NNN REIT Inc (NNN) 2014 Q4 法說會逐字稿

(Operator Instructions)>> Operator Greetings, and welcome to the National Retail Properties fourth-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Craig McNab, Chairman and CEO. Thank you. Please go ahead.

Brenda, thank you very much. Good morning, and welcome to all of you to our 2014 year-end earnings release call. On this call with me 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 comments.

2014 was another excellent productive year for National Retail Properties, as we increased our recurring FFO per share by a meaningful 7.8%, expanded our already fully diversified and well-occupied portfolio, while at the same time maintaining a fortress-like balance sheet. We have now concluded three consecutive years of terrific per share growth in recurring FFO. Significantly, we have achieved these results while decreasing leverage, as Kevin will expand upon in his comments.

As our press release indicated, we acquired 221 net lease retail properties last year, investing $618 million. The average initial cash yield on these acquisitions was an impressive 7.5%, despite the cap rate compression that seems to be occurring in all property types. As you are aware, this attractive yield improves over time, as the rent increases contractually over the duration of our very long leases.

One interesting detail of our acquisition activity is that the vast majority of the transactions were single-property acquisitions throughout the year, many of which are purchased from existing tenants with an average investment per property of only $2.8 million. Only three of our deals in 2014 were larger than $50 million in size, so we continue to adhere to our strategy of focusing on carefully underwritten retail properties at low price per property, with initial cash yields that are both above what is found in the broker auction markets, as well as comfortably in excess of our cost of capital.

As indicated a moment ago, we have a strong preference for acquiring retail properties where the rent grows over the duration of the lease. This means that we seldom purchase investment-grade properties at very low yields, high rents and with flat leases.

Our portfolio continues to be in excellent shape and at the end of the year we were 98.6% leased. This is another year where we have operated at effectively full occupancy. Over the next two years, we have very modest lease rollover, with only 2.8% of our leases, coming up for renewal through the end of 2016.

As of the end of the year, we owned 2,054 products, which are leased to about 375 different national or regional tenants in 47 states. These tenants operate in over 30 different segments of the retail industry, which provides us with very broad diversification. Finally, on average, these tenants are contractually obligated to pay us rent for approximately 12 years.

The health of our tenants continues to be very good. In the short term, the decline in the price of oil is meaningfully assisting the gas margins realized by our single largest category, convenience store tenants, who are achieving elevated margins at the pump. Perhaps more significantly, 2014 is another year where M&A activity is boosting the credit quality of our tenants. And I want to highlight here, that we are delighted that our third largest [pro] tenant is in the process of being acquired by the investment-grade-rated [kushatard]. What is not fully appreciated is that approximately 66% of our rent comes from companies that are either public or have rated securities outstanding.

Last year, we continued our multi-year track record of capital recycling, using our in-house expertise to sell 27 properties for $54 million, generating $11 million of gains that are not included in FFO. Importantly, the sale of these properties has the effect of qualitatively strengthening our portfolio, as many of these dispositions involve the sale of what we consider weaker assets.

In conclusion, our portfolio is in excellent shape and, very importantly, as you'll 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. While we are only 45 days into the quarter, we have already made a couple of property acquisitions and, perhaps more importantly, are conducting due diligence on what we think are a number of attractive acquisition opportunities. Kevin?

Thanks, Craig. I will start with the cautionary language, as usual. We'll 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 the 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 $0.56 per share and recurring FFO of $0.55 per share, as well as AFFO of $0.56 per share. This represents a 7.7% increase over prior-year results. For the full year 2014, we reported FFO of $2.09 per share and recurring FFO of $2.08 per share, which is a 7.8% increase over 2013 results. The AFFO for 2014 was $2.12 per share, and that represents a 6.5% increase over 2013.

The common dividend was increased 3.1% in 2014 to $1.65 per share. And this dividend increase was our 25th consecutive year of dividend increases, a record we intend to perpetuate, and one that puts us in a very small group of public companies and literally less than a handful of public REITs. Our dividend payout ratio was decreased to 78% of AFFO.

