NNN REIT Inc (NNN) 2004 Q2 法說會逐字稿

Good morning and welcome ladies and gentlemen to the Commercial Net Lease Realty second-quarter earnings conference call. [OPERATOR INSTRUCTIONS].

I would now turn the conference over to Mr. Craig Macnab, please go-ahead sir.

Craig Macnab: Charlene (ph), thank you.

Good morning and welcome to our second quarter of 2004 earnings release call.

With me on this call is Kevin Habicht our Chief Financial Officer, who will report on our second-quarter financial results.

Following that I will provide some brief comments.

Thank you, Kevin.

Thank you, Craig, and I will start off as usual.

We will make -- with the disclaimer -- we will make some 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 those forward-looking statements to reflect changes after the 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 in this morning's press release.

With that let me talk a little bit about our results, as indicated in the press release FFO is $14,809,000.00 or $0.29 for the second quarter of '04 and that compares with $0.36 for the same period last year, but excluding the management transition charges we discussed on the first-quarter call, FFO for the second quarter would have been $18,009,000.00 or $0.35 per share.

So revenue for the second quarter was 33.9 million, which represented a $9.3 million increase from a year ago and this increase was primarily the result of the rental revenue increasing about 36% or $7.6 million, largely as a result of the acquisitions we made in 2003.

Total occupancy at quarter end was 96.7%, which is flat with the immediately prior quarter and it's down 20 basis points from a year ago.

Our total GLA by the way is 8,103,000 square feet at quarter end.

Real estate expense and reimbursements increased slightly as a result of our Washington D.C. office buildings that we acquired in 2003.

We have reported gains on properties held for sale, decreased to $1.7 million.

This gain came from three properties that we sold in our taxable subsidiary.

Additionally we reported that we sold 8 properties from our core portfolio with a total GLA of 64,000 square feet at an average cap rate of 8.5% and most of the dispositions from the core portfolio is really just portfolio pruning, quality improvement on our part.

This gain and the operating results of these properties are included in the discontinued operations as you are aware are required under FAS 144.

As it relates to the properties, gains on properties held for sale, there will continue to be choppiness in that quarter -- in that number -- from quarter-to-quarter depending on the timing of the sale.

Lastly, interest income from real estate transaction increased $1.6 million virtually all of that coming from the mezzanine loan investment we’ve discussed previously that we made last October 2003 on the portfolio of office properties in California.

G&A expense was $5.4 million, as we previously mentioned beginning in 1/1/04.

This line includes all the G&A from the REIT as well as the development in acquisition activities in our taxable subsidiary.

This amount represents a $71,000 increase from prior year amounts but a $500,000 decrease from the immediately prior first quarter, which is largely attributable to a one time state tax expense reduction of approximately $300,000.

We expect G&A will be approximately $22 million this year running approximately 5.5 million per quarter in the last half of '04.

As a percent of revenues G&A declined in the second quarter of '04 by 410 basis points compared with the prior year and declined 110 basis points from the immediately prior first quarter, so we are making some progress on that front.

The property expenses increased to $3.4 million compared to last year’s 1.0 million, this increase was nearly all related to the Washington D.C. office buildings as well.

We have a section called other expenses and revenues, interest and other income in that section of $789,000 and that represents the interest from one of our taxable subsidiary entities and interest on a note there and some third party management fees.

The decrease from 2003 was largely attributable to some one time items in second quarter of '03.

This is a new line item for us.

In a routine review of our filings the SEC asked us to segregate our interest income from the mortgages from mortgage type investments from our other interest and other income hence we have two line items showing interest and interest and other incomes FYI.

Interest expense decreased -- increased, sorry -- $932,000 from year ago levels to $8 million, primarily as a result of higher outstanding debt balances.

Interest expense increased slightly 242,000 from the immediately preceding first quarter as a result of modestly higher debt balances and interest rates.

The equity in earnings from our unconsolidated entities was $1.286million, up from prior year amounts but very flat compared with prior quarter amounts.

With our taxable subsidiary now being consolidated in the REIT, this line represents primarily two things, one, interest income on mortgage investments that we've made that are held in LLCs which are capitalized with 100% equity and our 25% interest in our headquarters office building here in Orlando, this line item is anticipated to be fairly consistent over time.

Lastly with regard to our income statement, as we discussed on last quarter's call that in connection with the senior management changes that occurred in the first half of '04, we anticipated a $3.2 million charge, all of which we recognized in the second quarter of '04.

Including this charge we provided FFO guidance of 139 to 142 for 2004 and excluding that charge that will be 145 to 148.

At this point we are not revising our guidance.

We continue to evaluate a range of potential alternatives to improve these results and the acquisition environment continues to be difficult but we are still targeting our previously reduced acquisition projections for '04 of 150 to $180 million.

That will require some effort to get that done admittedly but we may run a bit behind on the projected timing of those acquisitions, which may have some impact on the result.

The market for disposition of properties that we’ve developed or acquired for sale continues to be robust and we expect good gains there for the balance of this year.

As always you know these projections are based on a number of factors and uncertainties that we have discussed in our public filing.

