NNN REIT Inc (NNN) 2010 Q4 法說會逐字稿

Greetings, and welcome to National Retail Properties fourth quarter 2010 and year end earnings call. At this time all participants are in a listen only mode. (Operator Instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce your host Mr. Craig Macnab CEO. Thank you Mr. Macnab, you may begin.

[Tanya], thank you. Good morning and welcome to our 2010 year end earnings release call. On this call with me is J Whitehurst our President and Kevin Habicht our Chief Financial Officer, who will review details of our fourth quarter and our year end financial results following my brief opening comments.

2010 was a productive year for National Retail Properties, as we continued to build our portfolio and expand our already fully diversified portfolio. In particular, we had a flurry of acquisition activity right at the end of the year, which exceeded our earlier acquisition expectations. We are pleased to have increased our dividend again in 2010, marking the 21st consecutive year that we have raised our dividend. This puts NNN in illustrious company, as there are only about 114 public companies that have consistently raised their dividend for 21 years. In terms of acquisitions, as I indicated earlier, the fourth quarter was very active for us, as we invested $128.7 million, acquiring 159 properties at an average cap rate of almost 9.25%. We acquired these properties from 14 different tenants. Only two of these 14 tenants are new to our portfolio, which is a very good illustration of the dip of our relationships with our existing tenants.

As we've discussed in the past, we obtained better initial cap rates, where we have strong relationships with our tenants. For the calendar year we acquired 194 different properties, investing $256 million at an average initial cap rate of 9.36%. Obviously, we are delighted to have found a number of noncompetitive, off-market transactions where we were able to acquire good real estate, plus achieve excellent yields. We continue to like the granularity of our business and with an average purchase price per property of a little in excess of $1.3 million last year, with land, in most cases, representing in the range of 40% to 45% of the total purchase price, these are clearly great acquisitions. One of the reasons that we obtained higher yields than those realized by other REITs in different lines of business to compete with us in the REIT world, is a small dollar size of the properties that we invest in. Frankly, it is a lot of work to acquire 159 different properties in any one quarter, with each one of these properties being individually underwritten by our team.

As of the end of the year, our portfolio continues to be in excellent shape and was 96.9% leased. Again, we have very limited lease roll over coming up this year. By the way, for those of you that keep track of this data, we have remained at least 96% leased for each of the last seven years. As of the end of the year, we own 1,195 properties, which are leased to over 250 different national or regional tenants in 46 states. These tenants operate in over 30 different segments of the retail industry, which provides us with very good and broad diversification.

Finally, on average these tenants are contractually obligated to pay us rent for the next 12 years. In anticipation of a question you may have, we do own five locations that are leased to Borders group. And we expect we will get back three of these properties. The good news is that these are prime real estate locations and our leasing team already has interest on a couple of these locations. As we look to the future, I like the way National Retail Properties is positioned. Our portfolio is in excellent shape, plus our balance sheet is very strong, which will allow us to take advantage of the carefully underwritten acquisitions that we expect to make this year.

Finally, our first quarter acquisition activity is off to a good start, which will help us make up for the lost rent that we now know we will lose from Borders in the short-term. With that, I will hand it over to Kevin.

Thanks Craig. And I will start as usual with the obligatory cautionary statements, that 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 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 mornings press release.

With that, a quick summary to start. This morning we reported a fourth-quarter FFO per share of $0.29. FFO per share excluding impairments was $0.38 for the fourth quarter, and $1.45 per share for the year, both of those in line with projections and guidance. We reported AFFO of $0.41 per share for the fourth quarter and $1.59 for the full year. As Craig indicated acquisition activity accelerated in the fourth quarter to $129 million at attractive cap rates bringing year-to-date acquisitions to $256 million. Occupancy is holding up well and the balance sheet is in great shape, which positions us well to capture any additional opportunities. With that, let me go into a few details, but I will be brief, as many of the income statement line items are very consistent with prior results and consistent with expectations.

As I mentioned, fourth quarter FFO results excluding impairments totaled $0.38 per share, that 's a 5.6% increase from the $0.36 for both the fourth quarter of '09 as well as immediately proceeding third quarter of 2010. For the year, FFO excluding impairments totaled $1.45 per share and AFFO per share totaled $1.59. As we've noted in the past, 2010's comparison with 2009 lacked the same level of transactional income.

Specifically, the 2009 results included $11.3 million of debt buyback gains and lease termination fee income for the year, versus only $1.6 million of lease termination fee income in 2010. So that $9.7 million of lower transactional income in 2010, obviously dampens the results. But we end up with higher-quality earnings streams and going forward will not have that comp headwind, if you will. The bottom line is the core fundamentals and performance in the income statement in the portfolio are relatively steady. Occupancy at year-end it was 96.9%, that's down 20 basis points from prior quarter levels, but up 50 basis points from the beginning of 2010.

