NNN REIT Inc (NNN) 2006 Q2 法說會逐字稿

Greetings ladies and gentlemen and welcome to the National Retail Properties Incorporated second quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]. It is now my pleasure to introduce your host, Mr. Craig Macnab, Chief Executive Officer and President. Thank you, Mr. MacNab, you may begin.

Doug, thank you very much and good afternoon and welcome to the second quarter 2006, earnings release call for National Retail Properties. I have with me on this call Kevin Habicht, our Chief Financial Officer who will report on our second quarter financial results after brief opening comments from me. We are delighted to have announced record operating results and FFO per share of $0.42 in the most recent quarter.

In addition to the fact, that this was a record quarter for NNN. The highlight of the quarter was selling the large office buildings that we previously own in the Washington area for net proceeds of nearly $228 million this significant capital recycling transaction is consistent with our focus on retail properties and also allowed us to realize the value that had been created by our team since the purchase of this property in 2003. As a reminder, our total investment in the building including the capital expenditure, was 174.5 million, and we realized a gain on selling this building of 59.5 million.

Following the sale of this large asset we were able to pay down our line of credit by 132 million. And as a result our balance sheet is in extremely good condition. At the risk of stating the obvious we have plenty of capacity for acquisitions and are well-positioned to grow FFO per share as to capital from selling these properties is reinvested at higher cap rates than the cap rate we previously received for the office building complex.

In most recent quarter we made solid progress on our acquisition volume objectives for this year by investing almost exactly $100 million in 46 investment properties. The cap rate on these properties was consistent with our stated objective of an 8.75% yield. Thus far we have invested 136 million this year in 86 investment properties.

During the second quarter we raised our acquisition volume targets for 2006 to a range of between $180 million and $220 million. With our activity thus far this year and the visibility we had for acquisitions closing in the months ahead, we are well on track to meet the revised acquisition guidance. Our continues to evaluate a wide variety of opportunities however, we continue to be selective with our carefully under written acquisitions. Prior to closing on a property acquisition an associate from our underwriting team visits each property and underwrites each individual assets.

In fact in many instances, a property will be visited by more than one member of our team. Our portfolio continues to be in extremely good shape. The occupancy is very high with over 98% occupancy. The average lease term is approaching 12 years. And we have modest amounts of lease roll over in the next several years. In terms of diversification of a portfolio, it is my opinion that we have a fully diversified portfolio by line of trade, by tenant and by geography.

Significantly in the last 18 months we have acquired over 250 individual properties, bringing our portfolio to over 600 individual retail assets. A couple of weeks ago we announced that we raised our dividend by $0.01 penny per quarter, or $0.04 a year. Obviously this year's increase in the dividend is larger than those of the most recent years and is consistent with our dual objective of growing the dividend while maintaining or improving the dividend coverage.

Based on year-to-date closing price, our current dividend yield is slightly more than 6.4% and I would point out that our dividend continues to be well covered by our FFO per share. Kevin will now provide an update on our quarter.

Thanks, Craig, let me stock with the obligatory cautionary statement that we may make certain statements that may be considered to be forward-looking 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 were made.

Factors and risk that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings of the SEC and this morning's press release. With that, as indicated in the press release we reported record quarterly results as Craig mentioned for the company with FFO totaling $24.5 million, or $0.42 per share for the second quarter of 2006 and that represents a 10.5% increase over prior year results and a 2.4% increase over the prior quarter results.

First half '06 FFO per share was $0.84 per share which represents a 12% increase over first half, 2005. We are pleased with these improved results which supports the increased earnings guidance we announced about a month ago. 2006 off to a very good start for us.

Let me go through some of the details for the quarter and then we will take some questions. Looking at the income statement we reported total revenues for the quarter of $38.1 million. The increase from Q2 '05 was primarily a result of increased revenues from investments made over the past year.

Rental revenues increased nearly 29% or $7.4 million which included $55,000 of contingent -- I'm sorry, contingent percentage rent in the second quarter of '06 versus $57,000 of percentage rent in the second quarter of '05. Acquisitions in the core portfolio as Craig noted totaled 99.8 million in the second quarter with notable activity in the convenience store and restaurant lines of trade. Occupancy was 98.4%. That was down 20 basis points from the immediately prior quarter and 40 basis points from a year ago.

