National Retail Properties (NNN)

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National Retail Properties, Inc. (NNN)

Q4 2008 Earnings Call Transcript

February 03, 2009 at 2:00 pm ET


Craig Macnab - Chief Executive Officer

Kevin B. Habicht - Chief Financial Officer


Michael Bilerman - Citigroup

Philip Martin - Cantor Fitzgerald

Pizzo Dustin - BAS-ML

David Pick - Stifel Nicolaus & Company, Inc.

Unidentified Analyst



Greetings, and welcome to the National Retail Properties Fourth Quarter 2008 Earnings Conference Call. At this time all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator’s Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Craig Macnab, Chief Executive Officer for National Retail Properties, Inc. Thank you, Mr. Macnab; you may begin.

Craig Macnab

Thank you Ryan and good afternoon and welcome to our 2008 year-end earnings release call. On this call with me is Kevin Habicht, our Chief Financial Officer, who will review details of our fourth quarter year-end financial results plus provide details about our revised guidance following my opening comments. National Retail Properties had a record year in 2008 and we are pleased with this performance.

Clearly we are operating in a different economic environment this year as we work hard to ensure that we have a strong balance sheet with very manageable debt maturities plus we have plenty of unused capacity on our credit facility. As of the end of the year our portfolio is 96.7% leased with very limited leases coming due in this calendar year.

We are currently on 1005 properties leased over 200 different national or regional tenants and 24 states. These tenants operate in other 50 different statements of the retail industry which provides us with a very broad diversification. Finally on average these tenants are contractually obligated to pay us rent for the next 13 years. As a landlord to retailers we are clearly seeing stress in our portfolio. In terms of where it is going I wish that I had a better idea of the depth or the duration of the recession and when consumers will reopen their pocketbooks. As our press release suggested we are cautious about the outlook and we are projecting a challenging 2009 but our investment plan reflects that conservatism. Over the last 4 years we have acquired over 350 convenience stores and this category has become our single largest line of trade, representing just over 25% of our annualized grades.

We are very pleased that the convenience store industry had a strong 2008 in the face of a very difficult retail environment. One of our two largest tenants, SaSa has pre-released earnings guidance and it appears that their financial performance was strong in 2008. Also, this morning The Pantry, which is our largest individual tenant, announced solidly profitable first quarter results with extremely good cash generation. The performance of our 2 largest tenants highlights the defensive attributes of the convenience store industry.

We continue to like the real estate attributes of convenience stores which are situated on busy streets, and signalized intersections with excellent ingress, egress and visibility. Also the investment per property is modest which contributes to very broad geographic and tenants diversification within the C store category.

In terms of our acquisition activity, in the fourth quarter we acquired $33 million of properties for our investment portfolio and average cap rates of 9.55%. In calendar 2008, our team did a superb job of acquiring 109 properties and $355 million in average cap rate right around 9%.

By the way our acquisition in the fourth quarter was less than half the volume in the third quarter which again was considerably less than the volume in the first and second quarters. This trend of declining acquisition activity will continue in the next couple of quarters. Our capital recycling program in 2008 was most successful as we sold a large number of properties in the first half of the year at cap rates that today seem a distant memory. Specifically we sold from both the investment portfolio and our taxable REIT subsidiary; a total of $214 million of properties and an average cap rate right around 6.9%.We are extremely pleased that our in-house team of industry leading experts completed these sales on a timely basis at very attractive cap rates.

For 2009 our strategy at NNN is very simple. Number one; maximize the value of our existing assets. Our team is focused on releasing space and renewing any leases. At this stage of the economic cycle our occupancy at 96.7 % solid. However, it is our view that this will deteriorate. For example we currently have four Circuit Cities plus one large Value City property that we need to re-lease in a market place where there not enough many large box retailers opening new locations unless the rent at that location offers a so-called ‘deal.’ The other properties and tenants that we will need to deal with in 2009.

On the acquisition side we are being extremely selective for all the obvious reasons. By the way in our judgment there continues to be a gap in price expectation between buyers and sellers which will only resolve it with the passage of time. In addition before committing capital, we would like to have further clarity on where our weighted-average cost of capital will settle in and then thirdly, we are carefully managing our expenses. We already made progress at reducing our expenses this year as earlier this month we went through a reduction in force. We are projecting that this year our G&A will be right around $22 million which is a measurable decrease from the $24.9 million of G&A in 2008.

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