NNN REIT Inc (NNN) 2009 Q3 法說會逐字稿

Greetings and welcome to the National Retail third quarter 2009 earnings call. (Operator Instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Craig Macnab, CEO of National Retail Properties. Thank you, Mr. Macnab, you may begin.

Tanya, thank you very much. Good afternoon and welcome to our 2009 third quarter earnings release call. On this call with me is Kevin Habicht, our Chief Financial Officer, who will review financial details of the quarter, plus provide initial guidance information for 2010 following my opening comments.

Our third quarter was fairly uneventful. Many of us at National Retail Properties spent a great deal of our time dealing with commercial bankers which was, however, a most productive use of our time. We're delighted to have refinanced our line of credit, which as you may have seen in our release currently has nothing outstanding. Kevin will provide additional information. But we are most appreciative of the support that we received from our bank group, many of whom have been lenders to NNN for many years.

In this environment, it is obviously easier to complete a financial transaction from a position of strength and our credit metrics and balance sheet continue to be very strong at National Retail Properties. We're looking forward to deploying some of this capital in the months ahead and into 2010.

In the third quarter, we continued to evaluate a couple of opportunities, but our acquisition activity was modest. As discussed in prior calls, we are not a good buyer of other people's challenging properties. And there are plenty of these inferior opportunities available for sale right now.

It appears that opportunities for the type of acquisition transactions we are interested in are steadily becoming more prevalent and we are in preliminary discussions on a couple of portfolios. As a reminder, most of our acquisition opportunities are created when retailers are expanding and selling their existing company-owned real estate or when a corporate transaction occurs. Some of the possibilities that we are evaluating do involve corporate transactions. So let me caution you that whether or not they occur is less predictable.

In terms of pricing, we are looking at initial yields that have a nine as the first digit, depending on a variety of factors including the quality of the real estate and the credit worthiness of the tenant. These initial yields result in average cap rates in the 10% plus to 11% range over the primary term of the lease, which for us is normally either a 15 or a 20-year lease. These returns are obviously attractive given where our cost of capital currently is and I think are also very favorable versus the returns that are achieved in other property types.

Our fully diversified portfolio is little changed at 96.3% occupied. We currently own 1,004 properties, which are leased to over 200 different retailers all across the country. Convenience stores are our single largest line of trade, where we own 339 stores in 19 different states leased to more than 30 different operators.

We continue to like the seasonal category due to the real estate attributes of each location plus the defensive characteristics of the industry. However, we are mindful that diversification is a key attribute of National Retail Properties. While we continue to evaluate C store opportunities, we are proactively looking for acquisition opportunities in other lines of trade.

Kevin?

Thanks, Craig. Let me just start out by some cautionary language. 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 these forward-looking statements and we may not release revisions to those forward-looking statements to reflect changes after the statements were 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, as indicated in the press release we reported third quarter 2009 FFO results totaling $31.4 million or $0.39 per share, which was in line with our projections and street estimates. The decline from prior year results was primarily due to some lower transactional income, both TRS gains and lease termination fees, as well as $6.6 million additional shares outstanding and the corresponding lower leverage balance sheet that goes along with it.

As required beginning January 1, '09, the results include the new convertible debt accounting, which added $1.451 million of non-cash interest expense, reducing our FFO by $0.02 per share. And we've included this in our non-cash items disclosure on page 5 of the press release, which also notes some other non-cash items, which in total is $2.7 million or about $0.03 per share of additional operating cash flow above our reported GAAP earnings and FFO results for the quarter. For the first nine months of 2009 these items totaled $0.11 per share.

Balance sheet, as Craig said, remains in very good shape with no material debt maturities until September 2011 and with all $400 million available on our bank credit facility. While this low leverage is a drag on per share results, these strong credit metrics position us well to maintain strong access to capital, handle any kind of macro economic weakness, and to take advantage of attractive acquisition opportunities that arise.

I want to go quickly through a few details on the third quarter. Then some comments on FFO guidance and we'll take questions.

