Q1 2021 National Retail Properties Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to your National retail properties first quarter 2021 the earnings conference call. All lines have been placed in a listen only mode on the floor will be open for your questions and comments following the presentation.
As a reminder, today's call is being recorded.
If you should require assistance throughout the conference. Please press Star then zero.
At this time it is my pleasure to turn the floor over to your host Jay Whitehurst, Sir the floor is yours.
Thank you Melinda good morning, and welcome to the National retail properties first quarter 2021 earnings call. Joining me on this call is our Chief Financial Officer, Kevin topics, and our Chief operating Officer, Steve Horn.
As this morning's press release reflects 2021 is off to a great start for national retail properties.
Beyond our impressive financial results during the first quarter, we were pleased and honored to be named as one of the few reach in the 2021, Bloomberg gender equality index and I'd like to take this opportunity to thank everyone in our office, who put in the time and effort to achieve that important recognition.
Yeah.
Given our strong start to the year, we're pleased to announce an increase in our guidance for 2021 core <unk> by approximately 6% from a range of $2 55 to $2 62 per share to a range of $2 70 to $2 75 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 3161 of freestanding single tenant retail properties continued to perform exceedingly well on.
Occupancy was 98, 3% at the end of the quarter, which remains above our long term average of 98 per cent.
And while our occupancy rate ticked down 20 basis points from December 31.
We're seeing impressive activity in our leasing department, including interest by a number of strong national tenants in some of our vacancies.
We also announced the collection of 97% of rents due for the first quarter.
As well as collection of 98% of rents due for the month of April.
Our impressive collection results continue to compare very favorably to other retail real estate companies, including those with a significantly higher percentage of investment grade tenants.
The majority of the remaining uncollected rent in the first quarter was simply deferred ramp that we expect to collect when the tenants repayment obligation kicks in later this year.
Notably, we only for gave 0.1% of our first quarter of rats.
Recently, our two largest bankruptcies were resolved and favorable fashion.
Chuck E cheeses affirmed all 53 of our leases in exchange for a 25% temporary base rent reduction that will expire at the end of this year.
And Ruby Tuesdays affirms 26 of our 34 leases accounting for over 80% of our annual rent from Ruby Tuesdays.
Again in exchange for a comparable temporary base rent reduction.
These impressive post pandemic occupancy leasing and rent collection outcomes of once again validated our consistent long term strategy of acquiring well located parcels leased of strong regional and national operators at reasonable rents.
Maintaining a strong and flexible balance sheet.
Although we continue to be prudent in our underwriting we acquired 29, new properties in the quarter for just under $106 million.
On an initial cash cap rate of six 4%.
And with an average lease duration of 17 and a half years.
Almost all of our acquisitions were from relationship tenants with which we do repeat programmatic business.
In an unsettled post pandemic environment, where cap rates remain at all time lows, we will continue to be very thoughtful on our underwriting and primarily pursue sale leaseback transactions with our relationship tenants.
We also reported that during the first quarter, we sold 11 properties raising $17 $6 million of proceeds to be reinvested into new acquisitions.
And our balance sheet remains rock solid during the quarter, we issued $450 million of unsecured 30 year interest only bonds at a rate of three 5%.
Kudos to Kevin and his team for once again, raising well priced capital when it's available.
A portion of those bond proceeds were used to redeem our 2023 debt maturities. So we ended the first quarter with $311 million of cash in the bank of.
Zero balance on our $900 million line of credit.
No material debt maturities until 'twenty 'twenty, four and an average debt duration of over 13 years. Thus, we're well positioned to fund all of our 2021 acquisition guidance with the available capital on hand, and with that let me turn the call over to Kevin for more details on our quarterly numbers and ups.
<unk> guidance.
Thank you Jay and as usual I'll note that we will make certain statements that may be considered to be forward looking statements under federal Securities law of the company's actual future results may differ significantly from the matters discussed in these forward looking statements that we may not release revisions to these forward looking statements to reflect changes after the state.
<unk> for made factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail the comps.
<unk> filings with the SEC on in this morning's press release.
With that headlines from the this morning's press release for for quarterly core <unk> results of <unk> 69 per share for the first quarter of 2021, that's up six <unk> from the preceding fourth quarter's 63 cents.
