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 the presentation. Property. At this time, it's my pleasure to turn the floor over to Mr. Jay Weitzers, Chief Executive Officer.
Sir, the floor is yours.
Thank you, Tom. Good morning, and welcome to the National Retail Properties 2nd Quarter 2019 Earnings Call. Joining me on this call is our Chief Financial Officer, Kevin Hobbits. After some brief opening remarks, I'll turn the call over to Kevin for more detail on our results. Once again, National Retail We've posted steady consistent results in the Q2 of 2019, which positioned us to increase our common stock dividend in July 5th year of increased annual dividends, a feat matched by only 2 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 and sometimes wild fluctuations, We continue to post steady consistent per share results. History has shown that over the long term, Partners. 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 2nd quarter at the higher end of that range. We had a 2nd quarter of acquisitions as well, investing almost $276,000,000 in 71 new single tenant retail properties at an initial cash yield of 6.9%. Year to date, we have now invested almost $393,000,000 to acquire 104 single tenant retail properties at an initial cash yield of 6.9% and with an average lease duration of 17.5 years.
Through the end of the first half of twenty nineteen, 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, just 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. But all that effort bears When we're ultimately able to acquire stronger real estate locations with favorable lease terms and the lease document that's tailored to our long term perspective. We also sold 13 properties during the 2nd quarter, generating almost $42,000,000 of proceeds.
Of particular note is our sale of a CVS drugstore at a 4.4 percent cap rate. This property was formerly a vacant box, which our leasing team re leased to CVS On an as is basis, in our disposition group, Penn sold for a gain of over $5,000,000 Year to date, through the end of June, we have raised over $61,000,000 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 I'll discuss our balance sheet and financial metrics in more detail, but I do want to highlight that we raised over $80,000,000 of well priced equity in the Q2 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. Taking to this long term strategy has resulted in a balance sheet that continues to be one of the strongest in our sector that positions us very well for the second half of twenty nineteen 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 multiyear basis. Our second quarter results reflect another steady Property. 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 statements that may be considered to be forward looking statements under federal securities law. The 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, a headline from this morning's press release Quarterly core FFO results of $0.68 per share for the Q2 of 2019, which is Flat with prior year results and is consistent with your projections and estimates. We're on track with our prior core FFO guidance of $2.71 to $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 7 of today's press release. Our AFFO dividend payout ratio for the first half of twenty nineteen was 72.4%, which was the same as full year 2018 payout. As Jay noted, recent increase in the dividend marks our 30th consecutive year of dividend increase. Occupancy was 98.8 percent at June 30, which was up 60 basis points versus the prior quarter.
G and A expense was 5.6 percent of revenues for the 2nd quarter and 5.7% for the first half of twenty nineteen, both of which were consistent with prior year levels. For For purposes of modeling 2019 results, the annual base rent for all leases in place as of June 30, 2019 of $650,100,000 So 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 $82,000,000 of equity in the 2nd quarter. That was at a $53.50 net price, primarily via our ATM. And as we've noted in the past and consistent with the past couple of decades, we Effective behavior in a relatively leverage neutral manner over time.
2nd quarter dispositions totaled $42,000,000 and first half dispositions totaled $61,000,000 So for the first half, the $61,000,000 of disposition proceeds, plus $87,000,000 of common equity raised, plus $62,000,000 of retained operating cash flow after all dividends, $210,000,000 of equity like capital raised in the first half of twenty nineteen available to fund new investments. As a reminder, we entered 2019 well ahead of the curve on 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 $63,000,000 outstanding on our $900,000,000 bank line, continuing several years of very modest bank line usage and significant liquidity. Leverage metrics remain very strong.
Our next debt maturity is in 2022 And our weighted average debt maturity is now 8.8 years. So our balance sheet is in good position to on future acquisitions as well as whether potential economic and capital market turmoil. Looking at quarter end leverage metrics, The net debt to gross book assets was 35.4%. As you all know, we have not found Market cash based leverage metrics particularly relevant, so we don't manage our balance sheet around that. More importantly, net debt to EBITDA was 5.0 times at June 30.
Interest coverage was 4.9 times and fixed charge coverage was 3 point 8 times both for the 2nd quarter and both of those metrics were 10 basis points higher than year end 2018. Only 5 of our 3,043 properties are encumbered by mortgages totaling $12,000,000 So 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 taking capital allocation investment decisions, driving per share results on a multiyear basis remains at the forefront of our mind. Our investment strategy in terms of property type, tenant type and our balance sheet strategy. You've been very consistent for many years.
And on with that, we will open it up to any questions. Control while we poll for your questions.
We'll take
our first question from Christine McElroy with Citi.
Good morning. This is Katie McConnell on the specialty. To talk about any further progress you've made on acquisitions to date, Property. Given the accelerated year to date pace versus your original expectations, what's your outlook for the remainder of the year? And would you say you see the high end of guidance is more Property.
