Q2 2020 National Retail Properties Inc Earnings Call
Good day, ladies and gentlemen, and welcome to your National retail properties second quarter 2020 operating results conference call.
All lines have been placed on a listen only mode and the four will be open for your questions and comments. Following the presentation. If you should require assistance throughout the conference. Please press star zero to reach a live operator at this time, but it's my pleasure to turn the floor over to your hosts to Jay Whitehurst, Sir the floor is yours.
Thank you.
Good morning, and welcome to the National retail properties second quarter 2020 earnings call. Joining me on this call is our Chief Financial Officer, Kevin Hovick.
First I want to express my heartfelt appreciation to all the associates a national retail properties for their hard work dedication ingenuity flexibility and respect for each other as we address and work through the myriad impacts like totaling 19 pandemic on our lives and the businesses.
Task order.
Yes to all of those first responders in healthcare workers, who are out there, we're keeping a safe and healthy I also our deepest banks as well.
Second quarter results for National retail properties reflects the basic strength and resiliency of our long term strategy and business model.
We ended the quarter and a strong liquidity position with $225 million of cash in the bank plus $900 million of available capacity on our line of credit.
Our fortress like balance sheet and long term perspective, we're driving factors behind the recent announcement of an increase in our common share dividend.
Once the dividends paid later this month 2020 will become our 31st year of increased dividends feed matched by only two other reach and less than 90 public companies in the United States.
We collected approximately 69% of our rents due in the second quarter and agreed to defer approximately 21% of our second quarter brands.
The pandemic spread and businesses shut down national retail properties adopted a very collaborative approach if those tenants that were materially impacted.
While remaining measured consistent and fair.
Our typical rent deferral agreement had a term of less than three months with repayment of the deferred rent typically commencing in the fourth quarter and continuing through the end of 2021.
To watch this is the way a long term partner should behave.
So those patents that were unwilling to pay right where agreed to a deferral arrangement, we're pursuing or legal remedies for payment and enforcement of the lease.
It is noteworthy that in all of our negotiations and agreements with tenants, we have forgiven only <unk>, 0.1% of our quarterly base right.
Today's press release also includes our disclosure that July right collections were approximately 84%.
Consistent with our long term practice of reporting results only quarterly we do not anticipate reporting monthly rent collections for August or September prior to our third quarter earnings release.
Oh, well located retail properties were in high demand prior to the cobot 19 pandemic.
Evidenced by our consistently high occupancy rate of 98% plus or minus 1%.
And our consistently high tenant lease renewal rate of 80% to 85% at approximately 100% prior rent.
Both of those impressive metrics continued to hold true through the first half of 2020.
We believe our properties will remain in high demand in the post pandemic world.
Our pause in acquisitions was evident as we acquired no new properties in the second quarter investing only $7 million to complete some projects that were already underway.
Year to date, we have invested $74 million at a 6.9% initial cash cap rate.
We're continuing to take a thoughtful approach to new capital commitments and focusing on maintaining our strong liquidity position.
Consistent with that philosophy, we have continued to raise capital in 2020 issuing $53 million of equity by our our ATM and raising $40 million through property dispositions through the first half of the year.
We ended the second quarter with more cash on the balance sheet then at the end of Q1, all without increasing our leverage.
This is an enviable position from which to start the second half of 2020.
In closing I want to reiterate the long term approach to all aspects of our business. We believe that well located real estate acquired at reasonable prices at least a strong regional and national tenants at reasonable rates all supported by at low leveraged balance sheet and a long tenure.
Staff of industry experts remains to write formula for creating shareholder value on a multi year basis.
With that I'll turn the call over to Kevin for more details on our second quarter results.
Thank you Jay and as usual I'll start with our cautionary statement 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 chain.
Ranges. After the statements were made factors and risks that could cause actual results to differ materially from expectations or disclose from time to time in greater detail on the company's filings with the FCC and in this mornings press release.
With that headlines from this mornings press released a report quarterly FFO results 65 cents per share for the second quarter of 2020, and a AFFO per share was reported at 49 cents per share.
Which reflects $30.2 million were 17 cents per share of noncash straight line rents arising from the rent deferral agreements, we discussed last quarter in connection with the economic shutdown.