And out of any from the prior year at <unk> 70 per share.
Results for the first quarter included two nonrecurring type items totaling $5 million first we collected $2 $2 million of receivables from cash basis tenants that relate to prior quarters and second we received $2 $8 million of lease termination fee income.
Which is more than typical for context full year 2020.
$2 million of lease termination fee.
For the income.
So these two items totaling approximately $5 million added just under <unk> <unk> per share to our results.
Today, we also reported that <unk> per share was <unk> 76 per share for the first quarter.
Which is centered on per share higher than the preceding fourth quarter 69, we did footnote. This amount included $9 $4 million of deferred rent repayment and our crude rental income adjustment in the first quarter <unk> number.
Rent collections continue to drift higher as Jay mentioned, we reported today, our rent collections of approximately 97% for the first quarter, 98% for April rent collection.
Most notable collections from our cash basis tenants, which represent approximately $50 million of 7% of our annual base rent improve to approximately 80% for the first quarter.
Previously we projected these cash basis tenants would pay at their historical payment rate of about 50% of rent so improving the 80% added about $4 million of revenues in the first quarter versus our prior guidance.
As Jay mentioned today, we increased our 2021 core <unk> per share guidance from the range of $2, 55% of $2 62 per share.
For a range of $2 70 to $2 75 per share.
This incorporates the better than expected rent collections and the results from Q1.
Some of the assumptions supporting this guidance are noted on page seven of today's press release and they are largely unchanged from last quarter's guidance the.
The driver for the increase in full year guidance is the $5 million of first quarter non recurring items I previously mentioned.
And the assumed higher rent collection rates more in line with current collection rates.
While we previously assumed 50% range of collections from the $50 million of cash basis tenant annual base rent.
Now assuming 80% on collection.
The incremental 30% amounts the $15 million for the full year.
And for the remainder of our tenants, we previously assumed 2% potential rent loss and we now assume 1%.
The potential rent loss, which equates to approximately $6 million of improvement for the year.
For the compare to prior guidance current guidance incorporates approximately a total of $21 million and approved Inc.
Improved rent collection of plus $5 million of one time items in Q1, or a total of $26 million and that all equates to about <unk> 15 per share.
J noted we ended the fourth quarter of $311 million of cash on hand, and nothing outstanding on our $900 million Bank line we.
We did execute of $450 million 30 year debt offering with the three 5% coupon on March 1st.
The large portion of those proceeds to pay off our $350 million of three 3% notes due in 2023.
Well time will tell given where we are in the 40 year declining interest rate cycle. It felt like it was a good time to continue to push out of debt maturities at these rates.
Our weighted average debt maturity is now 13 three years with the three.
Three 7% weighted average fixed income interest rate.
Our next debt maturity of $350 million with a three 9% coupon in mid 2024, so on very good liquidity and leverage position and have no need to raise any additional capital to meet our 2021 acquisitions guidance.
A couple of stats.
Net debt to gross book assets was 34, 7% at quarter end net debt to EBITDA was 5.0 times at March 31.
Interest coverage was four six times and fixed charge coverage for one times for the.
First quarter of 2021.
Only five of our 3161 properties are encumbered by mortgages totaling about $11 million.
For 2020.
2021, the off to a good start as the economy and retailers seem to be catching wind in their sales from the several trillion of stimulus injected by the government, which feels like it will continue into 2022.
Our focus remains on the long term as we continue to endeavor to give it an end of the best opportunity to succeed in the coming years and the window with that we will open it up to any questions.
Thank you the floor is now open for questions. If you do have a question. Please press Star then one on your telephone keypad to join the queue if youre on.
Using a speakerphone please pick up your handset to provide the best sound quality again, ladies and gentlemen, if you do have a question or comment. Please press Star then one on your telephone keypad at this time and it looks like our first question comes from Ronald Camden with Morgan Stanley. Please go ahead.
Hey debt.
Good afternoon, congrats on the quarter just looking at the acquisition of just wondering if you could provide just a little bit more color in terms of what you're seeing in terms of the pipeline and maybe what I know you guys are being disciplined but how are what are you seeing in terms of that pricing as well.
Sure Ryan This is Jay I'll start with a little bit of high level, and then turn it over to Steve for him to talk a little bit more about what he sees out there but.
