Q4 2009 Earnings Call Transcript

Published: 5 Feb 2010

[Operator:]

Greetings, and welcome to the National Retail Properties Year End Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Craig Macnab, CEO for National Retail Properties. Thank you, Mr. Macnab. You may now begin.

[Craig Macnab:]

Jackie, thank you very much and good morning and welcome to our 2009 year end earnings release call. On this call with me this morning is Kevin Habicht, our Chief Financial Officer, who will review details of our fourth quarter and our year end financial results following my brief opening comments. In 2009, we hit a milestone that we are very proud of where we're in for the 20th consecutive year we raised our cash dividend. This puts NNN in illustrious company, as there are only about 156 public companies that have consistently raised their dividend for 20 years. As of the end of the year our portfolio was 96.4% leased and again this year we have very limited lease roll over. By the way for those of you that keep track of this data, we've remained at least 96% leased for the last seven years. At this time, we currently own 1015 properties leased over 200 different national or regional tenants in 44 states. Our tenants operate in over 13 different segments of the retail industry, which we feel provides us with very broad diversification. Finally, on average, these tenants are contractually obligated to pay us rent for the next 12 years. In terms of acquisitions, 2009 was a quiet year for NNN, as we acquired eight properties for $38.9 million at an average cap rate of 9.69%. Our disposition activity was also modest, as we sold 11 properties for 21.9 million at about an 8% cap rate. For your information, the market for investment properties has recently improved, such that Walgreens, which is the bell cow in our net leased retail sector, are again closing in the mid 7% range in better locations. This is obviously a far cry from the mid 6% cap rates that were prevalent at the top of the market, but less than the 8% closing cap rates for Walgreens that we saw just a few months ago. On the acquisition side, there have not been many opportunities that have passed through our rigorous underwriting process. At this time, we're of course focused on the ability of the tenant to pay the rent, but we're also being disciplined in the price per square foot that we are willing to pay for our acquisitions. An example of this was that in the fourth quarter our purchase of properties from a well-known national restaurant operator were at a very small premium of what the land alone is worth. As you can imagine, we like to start the risk award and it's a great example of the type of opportunities that our team will uncover when capital is less plentiful than it has been. We continue to be very selective as we evaluate acquisitions. However, our pipeline is looking a little better than it has been for the last several months, and the quality of these acquisition opportunities remains attractive. As we look at the future, I like the way we are positioned. Our portfolio is in good shape. Our balance sheet is very strong, which will allow us to take advantage of the carefully underwritten acquisitions that we hope to make this year. Kevin?

[Kevin Habicht:]

Thanks, Craig. Let me start off by with our cautionary statements that we'll make certain statements that may be considered to be forward-looking statements under federal securities law. And 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 those forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from our 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, a quick summary to start. First, FFO per share excluding just the non-cash impairments was $0.36 for the fourth quarter and $1.65 for the year 2009 which is at the bottom of our '09 FFO guidance range. Second, the 2010 FFO per share guidance range of $1.51 to $1.58 is unchanged. And third, as Craig alluded to you, there is little activity in the fourth quarter but our occupancy is holding up well and the balance sheet is in great shape which positions us well to capture acquisition opportunities. With that, let me go me into a few details, as indicated in the press release, we reported fourth quarter 2009 FFO results which again excluding just the non-cash impairments totaled $0.36 for the quarter and $1.65 for the year, which was at the bottom of our $1.65 to $1.70 guidance range. We also reported a recurring FFO metric this quarter, which not only eliminates the non-cash impairment charges but also three other items

[Operator:]

Thank you. We will now be conducting a question and answer session. (Operator Instructions). Thank you. Our first question is coming from RJ Milligan of Raymond James and Associates.

[RJ Milligan:]

Craig, about a year ago a lot of people thought the acquisition market and the opportunities would be pretty robust in the net lease space. It was just a matter of time for the buyers and sellers to find that right price. Have you kind of changed that optimism in terms do you still think those opportunities will be there once that pricing is done or do you think it will be more of a trickle over the next year or two?

[Craig Macnab:]

That’s a important question and a good question. I think that couple of things. Number one, our guidance for this year is a $170 million of acquisitions weighted towards the second half of this year and obviously when you put together projections, you’ve got to make your best estimates. I personally hope that we can do better than that but for all this to happen a couple of things need to occur for

[RJ Milligan:]

So Craig, the transactions or the opportunities that you are seeing are they from distressed sellers now?

[Craig Macnab:]

No. We are not a good buyer of somebody else’s rubbish. We are very focused on high quality net lease retail assets. And if anything, we’ve focused on buying properties that just weren’t available at these cap rates a couple of years ago. We, obviously, are looking at distressed, and have spent a lot of time underwriting these types of properties. At the end of the day, there is a reason why they are distressed, and generally that’s not going to meet our underwriting standards.

