NNN REIT Inc (NNN) 2012 Q3 法說會逐字稿

Greetings, and welcome to the National Retail Properties third-quarter 2012 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. Thank you, Mr. McNabb, you may begin.

Brenda, thanks very much. Good morning, and welcome to our third-quarter 2012 earnings 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 2013 guidance.

We've just completed another strong, predictable quarter at NNN and are optimistic that our acquisition momentum will continue in the fourth quarter. As indicated in our press release, we are projecting a second consecutive year of excellent FFO per-share growth. Equally importantly, we are also guiding towards steady growth in 2013, helped by the net lease retail acquisitions that we've already made this year, as well as those that we are anticipating to close in the current quarter.

In the third quarter, we acquired 30 properties, investing $140 million at an initial cash yield of approximately 8.65%. We acquired these properties from 12 different tenants and each one of these tenants is what we describe as a relationship tenant, which of course means that we had little if any competition on these transactions. As a result, we've been able to maintain very attractive initial yields, which of course get better over time as the rent continues to grow.

We were pleased that a couple of our casual dining restaurant tenants were able to complete public offerings in the most recent quarter, in particular, Bloomin' Brands, whose primary restaurant concept is Outback Steakhouse, with whom we completed a $98 million portfolio acquisition at the beginning of this year.

We have previously discussed that our underwriting process includes an evaluation of the future prospects of a tenant, including their financing plans. It is gratifying when our internal evaluation of the likelihood of Bloomin' Brands goes public comes to fruition as soon after our portfolio acquisition.

Dispositions in the third quarter were again steady and consistent with a little portfolio pruning occurring. Plus our excellent in-house disposition team very successfully closed out our convenience store joint venture. This joint venture generated meaningful returns to our JV partner, which of course means that we similarly earned a very good return on our equity. Plus, we were pleased to realize promote and transaction fee income in the third quarter.

In terms of the portfolio, our fully diversified portfolio continues to be fully occupied and is now 97.9% occupied.

National Retail Properties continues to be very well-positioned. We have cash on the balance sheet which we expect to invest in this quarter. Our portfolio is in excellent shape. And as this year's acquisitions come into our full-year rent roll, we are optimistic about our growth opportunity in 2013. Kevin.

Thanks, Craig. Let me start 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 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, this morning, we reported third-quarter FFO of $0.52 per share, recurring FFO of $0.43 per share and AFFO of $0.47 per share. The $0.52 FFO results include two items we backed out to get to the $0.43 of recurring FFO. Those two items were $7.7 million reversal of a tax valuation allowance that we established in 2009 and 2010 in connection with some impairments we took in our TRS back then. And secondly, $1,964,000 of incremental income we realized in the third quarter as a result of winding down our joint venture.

This recurring FFO of $0.43 per share represented a 7.5% increase over 2011' $0.40 per share third quarter.

Similarly, the recurring FFO for the nine months of $1.28 per share represents a 10.3% increase over prior-year amounts.

As usual, the strong results were a combination of maintaining high occupancy and making new, accretive acquisitions while keeping our balance sheet is strong. Occupancy was 97.9% at the quarter end. That is down 30 basis points from prior quarter, but is up 70 basis points from a year ago. And as Craig mentioned, we completed $140 million of accretive acquisitions in the third quarter.

Just looking back over the past seven quarters, so back to the beginning of 2011, we acquired $1.2 billion of acquisitions over the past seven quarters, and notably, our balance sheet remains in very good shape and modestly less leveraged than seven quarters ago.

Just a few details on the third-quarter results. Compared to 2011's third quarter, rental revenues increased $17.1 million or 26.2%, primarily due to the acquisitions we made in 2011 and 2012.

In-place annual base rent as of September 30, 2012 was $335.4 million on an annual run rate. During the third quarter, property expenses net of tenant reimbursements totaled $1.4 million. That is down sequentially from $1.6 million in the second quarter and $1.8 million in the first quarter.

G&A expense increased to $8.7 million for the third quarter, and we now see full-year G&A coming in around $31 million.

In September of 2007, we formed a joint venture in which we had a 15% equity interest and an affiliate of Crow Holdings owned 85%. That joint venture owned 21 convenience store properties, all of which were sold during the third quarter for approximately $87.5 million. As a result of this sale and winding down the JV's operations, we received a $743,000 disposition fee and $1,221,000 of promote income, totaling $1,964,000 in the third quarter.

