NNN REIT Inc (NNN) 2021 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your National Retail Properties First Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, today's call is being recorded. (Operator Instructions) At this time, it is my pleasure to turn the floor over to your host, Jay Whitehurst. Sir, the floor is yours.

Thank you, Melinda. Good morning, and welcome to the National Retail Properties First Quarter 2021 Earnings Call. Joining me on this call is our Chief Financial Officer, Kevin Habicht; and our Chief Operating Officer, Steve Horn.

As this morning's press release reflects, 2021 is off to a great start for National Retail Properties. Beyond our impressive financial results, during the first quarter, we were pleased and honored to be named as one of the few REITs in the 2021 Bloomberg Gender Equality Index. And I'd like to take this opportunity to thank everyone in our office who put in the time and effort to achieve that important recognition.

Given our strong start to the year, we're pleased to announce an increase in our guidance for 2021 core FFO by approximately 6% from a range of $2.55 to $2.62 per share to a range of $2.70 to $2.75 per share. Kevin will have more details on this increase in his remarks.

Turning to the highlights of our first quarter financial results. Our portfolio of 3,161 freestanding single-tenant retail properties continued to perform exceedingly well. Occupancy was 98.3% at the end of the quarter, which remains above our long-term average of 98%. And while our occupancy rate ticked down 20 basis points from December 31, we're seeing impressive activity in our leasing department, including interest by a number of strong national tenants in some of our vacancies.

We also announced collection of 97% of rents due for the first quarter as well as collection of 98% of rents due for the month of April. Our impressive collection results continue to compare very favorably to other retail real estate companies, including those with a significantly higher percentage of investment-grade tenants. The majority of the remaining uncollected rent in the first quarter was simply deferred rent that we expect to collect when the tenant's repayment obligation kicks in later this year. Notably, we only forgave 0.1% of our first quarter rents.

Recently, our 2 largest bankruptcies were resolved in favorable fashion. Chuck E. Cheese's affirmed all 53 of our leases in exchange for a 25% temporary base rent reduction that will expire at the end of this year. And Ruby Tuesday's affirmed 26 of our 34 leases, accounting for over 80% of our annual rent from Ruby Tuesday's, again in exchange for a comparable temporary base rent reduction.

These impressive post-pandemic occupancy, leasing and rent collection outcomes have once again validated our consistent long-term strategy of acquiring well-located parcels, lease to strong regional and national operators at reasonable rents, while maintaining a strong and flexible balance sheet. Although we continue to be prudent in our underwriting, we acquired 29 new properties in the quarter for just under $106 million at an initial cash cap rate of 6.4% and with an average lease duration of 17.5 years. Almost all of our acquisitions were from relationship tenants with which we do repeat programmatic business.

In an unsettled post-pandemic environment where cap rates remain at all-time lows, we will continue to be very thoughtful in our underwriting and primarily pursue sale-leaseback transactions with our relationship tenants. We also reported that during the first quarter, we sold 11 properties, raising $17.6 million of proceeds to be reinvested into new acquisitions.

And our balance sheet remains rock solid. During the quarter, we issued $450 million of unsecured 30-year interest-only bonds at a rate of 3.5%. Kudos to Kevin and his team for once again raising well-priced capital when it's available. A portion of those bond proceeds were used to redeem our 2023 debt maturities. So we ended the first quarter with $311 million of cash in the bank, a 0 balance on our $900 million line of credit, no material debt maturities until 2024 and an average debt duration of over 13 years. Thus, we're well positioned to fund all of our 2021 acquisition guidance with the available capital on hand.

And with that, let me turn the call over to Kevin for more details on our quarterly numbers and updated guidance.

Thank you, Jay. And as usual, I'll note 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 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 $0.69 per share for the first quarter of 2021. That's up $0.06 from the preceding fourth quarter, $0.63, and down $0.01 from the prior year's $0.70 per share. Results for the first quarter included 2 nonrecurring type items totaling $5 million.