Hey, Katie. Good morning. We didn't change our acquisition guidance. We had a busy Property. The Q1 was a little slower than usual for us.
And so, we're comfortable we're very comfortable with kind of 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 over commit or over promise. So but I will say that Property. 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 and pipeline of business looks very good through the rest of the year.
But at this point, we're not prepared to say that we are confident that we will materially to achieve this year's guidance. And Jay, just as
a reminder, to the extent we did exceed guidance, which We're not confident about that. To the extent that occurs later in the year, call it Q4, It really has partial little impact on 2019 results and really it's more of a 2020 story. So We'll see where the opportunity is taken.
Okay, great. Thank you.
We'll take our next question from Brian Hawthorne with RBC Capital Markets.
Hi. My first question, looks like, Collyn, 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. And cap rates in that disposition environment is Selling properties one off to individual investors, often 10/31 exchange buyers, those cap rates are remaining very low. Call.
So, it really does provide us with a meaningful opportunity to continue to accretively recycle capital. Call. I should point out that our disposition our philosophy around dispositions 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 It's willing to pay a very low cap rate for those. And in many cases, it's properties that have for us either flat leases Or the residual value of real estate maybe to us is not so compelling.
But there's some reason that we're we don't feel like We need to be a long term holder of that property, but someone else wants it very badly. And so, we'll sell into that market. And 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. So, at the other end, it's kind of a defensive sale to keep the portfolio as clean as possible. And between those 2, 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 our cap rates far below our acquisition cap rates.
And then I guess, What lines of trade seem like they have the most expansion plans? Brian, A 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. So, 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, Property, which is to business with strong retailers on 2 retail locations. And we're finding opportunities across all of those existing lines of trade.
We'll take our next question from Vikram Malhotra with of Stanley.
This is Kevin on for Vikram. Just a quick couple of questions for me. Just in terms of the guidance, I know there's slight increase in the real estate expense as well as the G and A. The real estate expense, I assume, was from the moving up of the acquisition volume. In terms of the G and A, is there anything specific there we should be looking at?
Not really. That was yes, it was a $500,000 increase on a 36 $37,000,000 run rate. Yes, just fine tuning on our end. So yes, nothing much to read into it.
Okay. And then, sorry, I may
have missed this before, but just
on controlling it on the balance sheet, is that related to disposition
We'll take our next question from Spencer Allaway with Green Street Advisors.
Hi. Thank you. Can you provide some more color on the CVS asset sale? I know traditionally, obviously, the enhanced grade tenants of the 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 forecast you cited.
Is there anything specific about the deal, the location or perhaps the expected performance of the property that drove traffic so low?
Good morning, Spencer. Primarily, I'd say, it's driven by the location. You're absolutely right. This was a former I won't get into too much detail, but this is a Former Borders bookstore that was very well located here in Florida. And when Borders went bankrupt or I can't recall, I think they went bankrupt.
When the lease came back to us, Our leasing team did a very good job of finding the best tenant to take that space. And we had got a long term lease on that space on an as is basis, But it didn't have a lot of growth in it. And it was a very good location. And so, 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 property When you can take a vacant box and release 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 mention, Cory, did you already cite how long You just signed a long term lease. Did you mention the lease term?
I'm sure I didn't because I don't recall.
Okay. No problem. I'll follow-up on that. Okay. Maybe just one last one for me.
I know, Kevin, you spoke about the ATM program, and I realize you guys Have ample equity like capital to fund future acquisitions. But given what you guys are creating, 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. So in 2018, between ATM Equity and dispositions and free operating cash flow, we funded 84% of our $716,000,000 of acquisition with that kind of equity.
So yes, we're which led to my point, We entered 2019 very well equitized. But 2020 is coming and we know we'll have more acquisitions to make. And so yes, to your point, We are trying to get capital when it's available and well priced, and you probably shouldn't be too surprised if we do so.
Absolutely. And okay, sorry, last one. Would you expect to kind of wrap up the year probably funding, be those 3, is probably around the same 80 4% of acquisitions?
I won't commit to 84%. 84% is very high. Given that we historically run 65 or so percent historically. So I won't commit to that. But Our general approach is that we want to behave in a relatively leverage neutral manner over a multiyear period.
And We have no reason to believe that won't continue. And 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. And so
I'm guessing that will continue. And Spencer, just to highlight, one word Kevin said was multi year focus. And that's really how we look at Property. So, 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 solution, but 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.
Just a quick question for me. Just you can understand on the incremental exposure to
the equipment rental category sequentially. It's obviously up
Year over year and then also again sequentially, it looks like they're
going to be during the quarter.
Yes. We did a portfolio acquisition With one of the large equipment retail equipment rental companies in the second quarter, It really fit our profile very well as a strong operator. These were small individual properties. It was North of a $50,000,000 transaction, I think it was around an $80,000,000 overall transaction portfolio sale leaseback transaction Property. Operator, but it was a 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 details in terms of the geographic buckets or The bandwidth of cap rates For our acquisitions, it's really pretty narrow. So I think it's kind of in the bandwidth of our overall average. And geographically, my recollection, Collyn, is that it's just diversified across the United States. Okay.