[RJ Milligan:]

Even if they were refinanced, say, ‘05, ‘06 period and levered, it’s just a leverage issue not necessarily a --

[Craig Macnab:]

On the leverage side, there are some opportunities. We continue to see that lenders are extending and pretending. And we were quite interested in one particular transaction where much to my surprise the lender wants the interest. So I think the day of reckoning is coming there. But it still isn’t as prevalent as we had anticipated a year ago. But the acquisition opportunities for us are going to be very good over the next period of time. I don’t believe that volumes are going to be anything like they were two or three years ago, but right now, our pipeline is pretty good.

[Operator:]

Thank you. Our next question is coming from Greg Schweitzer of Citigroup.

[Greg Schweitzer:]

I’m here with Michael Bilerman as well. Craig, could you talk a little bit more about the impairments you took this quarter? Taking the land aside, what were some of the tenants underlining some of those properties?

[Craig Macnab:]

A couple of different things. Firstly, I do want to reiterate that these are non-cash items. Secondly, it’s something of a self-inflicted wound and we have elected to go ahead and take these where we had a sense that the values were less. But let me give you a couple of specific examples without mentioning the tenants or the dollars. We have some land contiguous to a very strong development with excellent tenants in it. And at this current point in time that phase two land, if you will, is not going to be developed to the types of returns that we would commit to allocate capital to. As it so happen, somebody has come along and said they are very interested in buying the development, we don’t want to earn the development without the land next to it. In the event we sell it, and believe me we’re so far from that, but in the event we’ll, we would walk away from this phase two land, which in today’s world is less than what we paid for it. So we’ve marked it down. Now, whether that deal happens or not is a complete crack sheet. Secondly, just I am giving you a different example. We had a property that’s been vacant for a period of time, but it was once upon a time the furniture store, and somebody has come along and is interested in buying it. And as opposed to our interest, which is always to re-lease our vacant properties, but in this particular instance if they want to buy it, we might let him own that, again, we’ve taken an impairment on it. And then there is a whole another bucket around where we -- consistently we have told you that some of our properties in our TRS were happy to hold for that duration. As we looked to move those from the held-for-sale category to the held-for-investment, we are required to make an impairment analysis. So, for example, we had a property in Puerto Rico and the reason we hadn’t discussed held-for-sale category is we didn’t have enough presence in Puerto Rico to make sense holding these given the tax issues there. That property is doing very well. That tenant is performing nicely. And we decided to transfer it to our held-for-investment lo and behold accounting normally requires there to be an impairment on that. So to me this is a (inaudible). But I think it’s the right thing to do, and we are going to move on. And to me it doesn’t fundamentally change the strength of National Retail Properties. And then finally, just to make sure my answer is complete, we do have that auto service operation in California. At the time we purchased it, we had to do a preliminary valuation there was this so called goodwill that we accounted for. And despite the fact that the operation has gone quite well and I think it’s going to steadily improve over the next period of time, we’ve chosen to write-off that GAAP goodwill.

[Greg Schweitzer:]

I believe the goodwill that you took in the second quarter was around 12 million (inaudible) the full amount?

[Craig Macnab:]

It’s what was driven by the valuation. So as you do the math there, you can see we are at little under $4 million now in what’s left, and that’s what the valuation required.

[Kevin Habicht:]

Yes. So, Greg, you are correct 12 to four in round numbers.

[Greg Schweitzer:]

Okay. And then just touching on the development in the TRS the first phase, how is leasing going there?

[Craig Macnab:]

Well, I think we have very little. To be honest, we haven’t been in the development business for years. We do have some residual land. The biggest piece of it was this one property that I previously described just a moment ago. But we have a couple of pieces of land that, frankly, are just held up right now, and we chose to write those down. Five or six different properties, a little bits of money each one of them, but on the one property contiguous to that multi-tenant property, it’s been a great success, by the way we chose to mock that vacant or that phase two land down. Any land purchased in the last couple of years waiting for development owned by any commercial landlord is worth less today than you paid for it. Why? Because there are no tenants to go in it.

[Greg Schweitzer:]

Got it. And just one final one, the re-leasing of the vacant Value City and Circuit City boxes, how is that progressing?

