NNN REIT Inc (NNN) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the National Retail Properties First Quarter 2019 Earnings Conference Call.

(Operator Instructions)

At this time, it is my pleasure to turn the call over to your host for today, Mr. Jay Whitehurst, CEO and President.

Sir, the floor is yours.

Thanks, Jess.

Good morning, and welcome to the National Retail Properties First Quarter 2019 Earnings Call.

Joining me on this call is our Chief Financial Officer, Kevin Habicht.

After some brief opening remarks, I'll turn the call over to Kevin for more detail on our results.

The first quarter of 2019 was another steady, consistent quarter for National Retail Properties.

Our broadly diversified portfolio of 2,984 single-tenant retail properties remained healthy with an occupancy rate of 98.2%, which is consistent with our long-term average of 98%.

Despite the headlines regarding retail store closures, our portfolio continues to perform admirably.

As we've mentioned before, the 400-plus tenants in our portfolio are typically large regional and national operators that are primarily focused on customer services, customer experiences and e-commerce-resistant consumer necessities.

On the acquisitions front, we invested $117 million in 33 new single-tenant retail properties at an initial cash yield of slightly over 7% and with an average lease term of over 16 years.

As usual, our tenant relationships were the source of a vast majority of our investments.

Over 80% of our total dollars invested in the first quarter were with our roster of relationship tenants.

We also sold 17 properties during the first quarter, generating over $19 million of proceeds at an average 5.9% cap rate.

Our disposition strategy continues to reflect a barbell approach.

On one hand, selling some properties at low cap rates in situations where we see less long-term value than the buyer.

And on the other hand, selling some vacant properties after concluding that our re-leasing efforts would generate less shareholder value than simply reinvesting the sale proceeds.

With our average disposition cap rate significantly below our average acquisition cap rate, we continue to validate our ability to recycle capital accretively.

Our balance sheet at the end of the quarter remained one of the strongest in our sector.

As we've discussed previously, we raised a significant volume of low-priced capital at the end of 2018 and entered 2019 with $0 outstanding on our line of credit and cash on our balance sheet, all of which continues to position us very well for 2019.

In closing, let me remind you that we run our business with a long-term focus, characterized by consistent per share growth on a multiyear basis.

Our first quarter results reflect another consistent steady step along that path.

With that, let me ask Kevin to provide his additional comments on our first quarter results.

Right.

Thank you, Jay.

And I'll start with the usual cautionary statement that we will make certain statements that may be considered to be forward-looking statements under federal securities law.

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 company's filings with the SEC and in this morning's press release.

With that, headlines from this morning's press release report quarterly Core FFO results of $0.67 per share for the first quarter of 2019, which was flat with prior year results and is consistent with our projections and estimates.

We left 2019 core FFO guidance unchanged at $2.71 to $2.76 per share, which implies 3.2% growth to the midpoint.

We do this, again, while maintaining a strong and liquid balance sheet and not relying on large amount of short-term and/or fixed -- floating rate debt.

Details of our 2019 guidances can be found on Page 7 of today's press release.

Our AFFO dividend payout ratio for the quarter was 72.8% and that compares to 72.4% for the full year 2018.

Occupancy was 98.2% at March 31.

That was flat with prior quarter.

G&A expense was 5.8% of revenues, and that compares with 5.7% a year ago.

Again, reminding you that we include state and local corporate taxes that we pay in various municipalities in our G&A expense, while some REITs exclude that from G&A and put that on a separate line item.

For purposes of modeling 2019 results, the annual base rent for all leases in place as of March 31, 2019, was $633.2 million.

This allows you to take some of the guesswork or estimation out of the timing of Q1 acquisitions and dispositions for projections starting April 1, 2019.

We did not issue any common equity during the first quarter via ATM.

As we've noted in the past and consistent frankly with the past couple of decades, we expect to behave in a relatively leverage neutral manner over time.

First quarter dispositions of $19 million and $30 million of free operating cash flow and debt after all dividend payments, that provided $49 million of equity-light capital for us for new investments.

As a reminder, we funded 84% of 2018's $716 million of acquisitions with this equity combination of common stock issuance, disposition proceeds and free cash flow.

So we entered 2019 well ahead of the equity raising curve.

We remain in very good leverage and liquidity position, which will allow us to maintain an active acquisition effort into 2019.

As Jay mentioned, we ended the quarter with no amounts outstanding on our $900 million bank line, and we had $80 million in cash on the balance sheet.

Leverage metrics remained very strong.

We've always been inclined to keep a balance sheet with notable financial capacity and flexibility.

