NNN REIT Inc (NNN) 2011 Q2 法說會逐字稿

Greetings, and welcome to the National Retail Properties Second-Quarter 2011 Earnings Conference 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.

Devon, thanks very much. Good morning and welcome to our second-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 second-quarter financial results following my brief opening remarks.

We're pleased with our second-quarter results, and are delighted to be slightly raising our guidance for 2011. Kevin will be updating you on our capital markets activity in the second quarter in a couple of minutes.

Obviously we're awfully pleased to have locked in very low interest rates for the next 10 years on our $300 million note offering. Also, we were delighted with the strong response from our bank group, which allowed us to measurably lower the cost of our line of credit.

In the second quarter, we acquired 25 properties, investing $54 million at an initial yield of just over 9.25%. Obviously the yield we have achieved thus far this year is well in excess of our cost of capital and will be nicely accretive for many years to come.

We acquired these properties from 11 different tenants. In the quarter, we added 2 new tenants to our portfolio, and we hope to do business with both of them again before the end of this year.

In these calls in recent quarters, we've discussed that one of the reasons we've been able to obtain excellent yields is our strong tenant relationships. In addition, with an average investment of just over $2 million per property thus far this year, we simply do not encounter much institutional competition in our bread and butter acquisitions.

From a risk management perspective, we also liked the granularity of our business and fully diversified portfolio where we own almost 1,250 small retail properties located all across the country.

We are again raising our acquisition volume guidance to a range of $200 million to $250 million. Right now, we have good visibility on the higher end of this target.

As a comment on the broader sale leaseback market for the retail properties, we've recently seen an uptick in the number of retail portfolios that are up for sale, which is of course a favorable development. A couple of these portfolios have been actively marketed to the usual suspects that compete in our niche segment, so we do expect them to trade at lower cap rates than we have been obtaining this year.

As of the end of the second quarter, our fully diversified portfolio remains 96.9% leased, which is almost exactly where we have been the last couple of quarters.

National Retail Properties continues to be very well-positioned. Our balance sheet remains strong, particularly after our recent bid offering, which we were very happy to complete when there was a window in this turbulent market in early July. As a result, we have plenty of dry powder in the event we prevail on some of the portfolio opportunities that are currently out there in the market.

I'll now hand it over to Kevin.

Thanks, Craig, and let me throw in a few cautionary statements to start off. 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 revise the 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, this morning, as we noted, we reported second-quarter FFO increased 5.6% to $0.38 per share from the same period last year which was $0.36 per share. We also reported AFFO increased $0.02 per share to $0.42 per share for the second quarter, which represents a 5% increase over last year's $0.40.

Looking at the first half, first half 2011 FFO was $0.75 per share and then $0.76 if you exclude a small amount of impairments. And that represents a 7% increase from the first half of 2010, which was $0.71 per share, excluding impairments.

Our occupancy, as Craig mentioned, is holding up well, 96.9%, which is flat with the prior quarter. And the balance sheet is in very good shape, which positions us well to continue capturing additional acquisition opportunity.

We did increase 2011 FFO guidance a bit, but first let me mention a few details about the second quarter, and I'll be brief as many of the income statement line items are very consistent and in line with expectations.

The $5.2 million or 9.5% increase in rental revenues was driven by property acquisitions made over the preceding 12 months. Property expenses, net of tenant reimbursements, totaled $1.8 million in the second quarter, which is a modest increase from the prior year, but a slight decrease in the first 6 months of 2011 versus the first half of 2010.

G&A expense was in line with projections with the increase over second quarter 2010 levels, primarily due to incentive compensation accruals this year.

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

As I mentioned, this morning we also announced a small increase in our 2011 FFO guidance to a range of $1.50 to $1.53 per share, increasing the bottom end of the range by a penny, which translates into a range of $1.64 to $1.67 per share for AFFO, which comfortably covers our dividend.

We have been tweaking our guidance higher this year, largely from increased acquisition volume and timing at good cap rate, and now see 2011 acquisitions of $200 million to $250 million. Our other guidance assumptions largely unchanged.

As Craig mentioned, during the second quarter we completed two important capital market transactions that will provide additional acquisition capacity. In May, we increased the size of our unsecured bank line to $450 million, reduced the interest rate to LIBOR + 150, and extended the maturity to May 2015 with a one-year extension that are still option. We really appreciate the support of our bank group in getting that credit facility recapped.

At the end of June, we executed a $300 million 10-year unsecured notes offering with a 5.50% coupon and a 5.688% effective yield to investors. This offering did not close until July 6, so the June 30 balance sheet numbers presented in our press release today do not reflect those proceeds, which totaled approximately $293 million and were used to pay down our bank line to zero and left us with a cash balance of approximately $75 million. We were pleased to get that long-term piece of capital in place at a very attractive cost.

Lastly I'll note that during June, Standard & Poor's upgraded our corporate and unsecured debt ratings to BBB flat from BBB- based on our strong operating performance, particularly during the recent economic downturn, and our solid debt coverages.

