NNN REIT Inc (NNN) 2013 Q3 法說會逐字稿

Greetings and welcome to the National Retail Properties third quarter 2013 earnings conference call.

(Operator Instructions)

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. Craig Macnab, Chairman and CEO for National Retail Properties. Thank you Mr. Macnab, you may begin.

Thank you very much. Good morning and welcome to our third quarter 2013 earnings release call. On this call with me are Jay Whitehurst our President and Kevin Habicht our Chief Financial Officer who will review details of our third quarter financial results following my opening comments. Also Kevin will update you on this years guidance plus provide some of the key assumptions in our 2014 guidance.

We have just completed another consistent predictable quarter at NNN. As indicated in our press release, we are projecting a third consecutive year of excellent FFO per share growth. Equally importantly, we are also guiding towards steady growth in 2014, helped by the net leased retail acquisitions that we have already made this year as well as those that we are anticipating making in the next several quarters. In the third quarter we acquired 35 properties, investing $90 million at initial cash yield of approximately 7.7%. When the rental growth from these properties kicks in, we will receive an average yield from these acquisitions that will be approaching 9%. We acquired these properties from 13 different tenants, and each one of these tenants is what we describe as a relationship tenant.

Thus far this year, we have acquired $570 million of acquisitions at an initial cash yield of 7.89%. Which yields steadily improves each year with annual bumps of 1.5% to 2%. We are pleased to have again maintained a healthy balance this year between very accretively growing our portfolio without chasing some of the acquisitions that could have been made at low GAAP yields, which barely moved the needle in terms of building shareholder value. Finally, we continue to avoid acquisitions that do not have contractual rental growth.

In the third quarter, our in-house disposition team was a little more active than normal, as we sold 22 properties, realizing $36 million. The average cap rate from this capital recycling was right at 7%. Interestingly, we sold one of the SunTrust pools that we had purchased in the second quarter. This pool was 18 properties, and generated a nice gain for us. Our fully diversified portfolio continues to be almost fully occupied and is now 98.1% occupied.

Within the portfolio, a very positive development is that many of our tenants have been or are in the process of being acquired by large investment grade companies. This is very gratifying, as it suggests to us that our selective acquisition effort in identifying well-managed retailers, that operate well-located stores, where we are obtaining excellent yields which have built-in rental growth of 1.5% to 2% per annum. Examples of what I am describing are evident when you review our top tenants list which now includes 7-Eleven and Energy Transfer Partners, otherwise Sunoco, following the acquisition of two of our C-store tenants.

Another meaningful new tenant for us is Lowes, which acquired Orchard Supply on the West Coast and soon, Advance Auto will be a tenant when they complete their pending acquisition of Genuine Parts next year. Obviously, we are delighted that these properties are now worth a lot more than when we purchased them. National Retail Properties continues to be very well-positioned. We have zero outstanding on our line of credit, our balance sheet is as strong as it has ever been. Our portfolio is in excellent shape and we're looking forward to another consistent predictable year in 2014.

Kevin?

Thank you Craig. I will start with my usual cautionary statement 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 companies filings with the SEC and in this mornings press release.

With that, this morning we reported third quarter FFO of $0.49 per share and AFFO of $0.50 per share. For the first nine months of 2013, we reported FFO of $1.41 per share and $1.42 per share of recurring FFO. These strong results allowed us to both increase our common dividend during the third quarter and push our dividend payout ratio down to 81% and mark 2013 as NNN's 24th consecutive year of increases in our annual dividend paid to shareholders. Additionally, we raise the bottom end of our 2013 FFO guidance range and introduced 2014 FFO guidance that is projected to result in 4% per share growth at the midpoint of our guidance ranges which I will discuss more in a minute.

As usual, the third quarter strong results were a combination of maintaining high occupancy and making new accretive investments while keeping our balance sheet more than strong. Occupancy was 98.1% at quarter end, that's flat with prior quarter and up 20 basis points from a year ago. And as Craig mentioned, we completed $90 million of accretive acquisitions in the third quarter. Over the past two years, last 8 quarters, we have acquired over $1.6 billion of properties while improving our balance sheet metrics and lowered our dividend payout.

A few details on our third quarter results. Compared to 2012 third quarter, rental revenue increased $15 million or 18% primarily due to the acquisitions made over the past 4 quarters. Property expenses net of tenant reimbursements for the third quarter totaled $1.3 million, and that compares with $1.2 million in the immediately prior second quarter as well as the prior year third quarter. G&A expense decreased to $7.5 million in the third quarter. The decrease was largely attributable to lower incentive compensation expense. We currently project full-year 2013 G&A expense to be approximately $33.8 million. But the big picture bottom line on this quarter's results are that core fundamentals, occupancy, rental revenue, expenses are all performing well with no material surprises or variances.