[Craig Macnab:]

Frankly, our leasing efforts in 2009, I think our team did a very, very nice job close to 50 different leases. Leasing activity as you are hearing elsewhere has recently grouped up if you are looking for general comment. In the last two months or so, we’ve got some nice activity going. That particular project that you asked about, we want to continue to make progress with the City, et cetera, et cetera, because it will involve a new multi-tenant building with two high quality retail tenants. It’s in a good location. Value City in the scheme of things had a low rate per square foot, and over time, I am quite optimistic that we are going to end up replacing that re-leasing that vacant property with high quality tenants at a higher rate that we were receiving. Having said that, Greg, it’s not just clicking my fingers and happening as fast as an impatient me would like.

[Operator:]

Thank you. (Operator Instructions). Our next question is coming from Jeffrey Donnelly of Wells Fargo.

[Jeffrey Donnelly:]

Craig, a question and actually I got your guidance and maybe this maybe better directed towards Kevin, that are you going to quantifying for us what you see is the FFO benefit from leasing in your portfolio over the course of 2010 versus say where you finished out in ‘09?

[Kevin Habicht:]

I don’t have a real number for you. But given that we are not really showing any meaningful change in occupancy, I think we’ll be trading a lot or little bit, there'll be a little bit upside, but I can't quantify that for you right now on this call.

[Craig Macnab:]

Let me add slightly different thing, Jeff one of the things that's encouraging for us is that we have turned the corner on having a portfolio which has previously been characterized as having no growth. And in 2009 our same-store rent, if you will, moved up by just a little bit less than 1% on a 20.6%, but given that we have a lot of high investment grade tenants where we have contractual bonds we now have really for the first time starting to see a little bit of growth from our portfolio. And obviously, that's going to improve over time.

[Jeffrey Donnelly:]

And anyway, I just wanted to be sure and I'm thinking about it correctly. But if we annualize your fourth quarter FFO per share, I think it's somewhere in the mid $40 range and if there is not a lot of movement from leasing over the course of the year, I guess the question is, does that put a lot of onus on the acquisition getting done on the back half of the year, to meet the guidance that you're looking at or I guess is there something else I'm just not thinking about in the numbers?

[Kevin Habicht:]

Yeah, I don't know precisely in your model, I mean we are very comfortable with the FFO guidance we've given and it's 53.5 million which is fourth quarter rental revenue I think those will get there coupled with the acquisitions and all of the other assumptions that we lay down related to that. So, I mean, I can maybe talk to you further about that, in particular, but we are very comfortable where we are.

[Jeffrey Donnelly:]

Okay, we can follow up on that. And then just the last question is, if any sort of two part is, do you have any or much exposure to movie galleries, has there been any new side of that. And I guess can you give us details around what you're seeing with the leases that you have with Barnes & Noble and OfficeMax given that there has been [with] those guys as well?

[Craig Macnab:]

Yeah. So in terms of broad tenants held, one of the good things is that we have been active program for many years to sell tenants that we had to dealt with. Today, we've got two Hollywood video, it wasn't that long ago, we had five of them. Not only do we have two of them, but one of them fortunately the lease expires here in middle of the year. We already have that property released to one of the big national auto parts company. So that the Hollywood video impact to us is absolutely diminimal. The other property, which is in Southwest Colorado is a very well located assets and while we look out Hollywood video is doing well there. So we expect them to continue to assume. I think, retail has obviously had a good year from a profitability standpoint. I don't think there is going to be a whole lot top (inaudible). There is a lot of euphoria about retail sales in January being up 3% to whatever that number was, that was against a pre-dismal January 2009. So in the book category, that category is (inaudible), the big lenders to Borders are the ones that hold the cards there. And I suspect that one shareholder that has a fair amount of ownership plus some data outstanding to Borders is keenly focused on doing everything he can to make sure they survive, given that his date is comes due. I'm sure he'll accommodate something. We have fortunately well located properties leased to these tenants and regardless of where they go our analysis appears that suggest we're in pretty good shape. In terms of OfficeMax, you know the office category hasn't done that well. One thing that's curious if you take the time to look at OfficeMax you'll see that their balance sheet is quite strong and they have a large slug of cash, which means that they're going to be around for a long period of time and then just to make sure my answer is complete here. There is this other one called Rite Aid, we do have some Rite Aid stores. And the good news is Rite Aid continues to extend their debt maturities, which will give them more time, but sooner than later they're going to need some revenue growth.

[Operator:]

Thank you. There are no further questions at this time; I would like to hand the floor back over to management for any closing comments.

[Craig Macnab:]

Jackie, thanks very much. We appreciate you all taking the time. We understand there are lots of other calls here. And we feel that our positioning for 2010 is pretty good in this economic environment. Quality of acquisition opportunities we're looking at is encouraging. And I'm excited about the opportunities for us over the next couple of years. Thanks very much. I guess, we'll be meeting with some of you in March, and then we'll be talking to you in a couple of months. Thanks very much.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.