National Retail Properties (NNN)

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National Retail Properties, Inc. (NNN)

Q2 2008 Earnings Call Transcript

July 31, 2008 10:00 am ET


Craig Macnab - CEO

Kevin Habicht - CFO


Greg Schweitzer - Citi



Greetings, ladies and gentlemen, and welcome to the National Retail Properties Second 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 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

Ryan, thanks very much, and good morning to all of you. Welcome to our second quarter earnings release call. As usual, on this call with me is Kevin Habicht, our Chief Financial Officer, who will review details of our second quarter financial results after brief opening comments from me.

We're very pleased with $0.50 of FFO in the second quarter, which is a 6.4% increase over the same period in 2007. Despite the anxiety about the economy and, of course, the pitiful credit markets, we are comfortable with our prior guidance of $1.97 to $2.02 per share for calendar 2008.

Our portfolio continues to be in solid shape, with occupancy at the end of the quarter just above 98%. Although the daily news reports are full of retailers that are struggling, I want to point out that we have zero stores in our investment portfolio that are leased to tenants such as Starbucks, Steve & Barry's, Linens 'n Things, or most recently, Mervyns. Of the last several years, we've had an abundance of opportunities to acquire properties leased to these retailers, and I'm delighted that our underwriting and real estates disciplines prevented us from completing such transactions. In the case of Linens 'n Things, we had previously owned stores leased to that retailer, but through our proactive capital recycling efforts, we disposed of our last store leased to Linens 'n Things several years ago, and, I may add, at a very good cap rate.

Subsequent to the end of the quarter, Uni-Mart, which is one of our tenants, did reject thirteen properties in our investment or, in our portfolio, pursuant to their bankruptcy proceedings. These stores are generally smaller units, and in total they represent about 0.36% of our current annual base rent. Our guidance does take into affect the full amount of the rent that we might lose from these store closures. Our leasing team is already in discussions with potential tenants on some of these closed stores, so I'm optimistic that we will be able to mitigate the Uni-Mart store closures and replace their anticipated rental stream.

Uni-Mart and the entire c-store industry were impacted by the unprecedented and rapid increase in the price of oil that occurred in the first half of this year. Specifically, they were unable to raise the price of gasoline fast enough as oil prices increased to maintain their profit margin. Also, credit card fees to these retailers of a very high ticket average really hurt their margins. Having said that, as the price of oil has decline in the last several weeks, gasoline margins for c-store operators have been very, very good. And I know this, having visited a couple of our bigger tenants in the last couple of weeks.

In the second quarter, National Retail Properties acquired 34 properties for $103 million for our investment portfolio, at an average cap rate just over 8.7%. These properties were acquired from nine different tenants, and I should point out that we've previously completed sale lease-back transactions with seven of these nine tenants. The remaining transactions were with two new retailers that are likely to become relationship tenants for National Retail Properties. And, in fact, we have already approved a second property acquisition with one of these tenants. This particular tenant is a large national retailer with a well-proven, profitable business model, and, I may add, extremely good credit. We're able to do business with them in this environment as they have sought to diversify their capital sources, and I can assure you, despite the high quality and the quality of the real estate, the initial cap rate that we have received is more than appropriate.

Let me make a couple of comments about the acquisition and disposition environment in which we're operating. As most of you know, there are clearly fewer fields out there than there were this time last year. But with much less competition, we are still able to selectively acquire carefully underwritten net lease retail real estate at better cap rates than we were able to obtain in 2007. We are currently evaluating a variety of deals, and I believe that we'll finish 2008 on the high end of our acquisition guidance of $300 million to $400 million of acquisitions.

Cap rates are creeping higher in the one of 1031 market, but on an absolute basis, cap rates continue to remain very low. By way of example, there are plenty of Walgreens trading in the mid-6% type range, and restaurant properties are still selling in the low 7% range.

At NNN, capital recycling continues to be a core strategy for us. So far this year, we've sold $37 million of properties from our investment portfolio, and, perhaps more importantly, we've meaningfully reduced our TRS inventory by selling just over $100 million of properties this year. We've continued to obtain low cap rates by selling properties internally off our market-leading, Web-based disposition platform. As a reminder, our ability to sell properties directly at extremely aggressive pricing is an invaluable tool that enables us to execute our capital recycling program but selectively sell assets from portfolios that we may acquire.

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