Q1 2022 National Retail Properties Inc Earnings Call
[music].
Yes.
Good morning, ladies and gentlemen, and welcome to the National retail properties first quarter 2022 earnings call.
At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation.
Now my pleasure to turn the floor over to your host President and CEO , Steve Horn, Sir the floor is yours.
Matthew Good morning, and welcome to National retail properties first quarter 2022 earnings call. Joining me on this call is our Chief Financial Officer, Kevin Habicht.
This morning's press release reflects 2022 is off to a fantastic start for national retail properties.
Beyond our financial results.
The quarter early April and then release inaugural corporate responsibility and sustainability report.
Created report with the ISO occur.
Important clues and highlights eminence commitments achievements and initiatives ongoing basis.
Also before we get into the financial and portfolio detail I wanted to address the current direction of that and that as I mentioned earlier. This year I plan to continue executing the long standing business model of Internet locating underwriting and acquiring real estate with the right operators, all while delivering consistent year over year.
Core <unk> growth.
We remain vigilant and continuously evaluating market opportunities, but I currently plan to stay the course of delivering repeatable growth.
Given our strong beginning of the year. We are pleased to announce an increase in our guidance for 2022 core <unk> from a range of $2 93 to three per share to a range of 301 to $3 eight 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 3271 freestanding single tenant properties continued to perform exceedingly well.
Occupancy ticked up 20 basis points, ending the quarter at 99 point to which remains above our long term average of 98 the.
The increase is a result of activity out of our leasing department. The department enjoyed a high level of interest by a number of strong national and regional tenants.
To take out some of our vacancies.
During the quarter and did not have any credit issues within the portfolio starting to be a trend here at <unk> that we can report for five consecutive quarters, we have had zero tenants going bankrupt.
Although we continue to maintain our traditional discipline in our underwriting we acquired 59, new properties in the quarter for approximately $210 million at an initial cap rate of six point too.
And with an average lease duration of 17 years, almost all of our acquisitions. This past quarter were sale leaseback transactions and that is a result of the in depth, calling effort of our <unk> acquisition Department.
And then then prides itself on maintaining the relationships business model.
Which we do repeat business.
Perfect where cap rates remain at all time low we will continue to be very thoughtful in our underwriting and primarily pursue sale leaseback transactions with our relationship tenants.
With regard to the acquisition pricing environment.
The Q1 initial acquisition cash cap rate of $6 two at a historic low for NMM as mentioned during the February call, we expected a little more pressure on the cap rates for 2022 and 2021 as.
As we now sit here at the beginning of May it feels like cap rates have bottomed out and private competition has dissipated a little.
This is a result, and then feeling that cap rate compression for the moment is behind us.
During the first quarter. We also sold 10 properties and generated about $20 million of proceeds which will be reinvested into accretive acquisition. This activity is on pace with our disposition guidance of $180 million to $100 million.
So I finish up.
At the risk of sounding like a broken record Kevin and his team keep the balance sheet rock solid we ended the first quarter with $54 million of cash in the bank zero balance on our $1 1 billion line of credit and no material debt maturities until mid 2024, thus tenant that is in terrific position to fund our 2022 acquisition target of $5.
$50 to 650 of new properties.
In summary, our occupancy rate leasing activity ranked collection outcomes, we still believe once again validates our consistent long term strategy of acquiring well located parcels leased to strong regional and national operators and reasonable rents, while maintaining a strong and flexible balance sheet.
With that let me turn the call over to Kevin for more detail on our quarterly numbers and updated guidance.
Thanks, Steve and I'll start with the usual.
Cautionary note that we may make certain statements that may be considered to be forward looking statements under federal Securities law.
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.
The headlines from this morning's press release report quarterly core <unk> results of <unk> 77 per share for the first quarter of 2022.
Up eight tenths or 11, 6% over Q1, 2021, and it's up to <unk>.
Or two 7% from the immediately preceding fourth quarter of 2021.
Today, we also reported that <unk> per share was <unk> 79 per share for the first quarter, that's up <unk> <unk> from the immediately preceding fourth quarter of 2021, 77%.