This may cost per share results a bit in the short run, but we think over time, a good defense will allow a more effective offense.

Capital structure matters and undrawn lines of credit are an asset.

Our next debt maturity is in 2022, and our weighted average debt maturity is now 9.1 years.

All of our outstanding debt is fixed rate.

Our balance sheet remains in good position to fund future acquisitions and weather potential economics or capital market turmoil.

Looking at quarter-end leverage metrics.

Net debt to gross book assets was 34.7%.

As you know, we're not big fans of market cap-based leverage metrics.

Believe, more relevant is net debt-to-EBITDA, was 4.8x, which is unchanged from year-end 2018.

Interest coverage was 4.9x, and fixed charge coverage was 3.8x for the first quarter.

Both of those metrics were 10 basis points higher.

Only 5 of our 2,984 properties are encumbered by mortgages totaling approximately $12 million.

So we believe 2019 will be another solid year of growth and operating results and the comps for multiple prior years are not particularly easy.

When sourcing capital and making capital allocation investment decisions, driving per share results on a multiyear basis remains at the forefront of our mind.

Our investment strategy in terms of property type, tenant type and our balance sheet strategy has been very consistent for many years.

And now you can decide if I've saved the best or the least for last.

But my final comment will touch on the new lease accounting impact all of us are dealing with.

For NNN, the impact is fairly modest with the most visible item of note being the presentation of revenues, which we now must collapse 5 lines of revenue into 1 line, which we call lease income.

We've added some supplemental info at the bottom of Page 6 of the press release to give you a little more visibility as to what's recorded in this 1 lease income line item to be consistent with the prior periods.

The other area that the new accounting will create some change is where we are the lessee.

In our case, this is our headquarter's office lease and 3 investment properties ground leases where we own the building and lease the land from a third-party.

The new accounting rules require recording a right-of-use asset and a lease liabilities for these leases.

Again, a fairly de minimis impact on our balance sheet.

Additionally, the accounting for lease costs that are connected to new acquisitions now requires us expensing any leasing cost that are not contingent on a lease getting signed.

For us, that occurs occasionally when we acquire properties where we may use a third-party law firm to be involved in any lease drafting responsibilities.

In the past, those costs would have been capitalized as a part of the acquisition.

But beginning in 2019, those costs will be expense.

And you can see we showed $52,000 for this in our first quarter results.

A little difficult to estimate the -- this amount going forward since it's entirely dependent on acquisition volume and some other factors.

I will note that in the past, we've never capitalized any internal leasing cost.

So there's no change in our expensing on that front for us.

Lastly, the new rules will not allow for establishing any general reserves for the uncollectibility of receivables.

So going forward, this can inject a degree of lumpiness to reported results, as the new rules push us to wait until the probability of collection gets meaningfully low and then write-off the entire receivable balance.

In the past, we may have been more inclined to reserve for potentially uncollectible receivable amounts sooner.

But all in all, the new lease accounting impact does not seem to have a material impact on our reported results despite some of this noise in the numbers.

And with that, Jess, we will open it up to any questions.

(Operator Instructions) We'll move first to Christy McElroy with Citi.

My name is Katy McConnell.

I'm not Christy.

Wondering, if you can just update us on your expectations for tenant closures, including those that you had mentioned last quarter?

And given occupancy held flat in the first quarter, are you expecting any tenant disruption or occupancy disruption in the balance of the year?

Katy, we feel like generally the portfolio is going to remain healthy and continue generally in the area where we are now.

When you're the landlord to retailers, you are always dealing with tenants that have issues.

As it relates to the larger bank tenant defaults and bankruptcies that we talked about previously, in the case of ShopKo, we owned 3 of those stores.

We still own 3. Two of those are -- we are working on.

One is pending resolution, a sale of that property.

All 3 of those are still paying rent right now.

ShopKo has not terminated those leases yet.

So we're still getting rent on those.

And as it relates to the Virginia College properties, we had 3 of those also.

Two of them are pending resolution and 1 we are still working on.

So none of those more impactful bankruptcies or defaults from the past, haven't fully resolved yet, but we're making good headway on a good piece of that.

And otherwise, looking ahead, we are cautiously optimistic.

I guess you'd say that everything is going to -- we're going to kind of stay in the ballpark of where we are.

And just for clarification, just to point out that the 3 Virginia College properties were in our vacancy as of December 31.

So that wasn't a new event in Q1.

We expect the ShopKos to go vacant in -- the 3 ShopKos to go vacant in Q2, but as Jay said, they continue to pay rent on those at the moment.

