NNN REIT Inc (NNN) 2012 Q4 法說會逐字稿

Greetings and welcome to the National Retail Properties fourth-quarter and year-end 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, Chairman and CEO of National Retail Properties. Thank you, sir, you may begin.

Christine, thank you. Good morning and welcome to our 2002 year-end earnings release call. On this call with me this morning is Jay Whitehurst, our President, and Kevin Habicht, our Chief Financial Officer who will review details of our fourth-quarter as well as our year-end financial results following my opening comments.

2012 was an excellent year for National Retail Properties as we maintained a very high level of occupancy, continued to do more deals with our relationship tenants and expanded our already fully diversified portfolio. Similar to last year we had a very active fourth-quarter on the acquisition front which exceeded our earlier expectations. And even though this activity has little impact on last year, it positions us very well for 2013.

In terms of acquisitions, as I indicated earlier, the fourth quarter of last year was productive for NNN as we invested $255 million acquiring 108 properties at an average initial cash cap rate of just over 8%. We were presently surprised that in the fourth quarter we identified a number of sellers who wanted us to close on their properties prior to the onset of the new higher capital gains tax rates.

As a result our team was really busy right through the holidays closing acquisitions. Some of these year-end deals were from new tenants, including a couple of large experienced fast food operators.

One more data point to be said, about 60% of our fourth-quarter activity was with relationship tenants. As our press release indicated, in calendar 2012 we acquired 232 different properties this past year, investing $707 million at an average initial cash cap rate of approximately 8.3%. As a reminder, this attractive yield gets better over time as the rent bumps kick in over the duration of our very long leases.

We are delighted to have strengthened and further diversified our portfolio with these acquisitions this past year. Many of these acquisitions were noncompetitive off-market transactions where we were able to acquire excellent real estate while achieving very strong yields.

We continue to like the granularity of our business and with an average purchase price per property of approximately $3 million last year, with land in many cases representing in the range of 35% to 40% of the total purchase price, these are clearly attractive opportunities.

One of the reasons that we obtained higher yields than those realized by other REITs who compete in different real estate sectors is that the net lease retail category is less competitive than many other property types and this is influenced by the small dollar size of the properties that we purchase. As some of my colleagues remind me, it is a lot of work to acquire almost one individually underwritten property every day of the year which is what we accomplished in 2012.

Our portfolio continues to be in excellent shape and at the end of the year we were 97.9% leased. By the way, this is the ninth consecutive year that we have been at least 96% leased, which speaks to the modest risk of our portfolio. In 2013 we had very modest lease rollover with only 1.7% of our leases coming up for renewal and some of these tenants have already extended their leases which of course is good news.

Many of our tenants had very positive activity this past year. For example, two of our restaurant tenants went public. In addition, and perhaps more significantly, our fourth largest tenant was acquired by 7-Eleven and we are delighted to now have their excellent credit on those leases.

As of the end of the year we owned 1,622 properties which are leased to over 300 different national or regional tenants located in 47 states. On average these tenants are contractually obligated to pay us rent for approximately 12 years.

Last year we continued our multi-year track record of capital recycling, selling 34 properties for just over $81 million generating handsome gains that are not included in our FFO. Given that we sold some weaker performing properties in our capital recycling activities, we upgraded our portfolio as well as generating capital to reinvest.

In conclusion, NNN is currently operating in a great environment. Our portfolio is in excellent shape and, very importantly, as you will hear from Kevin, our balance sheet is fortress like, which will allow us to take advantage of the carefully underwritten acquisitions that we expect to make this year.

As you heard earlier, my colleagues continue to find off market transactions that we are closing on at very wide spreads over our cost of capital.

Finally, we are always delighted to raise guidance, as we did in this morning's press release. And although it is early to be making predictions, we are cautiously optimistic that 2013 will mark our 24th consecutive dividend increase. Kevin?