First, we collected $2.2 million of receivables from cash-basis tenants that relate to prior quarters. And second, we received $2.8 million of lease termination fee income, which is more than typical. For context, full year 2020 was $2 million of lease termination fee income. So these 2 items, totaling approximately $5 million, added just under $0.03 per share to our results.

Today, we also reported that AFFO per share was $0.76 per share for the first quarter, which is $0.07 per share higher than the preceding fourth quarter, $0.69. We did footnote this amount included $9.4 million of deferred rent repayment and our accrued rental income adjustment in the first quarter AFFO number.

Rent collections continue to drift higher. As Jay mentioned, we reported today rent collections of approximately 97% for the first quarter, 98% for April rent collection. Most notable collections from our cash-basis tenants, which represent approximately $50 million or 7% of our annual base rent, improved to approximately 80% for the first quarter. Previously, we projected these cash-basis tenants would pay at their historical payment rate of about 50% of rent. So improving to 80% added about $4 million of revenues in the first quarter versus our prior guidance.

As Jay mentioned today, we increased our 2021 core FFO per share guidance from a range of $2.55 to $2.62 per share to a range of $2.70 to $2.75 per share. This incorporates the better-than-expected rent collections and the results from Q1. Some of the assumptions supporting this guidance are noted on Page 7 of today's press release, and they're largely unchanged from last quarter's guidance.

The driver for the increase in full year guidance is the $5 million of first quarter nonrecurring items I previously mentioned and the assumed higher rent collection rates more in line with current collection rates. So while we previously assumed 50% rent collections from the $50 million of cash-basis tenant annual base rent, we are now assuming 80% rent collection. So that incremental 30% amounts to $15 million for the full year.

And for the remainder of our tenants, we previously assumed 2% potential rent loss, and we now assume 1% rent -- of potential rent loss, which equates to approximately $6 million of improvement for the year. So compared to prior guidance, current guidance incorporates approximately a total of $21 million in improved rent collection plus $5 million of onetime items in Q1 or a total of $26 million, and that all equates to about $0.15 per share.

As Jay noted, we ended the fourth quarter with $311 million of cash on hand, nothing outstanding on our $900 million bank line. We did execute a $450 million 30-year debt offering with a 3.5% coupon on March 1, and used a large portion of those proceeds to pay off our $350 million of 3.3% notes due in 2023.

While time will tell, given where we are in the 40-year declining interest rate cycle, it felt like it was a good time to continue to push out debt maturities at these rates. Our weighted average debt maturity is now 13.3 years with a 3.7% weighted average fixed income interest rate. Our next debt maturity is $350 million with a 3.9% coupon in mid-2024. So on very good liquidity and leverage position, I have no need to raise any additional capital to meet our 2021 acquisition guidance.

Couple stats. Net debt to gross book assets was 34.7% at quarter end. Net debt to EBITDA was 5.0x at March 31. Interest coverage was 4.6x and fixed charge coverage 4.1x for the first quarter of 2021. Only 5 of our 3,161 properties are encumbered by mortgages totaling about $11 million.

So 2021 is off to a good start as the economy and retailers seem to be catching wind in their sales from the several trillion-dollar stimulus injected by the government, which feels like it will continue into 2022. Our focus remains on the long term as we continue to endeavor to give NNN the best opportunity to succeed in the coming years.

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

(Operator Instructions) And it looks like our first question comes from [Ronald Camden] with Morgan Stanley.

Congrats on the quarter. Just looking at the acquisitions, just wondering if you could provide just a little bit more color in terms of what you're seeing in terms of the pipeline and maybe what -- I know you guys remain disciplined, but how -- what are you seeing in terms of pricing as well?

Sure, [Ron]. This is Jay. I'll start with a little bit of high level and then turn it over to Steve Horn to talk a little bit more about what he sees out there.

But just as a reminder, our primary focus is on doing repeat programmatic business with our portfolio of relationship tenants that are strong, our regional and national operators, and that will continue to be our primary focus. When we do business with those folks, some of the benefits that we get out of those relationships are that the tenants sell us better real estate. The tenants are more likely to call out the weaker properties out of a sale leaseback and not commit to signing a long-term lease on those properties.