These results include about a penny from some one time items in Q1 about 1 million $1 million of lease termination revenue and $600000 of percentage rent.
We did footnote first quarter <unk> included $1 8 million of deferred rent repayment in our crude rental income adjustment for the first quarter without which would have produced an <unk> of 78% 78 per share as we've noted there.
Yes.
As these scheduled deferred rent prepayments continue to taper off from peak levels in the first half of 2021, we're seeing improved results kicking in from our 2021 and 2022 acquisitions.
I will also note that we took a $3 $6 million charge in the first quarter in connection with the retirement of our CEO all of which related to noncash vesting of stock Awards.
Was excluded in our core <unk> and <unk> calculations.
Excluding the deferred rent repayments.
And earlier our <unk>.
<unk> dividend payout ratio for the first quarter of 2022 was 68% and thats fairly consistent with historical levels.
Occupancy as Steve mentioned was 99, 2% a quarter and Thats up slightly from recent quarters G&A expense came in at $11 million and that's down from $11 $7 million year.
A year ago levels.
We ended the quarter was $732 million of annual base rent in place for all leases as of March 31, 2022, which we think is a good.
Starting point for folks thinking about projections going forward.
Today as Steve mentioned, we increased our 2022 core <unk> per share guidance from a range of $2 93 to $3 per share to a range of $3 <unk> to.
To $3 <unk> per share.
And similarly, we increased the <unk> guidance to a range of $3 8 billion to $3 15 per share.
Which reflects the scheduled slowdown and the deferral of repayments in 2022 that we noted on page 13 of today's press release.
The supporting assumptions for our 2000 to 2022 guidance are on page seven of today's press release and are largely unchanged from last quarter's guidance, albeit we are excluding any executive retirement charges from our guidance.
We continue to assume a 1% rent loss assumption in our guidance, which is what we've normally assumed in our guidance for a number of years. Despite the fact that we typically run at about half of that rent off level normally and that's where we are operating today as well.
As usual, we don't give guidance on any of our assumptions for capital markets activity, except for the general assumption that we intend to behave in a fairly leverage neutral manner over the long term.
Switching over to the balance sheet very quiet first quarter in terms of capital market activity. We were active in the debt markets last year and are not unhappy to be on the sidelines at the moment.
We ended the first quarter was $54 million of cash and nothing outstanding on our $1 $1 billion Bank line. So our liquidity remains in great shape, our weighted average debt maturity is now 14, five years, which seems to be among the longest in the industry.
Our next debt maturity as Steve mentioned is $350 million of three 9% debt coming due in mid 2024, and all of our debt is outstanding.
Outstanding debt is fixed rate debt.
Leverage and liquidity is in very good shape and the balance sheets.
Well positioned for 2022.
Just a couple of numbers that net debt to gross book assets was 45% at quarter end.
Net debt to EBITDA was five three times at March 31.
And interest coverage and fixed charge coverage was both four seven times.
First quarter 2022 is off to a very good start while there is increased level of economic and capital market uncertainty, we are well positioned for such.
As Steve alluded to possibly May lead to more disciplined acquisition environment, which we think is helpful to us at the margin.
Core 2022.
<unk> guidance now.
Now suggests 6% growth to the midpoint without any heroic assumptions our focus remains on growing per share results over the long term.
And Matthew with that we will open it up to any questions.
Certainly ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
We do ask that while posing a question. Please pickup your handset if you're listening on speaker phone to provide optimal sound quality.
Once again, if you have any questions or comments. Please press star one on your phone.
Please hold while we poll for questions.
Your first question is coming from Nicholas Joseph from Citi. Your line is live.
Thanks, Good morning, just.
Maybe starting on the acquisition maintained acquisition guidance, obviously in the first quarter you did over $200 million. So it seems like you're running ahead of pace. So what was the thought process and what are you assuming kind of in the back half of the year relative to kind of a busy first quarter.
Steve.
Acquisition guidance, we maintained really just the result of visibility.
I believe kind of 60% was our weighted backend the initial 60% of the $5 50 to 650, but.
