NNN REIT, Inc.

Good morning, ladies and gentlemen, and welcome to the National Retail Properties second quarter 2022 earnings call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Steve Horne, CEO. Sir, the floor is yours.

Thank you, Ali. Good morning, and welcome to the National Retail Properties second quarter 2022 earnings call. Joining me on the call is Chief Financial Officer Kevin Haubeck. As this morning's press release reflects, National Retail Properties' performance in 2022 continues to produce strong results, including continued high occupancy, impressive rent collections, and solid acquisitions driven by our proprietary tenant relationships. We are in position to continue enhancing shareholder value as we move into the second half of 2022 and beyond. In July, we announced roughly a 4% increase in our common stock dividend to be paid August 15th, thus making 2022 our 33rd consecutive annual dividend increase. National Retail Properties is one of the select companies of under 90 US public companies, including only two other REITs, which have achieved this impressive track record. Based on our continued consistent performance, We announced today a further increase in our 2022 guidance of core FFO per share to a range of 307 to 312 per share. Our longstanding strategy is designed to deliver consistent per share growth on a multi-year basis. This discipline of long-term approach is reflected in our second guidance increase this year. Turning to the highlights of national retail property second quarter financial results. Our portfolio of 3,305 freestanding single-tenant retail properties continued to perform exceedingly well. Maintained high occupancy level of 99.1%, which remains above our long-term average of 98% plus or minus a fraction. We also collected 99.7 of the rents due for the second quarter. Staying a little bit more on rent collections. The rent of deferrals that we provided to a select tenant during the early days of the pandemic continue to track as we expect. At the end of 2022, 87% or $49.5 million of the original $56.7 million deferred rent will have been paid back, which is 100% that is due at the time. While we continue on the topic of the portfolio, Dave and Buster has moved in our top 10 tenants with the acquisition of one of our top 15 tenants main event in June. With regard to acquisitions, during the quarter we invested just north of $150 million, 43 new properties, and an initial cap rate of 6.2 with an average lease duration of over 19 years, which 14 of the 16 deals were from relationship tenants, with which we do repeat programmatic business. The first half of the year, we invested over $350 million in 102 new properties with the initial cap rate of 6.2, with the average lease duration of 16.7. In an environment where cap rates are still near historic lows, but showing signs of adjusting, we continue our thoughtful and disciplined underwriting approach. NNM will continue to emphasize acquisition volume through sale-leaseback transactions with our stable of relationship tenants. Based on our pipeline and dialogue with our partners, we remain comfortable with our ability to meet and hopefully exceed our 22 increased acquisition guidance of $600 to $700 million, primarily via direct sale leaseback deals with our company's long-duration triple net lease form, which is more landlord-friendly than a 1031 market deal. During the second quarter, we also sold eight properties, raised almost $8 million in proceeds, to be reinvested in the new acquisitions. Year to date, we have now raised 28 million in proceeds from the sale of 18 properties, including 11 vacant. Although job one is always to release vacancies, and our leasing team does an outstanding job of it, we will continue to sell non-performing assets if we do not see a clear path to generating rental income within a reasonable timeframe. Our balance sheet remains one of the strongest in the sector. Our credit facility has plenty of capacity with only a balance outstanding of approximately $40 million, and we have no material debt maturities until mid-2024. NNN is well positioned to fund our 2022 acquisition guidance. In closing, I'd like to thank our associates for their dedication and hard work putting NNN back to pre-pandemic momentum as we look to finish 2022 strong and position NNN for success over multiple years in the future. With that, let me turn the call over to Kevin for more color and detail on our quarterly numbers and updated guidance.

Thanks, Steve. As usual, I'll start with a cautionary 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 79 cents per share for the second quarter of 2022. That's up 9 cents or 12.9% over second quarter of 2021. And that's up 2 cents or 2.6% from the immediately preceding first quarter of 2022. And first half year to date core FFO results were up 11.4% to $1.56 per share. Today we also reported that AFFO per share was 81 cents per share for the second quarter. That's up two cents from the immediately preceding first quarter's 79 cents. We did footnote second quarter AFFO included 1.7 million of deferred rent repayment in our accrued rental income adjustment for the second quarter, without which that would have produced AFFO of 80 cents per share for the quarter. And likewise, the first half of 2022 AFFO included 3.5 million of deferred rent repayments and our accrued rental income adjustment for the first half without which would have produced AFFO of $1.58 per share for the first half of 2022, which on the same basis compares to $1.43 per share for the first half of 2021. And that represents a 10.5% increase year over year. As the scheduled deferred rent repayments continue to taper off in peak levels in the first half of 2021, we are seeing improved results kicking in from 2021 and 2022 property acquisitions. I will also note that we took a $2.7 million charge in the second quarter in connection with the retirement of our CEO in April, and that was excluded from our core FFO and AFFO calculations. Including deferred rent repayments, our AFFO dividend payout ratio for the first half of 2022 was about 67%, and with the recent dividend increase, should run approximately 68% for the full year 2022. All that suggests that we will create approximately $180 million of free cash flow after the payment of all expenses and dividends for 2022. And as we've discussed with investors, we burden this quote-unquote free cash flow at a cost of 8% for purposes of making capital allocation decisions in new properties. So there's nothing free about it in our minds, but it is a significant part of the equity need for, say, $600 million acquisitions, especially if you couple it with $100 million of proceeds from dispositions. Occupancy was 99.1% at quarter end. That's been, as Steve mentioned, consistent with recent quarters. G&A expense was $9.7 million for the quarter. That is down from second quarter a year ago levels. Moving on, today we did increase our 2022 core FFO per share guidance from a range of $3.01 to $3.08 per share to a new range of $3.07 to $3.12 per share, and similarly increased our AFFO guidance to a range of $3.14 to $3.19 per share, which reflects the scheduled slowdown in deferral repayments in 2022, as noted on page 13 of the press release. The guidance midpoints for both core FFO and AFFO were increased by 5 cents compared to previous guidance. And the supporting assumptions for our new 2022 guidance are on page 7 of today's press release and are modestly fine-tuned from last quarter's guidance. We are, as I mentioned, excluding any executive retirement charges from our guidance, and 2022 acquisition volume was bumped up by $50 million. As usual, we don't give any guidance on 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. The most important takeaway from all this is that we expect to grow core FFO per share results in 2022 by about 8% to the new guidance midpoint. Switching over to the balance sheet, the second quarter was quiet in terms of capital markets activity. We were very active in the debt markets in 2021 and are not unhappy to be on the sidelines at the moment. We did issue a modest amount of equity, $32 million during the second quarter, and ended the quarter with only $40 million outstanding on our $1.1 billion bank credit facility, despite investing $365 million in the first half of the year. So our liquidity remains in excellent shape. Our weighted average debt maturity is now 14.2 years, which seems to be among the longest in the industry. Our next debt maturity is $350 million with a 3.9% coupon due in mid-2024. And all of our outstanding debt is fixed rate with the exception of that $40 million on our bank line. Net debt to gross book assets was 40.9% at quarter end. Net debt to EBITDA was 5.4 times at June 30th. Interest coverage and fixed charge coverage was 4.7 times for the second quarter. So we're in very good shape to produce strong core FFO per share growth with our 2022 guidance suggesting about 8% growth at midpoint. Importantly, without any heroic assumptions, our focus remains on growing per share results over the long term. We think the asset growth focused acquisition volume contest in many sectors in recent quarters may be slowing a bit or at least getting a little more disciplined on price. If so, we think renewed investor focus on per share results and managing balance sheets will accrue to our benefit, but time will tell. While there is currently an increased level of economic and capital market uncertainty, we are well positioned for such.