Earnings Call Transcript - NNN Q1 2021

Operator, Operator

Good day, ladies and gentlemen, and welcome to your National Retail Properties' First Quarter 2021 Earnings Conference Call. All lines have been placed in a listen-only mode and the floor will be open for your questions and comments following the presentation. As a reminder, today's call is being recorded. At this time, it is my pleasure to turn the floor over to your host, Jay Whitehurst. Sir, the floor is yours.

Jay Whitehurst, CEO

Thank you, Melinda. Good morning, and welcome to the National Retail Properties' first quarter 2021 earnings call. Joining me on the call this morning is our Chief Financial Officer, Kevin Habicht; and our Chief Operating Officer, Steve Horn.

Kevin Habicht, CFO

Thank you, Jay. And as usual, I'll note that we will make certain statements that may be considered to be forward-looking statements under Federal Securities Laws. The 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 filing with the SEC and in this morning's press release. With that, headlines from this morning's press release report quarterly core FFO results of $0.69 per share for the first quarter of 2021, that's up $0.06 from the preceding fourth quarter $0.63 and down $0.01 from the prior year $0.70 per share. Results for the first quarter included two nonrecurring type items totaling $5 million. First, we collected $2.2 million of receivables from cash basis tenant that relate to prior quarters and second, we received $2.8 million of lease termination fee income which is more than typical for context full year 2020 with $2 million of lease termination fee income. So, these two items totaling approximately $5 million added just under $0.03 per share to our results. Today, we also reported that AFFO per share was $0.76 per share for the first quarter, which is $0.07 per share higher than the preceding fourth quarter $0.69. We did note this amount included $9.4 million of deferred rent repayment and our accrued rental income adjustment in the first quarter AFFO number.

Operator, Operator

Our first question comes from Ronald Kamdem with Morgan Stanley.

Ronald Kamdem, Analyst

Hey, good afternoon. Congrats on the quarter. Just looking at the acquisition, just wondering if you could provide just a little bit more color in terms of what are you seeing in terms of the pipeline? And maybe what, I know you guys remain disciplined. But how, what are you seeing in terms of pricing as well? Thanks.

Jay Whitehurst, CEO

Sure. Ron, this is Jay. I'll start with a little bit of a high level and then turn it over to Steve Horn to talk a little bit more about what he sees out there. But just as a reminder, our primary focus is on doing repeat programmatic business with our portfolio of relationship tenants that are strong regional and national operators and that will continue to be our primary focus. When we do business with those folks, some of the benefits that we get out of this are that those relationships are that the tenants sell us better real estate. The tenants are more likely to call out the weaker properties out of the sale leaseback and not commit to signing a long-term lease on those properties. And so, we get better, higher quality real estate. We're able to negotiate our own lease documents. We get slightly better lease economics and one thing that's really an important factor to us is we get longer lease duration. As I noted, our average duration for the first quarter was 17.5 years and I believe our average duration for last year was a little more than 18 years. So that's very important to us to create that long-term rental income stream. And the pipeline does look good out there. So, Steve, let me turn it over to talk a little bit about the pipeline and pricing.

Steve Horn, COO

Yes, this is Steve. As you kind of look out, or if we look back, I should say in the fourth quarter, the pipeline today feels a lot more robust. I mean, there are some portfolios out there that weren't here in the fourth quarter. So, we're feeling good about that; the sale leaseback market seems to be opening up some. As far as pricing, I think just kind of based on our cash cap rate approximately 6.4; cap rates are still near a historic low and there is no sign of increasing at this point.

Ronald Kamdem, Analyst

Great. And one more if I may, just wanted to get your updated thoughts on tenant health. You think about the guidance, the confidence has sort of raised the collection to 80% for the cash tenants. What are you seeing in the market? What are you hearing from your relationships that gives you that sort of confidence back with the turned corner?