During the fourth quarter we did book $7.5 million impairment, primarily related to the Majestic Liquor bankruptcy. We owned 13 properties leased to Majestic and had one mortgage receivable loan. Majestic rejected four of our leases and defaulted on that one loan. Subsequently Majestic bankruptcy reorganization was approved and Majestic exited bankruptcy in late December, so we do not anticipate any additional negative impact from this.

A quick note on the balance sheet, which remains in very good shape. We have $239 million of availability on our bank credit facility, credit metrics remain strong with total debt to total gross book assets 40.2%, and debt to trailing 12 month EBITDA of 5.6 times. Interest coverage was 3.3 times for the fourth quarter and 3.2 for the year. Fixed charge coverage was 2.9 times for the fourth quarter and the year. Less than 1% of our properties are encumbered by mortgages.

We are very pleased with how the company is positioned. The strong acquisition pace and the second half of 2010 has positioned us for a good start to 2011's results. And with that, I think we will open it up to questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from Gregory [Schwitzer] from Citi. Please proceed with your question.

Good morning guys. Craig, you mentioned the acquisitions in the fourth quarter was off market, could you provide some more information on how this came about?

All of us at National Retail Properties, Kevin, J Whitehurst, is on the call with us. Myself, my acquisition officers have relationships with existing retailers plus relationship building goals and marketing goals. And over the last many years we have built up a variety of different relationships with retailers that own real estate on their own books, and are interested in selling at once the store is up and running and it performing well.And if we continue to do that, it's going to be very good for our business. In addition to that, we also are always looking for bigger transactions that arise from the M&A activity. And the good news is that it appears that there is a little more M&A activity in the equity markets. There is more debt available for companies that are looking to finance acquisitions. Over the next couple of years I think we are going to see a number of bigger transactions for National Retail Properties. In calendar 2010, most of our activity was smaller transactions that we were just doing with our existing tenants.

Okay Great. Thanks. Maybe onto Borders, the three properties that you expect to get back, does that make close to 1% of rent?

Doesn't what?

Does it make up about 1% of rent?

Maybe. I think it's a little bit less than that. But we have incorporated that into our guidance for 2011. In the short-term, there is clearly a little bit of pain, because they will not be paying rent this month or the next several months. The flip side of that is just to give you an indication for those of you that haven't seen the Galleria Mall owned by Simon properties down in Fort Lauderdale. It is a very good Mall, anchored by Neiman Marcus, Macy's, and Dillards.

And our Borders is right there on the water in front of the mall affectively on the pad-site alone. It is not on the Simon Property, of course. A great piece of real estate and we are going to do just fine with that. Just North of us here in our corporate offices is another Borders. The traffic counts, the income demographics et cetera, are excellent. Again, we will do just fine with that property. So, the good news with Borders is they tended to take good space. They were a high rent payer. There is not a lot of vacancy today for junior boxes and these properties will get leased up.

Okay. Just to be clear, on the Borders that you think will-- that you will keep, they are not paying rent on those either at the moment?

They are pursuant to their bankruptcy, they will be paying rent on them.

Okay, great thanks a lot.

So those two properties we expect to get rent during the course of this year.

Our next question comes from RJ [McMilligan] with Raymond James.

Good morning, guys. Craig, can you talk about just sort of your outlook for the year in terms of where you think pricing is going for -- in the acquisition markets given where the 10 year head is tracked and what that is the demand out there for the single tenant lease assets?

We have guided, RJ, to a 8.5% cap rate for the calendar year, that's clearly lower than last year. I think it reflects a couple of things. Number one, there is more demand for net leased real estate then there is supply. There is lots of cash on the sidelines. And then secondly, interest rates spreads on capital are very wide. So cap rates are clearly heading down. Last year for National Retail Properties was a little bit of an outlier, we obviously like getting hired yields. But the types of yields we achieved all year are just not going to be sustainable in 2011.

Does that make you consider going to different ends of the credit quality spectrum as you are looking at assets?

I don't think so, RJ. We will continue underwriting properties the way we have and continue to be extremely selective.

Okay.

I mean, just put this in perspective, the biggest part of our acquisition activity in the fourth quarter of 2010 at a rate cap coverage factor at the corporate level of four times. I don't think one would say that we were giving up on credit. Very high, very good rent coverage and good real estate and very low rent per square foot

Okay. Just a follow-up on the Borders question. What -- in the discussions that your teams had with alternative uses, what retailers or what types of retailers would be looking at those boxes?

