NNN REIT Inc (NNN) 2011 Q3 法說會逐字稿

Greetings and welcome to the National Retail Properties third-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. Thank you, Mr. Macnab, you may begin.

Rob, thanks very much and good morning to all of you. Welcome to our third-quarter 2011 earnings release call. On this call with me this morning are Jay Whitehurst, our President, and Kevin Habicht, our Chief Financial Officer, who will review details of our third-quarter financial results following my brief opening comments.

Also, Kevin will update you on this year's guidance plus provide some of the key assumptions in our 2012 guidance.

We have just completed a very productive quarter at NNN and are optimistic that our excellent acquisition momentum will continue in the fourth quarter. Importantly, we are delighted to again be slightly raising our FFO per share guidance for 2011, helped by the meaningful growth in our portfolio.

In the third quarter, we acquired 53 properties, investing $335 million at an initial cash yield of approximately 8.25%. We acquired these properties from 18 different tenants. In the quarter, we added only one new tenant to our fully diversified portfolio.

As we have discussed previously, this acquisition activity is reflective of our deep relationships with our tenants. This quarter, our average investment per property was higher than it customarily is as we purchased six properties from BJ's Wholesale Club for just over $140 million. As many of you are aware, BJ's went private right at the end of the quarter and we were delighted to complete a sale-leaseback with this high-performing retailer.

We are pleased to be again raising our 2000 acquisition volume guidance to a range of $600 million to $700 million. Our team is working on a number of opportunities that might close this quarter, continuing our excellent acquisition momentum. Depending on what actually closes in the next six weeks, we still expect that our average initial cap rate for the year will be at or around 8.5%, which is the number that we have previously guided towards.

With respect to the direction of our initial yields, we have consistently been saying that cap rates are coming down as there continues to be strong demand for well-located net lease retail properties. As a result, we continue to expect further cap rate compression from the exceptional initial yields that we have obtained so far this year.

In our portfolio, there was a little more good news in the third quarter as we made incremental progress on leasing up a couple of properties, and our fully diversified portfolio is now 97.2% occupied.

By the way, I remind you that only 1.9% of our rent expires next year.

National Retail Properties continues to be very well positioned. Our balance sheet remains very strong, our portfolio is in excellent shape and as this year's acquisitions come into our rent [roll], we are optimistic about our growth opportunity in 2012. With that I will now hand over to Kevin.

Thanks, Craig. Let me start off with the standard cautionary statements 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 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 we reported third-quarter FFO of $0.39 per share. That represents an 8.3% increase from the same period last year. We also reported AFFO increased $0.04 to $0.43 per share for the third quarter which represents a 10.3% increase over last year's $0.39 per share.

FFO for the first nine months of 2011 was $1.15 per share, representing a 12.7% increase from the first nine months of 2010, which was $1.02 per share.

If you exclude impairments for both nine-month periods, FFO per share increased 9.4% in 2011, $1.16 versus $1.06. Our occupancy is holding up well as Craig noted at 97.2% which is up 30 basis points from the prior quarter and the balance sheet is in very good shape, which positions us well to continue capturing additional acquisition opportunities.

We increased 2011 FFO guidance and initiated 2012 guidance. But first let me quickly mention a few details about the third-quarter and I will be brief as there aren't any material surprising variances from expectations.

Rental revenues increased $10.6 million or 19.8%, which was driven by $573 million of property acquisitions over the last 12 months. Property expenses net of tenant reimbursements totaled $2 million in the third quarter. That is up from $1.8 million in the previous second quarter. G&A expense was in line with projections with the increase over prior year levels, primarily due to incentive compensation accruals this year as well as an increase of approximately $400,000, and acquisition transactions due diligence costs for both the third quarter and nine-month period versus the 2010 levels. But bottom line, the bottom line is that core fundamentals and reported income statement performance are very strong.

As I mentioned this morning, we also announced an increase in our 2011 FFO guidance to a range of $1.54 to $1.56 per share. That is up from $1.50 to $1.53 per share which translates into a range of $1.67 to $1.69 per share for AFFO, which comfortably covers this year's $1.53 per share dividend.

We have been tweaking our guidance higher this year, largely from increased acquisition volume and timing of those acquisitions. We now see 2011 total acquisitions as Craig mentioned of $600 million to $700 million. Also included in this guidance is about $0.01 of additional lease termination type income in the fourth quarter. All of our other guidance assumptions are largely unchanged.

