NNN REIT, Inc. (NNN) Q4 2021 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the National Retail Properties Fourth Quarter and 2021 Operating Results. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Jay Whitehurst, the President and CEO of National Retail Properties. Sir, the floor is yours.

Thanks, Holly. Good morning, and welcome to the National Retail Properties 2021 Fourth Quarter Earnings Call. Joining me on the call this morning is our Chief Financial Officer, Kevin Habicht, and our current Chief Operating Officer and soon to be our new Chief Executive Officer, Steve Horn. Let me start by saying how pleased I am with our Board’s decision to elevate Steve to the role of CEO upon my retirement at the end of April. I was one of the people who interviewed Steve back in 2003, and it’s been a true pleasure to watch his career at National Retail Properties grow and develop. Steve understands every aspect of our business and our culture, and there’s no one better qualified to lead our company into the future. And while we’re looking forward, I also want to welcome Kamau Witherspoon to the Board of Directors of National Retail Properties. Kamau’s background with senior positions at Target, Yum Brands and United Health Care, and now as the recently appointed CEO of Shipt, as well as his impressive service as an officer in the U.S. Navy will add value to our company in the areas of strategic planning and consumer retailing. Much like the rest of National Retail Properties, our Board is very well positioned as we look ahead to the future. And lastly, I want to thank our Board and all my colleagues, especially Kevin Habicht for the privilege of working with you for the last 30 years – 30-plus years. We’re a family, and I could not be prouder of what we’ve built together. As Steve assumes the role of CEO in April, I know that the company is in the best possible hands to continue its long track record of success and growth in the years ahead. Turning now to the numbers. After a solid quarter, we’re pleased to announce 2021 core FFO per share of $2.86, which is a 10.4% increase over 2020. We’re also pleased to increase our guidance for 2022 core FFO per share to a range of $2.93 to $3 per share. Our business model is designed and executed to deliver mid-single-digits growth per share on a consistent multiyear basis, and we are clearly on that cadence. Let me now turn the call over to Steve for more color on our fourth quarter and 2021 performance.

Thank you, Jay. Good morning, everyone. Thanks for joining the call. Before discussing a few of NNN’s key metrics, I’d like to express how grateful I am for the opportunity to be the CEO of NNN at the end of April. In addition, I want to personally thank Jay for his mentoring, encouragement and support of the nearly two decades that we worked together. Without question, we’ll miss having Jay around. With that being said, I’m confident with the foundation Jay established along with the deep management team and talented associates of NNN, there is no doubt the mission to deliver outstanding results and create shareholder value year-over-year will continue. I’d also like to thank our entire Board of Directors for their confidence and support as NNN moves into another chapter. Now, let’s turn to NNN’s recent performance. We acquired 49 new properties for $100 million in the fourth quarter, bringing the 2021 acquisition volume to $550 million and 156 properties at an initial cash cap rate of 6.5% with an average lease duration of over 18 years. For the most part, our acquisitions for the year involve new long-term leases on NNN lease form. As we have mentioned in the past our focus on long duration net lease create the highly stable, growing income stream that is far superior to the more variable cash flow from other areas of commercial entities. Consistent with our historical trends, two thirds of our 2021 acquisition volume came from over 20 relationship tenants, with which we do multiyear sale-leaseback transactions. Our acquisition team on a daily basis is focused on building and identifying new relationships in various lines of [trade] (ph), coupled that with our current stable relationship tenants that are picking up the pace of growth organically and through M&A, results in our pipeline currently staying very strong for 2022. Turning to some of our key portfolio metrics. The portfolio remains very strong with occupancy up 40 basis points to 99% from the third quarter. Collection for both current rent and deferred rent is right on schedule. And tenant lease renewals are running about 85% for the year, which is right in line with our historical average. During the quarter, we also sold 21 properties for $51 million. For the year, that total of 74 that generated $122 million, which we invested into new acquisitions with long-term leases. Based on a dollar volume, about one third of our disposition were vacant properties. Before Kevin discusses our financial metrics, I’ll share a few highlights by saying the balance sheet remains one of the strongest in our sector with $176 million of cash in the bank at year-end, no material debt maturities until 2024 and zero balance in our – on our $1.1 billion line of credit. With that, let me ask Kevin to provide his additional comments on our balance sheet and year-end results.

