Q3 2007 National Retail Properties, Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Greetings, ladies and gentlemen. Welcome to the National Retail Properties Inc. third quarter 2007 earnings conference call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the presentation. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. Craig Macnab, Chief Executive Officer for National Retail Properties Inc. Mr. Macnab, you may begin.

CRAIG MACNAB, CEO, NATIONAL RETAIL PROPERTIES, INC.: Andrea, thank you very much. Good afternoon and welcome to our third quarter 2007 earnings release call. On this call with me is Kevin Habicht, our Chief Financial Officer, who will provide information and an update on our guidance and review details of our third quarter financial results after brief opening comments from me. We're extremely pleased with our financial performance in the third quarter, which positions us well for the balance of this year and, most importantly, sets us up for 2008. Our portfolio continues to be in great shape with over 98% of our properties occupied with very limited lease rollover in the the next 15 months. A high level of occupancy is attributable to the quality of our fully diversified net lease retail portfolio. We currently own as of the end of the third quarter 876 properties leased to approximately 200 different national or regional tenants doing business in 43 states. These tenants operate in over 30 different segments of the retail industry which provides us with broad diversification.

In the last 90 days we've completed a variety of transactions which are significant as we strive to build value for our shareholders. These transactions include firstly our joint venture with Crow Holdings Real Estate Fund. We anticipate acquiring somewhere between $200 million and $220 million of convenience stores in this joint venture with national retail properties investing $15 million of equity in the joint venture that we will manage and from which we will earn recurring fees. Strategically this joint venture, focused exclusive on convenience stores, is significant to NNN for a variety of reasons. A, the joint venture is a new source of capital for us, which is obviously important in this current liquidity and credit environment. B, we will moderate our direct exposure to convenience stores as we acquire properties in the joint venture that might otherwise have gone directly into our portfolio of real estate.

And three, this joint venture allows us to leverage the experience, knowledge and relationships that we have in the convenience store industry as we continue acquiring properties from our existing relationship tenants and other convenience store operators that we are currently talking to. At the end of the third quarter the joint venture made its initial acquisition closing on approximately $30 million of convenience stores and we're currently working on a couple of other acquisition opportunities that are destined for the joint venture. Secondly, we were very pleased to complete our equity offering of 4 million shares in early October, which means that today our balance sheet is in extremely good shape with zero outstanding on our recently expanded $400 million line of credit. As a reminder, we are now back to a more normal sale leaseback environment, where a cash buyer such as NNN has an inherent advantage over a leverage buyer of real estate.

Thirdly, in the third quarter we completed our first acquisition of theater properties from a privately held theater operator that is one of the ten largest screen operators in the U.S. This transaction strengthens the diversification of our portfolio and we hope to complete modest additional transactions with this theater operator in the future. Let me provide a couple of brief comments on our sense of the current acquisition environment. There continues to be plenty of net lease retail product on the market. And based on the deals that we're currently evaluating, we expect the deal flow arising from corporate transactions to perhaps be better in 2008 than it has been in the recent past. With the dislocation in credit markets leading to a higher cost of debt financing, a sale leaseback transaction is again a more attractive financing vehicle than other forms of debt capital.

Also it is important to point out that companies are currently being purchased at lower EBIT multiples with more cash equity in transactions, which means that the credit behind a potential sale leaseback transaction is stronger today than it was in the recent past. Cap rates have really not altered since the advent of the liquidity crunch in the market. Let me give you a couple of examples of this. We're currently selling a Walgreens property that we developed and it is under contract in the low 6% range. Also a couple of weeks ago, we closed on the sale of a high-quality restaurant property in the Dallas Metroplex area, again in the low 6% range. Having said that, we do think that cap rates will slightly increase at the margin and as a result we're in the process of attempting to move cap rates and yields higher on acquisitions that we're looking at. Remember, we're already obtaining better than market yields for the properties that we're acquiring as evidenced by our average yield on acquisitions this year of 8.34%.

In summary, National Retail Properties had a solid third quarter. Importantly, our capital markets activities over the past 60 days have positioned us very well for the opportunities that we anticipate in the months ahead. Our balance sheet is in great shape, our diversified portfolio is performing well and our pipeline of …