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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning ladies and gentlemen, and welcome to the National Retail Properties First Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host, President and CEO, Steve Horn. Sir, the floor is yours.
Thanks, Mathew. Good morning, and welcome to the National Retail Properties first quarter 2022 earnings call. Joining me on this call is our Chief Financial Officer, Kevin Habicht.
As this morning's press release reflects, 2022 is also fantastic start for National Retail Properties. Beyond our financial results post the quarter, early April NNN released inaugural corporate responsibility and sustainability report. We created report with the ISOS group. The report includes and highlights NNN’s commitments, achievements, the initiatives on an ongoing basis.
Also, before we get into the financial and portfolio detail, I want to address the current direction of NNN. As I mentioned earlier this year, I plan to continue executing the long standing business model of NNN locating, underwriting and acquiring real estate with the right operators, all while delivering consistent year-over-year core FFO growth. We remain vigilant and continuously evaluating market opportunities, but I currently plan to stay the course on delivering repeatable growth.
Given our strong beginning of the year, we are pleased to announce an increase in our guidance for 2022 core FFO from a range of 2.93 to 3 per share to a range of 3.01 to 3.08 per share. Kevin will have more details on this increase in his remarks.
Turning to the highlights of our first quarter financial results. Our portfolio of 3,271 freestanding single tenant properties continued to perform exceedingly well. Occupancy ticked up 20 basis points and in the quarter at 99.2, which remains above our long-term average of 98. The increase is a result of activity out of our leasing department. The department enjoyed a high level of interest by a number of strong national and regional tenants to take out some of our vacancies.
During the quarter, NNN did not have any credit issues within the portfolio. It's starting to be a trend here at NNN that we can report for five consecutive quarters we had zero tenants and [bankroll].
Although we continue to maintain our traditional discipline in our underwriting, we acquired 59 new properties in the quarter for approximately 210 million at an initial cap rate of 6.2, and with an average lease duration of 17 years, almost all of our acquisition of this past quarter were sale leaseback transactions and that is a result of the in depth calling effort of our NNN acquisition department. NNN prides itself on maintaining the relationships business model with which we do repeat business.
In an environment where cap rates remain at an all-time low, we'll continue to be very thoughtful on our underwriting and primarily pursue sale leaseback transactions with our relationship tenant. With regard to the acquisition pricing environment, the Q1 initial acquisition cash cap rate at 6.2 was at historic lows for NNN. As mentioned during the February call, we expect a little more pressure on the cap rates for 2022 and 2021. As we now sit here at the beginning of May it feels like cap rates have bottomed out and private competition has dissipated a little. This is result NNN feeling that cap rate compression for the moment is behind us.
During the first quarter, we also sold 10 properties and generated about $20 million of proceeds, which will be reinvested into accretive acquisition. This activity is on pace with our disposition guidance of 80 million to 100 million.
So I finish up at the risk of sounding like a broken record, Kevin and his team keep the balance sheet rock-solid, we ended the first quarter with 54 million of cash in the bank, zero balance in our 1.1 billion line of credit, no material debt maturities until mid 2024. Thus, NNN is in terrific position to fund our 2022 acquisition target of 550 to 650 of new properties.
In summary, our occupancy rate, leasing activity, rent collection outcomes, we still believe once again validates our consistent long-term strategy acquiring well located parcels leased to strong regional and national operators at reasonable rents. We'll maintain a strong and flexible balance sheet.
With that, let me turn the call over to Kevin for more detail on our quarterly numbers and updated guidance.
Thanks Steve. And I'll start with the usual, cautionary note that we may make certain statements that may be considered to be forward-looking statements under federal securities law. 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 filings with the SEC and in this morning's press release.
With that, now on to -- the headline from this morning's press release [Audio Gap] quarterly core FFO results of $0.77 per share for the first quarter of 2022. That's up $0.08 or 11.6% over Q1 2021 and it's up $0.02, or 2.7% from the immediately preceding fourth quarter of 2021.
Today we also reported that AFFO per share was $0.79 per share for the first quarter. That's up $0.02 from the immediately preceding fourth quarter of 2021, $0.77. These results include about a penny from some onetime items in Q1, about $1 million of lease termination revenue, and $600,000 of percentage rent.
We did footnote first quarter AFFO included $1.8 million of deferred rent repayment in our accrued rental income adjustment for the first quarter, without which would have produced an AFFO of $0.78 per share, as we've noted there. As these scheduled deferred rent repayments continue to taper off from peak levels in the first half of 2021, we're seeing improved results kicking in from our 2021 and 2022 acquisitions.
I will also note that we took a $3.6 million charge in the first quarter in connection with retirement of our CEO, all of which related to noncash vesting of stock awards and was excluded in our core FFO and AFFO calculations.