Occupancy was 98.7% at quarter end, that's down 10 basis points from prior quarter DNA expense was.
For the second quarter was 5.7% of revenues and that's down from 5.8% of revenues in the first quarter.
The primary items of note in our second quarter result, I read collections and receivables first ran collections improved monthly throughout the second quarter and into July today, We reported friend collections of approximately 69% for the second quarter and 84% for the month of July.
And the missed as the storm, it's never really never totally clear, if we're doing too much or too little with their rent deferrals, but we're hoping weve.
Struck a reasonable balance and what the benefit of three months of hindsight. We are relatively pleased with the progress being made as we work with a number of our tenants to find a path forward to pay that rent they owe us.
However, uncertainty continues in its out our opinion it'll be 2021, Thats, where we all get a better read on how the economy is going to perform.
So we remain cautious looking to reserve options, but we see some raises like on the collections from.
Now over to receivables first accrued rental income receivable, sometimes called straight line rent.
We recognized $35.8 million of accrued rent related to the tenant rent deferral agreement.
Is there to five point Sixmillion.
Producing a net increase in accrued rent of $30.2 million for the quarter in connection with those rent deferral lease amendments.
This accrued rental income is included in GAAP earnings. It's included NFV, FFO and core FFO results.
But consistent with our past practice practice, we excluded.
Accrued straight line rent when calculating F.
We did footnote what a AFFO would've been if we had not done this as I referenced at the beginning in my remarks.
These rent deferral agreements were entered into a certain tenants, which represented 21% the rent due in the second quarter.
On average the rent deferrals covered 2.4 months of rent.
84% of which related to second quarter rent and 16% relates to third quarter rent.
We expect to have 94% of these rent deferrals paid back to us by the end of 2021.
Secondly, the rent receivables increased by $17 million during the second quarter, we established a reserve of $2.6 million, resulting in a net rent receivable increase of $14.4 million for the quarter.
These receivables are concentrated in our for retail lines of trades, where our collections have generally been hit the hardest, which we noted on last quarter's call, namely theaters full service restaurants health and fitness and family Entertainment.
We expect these receivables.
Receivables will be paid resolved with a rental deferral agreement were end up in litigation.
We ended the second quarter with $225 million a cash on hand, no amounts outstanding on our bank credit facility.
We did not drawn down our bank line has many companies that we have not made material new property investments in our next debt maturity is in 2023, so in very good liquidity position and as their stock rallied 50% off its low lows, we opted to issue one for.
Here's a common equity in the second quarter near $37 per share on average via our ATM.
Not a large amount of the scheme of things and you shouldn't read too much into it, but just adding a bit more cushion and help preserving options.
Our weighted average debt maturities now 10.7 years with a weighted average interest rate of 3.7%.
Financial Covenant compliance is in good shape as outlined on page nine in the press release. So we're in a very good liquidity position with very few capital obligations. During the next three years.
Leverage metrics remain very strong net debt to gross book assets was 35.1% net debt to EBITDA was 4.8 times at June 30.
Interest coverage was 4.6 times.
And fixed charge coverage is was 4.1 times for the second quarter.
Only five of our 3117 properties are encumbered by mortgages totaling only $12 million.
Consistent with last quarter, we've not provided 2020 earnings guidance in light of the uncertainty in the economy generally in retailing in particular until we get a better read on the economic recovery and what the new normal might look like we're not able to reasonably predict precisely how things will play out.
As we work through what is in Dallas and undoubtedly a challenging 2020 for the global economy.
We will continue to endeavor to give and then the best opportunity to succeed in the coming years.
And with that we will open it up for any questions.
Thank you ladies and gentlemen, the floor is now open question. If you do have a question. Please press star one on your telephone keypad at this time, if you're using a speaker phone. We asked well closing your question you pick up your hands that to provide the best down quality.
Again, ladies and gentlemen, if you do have a question or comment. Please press star one in your telephone keypad at this time.
Well take our first question from Bryant Hopper with RBC capital markets. Please go ahead Sir.
Hi, guys I guess.
Just kind of want to talk about that leasing environment. How deep is the demand you seem for your leases and have you seen any changes in interest.
For a renewals throughout the pandemic.
Hi, Brian Good morning.
