NNN REIT Inc (NNN) 2010 Q1 法說會逐字稿

Greetings, and welcome to the National Retail Properties first-quarter 2010 earnings call.

At this time all participants are in a 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, Craig Macnab, Chairman and CEO for National Retail Properties.

Thank you.

Mr.

Macnab, you may begin.

Thank you, Rob, and good morning and welcome to our first-quarter 2010 earnings release call.

On this call with me is Kevin Habicht, our Chief Financial Officer, who will review details of our first-quarter financial results following my brief opening comments.

Let me start with a quick review of the portfolio and some comments on the credit of our tenants.

As of the end of the first quarter our portfolio was 96.4% leased, which is about where we were at the end of the year.

Our portfolio continues to be in excellent shape and the retail environment has recently improved which we see in the monthly numbers that we receive from certain of our tenants as well as in the broader macro data where retail sales increased by 1.6% in March on top of a very solid February.

It appears that consumer confidence is improving and retail sales are likely to improve further, particularly if the pace of job creation improves.

Specifically in our portfolio there are several items worth mentioning, including last week's significant debt financing by our second largest tenant, Susser, which nicely improves their credit profile and at a lower cost.

Logans Roadhouse is one of our top 10 tenants and their debt recently received an upgrade from Moody's, which was good to see.

In our acquisition activity we continue to be selective in evaluating opportunities.

In the first quarter we acquired four properties spending $12.4 million at a yield of just less than 10%.

While the volume was less than we had budgeted, the quality of these assets was excellent.

For example, we opportunistically acquired two Walgreens that are well located and perform well for the tenant.

The yield on these two well located Walgreens was well above market given that our acquisition yield in the quarter was just less than 10%.

What is encouraging is that it appears that the middle-market transaction environment is becoming more active and cash flow lenders are slowly returning to the market.

This will lead to more middle-market transactions occurring in the second half of the year and in 2011, which will result in additional sale lease back opportunities for NNN.

Examples of the improvement in the middle-market M&A environment are yesterday's announcement that Dave & Busters is changing hands and being traded among two private equity firms.

National Retail Properties continues to be well-positioned, our portfolio has always had high levels of occupancy and it is pleasing that the profitability of our retail tenants is now improving.

Our balance sheet remains very strong, which will allow us to take advantage of the carefully underwritten acquisitions that we hope to make later this year and in 2011.

I'll now hand over to Kevin.

Thank you, Craig.

Let me first start with some cautionary language that we will make some 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 these 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 let me just start with a quick summary.

First, we did reported FFO per share of $0.31 and FFO per share, excluding impairments, was $0.35 per share and AFFO was $0.38 per share.

2010 FFO per share guidance, excluding impairments in the first quarter, were reduced about $0.05 to $1.47 to $1.52, primarily due to slower acquisition timing and increased disposition projections.

This new FFO guidance translates to AFFO per share of $1.62 to $1.67.

Thirdly, not a lot of activity in the first quarter, but we are mildly encouraged about the visibility on some opportunities.

Our occupancy is holding up well and the balance sheet is in great shape, which positions us well to capture those opportunities.

Let me go through a few of the details.

As indicated in the press release we reported first-quarter 2010 FFO results, which, excluding the $3.7 million non-cash impairment, totaled $0.35 for the quarter and that compares with $0.44 for the first quarter of 2009.

As we noted on recent calls, 2010's comparison with 2009 will lack the same level of transactional income.

Notably in the first quarter of 2009 we reported $3.7 million of lease termination fee income and $2.4 million of debt buyback gain.

So that $6.1 million of transactional income from those two items equates to $0.08 of FFO in the first quarter of 2009 and that compares with nearly zero -- actually $52,000 -- but nearly zero in the first quarter of 2010.

So without that $0.08 of transactional income in 2009 the AFFO comparison would be $0.38 and Q1 2010 compared with $0.39 for first quarter 2009.

And the non-cash items used in calculating AFFO are shown on page 6 of the press release.

And this might be a long way of saying that the core fundamentals and performance of the income statement and portfolio are relatively steady.

Occupancy was 96.4%, as Craig mentioned, which was flat with prior quarter levels and down 30 basis points from year ago.

Many of the income statement line items were very consistent with our prior results and consistent with expectations, so I won't go through them in detail.

But I will note we booked a $3.7 million impairment on our commercial mortgage residual asset valuation which was the result of some increase in loan delinquencies relative to the third-party valuation model assumptions.