Yes first quarter, we got off to a strong start north of $200 million second quarter, the pipeline looks pretty good but as you know visibility to third fourth quarter. We don't have any currently so we just thought it'd be prudent to leave our guidance the same.
Thanks, and then just maybe in terms of cap rates you talked about.
We see cap rates being lower for the last few quarters, particularly this past quarter.
With the rise in interest rates, how susceptible is the.
The broader market, and particularly kind of sale leaseback to rising interest rates from a cap rate perspective.
As you noted our first quarter.
Historic low.
Those deals were priced January or December and so now they've cleared the market. We have noticed with the rise in interest rates that some private companies are kind of wait and see approach. So we're not feeling them as much.
But we are starting to feel that deals are starting to get re traded are falling out. So that's why we think they bottomed out.
Hopefully the back half of the year cap rates will catch up when they start getting repriced on the deals.
Thank you very much.
Thank you. Your next question is coming from <unk> <unk> from Bank of America. Your line is live.
Alright. Good morning, I was wondering if you guys can comment more on the disposition this quarter.
What was kind of the competition.
In person occupied.
And if you could also comment on maybe any sign.
Hi.
Jim Meiers core pool market was more difficult to find buyers.
Dispositions.
We sold 10 assets.
Three of those were income producing assets that more of a defensive sale that we thought there's a likelihood of a lack of renewal in the future. So we thought we'd kind of prune the portfolio there and the other were seven vacant assets, which is a little bit higher than our historical norm, but we try to re lease those assets class, what we always do first and foremost trying.
Lee re lease it but we werent finding good rental rates. So we decided it was better to dispose of the vacant and redeploy that capital into accretive acquisitions.
Okay great.
And if I can ask about.
Fantastic.
Thanks.
Thanks, Eric for your full year guidance.
Yeah. So.
<unk>.
As I mentioned, we continue to assume 1% rent loss, which is our general assumption for many many many years.
Despite the fact that usually doesn't quite get to that level.
It's normally runs about half of that meaning 50 basis points a year and we just have always assumed that we lease to retailers and we just assume not everything will go perfectly so.
The broad rationale if you will behind that.
Consistent with our past first quarter, we collected 99, 6% of the rents of 40 basis points.
Of loss in there and so.
Collections in.
Rent losses behaving as normal as it has for many many years pre pandemic.
Okay got it thank you.
Thank you. Your next question is coming from Spenser <unk> from Green Street. Your line is live.
Thank you.
Looking at recent market activity. It does seem as though implied risks session on have gone up in recent weeks.
How do you guys feel about your primary lines of trade in the abandonment broader economic slowdown and is there any high level color you can provide on your tenant's current rent coverage levels.
Yes, it's Kevin.
At the moment.
We don't feel like there's any real notable pressure to the rent paying ability of our tenants. We've not we've not seen a lot of stress there and Fortunately a lot of our tenancy as in the.
Fairly low price point.
Service related.
Food and beverage that so far we've not seen a lot of change in consumer behavior. If you will despite the fact that prices definitely are rising.
And so so far at the top level it just.
It doesn't feel like there is a lot of stress with our tenants.
Okay, and then as the leases coming due maybe this year and even Mac.
Can you just comment on what portion of those are CPI linked and do you have any concerns that.
Hi, I'm, placing environment might impact lease renewals or just the likelihood of tenant green to those same terms in the future.
Yes, Lisa.
That are coming due we haven't we have 40 properties remaining in 2022.
And what we're seeing is our renewals are based on our historical norms, where 85% of our tenants are renewing at a 100% rent and.
And that's just the retail nature of it so.
So we're not expecting anything different.
Going forward on our renewals and matter of fact sitting here today with one 3% of ABR.
<unk> thousand 22, we're in outstanding shape.
Basically a year ago at this time it was five 3% I believe just over 5% of ABR. So 2022 renewals are looking really solid right now.
Alright, thank you.
Thank you. Your next question is coming from Wes Golladay from Baird. Your line is live.