Jay Whitehurst, CEO

Yes, thanks. It's good. We have had great conversations with our relationship tenants kind of across the board for the launch of trade that make up our portfolio, and we've reported this earlier. Our tenants weathered the pandemic, the economic effects of the pandemic very well. And we're starting to rebound into the fourth quarter and that rebound is continuing. And what we're hearing from our relationship tenants is that they are more and more getting back into the mode of playing offense and I think that's reflected in Steve's comments about the growing number of sale leaseback transactions that we're seeing out there in the market. Kevin, is there anything else on the guidance?

Kevin Habicht, CFO

Maybe just I guess connected to that, our guidance is following our actual recent historical rent collection from our tenants. And so, when we increased from 50% to 80% for the cash basis bucket, because that's what happened in the first quarter when we were at 50% rent collection, that was consistent with the fourth quarter 2020 collection rate. So, we're tracking with them. We don't have any real sense on why that should change materially for the better or the worse at this point. But we'll keep you posted. But it does feel like, like I said, stimulus has been pumped into the economy finding its way to consumers and retailers.

Operator, Operator

Next, we go to the line of Harsh Hemnani with Green Street. Please go ahead.

Harsh Hemnani, Analyst

Thank you. Can you talk about industries or assets that you disposed of this quarter and maybe the cap rate on that?

Jay Whitehurst, CEO

Yes. Harsh, I think I heard and understood the question talking about our acquisitions and the cap rates for dispositions. It was a very small number, but it's still not much of a sample size there. But it was a huge property, primarily core cooling properties at the kind of lower end of the spectrum. Wasn't it, Steve?

Steve Horn, COO

Yes, it's more of a defensive corridor for us as far as; we were selling a few vacant assets, but assets that we kind of felt in the long term didn't fit the portfolio that we couldn't resolve issues going down the road.

Jay Whitehurst, CEO

Yes. The way it broke out just between vacant and occupied of that $17.6 million we sold, $11.7 million was occupied and $5.9 million vacant.

Harsh Hemnani, Analyst

Great. And then were there any tenants that you moved out of the cash basis buckets, just because of good collections?

Jay Whitehurst, CEO

Yes, fair question. Yes, we did not move anybody out of the cash basis bucket. Nor did we add anybody, got good news there but yes, we haven't changed it. Our thought process on that is we're not going to be too knee-jerk about one good quarter, if you will. And so we'll need to kind of have a little more testing of time before we're going to be more willing to pursue or think about moving somebody out of the cash basis bucket.

Operator, Operator

Next, we go to the line of Wes Golladay with Baird. Please go ahead.

Wes Golladay, Analyst

Hey, good morning, guys. Just a quick question for you, Kevin, on the end of period rent, the $684.3 million. Does that include the adjusted rent for Ruby Tuesday and Chuck E. Cheese? And maybe a follow-up to that would be: will you be able to maintain your master lease structure with Chuck E. Cheese?

Kevin Habicht, CFO

Yes, the ABR does reflect. If we made a prominent rent change, meaning we didn't just defer it, but we made it permanent, it would be included in our annual base rent numbers. So Chuck E. Cheese got a step down, Ruby Tuesday did as you noted. And what was the second part of your question? Sorry.

Wes Golladay, Analyst

Did you maintain your master lease structure with Chuck E. Cheese? And I'm not sure you had one with Ruby Tuesday; it doesn't sound like you did?

Kevin Habicht, CFO

Yes, we did maintain it. Yes.

Wes Golladay, Analyst

Got it. And then can you talk about what the demand is for the non-core assets? And if there is a firm bid, would you have to sell more this year, the point behind your guidance?

