 | 1 | | Number of Properties (Vacant) | — | 3 | - NNN has committed to fund construction on 39 properties with a remaining commitment of $117,104,000 as of March 31, 2024, indicating ongoing development activities[71] Note 3 – Line of Credit Payable NNN's $1.1 billion revolving credit facility had a weighted average outstanding balance of $116.1 million and an interest rate of 6.26% for Q1 2024. The facility matures in June 2025, with extension options, and includes an accordion feature to increase size up to $2 billion. NNN was in compliance with all financial covenants Credit Facility Details (Quarter Ended March 31, 2024) | Metric | Value | | :--------------------------------------- | :---------------- | | Total facility size | $1,100,000,000 | | Weighted average outstanding balance | $116,067,000 | | Weighted average interest rate | 6.26% | | Outstanding balance as of March 31, 2024 | $116,200,000 | | Available for future borrowings | $983,800,000 | | Maturity date | June 2025 (with extension options) | Note 4 – Notes Payable and Derivatives NNN had no derivative financial instruments outstanding as of March 31, 2024. The company reclassified $632,000 from accumulated other comprehensive income (loss) to interest expense for Q1 2024, related to previously terminated interest rate hedges, and estimates an additional $1,980,000 will be reclassified over the next 12 months - NNN reclassified $632,000 from accumulated other comprehensive income (loss) to interest expense for the quarter ended March 31, 2024, related to previously terminated interest rate hedges[76] - An estimated $1,980,000 will be reclassified over the next 12 months[76] - NNN does not use derivatives for trading or speculative purposes and had no derivative financial instruments outstanding at March 31, 2024[77] Note 5 – Stockholders' Equity NNN has a Universal Shelf Registration Statement for various securities and operates an At-The-Market (ATM) equity program, issuing 500,000 shares for $20.8 million net proceeds in Q1 2024. The Dividend Reinvestment and Stock Purchase Plan (DRIP) issued 19,494 shares for $709,000 net proceeds. Dividends declared and paid were $0.5650 per share, totaling $102.7 million for the quarter ATM Equity Program Issuances (dollars in thousands, except per share data) | Item | Quarter Ended March 31, 2024 | Quarter Ended March 31, 2023 | | :--------------------------------------- | :--------------------------- | :--------------------------- | | Shares of common stock | 500,000 | 349,809 | | Average price per share (net) | $41.61 | $45.95 | | Net proceeds | $20,806 | $16,074 | | Stock issuance costs | $119 | $294 | DRIP Issuances (dollars in thousands) | Item | Quarter Ended March 31, 2024 | Quarter Ended March 31, 2023 | | :--------------------------------------- | :--------------------------- | :--------------------------- | | Shares of common stock | 19,494 | 17,760 | | Net proceeds | $709 | $822 | Dividends Declared and Paid (dollars in thousands, except per share data) | Item | Quarter Ended March 31, 2024 | Quarter Ended March 31, 2023 | | :--------------------------------------- | :--------------------------- | :--------------------------- | | Dividends | $102,684 | $99,401 | | Per share | $0.5650 | $0.5500 | Note 6 – Fair Value of Financial Instruments The carrying value of NNN's Credit Facility approximates its fair value. As of March 31, 2024, the fair value of NNN's publicly traded notes payable was $3,762,576,000, based on Level 1 quoted market prices Fair Value of Notes Payable (dollars in thousands) | Date | Fair Value | | :--------------------------------------- | :------------- | | March 31, 2024 | $3,762,576 | | December 31, 2023 | $3,801,367 | Note 7 – Subsequent Events In April 2024, NNN amended its Credit Facility, increasing borrowing capacity from $1.1 billion to $1.2 billion and extending the maturity date from June 2025 to April 2028, with options to extend to April 2029 - In April 2024, NNN amended its Credit Facility, increasing borrowing capacity from $1.1 billion to $1.2 billion and extending the maturity date from June 2025 to April 2028, with options to extend to April 2029[84] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses NNN's financial condition, operating performance, property portfolio, revenues, expenses, liquidity, capital resources, and critical accounting estimates Forward-Looking Statements - The report contains