NNN REIT, Inc.

Greetings and welcome to the NNNREIT first quarter 2023 earnings call. At this time all participants are in a listen only mode and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Steve Horne, CEO of NNN REIT. Sir, you may begin.

Thanks, Ali. Good morning, and welcome to the inaugural NNN REIT first quarter 2023 earnings call. Joining me on this call is Chief Financial Officer Kevin Havik. As this morning's press release reflects, NNN's performance in the first quarter produced 3.9% core FFO growth, along with acquisitions slightly over $155 million with a 7% initial cash yield. In addition, our portfolio retained a high occupancy of 99.4%, which I attribute to the upfront due diligence on property acquisitions and the continuous portfolio management that NNN does every day. But before we continue with the operational performance, I want to address the name change, which I'm excited about. First, as I stated in the press release, the change does not signal a strategy shift with acquisitions, balance sheet management, with deliberate and consistent NNN. We felt it was time to take advantage of the NNN brand. The reality is NNN is what we are called with our circle of investors, peers, clients every day. In addition, our website and emails use the NNN REIT brand. Therefore, the change is making NNN even more consistent within our sector. Turning to the highlights of the first quarter financial results, our portfolio of 3,449 freestanding single-tenant retail properties continue to perform exceedingly well. As I stated earlier, occupancy ended at 99.4 for the quarter, which is above our long-term average of 98%. Occupancy remained flat from year end. At the quarter end, NNN only had 20 vacant assets, which is one less than the year end, which is a product of our leasing department enjoying a high level of interest by a number of strong national and regional tenants in our vacancies. In addition, 91% of our leases that were up for renewal during the quarter exercised an extension. I'm sure we'll cover more of the credit watch list in the Q&A, but I just want to give a little bit more color. There were some large names that filed bankruptcy, and our portfolio is still performing at high levels, and we expect that trend to continue. One of the recent filings of Bed Bath & Beyond, which NNN currently owns three of their assets with an average rent of $13 per square foot. We've been getting a lot of inbound interest on the assets because of the quality of real estate. So I expect when the time comes to release the assets, we'll have superior recovery rate in a timely manner. Remember, as I stated earlier, the average occupancy from NNN since 2003 is 98%. So the portfolio has stood the test of time through GFC and COVID. Turning to acquisitions, we'll continue to be prudent in our underwriting and NNN has afforded the luxury to continue to be selective. We acquired 43 new properties in the quarter for approximately 155 million. the initial cap rate of 7% with an average lease duration of 19 years. Almost all of our acquisitions this past quarter were sale-leaseback transactions. That is a result of the calling effort of our M&N Acquisitions Department. M&N prides itself on maintaining the relationship business model, which we do repeat programmatic business. With regard to the acquisition pricing environment, the last quarter of initial cap rate of 7% is approximately 40 basis points wider than the fourth quarter of 2022. As I mentioned during the February call, we were seeing cap rates steadily increase. But now, as we sit here at the beginning of May, the cap rate increases are starting to plateau some. What I mean, the rate of increase is definitely slowing down, so I'm not expecting another 40 basis points for the second quarter of 2023. This is resulting in an end-to-end feeling that cap rates are starting to hit the glass ceiling assuming the macroeconomic environment settles down. During the quarter, we also sold six properties that generated nearly 12 million of proceeds to be reinvested in new acquisitions. The dispositions consisted of three vacant assets and three income-producing assets at a 6.6 cap rate. I do expect disposition activity to be greater in the second quarter, and we are keeping our disposition guidance unchanged for the year. As I finish up, and to remain consistent as Pat's called, Kevin and his team keep the balance sheet rock solid. We ended the first quarter with $209 million out on our $1.1 billion line of credit. No materials debt maturities until 2024. Thus, NNN is in terrific position to fund the remaining of our 2023 acquisition guidance. In summary, the occupancy rate, leasing activity, the relationship-based sale-leaseback acquisition volume, We believe, once again, validated our consistent long-term strategy of acquiring well-located parcels leased to strong regional and national operators at reasonable rents while maintaining a strong and flexible balance sheet. As I stated earlier, NNN is in solid footing as we are quartering to 2023. With that, let me turn the call over to Kevin for more color and detail on our quarterly numbers.

Okay, Steve, thank you. And as usual, I'll start with a cautionary statement. 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. Okay, with that out of the way, headlines from this morning's press release report quarterly core FFO results of 80 cents per share for the first quarter of 2023, and that's up 3 cents or 3.9% over year-ago results of 77 cents per share. and that was flat with prior fourth quarter results. Today we also reported that AFFO per share was 82 cents per share for the first quarter, and that's also up 3 cents per share or 3.8% over Q1 2022 results. As can be seen in the footnote on page one of the press release, as well as the detailed deferred rent repayment schedule on page 13, The accrual basis deferred rent repayments have now been virtually fully repaid and will not create any real noise in our AFFO number going forward. The scheduled cash basis deferred rent repayments continue to taper off materially in 2023, as can be seen again in the details provided on page 13 of the press release. And that slowdown produces a about a $5.8 million or 3 cents per share headwind for the full year, which we obviously previously, I should say, noted and is baked into our 2023 guidance. One last note on first quarter results. We did receive $1.7 million of lease termination income, and that's higher than normal and compares with $1.0 million in Q1 of 2022. But overall, a good quarter in line with our expectations. Moving on, our AFFO dividend payout ratio for the first quarter of 23 was approximately 67%. That created approximately $49 million of free cash flow after the payment of all expenses and dividends for the quarter. This free cash flow funded 31% of our total acquisitions in the first quarter, and that's about half of the equity needed for those acquisitions Assuming we run a balance sheet at roughly 60% equity and 40% debt on a gross book value basis. Occupancy was 99.4%, as Steve mentioned, at quarter end, and that's flat with year end of 2022. G&A expense was $12.25 million for the quarter, and that represents about 6% of revenues. But our midpoint guidance for this line item is still $44 million for the full year 2023, which would put G&A closer to about 5.5% of revenues for the year. We ended the quarter with $782 million of annual base rent in place for all leases as of March 31, 2023. Today, we did not change our 2023 guidance, which we introduced in February. First quarter results might suggest we have the opportunity to be at the higher end of the guidance range, but we will revisit any guidance changes when we report second quarter results. The 2023 guidance and the key supporting assumptions are on page seven of today's press release. Switching over to the balance sheet, we maintain a good leverage and liquidity profile of roughly $900 million of liquidity. The first quarter was fairly quiet in terms of capital markets activity. We issued $17 million of equity in the first quarter, executing trades around $46 per share level. After a few years of nearly no usage of our $1.1 billion bank line of credit, we did begin to use it a bit in 2023, and that was a part of our plan to navigate this rockier interest rate and capital market environment. Our weighted average debt maturity is about 13 years, including that bank line. All of our debt outstanding is fixed rate with the exception of that the 209 million on our bank line, which represents about 5% of our total debt. A couple metrics, net debt to gross book assets was 40.4%, which is flat with year end. Net debt to EBITDA was 5.3 times at March 31st. Interest coverage and fixed charge coverage was 4.7 times for the first quarter of 2023. So we're in very good shape to navigate the elevated economic and capital market uncertainties and to continue to grow first-year results, which we view as the primary measure of success. And with that, we will open it up to any questions. Ali.