As of June 30, our total debt to gross book assets on a cost basis was 40.7%, 40.7%. Interest coverage was 3.3 times for the second quarter, and fixed charge was 2.9 times for the second quarter.

Only 10 of our properties, which is less than 1%, are encumbered by mortgages. The bottom line is our balance sheet remains in very good shape. And with the closing of the $300 million notes offering shortly after quarter end, we had over $500 million of availability from our cash balances and our bank credit facility.

So we're pleased with how the Company is positioned. We've had a good first half of 2011 that should allow us to post good growth and per share results and allow us to continue to deliver the consistency of results and dividend growth and balance sheet quality that has supported our attractive, absolute, and relative total shareholder returns for many years.

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

Thank you. (Operator Instructions) Our first question comes from the line of Greg Schweitzer with Citi. Please proceed with your question.

Good morning, guys.

Good morning, Greg.

Your commentary remains optimistic over acquisitions prospects, consistent with the increased [custody] on the line. And as we look out over the next 12 months, I'm just curious what we can expect from the mix of those acquisitions between portfolio deals and the smaller one-offs.

Greg, one of the things we've worked on for the last couple of years is working very hard to identify off-market transactions, almost all of which are directly sourced from our tenants, many of whom are performing well and gaining little bits of market share in this awfully competitive world. So we're going to continue doing business with them and that provides a very, very nice place. Most of our deals so far this year have been sourced that way.

There are a couple more portfolio transactions out there in the market, and I'm sure we'll have an opportunity to get our market share. We're going to continue to be very selective in underwriting and ensure that we are getting the types of yields that we think we deserve for deploying our capital.

So I think it's going to be a mix, Greg, and right now we are in a pretty good environment. We like the way we're positioned.

And then just on the general health of the portfolio, and perhaps you could give us an update on the tenants industry watch list and an update on the progress of the remaining two Borders locations?

Yes, in terms of our watch list, it's actually in pretty good shape at this point. As you are aware, a couple of ones that have been on there for a period of time have dropped-- been resolved, if you will, in the terms of kind of the Borders and Blockbusters bankruptcies. So what's left is pretty nominal.

We've got a few Perkins restaurant properties, all of which we believe will be affirmed. At least they're not on the store closure list, and so we don't think there's any real issue there. We only have less than 1% of our tenants are in bankruptcy, so we don't feel a lot of stress or strain at the moment with regard to the remaining portfolio at this point in time.

So in terms of the Borders, the Blockbuster, et cetera, our in-house leasing team is making good progress with these, and we've had some nice progress on the Borders that were previously rejected. We've got two of them spoken for with large, large national tenants. We're able to re-lease them without putting in any TI of material dollars.

In terms of the balance of the two, obviously they were pretty good locations because Borders themselves wanted to keep them. On one of them we've got very good tenant interest already. And on the other one, I think we're going to be just fine. It's very, very well located in Wilmington, Delaware right next to the Christiana Mall, and right off I-95 on a main street. So if location location is important, this one is going to be a good property for us to re-lease.

Okay, thank you.

Thank you. Our next question comes from the line of Joshua Barber with Stifel Nicholaus. Please proceed with your question.

Hi, good morning. I was wondering if you could talk a little bit about any increase deal flow in the last couple of months as we've seen some turmoil in the high-yield markets. Has that driven any borrowers or buyers back to consider longer-term net lease financing today, or do you think the market is pretty much where it was 3, 4 months ago?

Josh, there are a couple of deals out there in the market, as I mentioned, and I don't think the high yield market is causing that. These are just companies that are looking to-- saying to themselves, owning real estate is not the most efficient capital allocation. And as they look to diversify their capital sources between debt, high yield, long-term bonds, or sale leaseback, they're taking advantage of it. So I think it's just the natural evolution of how companies are financing their owned real estate.

Okay. And I know that you've talked in the past before about sticking with retail and those sort of assets. We've seen obviously some of your competitors going into different collateral types. Is there some thought of you guys doing that or is there a return hurdle above where you're currently investing to be able to get you into those sort of assets and collateral, or do you think that you're willing to stick with these [sale] because you know they have slightly lower return characteristics? Thanks.

I think in order-- any time you step outside your comfort zone, you're taking on different types of risk. And we evaluate that constantly. As you pointed out, we do want to get paid for it, number one. Number two, we want to make sure that any additional risks are mitigated.

Right now we are seeing plenty of deal flow straight down the middle in our retail category. We're going to look at other types, but in the near term, it's not something that's of much appeal to us.

Okay, thank you very much.

Thank you. Our next question comes from the line of Todd Stender with Wells Fargo Securities. Please proceed with your question.

Thanks, guys. And Craig, thanks for your color with the acquisition guidance. Can you just give us an indication of what the cap rate difference, would you say, some of these widely-marketed portfolios versus your more relationship-driven direct deals?

But of course, Todd, we'd hate to tell our competitors about this on the call where our pricing is going to be, but I appreciate the offer to do that. But I think the big message which we'd like to convey to our investors and people that are thinking of buying our stock is that although we spend a lot of time and we get measured by initial yield, I think the really important metric is the one of the average yield.