Thanks, Steve. And as usual, I’ll start with our usual cautionary statement that we will make certain statements that may be considered to be forward-looking statements under federal securities laws. 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 out of the way, so headlines from this morning’s press release report quarterly core FFO results of $0.75 per share for the fourth quarter of 2021, that’s up $0.04 from the preceding third quarter’s $0.71 per share and up $0.12 from the prior year’s $0.63, which was affected by the lockdowns in 2020. Today, we also reported that AFFO per share was $0.77 per share for the fourth quarter, which is up $0.02 from the preceding third quarter’s $0.75. I would characterize fourth quarter results as very good. They did come in about $0.02 better than expected. Approximately half of that came from some onetime revenue items particularly connected to lease termination or rent settlement income of about $1.4 million, and the other half coming from G&A reduction from lower stock compensation expense accrual. We did footnote fourth quarter AFFO included $2.9 million of deferred rent repayment and our accrued rental income adjustments for the fourth quarter, without which we would have produced AFFO of $0.76 per share. As these scheduled deferred rent repayments continue to taper off from the peak levels in the first half of 2021, we’re seeing the improved results kicking in from our increased acquisition levels in 2021. Full year 2021 core FFO results of $2.86 per share were up 10.4% over 2020. Looking at AFFO, we reported full year 2021 AFFO of $3.06 per share, and that’s up 21.9% over 2020’s $2.51 per share. Again, we footnoted these results, excluding the deferred rent repayments, which showed adjusted 2021 AFFO of $2.92 per share versus $2.68 in 2020 with those deferred rent repayments stripped down, and that would represent a 9% increase in the AFFO line item, which I understand [Indiscernible] more in line with core FFO’s 10.4% increase. Excluding all deferral repayments, our AFFO dividend payout ratio for the full year of 2021 was 72%, which – that’s fairly consistent with pre-pandemic levels. As Steve mentioned, occupancy was 99% at year-end. That’s up slightly from recent quarters. G&A expense came in at $9.9 million, and we ended the quarter with $713.2 million of annual base rent in place for all leases as of December 31, 2021. Steve mentioned rent collections continue to remain strong in the fourth quarter. Today, we reported rent collections of approximately 99.4% for the fourth quarter, which is very close to kind of the pre-lockdown levels we had previously. Collections from our cash basis tenants, which represent about 7% of our annual base rent, improved to approximately 98% for the fourth quarter rent, and that’s up from 94% in the third quarter. So doing well on the collection front, back to what we consider fairly typical normal levels across the board. Today, we increased our 2022 core FFO per share guidance from a range of $2.90 to $2.97 to a new range of $2.93 to $3 per share. And similarly, increased AFFO guidance to a range of $3.01 to $3.07 per share, which reflects the scheduled slowdown in deferral repayments in 2022, as noted on Page 13 of today’s press release. The supporting assumptions for our 2022 guidance are on Page 7 of today’s press release, and they are largely unchanged from our last quarter’s guidance. Albeit we are excluding any executive retirement charges from our guidance. We continue – we expect to continue to the high and current levels of rent collection rates, and we’ve assumed a 1% rent loss assumption in our guidance, which is what we’ve normally assumed in our guidance for a number of years, despite not typically reaching those loss levels. As usual, we do not include any of our assumptions for capital markets activity, but our general assumption in this regard is that we intend to behave in a fairly leverage-neutral manner over the long term. Switching over to the balance sheet. Fourth quarter was fairly quiet in terms of capital markets activity. In October, we redeemed $345 million of our 5.2% preferred shares, so we no longer have any preferred stock outstanding. And round numbers for the full year 2021, we raised $900 million of 30-year unsecured debt with a 3.25% average coupon, and we used approximately $700 million to redeem or repay outstanding debt and preferred stock with an average 4.25% coupon. We ended the fourth quarter with $171 million of cash on hand and no amounts outstanding on our $1.1 billion bank credit facility. So our liquidity remains in excellent shape. Our weighted average debt maturity is now approximately 14.7 years, which we suspect is among the longest in the industry. And with the benefit of a few months of hindsight, we’re very glad we went with very long maturities in size last year. Our next debt maturity is $350 million with a 3.9% coupon in mid-2024, and all of our outstanding debt is fixed rate. So our leverage and liquidity are in very good shape and the balance sheet is well positioned for 2022. A couple of stats. Net debt to gross book assets at year-end was 39.9%. Net debt to EBITDA was 5.2 times at year-end, which at this point is the same as net debt plus preferred since we no longer have any preferred. Interest coverage was 4.6 times and fixed charge was 4.4 times for the fourth quarter of 2021. So 2021 produced good growth in per share results, and we think we’re well positioned to continue that growth into 2022. With our current 2022 core FFO guidance suggesting about 4% growth to the midpoint. But as usual, our focus remains on the long term as we continue to endeavor to grow per share results. And with that, we’ll take questions. I will say, Jay, thanks so much. Thanks for keeping me out of trouble for a lot of years, and it’s been great working together. I know you’ll miss these earnings calls and investor conferences, et cetera, but I know we’ll stay in touch and wish you the very, very best. Thank you.

