NNN REIT Inc (NNN) 2010 Q2 法說會逐字稿

Greetings, and welcome to the National Retail Properties second-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, Chief Executive Officer for National Retail Properties.

Thank you, Mr.

Macnab, you may begin.

LaTanya, thanks very much, and good morning to all of you.

Welcome to our second-quarter 2010 earnings release call.

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

Financial Retail Properties, the second quarter was relatively uneventful with financial performance coming in about where we had anticipated.

Our acquisition activity this year and in the most recent quarter was clearly lower than we would have liked.

However, we are going to continue to remain disciplined and selective on the properties that we acquire.

In the second quarter we acquired six properties spending $26 million at an initial cap rate of 9.43%.

For your information five of these properties were leased to retailers that are already tenants in our portfolio.

The sixth property was an opportunistic acquisition of a bank branch that is leased to one of the top tier North American financial institutions that becomes a new tenant for us.

So as you can tell, the quality as evidenced by this bank branch was excellent.

The yield was ahead of what we had budgeted, but so far this year we are making acquisitions one property at a time, which means our volume has been less than what we would like.

Right at the end of the quarter we sold a multi-tenant retail property plus contiguous land for just over $40 million.

In the short term this sale is dilutive to our earnings, but while the center has excellent national tenants we were pleased to sell the entire property including the Phase II development land.

Obviously the opportunity for NNN and is to deploy our cash balance, which was significantly augmented right at the end of the quarter by selling the large shopping center that I referenced.

The good news is that our visibility on pending acquisitions has improved and our activity in the second half looks like it may allow us to reach our targeted acquisition goal of $170 million for this year.

With $50 million of cash on our balance sheet plus zero outstanding on our $400 million line of credit we have substantial availability of very inexpensive capital that's waiting to be deployed in accretive acquisitions.

As of the end of the second quarter our portfolio was 97.3% leased, which is a slight improvement from the prior quarter.

Our internal leasing team has had a productive first half of the year and continues to do a good job for us.

National Retail Properties is well-positioned; our portfolio is in good shape.

As I mentioned a moment ago, our balance sheet is very strong and, frankly, at this stage of the economic cycle we are probably under leveraged.

The acquisitions that we make in the second half will only have a nominal impact on 2010.

However, they will provide a decent lift to our 2011 results.

With that I'll hand over to Kevin.

Thanks, Craig.

We will make -- let me just start out by saying we will make certain statements that may be considered to be forward-looking statements under federal securities law.

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 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 press release.

With that, a couple -- just a quick summary.

To start 3.1, we, as you noted, reported second-quarter FFO per share of $0.36 per share which is up $0.01 from first quarter 2010.

We reported AFFO of $0.40 per share which is up $0.02 from first quarter 2010.

Secondly, our 2010 FFO per share guidance excluding impairments was reduced to $1.42 to $1.47 per share primarily due to a few factors including slower acquisition timing.

This new FFO guidance translates into AFFO per share of $1.56 to $1.61.

And while the visibility on new investment has improved, as Craig mentioned, it appears acquisition closings will be a little later in the year than originally planned.

And again, it obviously tees up FFO growth for 2011.

And then thirdly, a modest pickup in acquisition activity in the second quarter as we made $26 million of new investments.

Notably, as we communicated last quarter, we had increased dispositions which totaled $42 million in the second quarter.

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

With that let me get into a few details.

As indicated in the press release, again second-quarter of 2010 FFO per share was $0.36, that compares with $0.35 for the immediately prior quarter and $0.34 for the second quarter of 2009.

As we noted in the past, 2010's comparisons with 2009 lack the same level of transactional income.

In the second quarter of 2009 -- again the second quarter of 2009, we reported over $3.9 million of lease termination fee income and just over $1 million of debt buyback gain.

So those two things, that nearly $5 million of transactional income from those two items equates to about $0.06 of FFO in second quarter 2009 and compares with nearly zero, less than half a penny a share actually, in the second quarter of 2010.

So without that $0.06 of transactional income in 2009 the AFFO per share results comparison would be $0.40 per share for the second quarter of both 2010 and 2009.

For the first half results we had $0.13 of this transactional income compared to less than half a penny in the first half of 2010.

And as usual, the non-cash items used in calculating FFO are -- I'm sorry, calculating AFFO are shown on page 6 of the press release.

Bottom line is, the core fundamentals and performance of the income statement and the portfolio are relatively steady.

Occupancy at June 30, 2010 was 97.3% and that's up 90 basis points from the prior quarter levels and up 60 basis points from year ago.

Many of the income statement line items are very consistent with prior results and consistent with expectations.

I'm not going to go through them in a lot of detail.

Looking at our 2010 guidance, we announced, like I said, 2010 FFO guidance of $1.42 to $1.47 per share excluding impairment charges.

The guidance represents about $0.05 per share decrease from prior guidance which is primarily driven by slower acquisition pace, some of which is getting pushed down to the November/December time frame and therefore little 2010 impact.

But includes a handful of other smaller items including one liquor store bankruptcy in which we'll get four or five stores back, slightly higher property expenses and slightly lower operating income from our retail operations.

