NNN REIT Inc (NNN) 2013 Q1 法說會逐字稿

Greetings and welcome to the National Retail Properties first-quarter 2013 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, Mr. Macnab. Thank you, Mr. Macnab. You may begin.

Kevin, thank you very much. Good morning and welcome to our first-quarter 2013 earnings release call.

On this call are Jay Whitehurst, our President, and Kevin Habicht, our Chief Financial Officer, who will review details of our first-quarter financial results, following my brief opening comments.

We are delighted to have had a productive start to 2013 with plenty of activity in all areas of our Company.

The first quarter was another stable, predictable quarter for NNN that speaks about the quality of our team but also about the attractiveness of the net lease retail category.

At National Retail Properties, we are sometimes tagged as being boring because we do so many small box transactions. But sticking to our discipline and continuing to focus on the net lease retail sector is easy when it is fundamentally a very good business and delivers stable, predictable growth.

We are, of course, delighted to again be raising our guidance this year, and Kevin will give you more details of that in a moment.

In the first quarter, we acquired 17 properties, investing $43 million at an initial yield of 8.7%. The yield in the first quarter was higher than what we anticipate achieving in the balance of this year when some acquisitions will have a 7 not an 8 as the first digit. The excellent elevated yields that we achieved are a function of how long it took to close a number of the deals with the pricing having been negotiated some time ago.

Of course, our excellent acquisition offices will tell Jay Whitehurst after this call that these yields are entirely due to their excellent work. (laughter)

We acquired our properties in the first quarter from 10 different tenants. All of these transactions were with existing tenants, which is a very good illustration of the depth of our relationships with these growing retailers with whom we do repeat business.

Our press release also describes that we had a productive April. We felt that we needed to provide this disclosure given our active capital markets activity thus far this year where we have been very busy, as Kevin will describe.

The good news is that our acquisition activities for the first four months of 2013 are nicely ahead of both budget and guidance from a timing standpoint, and our initial yields remain ahead of what we anticipated.

The acquisition market continues to be robust, and our current deal flow gives me confidence that 2013 will be another good year for NNN.

Our fully diversified portfolio continues to be in outstanding shape with our occupancy remaining at 97.8%.

I do want to point out that our lease expirations for the next four years are really very, very modest.

National Retail Properties continues to be extremely well-positioned. As Kevin will describe, our balance sheet has plenty of capacity for the deals that we are actively evaluating.

And finally, the investment spread on these acquisition opportunities remains very attractive. Thank you, Kevin.

Thanks, Craig. And I'll be starting with the usual 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 on 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 first-quarter FFO of $0.47 per share, as well as recurring FFO of $0.48 per share and AFFO of $0.49 per share. The recurring FFO of $0.48 represents a 14.3% increase over 2012's $0.42 per share.

The strong results have allowed us to perpetuate our 23 consecutive years of increases in our annual dividends paid to shareholders, as well as reduce our payout ratio. Additionally our increased 2013 FFO guidance is projected to result in 7% to 8% per share growth at the midpoint of our guidance range, which I will discuss more in a moment.

As usual, the quarter's strong results were a combination of maintaining high occupancy and making new accretive investments while keeping our balance sheets strong. Occupancy was 97.8% at quarter end. That's down 10 basis points from prior quarter and up 30 basis points from a year ago.

And as Craig mentioned, we completed 43 million of accretive acquisitions in the first quarter. If you look back over the last four quarters, we've acquired over $500 million of properties, while at the same time improving our balance sheet metrics.

Just a few details on first-quarter results. Compared to 2012's first quarter, rental revenue increased $14 million or 18.5%, primarily due to the acquisitions we made last year in 2012.

Notably, in place annual base rent as of March 31, 2013 was $358 million on an annual run rate. Property expenses net of tenant reimbursements for the first quarter totaled $935,000, and that net property expense has been ticking down for several quarters now.

G&A expense increased to $8.3 million for the first quarter. That's up from $7.6 million in the first quarter of 2012. It is down from $8.9 million in the fourth quarter of 2012.