forward-looking statements, and actual results may differ materially due to various risks and uncertainties, including changes in economic conditions, tenant performance, market competition, and regulatory compliance[86][87][89] Overview - NNN is a REIT focused on acquiring, owning, investing in, and developing properties leased primarily to retail tenants under long-term net leases[90] Property Portfolio Overview (March 31, 2024) | Metric | Value | | :-------------------------------- | :---------- | | Total Properties owned | 3,546 | | States of operation | 49 | | Aggregate gross leasable area | 36,137,000 sq ft | | Weighted average remaining lease term | 10.0 years | | Occupancy rate | ~99% | - NNN maintains diversification by tenant, geography, and line of trade, with significant concentrations in restaurant (17.1%), automotive service (16.3%), and convenience store (16.2%) sectors, and geographically in the southeast (26.5%) and south (22.9%) United States[95] Results of Operations Property Analysis NNN's property portfolio grew to 3,546 properties with 36.1 million square feet of gross leasable area as of March 31, 2024, maintaining a 99% occupancy rate and a 10.0-year weighted average remaining lease term. The company acquired 20 properties for $124.5 million at an 8.0% cap rate and disposed of 6 properties for $18.5 million net proceeds, realizing a $4.8 million net gain Property Portfolio Summary | Metric | March 31, 2024 | December 31, 2023 | March 31, 2023 | | :--------------------------------------- | :------------- | :---------------- | :------------- | | Properties Owned (Number) | 3,546 | 3,532 | 3,449 | | Total gross leasable area (sq ft) | 36,137,000 | 35,966,000 | 35,251,000 | | Percent of Properties – leased | 99% | 99% | 99% | | Weighted average remaining lease term (years) | 10.0 | 10.1 | 10.3 | | Total annualized base rent | $831,010,000 | $818,749,000 | $781,909,000 | Property Acquisitions (dollars in thousands) | Metric | Quarter Ended March 31, 2024 | Quarter Ended March 31, 2023 | | :--------------------------------------- | :--------------------------- | :--------------------------- | | Number of Properties | 20 | 43 | | Gross leasable area (sq ft) | 284,000 | 275,000 | | Cap rate | 8.0% | 7.0% | | Total dollars invested | $124,492 | $156,244 | Property Dispositions (dollars in thousands) | Metric | Quarter Ended March 31, 2024 | Quarter Ended March 31, 2023 | | :--------------------------------------- | :--------------------------- | :--------------------------- | | Number of properties | 6 | 6 | | Gross leasable area (sq ft) | 113,000 | 16,000 | | Net sales proceeds | $18,531 | $11,925 | | Net gain on disposition of real estate | $4,821 | $6,300 | | Cap rate | 6.4% | 6.6% | Analysis of Revenues Total revenues increased by 5.5% to $215.4 million for the quarter ended March 31, 2024, primarily driven by a 5.5% increase in rental income to $214.8 million, largely due to recent property acquisitions Revenue Analysis (dollars in thousands) | Item | Quarter Ended March 31, 2024 | Quarter Ended March 31, 2023 | Percent Increase | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------------- | | Rental Revenues | $210,091 | $199,090 | 5.5% | | Real estate expense reimbursement | $4,734 | $4,540 | 4.3% | | Rental income | $214,825 | $203,630 | 5.5% | | Interest and other income from real estate transactions | $582 | $478 | 21.8% | | Total revenues | $215,407 | $204,108 | 5.5% | - The increase in rental income is primarily attributed to rental revenues from NNN's recent Property acquisitions[105] Analysis of Expenses Total operating expenses increased slightly by 0.6% to $81.9 million, while total other expenses rose by 13.1% to $43.95 million, mainly due to a 13.3% increase in interest expense. Impairment losses on real estate decreased significantly by 54.4% to $1.2 million Expense Analysis (dollars in thousands) | Item | Quarter Ended March 31, 2024 | Quarter Ended March 31, 2023 | Percent Change | | :--------------------------------------- | :--------------------------- | :--------------------------- | :------------- | | General and administrative | $12,584 | $12,251 | 2.7% | | Real estate | $7,154 | $6,846 | 4.5% | | Depreciation and amortization | $60,615 | $59,148 | 2.5% | | Impairment losses – real estate, net of recoveries | $1,204 | $2,640 | (54.4)% | | Total operating expenses | $81,907 | $81,383 | 0.6% | | Interest expense | $44,069 | $38,891 | 13.3% | | Total other expenses | $43,950 | $38,858 | 13.1% | - Interest expense increased by 13.3% primarily due to the issuance of $500 million aggregate principal amount of 5.600% notes due October 2033[108] Liquidity and Capital Resources Cash Flows NNN's cash and cash equivalents decreased to $1.1 million at March 31, 2024. Operating activities provided $190.7 million, investing activities used $97.7 million, and financing activities used $97.0 million. The net decrease in cash, cash equivalents, and restricted cash was $4.0 million Cash Flow Summary (dollars in thousands) | Activity | Quarter Ended March 31, 2024 | Quarter Ended March 31, 2023 | | :--------------------------------------- | :--------------------------- | :--------------------------- | | Provided by operating activities | $190,715 | $180,822 | | Used in investing activities | $(97,732) | $(142,346) | | Used in financing activities | $(97,010) | $(39,928) | | Net decrease | $(4,027) | $(1,452) | | Net cash at end of period | $1,128 | $5,326 | - Financing activities for Q1 2024 included $15.8 million in net repayments of the Credit Facility, $20.8 million from ATM equity program, $0.7 million from DRIP, and $102.7 million in common stock dividends[113] Material Cash Requirements NNN's material cash requirements include long-term debt maturities of $4.3 billion, interest on long-term debt of $1.9 billion, and $117.1 million in remaining construction commitments. The company anticipates meeting these obligations through operating cash, current capital resources, its Credit Facility, debt/equity financings, and asset dispositions Material Cash Requirements (dollars in thousands) as of March 31, 2024 | Obligation | Total | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | | :--------------------------------------- | :---------- | :----- | :----- | :----- | :----- | :----- | :---------- | | Long-term debt (principal) | $4,300,000 | $350,000 | $400,000 | $350,000 | $400,000 | $400,000 | $2,400,000 | | Long-term debt – interest | $1,918,308 | $115,906 | $148,750 | $134,225 | $119,233 | $104,567 | $1,295,627 | | Credit Facility | $116,200 | $— | $116,200 | $— | $— | $— | $— | | Headquarters office lease | $9,897 | $631 | $210 | $981 | $1,005 | $1,030 | $6,040 | | Total contractual cash obligations | $6,344,405 | $466,537 | $665,160 | $485,206 | $520,238 | $505,597 | $3,701,667 | Property Construction Commitments (dollars in thousands) as of March 31, 2024 | Item | Amount | | :--------------------------------------- | :------- | | Total commitment | $320,410 | | Less amount funded | $(203,306) | | Remaining commitment | $117,104 | - As of March 31, 2024, NNN owned 22 vacant, un-leased properties, accounting for less than one percent of total properties and aggregate gross leasable area[120] Capital Structure Total Outstanding Debt (dollars in thousands) | Item | March 31, 2024 | Percentage of Total | December 31, 2023 | Percentage of Total | | :--------------------------------------- | :------------- | :------------------ | :---------------- | :------------------ | | Line of credit payable | $116,200 | 2.7% | $132,000 | 3.0% | | Notes payable | $4,229,933 | 97.3% | $4,228,544 | 97.0% | | Total outstanding debt | $4,346,133 | 100.0% | $4,360,544 | 100.0% | - In April 2024, NNN amended its Credit Facility, increasing borrowing capacity from $1.1 billion to $1.2 billion and extending the maturity date from June 2025 to April 2028, with options to extend to April 2029[124] Common Stock Issuances via ATM (dollars in thousands, except per share data) | Item | Quarter Ended March 31, 2024 | Quarter Ended March 31, 2023 | | :--------------------------------------- | :--------------------------- | :--------------------------- | | Shares of common stock | 500,000 | 349,809 | | Average price per share (net) | $41.61 | $45.95 | | Net proceeds | $20,806 | $16,074 | Common Stock Issuances via DRIP (dollars in thousands) | Item | Quarter Ended March 31, 2024 | Quarter Ended March 31, 2023 | | :--------------------------------------- | :--------------------------- | :--------------------------- | | Shares of common stock | 19,494 | 17,760 | | Net proceeds | $709 | $822 | Critical Accounting Estimates - NNN's critical accounting estimates involve management's judgments and assumptions, particularly regarding real estate acquisitions, asset recoverability, and lease payment collectability[132] - No material