Just as a reminder, our primary focus is on doing repeat programmatic business with our portfolio of relationship tenants that are strong regional and national operators and that will continue to be our primary focus when we do business with those folks.
Some of the benefits that that we get out of those debt those relationships are the tenants sell us better real estate. The tenants are more likely to call out the weaker properties out of the sale leaseback and not commit to signing of long term lease on those properties.
And so we get better higher quality real estate were able to negotiate our own lease documents, we get slightly better lease economics, and one thing Thats really an important factor to us as we get a longer lease duration as I noted our average duration for the first quarter was 17 five years and I believe.
Our average duration for last year was a little north of 18 years.
That's very important to us to create debt long term rental income stream.
The pipeline does look good out there so Steve let me turn it over to you to talk about a little bit about the pipeline and pricing.
As the seat.
You kind of look out when we look back I should say in the fourth quarter. The pipeline today feels a lot more robust.
There are some portfolios out there that one here in the fourth quarter. So we're feeling good about that that the.
On the sale leaseback market seems to be opening up some on.
As far as pricing I think you just kind of based on the cash cap rate of approximately $6 for cap rates or sell near a historic low and no sign of increasing at this point.
But it's more on the investment grade world and the deemed essential asset there's still sit in the extremely low compared to historical levels.
Great.
And one more if I may just just wanted to get your updated thoughts just on tenant Health Inc.
Think about the guidance.
The a bit the confidence of sort of raise the collections. The 80 per cent for the cash tenants. What are you seeing in the market. What are you hearing from sort of your relationships that gives you that sort of the confidence that.
We've turned the corner. Thank you yes.
Yeah, Thanks, No thats good.
We have had great conversations with our relationship tenants kind of across the board for.
For the lines of trade that make up our portfolio and and we've reported this earlier they are tenants whether the pandemic.
The economic effects of the pandemic very well and we're starting to rebound into the fourth quarter and that rebound is continuing and what we're hearing from our relationship tenants is that they are more and more getting back into the mode of playing offense and I think thats reflected in steves comments about.
Growing number of sale leaseback transactions that were seeing out there in the market.
Kevin is there anything else on that in terms of our guidance.
I guess connected to that our guidance is following.
Our actual recent historical range.
The rent collection from our tenants and so when we increase from 50% to 80% for the cash basis bucket Thats because thats what happened in the first quarter. When we were at 50% rent collection that was consistent with fourth quarter.
2020 collection rates. So we are tracking with that we don't have any real sense on why that should.
Changed materially for the better or the worse at this point, but.
But we'll keep you posted but it does feel like like I said stimulus that's been pumped into the economy is finding its way.
To consumers and retailers.
Got it it makes a lot of sense, that's all for me. Thanks Scott.
Next we go to the line of harsh Hey, Mani with Green Street. Please go ahead.
Yeah.
Thank you.
Can you talk about bill.
For the assets that you typically.
Since the late this quarter and maybe the GAAP paid on debt.
Yeah harsh I think I heard the understood. The question to talk about our acquisitions in the good operators.
Dispositions debt was.
As you it was very small number of ours. So it's not much of a <unk>.
Sample size there but.
It was a few properties primarily core culling.
Properties.
At the kind of lower end of the spectrum wasn't of Steve. It is more of a defensive corridor for us as far as if it was on a few vacant assets, but assets that we kind of felt in the long term, but didn't fit the portfolio that could result from the issues going down the road the way of <unk>.
Coke out just between the.
Bacon and occupied of it.
$17 6 million, we sold $11 7 million was occupied $5 9 million of Aegean.
Okay and then.
Any sense that you moved out of the cash basis bucket.
Just because of good collections, Yeah Fair question, Yes, we did not move anybody out of the cash basis, but had noted we add anybody Doug good news there, but yes, we haven't changed that.
Our thought process on that is we're not going to be to knee jerk.
Marquee about one.
One good quarter, if you will and so we'll need to kind of of a little more test of time before we're going to be.
More willing to pursue I think about <unk>.
Moving somebody out of the cash basis bucket.
Okay. Thank you.
Next we go to the line of Wes Golladay with Baird. Please go ahead.
