NNN REIT Inc (NNN) 2008 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the National Retail Properties Second Quarter 2008 Earnings Conference Call. At this time all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Craig Macnab, Chief Executive Officer for National Retail Properties, Inc. Thank you, Mr. Macnab; you may begin.

[Ryan], thanks very much, and good morning to all of you. Welcome to our second quarter earnings release call. As usual, on this call with me is Kevin Habicht, our Chief Financial Officer, who will review details of our second quarter financial results after brief opening comments from me.

We're very pleased with $0.50 off FFO in the second quarter, which is a 6.4% increase over the same period in 2007. Despite the anxiety about the economy and, of course, the pitiful credit markets, we are comfortable with our prior guidance of $1.97 to $2.02 per share for calendar 2008.

Our portfolio continues to be in solid shape, with occupancy at the end of the quarter just above 98%. Although the daily news reports are full of retailers that are struggling, I want to point out that we have zero stores in our important investment portfolio that are leased to tenants such as Starbucks, Steve & Barry's, Linens 'n Things, or most recently, Mervyns. Of the last several years, we've had an abundance of opportunities to acquire properties leased to these retailers, and I'm delighted that our underwriting and real estates disciplines prevented us from completing such transactions. In the case of Linens 'n Things, we [had] previously owned stores leased to that retailer, but through our proactive capital recycling efforts, we disposed of our last store leased to Linens 'n Things several years ago, and, I may add, at a very good cap rate.

Subsequent to the end of the quarter, Uni-Mart, which is one of our tenants, did reject thirteen properties in our investment-- or, in our portfolio, pursuant to their bankruptcy proceedings. These stores are generally smaller units, and in total they represent about 0.36% of our current annual base rent. Our guidance does take into affect the full amount of the rent that we might lose from these store closures. Our leasing team is already in discussions with potential tenants on some of these closed stores, so I'm optimistic that we will be able to mitigate the Uni-Mart store closures and replace their anticipated rental stream.

Uni-Mart and the entire c-store industry were impacted by the unprecedented and rapid increase in the price of oil that occurred in the first half of this year. Specifically, they were unable to raise the price of gasoline fast enough as oil prices increased to maintain their profit margin. Also, credit card fees to these retailers of a very high ticket average really hurt their margins. Having said that, as the price of oil has decline in the past several weeks, gasoline margins for c-store operators have been very, very good. And I know this, having visited a couple of our bigger tenants in the last couple of weeks.

In the second quarter, National Retail Properties acquired 34 properties for $103 million for our investment portfolio, at an average cap rate just over 8.7%. These properties were acquired from nine different tenants, and I should point out that we've previously completed sale lease-back transactions with seven of these nine tenants. The remaining transactions were with two new retailers that are likely to become relationship tenants for National Retail Properties. And, in fact, we have already approved a second property acquisition with one of these tenants. This particular tenant is a large national retailer with a well-proven, profitable business model, and, I may add, extremely good credit. We're able to do business with them in this environment as they have sought to diversify their capital sources, and I can assure you, despite the high quality of the real estate, the initial cap rate that we have received is more than appropriate.

Let me make a couple of comments about the acquisition and disposition environment in which we're operating. As most of you know, there are clearly fewer fields out there than there were this time last year. But with much less competition, we are still able to selectively acquire carefully underwritten [net lease] retail real estate at better cap rates than we were able to obtain in 2007. We are currently evaluating a variety of deals, and I believe that we'll finish 2008 on the high end of our acquisition guidance of $300 million to $400 million of acquisitions.

Cap rates are creeping higher in the (inaudible)1031 market, but on an absolute basis, cap rates continue to remain very low. By way of example, there are plenty of Walgreens trading in the mid-6% type range, and restaurant properties are still selling in the low 7% range.

At NNN, capital recycling continues to be a core strategy for us. So far this year, we've sold $37 million of properties from our investment portfolio, and, perhaps more importantly, we've meaningfully reduced our TRS inventory by selling just over $100 million of properties this year. We've continued to obtain low cap rates by selling properties internally off our market-leading, Web-based disposition platform. As a reminder, our ability to sell properties directly at extremely aggressive pricing is an invaluable tool that enables us to execute our capital recycling program but selectively sell assets from portfolios that we may acquire.

In summary, I want to remind you of something that gives me great comfort as I think about our Company. Namely, that over 60% of our annualized base trends comes from companies that are either public or have rated debt outstanding. This important fact speaks to the quality of our tenant base and the real estate that we own.

One more item, before handing it over to Kevin. I want to remind you that we are hosting an institutional investor meeting in Charlotte on Tuesday, September 30. We will be visiting several of our convenience store sites, and I believe attendees will be pleasantly surprised with the high quality of these real estate locations. Kevin?

Thanks, Craig. Let me start with our standard cautionary language. We will make certain statements today that may be considered forward-looking statements under Federal Securities laws. The Company's actual future may differ significantly from the matters assessed in these forward-looking statements. And we may not release revisions to those forward-looking statements to reflect changes after we made the statements. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in our filings with the SEC and in this morning's press release.