And I think just maybe at a strategic level to point out that we have in-house leasing expertise.

We have folks that are -- that come to work every day focused on re-leasing our vacancies and creating value out of our existing portfolio.

And that's all part of being a real estate company.

And we are working these properties very hard.

We'll move next to Vikram Malhotra with Morgan Stanley.

This is Kevin on for Vikram.

Just a quick question for me.

Did you happen to disclose the cap rate on the dispositions?

The cap rate on our dispositions, Kevin, was about 5.9%.

Okay.

Great.

And then just in terms of the composition of the acquisitions.

I didn't see a whole lot of movement on the top tenants.

So can you give any color around what those -- what the composition was of those?

Yes.

It wasn't -- it really didn't move the needle much with any of our top tenants.

But it was a very broadly diversified group of acquisitions across -- gosh, I'm trying to remember.

I think it was 8 or 10 of our different relationship tenants.

It was a lot of individual one-off properties or small portfolios primarily with our relationship tenants, nothing notably outside the mix of our overall portfolio.

Okay.

Great.

And then just last one for me.

Just in terms of the straight line rents, I know towards the end of last year, it actually turned into a positive for basically a positive cash flow, whereas if I look at it in the first quarter of '19, it appears to be negative, which is what I would expect to be.

So just in terms of going forward, how do you expect that to trend?

I know you don't record a whole lot of straight lines given that you have a lot of CPI-based escalators.

How do you expect that to trend over the rest of the year?

Yes.

There is a little bit of lumpiness in that.

So you're right on that, Kevin.

And that on occasion, when you're leasing a new property, and you'll give somebody 3 years, 5 months of free rent to start off, then that will influence that number.

As you know, our number has been plus or minus -- it has been bounding around the 0 range by a few hundred thousand dollars.

Not very much up or down over recent quarters.

In terms of a trend, I would think we're close to that 0 mark.

So fourth quarter of last year, it was a positive $124,000.

As you noted this quarter, first quarter of 2019, a negative $747,000, but it will vary a little bit depending on the leasing activity.

But it's not straying too far from 0.

Okay.

So in terms of going forward, assuming 0 will probably be the best bet?

That's a reasonable assumption.

Yes.

You won't be too far wrong if you assume that.

We'll move next to Brian Hawthorne with RBC Capital Markets.

Just 1 question for me.

Are you guys looking at any new concepts?

Or is there -- has -- have any new concepts kind of come up on your radar that you'd like to invest in?

Brian, we -- our primary focus on our acquisitions is building relationships with these retailers and doing repeat programmatic off-market business with those folks.

And we have a team of folks led by Steve Horn in our office who spend every day looking for new concepts or retailers within existing concepts that we are not currently doing business with.

There is no big notable line of trade for us to say we're looking to materially move into.

But what we're always looking for are good retail operators that have real estate along high-traffic roads that we think is the right kind of real estate to own for the long-term, leased to an operator that gives us comfort that we'll get the rent for a long period of time.

We'll move next to Collin Mings with Raymond James.

First question for me.

Just the yield on the acquisitions in the quarter, a bit higher than 2018 overall as well as 4Q.

I just -- I mean, I imagined this was mix related, but just can you confirm that and just touch on the pricing environment for a minute just especially given the cost of capital for the public players here who have continued to improve in 2019.

Right, Collin.

We have 7% cash yield on leases with good operators with 16.5 years' worth of term.

And our typical kind of 1.5% bumps is a very good start to 2019.

Cap rates in general out there in the world are not -- we don't see them moving up at all.

For high-quality assets, cap rates are, if anything, trending down a little bit.

So I think our acquisition team did a very good job of getting this good, solid yield for our first quarter acquisitions.

I would not expect that to continue through the rest of the year.

It's -- cap rates are remaining low out there.

But our guys did a -- our team did a very good job of getting these first quarter acquisitions at a good yield.

Got you.

So again, it sounds like it was, again, specifically attributable to the deals the team struck as well as maybe mix, not anything indicative of the broader market.

That's correct.

I think also strategically, our focus on building relationships helps there.

When we are dealing with a relationship tenant, lowest cap rate is not the sole component of our value proposition.

And so we are able to get somewhat better yields on many of our relationship deals because there's more to the value of working with National Retail Properties than just the lowest cap rate.

Fair enough.

That actually leads me to another question.

Just bigger picture, and I think I know where you guys will go at this, but just given your relationship-based model for acquisition, have any of your tenants talked with you about international opportunities?

And just on the heels of Realty's announcement last week, just update us on how you would even think about such an opportunity?

Yes, we've looked at deals outside the United States before with -- some with relationship tenants and some others.