Thank you. All right, Holly, we’ll take questions.

[Operator Instructions] Your first question for today is coming from Brad Heffern [RBC Capital Markets]. Please announce your affiliation then pose your question.

Hey good morning everyone. Brad Heffern from RBC. Congratulations Jay on the retirement and Steve, on the new role. A question on cost of capital. So obviously, it’s moved higher here. Have you seen any change in cap rates in the acquisition market that will preserve spreads? Or does the 2020 guide assume that spreads will just be more narrow on a similar asset base?

Brad, this is Jay. Thank you very much for your comments. Steve, I’ll let you talk about what you’re seeing in the cap rate in the market.

Definitely. Cap rates, I mean they’ve compressed even further if we kind of saw the second half of the year, and it’s been a result more of supply in the market. It doesn’t feel like there’s a lot of inventory. I mean there’s still enough inventory out there to do acquisitions, but cap rates compressed. There’s a lot of capital out there chasing the deals. As far as our guidance, we don’t guide on the cap rate, but 6.5 was the cap rate for 2021, and we’re seeing it get compressed a little bit for 2022.

Okay. Got it. And maybe for Kevin. Looking at the new guide, it seems like the increase would have been entirely covered by the lower G&A, but I know you also reduced the delinquency guide some too. So is there an offsetting negative factor in there that’s resulting in where they guide ended up?

No, not really. I think you’re on target in terms of what’s driving most of that guidance improvement as there’s some G&A as well as some improvement in the reduced loss assumption, if you will from rent collections. And so those two items are the bulk of it. Of course, then thrown in the mix is our assumptions as it relates to capital markets activity, which we don’t – it’s in our projections, but we don’t give guidance because it’s – we try to be opportunistic in accessing those capital markets. So, we don’t really want to be held to that assumption in our metrics. And so that’s the other piece that might be impacting the guidance a bit that folks can’t model in precisely.

Okay. Thank you.

Your next question is coming from Spenser Allaway [Green Street]. Please announce your affiliation then pose your question.

Hi, so I’m with Green Street. Thanks for taking my question. Kevin, maybe just more specifically, just in terms of your – thinking about your weighted cost of capital currently. One, just how comfortable are you with where your leverage is at this point? How much more debt do you think you’d be comfortable taking on? And then in terms of 2022 acquisitions, can you just talk about your expectations in terms of funding split between equity debt?

Yes. So we’re – to answer the first question, I guess, is we’re very comfortable with our leverage profile today, and we think the rating agencies are as well, and we think investors are generally. So, I don’t think that’s going to change much. As it relates to funding 2022 acquisitions, it’s interesting. At this point at year-end, we’ve got about $170 million of cash in the bank. So nothing needs to be raised there. The company will produce – after payment of all dividends, we’ll produce about $140 million of free cash flow just from operations, and then we’ve guided to about $100 million of disposition. So $170 million of cash, $140 million of operating cash flow and $100 million of dispositions is about $400-plus million. And so – versus our guide of about $600 million of acquisitions, we’re pretty well funded already for 2022 acquisition.

Okay. Thank you. And then I know you mentioned just on the cap rate front in terms of maybe a slowdown in the fourth quarter in terms of acquisition activity. A lot of capital chasing deals, but anything else in terms of broader industry themes you can point to that kind of can also be attributed to the slowdown? And are tenants delaying activity, slowing M&A at all?

Hey, Spenser, it’s Steve. No, the activity is out there as far as – we didn’t find the right investments in the fourth quarter. We are comfortable with the $100 million that we bought in 2022. As I stated, our relationship tenants are getting back in the market, adding new stores through development and/or M&A. So, we’re still seeing a robust M&A market, specifically in the QSR line of trade and still in the automotive services, in particular, the Car Wash sector.

Great. Thank you.

Your next question is coming from Wes Golladay [Baird]. Please announce your affiliation then pose your question.

