NNN REIT Inc (NNN) 2020 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your National Retail Properties Second Quarter 2020 Operating Results Conference Call.

(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.

Good morning and welcome to the National Retail Properties Second Quarter 2020 Earnings Call.

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

First, I want to express my heartfelt appreciation to all the associates at National Retail Properties for their hard work, dedication, ingenuity, flexibility and respect for each other as we address and work through the myriad impacts of the COVID-19 pandemic on our lives and the business this past quarter.

And to all of those first responders and health care workers who are out there keeping us safe and healthy, I offer our deepest thanks as well.

Second quarter results for National Retail Properties reflect the basic strength and resiliency of our long-term strategy and business model.

We ended the quarter in a strong liquidity position with $225 million of cash in the bank, plus $900 million of available capacity on our line of credit.

Our fortress-like balance sheet and long-term perspective were driving factors behind the recent announcement of an increase in our common share dividend.

Once that dividend is paid later this month, 2020 will become our 31st year of increased dividends, a feat matched by only 2 other REITs and less than 90 public companies in the United States.

We collected approximately 69% of our rents due in the second quarter and agreed to defer approximately 21% of our second quarter rents.

As the pandemic spread and businesses shut down, National Retail Properties adopted a very collaborative approach with those tenants that were materially impacted while remaining measured, consistent and fair.

Our typical rent deferral agreement had a term of less than 3 months, with repayment of the deferred rent typically commencing in the fourth quarter and continuing through the end of 2021.

To us, this is the way a long-term partnership behaves.

For those tenants that were unwilling to pay rent or agree to a deferral arrangement, we're pursuing our legal remedies for payment and enforcement of the lease.

It is noteworthy that in all of our negotiations and agreements with tenants, we have forgiven only 0.1% of our quarterly base rent.

Today's press release also includes our disclosure that July rent collections were approximately 84%.

Consistent with our long-term practice of reporting results only quarterly, we do not anticipate reporting monthly rent collections for August or September prior to our third quarter earnings release.

Our well-located retail properties were in high demand prior to the COVID-19 pandemic, as evidenced by our consistently high occupancy rate of 98%, plus or minus 1%, and our consistently high tenant lease renewal rate of 80% to 85% at approximately 100% of prior rent.

Both of those impressive metrics continued to hold true through the first half of 2020, and we believe our properties will remain in high demand in the postpandemic world.

Our pause in acquisitions was evident as we acquired no new properties in the second quarter, investing only $7 million to complete some projects that were already underway.

Year-to-date, we have invested $74 million at a 6.9% initial cash cap rate.

We're continuing to take a thoughtful approach to new capital commitments and focusing on maintaining our strong liquidity position.

Consistent with that philosophy, we have continued to raise capital in 2020, issuing $53 million of equity via our ATM and raising $40 million through property dispositions through the first half of the year.

We ended the second quarter with more cash on the balance sheet than at the end of Q1, all without increasing our leverage.

This is an enviable position from which to start the second half of 2020.

In closing, I want to reiterate the long-term approach to all aspects of our business.

We believe that well-located real estate acquired at reasonable prices and leased to strong regional and national tenants at reasonable rents, all supported by a low-leveraged balance sheet and a long-tenured staff of industry experts, remains the right formula for creating shareholder value on a multiyear basis.

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

Thank you, Jay.

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

The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to these forward-looking statements to reflect changes after the statements were made.

Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in this morning's press release.

With that, headlines from this morning's press release report quarterly FFO results of $0.65 per share for the second quarter of 2020, and AFFO per share was reported at $0.49 per share, which reflects $30.2 million or $0.17 per share of noncash straight-line rents arising from the rent deferral agreements we discussed last quarter in connection with the economic shutdown.

Occupancy was 98.7% at quarter end.

That's down 10 basis points from the prior quarter.

G&A expense was -- for the second quarter was 5.7% of revenues, and that's down from 5.8% of revenues in the first quarter.

The primary items of note in our second quarter results are rent collections and receivables.

