NNN REIT Inc (NNN) 2005 Q3 法說會逐字稿

Good day everyone and welcome to today's Commercial Net Lease Realty Incorporated third quarter earnings release conference call.

Today's call is being recorded.

For opening remarks and instructions I would like to turn the call over to the Chief Executive Officer and President, Mr. Craig MacNab.

Please go ahead, sir.

Thank you very much.

Good afternoon and welcome to our third quarter 2005 earnings release call.

Also on this call is Kevin Habicht, our Chief Financial Officer, who will report on our third quarter financial results.

After brief opening comments from me.

Obviously, having announced record earnings, we are very pleased with our financial performance in the third quarter, which continues to be slightly ahead of plan.

More significantly, we are encouraged about the exciting momentum and visibility that we have in our business.

I will expand on our pipeline in a moment.

Our portfolio continues to be in excellent shape with occupancy improving to 99.2% as of the end of the quarter.

We do expect that our occupancy will deteriorate slightly in the current quarter.

However, as as we have very few lease renewals in the remainder of 2005 and 2006, the occupancy percentage will continue to be very high.

In the most recent quarter, we acquired 40 properties for $49.6 million for our investment portfolio at a weighted average cap rate of approximately 9%.

The largest acquisition that we made was portfolio of Uni-Mart convenience stores.

Most of these properties are in Pennsylvania, which is where Uni-Mart is headquartered.

Uni-Mart, which has been in business for 33 years, is one of the largest independent operators and licensors of convenient stores with 282 stores as of the end of last year.

For the nine months ended September 30, we have acquired $175 million of investment properties.

Which is in excess of the annual goal of 150 million of acquisitions that we established at the beginning of this year.

As I mentioned a moment ago, we have a robust pipeline of accretive acquisition opportunities with slightly more than $200 million of properties under letter of intent at the present time.

Some of these acquisitions will close early in 2006 but regardless of the timing, we will be very busy for the next several weeks.

The combined cap rate for our pipeline of acquisitions is around 9%.

Using a blend of straight line and initial rents based on the specific terms of each transaction.

For your information, we currently project we will sell approximately 25 to 35 million of these to-be-purchased properties through our taxable REIT subsidiary.

We are in the process of finalizing our plans on how we will finance our pipeline of acquisitions.

But it is likely that we will use capital recycling as the primary source of capital.

At this juncture, it is worth a reminder that over the last three quarters we have sold 93 million of properties.

Over the last four quarters we've sold 134 million of properties.

And if you extend out to five quarters we've sold 177 million of properties.

At the present time, we are marketing about 30 million of properties from both our investment and exchange portfolios.

In summary, we are going to continue recycling capital to finance our acquisition pipeline.

As many of you are aware, we have a large number of properties in our portfolio that, if sold, would command very attractive cap rates.

These properties obviously include our office building in Washington, D.C.

But we also have a number of other properties that we are evaluating for disposition.

We have not yet finalized our decision on which assets to sell but expect that decision making process to be completed later this month.

We will then immediately commence the marketing of these assets with anticipated closings to occur during the first quarter of 2006.

In the third quarter four stores that we developed were delivered to Walgreens.

In addition, our team made progress on a variety of development projects that will come to fruition in 2006 and beyond.

Significantly, during the quarter we successfully sold a multi-tenant retail project that we developed in Denver at a handsome gain.

In summary, we are having what we characterize as a very successful and productive 2005.

And are optimistic about the way we are positioned to continue to grow our FFO per share in 2006.

I will now hand over to Kevin.

Thanks, Craig, and I will start with my usual cautionary statement that we will make certain statements that may be considered to be forward-looking statements under Federal securities laws.

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 - - this afternoon's press release.

With that thank you for joining the call.

As indicated in the press release FFO was $21,375,000, or $0.40 per share for the third quarter of 2005.

An increase of 5.3% over the prior year's and the prior quarter's $0.38 per share results.

For the nine months of 2005, FFO was $1.14 per share, which excluding the $3.2 million charge taken in 2004, compares with $1.08 per share in 2004 and represents a 5.6% increase in year-to-date results.

