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spk04: Good morning, ladies and gentlemen, and welcome to the National Retail Properties First Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, President and CEO, Steve Horn. Sir, the floor is yours.
spk02: Thank you, Matthew. Good morning, and welcome to the National Retail Properties First Quarter 2022 Earnings Call. Joining me on this call is our Chief Financial Officer, Kevin Havik. As this morning's press release reflects, 2022 is also a fantastic start for national retail properties. Beyond our financial results, post the quarter, early April, NNN released inaugural Corporate Responsibility and Sustainability Report. We created the report with the ISOs group. The report includes and highlights NNN's commitments, achievements, and initiatives on ongoing Also, before we get into the financial and portfolio detail, I want to address the current direction of NNN. As I mentioned earlier this year, I plan to continue executing the long-standing business model of NNN, locating, underwriting, and acquiring real estate with the right operators, all while delivering consistent year-over-year core FFO growth. We remain vigilant and continuously evaluating market opportunities but I currently plan to stay the course of delivering repeatable growth. Given our strong beginning of the year, we are pleased to announce an increase in our guidance for 2022 Core FFO from a range of 293 to 3 per share to a range of 301 to 308 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 3,271 freestanding single-tenant properties continued to perform exceedingly well. Occupancy ticked up 20 basis points, ending the quarter at 99.2, which remains above our long-term average of 98. The increase is a result of activity out of our leasing department. The department enjoyed a high level of interest by a number of strong national and regional tenants to take out some of our vacancies. During the quarter, NNN did not have any credit issues within the portfolio. It's starting to be a trend here at NNN that we can report for five consecutive quarters we have had zero tenants in bankruptcy. Although we continue to maintain our traditional discipline in our underwriting, we acquired 59 new properties in the quarter for approximately $210 million at an initial cap rate of 6.2 and with an average lease duration of 17 years. Almost all of our acquisitions this past quarter were sale-leaseback transactions, and that is a result of the in-depth calling effort of our NNN's Acquisition Department. NNN prides itself on maintaining the relationships business model, with which we do repeat business. In an environment where cap rates remain at an all-time low, we will continue to be very thoughtful in our underwriting and primarily pursue sale-leaseback transactions with our relationship tenants. With regard to the acquisition pricing environment, The Q1 initial acquisition cash cap rate of 6.2 was a historic low for M&M. As mentioned during the February call, we expected a little more pressure on the cap rates for 2022 than 2021. As we now sit here at the beginning of May, it feels like cap rates have bottomed out and private competition has dissipated a little. This is a result of M&M feeling that cap rate compression for the moment is behind us. During the first quarter, we also sold 10 properties and generated about $20 million in proceeds, which will be reinvested into accretive acquisitions. This activity is on pace with our disposition guidance of $80 to $100 million. So I finish up, and at the risk of sounding like a broken record, Kevin and his team keep the balance sheet rock solid. We ended the first quarter with $54 million of cash in the bank, zero balance in our $1.1 billion line of credit, no material debt maturities until mid-2024. Thus, NNN is in terrific position to fund our 2022 acquisition target of 550 to 650 new properties. In summary, our occupancy rate, leasing activity, rent collection outcomes, we still believe, once again, validates our consistent long-term strategy acquiring well-located parcels, leased to strong regional and national operators at reasonable rents. will maintain a strong and flexible balance sheet. With that, let me turn the call over to Kevin for more detail on our quarterly numbers and updated guidance.
