NNN REIT Inc (NNN) 2002 Q1 法說會逐字稿

Good morning Ladies and Gentlemen and welcome to Commercial Net Lease Realty, First Quarter earnings conference call.

At this time I would like to inform you that this conference is being recorded for rebroadcast and that all participants are in a listen-only mode.

At the request of the company we will open up the conference for questions and answers following the presentation.

I will now turn the conference over to Mr. James Seneff, Chairman and CEO. Please go ahead Sir.JAMES SENEFF, JR.: Good Morning everyone and welcome. I have with me today Gary Ralston our President and Chief Operating Officer and Kevin Habicht, our Chief Financial Officer.

We're gonna make a formal presentation and then we'll open it up

for Q&A. First, we're gonna have Kevin walk through the numbers.Kevin.

Thank you, Jim.

As the press release indicated, FFO was reported at 14 million 161 thousand dollars, or 35 cents for the First Quarter of 2002. That compares with 36 cents for the the same period last year and compares with 35 cents for the immediately preceding Fourth Quarter.

These results were in line with our projections and consensus estimates. For the First Quarter of 2002, total revenues were 24.4 million, which represented a three and a half million dollar or 17% increase from year-ago levels. The changes in revenue from prior year amounts were primarily as a result of the tenant vacancies which began in the third Quarter of '01.

Offset with the closing of the Captec merger in December of last year. The First Quarter's rental revenue did include $438,000 of percentage rent.

The integration of the 135 properties acquired in the Captec merger has gone smoothly at the end of the First Quarter, 89% of the company's properties were leased. Interest and other income consisted of primarily $142,000 of property and asset management fees and 2 million 519 thousand dollars of interest and other income, mostly from our unconsolidated subsidiary. These interest and other income amounts were very consistent with Fourth Quarter 2001 amounts. G&A expense was $2,264,000 for the Quarter.

While this amount is on budget, it does represent a $400,000 increase from First Quarter of '01. The increase is largely related to costs associated with our increased leasing efforts as well as some miscellaneous general increases. Going forward, we continue to target G&A to be in the 8% of revenue range. Interest expense did increase to $6.6 million from $6.3 million for the same period last year. That was largely a result of the higher debt balances primarily from the Captec acquisition offset by lower interest rates on the bank line. The net income from our unconsolidated entities was $640 thousand for the First Quarter of 2002, that compares with a $1.3 million loss a year ago and net income of $958,000 in the Fourth Quarter of 2001.

We paired those losses in this line item in each Quarter of '01, broke into the black in the Fourth Quarter and are pleased to have continued profitability in the First Quarter of this year. We have mentioned before, the gains on sales primarily drive this line item and there's some choppiness from Quarter to Quarter but we are obviously pleased with the general improvement and believe we have better visibility on the profitability of this line item.

As we previously discussed, releasing properties has become a very high priority for the company over the last few months and Gary's gonna give an update on the leasing activity in just a minute. In regard to FFO for 2002 based primarily on our re-leasing assumptions and a number of other factors, we currently see 2002 FFO per share in the 145 / 146 range which is unchanged from the guidance we have previously given.

Obviously the projections are based on a number of factors and uncertainties as discussed in our public filing. Moving to the balance sheet, there was very little change from year-end 2001, we had sold three properties for $3.6 million in the First Quarter, total debt outstanding as of March 31 was $445 million and that was up $3 million from year-end December 2001. Of the $445 million of debt, $36 million was mortgage debt and only $89 million or 9% of the company's total assets are encumbered by mortgages, leaving 91% of the company's assets unencumbered. Total debt to total assets was 42% on a gross book basis. EBITDA interest coverage for the First Quarter of 2002 was 3.4 times. Which is up significantly from the 2.9 times in the Fourth Quarter as a result of lower debt leverage.

We continue to make a real improvement in this ratio, this year particularly in light of the property vacancies that hit us last year.

The fixed charge coverage was 2.7 times the First Quarter of '02 which compares for 2.6 for the full year last year.

And, lastly we are very pleased to report that Moody's has moved our outlook from negative to stable during the First Quarter.

That's all the prepared remarks. I'll turn it back to you, Jim, for now.JAMES SENEFF, JR.: Thank you, Kevin. Gary will talk about the operations and portfolio. Gary.

Thank you, Jim.

Our Triple Net Lease portfolio continues to generate a stable and predictable stream of income. We always think it's appropriate to reflect and highlight the advantages of Net Lease. The tenants are responsible for paying insurance, real estate taxes and real estate operating expenses, thereby mitigating the exposure that the company has in these areas.

As of the end of the Quarter the portfolio consisted of 360 properties representing approximately 6.8 billion square feet, leased to a hundred retailers in 32 lines of trade.