And so far, it just hasn't worked out for -- that hasn't made sense for us.

The level of volume that we need to generate in order to produce that consistent kind of mid-single digits FFO per share growth allows us to be very selective and not have to undertake herculean volume efforts.

And the -- when you couple that with the vast supply of single-tenant retail properties in the United States, so far we've concluded that we can meet our growth objectives while being selective and staying in U.S. markets that we feel like we know very well.

Fair enough.

So it sounds like something at some point, you -- never say never type of approach here but really see a very ample opportunity set just in domestically with kind of your current relationships.

Is that fair?

Yes.

That's very fair.

You said it better than I would have.

Yes.

Well, well said.

Last one for me.

And just going back to an earlier question just on the composition of acquisitions during the quarter.

It does look like the home improvement bucket picked up here a bit during the quarter.

Just maybe touch on the opportunities you're seeing there, the competition on that front.

Just anything else that you could maybe talk about on the home improvement bucket, recognizing again it's still pretty nominal.

Right.

No.

It is nominal, and that's a couple of acquisitions that we did.

Our focus is always primarily on the location of the real estate, the price, the rent per square foot for the property and certainly the rent versus market rent.

And so this -- that segment of retail is known to us, is no more or less competitive than any others.

We just are -- when we're looking at those kind of properties, what we're really looking for is, is this a good retail location, and is this a reasonable rent?

And in this first quarter, we found a couple of properties that fit that criteria.

(Operator Instructions) We'll move next to Spenser Allaway of Green Street Advisors.

Just going back to the pricing environment for a second.

You mentioned the cap rates are moving lower, if anything.

Are there specific industries within retail where you're seeing more notable cap rate compression?

There've been some -- Spencer, there've been some specific deals where you -- we've seen cap rates go below 6% that probably in the past wouldn't have been.

But it's really -- I can't say that there's particular sectors where that's happened.

I think it's just been transactions that have had 1 compelling feature or another for 1 or 2 buyers that caused folks to say that was the right thing for them to do.

In our case, we're going to try to -- we are going to stay focused on dealing with our relationship retailers and doing deals at yields that we think are adequately accretive for good real estate with good operators.

And we do think there's still plenty of opportunities out there for that.

We'll move next to Joshua Dennerlein of Bank of America.

Your occupancy is down year-over-year.

Is that all the SunTrust and then the Virginia College assets you talked about earlier?

Or is there any other assets in there?

And how should we think about kind of the evolution going forward with the ShopKo assets going dark or likely going dark in 2Q and just your lease expirations for the year?

Yes.

Josh, we're down year-over-year, but we're right about at our long-term average.

So when we were 99% occupied, we were quick to remind folks that we didn't think that was sustainable over the long term.

The -- where we are today is a reflection I think of just the general retail environment where all of us are going to have -- that own single-tenant retail properties are going to have some tenant vacancies along the way.

The Virginia College and the SunTrust are in that number.

But the -- in the SunTrust, in particular, were not unexpected.

We saw that coming a long time ago.

And we are working our way through the SunTrust vacancies.

I think we've only got 3 SunTrust properties that are either unresolved or not pending.

There's only 3 where there's just -- we're still working them, I do believe.

So it's just a kind of a general vacancies here and there.

To me, not particularly attributable to any 1 major tenant or factor.

And again, a reminder that we're flat sequentially versus prior quarter.

So nothing new in the current quarter.

And as Jay said, our standard line is think of us as being 98% occupied, plus or minus 1% over a couple of decade period.

And that's the way we tend to want to think about modeling our business.

Got it.

Makes sense.

You mentioned those 3 SunTrust assets.

Are you -- when you mean you're going to resolve them, does that mean you're going to re-lease them or is it like a more of a sale situation at this point?

Yes, yes.

It's -- the -- to be -- to put a little more clarity on that, we currently have 7 vacant SunTrust properties, 4 of which are pending resolution.

And Josh, I think, all 4 of those are sales.

Certainly, a majority of those are sales.

And then there's 3 that are remaining where we're still working them.

These last few remaining vacant SunTrust assets are some of the best we had in the pool of vacancies.

So our inclination is to try to lease those properties and start an income stream.

And that's why we're working those last few a little bit harder.

They may end up being resolved as sales down the road, but we are working hard to re-lease those last properties.

They are good -- generally pretty good real estate.

Okay.

And for the Virginia College and ShopKo, when you mentioned the pending resolution on the 2 college assets and the 2 ShopKo assets, is that kind of the same thing?

You're going to sell them and not re-lease them?

