NNN REIT Inc (NNN) 2017 Q3 法說會逐字稿

Greetings, and welcome to the National Retail Properties' Third Quarter 2017 Operating Results Conference. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Jay Whitehurst, CEO. Thank you, Mr. Whitehurst. You may begin.

Thank you, Tim. Good morning, and welcome to the National Retail Properties' Third Quarter 2017 Earnings Release Call.

Joining me on this call is our Chief Financial Officer, Kevin Habicht. After some opening remarks, I'll turn the call over to Kevin to discuss our financial results in more detail. National Retail Properties continues to post consistent strong results, generating meaningful growth in core FFO per share over the prior year. We're increasing our guidance for 2017 core FFO per share to a range of $2.51 to $2.53, which reflects a projected increase at the midpoint of 7.2% over 2016 actual results. Details of that guidance can be found on Page 6 of today's earnings press release.

As you've heard us say many times, our focus is on per share growth rather than absolute size, and we're especially pleased to have achieved these solid results while continuing to be highly selective in our underwriting and investment decisions.

Our portfolio of almost 2,700 single tenant retail properties remains very healthy. Our tenants' businesses are generally focused on providing customer services, customer experiences or e-commerce-resistant consumer necessities with very little exposure to apparel or other retail concepts that are struggling with e-commerce competition. Moreover, many of the primary lines of trade in our portfolio are, in fact, growing and expanding with store openings across the country.

Delving a little deeper into the portfolio. In October, we re-leased all 12 of our former Gander Mountain properties to Camping World under long-term triple net leases. While our typical recovery rate in re-leasing vacancies averages around 65% to 70% of prior rent, in this instance, our re-leasing rate for the former Gander Mountain properties is closer to 50% of prior rent. Nonetheless, we are pleased to be able to put all of these properties back into service quickly with a credit-worthy national tenant on a 20-year -- on 20-year triple net leases that include regular rent bumps and very importantly, with no investment of tenant improvement dollars to achieve this rent.

Our discussions with Camping World started shortly after Gander Mountain announced its bankruptcy filing, and we are very happy to have completed these 12 leases with our long-standing relationship tenant. Despite most of the Gander Mountain properties becoming vacant in the third quarter, our portfolio occupancy rate for the quarter remained high at 98.8%, which continues to exceed our long-term average of 98%.

On the acquisition front, in the third quarter, we acquired 18 single tenant retail properties for $90.1 million at an initial cash cap rate of 6.9% and with an average lease term of 17 years. Through September 30, we've invested just under $500 million in 182 single tenant retail properties at an average cash cap rate of 6.9% and with an average lease duration of 18.5 years.

Over 75% of our dollars invested through the end of the third quarter have been with our portfolio of relationship tenants. Our focus on sourcing acquisitions directly for retail operators typically provides us with superior-quality real estate, stores which are self-selected by the tenant based on unit level performance, a higher initial yield, better rent bumps and a lease document that's tailored to our requirements.

Our balance sheet remains strong and flexible in the third quarter, bolstered by the issuance of almost $100 million of equity through our ATM program and by our continued recycling of capital from dispositions. To sum up the quarter and the year-to-date, National Retail Properties continues to deliver compelling per share results from a broadly diversified healthy portfolio, a pipeline of direct relationship business with strong regional and national tenants, a highly selective underwriting process and continued access to well-priced capital.

With that, I'll turn the call over to Kevin for more details on our third quarter results.

Thank you, Jay, and I'll start as usual with a cautionary statement that we will make certain statements that may be considered to be forward-looking statements under federal securities law. The 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 company's filings with the SEC and in this morning's press release.

With that, headlines from this morning's press release include announcing third quarter results of $0.65 per share of core FFO operating results, which represents 10.2% growth over third quarter 2016 as well as $0.65 per share of AFFO, which represents 6.6% increase over prior year results.

For the 9 months, core FFO per share increased 8.6% to $1.90 per share and AFFO grew 6.7% compared to prior year results. So we're well on track for producing another solid year of growth in per share results while maintaining a strong and liquid balance sheet and not relying on large amounts of short-term floating rate debt. These results, coupled with anticipated fourth quarter acquisition activity, allowed us to increase 2017 guidance again this morning.

We maintained our AFFO dividend payout ratio at 72% for the first 9 months. And our recently announced fourth quarter dividend makes 2017 the 28th consecutive year of increased dividend, a record held by fewer than 90 public companies in the U.S. and only 4 REITs in the U.S. Occupancy ticked down 50 basis points to 98.8% at September 30, not surprisingly given the conclusion of the Gander Mountain bankruptcy, which Jay discussed. We continue to drive additional operating efficiencies with G&A expense decreasing to 5.8% of revenues for the first 9 months of 2017, and that's compared with 6.9% for the 2016 9-month period.