A primary objective for NNN is growing per-share results on a multi-year basis. Our primary objective is not simply growing our asset base or growing per share results by relying on the one-time benefit of increasing leverage. So, looking over the last three years, recurring FFO per share has grown 32.5% or 9.8% annually, with AFFO per share growing 7.6% annually over the last three years. As Craig mentioned, notably, we've achieved these results while using less leverage.

Now, looking at a couple of details on the past quarter, the strong results were a combination of maintaining high occupancy, making accretive new investments, while keeping our balance sheet more than strong. Occupancy was 98.6% at year end. And, as Craig mentioned, we completed 87 $million of accretive acquisitions in the fourth quarter and $618 million for the year.

Compared to 2013 fourth quarter, rental revenue increased $11 million, or 11.1%. That's primarily due to the acquisitions we made over the past four quarters. In-place annual base rent as of year end, 12/31/2014, was $439.8 million on an annual run rate.

Property expenses net of tenant reimbursements for the fourth quarter totaled $1.1 million, and that compares with $1.6 million for the fourth quarter of 2013. For the full year, property expenses net of tenant reimbursements was $5 million for 2014 versus 5.3 million in 2013.

G&A expense increased modestly to $7.7 million in the fourth quarter. For the full year 2014, G&A increased 4.6% over 2013 levels. A couple of notes on G&A. First, we've begun to account for third-party real estate acquisition transaction costs in a separate line item. Before it was included in G&A and created some variability if we happened to acquire a portfolio in a given quarter or not. So, we thought it would be better to break out this transactional expense in a separate line item.

Second, in the context I previously mentioned of driving per-share results over the past three years, over those three years revenues have increased 60%, while G&A has increased 15% over that same time period. So we continue to generate positive operating leverage in our growth, as G&A has declined from 10.5% of revenues in 2011 to 7.5% in 2014. So, big picture 2014, another very good year for NNN. Core fundamentals of occupancy, rental revenues, expenses all are performing well, with no material surprises or variances.

Turning to the balance sheet briefly, during the fourth quarter we raised $205 million of common equity, and that was primarily through an equity offering we completed in November that raised $200 million. And notably, that's the first equity offering we have executed since November 2011, three years earlier.

We also amended our bank credit facility in the fourth quarter, expanding it from $500 million to $650 million, and extending its maturity to January 2019 with the option to extend it to January 2020. Pricing on that bank line was reduced by 15 basis points to LIBOR plus 92.5 basis points. We had no outstanding balance on that credit facility at year end, leaving us with the full $650 million of availability.

The average debt maturity for all of our debt including the bank line is 6.7 years. Our next debt maturity is $150 million, 6.15% notes due in 2015, December of 2015. Our balance sheet remains in great position to fund future acquisitions and weather potential economic and capital market turmoil.

Looking at year end 12/31/2014 leverage metrics, debt to gross book assets was 32.6%. We've got significant liquidity with our $650 million of availability on our bank line. Debt to EBITDA was 4.2 times for the quarter, interest coverage, 4.4 times for the fourth quarter and fixed charge was 3.1 for the fourth quarter.

Only 11 of our 2,054 properties, well under 1%, are encumbered by mortgages, totalling $25.4 million. So, despite the significant acquisition activity over the past four years, our balance sheet remains in very good shape. During that four-year period we've acquired $2.7 billion of properties, and funded 76% of those acquisitions using permanent capital, which consists of common and preferred equity, as well as asset disposition proceeds. The balance was funded with long-term 10-year fixed-rate debt.

So, we're clearly not driving per-share results with short-term or variable rate debt. Again, we are raising capital and investing capital with a multi-year horizon.

Generally, 2015 looks to be another good year for NNN. We're optimistic we can produce another year of solid per share results growth and including making it our 26th consecutive year of dividend increases. We continue to believe we're 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, Brenda, we'll open it up to any questions.

(Operator Instructions)

Our first question comes from Vikram Malhotra with Morgan Stanley. Please go ahead with your question.

Thank you. Good morning, Craig, good morning, Kevin. Just a quick question on cap rates. Towards the middle of last year, you had indicated that you would probably see cap rates tick down further. We have seen, at least for your results, cap rates remain stable. But I'm wondering if just your view over the next few months, next few quarters, given the steep decline in oil, which was probably unexpected, and on the other side, potentially, just changes in competition levels, what's your view on pricing and what could be the drivers of that change?