As I mentioned this morning we also announced an increase in the bottom end of our 2013 FFO guidance by $0.02 to a range of $1.88 to $1.90 per share and that translates into a range of $1.96 to $1.98 per share for AFFO. We now see total acquisitions for 2013 coming in at about $600 million to $650 million. There are no other meaningful assumption changes in that guidance. The midpoint of our new 2013 guidance produces an 8.6% increase in recurring FFO per share compared to 2012. Despite the fact that 2013 results are on top of 8% growth in each of the prior 2 years, 2011 in 2012 as we have noted in the past, that 8% growth in per-share results is likely not a long-term sustainable per share growth rate for us nor frankly, the vast majority of REITs for that matter.

Our initial 2013 guidance I will point out made a year ago, was for 3% growth in recurring FFO per share. We increased that guidance in each of the past three quarters as acquisition visibility grew and capital markets execution was completed. $0.08 of non-cash adjustments bring estimated 2013 AFFO results to $1.96 to $1.98 per share. With the primary AFFO adjustments being the non-cash interest expense on our convertible debt and non-cash stock-based compensation expense. We remain one of the few REITs that produce AFFO that is higher than our reported FFO.

As I mentioned this morning, we also announced initial 2014 guidance of $1.94 to $1.99 per share. And AFFO of $2.00 to $2.05 per share. Hitting the midpoint of our 2014 guidance will represent 4% growth over 2013 FFO per share guidance midpoint. Primary notable assumptions in our 2014 guidance include $300 million of acquisitions, G&A expense of $33.4 million, no change in occupancy, $1.5 million of commercial mortgage residual interest income and that compares to $2.3 million in 2013 and $400,000 of lease termination fee income versus approximately $1.2 million in 2013.

Turning to our balance sheet, after a busy first half of the year in the capital markets we were able to stand aside in the third quarter when capital markets got more volatile and less friendly. With the cash on hand we paid off all $223 million principal amount of our 5 1/8% convertible notes during the third quarter. If you look at our September 30, 2013 leverage metrics, total debt to total gross book assets was 34% and that compares with 39% at the beginning of the year. And we have full availability at quarter end of our $500 million bank credit facility. Debt to EBITDA was 4.2 times for the quarter, interest coverage was 4.4 times for the third quarter and fixed charge coverage was 3 times.

Only 6 of our 1,850 properties, well under 1%, are encumbered by mortgages totaling under $10 million. So despite the significant acquisition activity over the past two years, our balance sheet remains in very good shape. If you step back and look at 2013 capital markets activity, we have effectively financed 100% of our $518 million of net acquisitions year-to-date. That would be the $570 million of acquisitions less $52 million of dispositions. We financed that $518 million of net acquisitions with permanent capital, common equity of $260 million and preferred of $277 million. Yet, we were still able to guide to 8% FFO per share growth this year despite all this new permanent capital used to fund acquisitions. Additionally, this has left our balance sheet with the opportunity for growth in coming quarters.

We're in this for the long-haul. Sometimes taking care of the long-term comes at the expense of the short term but in 2013 we have been able to achieve both short-term and long-term objectives in a strong fashion. So, 2013 is on track for another great year, we're positioned well to make 2014 another good year. We have not used this environment to push our leverage metrics higher and our payout ratios higher to the contrary, we are using this favorable environment to grow per share results while preserving capacity for future growth. We continue to believe we are well-positioned 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, we will open it up to any questions.

Thank you. At this time, we will be conducting a question-and-answer session.

(Operator Instructions)

Daniel Altscher from FBR.

Thanks for taking my question this morning. Kevin, I had a question about the guidance, and I apologize if I missed it, but the $300 million of acquisitions, a, is that a gross number or is that net of dispositions? And also can you give us a flavor of what the cap rate assumptions might be?

That is a gross number. We always pencil in some disposition activity. I think only in our guidance we probably have $20 million or $30 million so it's not a big number. The $300 million is gross acquisitions, and our cap rate guidance for next year is in the low 7s.

Great, thanks. And then maybe just a higher-level big picture question for Craig. Obviously there's been a continuation of inorganic or consolidation happening in the industry. Maybe that is not akin to an NNN strategy, but just wondering how you think about that going forward? Is this going to continue to be a consolidation industry and where we're going to see the big get bigger?

Daniel, that's an interesting question for us, because we have watched it from the sidelines, so you probably need to ask those people. I would say the following, that we obviously take a look at all of the deals that are out there, and National Retail Properties continues to remain selective and disciplined about building shareholder value over, as Kevin mentioned a moment ago, a multi-year timeline.

For us, we're going to continue to focus on net lease retail where we prefer the risk adjusted returns. Also I may add that our team has considerable domain expertise and knowledge of retail. We think that is important.