Adjusting for the non-cash items, the largest being the non-cash interest on our convertible debt, we estimate that would add close to $0.14 per share of additional operating cash flow which implies AFFO guidance of $1.56 to $1.61.

The other factor in 2010 results of course is the share count which is up 5% in the first half of 2010 versus the first half of 2009 which obviously dampens per share results.

So compared to 2009 our guidance reflects materially lower transactional income and higher share count that will dampen results, but at the end of the day produce higher-quality earnings, very high.

With that, a quick note just on our balance sheet which remains in good shape with no material debt maturities until September 2011, we've got $52 million of cash; we have all $400 million available on our bank credit facility.

Again, 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 macro economic weakness that lingers and take advantage of accretive acquisition opportunities that arise.

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

At quarter end total debt to total assets was -- on a gross book basis was 37.0% which is nearly flat with prior quarter and year-end levels.

At June 30, debt to trailing 12-month EBITDA, debt to EBITDA was just under five times, 4.96.

Interest coverage was 3.3 times for the second quarter and 3.2 for the first half.

Fixed charge coverage was 2.9 times for the quarter and for the first half-- 2.9 for the second quarter and first half of 2010.

So, in closing, we're through pleased with how the Company is positioned, we believe we're going to be able to make some attractive investments in the second half, which obviously will have much more significant impact on 2011.

For example, just investing the $50 million of cash on our balance sheet will add about $0.05 to annual per share results and adding another $100 million of acquisition using our bank line adds another $0.06 annually.

So we are optimistic about where we are headed in terms of operating results.

So, with that I think we'll open it up with any questions.

Thanks.

LaTonya?

(Operator Instructions).

Gregory Schweitzer, Citi.

I'm here with Michael Bilerman as well.

Craig, could you talk about some of the things that you are seeing with respect to acquisitions that give you comfort over the next few months so that you can pull the trigger on more volume later in the year?

Yes, Greg, it's just a function of what our current pipeline is, letters of intent we've signed, deals that we're currently underwriting, as well, to be honest, we've had a little more productive month in July certainly than we've had thus far this year and I think that's going to continue to be the case in August.

So we're working on a number of transactions right now.

Again, they're relatively modest in size, but the visibility has improved.

During the first half of the year, Greg, we had one or two deals that we thought we were going to make which, for a variety of reasons, the buyer and the seller never made a transaction.

So National Retail Properties, as the sale-leaseback provider, did not have a transaction.

Those were disappointing but that's the way it works in our business.

Okay, and then is the industry mix still quite broad?

I'm sorry, could you repeat that?

It's the industry mix still quite broad?

Yes, very broad.

And I think so far this year in these little onesie twosie deals that tended to be with existing tenants that we have relationships with and obviously our opportunity is to continue to expand and further diversify our portfolio and we're doing some of that.

Just to answer perhaps a follow-up question, the biggest categories for us remain our primary categories, restaurants we're going to do a little bit of business in and then a couple of other areas.

Great.

And then lastly, what industry were the five other properties that you acquired this quarter?

Just a variety of different things, obviously the bank, the auto service, just hang on a second -- one or two in the restaurant area, frankly three in the restaurant area.

So just straight down the middle, high-quality deals and the pipeline right now, Greg, looks a whole lot better than it has at different points of this year.

Great.

And then just one for Kevin.

Is the occupancy expectation that you had previously guided to staying the same or is there any update to that?

Yes, I think overall it's going to stay at the same.

It's going to ebb and flow a little bit over time.

We had some uptick in the second quarter and I think it could be a hair lower by the end of the year.

But as you look year over year I think it will be relatively flat in that mid 96 range plus.

I think the way I'd encourage you to look at it, for us full occupancy is somewhere between 96% and 97%.

And it's going to move around quarter to quarter, but that's a fully occupied portfolio for us.

Thanks, that helps.

(Operator Instructions).

Tayo Okusanya, Jeffries & Co.

Good morning.

A question about the different retail categories you're in.

I was just hoping you could give us a sense of what your overall outlook is for some of them, specifically talking about the bankruptcies for the liquor store and also the recent news about Barnes & Noble going up for sale, what your thoughts are on that?

Tayo, good morning.

Good morning.

I think that liquor store was a bolt out of the darkness for us; it was very, very disappointing.

It's a Texas-based company and in their market the liquor licensing rules were changed and some of the counties in which they did business went from being dry counties to wet counties which means that grocery stores and others could sell beer and wine.

So their business declined precipitously even though they're a good retailer and frankly were doing a good job.

But the rules of engagement changed and it got them.

So they chose to file Chapter 11.

Barnes & Noble, the good news for National Retail Properties is that we did our Barnes & Noble deals 10, 11, 12 years ago and they're extremely good real estate locations and rents in market have tended to increase handsomely from the rents that were established 12 years ago.

So, I don't think you're going to see us doing too many deals in the book retailing category going forward, which obviously talks to our outlook for that sector.

Barnes & Noble is a curious case.

They've got some activist shareholders entering the game.