Hey, good morning. It’s Wes Golladay from Baird. Can you talk a little bit about the dispositions in the quarter? I see that you carried some disclosure the Camping World? And were those operating Camping World and was that what drove the cap rate higher?

Hey, Wes, it’s Steve. You’re exactly right. The cap rate was higher on dispositions this year. We do the barbell approach when we’re looking at disposition. We’re opportunistic when somebody offers us a price for a property that we believe is extremely high, and we sell it. And then we do have a fair amount of portfolio management. And with regard to Camping World, those were dark assets paying rent that we did some portfolio management and worked to deal out with Camping World. And we’re going to do some development for on some other future fundings.

Got you. And then I guess, looking at the first quarter – the fourth quarter volume, it was about $100 million, but what we heard from the industry was, there’s a lot of deal activity in the fourth quarter and maybe some of it spilled into the first quarter of this year. I’m just trying to build out that last answer you gave. Did you have that happen to you where maybe some of it was just a push out?

We define the market a little bit different than our peers. Our average lease term is north of 18 years on our acquisitions because we do sale leasebacks, and we try to find deals directly with tenants. I agree with our peers. There was a significant amount of deal volume out there, but that’s the 1031 market and existing portfolios, which had lease term [Indiscernible]. If I can recall, several portfolios out there that had nine to 11 years on the term in a variety of different industries. Also our peers aren’t really focused directly on retail. They have a little bit wider of a net doing industrial. And I can’t speak to the industrial side, just we don’t see all those deals.

Yes. Well, fair enough. And maybe a last one. I think I might have missed it or maybe it wasn’t explicitly said, but what are the, I guess, the bad debt assumptions in guidance currently?

Yes. We’re kind of getting back to look – it’s Kevin, hey, Wes. What normally we would assume, which is 100 basis points, 1% rent loss in a typical year, like I said, despite the fact that we usually don’t reach that loss level. We just think that’s reasonable prudent number that we put in our internal guidance and projections to assume something somewhere may have an issue. But like I said, normally, we don’t get to that loss level, but that’s what’s baked into the numbers.

Got it. Thanks a lot guys. And congratulations to both Jay and Steve.

Thanks.

Thanks, Wes.

Your next question is coming from Katie McConnell [Citigroup]. Please announce your affiliation then post your question.

Yes, it’s Michael Bilerman here with Katie. We’re both from Citi. Maybe, Stephen, just starting with you. You’ve obviously been with the company for, I think, just almost 20 years. Obviously, very key on the acquisition side. I guess, as you enter the CEO seat, what is your strategy? And what have you communicated to the Board or maybe what the Board wants from you to sort of narrow the valuation discount to which in an end trades. The stock is currently at least two to three multiple points lower than peers. It trades at a discount to consensus NAV when most of your peers had trades at a premium. And obviously, given the fact that internal growth is light, your – as a net lease company, your strategy is to go out and acquire and create the accretion. And with a weaker cost of capital, it obviously affects that. So, I guess when you look at becoming a CEO, what do you think is the reason for that discount? And what are you going to do to address it? And does the Board share that with you?

Right. I think that the Board shares my strategy, otherwise I don’t think I’d be in this position. But one thing I can say, I’m not going to change is, I believe in the year-over-year FFO growth, the low single digits. I firmly believe in that strategy as far as – mid-single digits. Now the one thing as far as our equity price, yes, we view the long term, and I think right now, we’re in a little bit of a trough just like we were back in 2008, 2009. But I think if we deliver growth quarter-after-quarter, we’ll get that market premium back.

But a mid-single-digit growth is not very different than the overall peer set that actually is probably a little bit lighter. So, why do you think your stock would then trade at a premium or even in line with peers? I guess, what are going to be the things to get you there?

Yes. We can debate. Is it 4% to 5% growth rate, right? Or 5% or 6% growth. I think you kind of touched a little bit on my background is acquisitions. So, I do believe the acquisition or I expect the acquisition by to pick up and you might see a little bit more growth, but not exceedingly much higher.

Is there a strategy to reengage with investors to maybe stand, if that’s the right strategy? Or if other alternatives should be done. I guess you can’t be happy with where the – maybe you are maybe coming in the few years, you want a low stock price. But I imagine that this is not somewhere where the company or where the board wants to see it.

Yes. I mean over the long term, I agree, nobody wants to see that. It’s not our expectation, the management or the Board, and I expect it to increase over the long run. And that’s how I’m going to manage the company. Now as far as investor relations and meeting with investors, absolutely, I think being new to the seat, you’re going to see me a lot more out in the public in the near term to kind of express the strategy of M&A.