Yes.

The -- those 2 Virginia College, first.

Those were -- we said in our previous call that we hope that we could find some kind of a -- another school user for those.

And the 2 of those that are pending are both potential sales to charter schools.

So we'll see if all -- we'll see if those sales happen.

We certainly hope they do, but our goal is to try to find another school user for those.

And in this case, selling to the schools was the way that those deals ended up being structured.

As it relates to the ShopKos, only 1 of those is pending.

We still have 2 that we are working on.

And that 1 is -- also happens to be a sale.

We'll move next to Todd Stender with Wells Fargo.

Jay, you touched on this briefly about rental rates what they're underwritten at.

Can you talk about the Q1 deals you closed on and how those rents compare to market?

I guess, if they're relationship-driven, maybe there's flexibility on what the rent could be to ultimately drive a 7% yield.

Maybe any color there.

Sure.

No.

We're -- the -- for all of our acquisitions, whether it's the first quarter or last year or 5 years ago, the underwriting focus is on keeping the cost for the property low and, therefore, keeping the rent as low as possible whenever you're doing a sale leaseback.

And that's a big piece of our underwriting as to look at what's the market rent, what are the comparable rents being paid by other properties that we own that are similar to the properties we're looking at buying.

We feel like our portfolio sits pretty close to market rent generally.

If you think about our renewal statistics, at the end of our leases, 80% to 85% of the time, the tenants renew the lease at around 100% of the then current rent, which has been bumping all along through the term of the lease.

That gives us some level of comfort, and we feel like evidence that we are at market rents given the tenants' renewal at the -- at lease expiration.

Okay.

That's helpful.

And then did you guys specify some of the tenant names that you acquired and then what you sold?

And I'm just pointing to -- I guess, in restaurants.

I mean, we got quick service that went up but casual dining looks like it came down.

Have you guys spilled out any of the tenant names?

The -- well, quick serv I think went up in the quarter not because of anything we did this quarter but we bought a portfolio of fast-food restaurants near the end of the year last year.

And so I think that kind of moved that number.

And casual dining really went down I think just because it got diluted as opposed to anything else.

So again, we bought 33 properties, and we sold 17, so we didn't really move the needle on anything in terms of those kind of concentration levels.

Okay.

And then I guess on timing of acquisitions.

For modeling purposes, should we assume more back end weighted if you're -- you closed on $117 million in Q1, but you can get upwards of $600 million for the full year.

Just thinking about some timing I guess.

Yes.

It was skewed a little bit towards the back end of the quarter.

So I would assume that.

Again, we're -- another good data point to help model beginning kind of April 1 projection is there's $633.2 million of annual base rent that's in place as of March 31.

So you can start with that as your cash base rent, subtract some level of property expenses to get to an NOI, and our guidance for the property expenses for the year is around $9 million I believe.

And so that'll -- that's another way to go at that.

Okay.

And Kevin, just to stick with you.

Did I get it right that you didn't issue any shares under the ATM?

That is correct.

Nothing in the first quarter on the ATM.

But the shares issue, was that through the DRIP program?

Correct.

That's dividend reinvestment.

Okay.

Is there a cost difference between the two?

I mean, you're still -- they're still -- share count goes up, you're raising equity.

Am I splitting hairs, I guess, on how you raise the equity?

No.

There's no real difference in my mind.

There's the -- the cost is effectively the same.

(Operator Instructions) We'll move next to John Massocca of Ladenburg.

Just one for me.

I know Camping World has been, let's say, active in kind of refining its Gander store portfolio.

Are any of the properties they've -- are any of the retail locations they've closed over the last couple of quarters properties you guys own?

And how do you -- is there anything essentially kind of a short lease term that you have leased to them?

John, to answer your last question first, when we did the Gander Outdoor leases with Camping World, we did 20-year leases with them on our standard form.

So we -- our Camping World and our Gander Outdoor leases are all long-term.

Nothing -- nothing short term, especially nothing short term related to Gander Outdoor.

We did -- we've had a long-standing relationships with Camping World where we've done lots of different types of transactions with them.

And we have sold them back 1 or 2 of our Gander Outdoor properties and exchanged those for traditional Camping World properties in some instances.

So -- but otherwise, our Gander Outdoor properties are open and operating.

And gentlemen, I have no other questions at this time.

All right, Jess, thank you.

We thank you all for joining this -- us this morning.

And we look forward to seeing you at the upcoming ICSE or NAREIT conferences.

Have a good day.

This will conclude today's teleconference.

We thank you for your participation.

You may disconnect your lines at this time and have a great day.