First, rent collections improved monthly throughout the second quarter and into July.

Today, we reported rent collections of approximately 69% for the second quarter and 84% for the month of July.

In the midst of the storm, it's never totally clear if we're doing too much or too little with our rent deferrals, but we're hoping we've struck a reasonable balance.

And with the benefit of 3 months of hindsight, we are relatively pleased with the progress being made as we work with a number of our tenants to find a path forward to pay the rent they owe us.

However, uncertainty continues, and it's our opinion it will be 2021 before we all get a better read on how the economy is going to perform.

So we remain cautious, looking to reserve options, but we see some rays of light on the collections front.

Now over to receivables.

First, accrued rental income receivables, sometimes called straight-line rent, we recognized $35.8 million of accrued rent related to the tenant rent deferral agreements, but reserved $5.6 million, producing a net increase in accrued rent of $30.2 million for the quarter in connection with those rent deferral lease amendments.

This accrued rental income is included in GAAP earnings.

It's included in FFO and core FFO results.

But consistent with our past practice, we excluded accrued straight-line rent when calculating AFFO.

We did footnote what AFFO would have been if we had not done this, as I referenced at the beginning of my remarks.

These rent deferral agreements were entered into with certain tenants, which represented 21% of our -- the rent due in the second quarter.

On average, the rent deferrals covered 2.4 months of rent, 84% of which related to second quarter rent and 16% relates to third quarter end.

We expect to have 94% of these rent deferrals paid back to us by the end of 2021.

Secondly, the rent receivables increased by $17 million during the second quarter.

We established a reserve of $2.6 million resulting in a net rent receivable increase of $14.4 million for the quarter.

These receivables are concentrated in our 4 retail lines of trades where our collections have generally been hit the hardest, which we noted on last quarter's call, namely theaters, full-service restaurants, health and fitness and family entertainment.

We expect these receivables -- our receivables will be paid, resolved with a rental deferral agreement or end up in litigation.

We ended the second quarter with $225 million of cash on hand, no amounts outstanding on our bank credit facility.

We did not draw down our bank line as many companies did.

We have not made material new-property investments, and our next debt maturity is in 2023, so we're in a very good liquidity position.

And as our stock rallied 50% off its low -- lows, we opted to issue [1.1] (inaudible) of common equity in the second quarter, near $37 per share on average via our ATM.

Not a large amount in the scheme of things, and you shouldn't read too much into it, but just adding a bit more cushion and help preserving options.

Our weighted average debt maturity is now 10.7 years with a weighted average interest rate of 3.7%.

Financial covenant compliance is in good shape, as outlined on Page 9 in the press release.

So we're in a very good liquidity position with very few capital obligations during the next 3 years.

Leverage metrics remain very strong.

Net debt to gross book assets was 35.1%.

Net debt-to-EBITDA was 4.8x at June 30.

Interest coverage was 4.6x, and fixed charge coverage was 4.1x for the second quarter.

Only 5 of our 3,117 properties are encumbered by mortgages, totaling only $12 million.

Consistent with last quarter, we have not provided 2020 earnings guidance in light of the uncertainty in the economy, generally, and in retail, in particular.

Until we get a better read on the economic recovery and what the new normal might look like, we're not able to reasonably predict precisely how things will play out.

As we work through what is undoubtedly a challenging 2020 for the global economy, we will continue to endeavor to give NNN the best opportunity to succeed in the coming years.

And Karen, with that, we will open it up for any questions.

(Operator Instructions) We'll take our first question from Brian Hawthorne with RBC Capital Markets.

I guess just kind of wanted to talk about the leasing environment.

How deep is the demand you've seen for your leases?

And have you seen any change in interest for renewals throughout the pandemic?

Brian, the -- I would say that leasing demand right now is less than usual for vacant properties.

I mean I think there's just a lot of businesses that are waiting to see what they want to do about opening new stores.

