NNN REIT Inc (NNN) 2003 Q3 法說會逐字稿

Good morning and welcome ladies and gentlemen to the Commercial Net Lease Realty third-quarter earnings release.

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

At the request of the Company, we will open the conference up for questions and answers after the presentation.

I would now like to turn the call over to Mr. Jim Seneff.

Good morning and welcome to our third quarter earnings release call.

I have with me Gary Ralston, our President and Chief Operating Officer and Kevin Habicht, our CFO.

First, we will have Kevin go through the numbers.

Great, thanks Jim, and as usual, start with our statement that we will make certain statements that may be considered to be forward-looking statements under federal securities law.

The Company's actual future results may differ significantly from the matters discussed in any forward-looking statements and we may not release revisions to these forward-looking statements to reflect changes after these statements are made.

Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the Company's filings with the SEC and this morning's press release.

With that, let me walk through the press release information.

As indicated, FFO was $17,002,000; or 37 cents per share for the third quarter of 2003.

That compares with 36 cents for both the same period last year and the immediately preceding second quarter of 2003.

FFO per share for the first nine months of '03 was $1.08 versus $1.06 for 2002.

Looking at some of the individual income statement line items, total revenues for the third quarter were $27 million.

That is a $3.7 million increase from a year ago, if you exclude the FAS-144 impact, that's only 2.9.

The increase in revenues was really driven by the increase in rental revenues of 4.6 million, and much of that increase was from the previously announced acquisition of two Washington, D.C. office buildings selling 540,000 rentable square feet leased to the federal government.

That acquisition closed on August 1st of '03 and the property accounted for about $3 million of the rental revenue increase in the third quarter.

Total occupancy for the portfolio increased slightly to 97.2 percent as of September 30th, and that compares with 96.9 at the end of June '03.

In the interest and other income, that consisted primarily of $144,000 of property and asset management fees and $891,000 of interest and other income, mostly from our unconsolidated subsidiary.

These interest and other income amounts represent an $891,000 decrease from third quarter last year, primarily due to fewer build to suit property sales, fewer property sales in our build to suit sub.

Moving down to the P&L a bit (technical difficulty) property (indiscernible) increased 913,000 for the quarter.

About 80 percent of that increase of the second quarter of 2003 was related to the Washington D.C. office building as this lease has more unreimbursed property level expenses associated with it.

D&A was reported at $2,561,000; that's a $433,000 increase from the same quarter last year, but an $80,000 decrease from the immediately prior second quarter of 2003.

That line item is largely in line with our projections.

Interest expense decreased slightly from year ago levels to $6.8 million, but was flat in the second quarter '03 amounts.

Again, this was a result of a modest increase in the outstanding debt, offset by lower average interest rates.

The net income from our unconsolidated entities was $1,025,000 for the third quarter of '03.

That compares to $257,000 for the same period a year ago and $1,191,000 for the second quarter of '03.

Sold nine projects in build to suit in our taxable sub in the third quarter of '03.

And as we've mentioned before, there is going to be some choppiness in this number from quarter to quarter, but the market remains good for this activity.

We do anticipate that we will begin to consolidate our taxables (indiscernible) services on our apparent (ph) balance sheet financial statements in the fourth quarter.

Again, this should have no impact on our bottom-line or balance sheet to speak of, except more detail rather than line items consolidated into one line item.

Lastly on the income statement, I will note again that we have included in our press release disclosure additional disclosure to allow you to look at the various income statement line items so you can see what the P&L would have looked like if FAS-144 had not been applied.

And as you are aware, FAS-144 requires treating a sold property as a discontinued operation.

With regard to our guidance for '03, we're not changing our guidance for the year from the $1.44 to $1.46 range.

Notably, that guidance has not been changed at all this year.

We have some projects in the build to suit 1031 (ph) exchange disposition pipeline in our taxable sub that if the disposition of particularly more than one flips or accelerates, may cause some unexpected choppiness in our quarterly results.

We're still calling for a 36-37 cents guidance for the fourth quarter of '03, but again dependent on some timing issues, the sales of those properties.

We're placing initial guidance for 2004 at $1.48 to $1.52 FFO per share.

At this point, we see 36-37 cents per quarter in the first half of '04 and 37-39 cents per share per quarter in the second half.

This is based somewhat on our acquisition projection for next year of being $250 to $300 million.

Moving on to the balance sheet, there was a fair amount of activity in the third quarter.

Late July, as you're aware, we completed 5.6 million shares of common equity offerings.

That generated $95.5 million of net offering proceeds.