Hi there. This is Katie, just for a quick follow-up here. So since 4Q deal volume came in at the lower end of the range, can you just discuss what the active pipeline looks like today? And how we should be thinking about timing of that $600 million guidance you laid out for the year?

Hey Katie, it’s Steve. As far as timing, I can – the first quarter, we’re hitting our numbers. But as you know, in the real estate world, for the most part, my visibility of three months is zero. And I just want to remind you that the $600 million that we’ve guided to this year is an all-time high for M&A as far as guidance. We’re just based on that historical levels, talking to our relationships, what I know is out there in the market and what our acquisition guys are telling us. But the pipeline, as I stated in the opening comments, I feel very good about our 2022 pipeline as I sit here today.

Hi Katie, it’s Kevin. And typically, it also holds for 2022, we normally assume a little bit of back-end weighted acquisition volume. So something like 40% first half, 60% second half kind of round numbers is generally what we have assumed, and that’s what we’ve got included in our guidance for 2022 as well.

Okay, thanks.

Your next question for today is coming from Ronald Kamdem [Morgan Stanley]. Please announce your affiliation. Then post your question.

Hey, it’s Ron from Morgan Stanley. Hey just two quick ones, sort of follow-ups topics that have been touched on before. One is just on the transition, and obviously, congratulations to both of you. You hit on the strategy, but is there any changes sort of operationally reporting lines or anything like that, that’s being contemplated that we should be thinking about just how the business is going to be operating and so forth?

As far as the internal change, hey, thanks for the congratulations, Ron. The – if I were to – because I actually told our associates during the transition. 2014, I was Chief Acquisition Officer, mid-2020 became COO upon really Paul Bayer’s retirement from the company. So, I’ve assumed a lot of responsibility over the last couple of years. Yes, there’s going to be some internal valuation and as far as I’m going to kind of filter my responsibilities within the organization – as far as operationally from the outside, you’re not going to notice a difference. The strategy is going to remain the same as far as the FFO growth and multiyear strategy.

Got it. And then I wanted to sort of hit the cap rate compression question maybe a little bit differently. I think we’ve all seen sort of the PE announcement coming into triple nets. I think, historically, guys have talked about being granular, being focused, having the relationships being a big competitive advantage. Just maybe can you comment on what competition look like over the last three to six months? And what do you expect going forward as sort of more and more capital – private capital continues to come into the space?

So, we’ve felt it over the last six months, the additional capital coming into the space without question, and that’s just reflected on the cap rates. However, that being said, we touched on it a little bit earlier about the large volume of our peers or just the industry in general doing in the fourth quarter that the additional money coming into our space isn’t really hitting the QSR franchisees of Taco Bells. It’s the 1031 open market. And what we do, it’s tough, and it takes years to establish relationships in the market. It’s easy to go by a 12-year lease that’s already in place in the open market. That’s easy to do. But the mandate to go find the long-term leases, that’s a challenge, is difficult to do. And new money coming into our space is an effect in our company yet.

Great. That’s it for me. Thanks guys.

Your next question is coming from Joshua Dennerlein [BoA]. Please announce your affiliation. Then post your question.

Yes. Hey, BoA’s affiliation. Jay, congrats on the retirement. I hope you have a nice retirement party plan and vacation ahead. Just maybe I wanted to touch base on your tenant watch list. What’s on it today?

Yes, hey it’s Kevin. Really no change from where it has been in the recent quarters as those mattering of the four lines of trade that we had concerns about back in 2020 that we are very slow to take things off our list, and so we keep watching them. Having said that, we are – our collections are very high. We have no tenants that we’re communicating to you or the market that we’re worried about. And so despite the list not really changing much with, like I say, in casual dining and that kind of tenant exposure on that list. We just – at the moment, we feel very comfortable with kind of our collection expectations and the creditworthiness of our tenants. So, we’re in pretty good shape in that regard.

Great. Thanks, Kevin. Maybe kind of one related follow-up. If I heard you correctly, I think you’re now assuming 1% bad debt expense and guidance for 2022 versus, I think, 1.5% previously. What drove that change if the tenant watch list hasn’t really moved?