Thank you, Craig, and let me start with the customary precautionary statement that we will make certain statements that may be considered to be forward-looking statements under Federal Securities laws. The Company's actual future results may differ significantly from the matters discussed in those 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 fourth-quarter FFO of $0.46 per share as well as recurring FFO of $0.46 per share and AFFO of $0.48 per share. For the year 2012 we reported recurring FFO of $1.74 per share and that represents a 10.8% increase over 2011's $1.57 per share.

Notably 2012's per share results growth was on top of an 8% increase in 2011 and resulting in a two-year total growth of 20%. And we are now guiding 2013 towards a 5% growth at the midpoint of our guidance range which I will discuss in a moment.

These strong results have allowed us to perpetuate our 23 consecutive years of increases in our annual dividend paid to shareholders as well as reduce our payout ratio. As usual, the strong results were a combination of maintaining high occupancy and making accretive investments while keeping our balance sheet strong.

Occupancy, as Craig mentioned, was 97.9% at year end, that is flat with the prior quarter and up 50 basis points from a year ago. We completed $255 million of accretive acquisitions in the fourth quarter. And if you look back over the last two years, we have acquired nearly $1.5 billion of acquisitions while moving our balance sheet leverage modestly lower.

First just a few details on the fourth-quarter results compared to 2011's fourth quarter, rental revenue increased $15.2 million or 21.6% and that is primarily due to the acquisitions we made in 2011 and 2012. Notably, in place annual base rent as of December 31, 2012 was $354.8 million on an annual run rate on December 31.

Property expenses in the fourth quarter net of tenant reimbursements totaled $1.2 million and that number has been ticking down throughout 2012. G&A expense increased to $8.9 million for the fourth quarter and that is up from $8.6 million in the fourth quarter of 2011.

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

As I mentioned this morning, we also increased -- announced an increase in our 2013 FFO guidance to a range of $1.81 to $1.85 per share, that is up $0.04 from the $1.77, $1.81 per share prior guidance at both the bottom and top end of the range. This new FFO guidance translates into an AFFO range of $1.89 to $1.93 per share.

The increasing guidance was largely driven by the continued strong pace of the acquisitions in the fourth quarter of 2012 which obviously has more impactful -- is more impactful in 2013's results than 2012's. We have not changed any of our other material assumptions in our 2013 guidance including the $200 million of acquisitions in 2013 and relatively flat occupancy. Hitting the midpoint of our new 2013 guidance will represent 5% growth over 2012's recurring FFO per share results.

$0.08 of non-cash adjustments bring estimated 2013 AFFO results to $1.89 to $1.93 per share with the primary AFFO adjustment being the non-cash interest expense on our convertible debt in the non-cash stock-based compensation expense.

Turning to our balance sheet quickly and capital markets activity. As we mentioned on our last quarter call, most of our 3.95% convertible note holders had elected to convert their notes which we elected to pay off in cash rather than stock. We also called the remaining notes for redemption which effectively forced the remaining note holders to convert.

And so, we had a total of $138.7 million of these notes outstanding and as of year and $123.2 million have been paid off and the remaining $15.5 million were paid off in January of this year, 2013.

And lastly on the capital front I will mention we raised approximately $60 million of common equity during the fourth quarter via our DRIP and ATM programs. At year-end total debt to gross book assets was 39.0%; debt to EBITDA was 5.1 times for the fourth quarter; interest coverage for the fourth quarter was 3.8 times and for the year it was 3.7 times; the fixed charge coverage was 3.1 times for the fourth quarter and 3.0 for the year of 2012.

Only six of our 1,622 properties, well less than 1% of our properties, are encumbered by mortgages. And again, despite over $1.5 billion of acquisitions over the past two years, our balance sheet remains in very good shape.

I also want to note, you may have seen in January NNN's debt rating was upgraded to BBB plus by Fitch ratings and Moody's revised our rating outlook to positive. So we are pleased with how 2012 turned out and are optimistic about how 2013 is looking based on what we think are very achievable assumptions and continuing our moderate leverage capital structure.

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 returns -- shareholder returns for many years. And with that, Christine, I think we will open up with any questions.

(Operator Instructions). Craig Schmitt, Bank of America.