spk01: Thanks, Steve. And I'll start with the usual cautionary note that we may 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, the headlines from this morning's press release report quarterly core FFO results of 77 cents per share for the first quarter of 2022. That's up 8 cents or 11.6% over Q1 2021 and it's up 2 cents or 2.7% from the immediately preceding fourth quarter of 2021. Today, we also reported that AFFO per share was 79 cents per share for the first quarter. That's up two cents from the immediately preceding fourth quarter of 2021, 77 cents. These results include about a penny from some one-time items in Q1, about $1 million of lease termination revenue and $600,000 of percentage rent. We did footnote first quarter AFFO included $1.8 million of deferred rent repayment and our accrued rental income adjustment for the first quarter, without which would have produced an AFFO of 78 cents per share, as we've noted there. As these scheduled deferred rent repayments continue to taper off from peak levels in the first half of 2021, we're seeing improved results kicking in from our 2021 and 2022 acquisitions. I will also note that we took a $3.6 million charge in the first quarter in connection with the retirement of our CEO, all of which related to non-cash vesting of stock awards and was excluded in our core FFO and AFFO calculations. Excluding the deferred rent repayments I mentioned earlier, our AFFO dividend payout ratio for the first quarter of 2022 was 68%, and that's fairly consistent with historical levels. Occupancy, as Steve mentioned, was 99.2% a quarter, and that's up slightly from recent quarters. G&A expense came in at $11 million, and that's down from $11.7 million a year ago levels. We ended the quarter with $732 million of annual base rent in place for all leases as of March 31, 2022, which we think is a good starting point for folks thinking about projections going forward. Today, as Steve mentioned, we increased our 2022 core FFO per share guidance from a range of $2.93 to $3 per share. to a range of $3.01 to $3.08 per share. And similarly, we increased the AFFO guidance to a range of $3.08 to $3.15 per share, which reflects the scheduled slowdown in the deferral repayments in 2022 that we noted on page 13 of today's press release. The supporting assumptions for our 2022 guidance are on page 7 of today's press release and are largely unchanged from last quarter's guidance, albeit we are excluding any executive retirement charges from our guidance. We continue to assume a 1% rent loss assumption in our guidance, which is what we've normally assumed in our guidance for a number of years. despite the fact that we typically run at about half of that rent loss level normally, and that's where we are operating today as well. As usual, we don't give guidance on any of our assumptions for capital markets activity except for the general assumption that we intend to behave in a fairly leveraged, neutral manner over the long term. Switching over to the balance sheet, very quiet first quarter in terms of capital market activity. We were active in the debt markets last year, and are not unhappy to be on the sidelines at the moment. We ended the first quarter with $54 million of cash, nothing outstanding on our $1.1 billion bank line. So our liquidity remains in great shape. Our weighted average debt maturity is now 14.5 years, which seems to be among the longest in the industry. Our next debt maturity, as Steve mentioned, is $350 million of 3.9% debt coming due in mid-2024. and all of our outstanding debt is fixed rate debt. So leverage and liquidity is in very good shape, and the balance sheet is well positioned for 2022. Just a couple of numbers, Seth. Net debt to gross book assets was 40.5% at quarter end. Net debt to EBITDA was 5.3 times at March 31st. And interest coverage and fixed charge coverage was both 4.7 times for the first quarter. So 2022 is off to a very good start. While there's increased level of economic and capital market uncertainty, we are well positioned for such. And as Steve alluded to, possibly may lead to more disciplined acquisition environment, which we think is helpful to us at the margin. Core 2022 FFO guidance. now suggests 6% growth to the midpoint without any heroic assumptions. Our focus remains on growing per share results over the long term. And Matthew, with that, we will open it up to any questions.
spk04: Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset, if you're listening on speakerphone, to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Please hold while you poll for questions. Your first question is coming from Nicholas Joseph from Citi. Your line is live.
spk05: Thanks. Good morning. Just maybe starting on acquisition, maintained acquisition guidance. Obviously, in the first quarter, you did over $200 million, so it seems like you're running ahead of the pace. So what was the thought process, and what are you assuming kind of in the back half of the year relative to kind of the busy first quarter?
spk02: Steve, our acquisition guidance, we maintained really just the result of visibility. I believe, Kevin, 60% was our weighted back end, the initial 60% of the 550 to 650. But yeah, first quarter, we got off to a strong start north of 200 million. Second quarter, the pipeline looks pretty good. But as you know, visibility third, fourth quarter, we don't have any currently. So we just thought it'd be prudent to leave guidance the same.
spk05: Thanks. And then just maybe in terms of cap rates, you talked about obviously cap rates being lower for the last few quarters, particularly this past quarter. you know, with the rise in interest rates, how susceptible is the broader market and particularly kind of sale-leaseback to rising interest rates from a cap rate perspective?
