National Retail Properties (NNN)

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National Retail Properties (NNN)

Q4 2012 Earnings Call

February 07, 2013 10:30 am ET


Craig MacNab - Chairman and Chief Executive Officer

Kevin B. Habicht - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Treasurer, Assistant Secretary, Director, Director of CNL Commercial Finance Inc. and Director of Commercial Net Lease Realty Services Inc

Julian E. Whitehurst - President and Chief Operating Officer


Craig R. Schmidt - BofA Merrill Lynch, Research Division

Emmanuel Korchman

Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division

Todd Stender - Wells Fargo Securities, LLC, Research Division

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division

Thomas C. Truxillo - BofA Merrill Lynch, Research Division

Daniel P. Donlan - Janney Montgomery Scott LLC, Research Division



Greetings, and welcome to the National Retail Properties Fourth Quarter and Year-end 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Craig MacNab, Chairman and CEO of National Retail Properties. Thank you. Sir, you may begin.

Craig MacNab

Christine, thank you. Good morning, and welcome to our 2002 (sic)

Year-end Earnings Release Call. On this call with me this morning is Jay Whitehurst, our President; and Kevin Habicht, our Chief Financial Officer, who will review details of our fourth quarter as well as our year-end financial results, following my opening comments.

2012 was an excellent year for National Retail Properties as we maintained a very high level of occupancy, continued to do more deals with our relationship tenants and expanded our already fully diversified portfolio. Similar to last year, we had a very active fourth quarter on the acquisition front, which exceeded our earlier expectations. And even though this activity has little impact on last year, it positions us very well for 2013.

In terms of acquisitions, as I indicated earlier, the fourth quarter of last year was productive for NNN as we invested $255 million acquiring 108 properties at an average initial cash cap rate of just over 8%. We were pleasantly surprised that, in the fourth quarter, we identified a number of sellers who wanted us to close on their properties prior to the onset of the new higher capital gains tax rates. As a result, our team was really busy right through the holidays closing acquisitions. However, these year-end deals were from new tenants, including a couple of large, experienced fast food operators.

One more data point is that about 60% of our fourth quarter activity was with relationship tenants. As our press release indicated, in calendar 2012, we acquired 232 different properties this past year, investing $707 million at an average initial cash cap rate of approximately 8.3%. As a reminder, this attractive yield gets better over time as the rent bumps kick in over the duration of our very long leases.

We're delighted to have strengthened and further diversified our portfolio with these acquisitions this past year. Many of these acquisitions were noncompetitive off-market transactions where we were able to acquire excellent real estate while achieving very strong yields. We continue to like the granularity of our business. And with an average purchase price per property of approximately $3 million last year, with land, in many cases, representing in the range of 35% to 40% of the total purchase price, these are clearly attractive opportunities.

One of the reasons that we obtained higher yields than those realized by other REITs who compete in different real estate sectors is that the net lease retail category is less competitive than many other property types and this is influenced by the small dollar size of the properties that we purchase. As some of my colleagues remind me, it is a lot of work to acquire almost one individually underwritten property every day of the year, which is what we accomplished in 2012.

Our portfolio continues to be in excellent shape, and at the end of the year, we were 97.9% leased. By the way, this is the ninth consecutive year that we've been at least 96% leased, which speaks to the modest risk of our portfolio. In 2013, we have very modest lease rollover, with only 1.7% of our leases coming up for renewal. And some of these tenants have already extended their leases, which of course is good news.

Many of our tenants had very positive activity this past year. For example, 2 of our restaurant tenants went public. In addition and perhaps more significantly, our fourth largest tenant was acquired by 7-Eleven and we are delighted to now have their excellent credit on those leases. As of the end of the year, we owned 1,622 properties which are leased to over 300 different national or regional tenants located in 47 states. On average, these tenants are contractually obligated to pay us rent for approximately 12 years.

Last year, we continued our multiyear track record of capital recycling, selling 34 properties for just over $81 million, generating handsome gains that are not included in our FFO. Given that we sold some weaker-performing properties in our capital recycling activities, we upgraded our portfolio as well as generating capital to reinvest.

In conclusion, NNN is currently operating in a great environment. Our portfolio is in excellent shape, and very importantly, as you'll hear from Kevin, our balance sheet is fortress-like, which will allow us to take advantage of the carefully underwritten acquisitions that we expect to make this year. As you heard earlier, my colleagues continue to find off-market transactions that we are closing on at very wide spreads over our cost of capital.

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