Wondering in terms of acquisitions for 2013, do you think you will be acquiring closer to the pace of the first half of the year 2012 or the latter? I noticed you had mentioned there was a push to close due to higher capital gains tax. And I just wondered if there might be a slower pace starting the first quarter off?

That is what's baked into our guidance is the 2013 acquisitions will be skewed a little bit more to the second half rather than the first half.

Craig, just to supplement that. You are absolutely correct that right there at the end of 2012 we did have a lot of activity. And the way I sort of thought about that is that some of the early 2013 activity closed in 2012.

However, as you know, we have worked very hard to build up a large group of relationship tenants who continue to open new stores and expand their business and we are doing a nice amount of business with them. So we have got some pretty good visibility for 2013. But the volume at this point in time with 11 months to go is nowhere close to what we were looking at last year.

Great. And I thought you did a very good job of working down your concentration of convenience store tenants to 19.8%. Do you have a target where you would like to take that number?

Craig, this is Jay Whitehurst. As with all these concentrations over time, they just kind of ebb and flow. We are very comfortable with where the convenience store concentration is now. That built to the number that it got to based on deal flow out there in the market, there is less deal flow now. And so, it may still move up and down kind of around that number just depending on what else is out there in the market. But we are very comfortable with the convenience store business.

Craig, just to supplement that. I did mention in my prepared remarks that our fourth biggest tenant got acquired by 7-Eleven. So yes, those were excellent convenience store properties in Texas; most of them were originally Exxon's. But the fact of the matter is 7-Eleven properties today trade at a 6 cap.

So we are just really, really happy with what is going on in our convenience store portfolio, our single biggest tenant is Susser. And for those of you that own National Retail Properties stock, I hope you took a look at Susser because, my goodness, their stock has been on a tear. So they are executing well and they are just a great company.

Okay, thanks. That has been helpful.

Emmanuel Korchman, Citi.

Jay, I think in the past you've kind of provided us with an idea of what the pipeline is going into the following year. Maybe off of Craig's comment earlier that the pipeline is smaller now than it was last year, maybe you can give us some details on how much volume you are really seeing out there?

Sure, Manny. And the way Craig put it I think is exactly the right way to look at it. That there were a number of deals that would be in this year's pipeline that we would close this year that got accelerated earlier. We closed 18 separate transactions from December 14 through the end of the year. And so, all of those would have most likely fallen into 2013 otherwise.

But kind of across all the lines of trade the pipeline still looks good. Having accelerated those deals into last year, we are not talking about lowering our guidance -- are acquisition guidance for this year.

Our focus on relationships gives us a good line of sight to a fair amount of business through this entire year. And so, we feel very comfortable that we can meet and hopefully exceed the guidance that we put out. And on acquisitions it will look just like everything else that is in our portfolio, triple net leased retail.

Great, thanks for that. And then (technical difficulty) news reports that -- and I guess Craig had alluded to this earlier in his comments, the fast food deal that you had done. I believe that was Wendy's that he was referring to. And you guys, it looks like you split that with Cole and just was wondering why you would take a small portfolio like that and split it up rather than just taking it totally for yourselves?

Manny, that is a fair question and the news reports up there picked up part of the properties that we acquired from that particular tenant, not all of them. So it actually was a larger transaction. And -- it was a decent sized deal, it wasn't just H properties in Las Vegas.

Perfect, thank you.

Joshua Barber, Stifel Nicolaus.

It looks like one of the acquisitions you guys also made in the fourth quarter was increasing your size of Mister Car Wash. Can you guys I guess talk about the credit profile there and what you are seeing going on fundamentally in that business these days?

Hey, Josh, it's Jay Whitehurst. Mister Car Wash is a -- it is the number one car wash company in America, it's an extremely well-capitalized company, it is very well managed. They -- we've spent a lot of time getting to know them and think very highly of that organization.

As Craig talks about whenever we talk about our acquisitions, every deal we do is individually underwritten, so we spend a lot of time getting comfortable with the real estate as well as that operator. Kevin, do you want to talk a little bit about their corporate (multiple speakers)?