We also announced 2012 FFO per share guidance of $1.62 to $1.67 per share which represents 6.1% growth from midpoint 2011 to midpoint 2012 guidance.

Primary notable assumptions and our guidance include $150 million of acquisitions in 2012 skewed to the second half of the year. G&A expense of $28.3 million that compares with $27.1 million in 2011, about a 4% increase. No change in occupancy compared to 2011. $2.4 million of mortgage residual interest income that compares with $3.1 million in 2011. No lease termination fees in our guidance for 2012, and that compares with around $3.5 million that will be in 2011 when it is all done, we believe.

$0.10 of non-cash adjustments to 2012 FFO numbers bring estimated 2012 AFFO results to $1.72 to $1.77 per share, with the primary AFFO adjustment being the non-cash interest expense on our convertible debt of approximately $4.3 million in 2012 and non-cash stock-based compensation expense of approximately $6.3 million.

Turning to the balance sheet, Craig has already talked about our recent acquisitions, which drove the use of proceeds for the two capital market events in the third quarter, those being the $300 million 10-year unsecured notes which we closed on July 6 and the $9.2 million common share offering which was closed on September 12, which generated net proceeds of $230 million.

As of September 30, total debt to total gross book assets of 40.1% and debt to EBITDA of 5.4 times left our balance sheet leverage largely relatively unchanged from recent prior periods. Interest coverage was 3.1 times for the third quarter and fixed charge was 2.8 times for the third quarter. Only 10 of our properties, less than 1%, are encumbered by mortgages. The bottom line is our balance sheet remains in very good shape and despite the large year-to-date acquisition volume we still have full availability of our $450 million bank credit facility and a balance sheet still as modestly leveraged as it was at the beginning of the year.

Quick side note. None of the holders of our 3.95% convertible notes exercise their options to put their notes back to us when they had the opportunity in September. So the next opportunity they will get to do so is September of 2016.

So in closing, we are very pleased with how the Company is positioned. We have had a great first nine months which obviously bodes well for 2011 full-year results, but more importantly, the acquisitions in the second half of 2011 should significantly enhance the visibility on meaningful bottom line growth in 2012, all of this which allows us to continue to deliver the consistency of results, the dividend growth, the balance sheet quality that have supported attractive absolute and relative total shareholder returns for many years. With that, Rob, I think we'll open it up to questions.

(Operator Instructions). Lindsay Schroll with Bank of America.

Good morning. I know you guys didn't have any [Friendly's] in your portfolio, but can you just kind of talk about your outlook on the whole casual dining sector since you still have exposure to this segment?

That is a fair question and it is very tenant-specific. Right now it does appear that our restaurant tenants are performing quite well. Many of them are at the lower price point in the casual dining sector. And frankly, the monthly numbers and quarterly numbers that we get are trending right on track with where they have been.

I think 2008, 2009, early in the cycle, restaurants initially struggled. Many of them were operating with two consecutive years of quarterly same-store sales decreases. What we're seeing right now is they're flat to slightly up. There is a little bit of inflation pressure on commodity prices that is squeezing profitability, but the companies in our portfolio are generally performing quite well.

Then, given the increased interest in cap recompression and the triple net sector, would you consider increasing your disposition activity?

We are always looking at dispositions and it's sort of property by property, tenant by tenant. We are currently talking about a couple of properties that we might market internally using our excellent in-house capability. So I think you'll see us doing a little bit, but not a whole lot.

Joshua Barber, Stifel Nicolaus.

Good morning. Kevin, I may have missed this in your comments, but how much of your 2012 guidance, excuse me, what does your 2012 guidance assume about acquisitions?

$150 million of acquisitions in 2012 skewed to the second half of the year.

Okay, and could you also -- what was the total dollar amount of the BJ's acquisitions?

In my comments I mentioned right at $140 million.

And is there any chance of additional BJ's now what -- as they were finishing that go private process?

Yes, I think they have completed their transaction and all their financing is in place. That deal closed right at the end of third quarter. That transaction is illustrative of many of the properties in our portfolio which is that they are focused at -- in providing very good value in this retail environment and what you are seeing is wholesale clubs are continuing to have very solid same-store sales increases and you saw that for the companies that reported in October. So Costco and Sam's.

So, BJ's is doing well, it is excellent real estates, the range per foot is an attractive number for our perspective; sales, productivity of some of these stores is really very high and the rate coverage is quite a bit better than what we generally target.

That's helpful. One last mission. Craig, have you seen additional companies who are going through the go private process who are looking at financing given everything that's gone on in the high yield market for the last six months, that it gravitated more toward the triple net financing market or is it still depending on which way the wind is blowing?