We I would say that leasing demand right now is less than usual for vacant properties. I mean, I think there's just a lot of businesses are waiting to see what they want to do about opening new stores, but as I reported.
In my comments this morning, our lease renewal.
Metrics have remained very consistent with our long term average of around 80% to 85% of the tenets renewing their lease at around 100% of prior rent and that is without the landlord, providing any lease incentive or.
Our additional dollars to incentivize the tenant for that renewal. So those renewals are on an as his basis. So far it's remained very consistent with our long term average.
Great and then.
I guess, what would cause you to look at a potentially extending any deferral agreement then.
No what could that look like if you were to start doing those knowing that matches, yes, yeah as we talked about in if I recall and and earlier in this call Weve.
We've taken a very collaborative approach with our tenants a as an initial proposition for a first deferral so to the extent the tenants business was significantly disrupted a we were a.
Quick to be into willing to discuss short term deferral only not forgiveness, but deferral only to be repaid starting later this year typically and continuing through the latter part of next year.
Equally and to the extent tenants that's not enough for some tenants then we will engage in what we sometimes referred to with folks as a phase two discussion, which would be a more far ranging discussion about.
Ways to create value for national retail properties, if we have to do further deferrals or.
Or other provisions or that you might have to do that tenant to make things work out and we have a lot of tools in that tool kit, we can talk about.
Extending term, we can start talking about changing lease red bumps during the term of the lease. We can you talk about new transactions. We can talk about a substitution of properties that are currently leased for was that the tenant my.
Might want to swap out so theres a lot of tools in that tool kit, but it really so far with us has not come into play in any great measure at all we've we've had good success with dish first initial deferrals that we're as Kevin said almost completely structured.
To deal with second quarter rent.
And and then you've seen in July that say no rents started to pick up notably.
Okay, great. Thank you.
Well take our next question from since or all the way with Green Street Advisors. Please go ahead Sir.
Hi, Thank you guys I'm can you spend a little bit more color on where it's a specific tenant industries are driving the increase run collections on July versus two Q.
Spencer.
That's a good question, but I do I think it's a kind of across the board.
Lines of trade that has been.
Strong billing the most during the last few months has been a the theaters and health and fitness and those lines of trade kind of continue to struggle as those as it's difficult to get those businesses opened and and reopened so I'd say probably has not contributed much.
The increase but otherwise I think across the board the.
Businesses got better.
Okay.
And then you guys raise equity in a quarter on you obviously have ample liquidity.
Aligned so what would you need a current order if you'd like to get more aggressive southcross crime.
Sure.
Hi.
Especially we just wanted to see how things settle out over over the long term <unk> said already in this call a few times, we take a long term view of the business and and we just want to see how this continues to play out.
Each month since April things have gotten a little better and felt a little better but you by no means no. No. One is saying that this is behind this yet so we just want to get a better feel for for how the next few months you're going to play out.
Is that relates to pricing as well as cost of capital pricing for properties as well as cost of capital.
Thank you.
Well take our next question from Rob Stevenson with Janney. Please go ahead.
Hi, Good morning, guys first question a revolving around.
The any changes to the 10 31.
Program, you know with given the the election or you guys anticipating on queuing up some additional dispositions into year end to possibly take advantage of that that not you know in the cards or in the strategy. At this point, how you guys thinking about that in the opportunistic ability to be able to sell assets potentially signal.
Typically lower cap rates than January or February yeah, Yeah, Rob dispositions has been a core competency for us for a long time and we we have a good steady flow of disposition business.
We've gone back and looked at it only about.
Call, it, 30% plus or minus of our dispositions I've been to 10 31 exchange buyers and so we don't anticipate that affecting us a great deal.
In in terms of of those dispositions it.
We will see if if we ramped that outcome. The company ended the year a lot a lot of our 10 31 and dispositions are kind of reverse inquiries were a were being contacted by buyers who are trying to get through so you're right. There maybe a crop push to do that at the end of the year thatll be kind of demand.
Okay, then we'll see it it's not a big.
Component of our overall disposition platform.
And then when you look at your more challenged operators out there whether or not to be Dave and Busters. You know main event Chucky cheese theaters or the gyms is there any significant lease expirations coming up in those categories in 2021, where you know the operators.
Challenge and you're likely to get the assets back at that point rather than be a renewal.