Hey, Good morning, guys can you comment on what drove the big sale leaseback volume. This quarter was there a few portfolios in there was it driven by M&A activity by the tenants can you give us a little bit more color.
Yes.
I think it was nine transactions eight of those transactions were with relationship tenants. One was not we did a couple of portfolios that was just.
Post M&A, where they reconfigured the balance sheet doing sale leaseback.
We did a couple of kind of doubled the 2000 $30 million variety that we're peer sale leasebacks.
Got it and then E com.
Commented about seeing a little bit less competition or are you noticing a bigger difference for larger deals or the smaller one off deals.
The larger deals.
You kind of talk I mean, historically the private companies. We haven't felt we've always had competition, but on the larger deal.
Deals, where the new private money coming in they're hunting elephants, right now and we've kind of noticed a subsided a little bit.
But theres still a lot of competition, where there is a lot of oxygen at that 10% to $20 million level.
Okay, and then just a few quick modeling questions for you.
G&A was taken down or was that.
The noncash G&A being lower cash G&A and then when we look at the five three times debt to EBITDA that you said that ended the quarter is that a recurring number because that had the benefit of the turbine come bad debt.
I guess the.
Repayment of the cash the cash can it straight lines and it's a mixture.
Yes, So let me answer the first one.
I mean, the G&A is mostly.
Cash related as I mentioned, we took a charge related to Jay Whitehurst retiring.
And so there was.
Virtually all of that was noncash kind of.
Impact and so that to the extent.
There was any noncash items and G&A that flowed through the retirement cost line item and.
Until we can say and the second question again, sorry, I kind of missed.
The five three times debt to EBITDA, you said at the end of the quarter should we think of that as being more of a recurring number they have the benefit of the term income and the one time items you cited this quarter as well as the the repayments you are getting this year from previously deferred rent.
Yes.
Thanks for the moment, you should think of us operating in the low fives I.
I guess, if you step back and think about our numbers historically, our debt to EBITDA was in.
Call it the.
Mid to high fours in our debt plus preferred was in.
Mid to high Fives, and we're going to end up somewhere in between those two ranges, where we've operated which policy thoughtful to low fives I think is where it will be but the lease term income for this quarter.
And the deferral repayments really won't have a material impact on that going forward.
Great. Thanks for the time guys.
Thank you. Your next question is coming from Pedro Cardoso from TCW. Your line is live.
Alright can you comment a little bit on same store NOI.
Okay.
Okay could you repeat that.
Good luck.
Hi, do better now yes.
Great can you comment on same store NOI. Thank.
Yes, yes.
<unk>.
Rents go up about one 5% a year across the board and Thats consistent with what we're seeing it's fairly contractual some of them are.
The CPI, but its capped so effectively its a fairly fixed kind of rent bump and so one 5% is what.
We expect our.
We're experiencing.
At the moment and so thats, just a fairly normal run rate and it typically doesn't vary too much from there.
Do you expect to change the cap rate on new leases.
Okay.
And then as far as acquisitions, we buy at the market cap rates.
We do use our relationships, but kind of what I stated in the opening monologue that we are expecting cap rates not to go down any further.
We see an adjustment with the 10 year to date.
No no.
On the call.
The annual increase.
And at a certain rate.
In terms of the rent increase I'm, sorry, yes, a fair question not at the moment I don't why do we get one 5%, we get one 5% because thats about market for the kinds of tenants, we do business with which are large regional and national operators and Thats, just where the market is I think it's going to take a longer period.
Persistently higher rate interest rates and inflation rates.
That number move notably.
Look we always try to get what we can and sometimes we get 2%.
But I.
I think it's too early to say that the environment of today is going to.
Notably impact.
Rent increase numbers market rates for that.
In the near term anyway.
That's helpful. Thank you.
Thank you. Your next question is coming from John <unk> from Ladenburg Thalmann. Your line is live.
Good morning.
Good morning, John .
Can you maybe walk us through some of the pushes and pulls that drove the bottom line guidance increase it sounds like you have lower cash G&A expectations previously maybe in more kind of front end loaded acquisition expectation.