All right. Thank you.
We'll take our next question from Todd Stender with Wells Fargo. Thanks. Just looking at the
mix of the 2nd quarter investments, can you guys break out, you acquired 71 properties, but How many of those were, say, call it, good sized portfolio? And then maybe how many were relationship investing versus this time anywhere broadly marketed, just kind of characterize it.
Yes. Todd, I'll do the best I can on that question. And Property. Collin, just before asked about the equipment rental fees. And so that was one piece of it.
So a large, but And we did a few deals with discount retailers where we were very happy with those locations and with Low price per property and low rent per square foot. So, there was not 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.
And how many were existing tenants, I guess, and maybe how many have participated in auctions?
Almost all with existing tenants. A little over 80 Our dollars invested were with our relationship tenants. And then by that, I guess, I mean, either existing or folks that we built a direct Off market relationship with and get a first deal with. Okay. This 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. And 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 Property. 17.5 years and the 2nd quarter was even higher than that. But I think 1 quarter is not a very big sample size, Partners.
The $400,000,000 almost $400,000,000 worth of deals for the 17.5 year lease duration as opposed to getting in a bidding war or buying existing leases where some of the term has turned off.
Okay. Thank you for that.
I guess, Kevin, when we look at the capital sourcing subject, What's a reasonable free cash flow estimate for you guys for 2019 just as
we model out capital sources? Yes, dollars 120,000,000 to $125,000,000
Okay. And then we don't see much activity in the preferred equity market, I guess, across all REITs, Just because interest rates are low, that's been more attractive. I always think of the preferred pricing as about a 300 basis point Spreads, the 10 year, if that's accurate. Are you guys looking at that market? You can essentially get perpetual capital, but just and kind of seeing what pricing you get or are you looking at that?
Definitely looking. Yes. So 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, that preferred tends to be a little more sporadic in In terms of its availability, and so you tend to if it's well priced and available, we would 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.
And but it was well tight. It was 5.2% coupon. We just said, look, we've got the good perpetual cost of Equity Capital. Let's go get some. So, but you will consider it.
I would say, our capital stack preferred right now Now, I won't say full, but it's not, it's on the upper half of full, I guess. But it is definitely consideration. I will say that rates are very attractive right now, 10 year 30 year Compete very well with a preferred issuance in today's world. And so we'll see where we go. And the answer may end up being some of all the above.
But yes, we definitely think about preferred as an important part of our capital And as I think most on this call understand, we tend to view that more as We understand the QFAM is an obligation. The principal is an equity investment piece of capital in our minds, and We treat it as such.
Thanks, Kevin.
We'll go next to John Massocca with Piper
Most of my questions
have already been answered.
But on kind of the occupancy and kind of the pickup in occupancy POP during the quarter. Was that related to successful outcomes, some
of the vacancy you had or were expecting earlier this year, some of
the near term stuff of Mike Scioscopto in Virginia College. I know you're close on a close to Virginia Colleges. Any update on that?
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. But as it relates to the tenants you asked about, The SHOP code, 1 is still open and paying rent, hasn't been rejected yet. 1, we are have a pending sale And one we have temporarily leased to our Holiday store. Then we only own those 3.
And then we had 3 Virginia Colleges, 2 of those are under contract to sell, but haven't those contracts haven't closed yet and may not. We hope they do. We kind of expect They do, but they're that's pending. And one of the Virginia colleges we're still working on. The real basis for the reduction In our 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.
And in the second quarter, a number of deals matured. Corp. And we got this property either leased or sold.
Okay. And then have Any kind of changes to tenant watch list recently, particularly within kind
of the franchise restaurant segment? Not really. I mean, we've had our usual suspects on there for a while. Logan's Roadhouse has been on there. Ruby Tuesdays is on there, but no real change.
Both of those We'll take our next question from Chris Lucas from Capital One Securities. Most of my Question has been asked and answered.
But I think just, Kevin, going back
to the capital market question. Given the stock performance so far this year relative to sort of the bond performance in compression and yield. Is there a bias more towards debt right now than equity? That's That's a hard
one to answer. I like both price at the moment. So I'd
say I do think we're seeing the price we have we're itching to do longer on the debt side, longer term is better than shorter. And those who have followed us for a long time know we don't do anything shorter than 10 years. So But long term, that's very well priced and equities, we've moved price 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, is there are you at a point now where you could refi one of the pictures out today, a more competitive rate or is that spread not wide enough at this point?
Yes, we probably could. We We have a 5.7% coupon series deemed 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 working with HD And 30 year debt as well and as well as common equity and kind of see where we come out. But that option is available to And ladies and gentlemen, there are no further questions in the queue, Mr. Whitehurst.
I'd like to turn the call 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.