As Craig indicated, we are pleased with these improved results as nearly all areas of operations are performing well at the moment.

Including the acquisition volume, acquisition yields, gains on sale of inventory properties, occupancy and G&A.

Looking at the income statement line items.

Total revenues for the second quarter were $35 million.

That will represent a $2.3 million increase from a year ago.

Primarily the results of increased revenues from investments we made over the past year.

Partially offset by reduced gain on sale reported in continuing operations.

We did complete $49.6 million worth of acquisitions in the third quarter and just over $179 million for the nine months.

Occupancy at September 30 was 99.2%.

That's up 40 basis points from the immediately prior quarter and up 270 basis points from a year ago.

Moving down, the real estate expense reimbursement line item increased modestly for the quarter and the nine months compared with prior year year amounts.

In our revenue section we reported $138,000 loss on sale from the disposition of one land parcel in our taxable REIT subsidiary.

This shows up in our revenue section of continuing ops rather than discontinued ops like most of our property dispositions.

Due to the fact that this property had not started paying rent at the time of sale.

Interest income and other income from real estate transaction consists primarily of mortgage and mezzanine loan income and some miscellaneous items.

The $383,000 decreased to $1.5 million in the third quarter, came primarily from lower outstanding mezzanine loan balances compared to last year.

At the end of the quarter we had $26.6 million outstanding in structured mezzanine loans.

The $2.8 million of interest income from mortgage residual assets was produced as a result of our May, 2005 acquisition of 78.9% interest in Orange Avenue Mortgage Investments, which is now consolidated on to our books.

As we discussed and reported on our last conference call, on the revenue side, this investment produces interest income from residual interest and mortgage loan securitizations.

Offset by interest expense of $30 million of notes payable and income taxes and a modest amount of G&A on the expense side.

Moving down to the expenses.

G&A expense was $6.2 million for the quarter.

That's up from 5.8 million in the year ago period but largely in line with the guidance we have previously given of 6 million per quarter for the balance of 2005.

For the nine months, G&A is down $300,000 or 1.8% from year ago amounts.

We are reforecasting total G&A for 2005 to be $23.5 million.

Property expenses were $2.2 million.

That was down $455,000 from prior quarter amounts and down 580,000 from prior year amounts.

Primarily due to fewer vacant properties and to lower expenses at our DC office property.

In the third quarter we did book a $422,000 impairment charge related to three over restaurant properties.

And actually one of them goes back to our legacy Golden Corral properties.

In the other expenses and revenues; interest and other income declined $823,000 from last year to $415,000.

As a result of lower outstanding loan balances to one of our taxable subsidiary units and some one-time items in 2004.

This line item was up 106,000 from the prior quarter due to increased interest income from higher cash balances and higher interest rates on those cash balances.

Interest expense decreased slightly to $8.5 million due primarily to higher outstanding debt balances and higher short term interest rates.

Offset by increased capitalized interest from an adjustment to our tenant improvement accounting related to our DC office building in the third quarter.

The equity and earnings line item from unconsolidated entities was $111,000.

And that compares to 1.155 million last year and compares with 100,000 last quarter.

The significant decline from '04 and relatively flat comparison with second quarter '05, as I indicated earlier, due primarily to the May 2005 purchase of the equity interest in Orange Avenue Mortgage Investments.

The minority interest we previously held in these mortgage securities was recorded in equity and earnings up until May 2005 when we acquired our 79% equity interest.

And beginning in May 2005 we began to consolidate this investment on our balance sheet and income statement.

Maybe more importantly going forward, this equity and earnings line item will primarily represent the results from our 25% equity interest in our headquarters office building.

Which typically produces a GAAP loss of about $50,000 per quarter including $150,000 of depreciation expense per quarter.

And discontinued ops from the investment portfolio, we did sell three properties from our core portfolio, primarily as part of our portfolio pruning.

The gain and the results of operations from these properties are included in the supplemental information labeled "Discontinued Ops, Investment Portfolio".