Excluding the deferred rent repayments I mentioned earlier, our AFFO dividend payout ratio for the first quarter of 2022 was 68% and that's fairly consistent with historical levels. Occupancy, as Steve mentioned, was 99.2% at quarter end that's up slightly from recent quarters. G&A expense came in at $11 million and that's down from $11.7 million at year ago levels. We ended the quarter with $732 million of annual base rent in place for all leases as of March 31, 2022, which we think is a good starting point for folks thinking about projections going forward.
Today, as Steve mentioned, we increased our 2022 core FFO per share guidance from a range of $2.93 to $3 per share to a range of $3.01 to $3.08 per share. And similarly, we increased the AFFO guidance to a range of $3.08 to $3.15 per share, which reflects the scheduled slowdown and the deferral repayments in 2022 that we noted on page 13 of today's press release. The supporting assumptions for our 2022 guidance are on page 7 of today's press release and are largely unchanged from last quarter's guidance, albeit, we are excluding any executive retirement charges from our guidance.
We continue to assume a 1% rent loss assumption in our guidance, which is what we've normally assumed in our guidance for a number of years, despite the fact that we typically run at about half of that rent loss level normally, and that's where we’re operating today as well. As usual, we don't give guidance on any of our assumptions for capital markets activity except for the general assumption that we intend to behave in a fairly leveraged neutral manner over the long-term.
Switching over to the balance sheet, very quiet first quarter in terms of capital market activity. We were active in the debt markets last year, and are not unhappy to be on the sidelines at the moment. We ended the first quarter with $54 million of cash, nothing outstanding on our $1.1 billion bank line. Our liquidity remains in great shape. Our weighted average debt maturity is now 14.5 years, which seems to be among the longest in the industry. Our next debt maturity, as Steve mentioned, is $350 million of 3.9% debt coming due in mid-2024. And all of our debt is -- outstanding debt is fixed rate debt. So leverage and liquidity is in very good shape and the balance sheet is well positioned for 2022.
Just a couple of numbers, stats. Net debt to gross to gross book assets was 40.5% at quarter end. Net debt to EBITDA was 5.3 times at March 31. And interest coverage and fixed charge coverage was both 4.7 times for the first quarter. So 2022 is off to a very good start. While there's increased level of economic and capital market uncertainty, we are well positioned for such and as Steve alluded to, possibly may lead to a more disciplined acquisition environment, which we think is helpful to us at the margin.
Core 2022 FFO guidance now suggests 6% growth to the midpoint without any heroic assumptions. Our focus remains on growing per share results over the long-term.
And Matthew, with that, we will open it up to any questions.
[Operator Instructions] Your first question is coming from Nicholas Joseph from Citi.
Just maybe starting on acquisition, maintain acquisition guidance. Obviously in the first quarter, you did over 200 million. So it seems like you're running ahead of the pace. So what was the thought process? And what are you assuming kind of in the back half of the year relative to kind of the busy first quarter?
Your acquisition guidance we maintained really just the result of visibility. I believe 60% was our weighted back end, the initial -- 60% of the 550 to 650. But first quarter, we got off to a strong start. North of 200 million, second quarter in the pipeline looks pretty good. But as you know, visibility for the third, fourth quarter, we don't have any currently. So we just thought it'd be prudent to leave guidance the same.
And then just maybe in terms of cap rates, you talked about, obviously cap rates being lower for the last few quarters, particularly this past quarter. With the rise in interest rates, how susceptible is the broader market and particularly kind of sale leaseback to rising interest rates from a cap rate perspective?
As you noted, our first quarter historic low, but a lot of those deals were priced January or December. And so now they've cleared the market. We have noticed with the rise in interest rates that some private companies are turning to wait and see approach so we're not feeling them as much. But we are starting to feel that deals are starting to get retreated or falling out. So that's why we think they bottomed out and hopefully the back half of the year, cap rates will catch up when we start getting repriced on the deals.
Your next question is coming from [Lizzie Doican] from Bank of America.
I was wondering if you guys could comment more on the dispositions closed this quarter. What was kind of the composition of vacant versus occupied assets? And if you could also comment on maybe any signs of outstanding buyers pool, was it more difficult to find buyers?
Dispositions, we sold 10 assets. Three of those were income producing assets that were more of a defensive sale that we thought there's a likelihood of -- or lack of renewal in the future. So we thought we kind of put in the portfolio there. And the other were seven vacant assets, which is a little bit higher than our historical norm. But we tried to release those assets. That's what we always do, first and foremost, try to we release it. But we weren't finding good rental rates. So we decided to it's better to dispose the vacant and redeploy that capital into a creative acquisitions.
And if I could ask about bad debt expense you guys are assuming within your full year guidance now?