Vikram, good morning. A good question. Let's start with competition. We play in a very, very big market and there is plenty of net leased, retail properties available for sale.

We have any of a number of competitors, some of which are stronger one year and weaker the next year. But no matter what happens with competition, et cetera, it's a big market. We've got an excellent team. We have found a way to source $600 million-plus of properties in each of the last several years at very attractive initial cash yields, low market rents, and good rental growth over the duration.

I think cap rate, there's clearly more demand for real estate. Every day, cap rates have gone lower. We thought we would end up with a lower cap rate last year than we actually achieved in the mid-7% type range.

I think, finally, lower cap rates are going to catch up with us. So, we are guiding this year to cap rates that are well lower than 7.5%. Obviously, our day job is to exceed that and if we find opportunities to do it, we'll do it.

But there's plenty of product out there and our job is to find that which is attractive to build shareholder value. We are not focused on volume, which a couple of people think we should be. We are focused on carefully underwriting each individual property and being selective as we deploy capital.

And on the oil prices -- is that -- you mentioned you had some comments on that. But I'm just wondering, if we are at current levels for a while, could that somehow impact pricing in certain select categories?

It's not clear to me there's any correlation at all. What happens is that low gasoline prices means that the consumer has more money in their pocket. Whether they put that money into savings or greater spending, we're all going to find out.

But with a healthier consumer, retail is a good place to be for the next couple of years. I don't see it having any impact on cap rates at all.

Okay. And then just one last one on the acquisition side. I'm assuming the initial guidance you provided is the same in terms of acquisition volume. But given the fact that obviously you are focused on per-share results and the accretion that you can see, I obviously acknowledge that cap rates are much lower, but if we look at your spreads to cost of capital, you're still at very, very healthy levels, I would argue probably even a little better than what we've seen over the last 18 months, given the move in the stock price. So, should we anticipate that, even though you're not focused on volume, given the spread you have and the potential accretion, you could tick up the momentum on the external growth front?

Just as a reminder, in terms of our 2015 guidance, most of our acquisition activity that we are talking about in 2015 in our guidance and in our model is for more acquisitions to take place in the second half of the year than the first half. So obviously, that has a small impact on total rent realized. Jay Whitehurst and our acquisition team are working every day trying to build volume earlier in the year.

It's too early to tell whether we'll be successful, because any of a number of things have to happen. The properties that we are currently underwriting need to meet our thresholds and standards. Inevitably, many of them drop out. But right now, Vikram, our pipeline is pretty attractive.

Okay. And would that include anything you might have seen, whether it's a retrade or anything that, maybe, one of your larger competitors may just have had to step away from?

It's hard to say what's causing it, or greater M&A activity or more intensive sourcing by our team. But I think it's early yet and a lot of things have to happen for this to come together. But our pipeline today is quite healthy.

Okay. Thanks, guys.

Thank you. And our next question comes from the line of Nick Joseph with Citigroup. Please proceed with your question.

Hi, Craig. It's Michael Bilerman. Nick's on with me, as well. I had a corporate governance question. Curious how your Board thinks about your outside business commitments. You just went on American Tower's board, you're on your own board, you're on Cadillac's board, and you're also on DDR's board. I'm just curious how, in the discussions with your board, they think about the time that you have outside of the Company in terms of the commitments that you have.

Nick, that's a very fair question. And where we are is, we have published guidelines that I can be on the Board of two public external companies. Technically, I am currently on the Board of two external companies, public, given that Cadillac Fairview is a public company. However, I think that the intention is to only have somebody like me on the Board of two, large external companies. Given that I'm past that point already, I probably better do something to remedy it. And we are working on that.

Thanks. And then you mentioned the cap rate compression and the demand for real estate. Are you seeing a differential of cap rate compression between the larger portfolio transactions versus the smaller [one-offs] (technical difficulties -- inaudible)?

Michael, hi, it's Jay Whitehurst. Yes, definitely so. To reiterate, our big focus is on relationship building with growing retailers and doing business with those folks off-market whenever possible. And 2014 was a good year for that. We also saw some good portfolios in 2014 that we bid on.

