Release Date: May 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- NNN REIT Inc reported a strong occupancy rate of 99.4%, which is above the long-term average.
- The company successfully leased 7 assets with a 91% rent recapture rate, which is higher than the historical average of approximately 70%.
- NNN REIT Inc achieved an initial cash cap rate of 8% on new acquisitions, indicating robust investment returns.
- The company raised almost $19 million from the sale of 6 properties, which will be reinvested into new acquisitions.
- NNN REIT Inc's balance sheet remains strong with significant capacity in its credit facility, now increased to $1.2 billion.
Negative Points
- There are 22 vacant assets in the portfolio, indicating potential challenges in tenant occupancy.
- The company faces uncertainties in the macroeconomic environment, which could impact future cap rates and acquisition pricing.
- Lease termination fee income was unusually high at $4.2 million, which is not expected to be a regular occurrence moving forward.
- Some tenants like Frisch's and AMC are on the watch list due to potential financial instability, which could affect future revenue.
- The company noted a slight softening in rent coverage levels, although it has not been significant enough to raise concerns yet.
Q & A Highlights
Q: What do you guys assume as far as bad debt goes for the year? And is there any additional lease term fee income included in guidance?
A: Kevin B. Habicht - NNN REIT, Inc. - CFO, Executive VP, Treasurer, Assistant Secretary & Director: We've assumed 100 basis points of rent loss for bad debt in our guidance, which is typical for us. Historically, our realized loss is less, around 30 to 50 basis points. Regarding lease termination fees, we didn't include the $4.2 million from Q1 in our guidance. These fees are sporadic, and while we assume some amount annually, it's not significant enough to include in detailed guidance.
Q: Can you explain the process around lease terminations? Do you proactively reach out to tenants to suggest they might want to terminate their leases?
A: Kevin B. Habicht - NNN REIT, Inc. - CFO, Executive VP, Treasurer, Assistant Secretary & Director: Each case is unique. We're actively involved with our tenants and properties, and if there's a beneficial economic outcome that includes lease termination income, we pursue it. It's not a primary focus, but we don't ignore opportunities to enhance value through lease terminations.
Q: What are the current challenges with tenants on the watch list, specifically Frisch's and JOANNs?
A: Kevin B. Habicht - NNN REIT, Inc. - CFO, Executive VP, Treasurer, Assistant Secretary & Director: Frisch's has been on our watch list, and we're actively working with them as needed. JOANNs, which filed for bankruptcy, is affirming leases for both stores we have with them, so we expect no loss there. Other tenants like Big Lots and At Home are being monitored, but there are no significant changes or concerns at this moment.
Q: What assumptions are you making regarding debt maturities later this year in your guidance?
A: Kevin B. Habicht - NNN REIT, Inc. - CFO, Executive VP, Treasurer, Assistant Secretary & Director: We don't provide specific guidance on capital markets activities, but we have options. We could issue long-term debt or use our bank line depending on the rate environment. This flexibility helps us manage our balance sheet effectively without significant impact on our financials.
Q: How are you handling the 22 vacant assets in your portfolio?
A: Stephen A. Horn - NNN REIT, Inc. - President, CEO & Director: All 22 vacant assets are earmarked for re-tenanting initially. If we can't achieve acceptable rental rates within a certain timeframe, we then consider selling. However, our first approach is always to try and re-tenant to maintain recurring revenue.
Q: With the cap rate reaching 8% this quarter, is this the new normal given the current interest rate environment, or do you see opportunities for higher cap rates?
A: Kevin B. Habicht - NNN REIT, Inc. - CFO, Executive VP, Treasurer, Assistant Secretary & Director: The 8% cap rate reflects current market conditions. If the "higher for longer" interest rate scenario persists, there might be slight expansions, but for now, 8% is a reasonable expectation for modeling purposes.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