Looking at the balance sheet there was little change in the capital structure during the quarter.

In February, I am sorry -- in the first quarter we issued some stock.

We did finish the second quarter with total liabilities of $563 million.

Of this amount 164 million was mortgage debt, total debt to assets on a gross book basis is 40.7%, which is down from the year ago amount of 42.8%.

Floating rate debt is less than 10% of our total debt outstanding and let me just look here.

On June 18, I’d point out that we previously announced that we did close on a $150 million of 10-year unsecured note offerings.

The notes were priced to yield 629 , but as a result of a hedge that we had put in place in February the gain on that hedge will be amortized over the 10-year term.

That reduces the effect interest rate to 5.91%, which we believe is attractive 10-year capital for us.

Excluding the transition charges that I mentioned previously our interest coverage for the second quarter was 3.5 times and the fixed charge coverage was 2.7 times.

We are pleased with this level of coverages and expect they may moderate a bit with rising interest rates.

I will mention to you that we announced earlier this month we did increase our dividend to 32.5 cents, marking -- 2004 will mark the 15th consecutive year of increased dividends. which is an important intangible asset for us and the company and I will note that we did go ex-dividend today in our trading, so further reason for decline in share price.

In closing, we, while the acquisition environment is not exactly what we would like, we are redoubling our efforts to improve the long-term operating performance at the company.

However, we do the see the company is in very good financial position and the core portfolio is performing well.

And the quality of our tenant lot (ph) is very strong.

With that I will turn it back to you Craig.

Thank you, Kevin.

As Kevin indicated a moment ago, we were very pleased with the market’s reception to our offering of the $150 million of 10-year unsecured notes, which we completed in the middle of June.

By virtue of successfully hedging this refinancing we are delighted with the interest rate savings that we will realize over time.

Equally significantly, the financing leaves us with floating rate debt of less than 10% of our total indebtedness.

The balance sheet strength of commercial net lease realty as well as the high quality of our portfolio are two of the foundations upon which our company is built.

Going to the asset quality, we did sell $12 million of properties in the second quarter, which is consistent with an active process of selling non-core assets and recycling the capital into higher quality properties.

Prospectively one of the tactics we are evaluating is to traditionally take advantage of capital recycling opportunities that may opportunistically exist.

On our next conference call, we expect to provide additional information on a small transaction we will complete in the capital-recycling category during the third quarter.

This transaction takes advantage of the demand for high quality retail properties many of which are found in our portfolio.

With the demand for high quality retail properties out stripping the supply, the acquisition environment continues to be difficult.

However, as we increasingly focus primarily on a broader universal retailers while continuing to ensure that the real estate fundamentals of these property types are solid (sic).

We are beginning to identify opportunities that we are aggressively pursuing with an expectation that perhaps in the fourth quarter of this year we will be able to close on at least one portfolio acquisition.

All of these acquisitions that we are currently pursuing will be immediately accretive to our shareholders when they occur.

Two of the acquisitions that we completed in the second quarter are worth noting.

Firstly we purchased for $11 million an automobile dealership, which has a public national car retailer as the tenant in New Mexico.

Secondly we acquired a high quality 131,000 sq. ft office building in St. Louis, which has an A rated tenant in it for $11 million.

In closing I want to reiterate that our management team is very focused on developing strategies and tactics to expand our return on invested capital and to begin to grow FFO per share over a multi-year timeframe.

Thank you very much and with that Charlene (ph) we would like to answer any questions.

Thank you. [OPERATOR INSTRUCTIONS] And our first question comes from Ross Nussbaum from Banc of America Securities.

Please state your question.

Hi, good morning everyone.

Ross.

A question on the acquisitions in the second quarter.

The Auto dealership you purchased in New Mexico, what was the cap rate and what were the lease terms?

Ross, congratulations on your new position and opportunity.

Thank you.

The cap rate on this acquisition was slightly over 9% and it has a 15-year term and if you have a follow-up question on the office building that has a 10-year term and it was slightly over 8.5%.

And was that a triple net deal?

It was a double net deal, Ross.

And it is leased just to one tenant?

Yes sir.

Okay.

In terms of the capital recycling that you have discussed can you give us a sense of dollar amount in terms of what could be sold in the third quarter?

In order for it to be meaningful it probably needs to be in the range of at least $25 million and I think going forward we might have some opportunities perhaps not quite in the third quarter to do more than that.

But I think that as part of our objective to increase return on invested capital there are some categories of assets that we own that the demand is quite significant for and where we find that opportunistically we are going to take advantage of it and then take that capital and reinvest it in primarily retail assets with a high yield.

Okay.

And that's obviously my next question is for the portfolio transaction you referred to in the fourth quarter, would that be in excess of the dollar amount that you disposed of in the third quarter or you kind of reinvesting dollar for dollar or is it going to be more than that?

Ross, I think it will be about perhaps double the size of the 25 million I mentioned earlier.

And how do you think you'd finance that?

I think in -- our balance sheet continues to be extremely strong and I think we can finance it from our more than available lines of credit and perhaps from selling additional assets that Kevin mentioned that are in our build-to-suit program.