Total revenues included a gain on sale $563,000 from the disposition of 1 land parcel in our taxable subsidiary which was sold prior to rent commencement which requires us to report this gain in the revenue section of our continue op. Interest income and other income from real estate transaction which consists primarily of mortgage and mezzanine loan income and some miscellaneous items, the $456,000 decrease to $1.7 million was primarily a result of some one time fee income in the second quarter of '05 partially offset by a prepayment fee on a $24 million pay off on a mez loan that we had outstanding that took place in April of '06.

At the end of the quarter we had $8.8 million outstanding in our structured mezzanine loan portfolio. The interest income from mortgage residual assets was $1.9 million which was flat with prior year amounts.

G&A expenses was 7.1 million for the quarter. That's down slightly from prior first quarter but up from the second quarter of '05 is fairly flat with Q2 '05 as a percent of revenues. Much of the increase from last year's related to incentive compensation and timing expenses and we continue to expect G&A to total $26 million for 2006 per our prior guidance. Property expenses net of tenant reimbursement was fairly flat with the prior amounts for the quarter and the 6 months.

We booked an $842,000 impairment charge related to the mortgage residual assets. As you recall, in May, 2005, we invested $9.4 million to acquire a 78.9% interest in Orange Avenue Mortgage Investments which owns a static pool of commercial mortgage residual assets. These residuals are experiencing above average prepayment rate which produces the impairment.

This quarters impairment was more than offset by accelerated amortization of the deferred tax liability on Orange Avenues books which created a $1million 337,000 income tax benefit. If you net these 2 items total after minority interest, the net positive was only $391,000. If you look at the net of those 2 items for the first half of 2006 the impairment charge related to the residuals and the amortization of deferred tax liability were nearly identical, producing only $33,000 of net income.

We have again included some additional detail in Orange Avenues results in our press release. While there clearly has been some accounting noise created with this investment that can be distracting and add difficulty, I know, to making projections but since our $9.4 million investment in May of 2005 this entity has produced over $13 million of net cash flow for us, that's an end share. Time will tell precisely how much values produced from this investment based on interest rates, prepayment fees, loan losses, et cetera, but we obviously believe it's been a good investment.

We also took a $420,000 impairment charge on real estate in the second quarter which was related to a property we sold in early July and that charge is included in disc ops. In connection with restructuring our development group in April of '06 we took a charge of $1 million $580,000 in the second quarter. And the part of our review of the development unit and looking at the types of projects that we were implementing meaning self development versus the partner type deal and the volume of those projects we think we can achieve the target for that group with fewer people.

In other expenses in revenues, interest and other income increased to $1million $15,000. That's up nearly $700,000 from the prior year amounts but only up only $200,000 from prior quarter amounts. And the increases were largely due to higher cash balances and higher interest rates on those balances. Interest expense for the fourth quarter increased to 11.2 million.

That's up from 7.6 million in 2005 but down slightly from 11.9 million in the prior quarter. The $3.7 million increase from last year is primarily a result of higher outstanding debt balances and higher short-term interest rate. At quarter end $170.5 million of our $765 million in total liabilities with floating rate debt and the floating rate debt as a percent of total gross booked assets which was the primary metric was 9.5%. Equity and earnings from unconsolidated entities was $228,000, that's up slightly from prior year amounts and from prior quarter amounts.

This line item represents a gap results from our 25% equity interest in our headquarters office building. The largest event as Craig mentioned earlier of the quarter was the sale of our DC Office property which consisted of 2 buildings and a parking garage on May 16, and is reflected in disc ops investment portfolio. The sale generated net proceeds of $227.9 million and produced a gap gain of $59.5 million and a cash gain of $53.3 million on our gross investment of just under $175 million. Very importantly we were able to defer all the taxable gain by utilizing reverse and forward 1031 exchanges which we began last December.

Discontinued ops and inventory properties, we sold a total of 19 properties from our taxable subsidiary, one of which I mentioned previously in my comments in the revenue section, 17 of the 19 were from our 1031 exchange units which were nearly all convenience stores and then 2 were from our development unit. For the quarter total pretax preoverhead gain on sales from our TRS was $2.4 million and that compares with $3 million in the second quarter of '05. With our active acquisition pace over the last 3 quarters we had a good amount of inventory held for sale in our taxable subsidiary which we will be actively marketing this year.