And again, just to remind everyone, we made a $9.4 million investment in May of 2005 to purchase this asset, and to date that investment has produced over $29 million of distributions to us.

When we made the investment we thought we would have a significant return on our investment with the primary downside being the accounting noise it would generate due to the mark to market requirements.

And in hindsight we were right on both of those accounts.

Moving to our 2010 guidance, we announced 2010 FFO guidance of $1.47 to $1.52 per share excluding this first quarter's impairment charge.

This new guidance represents about a $0.05 decrease from prior guidance which is primarily driven by slower acquisition pace and increased dispositions.

Adjusting for other non-cash items, the largest being the non-cash interest on our convertible debt, we estimate these non-cash items would add close to $0.15 per share of additional operating cash flow which brings the AFFO number to $1.62 to $1.67 per share.

The balance sheet remains in great shape with no material debt maturities until September 2011.

We've got $31 million of cash in the bank and 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 [remain] good access to capital and to take advantage of attractive acquisition opportunities that arise.

We have no floating rate debt and 98% of our properties are unencumbered.

Total debt to total assets on a gross book basis is 37.1%, that's up slightly from 36.8 -- 36.8% at the end of 2009.

And as of March 31, 2010, end of first quarter, debt to EBITDA is 4.9 times.

Interest coverage was 3.2 for the quarter and fixed charge was 2.8.

So we were very pleased with how the Company is positioned and believe there will be good opportunities in the second half of 2010.

We're staying focused on managing the assets we own, maintaining occupancy, controlling costs and looking to capitalize on the solid opportunities to be more offensive.

And with that, Rob, I think we'll take some questions.

(Operator Instructions).

Gregory Schweitzer, Citigroup.

Good morning, Michael Bilerman is on as well.

Guys, could you just talk a little bit about the sale, provide a little bit more detail on the sale of the -- the potential sale of the [Power Center]?

Greg, good morning.

We had entered into an agreement -- it still has one or two conditions outstanding, but I think it's going to close -- to sell a multi-tenant retail property for close to $40 million.

We're enthused about this multi-tenant retail; it's not strategic to National Retail Properties, number one.

And number two, when we reinvest these proceeds in higher yielding net lease retail properties we'll get a small pickup of maybe half a penny or so of FFO for the next many years.

And in terms of the dilution you mentioned most of it's going to come from the sale as well as some reduced acquisitions.

Specifically on the sale what sort of dilution are you expecting?

Well, we're taking -- if this property closes here this quarter, which we expect it to do, we're certainly budgeting for that, we would be taking an income producing asset $40 million and depositing it in the bank and earning almost nothing until we reinvest it.

So it's a couple of pennies of dilution and then our acquisition activity has started off a little slower than we had budgeted originally.

And could you categorize the buyer?

What sort of buyer is this?

I think we're going to wait for that to close.

Are you having to chip in any of the financing, anything like that?

No.

It's a cash transaction; it's a very, very favorable transaction for us.

It's a good asset, by the way, we'd be happy to hold it if it doesn't close.

But reinvesting the proceeds in higher yielding net leased retail properties will lead to accretion over time.

In the interim until we reinvest that money it will be dilutive though.

Craig, it's Michael Bilerman speaking.

Just a question in terms of -- you mentioned Dave & Busters being sold to a private equity firm -- to a private equity firm.

What have been your discussions with private equity firms in terms of financing these transactions through sale leasebacks and effectively going back to a lot of the transactions that occurred where real estate became the financing source and the proceeds for the transaction to occur?

Michael, that's a good and timely question.

A couple of things just generally on the environment before specifically answering your question.

2009 transaction was -- transactional activity was considerably less than what we saw in 2007, for example.

And the market's improving, there are a couple of transactions out there, another one to reference is CKE Restaurants, which Apollo has announced they are purchasing.

So there is clearly more activity out there.

All the pundits report that many of these private equity firms still have considerable liquidity, considerable cash and are needing to put it to work before their investment periods run out.

And our discussions with them confirm that, number one.

Number two, in terms of how they're going to finance it, almost all of these private equity investors are very focused on return on equity and, with that in mind, sale leaseback financing is a big part of their capital stack.

So, as transactional activity picks up it is going to lead to higher amounts of sale-leaseback opportunities.

We're seeing a couple of green shoots in that area, but it is only beginning.

I think a company like Dave & Busters as it so happens has very few owned properties.

But some of these other middle-market transactions do involve companies that own a number of properties.

So I think the end result of this is that the second half of this year and into 2011 there's going to be much more sale-leaseback opportunity then there has been in the last year or so.

