Good evening, welcome to National Retail Properties' second quarter 2018 operating results. At this time, all participants are in a listen-only mode, a brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to Jay Whitehurst, CEO. Thank you. Please go ahead.
Thank you, Brenda. Good morning, welcome to the National Retail Properties second quarter 2018 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 to discuss our financial results in more detail. National Retail Properties continued its consistent performance in the second quarter. To some, our occupancy rates, acquisition volume, and balance sheet management may appear to be the same old boring results. To us, it's a validation of our business strategy to maximize shareholder value by consistently growing our FFO per share on a multiyear basis. The outcomes achieved by consistently executing our strategy remain impressive. In July, we announced a 5.3% increase in our annual dividend to $2 per share.
This makes 2018 our 29th consecutive year of annual dividend increases, a feat that's been accomplished by only three REITs and by fewer than 90 public companies in the U.S. As of June 30, the total annual return for NNN shareholders once again outperformed REIT averages and most major equity indices over every time period of one year, three years, five years, 10 years, 15 years, 20 years, and 25 years respectively. Looking more deeply into our quarterly results, during the second quarter, our broadly diversified portfolio of over 2,800 single-tenant retail properties remained healthy, with an occupancy rate of 98.5%, which remains higher than our long-term average of 98%.
The primary lines of trade in our portfolio focus on customer services, customer experiences, e-commerce resistant consumer necessities with minimal exposure to apparel or other concepts that are struggling with perceived or actual disruption by Amazon or other internet-based retailers. Moreover, our top tenants continue to perform well in their respective businesses and grow their store counts. The drop in our occupancy rate from the first quarter is due largely to the expiration of 18 SunTrust Bank branch leases in April. As we've discussed on prior calls, these lease expirations were anticipated for over a year, I'm pleased to report that as of the end of the quarter, all but seven of the former SunTrust properties are either resolved or in the process of being resolved.
The headline for the SunTrust transaction is not about these few vacant properties, but it is about the tremendous value created in the 80 SunTrust leases that were renewed for an additional 12-year term. The SunTrust portfolio acquisition was an excellent real estate investment. We now own numerous SunTrust properties with long-term leases that we can sell at very low cap rates into the private market, allowing us to harvest this value and reinvest the proceeds in accretive new acquisitions. On the topic of acquisitions, in the second quarter, we invested $140.5 million in 59 single-tenant retail properties at an initial cash cap rate of approximately 7.1% and with an average lease duration of over 19 years. As usual, our primary strategic focus was on doing direct, recurring off-market business with relationship tenants, including a portfolio sale-leaseback transaction with GPM, the country's largest privately held convenience store operator.
For the first half of 2018, over 80% of our dollars invested have been with 20 different relationship tenants in 15 different lines of trade. It is also worth noting that for the 111 properties we acquired in the first half of the year, our average lease duration is 19 and a half years. Although Kevin will provide more detail in his comments, we were active in raising capital in the second quarter, both through the use of our ATM program and through proactive dispositions of some of our single-tenant retail properties. It bears repeating that our portfolio contains many single-tenant retail properties that trade at low cap rates in today's market. In those instances where we see less long-term upside due to real estate characteristics or other factors, we can sell those properties at low cap rates and redeploy the proceeds into new accretive acquisitions.
This multifaceted approach to accessing well-priced capital, combined with our healthy portfolio and our relationship-based pipeline of new acquisitions, positions us to continue producing consistent mid-single digits per share growth on a multiyear basis, which we believe will continue to beat the REIT index averages over the long term. Let me now turn the call over to Kevin for his additional comments on our results.
Thanks, Jay. I will start with the usual 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 those 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, record quarterly results of $0.68 per share for the second quarter of 2018, which represents a 6.3% increase over prior year Core FFO results.
Core FFO per share of $1.35 for the first six months of 2018 represents an 8.9% increase over prior year results. A solid start to the year, which keeps us well-positioned to grow 2018 results in that 5%-6% range over 2017's Core FFO and AFFO results. It's consistent with the past several years and our multi-year growth goal. We do this while maintaining a strong and liquid balance sheet and not relying on large amounts of short-term and/or floating rate debt. Our AFFO dividend payout ratio was 69.9% for the first half. As Jay mentioned, as we noted on our last earnings call, the lease on 18 SunTrust properties expired on April 1st. As expected, our occupancy ticked down 70 basis points to 98.5% at June 30, which was fully baked into our guidance.