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

As we mentioned this morning, we also increased -- announced an increase in our 2013 FFO guidance to a range of $1.85 to $1.89 per share, which translates into a range of $1.93 to $1.97 per share for AFFO. This $0.04 increase in the top and bottom end of the range follows last quarter's $0.04 increase and was driven largely by an increase in 2013 acquisition volume guidance to $300 million. The timing of those acquisitions is coming a little sooner than originally thought and as well as the ability to execute capital market transactions at attractive rates. The improvements in our guidance is somewhat offset by an increase in G&A -- projected G&A to $31.8 million from $31.2 million. Still again better than last year's $32.2 million and a lower leverage balance sheet from recent equity issuance.

But hitting the midpoint of our new 2013 guidance will represent growth of 7% to 8% over 2012 recurring FFO per share results.

$0.08 of non-cash adjustments bring the 2013 AFFO results to $1.93 to $1.97 per share with the primary AFFO adjustment being the non-cash interest expense related to our convertible debt and non-cash stock-based compensation expense.

Turning to the balance sheet and capital markets. In January we paid off the remaining $15.5 million of our 3.95% convertible notes. Additionally we raised $164 million of common equity during the first quarter via our DRIP and APM programs, which is probably a little more than we initially projected. But we have had strong demand for our shares.

And lastly, after quarter end in April, we completed a $350 million 10-year unsecured note offering with a 3.3% coupon and a 3.39% effective yield.

I will note settlement of some hedges in connection with that note offering moved the all-in effective cost to 3.48%. And that offering was helped with some ratings momentum in January as our debt rating was upgraded to BBB+ by Fitch ratings, and Moody's revised our rating outlook to positive.

At quarter end, March 31, total debt to total gross book assets was 35.7%, and that compares with 39% at year-end 2012. Debt to EBITDA was 4.5 times for the quarter. Interest coverage was 3.9 times for the first quarter and fixed charge coverage 3.1 times for the first quarter. Only six of our 1636 properties are encumbered by mortgages. So, again, despite $1.5 billion of acquisitions over the past two years, our balance sheet remains in very good shape.

So we are pleased with how 2013 is starting out and believe we are well-positioned to continue to deliver the consistency of results, dividend growth, balance sheet quality that has supported attractive, absolute and relative total shareholder returns for many years.

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

(Operator Instructions). Josh Barber, Stifel.

Can you -- I may have missed this, I apologize. What is the average cap rate that you've done on the $160 million of deals to date through April?

Josh, we talked about what we closed in the first quarter as being a pretty elevated 8.7%. I did not comment on the April numbers, but they were in line with our guidance, which I believe was 7.9%.

Okay. Thanks. I guess especially with the ex-surveys and guidance, and Kevin, you were talking before about the better FAD coverage ratios. Can you just tell us what ratios, I guess, you're looking at today? You guys, I think, have done a good job in the last couple of years at widening out that coverage. What's an optimal level for NNN to have in terms of cash flow coverage going forward that you are comfortable with?

I mean, as it relates to dividend payout ratio, I think we've been pursuing the conflicting goals for a period of time growing our per-share results, as well as growing the per-share dividend amount, albeit at a slower pace than the FFO results.

So at the moment, we are probably settling into the mid-80s on FFO and the low 80s on AFFO, and that's probably a territory we're starting to get more comfortable with in terms of kind of long-term run rate.

Okay and you guys have the convert that's, I guess, splittable to you starting in June. What sort of options -- or I guess what would you ideally like to do with that particular convert? Is it easier to just convert the premium into shares, I guess, because that is reflected in the share count already, or would you prefer just to pay off the whole thing? How are you guys thinking about that?

That's a good point, yes. I mean we haven't made any decisions around that at this point, but really have the flexibility to kind of pivot any direction, frankly. But, as you importantly noted, the share count is already in our dilutive share count. So it really has no meaningful impact, and given that it's kind of a midyear transaction, it wouldn't have a big impact no matter what we did or didn't do in 2013. So we haven't made any final decisions around that, but I think all the options are open to us.

All right. Great. Thank you very much.

(Operator Instructions). Wes Golladay, RBC Capital Markets.

Can you comment on what is driving the acquisition volume? Is this new relationships or existing tenants?

Wes, it's all of the above. We're always looking for deals where the rent is at or about markets. As a reminder, we're in the real estate business. It just so happens that our spreads are pretty attractive, too. But I think the first quarter was a little bit of an anomaly with all of the deals being with relationship tenants. In April, we broke that track record. So we did do a decent amount of business with a couple of new tenants in the first quarter -- in the month of April, sorry.

Okay. And which categories are you buying right now?

