National Retail Properties (NNN)

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National Retail Properties Inc. (NNN)

Q407 Earnings Call

February 4, 2008 14:00 pm ET


Craig Macnab - CEO.

Kevin Habicht – CFO.


Jonathan Litt - Citigroup

David Fick - Stifel Nicolaus

Jeff Donnelly - Wachovia Securities

Dustin Pizzo - Banc of America Securities

Stephanie Krewson - Janney Montgomery Scott



Greetings ladies and gentlemen. And welcome to the National Retail Properties Incorporated Fourth Quarter 2007 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator 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 Incorporated. Thank you Mr. Macnab, you may begin.

Craig Macnab - CEO

Doug, thank you. And good afternoon to all of you, and welcome to our 2007 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 and year-end financial results after my opening comments.

NNN had a record year in 2007, and we are very pleased with our performance. More importantly, we are encouraged about the way that National Retail Properties is positioned for 2008. Our balance sheet is strong, our tenant supplying range and performance is satisfactorily, and we are seeing terrific deal flow.

Our portfolio continues to be in great shape with over 98% of our properties occupied with very limited lease rollover in 2008. A high level of property is attributable to the quality of our fully diversified net lease retail portfolio.

We currently own 908 properties, lease to just over 200 different national or regional tenants in 44 states. These tenants operate in over 30 different segments of the retail industry which provides us with very broad diversification. Finally, on average these tenants are contractually obligated to pay us rent for the next 13 years.

Our two largest tents are both profitable, publicly traded convenience store chains, namely the pantry and successor. At the corporate level the range coverage from both of these tenants is excellent. In the case of the pantry, rent coverage for the most recent 12 months was just over four times, and while I am not probe today in the details, but I can tell you that NNNs portfolio includes many of their higher performance tools including multiple properties that we earn in and around Charlotte, North Carolina.

Successor has recently completed a significant acquisition of a regional Texas-based chain, and if we use their pro forma numbers following this acquisition, the corporate level range coverage is 3.9 times. We’re delighted that our two largest tenants are leading consolidators in the convenience store industry with visionary management teams and we do not worry about their ability to pay our rent.

Let me add that we like the defensive characteristics of the convenience store industry, and in the event that oil prices moderate than convenient store operators Mikewell have their bags to the widened.

Finally, from a qualitative standpoint, it is worth repeating that about two-thirds of our annual base rent comes from tenants that are publicly traded and/or carry public date ratings.

In terms of acquisitions, in the fourth quarter we acquired a $146 million of properties for our portfolio, an average GAAP rates of 8.62%. In 2007, our team did a superb job investing $867 million with most of this money going to our investment portfolio, with lesser amounts for properties purchase for resale, as well as investments in our development subsidiary.

In addition, we established a joint venture exclusively to acquired convenience stores and acquire approximately $65 million of properties in the joint venture. We are currently being selective as we evaluate acquisition opportunities and carefully underwriting deals to reflect the current retail sales environment. However, it is worth noting that we are seeing plenty of opportunities to purchase net lease retail portfolios and attractive risk adjusted yields.

In terms of the marketplace, from the perspective of competition, much of the competition that we’ve experienced in the last 24 months has been from entities that need to line up financing before completing property acquisitions. Given the strength of NNN's balance sheet and as we revert to a more normalized environment where cash is king, we believe that we will be able to selectively cherry-pick from the transactions that we're currently evaluating.

Our capital recycling program has been a great success, and in 2007 we sold $148 million of properties an average cap rate in the low 7s, generating non-FFO income of $56 million. Selling properties from our portfolio produces capital that we can reinvest in carefully underwritten properties. But it also allows us to strengthen the quality of our portfolio.

Our activities in the fourth quarter were a good example of improving our portfolio as our in-house 10/31 experts sold a couple of properties that have short term, lease terms and inferior sales productivity.

In summary, NNN had a great year in 2007 and based on what I know today, I'm optimistic that 2008 will be another record year for National Retail Properties.

I will now hand over to Kevin.

Kevin Habicht – Chief Financial Officer

Thank you, Craig. Let me start of with our cautionary statement that we are going to make certain statements that may be considered to be forward-looking under Federal Securities Laws and that the company's actual future results may differ significantly from the matters discussed in any of these forward-looking statements, and we may not release revisions to those forward-looking statements to reflect changes after the statements were made.

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