Looking at the income statement, total revenues for the third quarter were $57 million, which was in line with our projections. As expected, there was little new investment in the third quarter, just $9.7 million in the core portfolio, about $4.2 million of that from a small acquisition and $5.5 million of ongoing funding of our couple of development projects.

Occupancy at September 30, 2009 was 96.3%. That was down 40 basis points from the immediately prior quarter and down 60 basis points from prior year 2008.

During the third quarter we had $155,000 of lease termination fees. That compares with $2.3 million in the third quarter of 2008. And for the nine months of 2009, lease termination fees were $7.8 million versus $3 million -- three O -- for the nine months of 2008.

Interest and other income from real estate decreased to $1.1 million in the third quarter, largely due to lower outstanding mortgage notes and receivable balances.

G&A expense was $4.9 million for the third quarter. That's down slightly from prior year and more notably, the first nine months 2009 G&A was down 15% from the first nine months of 2008, primarily due to cost cutting. We see G&A coming in around $22 million for the full year 2009, which will be an 11% reduction from full-year 2008.

Property expenses net of tenant reimbursements were a $1.622 million in the third quarter. That's up about $700,000 from prior year amounts, primarily due to the increased vacancies we've had over the last couple of quarters.

Interest expense for the third quarter decreased slightly from prior year amounts to $15.6 million and that was fairly flat with second quarter '09 results.

Also for the quarter, we reported results from the 12 California properties we are operating as a result of the eviction of a tenant late June in which we took possession and ownership of the tenant's business and business assets as we discussed on last quarter's call. A small loss of $233,000 for the quarter was in line with our expectations. And it does capture the start-up costs involved as the operator we hired to run this business gets up to speed at these properties. We do -- we are seeing and expect to see continued improvement in those numbers going forward.

During the third quarter, we reported the sale of just one property from our taxable subsidiary, which was a small land parcel with proceeds of just $315,000.

Looking at the balance sheet, we finished the quarter with total liabilities of $1.040 billion. That's down slightly from the prior quarter and year-end amounts. We only have $26 million of secured debt and 98% of the Company's total assets are unencumbered. Our next material debt maturity is $138.7 million due September 2011.

As of quarter end, we totaled -- liabilities to total assets on a gross book basis was 36.7%. And that's down from 41% a year ago, September 30, 2008.

Earlier this week, as Craig mentioned, we announced that we had closed on a new $400 million unsecured credit facility that matures November 2012 and does provide us the option to expand that maturity to November 2013 at our sole option. The line's priced at LIBOR plus 280 basis points. Happily there was no need to downsize the line capacity as the transaction was over subscribed primarily from our existing bank group.

The covenants are largely unchanged from the prior bank line. We're very pleased to have this facility in Belize that demonstrates the strength of our business and strong credit metrics. As I mentioned, we have no amounts outstanding on this credit facility.

Interest coverage for the third quarter, 3.3 times. Fixed charge coverage was 2.9 times for the quarter.

Moving onto our guidance, we did not make a change to our 2009 guidance of $1.65. FFO per share guidance of $1.65 to $1.70 per share at the moment seeing us ending up on the lower-end of that range.

We did introduce 2010 FFO per share guidance of $1.51 to $1.58. This translates into an AFFO result of $1.66 to $1.73 per share, which leaves our dividend well covered. Half of the $0.15 per share difference between the FFO and AFFO is non-cash interest expense on our convertible debt and the other half being items included on page 5 of our press release.

Some notable assumptions for our 2010 guidance and changes from 2009 include bit of a laundry list here. One, $170 million of acquisitions, which is slightly skewed to the second half of the year; $15 million of dispositions; G&A expense of $23 million. No real change in occupancy expected; $3.6 million of mortgage residual interest income; no TRS gains on sale; no lease termination fees, which that compares to $7 million year-to-date -- over $7 million year-to-date for 2009; and no gains from debt repurchases, which we had $3.4 million of gain year-to-date in '09.