While this is real cash income, it is not recurring, so we backed it out of FFO and [riding at] at our recurring FFO results.

The IRR to our joint venture partner over the life of the joint venture exceeded 15%, and it exceeded that level for us given the fees we received. The termination of the joint venture will not have a material impact on our results going forward.

But the big picture bottom line for the quarter results are that the core fundamentals -- occupancy, rental revenue, expenses -- are all performing well, with no material surprises or variances.

Let me shift to FFO guidance for just a minute. This morning, we also announced an increase in our 2012 FFO guidance to a range of $1.71 to $1.73 per share. That is up from $1.67 to $1.72 per share. And that new guidance translates into a range of $1.81 to $1.83 per share of AFFO, which comfortably covers our $1.55 per-share dividends in 2012.

We've been tweaking our guidance higher this year, largely from increased acquisition volume and the timing of those acquisitions. This new 2012 guidance accounts for that and recent capital market activities on top of the incremental acquisitions, which we now see totaling approximately $500 million in 2012.

Consistent with prior guidance, this guidance does not include any impairment charges nor the first quarter's preferred stock redemption charge of $3.9 million. And additionally, it exclusive the two items that I just noted in our recurring FFO number this quarter, the tax valuation allowance income and the JV termination income.

Hitting the midpoint of our new 2012 guidance will represent a 9.6% growth over 2011 FFO per-share results. And 2011's FFO per-share results were up 8%, so 2012's growth is not coming from easy comparisons with 2011.

We also announced 2013 FFO per-share guidance in a range of $1.77 to $1.81 per share. That represents 4.1% growth from the midpoint of 2011 to the midpoint of -- sorry -- the midpoint of 2012 to the midpoint of 2013. Primary notable assumptions in our 2013 guidance include $200 million of acquisitions, somewhat skewed to the second half of the year; G&A expense of $30.6 million; no change in occupancy; $2.4 million of mortgage residual income; and no lease termination fee income.

$0.09 of non-cash adjustments bring estimated 2013 AFFO results to $1.86 to $1.90 per share, with the primary AFFO adjustment being the non-cash interest expense on our convertible debt, which is about $0.02, and non-cash stock-based compensation expense, which is around $0.07.

Turning to the balance sheet and capital markets activity, in August of this past quarter, as you are aware we completed a $325 million 10-year unsecured notes offering with a 3.8% coupon and a 3.98% yield. This offering was well-received, with very strong demand and record pricing for NNN.

We paid off our bank line balance, and as you can see by today's press release, have $141 million of cash on our balance sheet. We felt like the very effective pricing on these notes was worth a couple of months of negative carry, pending the use of these excess funds, which is consistent with our conservative philosophy on balance sheet risk management.

We also announced in today's press release that approximately $100.6 million of our 3.95% convertible debt holders had elected to convert their notes. These notes have always required settlement of the par amount in cash, but we've also elected to pay any premium due above par in cash as well, despite having included these shares in our diluted share count historically. We will be paying off these converted notes sometime in November.

Lastly on the capital front, we raised approximately $58 million of new common equity during the third quarter via our DRIP and our ATM. I also wanted to mention, too, when we released this last week, we amended our bank credit facility, increasing the facility size from $450 million to $500 million. We extended the maturity out to October of 2016, plus a one-year extension option that would take it to 2017. We reduced the pricing down to LIBOR plus 117.5 basis points on the interest rate. So we were pleased to put that in place just recently.

As of September 30, our total debt to gross book assets was 38.8%, which -- that is down from 40.1% a year ago. However, excluding the material amount of cash that we have on our balance sheet, net debt to gross book assets excluding that cash was 36.7% at September 30, 2012.

Debt to EBITDA was 4.9 times for the quarter. And again, adjusting for cash balances, however, net debt to EBITDA was 4.4 times for the quarter.

For the third quarter of 2012, interest coverage was 3.5 times and fixed charge coverage was 2.9 times.