And so we get better, higher-quality real estate. We're able to negotiate our own lease documents. We get slightly better lease economics. And one thing that's really an important factor to us is we get a longer lease duration. As I noted, our average duration for the first quarter was 17.5 years, and I believe our average duration for last year was a little north of 18 years. So that's very important to us to create that long-term rental income stream. And the pipeline does look good out there.

So Steve, let me turn it over to you to talk a little bit about the pipeline and pricing.

Yes. This is Steve. If you kind of look out -- or we look back, I should say, in the fourth quarter, the pipeline today feels a lot more robust. I mean, there's some portfolios out there that weren't here in the fourth quarter. So we're feeling good about that, that the sale-leaseback market seems to be opening up some.

As far as pricing, I think just kind of based on our cash cap rate of approximately 6.4, cap rates are still near a historic low and no sign of increasing at this point. But it's more in the investment-grade world and the deemed essential assets. They're still sitting extremely low compared to historical levels.

Great. And one more, if I may. Just want to get your updated thoughts just on tenant health. When you think about the guidance, the confidence to sort of raise the collections to 80% for the cash tenants. What are you seeing in the market? What are you hearing from sort of your relationships that gives you the sort of confidence that we've turned the corner?

Yes. No, it's good. We have had great conversations with our relationship tenants kind of across the board for the lines of trade that make up our portfolio. And we reported this earlier. They -- our tenants weathered the pandemic -- the economic effects of the pandemic very well, and were starting to rebound into the fourth quarter, and that rebound is continuing. And what we're hearing from our relationship tenants is that they are more and more getting back into the mode of playing offense. And I think that's reflected in Steve's comments about a growing number of sale-leaseback transactions that we're seeing out there in the market.

Kevin, is there anything else on that in terms of our guidance?

Yes, yes. Just, I guess, connected to that. Our guidance is following our actual recent historical rent collection from our tenants. So when we increase from 50% to 80% to the cash-basis bucket that's because that's what happened in the first quarter when we were at 50% rent collection. That was consistent with fourth quarter 2020 collection rate. So we're tracking with then. We don't have any real sense on why that should change materially for the better or the worse at this point, but we'll keep you posted. But it does feel like, like I said, the stimulus that's been pumped into the economy is finding its way to consumers and retailers.

Next, we go to the line of [Harsh Hamani] with Green Street.

Can you talk about the industries or assets that you disposed this quarter and maybe the cap rate on that?

Yes. [Harsh], I think I heard -- understood the question. Talk about our acquisitions and the cap rates?

Dispositions.

Dispositions. That was a -- it was a very small number. So it's not much of a sample size there, but it was a few -- it's primarily culling properties at the kind of lower end of the spectrum. Wasn't it, Steve?

It's more of a defensive quarter for us as far as, if it was selling a few vacant assets but assets that we kind of felt in the long term didn't fit the portfolio. We could result in the issues going down the road.

Yes, the way we broke out just between vacant and occupied, of the 17.6 million we sold, 11.7 million was occupied, 5.9 million vacant.

Okay. And then were there any tenants that you moved out of the cash-basis bucket just because of good collections?

Yes, fair question. Yes, we did not move anybody out of the cash-basis bucket, nor did we add anybody, good news there. But yes, we haven't changed that.

Our thought process on that is we're not going to be too knee-jerky about one good quarter, if you will. And so we'll need kind of a little more test of time before we're going to be more willing to pursue or think about moving somebody out of the cash-basis bucket.

Next, we go to the line of Wes Golladay with Baird.

Just a quick question, Kevin, for you on the end-of-period rent, the $684.3 million. Does that include the adjusted rent for Ruby Tuesday's and Chuck E. Cheese? And maybe a follow-up to that would be, were you able to maintain your master lease structure with Chuck E. Cheese?