spk02: Yeah, as you noted, our first quarter, you know, historic low. But a lot of those deals were priced, you know, January or December. And so now they've cleared the market. We have noticed with the rise in interest rates that some private companies are kind of the wait-and-see approach, so we're not feeling them as much. But we are starting to feel that deals are starting to get retraded or falling out. So that's why we think they've bottomed out. And hopefully back half the year, cap rates will catch up when they start getting repriced on the deals.
spk05: Thank you very much.
spk04: Thank you. Your next question is coming from Lizzie Doykin from Bank of America. Your line is live.
spk07: Hi, good morning. I was wondering if you guys could comment more on the dispositions closed this quarter. What was kind of the composition of vacant versus occupied assets? And if you could also comment on maybe any signs of a thinning buyer's pool or if it was more difficult to find buyers.
spk02: At dispositions, we sold 10 assets. Three of those were income-producing assets that were more of a defensive sale that we thought there's a likelihood of a lack of renewal in the future. So we thought we kind of pruned the portfolio there. And the other were seven vacant assets, which is a little bit higher than our historical norm. But we tried to release those assets because that's what we always do first and foremost, try to release it. But we weren't finding good rental rates. So we decided it was better to dispose of the vacant and redeploy that capital into accretive acquisitions.
spk07: Okay, great. And if I could ask about the bad debt expense you guys are assuming within your three- or four-year guidance now.
spk01: Yeah, so we've, as I mentioned, we continue to assume 1% rent loss, which is our general assumption for many, many, many years, despite the fact that it usually doesn't quite get to that level. It normally runs about half of that, meaning 50 basis points a year. We just have always assumed that we lease to retailers and we just assume not everything will go perfectly. That's the broad rationale, if you will, behind that. Consistent with our past, first quarter we collected 99.6% of the rent, so 40 basis points of loss in there. So collections and rent losses behaving as normal as it had for many, many years pre-pandemic.
spk07: Okay. Got it. Thank you.
spk04: Thank you. Your next question is coming from Spencer Alloway from Green Street. Your line is live.
spk06: Thank you. Just looking at recent market activity, it does seem as though implied recession odds have gone up in recent weeks. How do you guys feel about your primary lines of trade in the event of a broader economic slowdown, and is there any high-level color you can provide on your tenants' current rent coverage levels?
spk01: Yeah, this is Kevin Spencer. At the moment, we don't feel like there's any real notable pressure to the rent-paying ability of our tenants. We've not seen a lot of stress there, and fortunately, a lot of our tenancy is in the fairly low price point, service related, and food and beverage that so far we've not seen a lot of change in consumer behavior, if you will, despite the fact that prices definitely are rising. So far, at the top level, it doesn't feel like there's a lot of stress with our tenants.
spk06: Okay. And then of the leases coming due, um, maybe this year and even next, um, can you just comment on what portion of those are CPI linked? And do you have any concerns that, um, you know, the high inflationary environment might impact lease renewals or just the likelihood of tenants agreeing to those same terms in the future?
spk02: Uh, the leases that are coming due, uh, we have, we have 40 properties remaining in 2022. And what we're seeing is our renewals are based on our historical norms, where 85% of our tenants are renewing at 100% rent. And that's just the retail nature of it. So we're not expecting anything different going forward on our renewals. As a matter of fact, sitting here today with 1.3% of ABR on 2022, we're in outstanding shape. Given basically a year ago at this time, it was 5.3%, I believe. That's over 5% of ABR. So 2022 renewals are looking really solid right now.
spk07: Okay, thank you.
spk04: Thank you. Your next question is coming from Wes Galladay from Baird. Your line is live.
spk03: Hey, good morning, guys. Can you comment on what drove the big sell leaseback volume this quarter? Was there a few portfolios in there? Was it driven by M&A activity by the tenants? Can you give us a little bit more color?
spk02: Yeah, we did, I think it was nine transactions. Eight of those transactions were with relationship tenants. One was not. We did a couple portfolios that was just post-M&A where they reconfigured the balance sheet doing a sale-leaseback. And then we did a couple kind of doubles, you know, the $20-$30 million variety that were pure sale-leasebacks.