Well, it sort of comes and goes. I don't really think that -- I know that several people on this call think that what happens in the high-yield markets is a big determinant. I would characterize it as an influencing factor, not a major issue. Many companies like to access a variety of capital sources.

What you are seeing, certainly in the restaurant category, doesn't mean we are looking at these deals, but there are a number of activist shareholders encouraging some of these companies that own the real estate to look at completing sale leaseback transactions. So it is very company-specific. What we're seeing with many of our relationship tenants is they continue to open new stores and we are delighted to help facilitate their growth by providing them capital.

In addition, getting back to your question, there are a number of portfolio transactions that are out there and we were being selected, we are looking at some of those. And then I suspect some of them will be priced at initial yields that don't meet our thresholds.

Thanks very much.

Tayo Okusanya with Jefferies.

This is actually [Albert Lin] with Tayo on the line as well. Going back to the acquisitions, you guys mentioned $150 million in second half of 2012. So it looks like it is going to be much lower than the $600 million to $700 million expected for 2011. Can you guys comment on what is driving that and what is making that back half weighted?

Yes, so Albert, that is a fair question and you might recall that this time last year we guided to exactly the same amount, $150 million generally in the second half of the year. If we had some deals under letter of intent or under contract right now, we would be talking about those. But we have got a lot of work to do to close our transactions in the fourth quarter of this year to get that $600 million to $700 million number. Right now it is looking quite promising, but once we've completed that, we'll be working on 2012 acquisitions.

Very importantly, if the sun, the moon and the stars align, we will do more than $150 million, but what we're saying is that that's a bonus.

And I think what is important to note there is that even when that number skewed to the back end of the year, we are comfortable with FFO guidance that's 6% above 2011 numbers.

And would you still be looking to acquire at cap rates on 8.5%?

I think that next year given the very low interest rate environment, the demand for well located real estate it is going to be lower than the 8.5%.

Okay.

I think, frankly, just in anticipation of your follow-up question I would say something like 8% is the right number for you to be thinking about.

Got it. Thank you.

R.J. Milligan of Raymond James.

Good morning. One of your peers is out saying that they anticipate about 5% of their rents to go into reorganizations next year and I am just curious if the outlook's similar for your tenant base, and I know you guys are a little bit higher up on the credit quality curve, but are you looking for the same weakness in certain sectors and are there any sectors that over the past three months that have given you more concern?

I hadn't noticed. But the good news is our portfolio continues to be in very, very good shape and those were comments which Kevin mentioned earlier and I mentioned in my prepared remarks. As to where the economy goes, we don't think there's going to be a lot of rising tides lifting the boat. We think it is a market share gain generally.

I think, right now, it appears that Christmas is going to be picking a number 2.5% to 3% higher for retail sales. But their are big market share shifts going up and many of our value necessity type retailers with lower price points continue to perform satisfactorily. You guys are much smarter at anticipating where the big macro force is, but our portfolio is in pretty good shape right now.

R.J. Milligan And, Kevin, what is the cap rate assumption on the acquisitions for next year?

I think what we have alluded to is that it would be in the around 8. low 8 kind of range.

Okay, great. Thank you.

Andrew DiZio with Janney Montgomery Scott.

Looking at the -- your guidance implies about $150 million to $250 million in the fourth quarter in the acquisitions. And you look at what you are looking on right now, is that primarily with new or existing relationships?

Most of the stuff we are working on is existing relationships. We do have one tenant that we've been calling on for several years that, if we get lucky, something might happen this per quarter. But most of it as I go down the list is the same old same old tenants and I can't emphasize enough the importance of our efforts to build deep relationships with our tenants and that has really worked for us, very, very effectively this year.

Thanks, Craig. And then just one other question. You guys have talked about cap rate compression and what you're seeing out there. Just wondering what the difference has been at compression between portfolio acquisitions versus the one-off type stuff and then versus the relationship stuff. I guess new relationships versus existing relationships just where that spreads them?

You know, each deal is different, but one of the things that has been a shift that is occurred in 2011 is that there has been a premium, in other words lower cap rates, on portfolio transactions and that kind of reflects the fact that many of our competitors don't have the deep tenant relationship that we have. So they are more inclined to complete aggressively on portfolios.