As part of our risk mitigation strategy, we are committed to diversification.

Geographically, by individual tenant and by line of trade. Geographically, using the regional allocations, we have 94 properties in the Southeast representing 25% of base rent.

94 properties in the South representing 22% of base rent.

49 properties in the Northeast representing 18% of base rent. 37 properties in the West accounting for 15% of base rent. 58 properties in the Midwest amounting to 14% of base rent.

And 29 properties in the Rocky Mountain Region accounting for 7% of base rent.

We are well diversified, having 100 different tenants now in the portfolio. We have only one tenant that is greater than 10%.

That's Eckerd. Eckerd Corporation, a wholly owned subsidiary of JC Penney is headquartered in Clearwater, Florida and is one of America's largest retail drug chains, operating approximately 2,640 drugstores in 20 states. The 2001 sales of Eckerd Corporation was 13.8 billion. They continue to make fine progress in their space.

The company maintains either a number one or number two share in its major markets. We had three tenants who are just slightly more than 5% each.

Best Buy, Barnes & Noble and OfficeMax. Our line of trade diversification, 32 lines of trade, is based on now using the NAAX numbers, but it's made very little adjustment from where we stood at year-end.

Pharmacies and drugstores are 14%, full-line restaurants, 11%, Radio, television and other electronic stores are 10%.

Bookstores are 9%. Sporting goods stores, 9%.

Office supplies and stationery stores, 8%. Limited service restaurants, 7%. Furniture stores, 5%. Supermarkets and other grocery stores, 5%.

Home furnishings stores, 3%, and from that point we drop to less than 1 1/2%.

Again, strong diversification. Kevin mentioned the disposition of properties. We actually sold three properties in the First Quarter, all of these were part of the portfolio strategy to strengthen the credit standing of the company.

One property was vacant and was effectively disposed of.

Two were disposed of to reduce concentrations due to credit. Obviously re-leasing is a critical part of our business and we believe over the past nine years we have consistently demonstrated our ability to lease space and we are very focused at present.

One of our top priorities this year is to lease vacant space and return the portfolio to an occupancy level in the range of 95%.

During the First Quarter we leased or sold 95,500 square feet of vacation retail space.

Subsequently we re-tenanted one property representing 50,000 square feet bringing current occupancy to 97%. In addition, we have approximately 330,000 square feet under letter of intent for lease or sale.

I believe we are very well positioned to achieve our occupancy objective. As Kevin noted, we are pleased with the continued profitable operations of our unconsolidated affiliate and we see consistent profitable performance through 2002.JAMES SENEFF, JR.: Thanks, Gary.

And now we would like to open it up for questions.

The question and answer session will begin now.

If you're using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press one followed by four on your touchtone phone.

If you would like to withdraw your question, please press one followed by three. Your questions will be taken in the order they are received. Please stand by for your first

question. Our first question comes from Jeff Donovan. Sir, your line is live.

Good morning, guys. I was curious what you were seeing in the acquisition market right now in terms of pricing on properties as well as the volume of transactions.[JAMES SENEFF, JR.] Actually, it's a good time, Jeff.

There is -- there are a lot of people still on the sidelines waiting for definitive word from FASBY on synthetic leases, special purpose entities, and so we have been trying to position ourselves to take advantage of that.

We think it could result in some slightly higher Cap rates

and some opportunities to acquire higher credit tenants at what we consider to be good thresholds.

Elsewhere, in, at least the land of retail real estate, I know, Net Lease real estate is somewhat different, the news is that products are scarce and bidding property values up.

I guess the two-part question.

Is there an opportunity that you guys see maybe to even sell properties of tenanted by retailers with maybe weaker credits or even sell vacant properties?

Is there an opportunity to take advantage of some sort of [INAUDIBLE]?[GARY RALSTON]:We have been endeavoring to capitalize on that. Obviously it's a key component of the 1031 exchange unit and it's also the method of disposing of of things that we build in the "built to suit' merchant building operation.

As I, we noted, we actually disposed of three properties that way in the First Quarter.

There is more stability in the Net Lease sector, Jeff, than exists in broader-based retail.

And that is a blessing often in times like this. The opportunity we say is more related to changes in the way some of America's leading corporations treat fixed assets on their balance sheet and off their balance sheet, more importantly.

So we think the second half of

the year will have some very exciting opportunities.

One of 1031 sales give us the best price as opposed selling the portfolio to someone that has [INAUDIBLE] that's where you'll get your highest price.

Right. Ok, thanks, guys.

Thank you. Our next question comes from Ross Nussbaum. Sir, your line is live.

Hi.