For purposes of modeling 2017 results, the annual base rent for all leases in place as of September 30 was $567.7 million. During the third quarter, we issued $97 million of common equity via our ATM. And equity raised year-to-date totals $172 million. And if you combine this with our year-to-date disposition proceeds of $56 million as well as our retained AFFO of $78 million after all dividend payments, we've raised $306 million of equity-like capital so far this year. And that's 62% of the $498 million of year-to-date total acquisition investments.

As Jay mentioned, we did increase our 2017 guidance, which suggests a 7.2% growth to the midpoint compared to 2016 results. We also introduced 2018 core FFO guidance of $2.60 to $2.64 per share and AFFO guidance of $2.64 to $2.68, which indicates 4% growth in per share results to the midpoint of guidance based on our current assumptions. And those assumptions include 5 -- for 2018, $500 million to $600 million of acquisitions in the mid- to high-6 cap range; G&A expense of $34 million to $35 million for 2018; we're not anticipating any change in occupancy; property expenses, net of tenant reimbursements, of $8 million to $9 million; and property dispositions of $80 million to $120 million.

We don't give guidance on our capital market plans, but you should expect our behavior to remain consistent with the past 20 years meaning we're going to maintain a conservative leverage profile and get capital when it's available and well-priced, all with a long-term multi-year view of managing the company and our balance sheet. During the third quarter, we did issue $400 million of 10-year unsecured notes right after Labor Day. They had a 3.5% coupon and a 3.548% yield.

Subsequent to quarter end, just 2 weeks later, on October 15, we repaid $250 million of 6.875% notes. And last week, we announced that we had recast our bank credit facility, increasing availability from $650 million to $900 million and extending the term to January of 2022. Additionally, the borrowing cost based on our current debt rating on that facility was reduced modestly to LIBOR plus 87.5 basis points, which I believe is the lowest in our sector.

We've ended the quarter with nothing drawn on our bank line, which is how we started 2017. During the 9 months of 2017, the weighted average outstanding balance on our bank line was $100 million. So we've not been particularly heavy user of that short-term variable rate capital despite its attractive pricing. We remain very well-positioned from a liquidity perspective and a leverage position. All of our outstanding debt is fixed rate.

If you take into account the $250 million debt repayment we made on October 15 using the $254 million of cash that was on our balance sheet at September 30, our weighted average debt maturity is 7.2 years with a weighted average interest rate of 4.0%. So our balance sheet remains in great position to fund acquisitions as well as weather any potential economic and capital market turmoil.

Looking at our September 30 leverage metrics, net debt to gross book assets was 34.7%. As you know, we don't manage our balance sheet around market-based cap -- market cap-based leverage metrics. More importantly, net debt to EBITDA was 4.5x at September 30. Interest coverage was 4.7x for the third quarter and fixed charge coverage was 3.6x for the third quarter. Only 5 of our 2,687 properties are encumbered by mortgages totaling $13 million.

Following 2016 6% growth in per share results, 2017 is well on track for a slightly better result. When sourcing capital and making capital allocation investment decisions, driving per share results on a multiyear basis is at the forefront of our minds, not volume or size. We already have more than enough scale to produce a diversified portfolio and access to well-priced capital. So growing per share results is job 1.

We're optimistic 2017 will be another year of solid growth and per share operating results and are hopeful 2018 will allow more of the same. Our strategy has been very consistent for many years, and we're optimistic that we'll be able to perpetuate our 28th consecutive year track record of raising our dividend, which has been an important part of outperforming REIT equity indices and general equity market indices for many years.

With that, Tim, we will open it up for any questions.

(Operator Instructions) Our first question comes from the line of Nick Joseph of Citigroup.

Kevin, it looks like implied 4Q core FFO guidance is $0.62 at the midpoint, which is $0.03 below what you did in third quarter. And I know you'll feel the full impact of the debt issuance and the higher share count, but then you'll get the benefit from paying off the high coupon debt from October and then some benefit, I'd imagine, from 3Q and 4Q acquisitions. So can you provide some color on the moving parts to get to that lower core number in the fourth quarter?

Yes, we're hopeful we'll be at the high end of that range that we put out there. We obviously have some other headwinds in the -- around the vacancy on Gander, et cetera. So that will weigh on results a little bit. But if things go precisely as planned, I think we'll be able to get to the high end of that guidance for 2017.

When did Camping World start to pay rent?

The rent for the Camping World leases on the Gander Mountain will start to -- it'll phase in over the next couple of quarters, Nick.

You should think about, on average -- maybe 3 to 5 months on average. But as Jay said, it will phase in over time of vacancy, if you will, prior to rent commencement.