Yes. The ABR does reflect -- if we made a permanent rent change, meaning we didn't just defer it, but we made it permanent, it would get included in our annual base rent numbers. So Chuck E. Cheese got a step down. Ruby Tuesday did, as you noted. And what was the second part of your question, sorry?

Did you maintain your master lease structure with Chuck E. Cheese? And I'm not sure if you had with Ruby Tuesday. Doesn't sound like you did.

Yes. We did maintain it, yes.

Got you. And then can you talk about what the demand is for the noncore assets? And if there is a firm bid, would you look to sell more this year, be it put at the high end of your guidance?

No. We -- Wes, as it relates to what you call noncore assets, I think we're seeing good demand for our vacant properties, both for -- from buyers and to re-lease those properties. The point I made earlier on in the pandemic was that our properties were in high demand before all of this, and I wasn't going to be surprised if they were -- if they continued to be in high demand. These are generally well-located properties at reasonable rents. And so for some reason, we may get them back, but they're the kind of properties where tenants typically want to be, and you can find somebody else who wants to be there. So it's too early to report a great deal of results, but our leasing team is doing a very good job of getting out there and making these properties available, and they have a lot of properties where there's discussions going on, either for a sale or a re-lease.

If you were talking about noncore properties in the sense of leased properties that were hit by the pandemic and were in lines of trade that are currently viewed as still being at risk, I'd say there's not a great bid not -- Steve, would you say there's not a great deal of bids yet for those kind of properties. I mean, not to beat up on the movie theater industry, but there's not many buyers of movie theaters out there.

In the fitness arena and the movie theaters, the market isn't very robust. There's still a big gap between the bid and the ask. And currently, where people are willing to buy those assets, and the net is sell at those numbers.

Got you. Thanks for the granular details there. Maybe one last one on the cap rate. Typically, it's been below your normal range in the last 2 quarters. And I think that's probably due to mix. I just wanted to confirm that. And if so, do you get higher escalators with these lower cap rates?

Wes, I would say that it's probably a little bit more driven by -- some of it may be mix, but it's also just being driven by cap rates continue to drift downward slowly. We do business with strong operators with the kinds of properties that are in high demand. And even though we have a relationship, our tenants are smart business folks, and they know what the proper cap rate is that their properties command. So we will win some business, win some ties, do a little better than the one-off market with our relationship tenants.

But to the extent cap rates for their types of businesses are moderating down, we have to moderate down with them. So I think that's more of what you're seeing than anything else. And the bumps are staying about the same. Market bumps for our -- the size of tenants that we do business with are in that 1.5% to 2% per year range. And that's remained consistent.

Next, we go to the line of John Massocca with Ladenburg Thalmann.

So if we look at the rent deferral schedule in the earnings release, I guess what really drove the new deferrals that are going to occur in kind of Q2 through Q4 of this year? And are they also what's driving the repayments that are getting scheduled kind of in '23, '24 and '25?

Yes. We had a modest amount of new deferrals as we kind of mop up on agreements, if you will, with tenants who we hadn't come to final terms with. And so yes, some of those are getting pushed out a little further than the original batch, if you will, bigger batch of deferrals. Yes. But it's not a huge number one way or the other.

John -- let me add in, John, that we've really been very pleasantly surprised with how few conversations we've had with our tenants about a second round of deferrals. We really have had very few tenants come back and need to extend or restructure the original deferral agreement that we made with them. And that's all part of the pleasant surprise of how well things have bounced back.

Okay. Have those been -- the small amount that have had additional deferrals or they're in this new kind of deferrals for 2021, are those tied to a specific industry? Or has it been -- it's not a huge number, but has it been kind of broad?

Yes. I'd say they come from our -- the lines of trade that were troubled right from the start.

Lines of trade,

Casual dining and movie theaters probably make up most of that, wouldn't you say, Steve?

Yeah, it's primarily movie theaters make up the first quarter, and that was kind of what we stated at the beginning because we hadn't reached agreement, discussions were going on in 2020, and we finally got it documented in 2021.