The market for the disposition of properties we developed or acquired for sale continues to be good and we expect good gains this year. As indicated in the past, there will be choppiness in our reported gains on sale number from quarter-to-quarter depending on the timing of those sales. With regard to FFO guidance we are maintaining the increased guidance we announced in June of $1.62 to $1.66 per share for 2006.

This increase was based on 180 to $220 million of portfolio acquisitions, disposing of our Washington, D.C. Office building plus an additional $40 million of portfolio investment properties, G&A expense of approximately $26 million, $7.8 million of interest income from our mortgage residual interests, TRS gains on sale of approximately $20 million pretax but after minority interests. And so we are very comfortable with that guidance for '06. As always, the projections are based on a number of factors and uncertainties discussed in our public filings. I will note that from where we see things at the moment while we are very comfortable with the full year guidance it seems third quarter results will be softer than our most recent quarter and fourth quarter appears to be stronger.

Moving quickly to the balance sheet, we finished the second quarter with total liabilities of $765.1 million. Of that amount only $63 million is secured debt. Approximately, 7% of the company's total assets are encumbered by mortgages leaving 93% unencumbered.

During the second quarter the buyer of our DC Office property assumed $95 million of mortgage debt. Additionally during the quarter we issued 328,696,000 shares of common stock from our stock purchase drift program which generated proceeds of $7 million. And lastly the holder of our $25 million of 6.7% Series B convertible preferred elected to convert those preferred shares into 1 million 294,000 shares, of common. And that took place in April 24 of '06. Debt to total assets on a gross book basis was 42.6%.

And that's down from 48.5% the prior quarter and 49.2 at year end '05. Largely due to the sale of our DC Office property, partially offset by additional acquisitions. On a market cap basis leverage was 38.8%. Interest coverage was 3.1 for the second quarter and the first half of '06. Fixed charge was 2.8 for the quarter and 2.7 times for the first half.

In closing, we are very pleased with the results for the second quarter and first half. We continue to believe the portfolio and balance sheet are in very good shape and our we are optimistic we are going to be able to deliver incremental per share results as we create value to targeted acquisitions, developments and dispositions. With that I will turn it back to you, Craig.

Well, Doug, thank you very much. We would like to take any questions, please.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Eric Rothman with Wachovia Securities. Please proceed with your question.

It's Eric Rothman with Wachovia. I was curious if you could comment on what you are seeing in the 1031 market in terms of cap rates. If I look at maybe what had you available for sale at the beginning of the quarter as listed on your Web site it looks like through the average asking cap rate below 7. Looking at it today it looks a little bit higher than that. Is that a function of the particular properties or is that a function of market?

Eric, I think to comment generally on the acquisition environment which obviously has an impact and the pricing environment has an impact on our ability to sell properties, I think it's, in the most recent 90, 120 days, obviously short term interest rates have ticked up and at the margin that has had an impact on cap rates. It's clear to us that there continues to be enormous demand for real estate. However, cap rates are no longer going down. Essentially flattened out and maybe ticked up a little bit from the pricing that we saw and in the Easter time frame. I personally think that cap rates are going to continue to remain low because there's lots of demand for real estate. At the margin prices have moved up a little bit and we moved the pricing on properties that are held for sale.

Sure. Can you remind us how much inventory you have for sale at the moment?

Eric, I took a look at that before the call and just in terms of some of the metrics we currently have about 70 properties held for sale right now. We have -- separately we have 10 properties under letter of intent and 7 properties that are under contract.

What's the total dollar amount there.

Of the properties that are held for sale that are not under LOI or under contract, it's about 76 million.

76 million. Great. Thanks very much.

And I'm sorry, that is just slightly impacted -- at the end of the second quarter we did close on 2 acquisitions transactions and we are remarketing some of those properties; around 20 of those in fact. Doug, thank you.

Okay. [OPERATOR INSTRUCTIONS].

Well, Doug, it's a busy day, conferences and calls here today. Again, we thank everybody for participating on this call. As Kevin mentioned we are very pleased with the quarter. It was a record quarter for NNN. We feel comfortable with our earnings guidance for the year. And frankly our business is going extremely well. We appreciate your interest and look forward to talking to you in about 90 days. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.