National Retail Properties, Inc. (NYSE:NNN) Q1 2024 Earnings Call Transcript May 1, 2024

National Retail Properties, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the NNN REIT, Inc. First Quarter 2024 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Steve Horn, Chief Executive Officer. You may begin.

Steve Horn: Thank you, Holly. Good morning, and welcome to NNN REIT's first quarter 2024 earnings call. Joining me on the call is Chief Financial Officer, Kevin Habicht. As this morning's press release reflects, the company's performance to start 2024 produced strong results, including continued high occupancy and in line acquisition volume driven by our proprietary tenant relationships. We are in position to continue enhancing shareholder value as we move deeper into 2024 and beyond. Highlights of the first quarter results emphasize our continuous effort actively managing the portfolio. The portfolio of 3,546 freestanding single tenant properties continued to perform exceedingly well, maintained high occupancy levels at 99.4%, which remains above our long-term average at 98% plus or minus a fraction.

The leasing department had a terrific quarter, leasing seven assets to QSR and auto service tenants primarily, with a 91% rent recapture from the prior rent. This recapture is above historical levels of approximately 70%. Remember, NNN works hard not to give TI dollars to buy off rent. Currently, NNN only has 22 vacant assets in the portfolio, which is a testament to working with relationship tenants to maximize value for shareholders. During the quarter, we also sold six properties, which were all income producing, raising almost $19 million of proceeds to be reinvested in the new acquisitions. Over the course of the year, NNN sells assets defensively and proactively. But overall, we target the blended disposition cap rate to be 100 basis points lower than the deployment of capital pricing.

The last point on the portfolio I'd like to mention is with regard to 2024 lease expirations, which we originally had 90 for the year. As of the end of the quarter, there's 39 left to handle, and I'm not expecting a departure from the norms, 85% renewal and 100% prior rent. Turning to acquisitions. During the quarter, we invested $125 million in 20 new properties at an initial cash cap rate of 8%. If we required a straight line, the GAAP rent would be 9.2% with an average lease duration of over 18 years. Eight of the deals were sub $5 million meaning we realized that deals, small deals can contribute to FFO per share growth. 12 of the 13 deals were from relationship tenants, which we do repeat business, creating a barrier to competition to solidify NNN's deal flow.

It is this business model that allows the team to feel good about pipeline for second quarter. With regard to acquisition pricing environment, in the last quarter, our initial cash cap rate of 8% was approximately 40 basis points wider than the fourth quarter of 2023 and 100 basis points year over year. The 40 point increase was a result of NNN being top of mind, which created a window of opportunity to push pricing mid fourth quarter last year for the first quarter deal closing. NNN was in good position because of our calling effort and our strong balance sheet to take advantage of the opportunities. As I mentioned during the February call, we observed increasing cap rates, but as they sit today in May, the peers with the cap rate increase is starting to flatten.

I anticipate the second quarter pricing of 2024 to be similar to the first quarter pricing. This suggests cap rates are stabilizing as sellers feel lower cap rates maybe in the future. As sellers assume, the macroeconomic environment may improve and the higher for longer narrative dissipates in the near future. NNN will maintain acquisition volume through sale leaseback transactions with our stable tenants. Based on our pipeline and dialogue with our partners, we remain comfortable with our ability to meet and hopefully exceed 2024 acquisition guidance of $400 million to $500 million primarily through the sale leaseback deals on our release form. Our balance sheet remains one of the strongest in our sector. Our credit facility has plenty of capacity with only a balance outstanding of $116 million down from $130 million at year-end.

We just increased the capacity by $100 million to $1.2 billion this past month, so NNN is well-positioned to fund 2024 acquisition guidance. With that, let me turn the call over to Kevin for more color and detail on our quarterly numbers.

Kevin Habicht: Thanks, Steve. And as usual, I'll start with a normal cautionary statement that we will make certain statements that may be considered to be forward-looking statements under federal securities law. 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 filings with the SEC and in this morning's press release. With that out of the way, so yes, headlines from this morning's press release report quarterly core FFO results of $0.83 per share for the first quarter of 2024, and that's up $0.03 or 3.8% over a year ago results of $0.80 per share.

AFFO results were $0.84 per share for the first quarter, which is $0.02 or 2.4% higher than year ago results. We did have unusually high lease termination fee income of $4.2 million in the first quarter and that compares with $1.7 million in the prior year first quarter. Over the past five years, we've averaged about $3 million of annual lease termination fee income. So this quarter's $4.2 million was well above average. But even with that incremental income, overall, another good quarter and in line with our expectations. Occupancy was 99.4% at quarter end, as Steve mentioned. G&A expense came in at $12.6 million for the quarter. That's up 2.7% versus prior year and represents 5.8% of revenues for the quarter, and again, in line with our guidance.

Our AFFO dividend payout ratio for the first quarter of 2024 was 67%. That resulted an approximately $50.6 million of free cash flow for the quarter after the payment of all expenses and dividends. We currently anticipate this free cash flow amount coming in at approximately $194 million for the full year of 2024. We ended the quarter with $831 million of annual base rent in place for all leases as of March 31, 2024. So that would take into account all acquisitions and dispositions completed during the quarter. Switching over to the balance sheet, couple of just little items. There was a small amount of equity issuance at a little over $42 a share, generating $21 million in net proceeds during the quarter. Shortly after quarter end, we completed a recast of our bank credit facility, increasing capacity by $100 million to $1.2 billion and extending the term out to April 2028.

There were no other material changes to the terms of that loan. We greatly appreciate the support of our bank group over many, many years. We maintain a good leverage and liquidity profile with over $1 billion of availability on our bank credit facility. As we've talked about maintaining our light capital market footprint, we've funded nearly 56% of our first quarter acquisitions of $124.5 million with free cash flow of the $50.6 million I mentioned and the $18.5 million of disposition proceeds. And then based on the midpoint of our acquisition and disposition guidance for 2024, we should fund close to 65% of 2024 acquisitions with free cash flow and disposition proceeds. Our weighted average debt maturity remains 11.8 years at quarter end, which will help us slow the refinance headwind that all companies are facing in the coming years.

Couple of stats. Net debt to gross book assets was 41.6%, debt to EBITDA was 5.5x at March 31st. Interest coverage and fixed charge coverage was 4.5x for the first quarter. And again, none of our properties are encumbered by mortgages. So we're we remained focused on appropriately allocating capital, which to us means ensuring we are getting what we believe are appropriate returns on equity while controlling risk through property underwriting and maintaining a sound balance sheet. Valuing equity adequately, whether that equity is produced by free cash flow, disposition proceeds or new equity issuance is at the heart of growing per share results over the long-term in our opinion. So in closing, Q1 solid start to the year. We believe and we're in relatively good position to navigate the uncertainties that are out there as we continue to focus on growing per share results.

And we are mindful this is a long-term multiyear endeavor as we think about our business. The fundamentals of the business remain in good shape. And with that, we will open it up to any questions, Holly. Thanks.

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