Yes, they are a huge factor in that business, big player in that industry. Rent coverage by our count comes in north of [2.5], around a 2.7. And more importantly, from my perspective, fixed charge coverage is north of 2 as well. And so on fixed chart we mean rent plus interest. So it is not a wildly leveraged operator.

Josh, if you just step back, think about what this is -- this is a very fragmented industry with really two large national players. And Mister Car Wash is the one that is executing the best and we are just pleased as punch to have them as a relationship tenant.

Jay, you also mention the real estate side of that. How do you guys think about the real estate in that I guess given that it is more of a special-purpose building and wouldn't be comparable to a lot of the other tenant categories that you guys have.

The buildings may be somewhat special-purpose, but remember a large part of our investment is in the land on these deals. Mister Car Wash selects excellent locations. And so, these are good retail locations where -- on busy streets at good corners, a typical great real estate location. And so, we think that that enduring -- that will be the enduring value on these properties.

Okay, great. Two more quick questions if you could. I don't know if you mentioned your total outlook for acquisitions in 2013 what that would be and what the average going in cap rate would be. And the second half of that would be Barnes & Noble, given that they are talking about additional store closures and stuff, how would that impact your portfolio? Thanks very much and good luck in 2013.

Thanks, Josh. Yes, I mean, we did -- we are staying with our original guidance as it relates to 2013 acquisitions of around $200 million of new acquisitions. As I mentioned earlier it would be we think a little bit second half loaded. I think the cap rate is probably in the high 7's rather than in the low 8's as it has been historically, at least that is what we penciled in for now. So that's as it relates to the acquisitions.

As it relates to Barnes & Noble, we have nine stores, so we don't have a lot of those. But they are very, again, good locations. We don't have any notice of closures. I think that announcement that they made was over a long period of time they intended to close those stores. So we don't foresee that having any real impact on 2013 or frankly 2014 results in any material way.

Great, thanks again.

Todd Stender, Wells Fargo.

And Craig, your comment about the 7-Eleven cap rates is very helpful. Can you just kind of walk through what we can expect, if any, if there are any changes that happen when an operator is acquired, when 7-Eleven acquired C.L. Thomas and maybe any risk to the leases being changed at all?

Todd, it's Jay. No changes, no risk is the short answer to that. In this instance, as in most of these instances, it is structured as a merger transaction. And in this case the parent company, the US parent company for 7-Eleven became our tenant in place of C.L. Thomas.

Okay, and what were the lease terms on those existing leases, how long were they?

At we time we did it they were somewhere between 15 and 20 years and today we have more than 15 years outstanding.

Okay, thank you. And, Kevin, I think I (multiple speakers).

Todd, just to -- let me supplement that. One of the things that attracted us to the convenience store category earlier, and this gets to Craig's earlier question, is it was a highly fragmented industry, it still is unbelievably fragmented. And there is a lot of opportunity for growth.

And so, what you are seeing, even with this acquisition by 7-Eleven of C.L. Thomas -- C.L. Thomas was an extremely well managed company, very profitable, excellent real estate. However, the buying power and the marketing dollars and the brand of 7-Eleven are better than C.L. Thomas. So what do we see as our level? We just see a company that makes more money at each location and we get the credit upgrade. So for us it is the best of all worlds, Todd.

Thank you, Craig. I appreciate that. And, Kevin, I think I had my math wrong with how much equity you raised through the DRIP and ATM in Q4. I had that you had raised about $65 million as of the third quarter and then you were up around $183 million for the full year.

Yes, we are at about $65 million for the fourth quarter and $183 million for the year and for the fourth quarter most of that came via the ATM versus the DRIP. For the year the $183 million was about two-thirds ATM, one-third DRIP in round numbers.

Okay. And do you have a price that you were buying it at in the fourth quarter?

We were just a little bit over $30 a share, call it $30.40, somewhere in there on average.

Issuing, I'm sorry.

Correct, issuing.

Okay, thank you, Kevin.

Rich Moore, RBC Capital Markets.

