NNN REIT, Inc. (NNN) Earnings Call Transcript & Summary

All right. Good afternoon, and welcome to the National Retail Properties presentation. This is Jay Whitehurst, and I'm here with our CFO, Kevin Habicht; and our Chief Operating Officer, Steve Horn. Many of you already know our story. So I'm going to quickly review our business model and some results and strategy, and then we can have time for questions. [Operator Instructions] This next slide -- let's go ahead and go. Yes. This slide lays out the business model that we've been executing for decades. We focus solely on single-tenant retail properties, and our portfolio is broadly diversified with high occupancy rate. We're retail real estate experts and we focus our acquisitions and our underwriting on well-located parcels along high-traffic roads; lease to large regional and national operators in e-commerce-resistant businesses at market rents; and we maintain a conservative, flexible capital structure. The result of all this is consistent multiyear per share growth and a dividend that we've increased for 31 consecutive years. This slide touches on our highlights for the third quarter of 2020. And we've discussed these results on our recent earnings call, and I'll comment on a few of these highlights in subsequent slides. An important driver of the long-term value creation at National Retail Properties is our history of raising the dividend every year for the past 31 consecutive years. And this impressive feat has been accomplished by only 2 other REITs and by only 1% of U.S. public companies. Our Board raised the dividend in August of 2020, and we think this -- the ability to take that step in the middle of a pandemic is a testament to our long-term approach to all aspects of our business. And nowhere is the long-term approach more notable than in our balance sheet management. The long-standing philosophy at National Retail Properties is to operate with low leverage and maintain access to all sources of capital, which has resulted in the fortress-like balance sheet that we have today. We ended the third quarter with a very strong liquidity position, almost $300 million of cash in the bank and 0 balance drawn on our $900 million line of credit. Our debt maturities are well-laddered with a weighted average term of over 10 years and no material debt coming due until 2023. What's not on this slide but also bears mentioning briefly is our deep pool of individual properties which can be sold one by one into the private market at very low cap rates. These -- and these properties sold at low cap rates provide us with another source of well-priced capital to be redeployed into our business. This slide updates you on the effects of the COVID-19 pandemic. First, most importantly really, I'm pleased to report that all of our associates remain healthy. Our office remains open on an optional basis and a number of our associates have been working from home, but businesses continued to run smoothly. And our rent collections have steadily improved since the beginning of the pandemic in March and April. We recently reported rent collections of 90% for the third quarter and 94% for the month of October. And the balance of that rent was divided roughly equally between deferred rent and outstanding rent receivable, notable that we've forgiven almost no rent through the pandemic so far. Generally, our rent deferrals involved 2 to 3 months of second quarter base rent with the deferred rent to be repaid in 2021. We were very collaborative with our relationship customers as we dealt with this unexpected disruption to their businesses. Drilling a little deeper into our portfolio metrics. National Retail Properties owns over 3,100 individual, single-tenant retail properties, leased to large national and regional retail businesses across the United States and broadly diversified across geography, industry and tenant mix. Our properties tend to have strong retail real estate characteristics. They're generally located along high-traffic roads with good visibility, access and signage. Our average property cost is only $3 million. These are lots of well-located, small box retail property. And additionally, the majority of our properties are located in suburban markets largely in the southern half of the U.S., which has been somewhat less impacted by the pandemic than urban city centers. Our long-term occupancy rate has been consistent at 98%, plus or minus 1%, which is among the best in commercial real estate. And you can see that at the depth of the Great Recession in 2008, 2009, we only dipped to 96.4% and recovered relatively quickly in the ensuing years. Another long-term attribute of our portfolio is that retailers don't like to relocate their stores. Location is more strategically important for retail operators than for tenants in many other property types. Over the last decade, when a retailer's lease is expiring, 80% to 85% of the time, the retailer has renewed its lease at the same location and at the then current rent all without the landlord's investment of any tenant improvement dollars or lease incentive payments. And this impressive statistic has remained true in 2020 and highlights to us our expectation that our properties will remain in high demand in the post-pandemic world. Although some of our lines of trade were impacted significantly by the pandemic, many have bounced back strongly. Among those more troubled lines of trade, we do expect that movie theaters, which comprise about 5% of our rent, to be the most slow in recovering. On the flip side, our largest line of trade, convenience stores, at about 18% of our rent, fared very well through the pandemic as did many of our other industries, such as fast food, auto service, car wash, et cetera. Drilling a little deeper into the list of our top tenants, you'll see that our portfolio consists primarily of large, well-capitalized tenants. Our top 25 tenants operate over 1,000 units each on average and are typically leaders in their respective lines of trade. These are large regional and national companies that have proven to be generally better positioned than smaller operators to withstand a major disruption in their business, such as the pandemic. Okay. I think one more slide. Thanks. A real moat around our business is our ability to source acquisitions directly from relationship retailers. One of the benefits of this direct relationship is that the tenant self-selects the properties to be included in a long-term sale/leaseback, which means we get the tenants better-performing properties. Another benefit is that our investment is typically at the tenant's cost without any developer markup. Lower cost for property means lower rent for property, which means a greater margin of safety and higher probability of the tenant's ability to pay rent if the business is disrupted. Well over 2/3 of our volume of acquisitions has come from doing off-market business with our relationship tenants. As the economic downturn began in the second quarter, we took a pause in our acquisition efforts to see how the disruption would play out. Although we continued to be active in the market, our relationship tenants were also taking a pause in their new store growth, and we did not see any portfolios on the market that met our underwriting criteria. As our relationship tenants are now returning to growth mode and as we identify portfolios in the market that may meet our criteria, we anticipate our acquisition volume will begin to ramp back up in the near future. That said, cap rates in the marketplace remain at all-time lows and the ability to underwrite corporate credit and store-level performance post COVID is challenging. So you should expect us to remain thoughtful and prudent in our new investment. And this last slide highlights the -- a real driver behind our strategy, which is the great people in our supportive culture. We have over 3,100 properties, over 400 tenants, over $675 million of annual rent, all handled by just 70 associates at National Retail Properties. We've maintained a flat organization with low overhead, but the main point I want to make on this slide is the long tenure of our entire team. 2/3 of our team has been with the company for more than 5 years and almost half have been here for at least 10 years. This is a stark contrast with many other companies and a competitive advantage when it comes to institutional memory, consistency of message especially during a time when folks are working remotely and have less day-to-day personal interaction. Let me just close by reiterating our long-term approach to all aspects of our business. Although we will continue to review and refine our strategy based on the lessons we've learned from the pandemic, we believe that the right long-term strategy for creating consistent per share growth on a multiyear basis is to own a broadly diversified portfolio of well-located real estate acquired at reasonable prices and leased to strong regional and national tenants at reasonable rents, all supported by a low leveraged balance sheet and a long-tenured staff of industry experts. And with that, I will turn it over or open it up for questions. [Operator Instructions]