And so if you buy something, if you buy a property with a, just pick an arbitrarily-selected 8% number, and you're getting 2% annual bumps, over a 15-year lease, which is what we're entering into and sometimes 20 years, you've got an average annual yield in the 9.25% to 9.5% type range. That is a spread that is well north of our cost to capital.

So we are always evaluating the initial yield, the bumps that we're getting -- the contractual bumps, by the way -- not having to re-lease it to get higher rent in the future, the quality of the real estate, which is our primary metric, and then who the tenant is and how they're doing in that location.

And on our existing relationship deals, we did enter into some awfully attractive transactions or deals last year which have closed now. As I've said for a couple of quarters, we're not going to continue getting 9.25% initial yields. But we need to get an average yield that's got a 9% kind of number and sometimes higher than that for us to get enthused about allocating capital to it.

Okay. Thanks, Craig. And then just looking at some of the lease discussions you're having now with leases that mature this year and next, any change in posture from the folks that are sitting across the desk with the backdrop of maybe GDP isn't as strong as we thought? Employment numbers aren't as robust as we thought. Any real change in some of those leasing discussions?

Now, Todd, if you're a retailer, you're going to build value for shareholders either by same-store sales, expanding margins -- neither of those are happening in this current environment -- or opening new locations. So the leasing environment right now is quite good. You don't have a feeding frenzy, but where you've got good real estate, the types of tenants that we're doing business with, the value, necessity type retailers continue to do just fine. And our leasing has done quite well.

You know if you think about it, we ended up the second quarter 96.9%, which is exactly where we were at the end of the year. And in the meantime, we lost 7 Blockbuster stores, 5 Borders stores, and that's 12 companies. That hurts us in the short term from a timing standpoint, but by this time next year, that all will be spoken for and we'll get a little uptick from that. Along the way, I'm sure there will be another tenant that will disappear, which will offset some of that.

But I think-- the good news is we don't have any properties in Italy or Spain or Greece.

Thank you, Craig. And last question. Did your increased acquisition guidance incorporate any incremental investment in mortgages? So are you guys adding to your mortgage investment portfolio?

To the extent we are, it's a very, very small part of the capital allocation process, Todd. And to be honest right now, we've looked at a couple of those earlier this year. We were-- one of our teammates spends more time on that than other things. But we're-- bricks and mortar is our core business.

Thank you very much.

Thank you. Our next question comes from the line of Wes Golladay with RBC Capital Markets. Please proceed with your question.

Good morning, guys. There was a large sequential increase in revenue from the retail operations. What were the main drivers of this increase?

Second quarter for that business is seasonally good and the first quarter is seasonally weak, so that's really what drove that. That line on our income statement, it's very much on track with our kind of $2.3 million projection for net operating income from that group of properties. It's a very seasonal business, and so that came through in the second quarter.

Second and third quarter are generally better than first and fourth quarter, Wes.

Okay, thanks, guys. And turning to your new tenants, are they adding to your visibility for 2012 acquisitions?

No. They're both-- the new tenants in the most recent quarter were, are each just going to be a small number of properties for the next couple of years, I would expect.

Okay, thanks. And one last modeling question. What was the term income for the quarter?

Termination fees?

Yes.

That's $204,000.

Okay. Thanks a lot, guys.

Thank you. (Operator Instructions). Our next question comes from the line of Andrew Dizio with Janney Capital Markets. Please proceed with your question.

Good morning, guys.

Morning, Andrew.

I understand you guys sold a big chunk of the portfolio a couple years ago. I'm just wondering now when you look at where cap rates are today, if you think there's any opportunity to burn a little more out of there?

Andrew, I think our portfolio is in very, very good shape. You might see us marketing a couple of small properties over the next 12 months. In this current environment, there's plenty of capital out there at a relatively inexpensive cost. And I think what you're going to see is more diversification of our existing portfolio rather than a whole lot of capital recycling.

Okay, understood. And then just going back to the transactions that you're seeing in the market, whether they're marketed or the ones that you're seeing off market, is there any kind of trend or pattern that you see as far as line of trade or industry?

Andrew, there really isn't. Just as a reminder, we're very bottom-up focused as a company, and obviously you can only buy back which is for sale at any point in time, so we are responsive to what the market is offering. But it is interesting that right now, the mix of portfolio deals that is out there is very wide and covers a number of different lines of trade. Who knows; I'm sure we'll be uncompetitive on some, and if we get lucky we might win a couple of them. But even if we don't, our acquisition guidance is in very, very good shape from the efforts of our acquisition offices building direct relationships with retailers.

Thanks a lot, Craig. That's helpful. That's all from me.

There appear to be no further questions at this time. I'd like to turn the floor back over to Management for closing comments.

Devon, thanks very much. We appreciate all of you being interested in National Retail Properties. Right now we're in pretty good shape and we're quite positive about the outcome. We look forward to talking to you at the end of the third quarter. Thanks very much and enjoy the balance of the summer.

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