Additionally, we completed a $25 million convertible preferred stock placement in August.

That preferred carried a 6.7 percent coupon as convertible into common shares at $19.32 per share, so we felt the terms were very practical.

Total debt outstanding as of September 30th was $484 million.

Of this amount, 53 million was mortgage debt, meaning only 10 percent of the Company's total assets are encumbered by mortgages, leaving 90 percent of the assets unencumbered.

The way we look at total debt to total assets on a gross book basis was 40.1 percent at quarter end.

That is down slightly from 42.8 last quarter and 42.1 a year ago.

If you look at it more on a market cap basis, we're about 36 percent total debt to assets.

On the interest coverage front, interest coverage for the quarter, third quarter came in the 3.7 times.

That compares with 3.3 times in the third quarter of '03.

Fixed charge coverage was 2.9 times for the third quarter of '03, and that compares with 2.7 times for both the year-ago and prior quarter levels.

For the nine months, interest coverage was 3.5 (ph), that is up from 3.4 the prior year and fixed charge coverage was 2.8 times for the nine months of '03 and that compares with 2.7 the first nine months of '02.

We expect these coverages to slightly moderate somewhat due to (indiscernible) short-term bank debt and rising interest rates in the future, and that is all about I have.

In closing, I think we were very pleased with the per-share results, particularly in light of having 12 percent more weighted average shares outstanding as a result of the equity offering we did at the end of July.

So to stay on truck with our numbers with that many more shares out, and we fell good about it.

I will turn it back to you now for (indiscernible).

Thank you Kevin.

Now Gary is going to go through our portfolio and give us an update.

Thank you, Jim.

We are pleased to be one of only 228 public companies that have paid increased dividends to shareholders for 13 or more consecutive years.

Our investment strategy is designed to create an attractive risk-adjusted return for our shareholders.

Central to that strategy is our commitment to real estate value.

Disciplined diversification, geographically by line of trade or industrial classification and by individual tenant enhances the stability of our operating income.

Our portfolio is made up of single-tenant properties in good locations that are net leased over a long-term to credit-worthy tenants.

We currently own 348 properties located in 39 states, lease to 128 corporations in 47 different industry classifications.

Long-term net leases are a key component to the safety of our dividend and a common thread at each of our investments.

That net lease structure reduces real estate operating risk because tenants are responsible for paying taxes, insurance and operating expenses.

We believe that leases in excess of a decade in duration bridge real estate and economic cycles.

The weighted average remaining lease term of our portfolio is 11 years.

To help you better understand our work to build and annutious (ph) income-generating portfolio, we have provided some additional disclosure information in this press release about our portfolio construction.

Giving you perhaps a little different perspective on the geographic and disclosing the regional allocations, at present, we have 50 properties in the Northeast region representing 33 percent of our base rental income; 96 properties in the Southeast representing 23 percent of the income; 87 properties in the South representing 17 percent of the income; 55 properties in the Midwest representing 11 percent of the income; 33 properties in the West representing 10.6 percent of the income and 27 properties in the Rocky Mountain region representing 5.45 percent of the income.

We are well diversified amongst our tenants.

We disclose the top 20 concentrations.

You will note that there is only one tenant with a concentration higher than 15 percent.

That is the United States of America.

We're very comfortable at that level.

We believe this is a strong credit which serves to enhance the overall credit profile of the Company.

We have one tenant slightly more than 10 percent, that it Eckerd Corporation.

They're a subsidiary of JC Penney, headquartered in Clearwater, Florida; they're one of America's largest retail drug chains with approximately 2700 drugstores in 20 states.

Their second quarter sales were approximately 3.7 billion and operating profit was 54 million.

We have two tenants now that have a 5 percent or greater concentration -- Best Buy, which is the nation's leading consumer electronics retailer.

Their earnings from continuing operations increased to 140 million in the second quarter, their revenue increased to 5.4 billion; that was a 17 percent gain and their comparable store sales gain was 7.5 percent.

We're very pleased to have them as a key tenant in our portfolio.

OfficeMax is the Cleveland-based office supply superstore.

They sell products through nearly 1000 superstore locations and via direct, catalog and the Internet.

They reported second quarter operating results with domestic same-store sales up 5 percent.

That was fueled by an increase in store customer transactions and average amount per transaction, another strong result.

Our line of trade industrial classification diversification, I will give you the top 11 concentrations.