The most notable change from 2009 results to the 2010 projection is that we anticipate lower transactional income in 2010. Specifically, we're projecting zero lease termination fees and zero debt buy-back gains in 2010, which compares to $11.2 million we reported for these two items in 2009. That translates into $0.13 plus per share impact.

Additionally there we expect an additional 4% of weighted average shares outstanding in 2010, which cost us about $0.06 a share. So while the core portfolio in operations are performing fine, we're -- and our balance sheet's strong, and our lowered leverage position looks very well for what may come, our guidance reflects the lower transactional and higher shares -- lower transactional income and higher shares outstanding, which are going to dampen our per share results.

We are pleased with how the Company's positioned and believe it will be good opportunities in 2010, potentially beyond what we've assumed in our guidance. Throughout 2010 though, we're going to stay focused on managing the assets we have, maintaining occupancy, controlling costs, and capitalizing on solid opportunities to be more offensive.

With that, Craig, we'll turn it back to (inaudible).

We'll let Tanya (inaudible) let's open it up for questions please.

(Operator instructions) Our first question comes from David Fick with Stifel Nicolaus. Please proceed with the question.

Good afternoon. Walking through the AFFO, the FFO numbers in the guidance with the positive spread due to the one-time items, we're still looking at several years of declining year-over-year either cash or GAAP to FFO earnings. And I'm just sort of wondering, given that you guys are designed to be stable over a long period of time and fairly defensive at times like this, what do you think your long-term growth rate is and should be over time? And I think Kevin, along those lines you alluded to potentially some upside in next year's numbers. What kind of things could potentially create upside considering that your guidance is so far below the street?

Dave, thanks very much. And clearly the starting point is that our growth comes externally. We need to be making acquisitions to build value for shareholders. And 2009 we have not accomplished that for a variety of reasons. But I think going forward, the acquisition opportunities qualitatively should be as good as we've seen in the past, if not better.

There's clearly less competition today than there was in 2007 and 2008, number one. And number two, access to capital is every bit as difficult for retailers as is it for real estate operators. So our guidance for next year is $170 million of acquisitions. And as you well recall in 2006, 2007, 2008, we acquired considerably more than that.

Right now we are looking at a couple of opportunities but they're not as many as frankly I might have thought. But the quality of them is very appealing and I think as we begin to get back on the -- making acquisitions that if our internal goal is to provide low double-digit total returns for shareholders. So there's a combination of dividends plus FFO per share growth, the sum of those two needs to add up to the low double-digits numbers. And we need to do that by keeping our portfolio stable, keeping our costs in line, and making acquisitions.

And you believe you'll be able to do that?

I'm very optimistic we will. Yes, David.

And I'm presuming that your June 30th numbers -- I'm fairly certain -- included the carwash transition in terms of the balance sheet. So I'm just wondering if you could illuminate us further on the 40 basis points of occupancy decline in the quarter.

Yes, there's just a little bit of noise at the margin. I mean we lost one or two secondary tenants that many of which are not in the primary term. And our releasing activities were pretty good, but not good enough to pick up every single one that dropped off to the side.

Okay. And then lastly, I guess the biggest convenience store transaction that's been announced recently was the 36 Exxon stations purchased by one of your competitors at an 11 plus cap rate. How do you -- how did you look at that transaction in terms of pricing? And implications considering these were mostly state of the art type locations around Washington, DC?

Yes, I think it -- and our congratulations to them. We did look at that transaction and any time you can buy assets in a major metropolitan market, it's probably a pretty good thing. Having said that, what we like to -- our model is to buy convenience stores where there's a balance of gasoline sold and merchandise sold. Merchandise has higher margins and I'm not sure that this portfolio had that, number one.

Number two, our very strong preference is to purchase properties where we've got bigger operators and our preference is not to do stores that are operated by dealers. So this is a great transaction for the other side and I think the real estate was pretty good. It doesn't really fit what we're looking for. But we did take a look at it earlier this year.

Great, thank you. We'll follow-up next week in Phoenix. See you there.