Okay. And then one other kind of small movement was health care -- sorry, health and fitness collection ticked down a little bit. I mean, what's driving that just given the positive kind of tailwinds, some reopening and economic stimulus, et cetera?

Yes. I don't think anything has changed materially. I don't think that you should read anything into that, at least from our perspective. We don't see that really a notable trend, if you will.

Yes. John, this is Jay. We are not -- we're not going to get into talking about specific tenants, but I will say, in that group, we deal with large operators that we think ultimately will be in a position to have gotten through this and gotten out the other side and be in a position to pay their rent. And so along the way, there may be some, as Kevin said, just some ticks up or down, but we feel pretty -- we feel good about the tenants that we've got in that line of trade.

Our next question or comment comes from the line of Katy McConnell at Citi.

This is Parker Decraene on for Katy. I guess not to beat up too much around the theater sort of aspect, but I was just wondering if you could touch on how conversations with some of those tenants over the past quarter have sort of changed? I think collections improved pretty significantly on a sequential basis. And also just sort of what actual collections for April sort of came in as, if you can provide that?

Sure. Well, yes, again, we're not going to talk about specific tenants. But as Steve mentioned, some of our theater tenants, we were in longer discussions for the deferral agreement. So whereas in 2020, that -- some of that theater rent would have been in the unresolved or outstanding bucket. Now it's in the deferred bucket. And as you can see, at the level of collections that we're getting, everybody is kind of on track now. So it feels very solid at the moment. And I think -- and you might have asked about April -- I don't know if you meant April collections in that line of trade. I think we're not in a position to do that, but we reported generally for April, we're at 98% of rent due for the month of April.

Got it. Okay. Yes, I was looking for the theater number, but that's all right. All right.

And then we take our last question from Linda Tsai at Jefferies.

Can you discuss your strong rent collection of 97% in 1Q and 98% in April? And in your comment that it exceeds some other companies with higher IG exposure, what accounts for this discrepancy if you're making an educated guess?

Yes, I think you might have to ask the companies that have the higher investment grade some part of that question, Linda. But I would say that it validates -- from our perspective, this validates our strategy of dealing with -- dealing directly with large operators and doing direct sale leasebacks with those operators so that you get the benefits I talked about in one of the earlier questions, where they only sell and lease back properties that they're comfortable signing a long-term obligation on. And we are very focused on keeping rent as low as possible to create a margin of safety for both our tenants and for ourselves if we get the properties back. And so if you deal with strong operators, and they call out the weaker properties and you focus on keeping the rent low, it should bounce back faster when things go well. So we don't -- we sweat tenant credit, and we study it, and we think about it, but we really rely on good real estate locations leased to large operators as our ultimate security, and we feel like that strategy has been validated through this process to be at least equal to and maybe, on a temporary basis, somewhat better than focusing more on investment grade where you pay more for the property, have higher rent and have less growth in the lease.

And then I guess given the strength in the retail sector you're seeing post-pandemic, is it fair to say that the occupancy decline will no longer be as bad as the great financial crisis?

You want to stick to that, if you knock on wood and cross your fingers...

Yes. No question. But yes, that's for sure. I think what originally felt like would be worse than the '08/'09, the wildcard, obviously, in this was several trillion dollars of stimulus that kind of came from left field. So I think you're seeing every -- really, a lot of retail real estate companies doing relatively well and better than expected at kind of across the board. So it's -- like I say, several trillion dollars seemingly will take care of some problems for a period of time anyway.

And that concludes our question-and-answer session. We return to Jay Whitehurst for closing remarks.

Thank you, Melinda. Before I close, I would like to offer my congratulations to Mary Fedewa for her well-deserved promotion to CEO of STORE Capital. In following Chris Volk, she's got big shoes to fill, but STORE is in great hands with Mary at the helm.

And thank all of you all for joining us this morning. We look forward to talking with you and maybe even seeing you in person in the weeks ahead. Thank you.

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