But as I reported in my comments this morning, our lease renewal metrics have remained very consistent with our long-term average of around 80% to 85% of the tenants renewing their lease at around 100% of prior rent, and that is without the landlord providing any lease incentive or additional dollars to incentivize the tenant for that renewal.

So those renewals are on an as-is basis.

So, so far, it's remained very consistent with our long-term average.

Great.

And then, I guess, what would cause you to look at potentially extending any deferral agreements?

And what could that look like if you were to start doing those extensions?

Yes.

As we've talked about in the prior call and earlier in this call, we've taken a very collaborative approach with our tenants as an initial proposition for a first deferral.

So to the extent that tenant's business was significantly disrupted, we were quick to be -- willing to discuss short-term deferral-only, not forgiveness, but deferral-only to be repaid starting later this year, typically, and continuing through the latter part of next year, typically.

And to the extent tenants -- that's not enough for some tenants, then we will engage in what we sometimes refer to with folks as a Phase 2 discussion, which would be a more far-ranging discussion about ways to create value for National Retail Properties if we have to do further deferrals or other provisions that you might have to do with the tenant to make things work out.

And we have a lot of tools in that toolkit.

We can talk about extending term.

We can start talk about changing lease, rent bumps during the term of the lease.

We can talk about new transactions.

We can talk about substitution of properties that are currently leased for ones that the tenant might want to swap out.

So there's a lot of tools in that toolkit, but it really, so far with us, has not come into play in any great measure at all.

We've had good success with these first initial deferrals that were, as Kevin said, almost completely structured to deal with second quarter rent.

And then you've seen in July that theater rents started to pick up notably.

We'll take our next question from Spenser Allaway with Green Street Advisors.

Can you just add a little bit more color on which specific tenant industries are driving the increased rent collections in July versus 2Q?

Spenser, that's a good question, but I think it's kind of across the board.

The lines of trade that have been -- that's struggling the most during the last few months have been the theaters and health and fitness, and those lines of trade kind of continue to struggle as those -- as it's difficult to get those businesses opened and reopened.

So I'd say that probably has not contributed much to the increase.

But otherwise, I think, across the board, the businesses got better.

Okay.

And then you guys raised equity in the quarter, and you obviously have ample liquidity and access to the line.

So what would you need to occur in order for you guys to get more aggressive on the external-growth front in the back half of the year?

Spenser, we just want to see how things settle out over the long term.

As we've said already in this call a few times, we take a long-term view of the business, and we just want to see how this continues to play out.

Each month since April, things have gotten a little better and felt a little better but you -- by no means, no one is saying that this is behind us yet.

So we just want to get a better feel for how the next few months are going to play out as that relates to pricing as well as cost of capital -- pricing for properties as well as cost of capital.

We'll take our next question from Rob Stevenson with Janney.

First question revolving around the -- any changes to the 1031 program with -- given the election.

Are you guys anticipating on queuing up some additional dispositions into year-end to possibly take advantage of that?

Is that not in the cards or in the strategy at this point?

How are you guys thinking about that and the opportunistic ability to be able to sell assets at potentially significantly lower cap rates than January or February?

Yes.

Rob, dispositions has been a core competency for us for a long time, and we have a good, steady flow of disposition business.

When we've gone back and looked at it, only about, call it, 30%, plus or minus, of our dispositions have been to 1031 exchange buyers, and so we don't anticipate that affecting us a great deal in terms of those dispositions.

We will see if we ramp that up come the end of the year.

A lot of our 1031 dispositions are kind of reverse inquiries where we're being contacted by buyers who are trying to get through.

So you're right, there may be a push to do that at the end of the year that will be kind of demand-driven, but we'll see.

It's not a big component of our overall disposition platform.

Okay.

And then when you look at your more challenged operators out there, whether or not it be Dave & Buster's, Main Event, Chuck-E-Cheese's, the theaters or the gyms, is there any significant lease expirations coming up in those categories in 2021, where the operator has been challenged and you're likely to get the assets back at that point rather than being a renewal?