(technical difficulty) Only six of our 1530 properties, which is well less than 1%, are encumbered by mortgages. And as I mentioned, despite over $1.2 billion of acquisitions over the past seven quarters, our balance sheet remains in very good shape and is less leveraged than it was seven quarters ago.

So in closing, we are very pleased with how 2012 is turning out, we are optimistic about how 2013 is looking, based on what we believe are very achievable assumptions and continuing our moderate leveraged capital structure. 2011's FFO per-share results grew 8%. 2012's guidance suggests 9% growth, and 2013 guidance results in additional 4% growth, hopefully with some opportunity for upside.

But we believe we are well-positioned to continue to deliver the consistency of results, dividend growth and balance sheet quality that has supported attractive absolute and relative total shareholder returns for many years.

With that, Brenda, we will open it up to any questions.

(Operator Instructions) Emmanuel Korchman, Citigroup.

If we look at the significant acquisition volumes you guys had this year, and then your guidance, which I guess is kind of more towards your normal run rate next year, why are you going to have sort of a timing gap that you are saying that most of the transactions will come in the second half? Why wouldn't the momentum continue?

That's a fair question. As we've done in the past, we have tried to establish expectations that we can meet and preferably exceed. Our visibility [goes] to a large extent several quarters out in our acquisition approach. So while we've got pretty good visibility on what we have on the fourth quarter, heading into 2013, that number is a plug, and our goal is to meet or preferably exceed that acquisition volume.

Okay, great. Kevin, I might have missed your specific comment. On the notes, how much cash are you going to use up for the note conversion? And then how much of that is going to be left for acquisitions?

We will use a good bit of it up. $100.6 million have converted. That's the par amount. And then you go through this 20-day observation pricing period, which is just concluding now, to determine how much the premium above par is related to the conversion value.

But -- pick a number, call 30%. So if it is $130 million, we will use quite a bit of the cash on balance sheet. However, we've got a $500 million credit facility to tap into for near-term acquisitions.

So then if we take your -- you have $140 million of cash now on the balance sheet.

Right.

And you're going to use -- so what is the (inaudible) note conversion?

I don't have a final number for you yet, but --

Just assume, Manny, we use all of it.

(multiple speakers) 135, yes, some number.

So really your dilution for carrying the cash on the balance sheet is going to be really limited (inaudible) use it up right away now rather than acquisitions?

In the month of November, correct, it will get utilized.

Perfect. Thank you.

Joshua Barber, Stifel Nicolaus.

I was wondering if you could talk about -- I may have missed this before -- but what was the average cap rate on your third-quarter acquisitions and what you've done throughout the year?

Josh, good morning. For the third quarter, we had a terrific initial cap rate of around 8.65%, is the number I used. And for the nine months, it is about 8.5% initial cash cap rate.

Is that shift just more indicative of different property types, or is that just some of your pipeline deals more closing in the third quarter versus portfolio transactions for the rest of the year?

Firstly, in terms of the difference 8.65, 8.5, it's pretty close, given the number of properties we acquired. But we are continuing to source off-market deals with both relationship and nonrelationship tenants. Our team spends a lot of time on the road and there is plenty of properties out there and finding some very attractive ones. So we are going to continue doing the same steady, predictable acquisition approach.

Okay. When I'm looking at your new credit line, and you have the facility to take it up to $1 billion now, how big would you want to be putting things on your facility? And is that you guys looking for, I guess, larger deals than you have in the last few years?

I don't think that really changes our approach to line usage and managing balance sheet risk. But yes, we have a $500 million accordion feature that, if need be, we could size up that credit facility with additional lender support. But at the moment, $500 million is a comfortable credit facility size for us and one that we will continue to use as we have in the past.

And Josh, just to supplement that, historically, what we have done is we've used our line of credit balance at the margin to complete transactions, and then have traditionally gone out into the credit markets and turned that out. So even though the pricing on this credit facility reflects a good balance sheet, we historically have chosen not to rely on short-term bank debt to finance our Company.

Right, and we all appreciate that. One last question, related to the Crow Holdings joint venture unwinding. Was there any option for you guys to buy the assets out of the JV once it was unwound, and if so, how come that wasn't exercised?

Josh, we did have that opportunity, and frankly, we had every intention of buying them. They were very, very good properties, leased to primarily two tenants, both of which are big tenants in our portfolio, Susser and Road Ranger.