Hey, Good morning, guys. Just a quick question Kevin for you on the the end of period of rent. The 684 million. Three does that include the adjusted of rent per Ruby Tuesdays and Chuck E cheese, and maybe a follow up to that would be where you're able to maintain your master lease structure with chucky cheese.
Yes, the ABR does reflect if we made a permanent change, meaning we didn't just deferred but we made it permanent.
Get included in our annual base rent numbers. So Chuck E cheese got stepped down Ruby Tuesday did as you noted what was the second part of your question sorry.
Did you maintain your master lease structure with Chucky cheese, and I'm not sure if you had one.
Ruby Tuesday doesn't sound like you did.
Yes, we did maintain it yet.
Got you and then can you talk about what the demand is for the non core assets and if there is a firm bid would you look to sell more of this year the towards the high end of your guidance.
No.
As it relates to what you would call non core assets I think we're seeing good demand for our vacant properties both for.
From buyers and to re lease those properties.
The point I made earlier on in the pandemic was at our properties were in high demand before all of this and I wasn't going to be surprised if they were if they continue to be in high demand. These are generally well located properties at reasonable rents and so for some reason we may get them back but there.
The kind of properties, where tenants typically want to be and you can find somebody else who wants to be there.
So.
It's too early to report a great deal of results, but but our leasing team.
<unk> is doing a very good job of getting out there and.
Making these properties available and they have a lot of properties, where there is discussions going on either for sale or re lease.
If you were talking about non core properties in the sense of <unk>.
Leased properties that were debt.
We were hit by the pandemic and are in lines of trade debt are.
Currently viewed as still being at risk I.
I would say there's not a great.
Bid not Steve would you say there is not a great deal of bids yet for those kind of properties not to beat up on the movie theater industry, but not many buyers of movie theaters out there on the fitness arena in the movie theaters, yet the market is very robust and theres still the gap between the bid and the ask.
Currently where people are willing to buy those assets and the net.
And the salary of those numbers.
Got it thanks for the granular details there maybe one last one on the on the cap rate is typically it's been below that of your normal range of the last two quarters.
I think thats, probably do the mix I just wanted to confirm that.
And if so do you get higher escalators with the visa lower cap rates.
Yes, I would say that it's probably a little bit more driven by some of it may be mix, but it's also just being driven by cap rates continue to drift downward slowly we do business with strong operators with the kinds of properties that are in high demand and even though we have a relationship.
Our tenants are smart business folks and they they know what the proper cap rate is that their properties command. So we will.
We win some business wins, some ties do a little better than the one off market with our relationship tenants, but to the extent of cap rates for their types of businesses are moderating down we have to moderate down with them.
I think thats more of what you are seeing then.
Than anything else and the bumps are staying about the same market bumps for.
For our.
The size of tenants that we do business with are in that one 5% to 2% per year range and that's remained consistent.
Got it thanks, a lot guys.
Next we go to the line of John Masato chat with Ladenburg Thalmann. Please go ahead.
Good morning.
So if you look at the rent deferral schedule in the earnings release, I guess, what moving drove the new deferrals that are going to occur in kind of Q2 through Q4 of this year.
And are they also what's driving the repayments that are getting schedule of kind of in 'twenty three 'twenty four 'twenty five.
Yes, we had a modest amount of new deferrals as we kind of mop up on agreements of UL with.
Tenants, who we hadn't come to final terms with and so yes. Some of those are getting pushed out of <unk>.
Little further than the original batch if you will bigger batch of deferrals, yes.
But it has not been it's not a huge number one way or the other.
But let me let me add in John that we've really been very pleasantly surprised with how few conversations we've had with our tenants about a second round of deferrals.
<unk> had very few tenants come back and need to extend or restructure the original deferral agreement that we made with them net.
Yes.
All part of the Pleasant surprise of how well things of bounce back.
Okay.
On the small amount the have had additional deferrals or they are in this new kind of deferrals for 2021 of those tied to a specific industry or has it been.
It's not a huge number but it hasn't been kind of Brian Yeah, I'd say that come from are the.
The lines of trade that were troubled right from the start of the tray of casual dining in movie theaters.
<unk> make up most of that when you say, Steve primarily of movie theaters makeup the first quarter and that was kind of let the standard at the beginning we had reached agreement discussions were going on in 2020, and we finally got a document of the pipeline one.