Jay Whitehurst, CEO

No, Wes, as it relates to what you call non-core assets, I think what we're seeing is good demand for our vacant properties both from buyers and to re-lease those properties. The point I made earlier on in the pandemic was that our properties were in high demand before all of this. And I wasn't going to be surprised if they continued to be in high demand. These are generally well-located properties at reasonable rents. And so for some reason, we may get them back. But they're the kind of properties where tenants typically want to be and you can find somebody else who wants to be there. So it's too early to report a great deal of results. But our leasing team is doing a very good job of getting out there and making these properties available. And they have a lot of properties where there are discussions going on either for a sale or a re-lease. As if you were talking about non-core properties in the sense of leased properties that were hit by the pandemic and/or in lines of trade that are currently viewed as still being at risk. I'd say there's not a great bid; not, Steve, would you say there's not a great deal of bids yet for those kinds of properties? I mean, not just beat up on the movie theater industry. But there are not many buyers of movie theaters out there at the moment.

Steve Horn, COO

In the fitness arena and the movie theaters, the market isn't very robust. And there's still a big gap between the bid and ask and currently where people aren't willing to buy those assets, and that is the seller's dilemma.

Wes Golladay, Analyst

Got you. And thanks for the granular details there. Maybe one last one on the cap rate; it's typically been below your normal range in the last two quarters. And I think that's probably due to the mix. I just wanted to confirm that. And if so, do you get higher escalators with these lower cap rates?

Kevin Habicht, CFO

Wes, I would say that it's probably a little bit more driven by; some of it may be mixed. But it's also just being driven by cap rates continue to drift downward slowly. We do business with strong operators with the kinds of properties that are in high demand. And even though we have a relationship, our tenants are smart business folks, and they know what the proper cap rate is that their properties command. So we will win some business, win some ties, do a little better than the one-off market with our relationship tenants. But to the extent cap rates for their types of businesses are moderating down, we have to moderate down with them. So I think that's more of what you're seeing than anything else. And the bumps are staying about the same; market bumps for our tenants that we do business with are in that 1.5% to 2% per year range. And that's remained consistent.

Operator, Operator

Next, we go to the line of John Massocca with Ladenburg Thalmann. Please go ahead.

John Massocca, Analyst

Good morning. So, if we look at the rent deferral schedule in the earnings release, I guess what drove the new deferrals that are going to occur in kind of Q2 and Q4 of this year? And are they also, what's driving the repayments schedule time in '23, '24 and '25?

Steve Horn, COO

Yes, we had a modest amount of new deferrals as we kind of mop up on agreements if you will with tenants who we hadn't come to final terms with, and so yes, and some of those are getting pushed out a little further than the original batch if you will, a bigger batch of deferrals. Yes. But it's nothing; it's not a huge number one way or the other.

Jay Whitehurst, CEO

Let me add in, John, that we've really been very pleasantly surprised with how few conversations we've had with our tenants about a second round of deferrals. We really have had very few tenants come back and need to extend or restructure the original deferral agreement that we made with them. And that's all part of the pleasant surprise of how well things have bounced back.

John Massocca, Analyst

Okay. Have those kinds of the small amount that has had additional deferrals or are they in this new kind of deferrals for 2021? Are those tied to a specific industry or has it been - it's not a huge number, but has it been kind of broad?

Jay Whitehurst, CEO

Yes. I'd say they're coming from the lines of trade that were troubled from the start; lines of trade, casual dining and movie theaters probably make up most of that. What you say, Steve?

Steve Horn, COO

Yes, it's primarily movie theaters that made up the first quarter. And that was kind of let these theaters begin, and we had reached agreements; discussions were going on in 2020 and we probably got documented in 2021.

John Massocca, Analyst

Okay. And then one other kind of small movement was healthcare, sorry, health and fitness collection hit down a little bit. I mean what's driving that just given the positive kind of tailwinds from reopening and economic stimulus, etc.?

Steve Horn, COO

Yes. I don't think anything changed materially. I don't think that you should read anything into that, at least from our perspective; we don't see that really as a notable trend, if you will.