Somebody just got really aggressive on their pricing when we were marketing these properties. And just to put it in perspective, the cap rates on these properties was in the low 7s off trailing rents. There is a rent bump that kicks in here over the next month, and that is -- off that was a 7.85%. So our fiduciary responsibility to our partner was to get them the best price and somebody else valued this more than we did.

Great. Thank you very much.

Paula Poskon, Robert W. Baird.

Just a housekeeping question first, and apologies if I missed this in your prepared remarks. What were the acquisition costs for the third quarter?

Acquisition costs -- for the third quarter were low, $40,000 for the quarter, $345,000 for the nine months.

Thanks, Kevin. And then just a further bigger picture perspective question. How close is your existing lines of trade exposure to your desired exposure? And how does the acquisition opportunity set compared to that? In other words, you said the acquisition pipeline looks attractive, but are you seeing the breadth of opportunity sets across the lines of trade in terms of the exposure that you would like to have across those?

It's a good question. The first thing is that internally -- Jay Whitehurst is on this call, our President -- always reminds our Group when we meet that we can only buy that which is for sale. So our approach is a very bottoms-up process. We look at each property that meets our tests in terms of market rent, real estate location. And then at the back end, we take a look to see how it fits into the portfolio mix.

Obviously, a couple of years ago, we had a more meaningful exposure to the convenience store industry. We liked that a lot. But given that we haven't done any real volume in the convenience store category, that has moved lower as a percent of our total rent. But we really like those corner locations at signalized intersections, leased to good tenants in an industry which has the dynamics of the convenience store category.

So if we can, we would like to find some more properties in that area. But I think if you take and look down the other categories, you are going to see much of the same going forward.

Thanks, Craig. And then -- I'll jump back in the queue. Go ahead. Thank you.

Todd Stender, Wells Fargo.

Just going back to the dispositions, what properties did you sell in the quarter? What was the pricing on those, just being the cap rates? And Kevin, was the impairment related to those dispositions?

I'll jump on the impairment question, but no, they were really not. The impairments were related to one property that was condemned, one property that we did move to held-for-sale but not sold yet, and then a couple from an old bankruptcy a couple of years ago that we marked down.

In the third quarter, our acquisitions, if you take a look at -- I don't mind feeding it to you -- if you take a look at the number of properties right at the very back end of our press release, the number of Road Ranger properties declined. And they entered into a particular transaction which had the effect of us selling some of the weaker properties that we have leased to that tenant. We actually replaced a good bit of this volume with an outstanding property leased to Road Ranger right in downtown Chicago. So it's a very, very good property. And we got rid of some weaker real estate.

We essentially agreed this transaction, which from a real estate standpoint is very good to us, and we agreed to sell those properties back to Road Ranger at our original purchase price, which is a 8.75 cap rate. That was a transaction that we entered into with our tenant, Road Ranger. It was good for the tenants and it was very good for us.

As it so happened, given the depreciation, we did generate an accounting gain from that transaction. But it's not really an economic gain.

That's helpful. Thanks, Craig. Just looking out to next year, it looks like you addressed a couple of the lease maturities. Is that correct, or was that a reflection of stuff that was disposed of?

The good news is in terms of lease maturities, many of our tenants have notification periods well in advance of when the lease comes due. And so far, we are having some pretty good success with those.

Any of the economics you could share with us, just saying what the rent was and what it has moved to?

Given that they are exercising an option that they have, I think if you want to use a rule of thumb, these properties generally have, given the time, the date they were acquired, many of them have a 10% bump every five years.

Okay, that's helpful. Finally, Kevin, as far as your ATM, with your share price pushing about $32, just under, have you guys issued any shares subsequent to the quarter?

We haven't made any announcements around that, but as we mentioned in the third quarter, we did issue shares under the DRIP and the ATM, and we have for the nine months. For the quarter, it was $58 million.

Okay, thank you.

Rich Moore, RBC Capital Markets.

On the tax benefit real quick, Kevin, I don't know if you guys mentioned it early in the call, but why is that so big, I guess? I thought it had something to do with the impairment, but it is as big as the impairment.