spk03: Got it. And then you commented about seeing a little bit less competition. Are you noticing a bigger difference for larger deals or the smaller one-off deals?
spk02: The larger deals where you kind of felt, I mean, historically, the private companies, we haven't felt. We've always had competition. But on the larger deals where the new private money coming in, they're hunting the elephants right now. And we've kind of noticed they subsided a little bit. But there's still a lot of competition where there's a lot of oxygen at that $10 to $20 million level.
spk03: Okay, and then just a few quick modeling questions for you. The G&A was taken down. Was that a non-cash G&A being lower? Is it cash G&A? And then when we look at the 5.3 times debt to EBITDA that you cited at the end of the quarter, Is that a recurring number? Does that have the benefit of the term income, bad debt, and I guess the repayment by the cash tenants and their straight-line tenants from last year?
spk01: Yeah, so let me hit the first one. I mean, the G&A is mostly cash-related. As I mentioned, we took a charge related to Jay Whitehurst retiring, and so there was – A good, virtually all of that was non-cash kind of impact. And so that, to the extent there was any non-cash items in G&A, that flowed through the retirement cost line item. And tell me, say the second question again. Sorry, I kind of missed that.
spk03: Yeah, for the 5.3 times debt to EBITDA you said at the end of the quarter, should we think of that as being more of a recurring number? Does it have the benefit of the term income and the one-time items you cited this quarter? as well as the repayments you're getting this year from previously deferred rent.
spk01: Yeah, I think for the moment you should think of us operating in the low fives. I guess if you step back and think about our numbers, historically our debt to EBITDA was in the, call it the mid to high fours, and our debt plus preferred was in the mid to high fives, and we're going to end up somewhere in between those two ranges where we've operated, which call it the low fives, I think, is where we'll be. The lease term income for this quarter and the deferral repayments really won't have a material impact on that going forward.
spk03: Great. Thanks for the time, guys.
spk04: Thank you. Your next question is coming from Pedro Cardoso from TCW. Your line is live.
spk09: Hi, can you comment a little bit on same store NOI? Thank you.
spk02: Could you repeat that one? It was pretty low.
spk09: Hi, is it better now?
spk01: Yeah.
spk09: Great. Can you comment on same store NOI?
spk01: Thank you. Yeah, I mean, our rents go up about 1.5% a year across the board, and that's consistent with what we're seeing. It's fairly contractual. Some of them are tied to CPI, but it's capped, so effectively it's a fairly fixed kind of rent bump. And so 1.5% is what we expect and are experiencing
spk02: the moment and so that's just a fairly normal run rate and it typically doesn't vary too much from there got it do you expect to change the cap rate on your leases as far as the opposition here we buy at the market cap rates we do use our relationships but kind of what I stated in the opening monologue that we are expecting cap rates to Not to go down any further, but we'll probably see an adjustment with the 10-year if it gains it.
spk09: I meant the cap on the annual increase cap at a certain rate.
spk01: Got it. In terms of the rent increases. Sorry. Fair question. Not at the moment, I don't. Why do we get 1.5%? We get 1.5% because that's about market for the kinds of tenants we do business with, which are large regional and national operators. and that's just where the market is. I think it's going to take a longer period of persistently higher interest rates and or inflation rates to have that number move notably. Look, we always try to get what we can, and sometimes we get 2%, but I think it's too early to say that the environment of today is going to notably impact the rent increase numbers market rate for that in the near term anyway.
spk09: That's helpful. Thank you.
spk04: Thank you. Your next question is coming from John Masoka from Leidenberg Thalmann. Your line is live. Good morning.
spk02: Morning, John.
spk00: Can you maybe walk us through some of the pushes and pulls that drove the bottom line guidance increase? Sounds like you have lower cash G&A expectations versus previously, maybe a more kind of front-end loaded acquisition expectation in the benefit from no kind of credit issues in the 1Q. But I was just curious if there was anything else that was really kind of driving the upward move in guidance.