Do you, Craig, look at any of these things -- any of these private REIT's like Cole and RT and those two in particular I guess? But then also, there are others out there. I mean has it become very popular on the private side and on the public non-traded side. And I'm curious if you review these in any depth?

Yes, Rich, it's a fair question and one of the duties of our industry, which has a smaller number of big players than most other property types, one of the advantages of that is we know all of these companies well, we track what they are doing, in many cases we sell them quite a lot of property. So the two companies you mentioned, we sold both of them properties in calendar 2012 and in one case they resold them to another net lease company.

We take a look at all of these transactions, and I think one of the things that I'd encourage you to think about when you consider National Retail Properties, is that for the last couple of years we have been very disciplined and stuck to our approach of doing it one property at a time.

And if you think about the power of an 8% initial yield plus bumps, which means that over a 15-year lease we are getting better than 9% average yield, that contrasts with a sub 7% and in one case sub 6% straight-line yield which some of these assets have traded for, straight-line, doesn't get any better. So we looked at all of those deals, our valuation for the assets was a couple of standard deviations lower.

Okay. And I assume you look at the other ones that are floating around out there as well?

You can count on that.

I figured I could. I want to go over to the fast food category for a second. The Wendy's, remind me, are those all company-owned stores, Wendy's?

Rich, no, it's a Jay Whitehurst. These are a very large franchisee, one of the top franchisees in the country.

Okay. And then do you have the Wendy's credit when you do that? Do they back those in any way?

No, you do not. We have got the large franchisee's credit. You always have an implied desire by the franchisor to keep the properties up and running if the franchisee and has trouble, but you don't have anything formal.

Okay. And when you generally look, Jay, at the fast food industry are you -- does it matter to you if it's company-owned or a franchisee (multiple speakers)?

Rich, what matters a lot more to us is market -- is real estate fundamentals, market rent and the store level performance. And that gets back to that individual one at a time underwriting that we do. And in the case of this portfolio and everything we did in the fourth quarter we were very happy with how -- with the property level metrics as well as being happy with the credit of the operator. But credit is always fleeting. So what we try to get ourselves very happy with is the real estate. And we did.

Good, thank you. And then, Kevin, on the line, it's bounced higher obviously, you've got plenty of capacity left. But with $174 million on the line, should we expect that you will do something to clear that shortly?

Yes, I mean, we don't have a lot of pressure to do that as our acquisition guidance is fairly modest -- moderate I guess I would say. So in due course we will do our normal pay down of the line via long-term debt and/or some equity, which we -- like I mentioned, we put out about $65 million in the fourth quarter. But, yes, long-term debt given where rates are probably makes some sense too.

Okay, but no need to do that at $174 million, you can wait a bit?

No, no we don't have any immediate pressure to do anything. But historically we get materially above $200 million we start to think long and hard about what is the best next piece of capital to layer in. Fortunately we have lots of good choices.

Okay, very good. Thank you, guys.

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

Apologies if I missed this housekeeping question. What was acquisition expense in the fourth quarter?

You're talking about real estate transactions costs?

Yes.

Very little, $30,000 in the fourth quarter, $375,000 for the year. And as a reminder, those low numbers are a result of us doing the vast majority, more than 90% of our acquisitions directly with retailers. So we are not buying properties that already -- from an investor who already has a lease in place that was written by somebody else. So because of that we don't have a lot of transaction costs flowing through the P&L.

That is helpful, Kevin. Thanks. And then just a big picture question coming back to the M&A dialogue. Given all the M&A activity recently in the sector, how do you feel if at all your competitive positioning has changed?

Paula, that is a good question and we have a fully diversified portfolio, number one. So we don't feel that there is any need to increase our scale. With a fully diversified portfolio and the size we are we -- as Kevin just mentioned a moment ago, we have access to all types of capital and we are very fortunate the rating agencies are pleased with the way we are executing and giving us additional stripes on our shoulders.

So additional size we don't think is really going to help us lower our cost of capital because it is already very good. In terms of competition, years ago we decided to try to go after less competitive off market transactions and it has taken us a lot of work to get to this point. And by the way, the work continues.