And the benefit from no tenant credit issues in the <unk>, but I was just curious if there was anything else that was really kind of driving.
The upward move in guidance.
I think you hit on the big things acquisition timing collections running better than guidance.
Some G&A.
Decrease in drifting a little lower.
And then the other kind of wildcard, which I mentioned that we don't give guidance as this whole capital markets activity. So we make assumptions around what we think we would like to do in terms of capital markets activity and sometimes with capital markets that have a different idea.
We would like to do and so we change our plans and so.
So that is an important piece of that puzzle.
I'll point to the past that point to last year as an example of that when we last year, we issued $900 million of debt and I promise you. We never in any of our assumptions assumed we were going to issue $900 million of 30 year debt last year, but that's what the market was offering at an attractive price. We felt it was a good opportunity to take it.
Vantage of.
And what's the benefit of a few months of hindsight it feels like a good idea, but it was not in our guidance.
Messes with the current year numbers.
But our inclination over the years has been get capital when it's available and well priced regardless, what you've assumed in your and your.
Your model or your projections and vice versa don't get capital.
Not readily available.
Payable and not well priced and so both of those scenarios can mess with.
Kind of the guidance.
And if not I know not helpful to you that answer in terms of trying to pin down a number but.
That is a wildcard in addition to the variables you mentioned.
That does influence things.
Okay.
And maybe to that last point, if you look at the capital markets today, and I think historically, if I think about it other than you traditionally havent really used the revolver all that much.
Does that maybe change in the current market dynamic or.
Are you still going to kind of stick to the kind of raising once you've spent cash yes. Good very good question and good note really over the last six years.
Average under $100 million of Outstandings on our line and last year, we had zero all year.
And so yes.
Want to try to zig when the markets are zagging and vice versa, and so yes, we went and issued a lot of long duration debt last year.
To the extent this environment persist.
It gets worse, you'll probably find us using our bank line more so we'll shift more to the shorter end of that equation.
And that means probably using our bank line more than we have in the past so yes, a fair comment.
And we will see how things about that's not projections, but thats.
That kind of thought that's kind of our thought process as we think about doing that and so.
Fortunately we.
We're at 14, and a half years weighted average debt duration, we can take on some short term debt like a bank line.
And not really expose the company to any real risk.
Okay. That's helpful. That's it for me. Thank you very much everyone.
Sure.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press Star then one on your phone at this time.
Your next question is coming from Linda Tsai from Jefferies. Your line is live.
Hi, good morning.
You noted.
That inflation isn't impacting shoppers within your tenant base, but to the extent it does.
Might you see it first in terms of industry exposure and where might you see it last.
As far as our top tenants.
They're finding a way to pass through the inflation.
Couple of quarters here.
The customer for our service base, if it's convenience stores or the quick serve restaurants, they're finding a way to pass it through.
It hasnt gotten out of control, where the customers arent accepting it.
You would see it more maybe in the Rvs later.
Big ticket items, we would expect to see the consumer pulling back.
Thanks, and then automotive services or about 13% of your industry mix and it's the industry increased the most year over year is.
Is there a threshold for how high this industry could become.
Now maybe we are a long way to go if you look through our history at one point, we were at 30% convenience stores.
Really focused on underwriting the real estate and if it makes sense to buy it because you are buying the real estate right, meaning keeping the rent low well covered asset, we'll keep pushing it but we have plenty of runway still in the auto services.
Just to remind folks that has a real variety. If you will of kinds of businesses within that so I mean that includes carwash and tire service and.
Oil with where collision.
A wide variety within that line.
A trade in so we feel like within the line of trade Despite 12.
12, 6%, which we don't.
Hi.
There is a high degree of diversification not only at the property level, but even within kind of.
Sub lines of trades within that line of trade.
Got it thank you.
Okay.
Thank you that concludes our Q&A session I will now hand, the conference back to President and CEO , Steve Horn for closing remarks. Please go ahead.
Thank you for joining us this morning, and look forward to talking with the vast majority of view upcoming at ICSC or NAREIT in June .
Have a good rest of your day.
Thank you ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day.
Okay.
Okay.