NNN REIT Inc (NNN) 2011 Q1 法說會逐字稿

Greetings, and welcome to the National Retail Properties 2011 First Quarter Earnings Conference Call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Craig Macnab, CEO. Sir, you may begin.

Kathy, thank you and good morning. Welcome to our first quarter 2011 earnings release call. On this call with me are Jay Whitehurst, our President, and Kevin Habicht, our Chief Financial Officer, who will review details of our first quarter financial results following my brief opening comments.

We are pleased with our solid first quarter results and are obviously delighted to be raising our guidance for 2011. Also, as you saw, our AFFO continues to be well ahead of our FFO.

In the first quarter, we acquired 29 properties, investing $55 million at an initial yield of 9.25%. We acquired these properties from 12 different tenants. Only two of these 12 tenants are new to our portfolio, which is a very good illustration of the depth of our relationships with our existing tenants, with whom we do repeat business.

The good news is that our acquisition activities came together a little earlier in the year than we'd originally budgeted. Plus, our initial yields continue to remain excellent.

Our team is currently working on a couple of interesting acquisition opportunities, which provides us with encouragement about our continued ability to expand and grow our portfolio in 2011.

Based on the mix of deals that we are currently evaluating, I do anticipate that our initial yields will drift slightly lower over the next couple of quarters.

As of the end of the first quarter, our portfolio was 96.9% leased, which is where we were at the end of the year. A hallmark of NNN has been our very high occupancy, which has been in excess of 96% in each of the last eight years.

Our excellent occupancy throughout the entire economic cycle confirms to me, firstly, that we own a quality real estate portfolio. And secondly, that our rigorous acquisition underwriting process is working. I would also add that our aggressive selling of almost $1.1 billion of properties in 2005 through 2008 has also been beneficial to our portfolio quality.

Our portfolio continues to be more than fully diversified, with over 1200 properties leased to over 250 different national and regional retailers doing business in about 35 different lines of trade.

National Retail Properties continues to be well-positioned. Our balance sheet remains very strong, which will allow us to take advantage of the pipeline of acquisition opportunities that we're currently evaluating.

Finally, our conservative balance sheet ensures that we have plenty of dry powder for these acquisitions. Kevin?

Thanks, Craig. Let me start off with the standard cautionary note -- that 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 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 you have noted, this morning we reported first quarter FFO increased 8.6% to $0.38 per share from the same period last year, which was $0.35 per share, excluding the impairment charge that we took last year. Similarly, we reported AFFO of $0.41 per share for the first quarter, which represents a 7.8% increase over last year's $0.38 per share.

Our occupancy is holding up well at 96.9%, which is flat with the prior quarter; and the balance sheet's in very good shape, and that positions us well to continuing capturing additional acquisition opportunities.

I will note we did increase the 2011 FFO guidance, but let me quickly just mention a few details about the first quarter. And I will be brief, as many of the income statement line items are very consistent with prior results and consistent with expectations.

The $5.5 million, or 10.4% increase, in rental revenues was obviously driven by property acquisitions we've made over the preceding 12 months.

Property expenses net of tenant reimbursements totaled $1.4 million in the first quarter, and that's a slight decrease from prior year and prior quarter levels.

G&A expense was in line with projections, with an increase over first quarter 2010 levels primarily due to incentive comp accruals this year.

There was virtually no lease termination or other unusual income items in the first quarter of 2010 or 2011 to impact the comparison.

Bottom line is, the core fundamentals and performance of the income statement is solid and improving.

As I mentioned, this morning we also reported an increase in our 2011 FFO guidance to a range of $1.49 to $1.53 per share, which translates into a range of $1.63 to $1.67 per share for AFFO, which comfortably covers our dividend. As Craig noted, this was largely driven by the productive quarter we had, closing $55 million of acquisitions at good cap rates.

We originally didn't project much closing in Q1, so this helps results through the balance of the year. We now see 2011 total acquisitions of around $200 million versus the $150 million we previously assumed. Our other guidance assumptions are largely unchanged.

A quick comment on the balance sheet, which remains in very good shape. We have $218 million of availability on our bank credit facility. Credit metrics remain strong with total debt, the gross book assets of 40.6%, and debt-to-EBITDA of 5.6 times.

Interest coverage was 3.2 for the first quarter, fixed charge coverage was 2.8 times for the first quarter. Only 10 of our properties, which is less than 1%, are encumbered by mortgage.

So we're very pleased how the Company is positioned. We've had a good start to 2011 that should allow us to post big growth in per-share results and allow us to continue to deliver the consistency of results, dividend growth, and balance sheet quality that have supported attractive absolute and relative total returns many years.

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

Thank you, gentlemen. (OPERATOR INSTRUCTIONS) Gregory Schweitzer, Citigroup.

Thank you. Good morning, guys.

Hi, Greg.

Good morning, Greg.

What is the primary driver of the loan and expected cap rates for the balance of the year versus the high 9.5% that you acquired this quarter? Is it an improvement in the credit or is there a specific industry or just plain market competition?

I think it's really just a mix of properties. Cap rates, as we talked about last time earlier this year with our year-end 2010 call, have come down a little bit. There is plenty of capital out there, debt costs are very, very low, so funding costs are low.

But it's really more just the quality of the properties and the mix. I think the outlook is very, very good. I'm not talking about big decreases, but I am trying to make it clear that 9.25%, which we attained in the first quarter and was our average in 2010, is really not a sustainable number for the balance of this year. That's just a little bit of nuancing, Greg.

Are you expecting a mid-8 average for the whole year?