The federal government is 16.8 percent, pharmacy and drugstores is 11.4, grocery stores 9 percent, bookstores 7.8 percent, full-service restaurants 7.4 percent, sporting goods stores 7.3 percent, consumer electronics 6.7, office supply and stationery stores 6.1 percent, limited service restaurants 5.2 percent, furniture stores 4.3 percent, home furnishings 3.1 percent.

There are four lines of trade between 1 and 2 percent concentrations -- that's jewelry stores, home improvement centers, department stores and hobby, toy and game stores.

The remaining categories of industrial classifications represent concentrations of less than 1 percent each.

Kevin mentioned a few changes in the portfolio from a property disposition standpoint we sold from the core portfolio 5 properties, all of which were part of our portfolio enhancement strategy.

There were three restaurants and two consumer electronics stores.

The focus was to reduce particular line of trade or tenant concentrations and credit exposure.

During the third quarter, we acquired two federal office buildings in Washington D.C. and a grocery store in Georgia.

We are pleased with our current occupancy levels.

We think that re-leasing is a critical element of our business and we have consistently demonstrated our ability to lease space in the past and we remain ever vigilant.

Our current occupancy level is quite satisfactory.

We expect to maintain at our average historic occupancy in the mid-90s.

Kevin noted some of our unconsolidated subsidiary (technical difficulty).

The build to suit development activity we have under construction or re-seated (ph) four drug stores -- three Eckerd's and a Walgreen's in Missouri, Oklahoma and Texas; a cash-and-carry grocery store in St. Petersburg, Florida, a La-Z-Boy furniture store in New Jersey, a Home Depot and Best Buy in Michigan and a Marshall's and Best Buy in Tennessee.

Kevin mentioned some of the disposition activities in our 1031 exchange program.

We actually sold three restaurant properties that what were acquired to resell, three ground lease properties and one auto part store service store.

We are pleased with this quarter's improved operating results and we're particularly happy to note that our upcoming November 15th dividend will mark the 14th consecutive annual increase in our dividends per share.

Thank you, Gary.

Before we open it for questions, I just want to say a word about our management team.

Our management team is very proactive in the marketplace right now as evidenced by some of the acquisitions we've done to date.

We have a rigorous monthly return on performance discipline in place and we just spent -- some of our management team just went to Emerson Electric, Pepsico, Marriott and J.P.

Morgan to learn more about talent management programs.

We're spending a lot of time on talent, making sure we have the right people in the organization and we're focused on attracting, developing and retaining the best talent and I believe you're seeing the results of that today, and you will see more in the future as a result of the talent that we're attracting to the Company.

Now we'd like to open it up for questions.

(Operator Instructions).

Ross Nussbaum (ph), Smith Barney.

Good morning guys.

Can you comment on your 200 million acquisition guidance for next year, in terms of what you think the mix is going to be between retail and office?

Our goal, Ross, was to, as we announced, was to enhance the portfolio diversification, reaching over a three-year plan period, concentration levels of 50 to 60 percent retail, 20 to 40 percent office and 10 to 20 percent industrial.

We think that the sector rotation capability gives us the opportunity to make advantageous acquisitions in the sector as we continue to diversify.

And that range for next year was 250 to 350, I think that's the number we're talking about.

Not 200?

No, it's 250 to 300 -- 250 to 350.

Where just raising the bar a little, Ross.

The government now represents -- I guess office is now 17 percent of your portfolio, so it does not take a heck of a lot more in terms of office acquisitions to get to your goal.

So should we expect more on the industrial front in the coming year?

As I mentioned, the ability to be able to rotate amongst retail, office and industrial properties gives us the capacity to search out the best risk-adjusted return for quality properties.

We've been able to identify some additional properties, and we may see some more of those near-term.

And we also are looking diligently at industrial opportunities.

But I would expect that we would get to our office limits before we get to the industrial.

We want to be opportunistic in those three areas, and we certainly want to balance out the portfolio the way Gary talked about, but we also want to be opportunistic where that is available to us.

Is it fair to say that you're going to finance this growth in a similar fashion to the way you have financed your business over the past few years?

I think that's largely the case.

To the extent we have some larger assets, we might use a little more mortgage.

We've used very little mortgage debt historically, so using more wouldn't be saying much, but it will be very similar.

In terms of keeping leverage where it is today, do you think you are at kind of a steady-state leverage level?

Thank you.

(Operator Instructions).

Gentlemen, I'm showing up further questions.

We want to thank all of you for joining us today.

We appreciated it.

Ladies and gentlemen, if you wish to access a replay for this call, you may do so by dialing 1-800-428-6051, or 973-709-2089 with an ID number of 311234.