changes to these policies occurred during the quarter[132] Item 3. Quantitative and Qualitative Disclosures About Market Risk NNN is exposed to interest rate risk from its variable rate Credit Facility and fixed rate long-term debt. The company manages this risk by borrowing at both fixed and variable rates and periodically using derivatives, though no derivatives were outstanding as of March 31, 2024. A one percent increase in variable rate debt interest would have increased interest expense by less than one percent for the quarter - NNN is exposed to interest rate risk primarily from its variable rate Credit Facility and fixed rate long-term debt[133] - The company's objective is to limit the impact of interest rate changes and reduce borrowing costs[133] Debt Obligations and Market Risk (dollars in thousands) as of March 31, 2024 | Year | Variable Rate Debt (Credit Facility) | Weighted Average Interest Rate | Fixed Rate Debt (Unsecured Debt) | Effective Interest Rate | | :--------------------------------------- | :--------------------------------------- | :----------------------------- | :------------------------------- | :---------------------- | | 2024 | $— | — | $350,000 | 3.92% | | 2025 | $116,200 | 6.26% | $400,000 | 4.03% | | 2026 | $— | — | $350,000 | 3.73% | | 2027 | $— | — | $400,000 | 3.55% | | 2028 | $— | — | $400,000 | 4.39% | | Thereafter | $— | — | $2,400,000 | 3.92% | | Total | $116,200 | 6.26% | $4,300,000 | 3.93% | | Fair Value (March 31, 2024) | $116,200 | | $3,762,576 | | | Fair Value (December 31, 2023) | $132,000 | | $3,801,367 | | - If interest rates on NNN's variable rate debt increased by one percent, interest expense would have increased by less than one percent for the quarter ended March 31, 2024[135] Item 4. Controls and Procedures NNN's management, including its Chief Executive Officer, Chief Financial Officer, and Chief Accounting and Technology Officer, concluded that the company's disclosure controls and procedures were effective as of March 31, 2024. There were no material changes in internal control over financial reporting during the most recent fiscal quarter - NNN's Chief Officers concluded that the design and operation of the company's disclosure controls and procedures were effective as of March 31, 2024[138] - There were no material changes in NNN's internal control over financial reporting during the most recent fiscal quarter[139] Part II – Other Information Item 1. Legal Proceedings This section states that there are no legal proceedings applicable to NNN REIT, Inc - Not applicable[141] Item 1A. Risk Factors This section indicates that there were no material changes to the risk factors previously disclosed in NNN's Annual Report on Form 10-K for the year ended December 31, 2023 - There were no material changes in NNN's risk factors disclosed in Item 1A. Risk Factors in NNN's Annual Report on Form 10-K for the year ended December 31, 2023[141] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there are no unregistered sales of equity securities and use of proceeds applicable to NNN REIT, Inc - Not applicable[143] Item 3. Defaults Upon Senior Securities This section states that there are no defaults upon senior securities applicable to NNN REIT, Inc - Not applicable[143] Item 4. Mine Safety Disclosures This section states that there are no mine safety disclosures applicable to NNN REIT, Inc - Not applicable[143] Item 5. Other Information This section states that there is no other information applicable to NNN REIT, Inc - Not applicable[143] Item 6. Exhibits This section lists the exhibits filed with the SEC as part of the report, including the Third Amended and Restated Credit Agreement, Section 302 and 906 Certifications from the CEO and CFO, and Interactive Data Files (Inline XBRL) - Key exhibits include the Third Amended and Restated Credit Agreement (dated April 16, 2024), Section 302 Certifications from the CEO and CFO, Section 906 Certifications from the CEO and CFO, and Interactive Data Files (Inline XBRL) for financial statements[143] Signatures The report was duly signed on May 1, 2024, by Stephen A. Horn, Jr., Chief Executive Officer, President and Director, and Kevin B. Habicht, Chief Financial Officer, Executive Vice President and Director - The report was signed on May 1, 2024, by Stephen A. Horn, Jr. (CEO, President, and Director) and Kevin B. Habicht (CFO, Executive Vice President, and Director)[147][148]