The -- Rob, the short answer to that is no.

There's nothing, I think, in the upcoming lease expirations that's not disproportionate to those lines of trade.

Yes.

To be honest, it's really outside of those lines of trade.

So near-term expirations, we should be fine.

We'll take our next question from John Massocca with Ladenburg Thalmann.

It appears that Mr. Massocca is no longer there.

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

Can you hear me?

We can hear you now.

Please go ahead

Hello, can you hear me?

Yes.

We can.

Go ahead, Vikram.

Okay.

I just wanted to clarify the impairment you took this quarter.

Could you just give us a bit more color on what that was?

In case -- I mean, if I missed that, I apologize.

And then just second on the asset sales, can you clarify kind of how you're thinking about vacant properties?

Sure.

Yes.

On the impairment, we had $21.8 million during the quarter.

Probably 2/3 of that roughly related to one small family-entertainment operator retailer that were looking to sell a number of properties.

And so that's what the bulk of that related to.

As it relates to dispositions, so far, it's been a kind of our usual balance between occupied and vacant.

I think 3 of our 8 this past quarter -- 3 of our 8 properties sold in the second quarter were vacant, which, again, in terms of mix, it's kind of the normal.

I think going forward, we'll -- again, we'll see -- sorry to keep kind of saying that.

You will see if that picks up or not.

It seems like it would, but we'll just have to see.

Yes.

Vikram, just at a kind of a strategic business-model level, job one is -- continues to be to release our vacant properties.

And so that's what you will see us attempt to do, first and foremost, as always.

But we may be a little bit quicker to dispose of vacant properties and monetize those if we have not had success getting them re-leased within 9 months or a year.

Historically, we sometimes held properties longer than that, trying to get them re-leased, and we may be a little bit quicker to monetize that and turn that money into new acquisitions.

Okay.

And then just I wanted your updated thoughts on how to think about the occupancy trajectory from here on over the next, call it, 6 to 12 months.

I know during [ARE], you'd offer a certain kind of hypothetical bear-case view on occupancy.

And I'm just wondering, now that we're a couple of more months under our belt, like how were you thinking about the effects of a recession on occupancy versus, say, the GFC.

Yes.

It's still hard -- very hard to answer that.

I will say, I think we're probably slightly more optimistic than we were.

I mean like I said, with the benefit of 3 months of hindsight, it feels like things are moving in the right direction.

Collections obviously have picked up.

We actually had a couple of rent deferral agreements that got sent back to us and said, "We've got the money.

We're going to pay you rent.

We don't need the deferral agreement." At the margin, slightly better.

Having said that, we -- I think one of the ways we've framed this is that 2008 and '09, we lost 300, 350 basis points of occupancy, and this feels worse than that.

So we obviously think it will be more than that.

But we think whatever that number is, which we don't know, obviously, it appears that we'll be just fine in terms of balance sheet, dividend, all the critical kind of metrics, and it really just becomes a matter of re-leasing properties in due course and getting back -- turning back on the acquisition engine when we think it's appropriate.

Okay.

And then just last one for me, if I can clarify.

You had alluded to the fact that if you need to offer more deferrals, you might look at pulling certain levers in terms of bumps, et cetera.

But just as you think -- as we think about the next 6 months, is this your base case?

Like are you planning for a certain percentage of deferrals to discontinue through the balance of the year?

We're -- Vikram, I think I understand the question.

We're optimistic that the majority of our deferrals, the initial deferrals, will be paid back on schedule, and the tenants will otherwise get back on the regular rent-payment schedule through this third quarter and into the end of the year.

It would be unrealistic to assume that we won't have some other problems and need to do some additional deferrals or lease restructurings with some tenants.

But to date -- to echo Kevin's modest sense of optimism, to date, we've had very few discussions about those kind of things with tenants.

We'll return to John Massocca with Ladenburg Thalmann.

Second time with John.

So I just wanted to dive a little bit on Chuck E. Cheese's.