That's in our budget, yes.

And once again, when did the bulk of the $55 million of acquisitions close this quarter, or was it fairly widely spaced?

It was fairly evenly throughout the quarter. Again, in terms of trying to think about projecting forward the rental revenue from the whole portfolio for the existing assets and the ones we acquired in first quarter, the last page in our press releases gives a little bit of help in that regard in that if you look at page 12, where it shows that there's $237.7 million of annualized and base rent in place as of March 31. So that takes into account all the acquisitions and dispositions, etc., during the quarter. And that's kind of the run rate, if you will, starting April 1. So that's a decent number to start off with.

Okay. I just had two more. Could you just try to -- a quick Borders update? And then as well, an overall tenant health update?

Tenant health in general is good. The good news in our total portfolio is that we have very, very few leases coming up for renewal this year. Just slightly over 1% of our total rental revenue. So there, we're in good shape.

Borders probably -- has continued to weaken. Even existing stores, they're looking to renegotiate leases and they've still got to finalize getting their business plan together and their financing. At the end of the day, over a multi-year timeframe, I suspect they have more than their share of challenges.

In terms of our portfolio, as we've mentioned, the three properties that have been vacated, I think they continue to pay rent through the end of April. Two of the three were in very, very good shape and have high-quality big, big national retailers in various stage of lease negotiation. The third asset is a good property located right next to a big mall on the south side of Richmond, Virginia, and we'll re-tenant that over the next 12 months, I would anticipate.

Okay, thanks very much.

Wes Golladay, RBC Capital Markets.

Hey, good morning, guys. It looks like G&A was up quarter to quarter. Were there any acquisition or one-time items in that?

Not necessarily. The bulk of that was driven by, as I mentioned, cash and noncash accruals for short-term and long-term comps this year compared to last year. We're pretty much on track to where we felt we would be for G&A for the year; nothing's changed in that guidance.

Okay. And I see that the line of credit is just under $200 million. Are you going to look to take that out with an unsecured note later this year?

Yes. I think in our capital plan, as we make acquisitions, as we've done historically for years, as that balance gets north of $200 million, $250 million, then we'll look to turn that piece of capital, that bank line, out to longer capital. And so that's probably in the cards. The market's obviously wide open for that kind of thing.

Okay, and one final one --

Wes, as we mentioned, our acquisition activity is coming together nicely and we are going to be looking at a variety of refinancing and financing alternatives over the next couple of months. The good news is that, as Kevin just noted, the capital markets are wide open, spreads are very, very tight. If you look at the big banks, most of them are announcing that loan growth is difficult and we hope to be able to help them a little bit. (Laughs)

Nice. Okay, turning to your acquisitions. We noticed that you were buying mini-golf facilities. Is this one of the new categories for you or is it an existing tenant?

In the first quarter, that was actually not one of the new tenants. In the first quarter, the new tenants were just straight down the middle, casual dining being one of them. I think we're going to continue to focus on companies that are well run, that consistently are profitable, where we like the real estate. And right now, as some of these companies are doing well and they're opening new stores, we're finding pretty good opportunities.

Okay, thank you, guys.

Joshua Barber, Stifel Nicholaus.

Good morning. You had touched before, and Wes had just alluded to, some new investment categories, I guess, that you were exploring. And we've seen a couple of your competitors start branching into some very newer asset classes. Is that something that's on your mind, or do you really think that you're going to stick to retail and maybe slightly more exotic retail?

Josh, we're always looking at all of these new categories. But right now in retail, we continue to find that the risk-adjusted returns are exactly where we like them. So while we're looking at other categories and might do something in those areas, right now we prefer the retail category.

Okay. And on your preference for debt going forward, you had mentioned before the thought about a bond offering. Would that be something more to lines of a straight senior bond, or would you look to do something like a convertible bond again?

We're not going to be announcing that on this call, but I appreciate the question. But I think what you might see when we release our 10-Q, which is coming up pretty soon here, we have actually locked in long-term Treasuries.

That's helpful. Thank you.

(OPERATOR INSTRUCTIONS) Andrew Dizio, Janney Capital Markets.

Thanks. Good morning, guys.

Morning, Andrew.

Just a question around the auto services business you guys have been in for a few quarters right now -- I think that was 12 properties. Wondering if there's any update on the potential to sell that. Any idea of what that could mean as a source of funds.

It's probably a little early in the cycle of operating that business. As you recall, we have one of the big -- arguably the largest national operator is our manager for that. The business is somewhat seasonal and right now we're in the healthier part of the year for the next couple of quarters. And the business is right on track with our budget. With a little bit more maturity of operations, we will be looking to do something. However, right now on this conference call is too early to be thinking about that.

Sure, that's fair. Thanks, Craig. And just one other question. Looking at the -- obviously, you guys made some acquisitions, sold a couple of properties, and occupancy remained around stable. Just wondering if you can give some color on the tenant move-outs that you saw.

Color on the what, Andrew?

The tenant move-outs.

It's as close to nonexistent as it gets. What we've had is we had some leasing and one or two properties going vacant, but not enough to move the needle one way or another. If anything, our leasing activity right now is looking quite promising.

Good; thanks a lot, guys.

But it's very small dollars, those changes.

Thanks.

(OPERATOR INSTRUCTIONS) Gentlemen, I'm showing no further questions in my queue at this time.

Kathy, thanks very much. We appreciate all of you paying attention and listening to our call. We look forward to seeing some of you in Las Vegas at ICSC and more of you in New York City at the May REIT meeting. Till we see you again, have a great couple of weeks. Thanks very much.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time.