We're absolutely small box retail, and we're going to buy properties in every single category across the spectrum.

Okay. And a quick question for Kevin. What was term income for the quarter?

Lease termination fee income for the quarter was $378,000, and that compares with $80,000 in the first quarter of 2012.

Okay. Thanks, guys, and nice quarter.

Thank you, Wes.

Todd Stender, Wells Fargo.

I don't know if you went over this, Craig, but what were the average lease terms for the April acquisitions, and can you comment on who the new tenants are?

Yes, we did not cover it, but generally with these types of deals, our new initial lease term -- and it differs from transaction to transaction -- is somewhere between 15 and 20 years. We're really going to talk about April here in the second quarter. We did sort of skip out of what we normally do to give you this disclosure, especially as we have been very active in the financing front.

Okay. Thanks. Just bigger picture. We hear a lot about convenience stores and casual dining, but as you move kind of downward, currently in your industry portfolio, any current thoughts on the automotive parts and services business, and is that really a business for larger consolidators to create more acquisition opportunities for you guys in the future?

It's interesting. The good news is right now we're seeing in activity in a wide variety of sectors, just right across the board of what we're looking at.

So our excellent acquisition offices are out there, beating the bushes on all kinds of different categories. And our goal is to create a large number of deals from which a smaller funnel comes down for deals that we can close.

Okay. And just the properties you sold in the quarter, what tenants were those, and what is currently in the bucket that's marketed for sale?

Yes, we only had two properties, so it was just kind of at the margin. A couple of properties -- one that we decided to sell and it was a low 7 kind of cap rate, which drove the bulk of that number. And then we had one very, very small basically land parcel that we sold. So not a lot of activity there.

We always put some disposition activity in our guidance, and over the years we've probably sold more than anybody. We sold a lot of properties over the years. Last year only about $81 million. But we always assume we are going to sell $30 million to $50 million in any given year. But we are, again, opportunity driven in some respects. We actively market some properties, but other properties we -- opportunities arise, and we hit the button to sell.

Okay. Thank you.

(Operator Instructions). Emmanuel Korchman, Citi.

Just wondering what maybe has changed over the last couple of months since we last spoke that would make you increase your acquisition guidance. I know that you spent some time working on the deals that have closed. So had you assumed that those wouldn't be closing in the year at all, or is there just even more activity out there than you saw a couple of months ago?

It's a fair question, but just as a reminder, in terms of building out the current year's FFO, it's a function of two different things. One, the volume of acquisitions, but as a practical matter, it's more important the timing of those. And obviously if you can complete transactions through the end of April, you get eight to nine months of rent during the year.

But at any point in time, we have a number of transactions which we are working on, and I can -- our hit rate on deals is not 100%. So until they are closed, it's just fruitless to count the chickens.

So, as it so happens, we had some nice activity through the end of April, and we've got lots of balls in the air at this point in time. But we never count a chicken until the deal is closed.

And then, Kevin, you had mentioned that timing would be earlier. Is that referring to the stuff that's been completed so far, or can we assume that the entire $300 million will be more front-end loaded now than --?

No, it's really referring to what we've done so far. I think our original guidance was around $200 million to $250 million second-half weighted. And given that we bumped that up to $300 million and we have already gotten $140 million in the bank in completed acquisition, it is just I wanted to note that timing shift, as well as modest volume shift as well.

Great. Thank you.

Wes Golladay, RBC Capital Markets.

It's Rich Moore. How are you? I'm wondering, Craig, what do you think of paying a monthly dividend?

You know, I see that one of our peer group has moved towards that, and we're going to closely follow.

You have a couple out there now.

Well, EPR has joined Realty Income. And as best we can tell with our stock trading moving more than 1 million shares a day, institutions seem to drive the market, not the classic retail holder who buys 100 shares. But we're going to watch it, Rich, and if it helps us get to the promised land, I think we should take advantage of it. But right now we have no plans.

Okay. Great. Thanks, Craig. I appreciate your thoughts.

(Operator Instructions). As there are no further questions at this time, I would like to turn the floor back over to management for any further or closing comments.

Kevin, thanks very much. We appreciate the interest of all of you. We know it's a busy time of year for you. We're going to see some of you out in Vegas, and then there are a couple of conferences, including the NAREIT conference. So we look forward to talking to you all then.

Have a great day.

Thank you very much, Kevin. Cheers.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.