And then just on theaters' 5% of your exposure. Just wanted to get your thoughts on that kind of industry overall and if you see any risks from premium video on demand.

Yes. Nick, first I think just to reiterate, our portfolio is very healthy. We are primarily small box retail properties. But inside this broad portfolio, we've got room for bigger, more special-purpose boxes. We are very -- we're happy with our theater exposure at the level of where it is. The 2 largest tenants in our portfolio are AMC and Cinemark, and the theaters that we own with them we are very comfortable with the real estate and the operations there. We're not looking to grow that portion of our portfolio meaningfully. There may be the occasional property that comes along, but we're happy with what we've got. We're not looking at growing it substantially.

Our next question comes from the line of Dan Donlan of Ladenburg Thalmann.

Just going back to Gander Mountain. I was just curious if you could give us any type of concessions you gave or maybe -- or any concessions you got in terms of lowering rent to Gander Mountain -- or excuse me, Camping World. Are you able to get four-wall coverages now? And maybe what's the weighted average lease term? And if you could share the coverage, that would be great. But I understand if you don't want to.

Yes, Dan, let me kind of take you back. I'd think -- plus, Dan, let me first say that I don't know what we'll talk about with you later after this now that Gander is behind us. But let me say that the highlight, really, the headline for the Gander announcement is that we have 20-year triple net leases with a national retailer with no CapEx dollars committed to get those leases -- no TI dollars committed to get those leases and it's behind us. It's baked into all of our numbers.

So when we balanced quickly getting all of the properties leased on those terms, which are substantially better than you typically get with second-generation space, it was kind of a no-brainer to go ahead and take what is somewhat less ramped than we typically get on our re-leasing of vacancies. The opportunity to get it tied up and sooner and not putting CapEx dollars and get the 20-year lease with a national tenant made the bird in the hand very appealing. That was really our thought process.

And of course, as we approach all of that, we were thinking about all of that on a present value basis. To Jay's point, when you put that in the spreadsheet, it compares favorably to creating some long period of -- longer period of vacancy with TI dollars, leasing commissions, et cetera, and potentially lower quality tenants and lease terms. So for us, we opted for certainty.

Sure. I mean, I guess those coverages you can't really give because they're going to be selling completely different products I guess, but...

That's correct, Dan. There's nothing to (inaudible) there.

Right. But do you -- are you going to be able to get financials? And maybe could you tell us what the bumps -- are there annual bumps? Is it CPI?

The rent bumps and the lease are pretty consistent with what we get across our entire portfolio with new acquisitions, which are kind of in the range of 1.5% to 2% -- average out to 1.5% to 2% per year. And I do not recall what the lease says about financial reporting, Dan.

Okay. And then as it pertains to SunTrust, how are -- I think I -- if you said it in your prepared remarks, I missed it. How should we think about the vacancies there? Are you going to kind of -- I think last call, you'd said that you felt like you were confident you could re-lease maybe 1/3 or sell 1/3. And then you didn't really give much guidance on the remaining, call it, 66%. So just kind of curious how, Kevin, in your model in the earnings, we should be thinking about that tenancy.

Dan, let me just give you a little bit of detail -- and the listeners a little detail on where we are right now. We've resolved 7 of the SunTrust pending vacancies so far, and that's been a mix of leasing some and selling some. And we've got 4 others that are in process. So there's 20 remaining SunTrusts that will -- where the lease will expire in April of 2018 that our team is still working on. And those 20 amount to -- Dan, my recollection is they amount to about 0.5% of our total rent. So in context, it's getting smaller and smaller. But our team is still working on them, and it's proceeding about at the pace that we expected.

Okay. And then I think you have -- you guys -- not at Ganders, but now we have ShopKo to deal with. I think you guys have some ShopKos. What's your thought process there in terms of guidance there?

Yes, we -- again, just to step back in context, very small percentage of our rent. We own 4 ShopKos that are performing right now, and we otherwise don't spend much time thinking about it, Dan.

Got it. And then just last question for me. I was just looking at the G&A, Kevin. Your G&A in 2015 was $34.7 million. Your G&A in 2018 is at the midpoint. You're guiding to $34.5 million. So just curious, how have you been able to kind of keep that from going up? Or is it just simply, given the departure of Craig, you haven't added back another COO? Or just curious how -- why that's not trending upwards.

Yes, so -- and that's a trend that's been going on for years to be quite honest. So if you go all the way back to 2011, G&A was 10.4% of our revenues. And our guidance for this year is sub-6%. And so we've been able to achieve operating efficiencies over the year as we've gotten larger as a chunk of the equation.

Another piece is, as you mentioned, we haven't backfilled one of the executive positions here, so -- which is a higher pay rate. And so that also contributes to that efficiency. So it's a combination of those 2 things. I think we're probably nearing a point in 2017/2018 where we may be slowing down that rate of descent in terms of our G&A as a percent of revenues. But it's -- we've got another year of good results on that front, I think, in front of us.