Jay Whitehurst, CEO

Yes, John, this is Jay. We're not going to get into talking about specific tenants, but I will say in that group we deal with large operators that we think ultimately will be in a position to have gotten through this, and gotten out the other side and be in a position to pay their rent. And so, along the way, there may still be some pickups or downturns, but we feel pretty good about the tenants that we've got in that line of trade.

Operator, Operator

Our next question or comment comes from the line of Katy McConnell at Citi. Please go ahead.

Unidentified Analyst, Analyst

Hey guys, this is on for Katy. I guess not to be beat up too much around the theater sort of aspect. But I was just wondering if you could touch on how conversations with some of those tenants over the past quarter have sort of changed. And I think collections improved pretty significantly on a sequential basis. And also just sort of what actual collections for April, sort of came in as if you can provide that? Thanks.

Jay Whitehurst, CEO

Sure. Yes, again, I'm not going to talk about specific tenants but as Steve mentioned some of our theater tenants, we were in longer discussions for the deferral agreement. So, whereas in 2020, some of that theater rent would have been in the unresolved or outstanding bucket. Now it's in the deferred bucket. And as you can see at the level of collections that we're getting; everybody is kind of on track now so it feels very solid at the moment. And I think, you might have asked about April client; you meant April connections in that line of trade. I think we're not in a position to do that, but we reported generally for April, we're at 98% of rent due for the month of April.

Unidentified Analyst, Analyst

Got it. Okay, yes, I was looking for the theater number but that's all right. Thank you, guys, so much. Appreciate it.

Operator, Operator

And then we take our last question from Linda Tsai at Jefferies. Please go ahead.

Linda Tsai, Analyst

Hi, can you discuss your strong rent collection of 97% in 1Q and 98% in April? And in your comment that it exceeds some other companies with higher IG exposure? What accounts for this discrepancy if you're making an educated guess?

Jay Whitehurst, CEO

Yes, I think you might have to ask the companies that have the higher investment grade, some part of that question, Linda, but I would say that it validates - from our perspective, this validates our strategy of dealing directly with large operators and doing direct sale leasebacks with those operators, so that you get the benefits I talked about in one of the earlier questions where they only sell and leaseback properties that they're comfortable signing a long-term obligation on. And we are very focused on keeping rent as low as possible to create a margin of safety for both our tenants and for ourselves if we get the properties back. And so if you deal with strong operators, and they call out the weaker properties, and you focus on keeping the rent low, it should bounce back faster when things go well. So we don't sweat tenant credit, and we study and we think about it, but we really rely on good real estate locations leased to large operators as our ultimate security. And we feel like that strategy has been validated through this process to be at least equal to and maybe on a temporary basis somewhat better than focusing more on investment grade where you pay more for the property, have higher rent and have less growth in the lease.

Linda Tsai, Analyst

Thanks for that. And then I guess given the strength in the retail sector, you're seeing those pandemic, is it fair to say that the occupancy decline will no longer be as bad as the Great Financial Crisis?

Jay Whitehurst, CEO

You understood. If you knock on wood and cross your fingers.

Steve Horn, COO

Yes, no question. But yes, that's for sure. I think what originally felt like would be worse than the '08, '09. The wildcard obviously was several trillion dollars of stimulus that kind of came from left field. So I think you're seeing really a lot of retail real estate companies doing relatively well, and better than expected and kind of across the board. So like I said, if several trillion dollars seemingly will take care of some problems for a period of time anyway.

Operator, Operator

And that concludes our question-and-answer session. We return to Jay Whitehurst for closing remarks.

Jay Whitehurst, CEO

Thank you, Melinda. And before I close, I would like to offer my congratulations to Mary Fedewa for her well-deserved promotion to CEO of STORE Capital. And following Chris Volk, she's got big shoes to fill, but STORE is in great hands with Mary at the helm. And thank all of you for joining us this morning. We look forward to talking with you, and maybe even seeing you in person in the weeks ahead. Thank you.

Operator, Operator

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.