NNN REIT, Inc.

Greetings and welcome to the NNNREIT second quarter 2023 earnings conference call. At this time all participants are on 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 Horn. Sir, you may begin.

Thanks, Ali. Good morning, and welcome to NNN's second quarter 2023 earnings call. Joining me on the call is Chief Financial Officer Kevin Hobbins. As this morning's press release reflects, M&N's performance in the second quarter produced 1.3% core FFO per share growth over prior year's results, along with investments of slightly over $180 million with a 7.2% initial cash yield. The solid acquisitions for the quarter are driven by our tenant relationships. In addition, our portfolio continued with a high occupancy of 99.4%. and strong lease renewals for the quarter that have been trending above historical levels year to date. These results have NNN in position to create shareholder value as we transition into the second half of 2023 and beyond. In July, we announced an increase in our common stock dividend to be paid August 15th, thus making 2023 our 34th consecutive year of annual dividend increases. NNN is in select company of the under 75 U.S. public companies, including two other REITs, which have achieved this impressive record of accomplishment. Based on our first six-month performance, we announced an increase of our 2023 core FFO guidance to a range of 317 to 322 per share. Our long-standing strategy is designed to deliver consistent per-share growth on a multi-year basis. This discipline of this long-term approach is reflected in the guidance increase during the current challenging economic backdrop. Turning to the highlights of the quarter, our portfolio of 3,479 freestanding single-tenant properties continued to perform exceptionally well, maintained high occupancy levels of 99.4 for four consecutive quarters, which remains above our long-term 98% average. At quarter end, NNN only had 22 vacant assets, which is the result of our leasing department's effort working in non-performing properties and creating value for NNA. In addition, nearly 90% of the leases that were up for renewal during the quarter exercised an extension at 105% of the prior rent. Moving to acquisitions, during the quarter we invested just north of $180 million in 36 new properties with an initial cash cap rate of 7.2%, with an average lease duration of 19.7. We closed on 19 transactions in the quarter, and 17 were from our relationship tenants that we do repeat business. The first half of the year, we invested over $337 million in 79 new properties with an initial cash cap rate of 7.1 and an average lease duration of 19.4. Given that M&M closed on roughly 60% of the original midpoint acquisition guidance, Coupled with the visibility of our acquisition pipeline, NNN has bumped up acquisition volume guidance to $600 to $700 million for the year. Almost all of our acquisitions this year are long-term lease deals, defined 15 to 20 years. And that is a result of the calling effort of NNN's acquisition team. NNN prides itself on maintaining the relationship business model and targeting sale-leaseback transactions. There is a lot that goes into deploying capital at the right risk-adjusted returns and the value of NNN's lease form as a tool to mitigate risk within the portfolio, which is easier to obtain if you have the sale-leaseback model, can sometimes be overlooked. With regard to the acquisition pricing environment, as I mentioned in the May call, we are seeing that cap rate increases started to plateau and stabilize. That played out in the second quarter as expected with a 20 basis point increase over Q1 versus the 40 basis point pickup quarter before. The first six months cash cap rate was 7.1, which is 90 basis points higher year over year. As far as the second half of the year, I'm seeing NNN's initial cap rates slightly higher than the second quarter in the range of 10 to 20 basis points. During the quarter, we also sold seven properties, two which were vacant, raised 28 million of proceeds at a 5.1 cap rate to be easily reinvested into their creative acquisitions. Year-to-date, we have now raised $40 million in proceeds and a 5.6 cap rate from the sale of 13 properties, including five vacant. Although job one is to release vacancies, in year-to-date, NNN has had a 97% rent recapture with minimal TI dollars reinvested. We will continue to sell non-performing assets if we cannot see a clear path to generate rental income within a reasonable timeframe. The current banking conditions, along with the higher interest rates, are creating a softer 1031 market, but NNN is navigating the water successfully. Our balance sheet remains one of the strongest in our sector. Our credit facility has plenty of capacity, no material debt maturities until mid-2024, strong free cash flow, and a viable disposition strategy. NNN is well positioned to fund our 2023 acquisition guidance. In closing, I want to thank our associates for their dedication and hard work for putting in position to finish 2023 strong and set us up for 2024 and beyond. With that, let me turn the call over to Kevin for some more color and detail on our quarterly numbers and updated guidance.