Let me just say one or two more things. We think acquisitions which contain built-in rental growth are much more preferable to those that have no rental growth and by the way, those are frequently investment-grade tenants.

And then finally, we think that the quality of the real estate is important. We do visit and underwrite each and every acquisition we make. And of course, this is time-consuming, and involves considerable travel but I would point out that we are in the real estate business and we think it is location that ultimately matters, not the type of lease that you may have.

I have no doubt that consolidation is going to continue to occur. And we hope that that leads to the promised land.

Thanks and maybe a quick follow-up also. Craig, I think you mentioned also Orchard Supply and Genuine Parts being acquired by some bigger tenants. And that the properties now are worth a lot more than when you purchased. Can you give us a little bit of a flavor as to what you meant there? Maybe numerically, if you've got recent broker opinions to show that, what the potential unrealized gains if you will, would be on those?

Yes, Daniel I am sorry. I should have perhaps been a little clearer. With both of those tenants, being Carquest Genuine Parts, the same company and then Orchard Supply on the West Coast, at the time we purchased those, our initial cap rates were in the 8% range. And that applies to those types of tenants. Obviously, Lowes credit is very highly valued, and we have had some calls offering us in the 5% range for the properties that we now have with Lowe's credit on them. So the value creation is quite significant.

The Advance Auto deal has not yet closed yet, so I cannot speak to that one. Obviously, we could sell if we chose to, some of those Orchard Supply properties at really low cap rates. We like the real estate in the first place and frankly, the real estate just continues to get better. So we are going to stay with those probably.

Great, thank you.

(Operator Instructions)

Rich Moore with RBC.

Hi good morning guys. I'm curious Craig, you were talking about the real estate on those Genuine Parts and Orchard Supply locations. Were you thinking in the beginning that those were 5% locations? Or does the tenant help out a bit here? The fact you've got a credit tenant make it seem more valuable, more from the lease standpoint as opposed to the real estate standpoint?

Rich, thank you for your comment and I think there are two things just as a reminder. Your comments about the lease is very legitimate and valid. And just as a reminder, in general, Lowes properties that are out there have no rental growth. Just like many investment-grade companies, the lease that you get or the return that you get at day one is the same as the return you get at the end of the primary term of the lease. Pick a number,15 years. In both of those, tenants or certainly in the case of Orchard Supply, we have got nice growth over the duration. In addition by virtue of this transaction, we have a meaningful credit upgrade.

But, I think that the big point that I would like you to think about is that we are out there being very selective looking to identify companies that one, do business in good locations, two, are well-managed companies that over time are going to succeed. And I was just pointing out than in the recent past we have had some success in executing that strategy.

Good, I got you, thank you. (technical difficulty) On the SunTrust portfolio you had, I think,18 assets you sold in the quarter. Was that part of your original strategy, to get rid of those 18? Or did something special come up this quarter that you just couldn't resist?

We had an opportunity to do it. I think the thing that I would focus on if I were you is that clearly given the amount of the gain and the cap rate difference between that which we purchased it at and that which we could sell at less than 90 days later, just shows that National Retail Properties continues to be selective and identifies well-priced acquisitions.

I got an e-mail from one of our investors in the last couple of days, asking whether we are going to participate in this mud pie eating contest. And it certainly gets to Daniels question a moment ago. I think what you've seen National Retail Properties do is remain selective and disciplined. And let's hope we can stick to that, Rich.

Very good, thank you. I take it Craig there's no more of the SunTrust portfolio you are looking to sell? That was the piece?

Yes.

The last thing I have for you guys, on the acquisition side of things, maybe you could give us your thoughts on what you see out there in terms of volume? But also a lot of these guys are chasing the portfolio side of the equation, I'm wondering if you're shying away from portfolios in favor of one-off transactions, because all these guys are out there hunting for the portfolios?

Rich, it's Jay Whitehurst. How are you?

Hi, good. How are you Jay?

I will take this one. I think first and foremost our pipeline of relationship deals remains very strong. And so we are very comfortable with our off-market if you will, pipeline of deals for the future. And we see all of the other deals. So I wouldn't say that we shy away from them, Rich. We look at them and evaluate all of them, but at the end of the day, to reiterate what Craig had said, we are going to be very selective about the ones that we pursue because we are going to look for real estate quality, a good business operation, and rental growth.

Very good, thank you guys.

(Operator Instructions)

There are no further questions in queue at this time. I would like to turn the call back over to Mr. Macnab for closing comments.

Thank you very much, and we appreciate all of you participating. We understand this is the height of earnings season, and the good news is we are going to have an opportunity to meet in person with several of you out in San Francisco at NAREIT. Thanks very much and we look forward to talking to you in the near future. Much appreciated.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.