We continue to drive additional operating efficiencies with the G&A expense decreasing to 5.6% of revenues for the second quarter of 2018, compared to 6.1% a year ago. For purposes of modeling 2018 results, the annual base rent for all leases in place as of June 30, 2018, was $599.6 million. This allows you to take some of the guesswork or estimation out of the timing of Q2 acquisitions and dispositions for any projections that you might be starting as of July 1. We did maintain our 2018 Core FFO guidance of $2.62-$2.66 per share and did not change any of the underlying assumptions. We did issue 3.2 million shares of common equity in the second quarter, mostly in June via our ATM, which will obviously weigh on second half 2018 per-share results a bit.
Combining this equity issuance of $130 million with $84 million of property disposition proceeds, plus $63 million of free operating cash flow after all dividend payments. That combination provided a total of $277 million of equity-like capital in the first half, which funded 87% of the $317 million that we invested in new acquisitions. This leaves us in a very good leverage and liquidity position to maintain an active acquisition effort into 2019. We ended the second quarter with only $167 million outstanding on our bank line, leaving $733 million of availability. We have not been big users of that short-term variable rate part of our capital stack for many years. We remain very well-positioned from a liquidity perspective and a leverage position. With the exception of our bank line, all the outstanding debt is fixed-rate.
Our balance sheet remains in good position to fund future acquisitions and weather potential economic and capital market turmoil. Quickly, our quarter-end leverage metrics Debt to Gross Book Assets was 34.7%. As you know, we don't manage our balance sheet around market cap-based leverage metrics. More relevant, we believe Net Debt to EBITDA was 4.8 times at June 30. Interest Coverage was 5.0 times for the second quarter of 2018, and Fixed Charge Coverage was 3.8 times for the second quarter. Only five of our 2,846 properties are encumbered by mortgages totaling only $13 million. We believe 2018 will be another good year of solid growth in operating results, the comps for multiple prior years are not easy. When sourcing capital and making capital allocation investment decisions, driving per-share results on a multi-year basis is really at the forefront of our minds.
Similarly, we think about making long-term investment decisions with a long-term cost of capital view and not a short-term or marginal cost view. Our investment strategy in terms of property type, tenant type, and our balance sheet strategy have been very consistent for many years. With that, Brenda, we'll open it up to any questions.
Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue, and you may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Again, that is star one to ask a question at this time. Our first question comes from the line of Collin Mings with Raymond James.
Hey, good morning, guys.
Morning.
Morning.
First question from me, Kevin. Just in the past, you've discussed the potential issuance of long-term debt later in the year, and that was potentially on your radar. Can you just update us as to your thoughts on that front, just in terms of sizing and pricing, particularly given the equity issuance in 2Q?
Fair question. That is still on our radar. As we've talked about, we've put in a couple hedges earlier in the year to hedge interest rates around that. We are still anticipating that sometime later this year, we will be issuing unsecured debt. I presume at this point in time, we're estimating 10-year term fixed-rate debt at the moment. It would be priced somewhere in the mid-4s, 4.5%, call it. We will see how that all unfolds. That is still out there. Obviously, the timing of that does impact second-half results. Whether we did that in September or whether we did it in December would have some impact on this year's second half results. We do not give any guidance around specific timing, in part because we want to reserve the right to react to opportunities that the marketplace may present.
Okay. All right. That is helpful. Just going back to the prepared remarks, can you maybe just expand on the GPM transaction in a bit more detail, just in terms of how it came together and terms of the transaction?
Yes. Not really a whole lot more to expand upon. GPM is a relationship tenant that we have done a number of smaller deals with through the years. We have known that management team for a long time. They are the, as I mentioned, the largest privately-owned convenience store operator in the country. This was just a transaction where they were acquiring another company and doing a sale-leaseback of some of that real estate that we were already familiar with. In general, we like convenience store real estate very much. It is some of our safest and best real estate. These properties were at a good price per property with a good national operator. We were happy to be able to do another deal with our relationship tenant.
All right. One last one, and I will turn it over. Just Kevin, can you just touch on the impairment charge in the quarter?
Yeah. That was primarily driven by some of the SunTrusts that we got back as vacant properties. That triggered the vast majority of that impairment during the quarter.
Okay. I'll turn it over. Thanks, guys.
Thanks, Tyler.
Our next question comes from the line of Nick Joseph with Citi.
Thanks. Just going back to maintaining guidance, just want to better understand what's assumed. Call it for in the first half was $1.35. If you take the 2Q run rate of $0.68, you get to a number about 2% above the high end of guidance. You just mentioned the expected unsecured deal. Are there any other assumptions from an acquisition or disposition timing standpoint that impacts the run rate?