Great.

David, look forward to that. Thank you.

(Operator instructions) Our next question comes from Greg Schweitzer with Citigroup. Please proceed with your question.

Afternoon. I'm here with Michael Bilerman as well. First of all, congrats on getting the line done.

Thanks, Greg.

And Craig, could you elaborate a bit more on the type of opportunities that you are seeing? What types of industries and so forth?

Well, the -- two things. As big oil, which is just as this transaction that David talked about a moment ago, I those were Exxon stores in Washington, DC. Big oil continues to be a big seller of their convenience store operations and there are a lot of those types of transactions going on. And we've got a very strong presence in that industry. We tend to see most of those transactions, and there's more than enough opportunity for everybody.

Having said that, as we all know on this call, we're pretty full in the convenience store space. I think there are a couple of opportunities in major urban markets that are still going to appeal to us, but we are being selective.

So once you get past that; the biggest line of trade, the biggest category is the restaurant industry. 2006, 2007, and 2008 we had a very, very aggressive competitor in that space and cap rates were awfully low. That big competitor is -- appears to be less active currently. Pricing is more in line with what we're looking for, which are initial cap rates with a nine in front of them.

And in the restaurant space, particularly in the quick service arena, we are seeing a couple of small opportunities. And we're going to continue to look for opportunities there and I think the pickings are going to be pretty good for the next couple of years.

Okay. And then just on tenant health has been in the portfolio today, how are the other car services and car wash businesses faring besides the business that you took over?

That's -- the automobile service area is frankly doing quite well. As the number of car dealers decline, the number of years that cars remain on the market, the fundamentals are pretty good. And I think you're seeing that in the big publicly traded companies.

What we're seeing with one of our tenants, who I met with just here in the last couple of weeks, an automobile service operator, their comp store sales are up very nicely. I think as a Company, and they've got 150 different stores, they're up, I don't know, 4.5%. Our stores, frankly, are doing better than that this year and I think that category's going to do well for the next several years.

Craig, it's Michael Bilerman speaking. Good afternoon.

Hey, Michael.

Now, when you referenced the transaction activity you were talking about, you said there was a lot of corporate deals, which I guess assumes your more traditional sale leaseback direct with the owner of -- owner occupied real estate. Is there any private equity in terms of transactions where you see them going after corporates and your being the financing source for the transaction through sale leaseback on the real estate?

Michael, that activity so far this year I think you're referencing has been fairly modest. And the private equity is loaded up with capital and frankly struggling to deploy it. So they're actively out there. We've all marketed aggressively to those companies and as the credit markets are improving, those guys are seeing more and more opportunities.

Currently I think there -- it's going to be fairly attractive for companies like us for a couple of reasons. Number one, the EBITDA multiples that the private equity groups are looking at today are several (inaudible) turns lower than they were in the go-go years.

Secondly, given that debt multiples are lower, the private equity groups are having to capitalize these companies better. And as a result from a credit standpoint, the transactions make a lot of sense.

So we're currently looking at a couple of these opportunities. The challenge is the sticker shock that sellers are having to endure taking these lower EBITDA multiples. So it's a struggle for some of those to happen. But I think that 2010 we are going to get back to doing some of this business. It's going to be properly underwritten by everybody, including the lenders.

So Michael, I'm pretty encouraged about the acquisition opportunities for the next several years. I don't think they're going to be quite as voluminous, but I think two things. Number one, the quality is going to be higher, and secondly those of us that have capital, and there are a small number of us in that category, are going to have far less competition pursuing these opportunities.

How have the corporate -- I guess when you're having the discussions directly with the corporates in terms of shedding real estate and doing sale leaseback, how are they reacting to a view that why would I want to sell my real estate at what I think is the bottom combined with paying a very high lease rate for that capital? I would have thought that would have stymied a lot of companies from doing transactions.