Discontinued ops inventory properties we, as Craig indicated, sold a totally five properties from our taxable subsidiary.

One of which I mentioned previously in my comments on the revenue section.

Three of the properties sold were from the development unit, which generate add $6 million gain net of minority interest.

And two of the properties were sold out of our 1031 exchange unit and generated a $200,000 gain with net proceeds of $1.1 million.

As we've indicated, there will be some choppiness in this number from quarter to quarter depending on the timing of the sales.

With regard to FFO guidance, we are again increasing our guidance for 2005 to $1.52 to $1.54 per share.

Increasing both the bottom and top ends of the range by $0.02.

We currently believe the acquisitions for 2005 will exceed $200 million, as Craig indicated.

But depending on the timing of the acquisitions they might not have a material impact on fourth quarter operating results.

The acquisition environment still is a challenge.

But we think we see significant opportunities in front of us that we are optimistic will closed at some point in the coming months.

The market for disposition of properties was that we've developed or acquired for sale continues to be very robust and we continue to expect good gains of this year.

We are initiating FFO per share guidance of $1.58 to $1.60 for 2006.

This represents a 4% increase from midpoint '05 guidance to midpoint '06 guidance.

And this guidance is based on $165 million of acquisitions, $50+ million of dispositions, G&A expense of $25 million, $9.8 million of revenue from our mortgage residual interest income, that's before minority interest and TRS, taxable reconsidered gains on sale of approximately $1 to $2 million higher than what we are going to achieved in 2005.

Meaning about $17 to $18 million of gain after minority interest from our taxables.

As always these projections are based on a number of factors and uncertainties we've discussed in our public filings.

Moving to the balance sheet.

The primary change of additional borrowings on our bank line related to our completed acquisition and development activities.

We finished the second quarter with total liabilities of $726 million.

Of that amount 152 million was mortgage debt.

Approximately 19% of the Company's assets are encumbered buy mortgages, leaving 81% of the Company's assets unencumbered.

Total debt to total assets on a gross book basis, excluding accumulated depreciation was 44% as of quarter end.

And that's up slightly from 41% a year ago.

On a market cap basis, leverage was 38.4%.

Interest coverage was 4.0 times for the third quarter and 3.8 times for the nine months of 2005.

Fixed charge coverages was 3.1 for the quarter and 3.0 for the nine months.

We are pleased with these levels of coverages but as we projected they have moderated slightly with rising interest rates.

In closing we felt good about third quarter's 5.3% increase in per share results and our expectation for per share results in '05.

As we near 2006, we believe we have some opportunities to continue to create value through targeted acquisitions, developments and dispositions to drive incremental per share results.

We have a very solid portfolio of properties and an equally solid capital structure.

Our challenge is to grow the bottom line and we are very optimistic that we will be able to do so again in 2006.

Craig, let me turn it back to you.

Please open it up to questions.

Thank you. [OPERATOR INSTRUCTIONS] We will go first to the site of Michael Bilerman with Citigroup.

This is actually David Carlisle here with Michael Bilerman.

The first question related to the Uni-Mart properties, a very attractive cap rate on that.

I was wondering if you could tell us how that relationship developed and if there's a potential for you to get more properties from them?

I think I saw they had about 282 properties in total.

David, thanks very much.

As you're aware during the course of the last 12 months and beyond several of our acquisition offices have been marketing directly to a variety of companies.

One of the categories that we have targeted is there convenience store segment, which as you know is an extremely fragmented industry.

Uni-Mart is one of those companies who we are very pleased to close this transaction.

At this point in time, we do continue to see fairly healthy pipeline opportunities in the convenience store sector.

We hope to have some success there in the next 12 months.

Are you acquiring the underground gasoline tanks with those properties?

It depends in each situation.

But one thing I can assure you is that we are very carefully underwriting the environmental risks including performing phase I environmental studies on every property that we acquire.

Fair enough.

The - - it sounds like you have a very solid acquisition pipeline, you mentioned 200 million plus that you are looking at.