The Rob the short answer to that is no.
There's nothing I think in the upcoming lease expirations that and nothing no disproportionate to those lines of trade and to be honest, it's really outside of those lines of trade so right.
Near term expirations, we should be fine.
Okay. All right that was it that was what I was trying to get out thanks, guys. Appreciate it.
Well take our next question from John that's not going with Ladenburg Thalmann. Please go ahead.
John.
It appears that Mr was I can no longer there will move toward next question with the Vikram Malhotra with Morgan Stanley. Please go ahead.
Mr Malhotra.
Yeah I mean.
We can hear you now. Please go ahead, though can you hear me.
Yes, we can go ahead that growth. Okay. I just wanted to classify the impairment you took this quarter or could you just give us a bit more color on what that wasn't good I mean, if I missed that I apologize and then just second on the asset sales can you clarify kind of how you're thinking about vacant properties.
Sure Yeah, only impairments, we had 21.8 million during the quarter.
Probably two thirds of that roughly related to one small family entertainment.
Operator retailer that.
We're looking to sell a number of properties and so that that's what the bulk of that related to.
As it relates to dispositions as you know that so far it's been a kind of our usual balance between occupied and vacant I think three of our eight this past quarter three of our eight properties sold in the second quarter were vacant.
Which again is in terms of mix, that's kind of the normal I.
I think going forward will again, we'll see sorry to keep kind of saying that you.
You will see if that picks up or not it seems like it would but we'll see.
I'll just have to see yeah very quickly.
Or just added.
Kind of strategic business model level job. One is continues to be to release, our vacant properties and so that's what you will see us attempt to do a first and foremost.
Can as always but but.
We may be a little bit quicker to.
Dispose of vacant properties and monetize those if we have not had success getting them released within.
Nine months or a year historically, we sometimes held properties longer than that trying to.
Yes, and release and we may be a little bit quicker to.
Monetize that in turn that money into new acquisitions.
Okay.
And then just I wanted your updated thoughts on how to think about.
You know the occupancy trajectory from here on over the next call. It six or 12 months I know during every you you'd offered a certain kind of hypothetical bare case, you on occupancy and I'm. Just wondering now declared a couple of months under our belt affects how are you thinking about the effects of the recession.
On on occupancy versus say the GE etsy.
Yeah, I still hard very hard to answer that I will say I think we're probably are probably slightly more optimistic than we were I mean like I said with the benefit of three months of hindsight. It feels like things are moving the right direction.
The collections, obviously have ticked up.
We actually had a couple rent deferral agreements that.
Got sent back to US and said we've got the money, we're going to pay rent, we don't need the deferral agreement <unk> at the margin.
Slightly better having said that you know we I think one of the ways Weve frame. This is that 2008 nine we lost 300 350 basis points of occupancy.
And this feels worse than that so we obviously think it'll be more than that but.
We think whatever that number is which we don't know obviously.
It appears that will be just fine in terms of.
Balance sheet dividend of the critical kind of metrics and it really just becomes a matter of.
Releasing properties in due course and getting back Oh, turning back on the acquisition engine when we think it's appropriate.
Okay and then just last one for me if I can clarify you had alluded to the fact that if you need to offer more deferral you might look at you know putting certain lever. It never is in terms of bumps et cetera, but just as you think as we think about the next six months or is this your base case like are you planning for a third.
<unk> percentage of deferrals to just continue through the balance of the year.
Weird.
Vikram I I think I understand the question, where we're optimistic that the majority of our deferrals.
The initial deferrals well will be paid back on schedule and the tenants will otherwise get back on the regular ranch.
Payment schedule, a through the third quarter in into the end of the year it would be realistic to assume that.
No we won't have some other problems.
And they need to do some additional deferrals or lease restructurings with with some tenants, but to date to to echo kevins modest sense of optimism today, we've had a very few discussions about those kind of things with tenants.
Okay, great. Thanks, so much.
Well returned to John will come with Ladenburg Thalmann, Sir Your line is now open.
Morning.
Hey, John.
Second time chart [laughter].
[laughter].
So I just wanted to dive a little bit on Chuck E. cheese, you kind of given what's going on there I guess, maybe what are your views kinda early views on and recovery potential there I'm, just saying kind of color would be helpful.
We.