Yes, I think that they also have higher weighted average debt costs -- I mean capital costs themselves. Their debt costs are up. But I think more than that it's a slightly different issue. What's happening is that you have any of a number of -- just take, say, the restaurant space. Some of these operators are continuing to migrate to more and more of a franchise business model. And as they look to complete transactions where they sell existing company-owned stores to good, well-capitalized franchisees, transactions are going to occur.

And those franchisees, particularly those that are financed by private equity generally don't want to own their own real estate. So that's where the opportunities are coming. The pricing has clearly changed. Debt multiples, by the same token are much lower, so the cost of debt is also higher. So within that, there's plenty of opportunity.

But I think the -- just stepping back, our guidance for next year is $170 million of opportunities. And the size of the net lease retail market is probably bigger than the mall space combined. So we just need a small little bit of that sandbox to accomplish our goals. And if we're lucky we can exceed them, although right now we don't have a line of sight on doing that.

And just following up, one more from that. How much exposure would you say you have to tenants today that were products of the [CNBS] activity over the past few years?

That's a good question, Greg, and we have a modest exposure. The last couple of years we -- particularly as we were buying a lot of convenience store space, we did not participate in a huge amount of those transactions. Some of our bigger transactions involved either the Pantry or Susser completing meaningful acquisitions themselves. And both of those companies remain quite well capitalized. We have very good rent coverage from them and frankly we have some of the better stores.

But in our case, that type of transactional activity was a smaller part of our business, Greg. I haven't looked at it that way, but in the -- something from, pick a number, 8% to 15% or so is the number. And look, I'm just guessing there.

Okay. And then the last one just on guidance. What are you assuming for the business in California for 2010 guidance?

In round numbers something like $0.03 a share.

Okay, thank you.

Our next question comes from Jeff Donnelly with Wells Fargo. Please proceed with your question.

Hey, guys. Good afternoon. I guess just building on some of the conversations or comments you've made on acquisition activity. You mentioned there's some portfolios out there, and I guess I'm sure they'll be one off deals, but given the sheer size of the net lease business, and there's certainly some large buyers out there, like Cole Capital and what have you. Do you think there will be opportunity to have, I guess I'm sort of delineating and saying more of a transformative acquisition opportunity in the next few years? Or is that just not something you're looking for where portfolios could be several hundred million dollars, or even larger.

Yes, it -- that's a good question. I think the starting point in answering that sitting here today, after we've done; worked so hard to get our balance sheet in very, very good shape. To take advantage of what I would have anticipated would have been a large number of transactions. I'm a little surprised sitting here today that the opportunity set is less than what one might have thought.

Having said that, as we head into 2010, we all know that there's a lot of CNBS debts coming due. And we're going to all get to discover whether pretend and extend is the new part of our lexicon or not. And to the extent the regulators put any type of pressure on some of the real estate lenders or the services, et cetera, to get real in dealing with this, we're going to have more opportunity than we can shake a stick at.

Now in terms of transformative, one of the things that is striking as you look at the REIT industry in totality is how very little consolidation has occurred. Even though, I think you would agree, it's likely that we're going to migrate into haves and have-nots in the REIT space, even though it really hasn't occurred this year. If anything, riskier companies have commanded or have appreciated more than others.

So if there is that type of delineation, which you're probably going to influence more than we are, one would think that consolidation will occur. And to the extent there is that opportunity, I'm quite confident National Retail Properties will be in that mix. Having said that, as I said earlier, we are not a good buyer of other people's challenging assets.

That's helpful. And that's it for me. I'll see you guys next week.

Thank you, Jeff. Tanya, any other questions?

Yes, we have another question from Ben Rosenswig from Privet Fund Management. Please proceed with your question.

Hi guys. Thanks for taking my call. Appreciate it. I might have missed this, but can you kind of get into some of the same store results, like same store lease spreads?

Like same store what?

Lease spreads for the quarter?

Yes, in this current environment, same store lease spreads are not upward. We're working as hard as we can to maintain occupancy. We want any vacant properties we have to be paying rent. And we are not seeing positive rent spreads.