spk01: No, I think you hit on the big things. Acquisition timing, collections, you know, running better than guidance. some GNA decrease and drifting a little lower. And then the other kind of wild card, which I mentioned that we don't give guidance, is just the whole capital markets activity. So, you know, we make assumptions around what we think we would like to do in terms of capital markets activity, and sometimes the capital markets have a different idea than what we would like to do, and so we change our plans. So that is an important piece of that puzzle. I'll point to the past. I'll point to last year as an example of that. Last year we issued $900 million of debt, and I promise you we never in any of our assumptions assumed we were going to issue $900 million of 30-year debt last year. But that's what the market was offering at an attractive price. We felt it was a good opportunity to take advantage of. And with the benefit of a few months hindsight, it feels like a good idea. But it was not in our guidance. It messes with the current year numbers. But our inclination over the years has been get capital when it's available and well-priced, regardless what you've assumed in your model or your projections. And vice versa, don't get capital when it's not readily available and not well-priced. you know, scenarios can mess with the kind of the guidance. And it's not, I know, not helpful to you, that answer, in terms of trying to pin down a number. But that is a wild card in addition to the variables you mentioned that does influence things.
spk00: Okay. And maybe to that last point, as you look at the capital markets today, I mean, I think, historically, if I think about it, you traditionally haven't really used the revolver all that much. Is that maybe change in the current market dynamic or are you still going to kind of stick to kind of raising once you've spent cash?
spk01: Yeah, very good question and good note that really over the last six years, we've averaged under $100 million of outstandings on our line. And last year we had zero all year. And so, yeah, and I want to try to zig when – the markets are zagging and vice versa and so yeah we went and issued a lot of long duration debt last year to the extent this environment persists and or gets worse you'll probably find us using our bank line more so we'll we'll shift more to the shorter end of the debt equation and that means probably using our bank line more than we have in the past so yeah fair comment and And we'll see how things, that's not a projection, but that's kind of our thought process as we think about doing that. And so, fortunately, we're at 14 and a half years weighted average debt duration. We can take on some short-term debt, like a bank line, and not really expose the company to any real risk.
spk00: Okay. It's helpful, and that's it for me.
spk04: Thank you very much.
spk02: Thanks, John.
spk04: Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star, then 1 on your phone at this time. Your next question is coming from Linda Tsai from Jefferies. Your line is live.
spk08: Hi. Good morning. You noted earlier that inflation isn't impacting shoppers within your tenant base. but to the extent it does, where might you see it first in terms of industry exposure and where might you see it last?
spk02: As far as our top tenants, they're finding a way to pass through. The inflation, it's been a couple quarters here, but the customer for our service base, if it's the convenience stores or the quick serve restaurants, they're finding a way to pass it through. It hasn't gotten out of control where the customers aren't accepting it. But where you would see it, you know, more maybe in the RVs later, you know, the big ticket items, we would expect to see the consumer pulling back.
spk08: Thanks. And then automotive services are about 13% of your industry mix, and it's the industry who's increased the most year over year. Is there a threshold for how high this industry could become?
spk02: No, we have a long way to go. If you look through our history, at one point we were 30% convenience stores. We really focused on underwriting the real estate, and if it makes sense to buy it because you're buying the real estate right, meaning keeping the rent low, well-covered asset, we'll keep pushing it. But we have plenty of runway still in the auto services.
spk01: Yeah, just to remind folks, that has a real impact. variety, if you will, of kinds of businesses within that. So, I mean, that includes car wash and tire service and, you know, oil and collision and, you know, a wide variety within that line of trade. And so we feel like within the line of trade, despite that it's at 12.6%, which we don't view as overly high, there's a high degree of diversification, not only at the property level, but even within kind of a sub-lines of trades within that line of trade.
spk06: Got it. Thank you.
spk04: Thank you. That concludes our Q&A session. I will now hand the conference back to President and CEO Steve Horn for closing remarks. Please go ahead.
spk02: We thank you for joining us this morning and look forward to talking with the vast majority of you upcoming at ICSC or day rate in June. Thank you. Have a good rest of your day.
spk04: Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day.
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