Yeah. There in bankruptcy, we are Kevin were on the creditors Committee, we are for for that right, so, but but they projected to some other leases already none of which being ours and we'll just see how that plays out we.
That's an example to us acquiring good real estate locations at reasonable prices and reasonable Reds and so far they those properties have.
Stayed in the business into bankruptcy.
And then just in terms of making recovery I mean should we expect something in line with historical norms or as you get in the operating environment, we're in maybe something discounted to that.
Yeah, the historical norm for for US is on vacant properties, we collect about 70 cents.
On the dollar about 70% of our prior rent without and that's on an as his basis, so without putting additional money into those properties and you know I think right now that that's probably kind of the bright line, we're looking at but it's too early for us.
To have a feel for that we may be better.
Or maybe worse.
Okay, and then I'm looking at kind of the QQ rental actions one industry that kind of stood out in terms of collection and not being maybe on the the traditional industries that have been impacted particularly hard was with the automotive services. These provide any color on on what kind of caused that low level rank collection that.
Hey industry in our they maybe one of the pay industries that have rebounded in July.
Yeah, they were without getting into talking about specific tenants that sector also includes car washes and the and so there are the those businesses, where some that we were.
Happy to talk to about deferral agreements when when the pandemic first struck by your assumption is right John they in many cases those businesses that have rebounded and so that that line of trade.
You know is is notable in the exhibit to the press release, but it is not at all a lot of trade that we are losing sleep over in terms of.
Getting back to full rent getting and getting those deferrals paid.
That's a lot of spend into strong founded a lot of strong tenants in that line of trade.
Okay and then one quick detail question you just make sure I was hearing it right the amount potentially it you reserve for being below Collectability threshold, that's in that 5.6 million.
Correct.
But.
Sorry, Yeah, that's a general reserve.
For the accrued ran when they all the accrued rent is effectively all is related to the rent deferral lease amendments that we entered into yeah.
Okay.
That's it for me. Thank you all very much.
Well take our next question from Christy Mcelroy with Citi. Please go ahead.
Hi, Good morning, guys. Thanks, I just a quick follow up on that reserve question. So you also mentioned that 2.6 million dollar number I'm what was that a portion of the 5.6 and just to clarify that and did you write off any straight line rent as well the quarter.
Yeah. So the first one or the last one no we didn't write anything right any off but yeah, two different buckets of receivables one the prudent rent.
Receivable, which we've always had over the years, but we added to significantly in the second quarter. As a result of the of at least the rent deferral lease amendments and so that that approved rent receivable went up $35.8 million, we reserved 5.6 million.
Just for that accrued rent receivable there are other receivables, which is just typical quarter end rent receivable somebody did.
Pay rent and they didn't enter into a deferral agreement and so that receivable went up by 17 million. We reserve 2.6 million for that receivable two different buckets. So yeah. The total of 8.1 million or 8.2 million I guess.
Total reserves for receivables.
Okay got it. Thank you and then just on the accounting treatment of the deferred rent. So it looks like it was treated as a as always modification a instead of taking advantage of size. These relief for treating it is not a modification given that it went through the straight line rent a line instead is occurring in the rental revenue line.
Can you just talk about the nature of the deferrals that either meet it ineligible for the five be relief or that you decided to treat it that way as a modification.
Now, we decided to book it as a crude ran.
We did take advantage of that that we did not reclassified these leases and so.
But there's at least deferral amendments were all treated as a.
Increase and accrued rental income.
Increase in accrued so so so you put you put it through it straight line rents. There of course, you know a as opposed to recruiting in the rental revenue line correct for the at least the deferral amendments yeah.
Okay, great modified.
Correct.
Okay, and then just in terms of the Q2 and July collection. So the amount of deferrals that Q2 implies about 10% unresolved, which you talked about and then you know in July can you provide the bucket out of the 16% remaining can you.
Provide the amount deferred and the amount unresolved and then I guess the second part of that question. If maybe you can give a little bit more color on that unresolved bucket you know what portion of that are you pursuing those legal remedies and what portion of that are national tenants.
Yeah. So they you should think of July very similar to the Twoq you in terms of they on resolving being about that same 10% number meaning 94% collected theres, probably 6%, that's being deferred and third quarter as I mentioned.