You know, those might be 50 basis points, they might be 75 basis points, it is just a function of how people see each individual deal. But let me remind you of one thing that I think is the most important part of all of this, which is that even at an 8% initial cap rate just for hypothetical purposes next year, 8% initial cap rate, something up to and or close to 1.5% to 2% annual bumps over a long duration lease, we are looking at average annual deals, nicely above 9% which helps us consistently builds value for shareholders.

I think that if a lot of people get bogged down in the little small details and forget what a very good business net lease retail is.

Thanks, Craig, and then one other question for Kevin. I did your debt offering back in July. I'm just curious on where you think you would be able to issue debt at today?

Interestingly, I think we are probably right about the same ZIP code, mid-5's.

Great. Thanks a lot.

Rich Moore with RBC Capital Markets.

Good morning. Sounds like we are going to have to apply the 4X factor to the acquisition guidance of $150 million, given that that is what you had last year as well. But what I do want to ask you in all seriousness is, these portfolios that you are looking at, would they be meaningfully above that number? In other words are the portfolios $100 million in size? Is that kind of how it you are thinking or are they small enough that they would sort of be part of this $150 million?

Yes, sitting here a year ago, I'll be honest, when we came up with that $150 million number we had no idea where it was going to come from. Over the course of this year, we have talked consistently on prior calls that there are a number of portfolio transactions out there in the market. Some of our competitors have had some success with some of those and we have had our share.

You know, going into next year, I am not sure that we see a lot of big deals out there. There are a couple of things that are being talked about that have potential, but in terms of what's, as Jay Whitehurst who is on this phone always says, internally, we can only focus on that which is available for sale today. And as we look out there, if we -- our day job is to meet or exceed guidance and if a couple things go our way, we might have that opportunity. But right now $150 million back half of the year looks like a good starting point.

But, Rich, you are focused on external growth as an opportunity for REITs and the beauty of the net lease retail business is that there continues to be decent opportunities for external growth. As to how much the dollar has come in that, our day job is to get as much of it as possible at good risk adjusted returns, carefully underwritten.

Very good, Craig, and you're absolutely right. That is a key focus I think. Now let me ask you if I could, you guys -- I think you had one B.J.'s before. Is that right?

Yes, sir.

So you have obviously in place a lease agreement with these guys. Sounds like you could do the other six, but you just did pretty easily. Could you do more? Is there a possibility that they have interest in other locations because that seems like a pretty big sizable investment per store?

Yes, I -- BJ's -- I don't want to speak for some of our competitors, but they did complete a fairly large sale leaseback in conjunction with their going-private transaction. One of the private REITs disclosed that they did a couple hundred million dollars of sale leaseback or something like that with BJ's. And then I think it's fair to say that there was some a third company that also did some BJ's. So BJ's did a meaningful sale leaseback of their own real estates in conjunction with their going private.

So you think that maybe that is end for the time being? Is that kind of what I am reading?

Based on -- that's right, Rich.

All right, good, thank you. And then I want to ask you to I think you added about 12 Best Buys, is that right? In the quarter?

We did.

And Best Buy is one of those tenants that everybody has been talking about. And in particular they are all talking about this notion that downsizing, which I think is maybe overblown in the retail space in general, but Best Buy is one of the tenants that is doing a lot of talking about taking their store size down. Can you tell us about this group of Best Buys? You know, maybe what they've said to you, I guess how long you have in duration, but then what they said to you as far as what their plans for the existing store size are?

Yes. So that is a fair question and Best Buy is clearly out there saying, I think on their most recent conference call they said that over the next several years they expect to reduce their GLA by 10%.

But as in all of these types of deals, the devil is in the details. And the details that we pay extensive attention to include the following two things.

One, how does that specific store do? And when you can buy their underlying real estate for one store that is doing $80 million in sales, we think that is a pretty good opportunity. And that is a pretty good opportunity on its own.

The second piece that we pay attention to is, what is the rent that the store is being paid and how does that tie in with what the market is for comparable space in that specific location. And we purchased this portfolio at very low initial rent per foot. So no rent, high productivity stores when everybody hates the category, that is an opportunity for us.

I would also remind you Best Buy is quite a big company. I think even at this new lower stock price, they have a $10 billion equity plus equity market account. Anyway, so the devil is in the details. So it is how do the stores perform and what's the rate per square foot.

Now, not all of those stores did $80 million.

Right, I got you. And then the duration, Craig, roughly of that portfolio in terms of time remaining on the leases is what about?

It's less than 10 years.

10 years. Okay. And then the last thing I was going to ask you is about Logan's Roadhouse. That looked like another addition in the quarter. Is that correct? And if so, could you give us a little color on that?