It early in the cycle that you should be thinking of the Junior boxes. The Junior boxes include companies such as Best Buy and so forth. Very good credit retailers who generate higher rent per square foot.

Okay. Thanks Craig.

Our next question comes from Tayo Okusanya with Jefferies.

Yes. Good morning gentleman. Just a few things about Borders, the 1% of rent you are talking about is that based rent as well as the tenet reimbursements?

That is just base rent--base rent probably--It is less than 1% probably maybe 0.7% might be a round number of based rent. Expenses associated with the property might add another 10% above that so go up 0.8% of total base rent. So it's about $1.5 million per year in round numbers.

$1.5 million a year-- And the bottom-line impact to FFO is empty for the rest of the year?

Basically, that last rent -- that $1.5 million is what you should expect that we are talking about for calendar 2011. Outside chance -- that retailers like to open before Christmas obviously so this is prime real estate and if the sun and the moon align we might get these released of this year. But it's not in our guidance.

Got it. Going back to the Majestic Liquor, I knew they went bankrupt all the way back in June of 2010,just kind of curious about why the charges are coming through all the way in December?

We really didn't know how it would get played out, particularly as it related to the one loan that we had and the recovery may or may not be related to that. And so it went through a number of twists and turns in terms of the reorganization and it turned out very well to be quite honest. But, so it wasn't until the fourth quarter when we could really determine where things would end up.

And the loan is how much of the charge?

The loan -- the Majestic Liquor piece of the impairment is about $5.6 million of the $7.5 million.

And that's all just purely the loan?

It's related to the whole majestic liquor. It's primarily the loan but as well the four rejected properties.

And the four -- the properties were rejected when? I'm sorry --

I don't recall that -- it was in the third quarter probably, when they officially rejected those.

But that does not reflect any of your fourth quarter numbers?

Correct.

Got it -- and I'm sorry I may have missed this but could you give an update on 2011 guidance versus -- the third quarter numbers you mentioned in the third quarter?

We have not changed our guidance notably from what we had previously provided. And still feel comfortable with what our guidance was at that point in time. $1.47 to $1.52 per share for the year. We are sticking to that despite the headwind we talked about with Borders et cetera.

Okay. Helpful. Thank you.

Our next question comes from Rich Moore with RBC capital markets. Please proceed with your question.

Hi, good morning guys. So did the guidance that you had before contemplate losing three of the Borders?

No it did not, Rich.

Okay. So you're just thinking you will make it up as you go Craig?

Our acquisition activity, as I mentioned, is a little bit better than we originally projected here in the first quarter.

Sure, I want to get that in the second. But do you guys have the three locations the three Border locations that you are losing, you mentioned the one, but do you have the actual locations of the other two?

Sure, there's one in Altamont Springs, Florida which is just North of Orlando, one in Fort Lauderdale, and the third one is in Richmond, Virginia.

Got you. Okay good. Thank you. And then on the acquisition pace, have you had some thought, Craig, on how you much you might do in the first quarter or actually close, are you just thinking the pipeline is looking stronger in the quarter?

I think the pipeline is looking a little stronger than we projected. You might recall that our guidance was very backend loaded and in the first quarter we just got a couple of things that look like they might happen now. These deals are still to close but we feel pretty good about a number of them.

Okay. So moving the same sort of volume you were think in the year before but maybe moving at little up? Is that --

Yes, just the timing of it is obviously very important -- the properties we acquired in the fourth quarter of 2010 had zero impact of any meaningful amount on our FFO, our earnings in 2010. However, if we acquire properties in the first quarter we will get three quarters of rent from them, so that helps us make up for the loss of the Borders.

It's like you're looking at my questions you're going down the list. So the timing of the acquisitions in the fourth quarter, could you give us some thoughts on that maybe an average? So we could for modeling purposes know when those -- ?

For modeling purposes it's quite extraordinary that between Christmas and New Year we had a bunch of people in our offices that work celebrating the closing of real estate acquisitions. Rather than with there family.

It was late in the quarter, Rich. And just one item that we regularly disclose at the very end of our press release, page 12 it's actually the last line -- we let folks know where we are as of the year end in terms of the annual base of rent that is in place at that day. So you don't have to try to guess and do some waiting of acquisitions for the prior quarter and guess where we are. And that shows $233.1 million of annual based rent in place at 12/31 so that's a decent starting point if you will it to kind of think about 2011 and beyond.

Right Kevin, you're right that's great. Thank you. And then, I want to ask you guys, the environment as you mentioned for triple net asset is getting more competitive. There is money out there in cap rates are coming down. Would you guys consider selling more assets into an environment like that?