But just a little fact, to put some color on that, Craig mentioned that three of our closings in 2014 were greater than $50 million. We had 34 closings, 34 separate closings that were less than $5 million. And the cap rate differential between the big closings and the little closings was well over 100 basis point difference. And that really highlights the -- most of those small closings were our relationship closings, so it really highlights the value of the hard work that goes into doing those small one-off closings.

We're going to continue to build our relationship-tenant base. We've got over two dozen relationship tenants that we work with regularly to do recurring programmatic transactions.

We're going to continue to build that and then look at all the big deals that are out there being broadly marketed and pursue those where we are happy with the retailer, interested in the real estate, and the lease makes sense. In those instances, we're going to pursue the ones that we selectively choose to chase after and, in the meantime, continue to focus on those relationship deals that are just a great core business for us.

Thanks for the detail on that. And then finally, in terms of the occupancy, it looks like it ticked down a little in the fourth quarter. I'm wondering what drove that, given seasonality, typically it either increases or remains flat in the fourth quarter.

This is Jay again. I'll talk to that. I would say that it's flat, Michael, for the number that we're at, 98.6%. We have 29 vacancies in the portfolio. We might have had 28 in the prior quarter, something like that. So it's really effectively fully occupied anywhere in this ballpark. And any one given quarter is really not -- I don't think, is indicative of any kind of longer-term trend at all.

Thanks.

Thank you. And our next question comes from the line of Juan Sanabria with Bank of America. Please proceed with your question.

Hi, guys. Good morning. Just hoping you could speak to guidance with relation to your fourth-quarter run rate, just looking at the annualized number, the number that you put out there for 2015. It may look a little conservative. I was wondering if there was anything unusual we should be backing out on the fourth-quarter number or any headwinds you could remind us of that we should be penciling in for the balance of 2015. And if you wouldn't mind commenting on what the number is that you penciled in for cap rates for 2015 acquisitions?

Hi, Juan, it's Kevin. Not a lot of headwinds in this year. The one thing we don't give guidance on is capital markets activity. So, that's a pretty significant piece of the puzzle as to type, amount and timing of any particular capital raise.

One thing that is obviously a headwind, a bit, is we did a large equity offering late last year, so that weighs into the equation somewhat. And we did that after announcing our earnings and guidance for the year. So that will weigh on per-share results. So we really don't have that.

We'll consider -- every quarter we reproject how the results are going and whether we should tweak our guidance, and didn't feel like we had enough visibility on things at this point to do that. But hopefully we can.

And then the cap rate assumption, we used was about a 7% cap rate. I think our guidance for 2014 was 7.25%. We actually did 7.5%. Like we said, we were surprised, genuinely. But as Craig indicated, we think the cap rate, compression trend that's been going on, not only in our sector, but broadly in real estate, will likely catch up to us a little bit in 2015. And so in our guidance for 2015, it was a 7.0% cap rate assumption.

Great. Thanks. And just wondering if you could comment on the build-to-suit opportunity set, what you think a run-rate number, on an annual basis, you can achieve is. And maybe just a little color on cap rates for those type of opportunities versus acquiring assets through typical relationships, [or just the] bread-and-butter acquisition. If you could just comment on that. Thanks.

Sure. Juan, it's Jay Whitehurst. It's hard to put too precise a number on the run rate that we want to get to with our tenant development financing. Historically, we've been in the $100 million to $150 million per year run rate in that business. And we are always hoping to grow it even more. But I suppose that's probably a good run rate to think about.

Those cap rates are in the 50 to 75 basis point range above what we would otherwise be able to get out in the open market. So think of them as mid to high 7%s for penciling in numbers.

And then just as a reminder, we're not in the development business, Juan. We don't do that at all. So, from my perspective, it doesn't really make a lot of difference whether we buy an existing store from a retailer or we finance their construction of a new store.

However, some of my colleagues who are listening to this phone call will chafe at that comment because there's a lot more work and a lot more detail if we are financing their construction of a new store that becomes a typical sale leaseback. So, it's just where we get it in the cycle. But, again, that's part of our relationship effort with our partners as retailers.

Thanks. And just a last question, can you give any color on G&A? I think you had given some expectations, $35 million to $36 million last quarter. Are you still happy with that? Any additional personnel you're thinking of bringing on for 2015?