Craig, it's Greg again.

iStar Financial has been shopping (technical difficulty) of net leased assets and it sounds like they've recently lined up a buyer.

Can you provide any detail on that portfolio?

And any sense of the pricing?

Well, the buyer isn't us, I'll tell you that.

But a credit tenet portfolio is of interest to iStar, it's not particularly of interest to us.

They do have some retail net lease properties, but currently we're not a buyer of those.

Okay, great.

Thank you

R.J.

Milligan, Raymond James.

Good morning.

I was wondering, last quarter on the call you guys gave guidance for acquisitions skewed to the second half of the year of $170 million and $15 million of dispositions.

What are those numbers now?

I think the $170 million is not changing.

I think the timing is shifting a little later in the year; we're a little bit behind in the first quarter.

And so that's a piece of it.

The bigger piece is in terms of its impact on guidance relates to the dispositions Craig talked about, which you could see that $15 million become a $50 million to $60 million number and happening a little sooner in the year.

So the combination of those two is the primary driver for changing guidance.

Okay.

And with regards to the impairments, do you guys expect anymore impairments going into the third quarter -- I'm sorry, second quarter?

(multiple speakers) I mean, we don't expect anymore.

I mean, it's tough to call it on those two fronts -- real estate we don't see any -- have any visibility on impairments.

The commercial mortgage residual assets, which I think are on our balance sheet at a total of about $16 million now, that just depends on how those pool of loans perform and my gut kind of says we're closer to the bottom than we were and the reality is the distributions keep getting made to us.

And so it's still cash flowing to us, it's just the right down is a little bit noisy.

And then like I say, in hindsight a great investment, but that's just a hard one to call on those mortgage residual interest just given where we are in that capital stack, which is at the bottom, and the leverage that's there.

So, we'll just have to see how that plays out.

And then, R.J., just staying with this asset disposition, certainly in the short term, one quarter, two quarters, which will impact calendar 2010, it is dilutive.

But in the long term this is a very good transaction for us.

The timing is just perhaps sub optimal.

Okay.

And to jump back to the acquisitions.

For 2011 given the activity or the expected activity that you see with possible sale leasebacks would you expect to see a greater pace of acquisitions in 2011 than 2010?

I would hope so, R.J.

What we certainly would like to see is on a quarterly basis we would like to be doing, pick a number, $30 million to $50 million every quarter.

And then occasionally you will see us doing more than that as there's a bigger sale leaseback opportunity.

We started out this year slowly, the first quarter we were behind budget, I think we heralded that.

And right now there are a couple of deals in our pipeline, but our pipeline could improve.

Okay, great.

Thanks, guys.

Rob, are there any other questions?

Yes, sir.

Jeffrey Donnelly, Wells Fargo.

Thanks.

Good morning, guys.

Craig, if I could just jump back to the questions at the beginning of the call.

Can you share with me the cap rate you're expecting roughly on that multi-tenant sale?

Jeff, good morning.

Yes, the cap rate, depending on how you look at it, what type of vacancy factor, etc., management fees, etc., is either in the high 7s or around an 8% number.

Okay, that's helpful.

And then looking at the most current quarter, the dividend coverage compared to your AFFO is tighter than normal.

I'm just thinking as we look forward a few years, I mean is there a level of cushion, if you will, that you'd like to get back to between your AFFO and your dividend that either points to maybe a more aggressive acquisition pace or a slower than historical increase in your dividend?

Or, I guess how do you think about it?

Yes.

Well, I think that you're wise to focus on the AFFO and that's certainly how we're looking at it, that is our actual cash flow.

Based on the current AFFO guidance and the dividend, it's around 90%, maybe just a tick or two higher than that.

I think as we make more acquisitions and take advantage of the line of credit our FFO and AFFO will improve, which will allow our dividend payout ratio to decrease again.

But clearly we need to deploy some capital.

And that's our opportunity.

Yes, I mean, we are at this point in probably the lowest leveraged position we've been in for a number of years and the highest liquidity position we've been in.

And so getting some of that available capital deployed will have a meaningful impact on results, obviously.

I don't want to sound like I'm calling you guys cautious, but is the slower acquisition pace than you expected reflective of maybe a recovery in pricing that's a little more brisk than you expected or is it just not seeing the right product?

I would say two or three things, there -- certainly the last six months there has been a dearth of product, just the type of opportunities we want.

In my prepared comments I used the word selective about our acquisitions that we're looking at.

And it's fair to say that in the last 12 months National Retail Properties has probably been too conservative.