Yeah, so we've -- as I mentioned, we are continuing to assume 1% rent loss, which is our general assumption for many, many, many years. Despite the fact that usually doesn't quite get to that level, it normally runs about half of that, meaning 50 basis points a year. And we just have always assumed that, we’ve leased our retailers and we just assume not everything will go perfectly. So that's the broad rationale, if you will, behind that.
Consistent with our past, first quarter we collected 99.6% of the rent, so 40 basis points of loss in there. And so it's -- collections and rent loss is behaving as normal as it had for many, many years pre-pandemic.
Your next question is coming from Spenser Allaway from Green Street.
Just looking at recent market activity, it does seem as though implied recession odds have gone up in recent weeks. How do you guys feel about your primary lines of trade in the event of a broader economic slowdown? And is there any high level color you can provide on your tenant’s current rent coverage levels?
Yeah, it's Kevin, Spenser. At the moment, we don't feel like there's any real notable pressure to the rent paying ability of our tenants. We've not seen a lot of stress there. And fortunately, a lot of our tendency is in the fairly low price point, service related, and food & beverage. So far, we've not seen a lot of change in consumer behavior, if you will, despite the fact that prices definitely are rising. And so, so far at the top level, it just -- it doesn't feel like there's a lot of stress with our tenants.
And then of the leases coming due maybe this year and even next, can you just comment on what portion of those are CPI linked? And do you have any concerns that the high inflationary environment might impact lease renewals or just the likelihood of tenants agreeing to those same terms in the future?
Lease going to come and due. We haven't -- we have 40 properties remaining in 2022. And what we're seeing is our renewals are based on our historical norms where 85% of our tenants are renewing at 100% rent. And that's just the retail nature of it. So we're not expecting anything different going forward on renewals. As a matter of fact, sitting here today with 1.3% of ADR on 2022, we're in outstanding shape, given basically a year ago at this time it was 5.3% I believe. But it’s over 5% of ADR. So 2022 renewals are looking really solid right now.
Your next question is coming from Wes Golladay from Baird.
Can you comment on what drove the big sale leaseback volume this quarter? Was there a few portfolios in there, was it driven by M&A activity by the tenants. Can you give us a little bit more color?
We did -- I think it was nine transactions, eight of those transactions were with relationship tenants, one was not. We did a couple of portfolios that was just post M&A where they reconfigured the balance sheet during the sale leaseback and then we did a couple of kind of doubles, the $20, $30 million variety that were pure sale leasebacks.
And then you comment about seeing a little bit less competition. Are you noticing a bigger difference for larger deals, or the smaller one-off deals,?
The larger deals where you kind of -- I mean, historically, the private companies, we haven't felt -- we've always had competition. But on the larger deals were the new private money coming in, they're hunting the elephants right now. And we've kind of noticed they subsided a little bit. But there's still a lot of competition where there's a lot of oxygen at that $10 million to $20 million level.
And then just a – a few modeling question for you. The G&A was taken down, was that a non-cash G&A being lower as a cash G&A. And then when we look at the 5.3 times debt to EBITDA that you cited at the end of the quarter, is that a recurring number, does that have the benefit of the term income bad debt and I guess the repayment of the cash, by the cash tenets and their straight-line tenants or master?
Let me hit the first one. I mean, the G&A is mostly cash related. As I mentioned, we took a charge related to Jay Whitehurst’s retiring. And so there was a good, virtually all that was non-cash kind of impact. And so that, to the extent, there was any non-cash items in G&A that flowed through the retirement cost line item. And tell me -- can you say the second question again, sorry, I kind of missed that.
For the 5.3 times debt to EBITDA you said at the end of the quarter, should we think of that as being more of a recurring number that have the benefit of the term income and the one-time items you cited this quarter, as well as the repayment you're getting this year from previously deferred rent?
I think for the moment, you should think of us operating in the low fives. I guess if you step back and think about our numbers, historically, our debt to EBITDA was in the call it, the mid to high-4s and our debt plus preferred was in the mid to high-5s, and we're going to end up somewhere in between those two ranges where we've operated, which call it, the below-5s, I think is where we'll be. The lease term income for this quarter and the deferral repayments really won't have a material impact on that going forward.
Your next question is coming from Pedro Cardoso from TCW.
Can you comment a little bit on same-store NOI?
Could you repeat that one? That was pretty low.
Can you comment on same-store NOI?
We -- our rents go up about 1.5% a year across the board. And that's consistent with what we're seeing. It's fairly contractual. Some of them are tied to CPI, but it's capped. So effectively, it's a fairly fixed, kind of rent bump. And so 1.5% is what we expect and are experiencing at the moment, and so that's just a fairly normal run rate, and it typically doesn't vary too much from there.
Got it. Do you expect to change the cap rate on your leases?
As far as the acquisitions we buy at the market cap rates. We do use our relationships. But kind of what I stated in the opening monologue that we are expecting cap rates, not to go down any further, but we'll probably see an adjustment with the 10 years of things that.