Good morning. Can you talk a little bit about the profitability inside of the "build to suit" business and roughly I know it's a lumpy line item Quarter to Quarter, but what can we expect for the rest of this year?[KEVIN HEBICHT] Yeah.

The -- it is lumpy, and it's

very [INAUDIBLE]when the timing of dispositions, but for the year we are in about the $2 million range for after-tax profitability in the subsidiary.

Ok. And you think, again, it could be lumpy in terms of where it hits quarterly?[KEVIN HEBICHT]: Yeh, it is.

Okay.

The only other question I had was what were straight-line rents for the quarter?[KEVIN HEBICHT]:Straight line rents were $332,000 for the Quarter and we actually took some additional reserves. We reserve on a regular basis but we have been trying to bump that up a little bit, and the capital lease, one of the unusual items, is URL's we have a direct financing leases which have the exact opposite impact on our cash flow and GAAP reporting of revenues as straight-line rents meaning we actually collect more in cash from tenants in rent than we report because of the GAAP accounting rules and that's actually a $518,000 number for the Quarter so the net between the straight line rents of 332 and the capital lease direct financing lease adjustment of $518 is $186,000.00 to our good, if you will.

Now, correct me if I'm wrong, but I thought straight line rents were running higher last year and I thought they were going to increase because of the Euro Captec market?[KEVIN HABICHT] Yeah, they were.

This Quarter is a but of an anomaly, if I can say that right, and I think going forward you're gonna see that number creep a little higher.

And so, like I said, this was a little bit unusual.

So you'll see straight line rents bounce back probably more to what you have become

accustomed to, and that would be in the $700,000.00 to $800,000.00 range on a quarterly basis rather than the three we just reported.

That's all I had. Thank you.

Thank you. Our next question comes from Scott Campbell. Sir, your line is live.

Thanks, Gary.

Can you give us a little bit of color on the range service merchandise portfolio, where you stand on that? And also, I guess just to clarify, I think you mentioned 7 million

or so of additional construction activity in the Quarter. What type of tenants are you looking at with with regard to that product still in the build to suit?

As I mentioned the service merchandise portfolio continues to be just a wind-down for us.

This Quarter as a result of a bit of leasing that we picked up.

It was a nominal impact.

You gotta find that Kevin? Go ahead.

Let me give you the number, the breakdown for service merchandise.

The -- your other question as to new property that we have under construction that we are investing in for this Quarter included a grocery store that's part of the A Hole chain and two drugstores, one Eckerd, and one Walgreens.

And how many stores do we still have in that portfolio?

We have eight.

Out of an original 21, is that right?

We had -- we turned a couple around very quickly. Originally we had 26.

26. Okay.

Our investment -- the -- our investment base in the -- in those assets today is down to just between $2 million and $3 million.

Okay. And then just a follow-up question. I think you had mentioned on two of the asset sales you reduced some credit concentrations as a part of those sales?

Yeah.

Can you elaborate on that a little bit, and, I guess, are there any other -- any other concerns in the portfolio as you look to when the sell assets?

Let me address the A part and I'll let Kevin address the B part.

One of the assets was obviously vacant was part of the Captec portfolio and frankly we didn't assign a value to it as part of our analytic.

From an economic standpoint we thought that was good, extracting value where none was originally anticipated. One of the other assets was leased to something called, [INAUDIBLE] Boxley Enterprises, which was a local tenant, and a releasing activity and we felt that disposing of it advantageously would be good. The other was a Good Guys store in Clackamas,Oregon, and we sold that to help reduce our concentration to Good Guys.

I think Kevin did make the comment earlier, but the exit cap rate on the properties was approximately 9 1/2%, which we felt, considering the tenancy, was good.

Yeah, really good.

The driver for the dispositions in the first Quarter was portfolio pruning. We just think it improves the quality of the portfolio by letting some of these go. As it relates to credit, the one we have mentioned in the past was just Good Guys, which is a West Coast consumer electronics retailer. They seem to have -- are doing a little bit better in terms of comp store sales.

There's a small equity infusion a about a month ago, but, you know, it's a very competitive environment

they're in so that's one we're kind of watching.

Great. Thanks, guys.

Once again, if you do have a question or comment, please press one followed by four on your touchtone telephones at this time.

[pause]

If there are no further questions, I will turn the conference back to Mr. Seneff to conclude.JAMES SENEFF, JR.: Thanks, everyone, for joining us today. Have a good day and a good weekend.

Ladies and Gentlemen, that concludes the conference for today.

If you would like to access the digital rebroadcast of this call, you may do so by dialing 1-800-428-6051.

With pin number 239735. Rebroadcast will be available until May 7, 2002. Thank you all for participating and have a good weekend.