So the first question that's come up here is about cap rates. How do we think about cap rates when purchasing assets? Do you have a limit to the going-in cap rate? Good -- there's a couple of good points to be made there. One thing is we are very cognizant of acquiring properties at cap rates that allow for accretion, that allow for growth in our per share earnings. So we do have a limit on how low we will go with cap rates. We do want investments to be adequately accretive. Historically, over the last few years, our average acquisition cap rate has been around 6.8%, 6.9% initial cash yield on our investments. And our average lease duration has been in the 15- to 20-year range, probably around 18 years' average duration. So we get rent bumps during the term of that lease on top of the high 6% initial term. So these investments have been more than adequately accretive for us. And looking at the pipeline ahead, we feel like we're -- we will be able to continue to find good investments at cap rates that are -- that work for us, that create adequate accretion. I do want to add one more thing though before I move on to another question, and that is we don't use cap rates to manage risk as much as some other company may. If you think about a bank that lends out money, the bank -- if the bank sees risk, it will raise the interest rate because -- to compensate it for the risk. What -- we believe that if you raise the cap rate when you perceive risk, all you've done is make it a little bit worse. You've charged more rent for a property that you think is -- has some risk. You've made it harder for the tenant to succeed and harder for yourself to replace it. So the way we manage risk is not by cap rate but is by dollars invested. And we -- when we see risk, we tend to reduce the amount of dollars that we want to invest in a property. If we can reduce the dollars invested, we will reduce the rent. We'll make it easier for the tenant to succeed and make it easier for us to replace that tenant if something goes wrong. That seems like a much more -- a much better mitigant to addressing risk than by raising the rate. Move on down here. Here's another question. Are there any new geographies you're considering, any geographies you're downsizing? The -- not specifically. The -- we do business primarily with these large regional and national retailers who are expanding around the country. And our retailers are following population growth. So there are -- they're taking us to areas that are growing in population and with economic growth. And that has ended up putting us through the Southeast and the Mid-Atlantic and the South primarily in our portfolio. And so we will continue follow those relationship retailers as they take us to the places where they want to be. Kevin, what else do you see up there?

About the dividend?

Yes. At...

With #7?

Yes. The dividend payout ratio above 100%, does your team expect to make changes to dividend rates? Or how will your team adjust to ensure dividend coverage to continue forward? Kevin, do you want to talk about the dividend payout a little bit?