In fact Jay Whitehurst who is sitting on my left is off out of town Monday, Tuesday visiting a tenant that we are hoping to do more business. By the same token, I am doing the same thing going to a different tenant.

Many of our competitors, especially the private REITs, they specialize in buying properties directly from brokers. So you have an in-place lease which you have to accept, you can't negotiate that, and the only way you get to buy it is by paying more than everybody else. And it is not obvious to us that that builds shareholder value over the long term. So our competitive position is very good and we are going to continue doing it the old-fashioned way, one property at a time.

Thanks, Craig. That's all I have.

Tom Truxillo, Bank of America-Merrill Lynch.

Appreciate all the color on your capital, uses of capital here. But, Craig, you just mentioned that you don't think your cost of capital gets any better with size. Obviously the delevering you guys have done and the work on the balance you have done has brought that cost of capital down. But it could go further down.

You got the upgrade from Fitch, positive outlook from one of the other agencies. And it seems to me that scale is -- would add -- would put you in the BBB range -- that high BBB range and reduce your cost of capital more. But listening to your comments it sounds like maybe that incremental cost of capital savings isn't worth pursuing the larger deals at lower cap rates, is that pretty much what you are saying?

Tom, you are a student of this game and your comments are very well taken. And by the way, we have appreciated your support and advice over the years. But we underwrite each and every property, we take a look at a lot of them.

And what our internal approach is is we want to create something that looks like a funnel, we want a lot of properties coming in the top end and then we have a narrower spigot that comes out. And if we continue to remain disciplined we think good things happen.

What does discipline mean? Discipline means you've got to be a responsible allocator of capital, that is what we do. Number two, take a look at how our occupancy has stood the test of time. So if we continue to do that we think that investors, and that includes bond investors as well as equity investors, will enjoy the benefit.

Just to remind everybody I guess, we have acquired $1.5 billion of properties over the last year and a half. So I do think we are building scale, I think we go about it in a different way, we think it is a better way, a more profitable way. So we have appreciation for what scale does, but -- and we understand equity and fixed income investors like more liquidity and we are -- we understand that and we think that will happen over time.

And frankly we are still hopeful that we have more rating agency upside, if you will in the future. And so, we hear what you're saying, but at the end of the day we are trying to drive per share result growth which we think is good for equity and fixed income investors alike.

Okay. And Kevin, on the back of the comments about potential issuance, given the lower pace of acquisitions to term out a $250 million index eligible deal, to take down the credit line and new borrowings to finance the acquisitions you have planned, that would probably result in slightly higher leverage. But I am assuming that would just be for a short time period until you continue to pursue other acquisitions and then you would issue equity to get that back in line with where you have been heading?

Yes, I mean I guess conceivably, and we choose to be -- we did that a little bit I guess in 2012 when we issued debt in August and carried a fair amount of cash, $141 million as of September 30. And so, yes, we are willing to look through a quarter or two if need be to capture attractive pricing on capital.

And we are more than committed to index eligible debt offerings, just to be clear. And by more than I would suggest that hitting the $250 million minimum is not our objective. We obviously are looking to do more than that.

Okay, great. Thanks for the commentary, guys.

(Operator Instructions). Dan Donlan, Ladenburg Thalmann.

Just one for me. Craig, one of the things we are hearing is that cap rates on shorter duration net leases are very, very attractive versus the longer duration net lease properties, quite a wide delta. Given that you guys have about 12 years I think in terms of average lease length, is this something that you guys are going to potentially pursue or are you willing to go out a little further along the risk curve to take on some of that near-term term risk or how do you think about that?

Dan, this is Jay Whitehurst. And we are looking at those. That -- in the situations where you can find those shorter lease-like properties and get comfortable with the real estate, get comfortable with what happens at the end of the lease, those are acquisitions that we have pursued. In the end often those are kind of one-off deals where you can get yourself happy with the real estate. But it is something that we are looking for.

Okay, thanks.

Ladies and gentlemen, we have reached the end of the question-and-answer session in today's teleconference. We thank you for your participation, you may disconnect your lines at this time. And have a wonderful day.