I think our guidance for last year was around $35 million, $35.5 million number. That did include real estate acquisition transaction costs of about $900,000. So, depending how you're thinking about G&A going forward, the way we're thinking about it is that G&A will be -- call it $34.25 million and add another $900,000 for real estate acquisition transaction costs.

And to be clear, we have a pretty good handle on the G&A expense. The real estate acquisition transaction cost, that's just a number we're estimating. As you know, over time, it can vary from $500,000 to $1.5 million, depending on just what kind of properties and portfolios we're acquiring. So, I don't have a lot of visibility on that number but we are assuming $900,000 for now.

Great. Thanks, guys.

(Operator Instructions)

Our next question comes from the line of Dan Donlan with Ladenburg Thalmann. Please proceed with your question.

Thank you, and good morning. Just had a quick question on the tenants that did not renew for the year or even for the quarter maybe, what was the impetus for them leaving? Did they go out of business? What happened to the tenants? Why didn't they renew?

Dan, it's Jay Whitehurst. I think, first, to step back and just point out that one of the things we love about our business, in the retail business, is the high renewal rate of the tenants at the end of the lease. And we have a very active portfolio management group, asset-management group, that stays in touch with tenants and has a lot of dialogue with them as the leases are running down.

This past year, 82% of our tenants renewed. The long-term history is that we are around a 90% renewal. But I don't think you should read any trend into that. The numbers are so small. There were 32 tenants that renewed in 2013, and if it had been 35, it would have been the same as our long-term average. So the long-term numbers seem to be still tracking and reasonable at a 90% renewal rate.

For the tenants that don't renew, those are instances, almost always, where they are just not making money at that unit. Tenants don't like to move and have their customers have to find them all over again in retail businesses. And so, these are ones that were just going out of business at that location at the end of the lease. But it's really at very few properties.

Okay. That's helpful. And so how should we view -- do you feel like you're operating at full occupancy? How should we view the remaining vacancy you have in the portfolio? And do you look to cull that by potentially selling some vacant assets this year?

As I mentioned earlier, we only have 29 vacancies. So, yes, I really think you should look at it as if we're at full occupancy.

The philosophy here is to try to lease the vacancies, much more than going ahead and just selling them quickly. We have a very talented leasing group in-house that works on leasing those properties. At some point if you don't lease it, then we just go ahead and sell it.

But we're going to try to lease all of those properties for an extended period of time before we give up on them. We're in the business of collecting rent. But, no matter what happens in that small of a sample group, it's not going to move the needle very much.

Sure. And then just lastly, on acquisitions for this year, are you baking in any type of portfolio transactions -- I guess that would mean something greater than $50 million, let's say -- into that acquisition guidance? Or would that be incremental to what your acquisition guidance is for this year?

Dan, the acquisition guidance is an aggregation of everything, individual properties and portfolios. As it so happens, we have pretty good visibility right now on a little more activity than we had when we talked to you in November. So there's work to be done, deals always drop out, but right now our pipeline of deals we are evaluating is quite encouraging.

But we've always got a way to go before we close them. My colleagues are just kicking me under the table. But right now our visibility is good, Dan.

Okay,. And sorry, just one more after this. What's really driving the cap rate compression in your sector? Do you think people are more used to it now than maybe last cycle? With 7% cap rates, I don't think you've ever guided to that low. Is it just the 1031 market's coming back more robustly, and it's just simply a 10-year, relative to cap rates? Is there anything different other than simply interest rates going on here?

Dan, it's just simply the fact that alternative yields are very, very low for the average investor. So, what you're seeing is enormous demand for the predictable returns of real estate. We, frankly, marvel how attractive our yields are at 7%-plus percent with contractual growth, when you compare that people are buying other property types in the 4.5%-type or low 5%s,. It just seems to me that net-lease retail continues to be quite an attractive category.

Okay. Thank you.

It seems that we have no further questions at this time. I would like to turn the floor back over to management for closing remarks.

Brenda, thank you very, very much. We appreciate that there are lots of calls today. Thanks very much for your interest. We're going to see any number of you at a conference in a couple of weeks. And if you have any comments or questions, please call either Kevin, Jay or me. Thank you very much for your interest. And, Brenda, thank you.

Thank you. Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.