Kind of given what's going on there, I guess, maybe what are your views -- kind of early views on recovery potential there?

Just any kind of color would be helpful.

We -- they're in bankruptcy.

We are -- Kevin, we're on the Creditors Committee for that, right?

We are.

So -- but they've projected some other leases already, none of which being ours, and we will just see how that plays out.

We -- that's an example to us of acquiring good real estate locations at reasonable prices and reasonable rents.

And so far, those properties have stayed in the business, in the bankruptcy.

And then just in terms of maybe recovery, I mean, should we expect something in line with historical norms?

Or is -- given the operating environment we're in, maybe something discounted to that?

The historical norm for us is, on vacant properties, we collect about $0.70 on the dollar.

About 70% of our prior rent without -- and that's on an as-is basis, so without putting additional money into those properties.

And I think right now, that's probably kind of the bright line we're looking at, but it's too early for us to have a feel for that.

It may be better or it may be worse.

Okay.

And then looking at kind of the 2Q rent collection.

One industry that kind of stood out in terms of collection and not being maybe on the traditional industries that have been impacted particularly hard was with the automotive services.

Can you just provide any color on what kind of caused that low level of rent collection in that kind of industry?

And are they maybe one of the tenant industries that have rebounded in July?

Yes.

They -- without getting into talking about specific tenants, that sector also includes car washes.

And the -- and so there -- those businesses were some that we were happy to talk to about deferral agreements when the pandemic first struck.

And your assumption is right, John.

The -- in many cases, those businesses have rebounded.

And so that line of trade is notable in the exhibit to the press release, but it is not at all a line of trade that we're losing sleep over in terms of getting back to full rent and getting those deferrals paid.

We have a lot of strong tenants in that line of trade.

Okay.

And then one quick detailed question just to make sure I was hearing it right.

The amount potentially that you reserved for being below a collectibility threshold, that's in that $5.6 million?

Correct.

Sorry.

Yes, that's a general reserve for the accrued rent when they -- all the accrued rent is -- effectively all, is related to the rent deferral lease amendments that we entered into.

Yes.

We'll take our next question from Christy McElroy with Citi.

Just a quick follow-up on that reserve question.

So you also mentioned a $2.6 million number.

Was that a portion of the $5.6 million?

And -- just to clarify that.

And did you write-off any straight-line rent as well in the quarter?

Yes.

So I'll answer the first one over the last one.

No, we didn't write any off.

But 2 different buckets of receivables.

One, the accrued rent receivable, which we've always had over the years, but we added to significantly in the second quarter as a result of the lease -- the rent deferral lease amendments.

And so that accrued rent receivable went up $35.8 million.

We reserved $5.6 million just for that accrued rent receivable.

There are other receivables, which is just typical quarter end rent receivables.

Somebody didn't pay rent and they didn't enter into a deferral agreement.

And so that receivable went up by $17 million.

We reserved $2.6 million for that receivable, 2 different buckets.

So yes, the total of $8.1 million or $8.2 million, I guess, of total reserves for receivables.

Okay.

Got it.

And then just on the accounting treatment of the deferred rent.

So it looks like it was treated as a lease modification instead of taking advantage of FASB's relief for treating it as not a modification given that it went through the straight-line rent line instead of accruing in the rental revenue line.

Can you just talk about the nature of the deferrals that either made it ineligible for the FASB relief or that you've decided to treat it that way as a modification?

No.

We decided to book it as accrued rent.

We did take advantage of that, that we did not reclassify these leases and so -- but the lease deferral amendments were all treated as increase in accrued rental income.

Increase in accrued, so you -- but you put it through the straight-line rent as opposed to accruing it in the...

(technical difficulty)

In terms of the Q2 and July collection, so the amount of deferrals in Q2 implies about 10% unresolved, which you talked about.

And then in July, can you provide the bucket -- out of the 16% remaining, can you provide the amount deferred and the amount unresolved?

And then I guess the second part of that question is maybe you can give a little bit more color on that unresolved bucket.