No, it was related to impairments we took back in 2009 and 2010, and at that point in time, we didn't take any tax benefit for that. We created any valuation allowance for the benefit associated with that impairment expense. And so this is really unwinding that tax valuation allowance. And so we are booking it this quarter. We backed it out in terms of calculating recurring FFO, because it is obviously a non-cash kind of item and not recurring. But it was related to 2009, 2010 impairments in the TRS.

I got you. Good, thanks. And as far as stuff like that and additional impairments, I realize if you have an impairment charge, you've got to take it when you realize it. But is there something that triggered, I guess, the impairments this quarter that you may be going through more of that same process going forward?

It is a process we go through continuously as we evaluate properties and what we intend to do with them. Like I said, one of them was a condemnation, and so those just come up from time to time; sometimes it might be an impairment, sometimes not. Sometimes we will move a property from held-for-investment to held-for-sale, which we have to evaluate it. And then we also look at any properties that might be vacant for a long period of time, we do an evaluation there. So it's not something we really budget, if you will, but it's something we look at continuously every quarter for potential impairments.

Okay, and then on the tax benefit, that is all done from 2009 (multiple speakers) --

Yes, that's done, yes. That's a good point. We don't anticipate any tax expense or benefits flowing through in connection with anything going on on the TRS at this point.

Okay, great. Thanks. And on the interest expense and interest income, both were up in the quarter. And I assume -- it looks like kind of a timing thing. Obviously, the interest income is from the cash balance, I'm guessing, and the interest expense was a bit surprising to be higher. Any thoughts on those?

No, just generally more debt outstanding. We did do this August transaction, which we borrowed a lot of money. Granted, it was a good rate, but we weren't using it. We had it sitting in cash that was not earning us very much. And so that drives some of that.

Okay, good. And then the last thing. I'm a little bit curious how much you guys have in your -- how much volume of stuff you are looking at for acquisitions. Because it seemed like it has been pretty high for everybody. Is it that you are seeing less stuff at this point, or maybe just not seeing the kind of stuff you would like to buy, that you might think you would see a bit of slowing going into next year?

Rich, our take on the third quarter was it was a pretty good quarter for us; very, very good quality of real estate, excellent initial yields, nice growth in rent over time. So we are looking at pretty much 10% type average return on those assets. So that to me suggests you've got a pretty good number of transactions in the hopper.

In terms of total volume, at a point in time, we used to track this religiously. After a while, it occurred to me it is a complete waste of time. What is much more relevant to us here is the properties that we spend time on, the properties we go and visit, the tenants we go and visit, and understanding their business.

Acquisition -- if we continue to get out there, visit our tenants, deal with relationship tenants, we are going to drum up acquisition opportunities. And so right now, our visibility is very good, Rich, in the fourth quarter to support the $500 million that Kevin mentioned in his numbers. 2013, there will be some opportunities, and I hope that National Retail Properties takes advantage of those.

And I think that's another slant on that. Our guidance for FFO per-share growth is 4% next year, and that is with $200 million of acquisitions. So to the extent we can do better -- and as Craig said, our visibility is not particularly long on our acquisition pipeline -- but if we can do better than that amount, then there is room for upside. But with a fairly modest -- moderate amount of acquisition activity for next year, really back-end-loaded in the second half of next year, we are still growing FFO per-share results 4%.

Okay, good, guys. Thank you.

(Operator Instructions) Paula Poskon, Robert W. Baird.

Just a quick follow-up. Do you think any of the acquisition volume that you are seeing right now is being driven by tax-motivated sellers, or do you think that is just an overblown thesis?

In our case, I think it is overblown, Paula. Every quarter for the last several years, we've seen a healthy opportunity set, and it's our challenge to (inaudible) the spigots and then narrow it down to a very small funnel and take opportunities from that.

Thanks.

Certainly at this stage, just as a supplemental comment, here we are in early November; any transactions that are going to close this year, given the timeline of our business, they need to be well in the pipeline. Somebody deciding to sell properties today, conducting environmental analysis, et cetera, they are going to fall into 2013.

Thank you, Craig.

Brenda, thank you very much. We appreciate all of you participating in our call. We look forward to seeing a couple of you in San Diego at NAREIT's meetings. But otherwise, please contact any of us on this call, Jay, Kevin or myself, and thank you very much for listening this morning. Good morning.

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