But if that's the criticism that's levied at us I think we'll take that as a badge of honor.

Now, what does too conservative mean?

Our balance sheet is in extremely good shape and we've been very demanding on our acquisition offices, our underwriters on the types of properties that we're going to close on.

This last quarter, those two Walgreens, they were just opportunistic, a terrific cap rate, which we're going to get for many, many years to come.

The second sort of [L] component of it is the deal flow from transactional opportunities, which is really buyout transactions have been very, very limited.

It is starting to improve and we're going to get our share of transactions coming out of that.

A couple of months ago we were very, very encouraged internally, we had completed underwriting and were ready to go on a decent sized sale-leaseback for NNN, but as it so happens the buyer and the seller dropped out in their negotiations right at the end, so the transaction did not happen.

So, we need buyers and sellers to make their deals and then to finance them through sale-leasebacks as part of the capital stack.

So, that particular transaction, which fell out, if it had happened we would have had a very good 2010, but it didn't.

Just one last question.

What's happened for -- to financing markets for I guess I'll call it the one-off or the more mom and pop buyer out there not net lease assets.

Has the financing market or the availability of financing for those folks shifted meaningfully in the last six to 12 months like we've seen elsewhere in just real estate capital markets?

Yes.

A couple of observations on that market.

The so-called 1031 market is still lackluster, there are not a lot of people flipping apartment buildings or whatever it is that one should reinvest the proceeds in net lease assets.

But there is plenty of cash on the sidelines, professional investors are the primary buyers right now and cap rates have definitely come in several hundred points in the last six months.

So, smaller ticket assets, in particular say single restaurants, fast food restaurants, $1.25 million, $1.5 million per copy.

Those cap rates are right down there.

Pick a number, 7.5%.

So, that market is much, much stronger.

For portfolio transactions there's a nice, nice spread though because there are far fewer of us competing for those transactions.

Thanks, guys.

(Operator Instructions).

David Fick, Stifel Nicolaus.

Good morning.

I won't be shy about calling you too cautious.

Craig, I think it's been publicly this contract, I know it's been publicly disclosed that the multi-tenanted asset is [Rockwall] and that [Excel] is the buyer.

Given if they have closed on their IPO what would be the remaining closing risk there?

David, well done for identifying it.

And Excel in their I guess red herring did disclose this property.

But I applaud you for being on top of that.

It's in our guidance; I think it closes this quarter.

Okay.

Given where your implied cap rate is and that you're a roughly $3 billion company, it seems that $30 million to $50 million a quarter as a targeted objective is fairly conservative.

With the amount of capital that you've got why not start pushing cap crates a bit and do you have to be north of 9%?

Can you be a closer to 8% for that kind of quality that you're looking for?

The good news is that the acquisition market has improved; your comment is well taken.

The last six months we certainly have been cautious.

We're underwriting some fairly good transactions right now, rent coverage remains very solid and I think pricing is going to produce a nice level of accretion for our shareholders for many years to come.

I don't think cap rates are going to get down quite as low as you talked about, Dave.

But it's going to be hard to keep them above 9%.

Do you need to expand or enhance your acquisitions team?

No, I think our acquisition team is the best in the business, we've got some great, great people, a lot of experience, a lot of real estate knowledge, good finance skills and we just need more transactional activity.

Thank you.

I expected you to save nothing less.

Thank you.

Andrew Dizio, Janney Montgomery Scott.

Thanks, good morning, guys.

Can you talk about the audit services operating business that you own if you are having any luck in releasing that or where that's headed?

Yes, a good question.

I think a couple of things.

Certainly internally in our current business plan we would have -- in our discussions with our Board we've talked about to them about operating that business for a couple of years.

Operations are going quite nicely, a decent sequential uptick.

The first quarter of the year is seasonally weak.

When it rains in Southern California the auto service business is down.

But it's consistent with our internal budget.

The good news is that the last six weeks or so performed very nicely and that business is going fine.

Our objective from the get-go has been to stabilize and improve the operations.

And when we've picked some of the low hanging fruit we would expect to re-tenant those assets.

But right now there's low hanging fruit and we're gobbling it up.

The short answer is it's going to be around for a couple of years, Andrew.

Gregory Schweitzer, Citigroup.

Thanks, my question was answered.

There are no further questions in the queue at this time.

I would like to turn the floor back to management for closing comments.

Rob, thanks very much, we appreciate everybody participating and we'll be seeing some of you out in Las Vegas for recon and we appreciate it and we'll be talking to you in 90 days if not before.

Thanks very much.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.