Now on our re-leasing activities this quarter -- sorry, this year, because frankly there only are, I think, three leases that re-signed in this current quarter. And Ben, if you're new to our Company, we don't have a lot of vacancy, by the way.

Right.

But as -- in the beginning of the year, Circuit City went dark and we had a couple of those properties. And re-leasing big boxes is more than a challenge. We've had a little bit of success, but the ones that are yet to be leased we are looking at rents, which are solidly 25% to 50% lower. Now that is just that one example, but if you back out one or two really challenging cases, our rent spreads are negative across the board and pick a number today; 25% to 35%.

Okay, that's helpful.

And I'm sorry, just to stay with that just for one more second, for those of you that are new to our Company. We are, as a practical matter, only re-leasing challenging properties. The good properties, even when they come to the end, the tenant exercises the option and continues paying the rent. It's only properties where there's either a bankruptcy or the lease is rejected that we get to re-lease them. So by definition, we are -- we've got [adverse] selection in the properties we're releasing.

Right, okay. And I guess you don't necessarily kind of talk about same store results across the board, but what -- if you had to talk about your same store pool, how many of your -- what is it -- 1,004 properties would be included in the same store?

Well, Ben that's a good question and you're right. We don't talk about it. But if we go down the categories, our single biggest category is the convenience store space. And that sector has had pretty good numbers.

Our second biggest tenant, Susser, just announced their third quarter results. And if you take a look there, they had very nice comp store merchandise sales growth in the third quarter and for this whole year, pick a number, 45% for those too. It did say on their most recent earnings call that those numbers have moderated as they came into the end of the quarter and into the fourth quarter.

Our single biggest tenant is the Pantry. They're on a September year-end and they have not announced their numbers yet. Then you go to the second biggest category, which is restaurants and quick service restaurants have been doing quite nicely this year. And casual dining and fuller service, which we have very, very little exposure to, has seen negative same-store sales.

So the fact -- I mean it's just segment-by-segment, but in totality, companies that are in the net lease space where we have very little, if any, high-end retailers. Most of our retailers are value oriented or necessity type retail. They are doing just fine. And the reason that that's relevant is that even though retail sales in the aggregate are flat or maybe slightly up, companies like specialty retailers are challenged as you saw in this morning's October numbers for some of the -- particularly the teenage apparel companies. But value-oriented is doing just fine. And by the way, I don't see any change into 2010 for that statement.

Okay, so how many of your stores are same store for this quarter?

Ben, I don't have that number on this call right here.

Okay. Well, what's your criteria, just so I can understand.

In terms of --?

Well, what do you use to count something a same store? Just that it was around a year ago or sort of adverse circumstance?

We have any of a number of tenants that report this data to us and it's year-over-year comp store sales. But some of our bigger tenants, whether it's Best Buy, CVS, Barnes and Noble, et cetera, don't report that data to us or to any of their other landlords.

By the way, we get very nice corporate credit there.

Okay. And then just a quick anecdotal question about some of your exposure to Blockbuster and Hollywood Video. I think you've seen a few pretty negative articles about them and some of their real estate. So I was just kind of curious if you could give some color on what you've been hearing from them.

Well, those companies have been on our watch list for a long time. And Kevin on this phone deserves all the credit in the world for paying attention to Blockbuster years ago. We have stayed away from it. We did have more Blockbuster stores. Today it's a pretty small number. I think we have three Hollywood Video. In the aggregate, the sum of all of that rent as a percent is not really enough to move the needle.

Less than 0.5%.

And some of those Blockbuster stores in particular, the leases have come up and we've renewed them at the same kind of rent that they were paying previously. So those stores are clearly in their better performing category.

Okay. I appreciate it. Thanks, guys.

(Operator instructions) There are no further questions in queue at this time. I would like to turn the call back over to Mr. Macnab for closing comments.

Tanya, thanks very much. We appreciate all of you participating and listening in to our call. And we look forward to seeing several of you next week in Phoenix. Thanks very much. See you then. Cheers.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.