Nick, I'd say a couple things. One, the 3.2 million shares we issued in the second quarter clearly weigh on per-share results. They got, like I say, mostly issued in June. We didn't have much second quarter impact. That'll flow through. Two, we did have a little bit of lease termination income in the second quarter, $780,000. We always have $100,000 or $200,000 of that kind of stuff, but it was a little heavy this quarter. It's not a lot in one sense, but those half pennies per share kind of add up at some point. Three, I'd say, yeah, we're probably comfortable towards the higher end of our guidance range rather than the lower end. Lastly, speaking to that, I guess, would be our history is we tend to be cautious and conservative on changing guidance.
I think we're just creating some flexibility for us. That was the rationale.
Thanks. That's very helpful. With 11 of the 18 SunTrust leases, I think you said resolved or in the process, what do you expect occupancy to be in 3Q?
I think it'll drift up a little bit from where we are, call it 40 basis points or something like that.
Thanks.
Our next question comes from the line of Vikram Malhotra with Morgan Stanley. Please go ahead.
Hi, this is Kevin on for Vikram. Just a quick question in regards to cap rates. Just if you could give any color around what you've been seeing the trends recently with rates going up.
Hey, good morning, Kevin. No. We will once again report that cap rates remain flat for the small box types of single-tenant retail properties leased to good operators that we are looking for. We're not seeing any drift upward in cap rates yet. Our cap rate was a little higher this quarter than we've been talking about in the second quarter. That was really just driven by specific transactions that traded in the low 7s as opposed to lower. We still think that for the year, our cap rates for our acquisitions will be in the mid to upper 60s.
Okay. Thank you for that. Just in terms of disposition levels, do you think there's anything that would possibly cause you to increase your disposition levels and just use that as a source of funding for acquisitions?
Sure. Yeah. You cut out a little bit. I think you asked about dispositions going forward. Our portfolio, as I mentioned in my prepared remarks, we have many single-tenant, small box properties that would trade at very low cap rates in the one-off market. We are constantly reviewing the portfolio to look at which of those properties should we put on the market to harvest those proceeds for reinvestment. As Kevin mentioned, we're probably looking at being at the high end of our guidance right now. It is a wonderful adjunct to have that ability to sell these properties individually at low cap rates, to balance against where our stock is trading at any given time, just be able to decide if, today, are we issuers via the ATM, or are we more sellers of individual properties at low cap rates?
Kevin, I don't know if there's anything you want to add to that.
I think it's still a good market for us to sell into. We've been able to take advantage of both ends of the spectrum in terms of selling weaker properties that we'd rather not own, as well as selling some properties at very low cap rates, at very strong pricing that we just think are more than full value. Yes, still a good environment.
All right. That's all for Ryan. Thanks a lot for the time.
Thanks, Kevin.
Our next question comes from the line of Joshua Dennerlein with Bank of America. Please go ahead.
Hey. Good morning, guys.
Hey. Morning, Josh.
I saw Sunoco is back on your top tenant list. Could you maybe provide some color on that transaction and maybe how those properties compare to the ones that 7-Eleven acquired earlier this year?
Sure. Yeah, Josh, we think that all that has now settled down. Between 7-Eleven and Sunoco, 7-Eleven acquired many of the Sunoco properties that we owned and had leased to Sunoco. Ultimately, due to regulatory matters, some 7-Eleven properties had to be transferred to Sunoco. In this instance, ultimately, 7-Eleven transferred some of their properties back to Sunoco, not the same ones that came over, but some others, to meet regulatory requirements. At the end of the day, this is where it has all settled out. We're agnostic as to which of those two large investment-grade operators are running the properties. One other point to make, I think, is on those 12, they were leased to 7-Eleven. Now they have been assigned to Sunoco, but the 7-Eleven lease is still in place.
We have both companies credited on those 12 leases, but they're being operated as Sunocos, and so we thought it was appropriate to put them in the Sunoco bucket.
Okay. Got it. A little tricky there, makes sense. On the seven SunTrust properties that haven't been resolved, any kind of general color across maybe why people aren't interested in them or why that process is slower for those than the rest?
Right. No, in fact, it's the opposite of what you might be thinking. Job one with us is to re-lease our vacant properties, we will spend a great deal of time and energy trying to re-lease vacancies before we throw in the towel and sell a vacant property. I don't want to jinx our leasing team down the hallway here, these seven are some of the better remaining vacancies, we are working hard to try to re-lease those as opposed to taking any other action. We had a year to get ready for the vacancies and to market those properties. Some of the ones you've seen us sell are ones that we marketed and concluded that the best outcome was to go ahead and sell those properties. For these seven, we have not reached that conclusion.