Okay, thank you.

[OPERATOR INSTRUCTIONS].

Our next question comes from Eric Rothman from Wachovia Securities, please state your question.

Yes good morning, gentleman.

With respect to the properties that you sold, of the 11 properties that you sold during the second quarter, what was the average age of those properties?

What was the average remaining lease term?

Sorry, the age and the what, Eric?

The average remaining lease term?

As I mentioned, we sold eight properties from the core portfolio.

I don't have the average age at hand.

I mean we acquired many of those in the CapTech acquisition.

So, they are -- a good estimate of what they would be is probably in the five to eight year range of age.

Most of them were, to be specific, of the eight, seven of them were restaurant properties and one was just a retail property of the eight that we sold.

And these we viewed as again more in the category of portfolio pruning and so that we think we didn't have to sell some of these and but think -- thought it was the best thing to do in terms of recycling of capital as well as improving the quality of the portfolio.

And with respect to recycling the capital, do you expect most of the assets that you cycle will have been former CapTech assets or is there a particular segment of your portfolio from which those assets will be pulled?

Yes I think.

Sorry, I think it is going to be a mix, I think that we are going forward will continually look to pull at the margin which I think is what occurred in the second quarter.

But we are, we see 10-31 exchange buyers or people that are really very anxious to put capital to work, it may come from the core original commercial net lease realty portfolio as well as the CapTech portfolio.

Have you looked at any large portfolios of office properties to -- Net Lease office properties to purchase or are you pretty much focusing your portfolio acquisition opportunities elsewhere?

Eric, we have looked at those and there have been a number of them that closed in the second quarter and as I am sure you are aware there are a couple of them that are actively being marketed right now.

The, several of them are very high quality and they are going at prices that just don't make sense for us to pursue and the office property that we acquired in the second quarter was an opportunistic transaction.

It required a -- that the original buyer was unable to complete the transaction in the time lines and in a very short time frame we responded and with an A rated tenant to get a yield of 8.5%.

We told you we had to jump through a lot of hoops.

Some of those transactions that are currently being marketed and closed in the second quarter went for cap rates well south of that and for us I don't think that makes sense.

All right.

What do you suspect the average cap rate is on the office acquisitions for net lease properties?

Well it depends on the quality of the tenant but if they are --

Within you target?

In our target we are focused on -- we needed to be 8.5 or more that right now in the office sector and frankly in the industrial sector, the price is well south of that for high quality investment grade type single tenant users.

Sure.

I know, I guess I know it was not your decision but sort of looking back if you could, a year ago they made the announcement to focus on those two areas.

You know would you say that was at this point maybe not the wisest decision or is that part of your strategy that, having made the decision to focus there, you are sort (inaudible) now even though maybe the returns don't warrant your attention at this moment or am I not looking at that right?

Eric, I think at the time a decision was made, it was a very good decision and with the benefit of hindsight, that big office building that we acquired in Washington D.C. is frankly a trophy property which is very -- the value creation there for our shareholders is terrific.

Having said that in the current environment as we look at it in this snapshot of time, the cap rates for high quality office and industrial properties at the present moment do not make sense for our shareholders.

We, in tomorrow's environment that might change but in the near term our focus is primarily on retail which is very consistent with our core competencies on knowledge based and we see --where we see opportunities to build value for our shareholders.

Great just one final question, you mentioned you are evaluating a range of alternatives.

Would those alternatives include either just a flat outright sale of the company or a liquidation of the portfolio, have you guys considered that?

On the follow-up that is something we have no intention to talk about.

It's not clear to me that liquidating the assets ultimately results in value to shareholders and I would guess that may be the reason that we haven't seen many transactions like that from other people.

But our challenge out is to, if we do a good job of gradually increasing our return on invested capital, we manage our capital efficiently.

I think we have good opportunity to grow our FFO per share over time with the objective of building value for shareholders.

If there are other ways to do it, we need to constantly evaluate those as well.

Right.

And I want -- just one more comment.

You know, I -- as a management team we are very focused that this is a marathon and not a one month sprint.

Actually, I guess I do have just one very quick comment or question for you about the severance expense.

I had thought that the $3.2 million was supposed to be spread over the remaining three quarters of the year with 2.6 in the second quarter and then a little bit in third and fourth quarter.

Why -- what was the decision to change that base line?

Yes, I mean initially that was kind of the thought based on kind of where things ended up and the finality, I guess, of the amount of the ability to calculate more precisely what it was going to pencil out to be, the decision was made just to take into -- all in the second quarter which we think made sense.

But yes, we had originally anticipated that 85-plus% of it would hit the second quarter anyway.

So, the change isn't very significant.

Right thank you very much.

Great thanks.

[OPERATOR INSTRUCTIONS].

If there are no further questions, I will now turn the conference back to Mr. Macnab.

Charlene, thanks very much for your assistance and we look forward to talking to you in about three months, and hope you have a wonderful summer.

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 367595, or visit the Company’s Web site at www.nnnreit.com.

This concludes our conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.