As you look back in the third quarter there were several large deals that some of the other triple net REIT's did, and with the growth income here, I trust you all did large deals.

I was wondering if you had looked at those and if so why did you pass on them?

David, all of the companies in this category such as ourselves are all generally targeting bigger portfolios.

Where our capital resources can separate ourselves from the multiple competitors that exist.

What that means is that we generally see the same types of transactions.

And I believe the transaction you are referring to we did take a look at.

And we congratulate our competition on their success in that transaction.

By the same token, there's very little that we do that's completely proprietary.

However, we have had some success this year in finding transactions where we've managed to structure and negotiate a transaction without any competition.

And a significant one in that regard was our acquisition during the summer of National Properties.

Right.

In terms of the disposition, I know you mentioned that you have plans to ramp that up and you did a few dispositions this quarter.

What are some of your criteria when you look at your portfolio of which properties you are considering for dispositions?

That's a good question.

We - - internally we conduct semiannual reviews of all of our properties, David.

And in this process a number of properties will drop out that we think it's better for other people to own.

Some of those would be where we have a concentration of certain assets.

Others would be where we - - other types of scenarios where we decide to divest a property would be where we are concerned about the credit of a tenant.

Alternatively, if anything is occurring that's specific to the location of that particular property.

In addition, the type of things that we look at internally include the structure of the lease.

Where a property has a flat lease rate over time we are not getting the benefit of inflation from that.

So where we see those, those are a prime candidate for divestiture as well.

So those are some of the things that we take a look at.

Maybe just taking a broader look at the idea of dispositions, obviously this quarter we had the sale of cars going private and a lot of institutional interest.

And these type of assets.

To would extent is your Company considering a sale of the Company?

David, if we were I don't think, with respect, we would announce it on this conference call.

Fair enough.

Anyway, that's all I have.

Thank you.

Thank you, David.

[OPERATOR INSTRUCTIONS].

We will go next to the site of Dan Sullivan of Wachovia Securities.

Please go ahead.

Your line is open.

Good afternoon, gentlemen.

I did have a question about the structured finance investments.

I think Kevin, that you mentioned that they dropped from the $28 million range to the $26 million range.

I did want to get an update on the performance of those loans.

And also just in terms of the investment basis if this is something you are going to be growing going forward or if it's something you are going to hold steady going forward?

No, it dropped marginally.

We have a small portfolio of mezzanine structured finance loans that really typically have a fairly short maturity cycle to them.

Meaning many times those loans are outstanding for 60 to 120 days.

And so they will originate new ones and old ones will pay off and so they will fluctuate a bit.

We have one large one remaining that we originated back in 2004, actually, which is $24.3 million of our existing 26.6.

So, that's the most material one.

And we've been anticipating that that would get paid off this year and we still think that might be the case.

But time will tell.

That has had a four year original maturity.

To get to your point - - your question regarding the quality.

We have been very fortunate in our - - and have done a good job of underwriting these.

And so all the loans have performed as expected with zero losses.

And obviously if they get paid off as quickly as it has occurred that's a positive event for the borrower.

In terms of where this is going we are spending a little bit of time test marketing the category.

It's only small dollars either way.

But we do see modest opportunities in that area, Dan.

Thank you very much.

[OPERATOR INSTRUCTIONS] At this time there are no further questions.

I would like to turn the conference back over to your host for any further or concluding comments.

Kevin, thanks very much.

We do appreciate your listening to this call.

We recognize it's the end of a busy earning season.

I would like to reiterate that we are very encouraged about the robust pipeline that we have and the momentum that that will allow us as we enter 2006.

Thanks very much.

We wish you all very happy holidays and we will talk to you in the new year.

Thank you very much.

Ladies and gentlemen, a replay of today's conference will be available today, November 1, at 3:30 pm Eastern and run until midnight on November 5.

To access the replay please dial (888)203-1112, and enter the confirmation code of 5547989.

The replay is also available on the Company's Website at www.nnn.reit.com.

This does conclude today's teleconference.

We thank you for your participation.

You may now disconnect your lines.