Got it. Thank you. I'll yield the floor.
Our next question comes from the line of Todd Stender with Wells Fargo. Please go ahead.
Thanks, guys. When going back to the GPM investment transaction, did that come down to a competitive situation to be their capital provider? It seems like they're a growing aggregator of convenience stores, but if they bring you properties, do you have to fund them? What kind of arrangement do you have?
When we build a relationship with any retailer, Todd, what we try to do is to say yes as much as possible to the deals that they bring us. In this particular case with GPM, we looked across the entire portfolio of what they were buying, and there were parts of that portfolio that made sense for us and had a dialogue with GPM about a portion of that portfolio. Often with our relationship retailers, we may not take an entire transaction, or there may be some properties that we think would be better owned by other folks. In those instances, we actually help the relationship retailer try to find other capital for the properties that don't fit best with us. It's all part of a long, thorough dialogue that we have with our relationship retailers.
They are folks that we want to be supportive of, but we're always mindful of the quality of the real estate that we are trying to acquire from anybody, including our relationship folks.
Sure. Thanks. How about, did you guys disclose the cap rate? Then 2, is there any CapEx that the tenant will be responsible for? Is there any rebranding or any money needs to be put into these? Are they newer? Do they need a little more capital upfront?
The cap rate was in the low sevens. It was in the vicinity of where we came out for the quarter. These were existing properties that had a relatively long seasoning and history. As I sit here right now, Todd, I don't recall any major kind of CapEx obligations on the tenant. It is the tenant's obligation under the lease to keep those properties up. What we have found with our good operators under long-term leases is that they do a good job of keeping up their properties.
Sure. Thanks. Probably for Kevin, just the last one. You tapped the ATM in the quarter. I'd say anytime we see anything over $100 million, that's a pretty good number for a quarter. How many transactions was that spread over? We have not seen overnight from a lot of REITs, but that would be one big chunk, pretty dilutive, but this is kind of match funding. How big of bites are these transactions?
It is generally grind-it-out on a daily basis. I will say we had one block as a part of that $3 million that was of some size. Other than that, it's a daily grind-it-out, and really evaluate on a daily basis. Is this a price that we're comfortable with? Two, is the market tone sufficient that we feel comfortable with selling some shares? Because if it's not trading well, we'll stand aside. That's the good news of maintaining a strong balance sheet, is not needing capital. That's kind of the mantra and the key, we think, to managing the balance sheet. When you don't need it, then you can stand aside and let the market do what it's doing, and only participate on some strength.
Great. Thank you.
Thanks, Todd.
Our next question comes to the line of John Massocca with Ladenburg Thalmann. Please go ahead.
Good morning.
Morning, John.
I know it's kind of a smaller tenant and it's outside of your top tenant list, but how are you looking at your Applebee's properties in the wake of kind of strong same-store performance there recently, but maybe offset by concerns and issues with the RMH Franchise? Are these potential disposition fodder going forward, or might you actually even look to add to your position given kind of some issues with the brand causing price dislocation?
Well, John, yeah, we do have a modest concentration with RMH. I think it's, Kevin, is it like 0.5% ?
Yeah, 0.5%, yeah.
Yeah. A 0.25% of our rent is with RMH, and that's across 17 units, most of which are doing pretty well. We're watching that carefully and thinking about it, but it is not a particularly material number, and it's not causing us to lose a great deal of sleep. Our focus whenever we are acquiring restaurant properties is on rent coverage and cost per property, primarily. If you look at the restaurants that we have acquired, you'll see that generally they are at very low cost per property and therefore low rent per property, which builds in a margin of safety for both the tenant and the landlord. To the extent other opportunities came up that fit that criteria, a good operator with low rent per property, that's the kind of thing we would look at.
That makes sense. Most of my other questions have been answered, that's it for me.
Thanks, John.
Thank you. Once again, as a reminder, you may press star one to ask a question at this time. Our next question comes from the line of Chris Lucas with Capital One.
Hey, good morning, guys. Just a quick housekeeping question. Kevin, on the Below-Market Rent Amortization item, it spiked a bit from what your sort of historic run rate is. Is there anything specific that's going on there during the quarter that we should be thinking about?
Not really. I think that probably related to some properties that we sold, actually, that had a lease in place that we had to write off or recognize that Below-Market Amortization. No, you shouldn't read anything really into that.
That's all I had this morning. Everything else was answered. Appreciate it.
Thanks. All right. Thanks, Chris.
Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any closing comments.
Thank you all very much for attending today. We look forward to seeing you as the fall conference season commences. Have a good day.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.