With that, as Craig indicated and the press release indicated, we reported second quarter 2008 FFO results totaling $36.7 million or $0.50 per share representing a 6.4% increase from the $0.47 per share in the second quarter of 2007. For the six months, we recording $1.01 per FFO per share, which represents a 5.2% increase over 2007's first half. We were pleased with the results. We believe we have good visibility on our $1.97 to $2.02 per share guidance for calendar 2008, and that represents a 5% to 8% growth over 2007's result. Our business plan continues to produce good results, the balance sheet is in good shape, and our property portfolio continues to produce the rent we anticipated, even in this tough environment.

Let me quickly go through some of the details in the second quarter, and then we'll take questions. Looking at the income statement, total revenues for the second quarter increased to $57 million, primarily driven by additional rent from (inaudible) new investments made over the past year as well as accretive capital recycling from the dispositions. Acquisitions in the core portfolio totaled $103.2 million in the second quarter, as Craig just discussed, and $253.8 million for the first half, which puts us well on track for our 2008 guidance of $300 million to $400 million of core portfolio acquisitions.

Occupancy at June 30 was 98.4%, that's up [50] basis points from the immediately prior quarter, and flat with a year ago in numbers. On page 5 of the press release, it includes some additional disclosure regarding our contingent percentage rents, straight line rents, and capital lease earned income information, for your information. I will note the second quarter percentage rents of $302,000 included about $127,000 of percentage rent that in the future will be classified as base rent going forward.

Interest and other income from real estate transaction was $1.4 million for the second quarter. That's certainly higher than the prior period of $1.2 million and higher from prior year amounts, primarily due to somewhat higher balances of our mortgage and notes receivable. At the end of the second quarter, we had $6.8 million outstanding in our structured mezzanine loans, and our mortgage and notes receivable balance was $83.3 million, which was a decline from $99.9 million the prior quarter. And we do expect further reductions to this balance in the third quarter.

G&A expense was $6 million for the second quarter. That's up 1.6% from prior year amounts and down from $7.6 million in the first quarter. For the year, we see G&A coming in at $24.5 million to $25 million. If you look at-- on a year to date, 2008, we continue to see operating leverage improve, with G&A at 12.4% of total [NLI] revenues compared to 14.7% in the first half of 2007.

Property expenses net of tenant reimbursements were $798,000 for the second quarter. That is down slightly from the first quarter's $861,000. Interest expense for the second quarter increased to $14.7 million. That is up from $12.4 million last year, primarily due to higher average debt balances.

At quarter end, we had $127 million of our total liabilities, or 10% of our total liabilities were floating rate debt. If you look at floating rate debt as a percent of gross book assets, which I think is more meaningful, that was 4.4%-- floating rate debt divided by gross book assets.

During the second quarter we reported the sales of seven properties from our core investment portfolio, and that is reflected in the investment portfolio (inaudible) on page 7. The capital recycling generated net proceeds of $26.5 million and produced a gain of $2.7 million. And, a reminder-- these gains are not included in our FFO results, but obviously create value as we reinvest in higher cap rates.

Looking at our discontinued inventory properties -- these are TRS properties-- we sold a total of seven properties from [our] taxable subsidiary, with net proceeds of $29 million, all seven of which were sold out of our 1031 exchange unit during the quarter. For the second quarter, total pre-tax, pre-overhead gain on sales from TRS was $917,000 for the second quarter. It was $6.6 million for the first half of 2008. We're still very confident with our prior guidance of $10 million to $10.5 million of pre-tax gain for this line item in 2008. As Craig noted, our total TRS inventory is down $72 million from year end, and based on what we have under contract for sale, we anticipate that trend will continue in the third quarter as well.

As we discussed in the past, our disposition activity is a core competency which has allowed us to create value through capital recycling. Looking at both the core portfolio and the TRS combined for the first half of 2008, 49% of our acquisition and development and investment activity has been funded with disposition proceeds. Which is-- it's not just a capital funding of new investments, but it's adding value by selling at a lower cap rate and reinvesting at a higher cap rate, demonstrating the embedded value in our portfolio and growing our rental income stream. If you look over the last 3.5 years, our total dispositions have funded 44% of our acquisition and development activity during that same time period. We have one of the best disposition platforms in our niche, and it's an important tool in managing our Company and portfolio. It looks to continue performing well for us in 2008.

Looking quickly at the balance sheet, we finished the second quarter with total liabilities at $1,227,000,000, which was virtually flat with prior quarter amounts. Of this amount, only $27 million was secured debt, with 98% of our total assets unencumbered. There was very little balance sheet activity-- net-- during the second quarter. Most notable, in June, Moody's did upgrade our unsecured debt to Baa2 and our preferred to Baa3, which, given the difficult macro and capital environment, we were particularly pleased with.

At June 30, '08, our total debt to total assets on gross book basis was 43.7%. That is down slightly from the prior quarter's 44.3%, and it is up slightly from year end 2007's 42.5%. On a market cap basis, leverage was 42.9% at quarter end. Importantly, we have no material debt maturity until September 2011. Obviously, the value of maintaining balance sheet flexibility is more apparent in times like these. We believe we are in a very good position, which will enhance our competitiveness at the margin.