They must see something that probably you and I don't see, Tayo.

So, it's going to play out the way it is.

Do you think there's any risk of massive restructuring there that could lead to a bunch of store closures?

I don't think so.

Barnes & Noble has got a very strong balance sheet at this point in time and I don't see any issues there going forward.

To the extent somebody is looking at a leveraged buyout of that company, then the capital structure would change.

But let's remind ourselves that capital markets themselves are very efficient and any prospective lenders there will see the same things you and I see.

Got it.

And then just on the acquisitions front.

Are you seeing more activity as people start worrying about potential for higher capital gains taxes in 2011?

Is that spurring any new activity of people trying to do the sales this year instead?

Tayo, that's a good question.

And I think what we're seeing is that our tenants are feeling a little more comfortable in the business environment.

While I don't think they're forecasting big sales increases, sales have stabilized, they feel better about the business.

To be sure small businessmen need to be concerned about the increased cost of regulation and the potential for higher tax rates.

And if they're in the second half of their lives and they're thinking about selling the business you definitely want to do it today before tax rates are higher.

So there is some activity there.

That's a good question.

Okay.

Appreciate it, thank you.

Andrew DiZio, Janney Montgomery Scott.

Hi, good morning, guys.

Good morning, Andrew.

Just a few questions for you.

First, I noticed that you scaled-back issuance under the DRIP plant this quarter, is that something you expect going forward?

Yes, I mean, given our leverage and liquidity position, which is both very strong, we just have some flexibility to control that to some degree.

And so yes, we've tailed off on issuing equity at this point in time.

But it remains a viable option going forward.

Okay, and with your notes that come due later on this year, do you expect to repay those in cash or do you think you'll refi those?

You're referring to the $20 million.

Yes.

Yes, we had $20 million due in September, yes, that's just cash and/or line of credit, small amount.

Okay.

And then just one last question, I guess this is more of a bigger picture question.

You've talked in the past about seeing less competition in the market for sale lease backs.

In your opinion do you get the feeling that there's competition in the woodwork that would come back if portfolio deals resurface?

Andrew, there's always competition, but the number of competitors today is clearly much less than it has been in the 2007, early 2008 timeframe.

And the competition that was buying for resale have disappeared, number one; and number two, those competitors that were using very high amounts of leverage are no longer factors in the marketplace.

So there's less competition, it's disciplined competition which is great.

We have in the past suggested that cap rates are probably going to be trending a little bit lower.

The types of yields we've been getting, 9.43%, I don't think our guidance for next year is going to be a number anything approaching that.

Thank you.

Jeff Donnelly, Wells Fargo.

Good morning, guys.

Craig, what do you expect I guess happens to Spirit Finance?

Are there aspects of that company that you might be interested in?

Jeff, good morning.

That's putting us on the spot I guess, but why not.

I don't think we want to get too deep into that.

But let me just review the detailed framework under which we would evaluate any larger opportunity and, frankly, the same goes on the individual transactions.

But our team would obviously assess the economic environment under which we're operating and what our near-term outlook for the future is.

It's obviously important to understand our cost of capital.

Once we've done this, as we've talked about repeatedly, we review the real estate and all of the ingredients in that.

And then Kevin [Steen] performs a financial analysis to understand the likelihood and the probability that we're going to get paid rent for the long duration of our lease.

Obviously we also need a focus on the terms of the lease.

So then within that, once we've done that, we take a look how this opportunity, any large opportunity would fit into our portfolio from a diversification standpoint, by tenant, by line of trade and of course by geography.

So having done all of that we would then review the risk-adjusted yield from this opportunity and then our management team has to make a determination if we're being adequately compensated for deploying any precious capital.

Any bigger deal like the one you referenced, clearly our Board has a big seat at the table too.

But one thing to -- just as a reminder, most of our deals, 2009 and certainly this year, have come in very uncompetitive environments hence the types of cap rates we are getting.

Once you have a company which is publicly announcing that they're exploring alternatives, which I think the leak on Spirit suggested, you start getting into rarefied air on cap rates.

And one thing for you to think about is -- and this might apply, Jeff, to people like yourself that are more analytically minded.

It's interesting to calculate how much capital you need to invest at different cap rates to get a similar amount of accretion.

The way it works obviously is that at lower initial yields one has to make a higher volume of acquisitions.

In fact the difference between making acquisitions at 9% or at 8% for National Retail Properties means that you have to make almost twice as much acquisition at 8% to get the same level of per share accretion that you would get at 9%.

Anyway, so, that's the framework that will take a look at these types of things.

And it's not clear to me we're going to be talking about this topic on future calls.

I'm curious, one other question on that is do you have a sense of timing?

Do you think, based on what they've said, it's a year-end type event for them or is it later than that?

I have no idea, really don't know.

Okay.

Thanks, guys.

There are no further questions in queue at this time.

I would like to turn the call back over to Mr.

Craig Macnab for closing comments.

LaTanya, thanks very much.

We appreciate all of you taking time out of your schedule and look forward to talking to you in a couple of months.

Thanks very much.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.