Yes. So, Logan's is clearly one of our relationship tenants. We've been -- and, Rich, thanks for paying attention to the detail. But Logan's is clearly a relationship tenant for us. They -- I think there's some pretty good information out there on Logan's because they filed an S-1 to go public in the most recent year or two.

So if you were to take a look at that, you'll see -- and Logan's is a private company. So it is not up to me to disclose how they are doing, but if you were to take a look at that S-1, which is a little bit dated right now, they have been performing extremely well. They are [equipped] -- they are a steak concept and getting to an earlier question, they are in the casual dining category. Their value proposition is extremely good. Their average check is probably the lowest in the steak concept area.

And in terms of how this whole category is doing, if you take a look at a big public company, Darden, they are consistently talking right now that Longhorn, which is their steak concept, is their growth vehicle for the near term. So with a good company like Logan's, we are happy to do some more stores for them.

Very good, thank you.

Todd Stender, Wells Fargo.

Could we just get into a little more detail on the BJ's properties? The time remaining on those leases and then what the initial lease yield was on those was?

The BJ's were 20-year initial leases. That was a deal that was done directly with the retailer and I don't want to give you the exact yield, but clearly in the third quarter our yield came down and we mentioned that some of these portfolio deals were dragging at lower.

So, if you -- just for government purposes if you assume that it had a 7 as a first digit and was close to 8, I think you are getting there.

And anything change in your underwriting of the BJ's deal, being that they are now owned by private equity? Any change in the average that you need to account for?

So, our process is the same for every single deal. Our underwriters go and visit the properties, we spend a lot of time taking a look at each individual store, how that store performs in that market, what the rent per property is. How that store performs, what alternative uses would be. And frankly, we think we cherry picked some of these properties. And obviously, we pay a lot of attention to the ability of the tenant to pay the rent, but the rent coverage on these BJ's was extremely good.

Thanks. And you have done equity recently, you've done debt offerings. Is the preferred market attractive to you right now? How much room do you have to add preferred if you went that route? And any indication of what pricing would be?

I mean, we have some preferred in our capital structure now. We have room for more preferred. I am not sure where it is priced today, it's our best alternative, but it is clearly on the table along with really every other flavor of capital at the moment. Everything is reasonably well priced, preferred still -- still is a little high for us, I think. But I think we would be in the low 7, 7%, low 7s kind of yield range is my guess at the moment.

Thanks. And then the last question, any changes in assumptions for next year just looking at maybe what CPI is or interest rates? Anything about maybe your leases come in from your traditional 15 years, any changes you are forecasting?

I think at the broad level, the answer to that question is no. We are in low interest rate environment, our lease duration remains very, very long.

Thank you.

Tayo Okusanya with Jefferies.

Just in regards to the acquisition Outlook, could you talk a little bit about any new retail categories you may be looking at and why those categories may be attractive to you?

You are nice to ask and I don't think we want to tell our competitors everything we are doing, particularly not on this phone call. But we are continuing to stick to our knitting, looking at all retail categories. We are hopeful that some of our relationship tenants are going to open new stores next year and we can participate in their growth by providing them sale leaseback capital and then our excellent acquisition offices are out there, beating the bushes to try to find new deals.

You know, just as I mentioned, we are in the risk-adjusted return business. We look at every -- we look at a lot of deals, many of which we don't close on. So but we are out there looking at all the categories and we will see which ones find our retail standards.

And then just one more follow-up question. As we look out over the next 12 months, could you talk about the two or three things that worry you the most?

I think the thing that worries me the most and it has been the same for the last 12 months is how are we going to create jobs in our economy to provide the unemployed an opportunity to have the great future that we have all had. You and I as immigrants in this country have been blessed to be here. If we don't start finding a way to create jobs, it is hard to see how we can sustain that.

Tayo Okusanya Got it. Anything else on your mind?

Well, we need some resolution in Europe and I suspect making the sausage is going to be a very ugly process. So it is going to take a while and it is going to be -- cause continued volatility in the markets. But at the end of the day, if retail sales have small growth, our portfolio will be just fine.

Appreciate the comments. Thank you.

There are no further questions at this time. I will turn the floor back to management for closing comments.

Thanks very much. We are going to meet with a number of you at NAREIT's investor meeting in Dallas in a couple of weeks. We look forward to seeing you then and we'll be talking to you in a couple of months to report on how 2011 finished up.

With that, we wish you all happy holidays and enjoy the balance of the year. Thanks very much, Rob. Cheers.

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