Okay.
And then one other kind of small movement was health care, sorry of health and fitness collection ticked down a little bit I mean, what's driving that just given the.
Of the positive kind of tailwind from reopening an economic stimulus et cetera.
Yes.
I don't think anything has changed materially I don't think that you should read anything into that at least from our perspective, we don't we don't see that.
Really.
A notable.
Trend if you will.
John This is Jay.
We are not going to we're not going to get into talking about specific test, but I will say in that group. We deal with large operators that we think ultimately will be in a position to have gotten through this had gotten out of the other side and be in a position to pay their rent and so.
Along the way there may be sort of like Kevin said, just sort of ticks up or down, but we feel pretty we feel good about the tenants that we've got in that line of trade.
Okay.
That's all for me thank you very much.
Our next our next question or comment comes from the line of Katy Mcconnell of Citi. Please go ahead.
Hey, guys. This is part of the crazy on for Katy I guess not to beat up too much on the theaters sort of aspects of it I was just wondering if you could touch on how conversations with some of those tenants over the past quarter sort of changed I think.
Collections improved pretty significantly on the sequential basis and also just sort of.
What actual collections for April sort of came it at if you can provide that.
Sure.
Yes again.
Not going to talk about specific tenants, but as Steve mentioned some of our theater tenants we were.
In longer discussions for the deferral.
Agreement, so, whereas in 2020 that some of that theater rent would have been in the unresolved or outstanding bucket now it's in the deferred bucket and and as you can see at the at the level of collections that we're getting.
Everybody is kind of on track now so it feels very solid.
At the moment.
And I think of you might have asked about April I don't know if you meant April collections in that line of trade I think we're not in a position to do that but we reported generally for April we're at 98%.
Of rent due for the month of April.
Got it okay. Yeah, I was looking for the theater of number, but that's alright alright.
Most of that so much appreciate it.
Okay.
And then we take our last question from Linda Tsai of Jefferies. Please go ahead.
Hi can you discuss your strong rent collection of <unk> 97 per cent of <unk> and 98% in April and you know on your comment that exceed some of other companies with higher <unk> exposure.
What accounts for the discrepancy if youre, making an educated guess.
Yes.
Yes, I think you might have to ask the companies that have the higher investment grade part of that question, Linda, but I would say that it validates from our perspective.
This validates our strategy of dealing with that.
Dealing directly with large operators and doing direct sale leasebacks with those operators. So that you get the benefit as I talked about in one of the earlier questions, where they only sell and lease back properties that they're comfortable signing of long term obligation.
On and and.
And we are very focused on keeping rent as low as possible to create a margin of safety for both our tenants and for ourselves if we get the properties back and so if you deal with strong operators and they call out the weaker properties and you focus on keeping the rent low.
It should bounce back faster when things go well so.
We don't we sweat tenant credit and we study it and we think about it but we really rely on good real estate locations leased the large operators as our ultimate security and we feel like that strategy has been validated through this process to be at.
At least equal to and maybe on a temporary basis somewhat better.
Dan focusing more on investment grade, where you pay more for the property have higher rent and have less gross in the lease.
Thanks for that and then I guess, given the strength in the retail sector you're seeing.
Pandemic is it fair to say that the occupancy decline will no longer be as bad as the great financial crisis.
Well if you wanted to.
If you knock on wood cross your fingers.
Yes, no no no question, but yes, that's for sure.
Generally felt like would be worse than the.
009.
The wildcard obviously and this was several trillion dollars of <unk>.
The most of that.
<unk> kind of came from left field, So I think youre seeing.
Average really a lot of retail real estate companies.
The doing relatively well on better than expected it kind of across the board. So.
Like I say several trillion dollars.
The seemingly well.
Take care of both on problems were a period of time anyway.
Thanks.
And that concludes our question and answer session. We've returned to Jay Whitehurst for closing remarks. Thank.
Thank you Bill Linda, but before I close I would like to offer my congratulations to Mary Fedewa for her well deserved promotion to CEO of store capital and following Chris of all she has got big shoes to fill but store is in great hands with Mary at the helm and thank all of you all for joining US. This morning, we look forward to talking with.
And maybe even seeing you in person in the weeks ahead. Thank you.
Thank you for 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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