Thanks, Steve. 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 produce 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, headlines from this morning's press release report quarterly core FFO results of $0.80 per share for the second quarter of 2023. That's up $0.03 or 1.3% over a year ago results of $0.79 per share. And first half 2023 results were $1.60 per share, which represents an increase of 2.6% over the prior year results. AFFO for the first half of 23 was $1.62 per share, and that's a 1.3% increase over prior year results. As we footnoted on page one of the press release, if you absent the accrual basis deferred rent repayments in both 2022 and 2023, this AFFO per share growth would have been 2.5% for the first half of 2023. Similarly, the scheduled cash basis deferred rent repayments continue to taper off as anticipated in 2023 and can be seen in the details provided on page 13 of the press release. Absent these cash basis deferred rent repayments in both 22 and 23, core FFO per share would have increased 3.2% for the first half of 2023. Separately, I'll note too that in the second quarter of 2023, results included $290,000 of lease termination income, and that compared with $1.7 million in the first quarter. But overall, a good quarter, which was in line with our expectations. Moving on, our AFFO dividend payout ratio for the first half of 2023 was approximately 68%. And that created approximately $95 million of free cash flow. That's after the payment of all expenses and dividends for the first half. As Steve mentioned, after quarter end, we announced what will be our 34th consecutive annual increase in our dividend that gets paid in a couple weeks on August 15th. Occupancy was 99.4% at quarter end. That's flat with the prior quarter and flat with year end 2022. G&A expense was $10.7 million for the quarter. That represents 5.3% of total revenues, and it was 5.7% for the first half of 2023. Notably, our midpoint guidance for this line item is still $44 million for the full year 2023, and that should put us closer to about 5.5% of revenues for the year. Lastly, we ended the quarter with $794.5 million of annual base rent in place for all leases as of June 30, 2023. Steve mentioned we did increase our 2023 core FFO guidance, increasing the bottom end by 3 cents and the top end by 2 cents to a range of $3.17 to $3.22 per share. AFFO guidance was increased to a range of $3.20 to $3.25 per share. The smaller increase in the AFFO guidance range is primarily a result of projected capitalized interest expense from increased investment of what we call split-funded acquisitions. These are acquisitions that are funded over time as the property is constructed. which we think is of value to our customer. We're doing more of that this year than typical. In typical year, probably 20 to 25% of our acquisition dollars are in that type of program where construction gets funded. This year, we're probably pushing closer to 35% in terms of total dollars invested in that sort of mode. But overall, in terms of per share growth, You know, the more modest growth in 2023 reflects really a couple things in my mind. A, the high bar from last year's 2022's 9.8% growth created and the lack of tailwinds that were helpful in 2022, coupled with the slowdown in our scheduled deferred rent repayments in 2023, as noted on page 13. The 23 guidance and key supporting assumptions are on page seven of today's press release, which is really the only notable change being a $100 million increase in our 2023 acquisition volume guidance, which is now $600 to $700 million. Switching over to the balance sheet, we maintain a good leverage and liquidity profile with over $750 million of liquidity. The second quarter was quiet in terms of capital markets activity. We issued $13 million of equity in the second quarter and $30 million of equity for the first half of 2023. So this fairly modest equity raise of $30 million in the first half plus $95 million of free cash flow in the first half and $40 million of property disposition proceeds totals $165 million which allowed us to fund nearly all of the equity portion of our $337 million of first half acquisitions on a leverage neutral basis. Consistent with our plan and prior comments, we have begun to use our bank line a little more after a few years of virtually nearly no usage. It's part of the plan to navigate this rockier interest rate and capital market environment. Our weighted average debt maturity is over 12 years, and that includes the bank line, which is among the longest in the industry. Our debt outstanding is all fixed rate with the exception of the bank line, which represents about 8% of our total debt. A couple numbers. Net debt to gross book assets was 40.8% as of June 30th. Net debt to EBITDA was 5.5 times at June 30th. Interest coverage and fixed charge coverage was 4.6 times for the second quarter. All properties owned by NNN are unencumbered by mortgages. In closing, we're in Good shape to navigate what seems to be elevated economic and capital market uncertainties and to be able to continue to grow per share results, which we view as the primary measure of success. Fundamentals, as Steve mentioned, of our business remain in good shape. Occupancy, releasing, renewals, acquisition, and disposition volumes and cap rates. We feel like we're on a pretty good track for this year. With that, we'll open it up. to any questions, Ollie.