Yeah, I mean, the cap on the annual increase capital has certain rate, even --
Go it. In terms of the rent increases, sorry, yes. Fair question. Not at the moment, I don't. Why do we get 1.5%, we get 1.5% because that's about market for the kinds of tenants we do business with, which are large, regional and national operators. And that's just where the market is. I think it's going to take a longer period of persistently higher rate, interest rates and/or inflation rates, to have that number move notably. Well, we always try to get what we can, and sometimes we get 2%, but, I think, it's too early to say that the environment of today is going to notably impact the rent increase numbers, market rate for that -- and in the near-term anyway.
Your next question is coming from John Massocca from Ladenburg Thalmann.
Can you maybe walk us through some of the pushes in polls that drove the bottom line guidance increase? Sounds like you have lower cash G&A expectations versus previously maybe a more kind of front end loaded acquisition expectation, in the benefit from no tenant credit issues in1Q? But I was just curious if there was anything else that was really kind of driving the upward move in guidance?
No, I think you hit on the big things. Acquisition timing, collections, running better than guidance, some G&A decrease and drifting a little lower. And then the other kind of wildcard, which I mentioned, that we won't give guidance, is just whole capital markets activity. So, we make assumptions around what we think we would like to do in terms of capital markets activity, and sometimes the capital markets have a different idea than we would like to do. And so we change our plans. And so that is an important piece of that puzzle.
And I'll point to the past, I'll point to the last year as an example, that when we -- last year, we issued $900 million of debt. And I promise you, we never in any of our assumptions, assumed we were going to issue $900 million with 30-year debt last year. But that's what the market was offering at an attractive price. We felt it was a good opportunity to take advantage of and with the benefit of a few months hindsight, it feels like a good idea. But it was not in our guidance, it messes with the current year numbers.
But our inclination over the years has been good capital when it's available and well-priced, regardless what you've assumed in your model or your projections. And vice versa, don't get capital when it's not readily available and not well priced. And so both of those scenarios can mess with the kind of a guidance and it's not, I know not helpful to you as answer on terms of trying to pin down a number but that is a wildcard in addition to the variables you mentioned, that does influence things.
And maybe to that last point, as you look at the capital markets today, and I think, historically if I think about it again, you traditionally haven't really used the revolver all that much. Is that maybe change in the current market dynamic? Or are you still going to kind of stick to kind of raising once you've spent cash?
Very good question, and good note. Really over the last six years, we've averaged under $100 million of outstandings on our line. And last year, we did -- we had zero all year. And so yes, and I want to try to zig when the markets are zagging and vice versa. And so, we went and issued a lot of long duration debt last year, to the extent this environment persist and/or I guess worse, you'll probably find us using our bank line more. So we’ll shift more to the shorter end of the debt equation, and that means probably using our bank line more than we have in the past.
So yes, fair comment. And we'll see how things about -- that's not a projection. But that’s – that’s kind of our thought process as we think about doing that. And so fortunately, we were at 14.5 years weighted average debt duration, we can take on some short-term debt, like a bank line, and not really expose the company to any real risk.
[Operator Instructions] Your next question is coming from Linda Tsai from Jefferies.
You noted that inflation isn't impacting shoppers within your tenant base. But to the extent it does, where might you see it first in terms of industry exposure and where might you see it last?
As far as our top tenants, they're finding a way to pass through -- the inflation, yes, it's been a couple quarters here. But the customer for our service base, if it's the convenience stores, or the quick serve restaurants, they're finding a way to pass it through. It hasn't gotten out of control where the customers aren't accepting it. But where you would see it more maybe in the Arby's later, the big ticket items, we would expect to see the consumer pulling back.
And then automotive services are about 13% of your industry mix. And it's the industry that increased the most year-over-year. Is there a threshold for how high this industry could become?
Now, we have a long way to go. If you'd look to our history, one point we were at 30% convenience stores. We've been really focused on underwriting the real estate. And if it makes sense to buy it, because you're buying the real estate, right, meaning keeping the rent low, well covered asset. We'll keep pushing it, but we have plenty of runway still in the auto services.
And just to remind folks, that has a real variety if you will, of kinds of businesses within that. So I mean that includes carwash and tire service and oil, collision and a wide variety within that line of trade. And so we feel like within the line of trade despite that it's at 12.6%, which we don't use overly high, there's a high degree of diversification not only at the property level, but even within kind of sub lines of trades within that line of trade.
Thank you. That concludes our Q&A session. I'll now hand the conference back to President and CEO, Steve Horn for closing remarks. Please go ahead.
We thank you for joining us this morning and look forward to talking with a vast majority of you upcoming at ICSC or NAREIT in June. Thank you. Have a good rest of your day.
Thank you ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Be patient.