Rich, as you know in the past, we have sold a lot of properties and so we constantly evaluate it. And we would look at it. Last year, we didn't sell a lot of properties but I think that was $50-million odd, which given the amount we required acquired there was a lot of activity if you think about it. So we are always looking at this, yes. And the way we think about it is does positions are this positions are just another source of capital.

Okay. So you might time that with other assets that you are looking to buy or something like that, Craig?

Yes, we might. But nothing planned at this point.

Great. Thank you.

Our next question comes from Joshua Barber with Stifel Nicholas. Please proceed with your question.

Hi good morning. I'm just following up somewhat on Rich' s question -- and that's I'm looking at where high yield spreads have been lately, who are you seeing in the new acquisition market or in some of the deal market who is actually looking to access triple net financing today?

I'm not sure I followed follow the question in terms of where financing may end up in the capital stock of transaction?

Well yes -- in other words, if somebody was doing the deal today would they be more inclined to use the high-yield market versus the sale lease back market or are most of your deals today just coming from existing sale lease back assets?

I think on some of the bigger M&A transactions, the high yield market is a legitimate source of alternative capital. Having said that, we were involved in a transaction last year where the deal sponsors chose to go with high yield, at the particular time they priced their high yield, the markets went against them. And judging by the phone calls we got, they wish they had gone with sale-lease back financing. So, it's a trade-off that people have to make. The certainty of execution with people like National Retail Properties versus taking a chance of where the markets are going to be at the dates you're going to price your offering. On the bigger transactions, right now, the high-yield market is attractive. One of the strengths of our business is the relationship we have established and we still focus on deals one at a time. If bigger deals come along we will celebrate with you.

Okay. One other question related to I guess -- some of the vacancies. Can you talk a little bit about your re-leasing spreads on vacant boxes that you released last year? And what you think the outlook would be, if you were to release some of those assets this year just versus where rents are today?

Let me go two different ways Josh. Firstly, on the releasing of space where there was coming to the natural end of the primary term or what ever, our re-leasing spreads on renewals were positive last year. I don't want to say positive by a lot, but they were positive. Which I think is a very good thing to have here.

Now, just reminding ourselves, in the event that the tenant is not renewing at the end of the term, one should assume that the tenant is not generating a lot of positive operating income from that location. So, clearly in that case, if you think about our real estate and use a bell curve, you are talking about properties that are probably in the weaker piece of our portfolio. So with that in mind, our releasing spreads last year were negative and they were in the 80%-something of what the rent was previously. Obviously this is impacted by one or two properties in particular.

That's very helpful. Thank you.

(Operator Instructions) Our next question comes from Jeffrey Donnelly with Wells Fargo. Please proceed with your question.

Good morning, guys. I just want to build on our RJ's earlier question. I'm curious about what impact do you think change in long term rates has on net lease property pricing? Do you find that it's -- typically a one-for-one impact? How quickly do you think that flows through to the private market and what is you thinking about the next 12 to 24 months on that interplay?

Jeff, you are speculating that interest rates are going higher, huh?

Well they could go the other way to.

Well, I tend to agree with you. But I think what we have found is that cap rates lag movements in interest rates. Deals have a cycle of their own. The deals that we are hoping to complete here in the first quarter of this year, were probably executing an LOI sometime earlier last year. So, I think that the medium-term trend in cap rates is probably upward, although this calendar year they are down. Even if the treasuries continue to tick higher.

That's helpful. And the just a follow-up on Borders. Kind of a nit picky question. Can you tell us where those locations are, I may have missed it, if you said it?

Yes. The three that we are losing are in Fort Lauderdale right in front of the Galleria Mall right on the water, the second one is here in Altamont Springs just North of our offices, again a terrific location. And the third one is in Richmond, Virginia.

Great. Thank you guys.

We have a follow-up question from Tayo Okusanya with Jefferies.

Yes, I have just a quick question given that after Christmas is when you really start to see any potential kind of bankruptcies. Can you talk about your watch list and any tenants you may be concerned about particular categories maybe you are concerned about?

Tayo, it's a fair question. Obviously, after Christmas is when these companies evaluate what their outlook is. Retail sales environment has stabilized. What you are seeing is some of the weaker tenants are continuing to struggle. I think at the end of the day -- 96% occupancy we feel pretty good about it. But there are always one or two tenants that are not going make it. I don't think we've got any big exposure. But, there is always noise in our portfolio and that's why we have a good leasing team.

Okay. Great. Thank you.

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

Tanya, thanks very much. Folks we appreciate your interest and if you have any questions please follow up with Kevin, J, or myself. We look forward to seeing you in a couple weeks at the conferences that are out there. Thanks very much.

And this concludes the teleconference you may disconnect your lines at this time. Thank you for your participation.