Interest coverage for the second quarter-- 3.4 times. Fixed charge coverage was 3.0 for the second quarter. And, lastly, I'll note that we did increase our quarterly dividend by 5.6% to $0.375 cents per share for the quarter, in the second quarter, which puts us on track for $1.48 dividend in 2008, which will mark the 19th consecutive year of increasing our annual dividend per share while, at the same time, we've been reducing our dividend payout ratio to nearly 74%, based on the midpoint of our '08 guidance.

So, in closing, our balance sheet and portfolio are in very good shape, and we're in a very good position to deliver solid results in 2008.

Ryan, we'd like to open it up to questions, please.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. (OPERATOR INSTRUCTIONS). Our first question comes from the line of Michael Bilerman, with Citi.

Hi, it's actually Greg Schweitzer here with Michael. Good morning.

Good morning, Greg.

Could you talk a little bit about the tenant or sector composition of the-- I think it's $175 million in the inventory portfolio? And just basically how you get comfortable with that balance?

Well, just before that-- you know, the starting point is-- and Kevin is going to give you some information, but the starting point is that during the course of this year, we have reduced that inventory by just over $100 million through June 30. And we've already had, as Kevin mentioned-- he said, we have several properties under contract. In fact, several of them are actually closed here in the month of July, and again, at very low cap rates. So, we have done a good job of shrinking that. We did complete a large transaction in late 2007, where we did put a meaningful [slug] of properties into the TRS. This was quality control from that portfolio and the good news is, we've dramatically curtailed and shrunk that inventory.

And, Greg, we don't get a whole lot of detail on what's in there. We'll note and remind folks that our www.nnn1031.com website lists things that we're marketing. Much of that is from our TRS. But I will note that in our TRS, of the $176 million that you see on the balance sheet at quarter end, about $77 million of that is in our 1031 exchange properties, which are properties we've acquired for immediate resale, and about $99 million is in development, and of that development $99 million-- $74 million, $75 million is completed. So, it's properties and tenants that look a whole lot like our core portfolio, and you can get some color on that website as to exactly what they are and what kind of cap rates we're looking at.

Okay, thanks. And, the sales that you completed in July. Cap rates-- in the low 7s? Is that reasonable?

Maybe a little bit better than that. These were deals that were struck several months ago, and cap rates were [aggressive].

Are the three Uni-Mart assets still in the [hope to sell] budget?

Yes, absolutely. Unfortunately, yes.

And what are the chances that you could see any payment on those-- I mean, how would you raise those assets to the rest of the Uni-Mart assets in the portfolio?

Given that we were trying to sell them, they were probably on the weaker (inaudible), but the fact of the matter is, it's very small dollars. Our task for the next several months is to release all of the thirteen Uni-Mart properties, and early indications look quite promising.

Okay. And then, just one more-- I'm not sure if I missed this in your comments or not, but where do you think occupancy will shake up towards the end of the year?

You know, I think-- let's just step back for a second. I think if you take a look at ICSC data across the entire retail spectrum, there's about a 6.5% vacancy level. So here we are, sitting at 98%, and that's very, very high in the scheme of things. Now, obviously, that represents the quantity of our portfolio, but we know that there are, between now and the end of the year-- we've already seen some stores closed in our portfolio. We measure occupancy by number of properties, and given that some of these properties that are closed are very small and low-rent payers, our occupancy-- just in round numbers, is probably going to come in-- depending on what happens between now and the end of the year, and the number of properties we acquire, etc., etc.-- but, somewhere between 96% and 97%, I am speculating. But the actual amount of rent that's lost from these vacant properties is less than that 2%. It's actually quite a bit less than that.

Okay. Are there any new tenants that you have concern over?

The consumer is stretched, retail is tough. Another tenant that has most recently filed Chapter 7 is Bennigan's/Steak and Ale, and in our portfolio we have five properties there. Two of these five, I would add, are extremely strong real estate locations. This tenant filed on Tuesday of this week, and on one of those properties-- one of the five-- we are very close to having a Letter of Intent with a bank. Now, this speaks to a couple of different things. It talks to proactive portfolio management, it talks to the quality of our leasing team being ahead of that curve-- we had several tenants in the hunt, and I think we're going to have a deal with a bank in that space. One of the other properties is probably in our top twenty locations. It's in a major urban market. And then, predictably, in five of them, there's one of them we wish we didn't have. But let me say this, that I think-- a take-away is that the retail environment, which is clearly weaker than it was at this time last year-- the impact on national retail properties taken in totality is not that high. We're just repeating our prior guidance, which shows healthy growth over 2007, despite in the external environment. There's always noise. Retailers come and go, but at the end of the day, National Retail Properties, with its strong real estate and its good balance sheet, is in extremely good shape.

Great. Thanks very much.

Thank you, [Greg].

(OPERATOR INSTRUCTIONS). Seeing as there are no further questions, I'd like to turn the call back to Management for any concluding remarks.

Ryan, thanks very much. We look forward to speaking to you in about 90 days. If you have any questions, Kevin and I would like to take them. Thanks very much, and good morning.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation.