Good day, ladies and gentlemen, and welcome to the National Retail Properties second quarter 2019 earnings call. All lines have been placed in listen-only mode and there will be a question and answer session following this presentation. If you should require assistance during the call, please press star zero and an operator will assist you. At this time, it's my pleasure to turn the floor over to Mr. Jay Whitehurst, Chief Executive Officer. Sir, the floor is yours.
Thank you, Tom. Good morning and welcome to the National Retail Properties second quarter 2019 earnings call. Joining me on this call is our Chief Financial Officer, Kevin Habicht. After some brief opening remarks, I'll turn the call over to Kevin for more detail on our results. Once again, National Retail Properties posted steady, consistent results in the second quarter of 2019, which positioned us to increase our common stock dividend in July by 3% to $0.515 per quarter. 2019 will mark our 30th consecutive year of increased annual dividends, a feat matched by only two other REITs and by less than 90 public companies in the United States. With a dividend payout ratio of approximately 73%, we're well-positioned to be able to continue this enviable track record into 2020 and beyond.
In an era when headlines and tweets move the market in sometimes wild fluctuations, we continue to post steady, consistent per-share results. This trend has shown that over the long term, our business model will achieve above-average returns for shareholders, while, in our opinion, taking below-average risk. Looking into the details, our broadly diversified portfolio of 3,043 single-tenant retail properties remains healthy as our occupancy rate ticked up 60 basis points to 98.8%. As you've heard us say many times, our long-term occupancy rate is 98%, plus or minus 1%. Due to the hard work of our asset management and leasing teams, we're pleased to end the second quarter at the higher end of that range. We had a busy second quarter of acquisitions as well, investing almost $276 million into 71 new single-tenant retail properties at an initial cash yield of 6.9%.
Year-to-date, we have now invested almost $393 million to acquire 104 single-tenant retail properties at an initial cash yield of 6.9%, and with an average lease duration of 17 and a half years. Through the end of the first half of 2019, we've done recurring business with 25 relationship tenants operating in 13 different lines of trade. These relationship tenants accounted for over 80% of our total dollars invested so far this year, which is generally consistent with our long-term average. It's time-consuming, hard work for our acquisitions team, our asset management team, and our senior management to build and maintain these deep tenant relationships. All that effort bears fruit when we're ultimately able to acquire stronger real estate locations with favorable lease terms and a lease document that's tailored to our long-term perspective. We also sold 13 properties during the second quarter, generating almost $42 million of proceeds.
Of particular note is our sale of a CVS drugstore at a 4.4% cap rate. This property was formerly a vacant box, which our leasing team re-leased to CVS on an as-is basis, and our disposition group then sold for a gain of over $5 million. Year-to-date through the end of June, we have raised over $61 million from dispositions of 30 properties at an average sale cap rate of just over 5%. As we've discussed before, the ability to accretively recycle capital by selling properties at disposition cap rates meaningfully below our acquisition cap rate is a strategic advantage of our business model. Kevin will discuss our balance sheet and financial metrics in more detail, but I do want to highlight that we raised over $80 million of well-priced equity in the second quarter through our ATM program.
We recognize that issuing equity may create some short-term dilution, but our long-term strategy is to raise capital when it is well-priced while remaining disciplined in our selective acquisition process. Sticking to this long-term strategy has resulted in a balance sheet that continues to be one of the strongest in our sector and positions us very well for the second half of 2019 and beyond. In closing, let me reiterate that we run our business with a long-term focus, characterized by consistent per-share growth on a multi-year basis. Our second quarter results reflect another steady, consistent step along that path. With that, let me ask Kevin to provide his additional comments.
Thanks, Jay, and I'll start, as usual, with the 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, headlines from this morning's press release report quarterly Core FFO results of $0.68 per share for the second quarter of 2019, which is flat with prior year results and is consistent with our projections and estimates.
We're on track with our prior 2019 Core FFO guidance of $2.71-$2.76 per share, which we left unchanged from the prior quarter, and which implies a 3.2% growth to the midpoint. We do this while maintaining a strong and liquid balance sheet. Details of our 2019 guidance is on page seven of today's press release. Our AFFO dividend payout ratio for the first half of 2019 was 72.4%, which was the same as full year 2018 payout. As Jay noted, our recent increase in the dividend marks our 30th consecutive year of dividend increases. Occupancy was 98.8% at June 30, which was up 60 basis points versus the prior quarter. G&A expense was 5.6% of revenues for the second quarter and 5.7% for the first half of 2019, both of which were consistent with prior year levels.
For purposes of modeling 2019 results, the annual base rent for all leases in place as of June 30th, 2019, was $650.1 million. This allows you to take some of the guesswork out of for estimation out of the timing of Q2 acquisitions and dispositions for projections starting July 1, 2019. Jay noted we raised $82 million of equity in the second quarter. That was at a $53.50 net price, primarily via our ATM. As we've noted in the past and consistent with the past couple of decades, we expect to behave in a relatively leverage-neutral manner over time. Second quarter dispositions total $42 million and first half dispositions totaled $61 million.
For the first half, this $61 million of disposition proceeds, plus $87 million of common equity raised, plus $62 million of retained operating cash flow after all dividends, totals $210 million of equity-like capital raised in the first half of 2019, available to fund new investment. As a reminder, we entered 2019 well ahead of the curve in terms of raising equity. We remain in very good leverage and liquidity position, which will allow us to maintain an active acquisition effort into 2019. We ended the quarter with $63 million outstanding on our $900 million bank line, continuing several years of very modest bank line usage and maintaining significant liquidity. Leverage metrics remain very strong. Our next debt maturity is in 2022, and our weighted average debt maturity is now 2.8 years.
Our balance sheet's in good position to fund future acquisitions as well as weather potential economic and capital market turmoil. Looking at quarter-end leverage metrics, net debt to gross book assets was 35.4%. As you all know, we have not found market cap-based leverage metrics particularly relevant, and so we don't manage our balance sheet around that. More importantly, net debt to EBITDA was 5.0 times at June 30th. Interest coverage was 4.9 times, and fixed charge coverage was 3.8 times, both for the second quarter, and both of those metrics were 10 basis points higher than year-end 2018. Only five of our 3,043 properties are encumbered by mortgages totaling $12 million. 2019 looks to be another year of solid growth and operating results, and the comps for multiple prior years are not particularly easy.
When sourcing capital and making capital allocation and investment decisions, driving per-share results on a multi-year basis remains at the forefront of our minds. Our investment strategy in terms of property types, tenant types, and our balance sheet strategy have been very consistent for many years. Tom, with that, we will open it up to any questions.
Thank you, sir. Ladies and gentlemen, if you'd like to ask a question at this time, it is star one on your touch-tone telephone. If you're using a speakerphone, we ask you, while posing your question, you pick up the handset to provide favorable sound quality. Again, ladies and gentlemen, that's star one on your touch-tone telephone at this time, if you'd like to ask a question. Please hold while we poll for your questions. Our first question from Katy McConnell with Citi.
Good morning. This is Katy McConnell on the Citi. Can you talk about any further progress you've made on acquisitions to date? Given the accelerated year-to-date pace versus your original expectations, what's your outlook for the remainder of the year? Would you say you see the high end of guidance is more likely now?
Thanks, Katy. Good morning. We didn't change our acquisition guidance. We had a busy second quarter. The first quarter was a little slower than usual for us. We're very comfortable with where we are and with finishing in the range of the guidance that's out there. As you know, the future acquisitions are so fuzzy, and we don't want to overcommit or overpromise.
I will say that the pipeline looks very good. The acquisition environment still provides a lot of opportunities for us. As I said, we do most of our business with our relationship tenants, where we do repeat, recurring off-market sale-leasebacks with long-term leases. That pipeline of business looks very good through the rest of the year. At this point, we're not prepared to say that we're confident that we will materially exceed this year's guidance.
Katy, just as a reminder, to the extent we did exceed guidance, which we're not confident about yet, to the extent that occurs later in the year, call it fourth quarter, it really has precious little impact on 2019 results and really is more of a 2020 story. We'll see where the opportunities take us.
Okay, great. Thank you.
We'll take our next question from Brian Hawthorne with RBC Capital Markets.
Hi. My first question, with rates falling, do you see more opportunities for opportunistic dispositions?
Brian, hey, good morning. We have a very effective in-house disposition platform. We run most of our dispositions internally. Cap rates in the disposition environment, it's selling properties one-off to individual investors, often 1031 exchange buyers. Those cap rates are remaining very low. It really does provide us with a meaningful opportunity to continue to accretively recycle capital. I should point out that our philosophy around disposition is kind of a barbell strategy. We look at properties that, for one reason or another, someone out there in the world really wants those properties and is willing to pay a very low cap rate for those. In many cases, it's properties that have, for us, either flat leases or the residual value of the real estate maybe to us is not so compelling.
There's some reason that we don't feel like we need to be a long-term holder of that property, but someone else wants it very badly. We'll sell into that market. Then on the other end of the barbell, we're looking at properties where we think there's some reason that we would like to sell those before the expiration of the lease or vacant properties that have carrying costs. At the other end, it's kind of a defensive sale to keep the portfolio as clean as possible. Between those two, we are averaging a very low cap rate, and it's really providing us a meaningful distinction, I think, between our business and many other areas in REIT world where we're able to sell at cap rates far below our acquisition cap rates.
Great. I guess, what lines of trade seem like they have the most expansion plans?
Brian, the simple sentence that we often say is you can only buy what's for sale. What we're focused on are good real estate locations with good access and signage and visibility, operated by strong tenants in their particular businesses, in situations where we can acquire those properties at low cost and at low rent per property. If you look at the lines of trade that make up our portfolio, in all of those lines of trade, there are opportunities to do what I just described, which is do business with strong retailers on good retail locations. We're finding opportunities across all of those existing lines of trade.
Gotcha. Thank you.
We'll take our next question from Vikram Malhotra with Raymond James.
Hi, this is Kevin Alagh for Vikram. Just a quick couple questions for me. Just in terms of the guidance, I know there's a slight increase in the real estate expense as well as the G&A. The real estate expense, I assume, is from the moving up of the acquisition volume. In terms of the G&A, is there anything specifically there we should be looking at?
Not really. That was a $500,000 increase on a $36 million-$37 million run rate. Yeah, just fine-tuning on our end. Yeah, nothing much to read into it.
Okay. Sorry if I may have missed this before, but just because of the non-controlling interest on the balance sheet, if the balance increased, is that related to dispositions this quarter?
Yes.
Okay. Great. Thanks a lot.
Take our next question from Spenser Allor with Green Street Advisors.
Hi, thank you. Can you provide some more color on the CVS asset sale? I know traditionally, obviously the investment-grade tenants such as CVS have garnered lower cap rates, but recent comps, at least that I've seen in the drugstore space, have certainly seen cap rates pick up, certainly north of the mid four cap you cited. Is there anything specific about this deal, the location, or perhaps the expected performance of the property that drove the cap rate so low?
Good morning, Spenser. Yeah, primarily I'd say it's driven by the location. But you're absolutely right. I won't get into too much detail, but this was a former Borders bookstore that was very well located here in Florida. When Borders went bankrupt. I can't recall. I think they went bankrupt. When the lease came back to us, our leasing team did just a very good job of finding the best tenant to take that space. We got a long-term lease on that space on an as-is basis. It didn't have a lot of growth in it, and it was a very good location. It was exactly the kind of property that we look to sell through our disposition platform.
It is one version of getting a credit upgrade on your properties when you can take a vacant box and re-lease it to a high-credit tenant in a good location, and then turn around and harvest the value that you created that way.
Absolutely. Did you already cite how long you think you can find a long-term lease? Did you mention the lease term?
Spenser, I didn't because I don't recall.
Okay. No problem. I'll follow up on that. Okay, maybe just one last one from me. I know, Kevin, you spoke about the ATM program, and I realize you guys have ample equity-like capital to fund future acquisitions. Given where you guys are trading, which appears to be a pretty substantial premium to asset value, is there any kind of interest to pre-fund additional growth as you head into the back of the year?
Yes. We always have interest in raising capital when it's available well-priced. As I alluded in my comments, 2018 was a good example of that. In 2018, between ATM equity and dispositions and free operating cash flow, we funded 84% of our $716 million of acquisitions with that kind of equity. Which led to my point, we entered 2019 very well-equitized. 2020's coming, and we know we'll have more acquisitions to make. Yeah, to your point, we are inclined to get capital when it's available and well-priced, and you probably shouldn't be too surprised if we do so.
Absolutely. Okay, sorry, last one. Would you expect to wrap up the year, probably funding via those three is probably around the same 84% of acquisitions?
I won't commit to 84%. 84% is very high, given that we historically run 65% or so historically. I won't commit to that. Our general approach is that we want to behave in a relatively leverage-neutral manner over a multi-year period, and we have no reason to believe that won't continue. Frankly, as you're alluding to, in recent times, we've ended on the lower side of the leverage profile that we're comfortable with. I'm guessing that will continue.
Yeah. Spenser, just to highlight that one word Kevin said was multi-year focus, and that's really how we look at this. To the extent the opportunity to raise well-priced capital at the end of the year comes, and it may create a little short-term dilution, but if it's the right thing to do for the long term, you should expect us to do it.
Excellent. Thank you, guys.
We'll take our next question from Collin Mings with Raymond James.
Hey, good morning, guys.
Collin.
Just a quick question from me. Can you expand on the incremental exposure to the equipment rental category sequentially? It's obviously up meaningfully year-over-year, and then also against your cushion, it looks like they're going to be growing it forward.
Yeah, we did a portfolio acquisition with one of the large equipment rental companies in the second quarter. It really fit our profile very well. It was a strong operator. These were small individual properties. It was north of a $50 million transaction. I think it was around an $80 million overall transaction portfolio, sale-leaseback transaction direct with this operator. It was one of the new relationship tenants that we've started to work with, and very happy with the property, very happy with the operator.
Okay. Any key details in terms of the upside? GAAP improvements or the cap rates? Any other details you can give us about the risk return side?
The bandwidth of cap rates for our acquisitions is really pretty narrow, so I think it's in the bandwidth of our overall average. Geographically, my recollection, Collin, is that it's just diversified across the United States.
Okay. All right. Thank you, guys.
I'll take our next question from Todd Stender with Wells Fargo.
Thanks. Just looking at the mix of the second quarter investments. Can you guys break out you acquired 71 properties, but how many of those were, let's say, call it good-sized portfolio? Maybe how many were relationship investing versus how many were broadly market? Just kind of characterize it.
Yeah, Todd, I'll do the best I can on that question. Collin, just before, asked about the equipment rental piece, and so that was one piece of it. A large chunk was equipment rentals. We also had auto service and some tire stores. A few car washes. We did a few deals with discount retailers where we were very happy with those locations and the low price per property and low rent per square foot. There weren't very many convenience stores or fast food restaurants in the second quarter, which is a little bit different from us, but otherwise it was pretty much down the middle of the fairway.
How many were existing tenants, I guess, and maybe how many you participated in auctions?
Almost all with existing tenants. A little over 80% of our dollars invested were with our relationship tenants. By that, I guess I mean either existing or folks that we built a direct off-market relationship with and did a first deal with.
Okay.
It's relationship business where the retailer kind of holds back the properties that they're a little more concerned about, so we get slightly better real estate. Very importantly, we get to focus on the lease duration. I really want to highlight that for the first half of the year, our average lease duration is 17 and a half years, and the second quarter was even higher than that. I think one quarter is not a very big sample size. To do almost $400 million worth of deals with a 17-and-a-half year lease duration is, I think, really setting ourselves up well for the long term. Those are the kind of things you can negotiate when you're doing direct relationship business as opposed to getting in a bidding war or buying existing leases where some of the term is burned off.
Okay, thank you for that. I guess then, Kevin, when we look at the back of the capital sourcing subject, what's a reasonable free cash flow estimate for you guys for 2019, just as we model out capital sources?
Yeah, $120 million-$125 million.
Okay. We don't see much activity in the preferred equity market, I guess, across all REITs, just because interest rates are low, debt's been more attractive. I always think of the preferred pricing as about a 300 basis point spread to the 10-year, if that's accurate. Are you guys looking at that market? You can essentially get perpetual capital. It's then kind of seeing what pricing have you get or even if you're looking at that.
Definitely looking. Yeah. In our minds, when we pursue capital, and particularly on that piece of the capital structure, we think about 10-year debt, 30-year debt, and preferred pricing, and consider the relative pricing of those three pieces as to what might be more attractive. In the case of preferred, whether the window really is open to issue. Preferred tends to be a little more sporadic in terms of its availability. You tend, if it's well-priced and available, we generally go get it. October of 2016 was the last time we issued preferred equity, and we had no intention of doing that as we entered 2016. It was well priced. It was 5.2% coupon. We just said, "Look, we got the good perpetual cost of equity capital. Let's go get some." We will consider it.
I would say our capital stack of preferred right now is, I won't say full, but it's on the upper half of full, I guess. It is definitely a consideration. I will say debt rates are fairly attractive right now. Ten-year and 30-year competes very well with a preferred issuance in today's world. We'll see where we go. The answer may end up being some of all the above. Yeah, we definitely think about preferred as an important part of our capital stack. As I think most on this call understand, we tend to view that more as equity than debt. We understand the coupon's an obligation. The principal is an equity piece of capital in our minds, and we treat it as such.
Thanks, Kevin.
Again, ladies and gentlemen, that's star one on your touchtone telephone if you'd like to ask a question, star one at this time, please. We'll go next to John Massocca with Piper Sandler.
Good morning.
Morning, John.
Most of my questions have already been answered. On kind of the occupancy and kind of the pickup in occupancy during the quarter, was that related to successful outcomes of some of the vacancies you had or were expecting earlier this year, some of the near-term stuff like the Shopko in Virginia College? I know you were close on a couple of Virginia Colleges. Any update on that?
Yeah, John, the short answer is no, not at all, really. The portfolio is very healthy at almost 99% occupied. We're running well above our regular average. As it relates to the tenants you asked about, the Shopkos, one is still open and paying rent, hasn't been rejected yet. One, we have a pending sale, and one we have temporarily leased to a holiday store.
We only own those three. We have three Virginia Colleges. Two of those are under contract to sell, those contracts haven't closed yet, may not. We hope they do, we kind of expect they do, that's pending. One of the Virginia Colleges we're still working on. The real basis for the drop in our vacancy, increase in our occupancy rate, is just the hard work of our leasing team on all the other kind of individual, smaller vacancies that we've got. They work those all the time, in the second quarter, a number of deals matured, we got those properties either leased or sold.
Okay. Have there been any kind of changes to the tenant watch list recently, particularly within kind of the franchise restaurant segment?
Not really. We've had our usual suspects on there for a while. Logan's Roadhouse has been on there. Ruby Tuesday is on there. No real change. Both of those are less than 1% kind of tenants. No notable changes.
Okay. That's it for me. Thank you very much.
Yeah.
We'll take our next question from Chris Lucas from Capital One Securities.
Hey, good morning, everybody. Most of my questions have been asked and answered, but I guess just, Kevin, going back to the capital market question. Given the stock performance so far this year relative to sort of the bond performance and the compression in yields, is there a bias more towards debt right now than equity?
That's a hard one to answer. I like both where they're priced at the moment, so I hate to have to choose. I'd say no. I do think where things are priced, we're itching to do longer On the debt side, longer term is better than shorter. Those who have followed us for a long time know we don't do anything shorter than 10 years. Long-term debt's very well priced, and equity's reasonably priced as well, so no real bias one way or the other.
Just going back to the preferred question. I guess the question I would have is, are you at a point now where you could refi one of the tranches, Alan, at a more competitive rate, or is that spread not wide enough at this point?
We probably could. We have a 5.7% coupon Series D preferred outstanding that is redeemable that we could redeem and reissue preferred at a cheaper rate. Again, we're going to put all that in the context of where can we issue 10- and 30-year debt as well, and as well as common equity, and kind of see where we come out. That option is available to us.
Great. That's all I had this morning. Thank you.
All right. Thanks, Chris.
Ladies and gentlemen, there are no further questions in the queue. Mr. Whitehurst, I'd like to turn it back over to you for any closing comments.
All right. Thanks, Tom, and we thank all of you for joining us this morning, and have a good day.
Ladies and gentlemen, this does conclude today's conference. We appreciate your participation, and you may disconnect at this time.