What portion of that are you pursuing those legal remedies?

And what portion of that are national tenants?

Yes.

So you should think of July very similar to the 2Q in terms of the unresolved being about that same 10% number, meaning 84% collected.

There's probably 6% that's being deferred in third quarter.

As I mentioned, some of our deferrals billed in the third quarter and then 10% is still unresolved.

It's a little still hard to handicap exactly how it's going to -- that 10% is going to get broken out between collected, which we've had a fair amount collected, execute a deferral agreement or litigate.

And so we're in the early stages of sorting that out.

Christy, I just -- maybe to add a little bit of color to that.

The -- when I look at it, about half of that 10% are in -- after discussions about deferrals, that may well happen, that I'm a little more optimistic about, and about half of it is in discussions with tenants that I'm less optimistic won't -- will result in a deferral agreement, more likely may end up in legal process.

But those are with -- a lot of the tenants that make up that 10% are large strong companies that have simply chosen either not to pay or not to agree to deferral terms that we think are fair and reasonable.

(Operator Instructions) We'll take our next question from Chris Lucas with Capital One.

I guess just -- Kevin, just on the expense side of the equation, do you guys have much insight into the direct payments that tenants have to make as it relates to expenses and how on top of those they are?

Yes.

I mean again, we obviously track that along with rent.

And so taxes -- real estate taxes being the most important.

So yes, we definitely stay on top of that and make sure the tenants are staying on top of that.

Our deferral agreements typically continue to require the tenant to pay those expenses, and we're deferring generally just the base rent amount.

So when you -- as it relates to just the sort of percentage rent collected or whatever metric you guys have provided, for those like that haven't paid rent and you don't have a deferral agreement, are you able to sort of stay on top of whether or not they paid any expenses or not?

Or is that an additional sort of unknown?

No.

We know.

We have a good sense of whether someone's paid the taxes or not.

The utilities and insurance, et cetera, are less critical, obviously, and less sizable.

And so the real estate taxes is the big one.

And yes, we continue to track that.

And that's factored into your collective results?

Correct.

Yes.

Chris.

Chris, all of the triple-net expenses are part of the overall discussions with tenants that have not -- with tenants that make up that 10% AR bucket, unresolved bucket.

Okay.

And then I guess as it relates to -- retained cash flow has been a big component of your capital investment opportunity set, I guess, if you want us to call it that way.

Anyway, do you have a number for us for second quarter in terms of retained cash flow?

Not really.

I mean I guess, for the quarter, I mean if you're looking at versus all-in dividends, et cetera?

Yes.

Yes.

I mean we're just about breakeven for the quarter.

That was at 69% rent collection.

I think we're -- if you look at our AFFO of $83 million, dividend was $88 million, if that gives you any kind of context.

Yes.

Like on a straight cash base, we're about breakeven.

For the quarter, yes.

And for the half, we're obviously still positive.

Yes.

We'll take our next question from Joshua Dennerlein with Bank of America.

Just maybe a follow-up to Christy's question.

Josh, I think we lost you.

I'm looking at your industry...

Josh you're cutting out.

Karen, let's go on to the next call and see if we can get Josh back.

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

Just wanted to clarify.

On the rent -- on the deferrals or even just the collections, just wondering if there's any change in your experience from tenants and states like Texas and Florida, where we've seen a ramp-up in cases?

No.

We haven't really seen any regional or statewide notable variances in all of that at this point, Vikram.

Remember that we deal with large tenants that have businesses everywhere.

So even to the extent there may be a hotspot that pops up and causes them to shut down some of the units in that hotspot, these are the -- we're -- to the extent the tenant was paying us rent, they're still paying us rent.

(Operator Instructions) There appear to be no further questions at this time.

Mr. Whitehurst, we'll turn the floor back to you.

Thank you.

We appreciate all of you joining us this morning.

Have a good day.

Ladies and gentlemen, this does conclude today's teleconference.

We thank you for your participation.

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