Some of our deferrals spilled into third quarter, and then 10% still unresolved you know, it's a little still hard to handicap exactly how it's going to that 10% is going to get broken out between collected which we've had a fair amount collective.
Execute a deferral agreement or litigate so were really early stages of sorting that out.
Okay. Thank you [laughter] Christy I, just maybe to add a little bit of color to that the is when I look at it about half of that that 10%.
In.
I have to discussions about deferrals that.
May well happen I'm, a little more optimistic about.
And about half of it is in.
Discussions with tenants that on less optimistic won't.
Oh, No will result in in a in a.
In a deferral agreement, but more more likely may end up in legal process, but those are with a lot of the tenants that make up that 10%. Our large strong companies there simply chosen either not to pay or not to agree to deferral.
Firms that we think our fair and reasonable.
Okay. That's helpful. Thank you.
As a reminder, ladies and gentlemen, if you do have a question or comment on me Press Star one on your telephone keypad at this time again, that's star one is the other question or comment well take our next question from Chris Lucas with capital One. Please go ahead.
Hey, good morning, guys.
I guess just Kevin just on.
On the expense side of equation.
Much insight into the direct payments the tenants have to make as it relates to expenses and how.
On top of those then or.
Yeah, I mean, it you know, we obviously track that along with ran so taxes.
Real estate taxes being the most important so yeah, we definitely stay on top of that and make sure. The tenants are staying on top of that our deferral agreement.
Typically continue to require the tenant to pay those expenses and we're deferring generally just.
Base rent amount.
So when you are and is it relates to just the sort of person.
Collected or or whatever metric you guys provided for there was like that haven't paid rent.
You don't have an <unk> deferral agreement are you able to sort of stay on top of whether or not in any expenses or not or center.
You know sort of on though no. We know we have a good sense and whether someone faded taxes or not you know the utilities with insurance et cetera are.
Less less critical obviously in the last sizable and so the real estate taxes, the big one and yeah, we continue to track that.
And that's factored into into your collected correct correct, Yes, Chris <unk>.
Chris It all of the Triple net expenses are part of the overall discussions with tenants that have not.
Tenets that make up that a that 10% a our bucket and unresolved bucket.
Okay, and then I guess as it relates to.
Cash flows going up a big component of your.
Capital investment opportunity set I guess, if you want is call it that way.
Anyway.
You have a number for us for second quarter terms routine cash flow.
I'm not really I mean, I guess, I guess, where the corridor.
And if you're looking at.
You know versus all in dividends et cetera.
Yep.
Yeah, I mean, we just about breakeven for the quarter.
That said that was that you know 69% rent collection.
I think weird.
If you look at our FFO $83 million dividend was 88 million.
If that gives you any kind of contact.
Yeah. Thank you appreciate it yeah, yeah, there like on a straight cash based worth about breakeven for the quarter, Yeah and for the half were obviously still positive yeah.
Well take our next question from Joshua Dennerlein with Bank of America. Please go ahead.
Hey, guys I'm, just maybe a follow up to Christys question.
Josh I think we last year.
No I'm looking at your industry.
Yes, Josh you're cutting out.
To tear and lets go onto the next call and see if we can get Josh back.
We'll move back to Vikram Malhotra with Morgan Stanley. Please go ahead.
Thanks, guys for comedy didn't just wanted to clarify under rent on the deferrals or even just the collections just wondering if there's any change in your experience from tenants in states like Texas, and Florida, where we've seen a ramp up in cases.
No you haven't really seen any you know regional or statewide notable you know variances in all of that you know at this point victim.
Remember that we deal with large we deal with large tenants that have a businesses everywhere. So even to the extent there may be a hot spot that pops up in causes them to shut down some of the units in that hot spot.
These are here, where where it to the extent of tenant was paying a spread there's there's still facts right.
Thank you.
As a reminder, ladies and gentlemen, if you do have a question or comment you made press star one on your telephone keypad at this time again, that's star one and your telephone keypad at this time.
And with more ladies and gentlemen, that's star one on your telephone keypad, if you'd like to ask a question or have a comment.
There appear to be no further questions at this time Mr., Mike I'll turn the floor back to you.
Thank you. We appreciate all of you joining us this morning have a good day.
Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time and have a great day.
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