Our next question comes in the line of David Corak of B. Riley.

Can you talk a little bit about the cap rate environment? It looks like we got some compression in C stores and auto specifically? But just wondering kind of what you're seeing in the market?

Yes. David, good morning. This -- from our perspective, cap rates continue to remain flat. You saw our third quarter number. It was right on top of our year-to-date number, which is really right on top of last year's number and the high 6s for the large regional and national retailers that we're targeting for our acquisitions. To us, it just feels like a flat cap rate environment right now for the types of properties we're looking at.

Okay, fair enough. And so next one, my peers touched on most of the tenants we usually talk about. But when you look at the 7-Eleven combination, it looks like you sold a Sonoco or did something with the Sonoco this quarter. Obviously, a bigger portfolio provides a nice kind of accretive capital recycling source. But just trying to get a sense as to the size and the breakout of a potential disposition there in light of your kind of guidance for next year. Maybe another way of asking is just what sort of single tenant concentration are you comfortable with?

Let me start by saying we're very comfortable with the tenant concentrations that we have now. There -- Sonoco is still in process of selling a number of the stores that we own to 7-Eleven, which will make 7-Eleven our largest tenant when that transaction is completed. Those 2 parties are still working out the mix of what stores will be sold and what will be retained by Sonoco. And to a large degree, we're agnostic about that. They're both great operators, and the real estate will be good whether it's in the hands of one or the other. So we're happy with however that comes out.

To the -- but to your -- another point about the disposition potential of a lot of our properties to be able to sell them at cap rates that are below our acquisition cap rate and be able to recycle capital accretively, you are right on. We have a number -- a lot of our convenience store properties that are in the portfolio would trade in the one-off market well below 6s in a lot of cases -- well below 6 cap. And that is something that we look at and think about all the time when it comes to sources of capital and portfolio pruning.

But it will be done more on a basis of playing offense with which properties do we want to harvest the proceeds and recycle as opposed to, on a defensive basis, worrying about concentration levels across any of our top tenants.

Okay, fair enough. But does the guidance next year assume a portfolio disposition? Or did you not kind of break it out like that?

No, we don't -- it does not assume a portfolio disposition.

(Operator Instructions) Our next question comes from the line of Joshua Dennerlein of Bank of America Merrill Lynch.

Most of my questions have been answered, but just kind of looking at lease expirations for 2018, 2019. Anything you guys are worried about would go vacant beyond the SunTrust assets, any visibility on that?

No. Josh, good morning. Let's take one step back and remind folks. Our history tells us that at the expiration of our leases, 80% to 90% of the time, the tenants renew the lease at about 100% of the expiring rent. So we have a very, very high lease renewal rate. And when we look ahead to the -- I think, what are we, Kevin, kind of 2% to 3% of base rent expiring in 2018 and 2019...

About 2.5% each year.

Yes, yes. And so it's a relatively modest number, and history tells us that 85 -- give or take 85% of the time, those rents are going to be renewed. So there's -- at the end of the day, it really works out to be kind of a modest number that ends up becoming vacant properties. And there's really nothing in the next couple of years that's notable, no big portfolios or big numbers.

Our next question comes from the line of Jason Belcher of Wells Fargo.

Sorry if I missed this, but just on that uptick in disposition guidance for 2018. Is that driven mainly by SunTrust and Gander Mountain? Or is there something else driving that? If could you give us a little more color there.

Yes. No, that's -- frankly, in our minds, we always think around $100 million is what we will probably sell on any given year. And so that's where that general assumption came from. So that number is not -- despite the fact that it will be larger than 2017 dispositions may have been, you really can't read too much into that, I don't think.

Got it. And then just in terms of any potential upcoming debt prepayment or refinancing opportunities on the horizon, anything there we should be thinking about?

Not really. We've pretty much cleared the deck for a few years in terms of debt maturities, so we're in pretty clean shape on that front. And as I mentioned our weighted average debt maturity now is just over 7 years, and so we're pretty squeaky clean on that front. We're -- at the moment, I'm not inclined to reach out the 2021, 2022 debt maturities to start prepaying those, but -- and they're not at terrible rates. But now we're in good shape on that front, so capital raising will largely be driven by the need to fund acquisitions at this point.

There are no further questions over the audio portion of the conference. I would now like to turn the conference back over to Mr. Jay Whitehurst, the CEO, for closing remarks.

Thank you. It's a very hectic day out there for many of you, and we thank you for your attention and look forward to seeing you at NAREIT later this month. Good day.

This concludes today's conference. Thank you for your participation. You can disconnect your lines at this time, and have a wonderful rest of your day.