Yes, it’s really just continued solid collection performance. So like I said – and so we may be and maybe – Kevin maybe just different as to how we think about tenant credit watchlist. And so companies tend to go on and stay on until we have a compelling reason to take them off. For example, Barnes & Noble, who I think we have like a half a dozen stores with, and we love the stores and the locations and are very happy with them. They’ve been on our credit watch list for more than a decade probably. If you recall, Amazon started as a book retailer and was designed to put them out of business. So now they’re still hanging in there. I wish them well. They’ve done great, survive as long as they have, but they’re on the list, but they continue to pay rent, and I’m not worried about next month rent coming from either. So, I think it might be a philosophy or a distinction about how we put companies on and off that list. And so like I said, I’m trying to communicate that despite it hasn’t really changed much. That’s not what drives our guidance directly. In fact, the companies stay on that list for a period of time. They may very well continue to perform and pay rent as usual.

Got it. One quick one. The term fees that you’re seeing in 4Q, you just – I didn’t hear that now in this per share impact.

Yes. It was about $1.4 million, and that was actually – we lump all together a lease termination and what we call rent settlement together. It’s kind of onetime somewhat surprising funds that show up. I’ll give you one example. So it was $1.4 million, a little over $500,000 of that in the fourth quarter came from Gander Mountain. Out of the blue bankruptcy, court settlement, I just – it just shows up as the funds go out to various unsecured creditors. And you don’t really know precisely when or how much it might be, and so it’s that kind of thing that’s in that line item.

Okay, thanks everyone.

[Operator Instructions] Your next question for today is coming from John Massocca [Ladenburg Thalmann]. Please announce your affiliation. Then post your question.

I am with Ladenburg Thalmann. First off, Steve and Jay, congratulations to both of you.

Thanks, John.

In terms of the G&A reduction that was kind of the change in guidance versus your 3Q results or the 2022 guidance versus 3Q results? How much of that, if any, is being driven by the CEO transition? Is any down to kind of an updated stock comp outlook? And maybe what are the other factors that are driving that reduction?

I’d say, yes, that’s part of the equation for sure. And I think the other thing, too, is just our assumptions on incentive comp in 2022 and where those levels will be. Those two things are, I’d say, broadly defining or creating some of that benefit to the G&A line item in 2022 versus our assumptions.

I mean as we look out in 2023, is there anything kind of structural in there that maybe – if your stock price goes up, obviously, probably not going to have a CEO retirement in 2023 hopefully as well, I mean. So is there anything else in there that maybe could keep that increase those efficiencies, if you will, versus kind of 2021 numbers?

Yes. So, I think over time, I think that’s what you’ve seen from us over the years has been able to improve our efficiency in that regard. Last year, in 2021, G&A was about 6.1% of revenues. Five years earlier, it was about 6.8%. So, we’ve been able to continue to press operating efficiencies, and I think as our guidance for 2022 suggests about 5.8% G&A as a percentage of revenues. And so you’ll continue to see us move that efficiency lower even if G&A may creep higher over time, the revenues are growing faster than that.

Okay. And then in terms of same-store growth, the number you reported with the kind of supplemental, obviously, it was heavily impacted by deferrals. I mean, I guess if you could back those deferral repayments out of that number, what would have kind of a more normalized same-store growth number have been?

Yes, fair question, and we’re glad you brought up because it is heavily influenced by the deferrals and losses as that went on in 2020 and 2021. And so it’s just – some of the same-store numbers are just a little noisy for sure. And so what we’ve communicated to investors consistently and remains true today is that you should think about a 1.5% rent increase over the long-term and that’s top-line because we’re triple net lease that all drops to the bottom line. And so it creates some internal growth opportunity for us.

No, I guess, I mean, net of – as we look out then, net of kind of what you’re assuming in terms of credit loss, I mean is that basically a 50 basis point then?

Yes. Yes, that’s a fair assumption. Yes, 1.5% top-line growth, yes. If you assume 50 basis points of lost rent, which might be a more reasonable assumption than what’s in our guidance, then yes, you’re about a 1% kind of all-in kind of growth, yes sir.

And I guess going back to the original question, kind of as we think about the historical performance last year, I mean was that kind of in line with that historical outlook? Or was it maybe a little bit elevated lower just on a more normalized non kind of repayment of past rent basis?

I’m not sure, I’ve had…

John, if you pulled out the deferred rent then we own that kind of 0.5 basis point, 1.5 basis points. Yes, same-store.

Yes, correct.

Yes, that was the question, Jay.

Thank you. That’s I miss the word, I’m going to do next quarter.

I’m starting to earn my consulting fee already, John. Thank you.

I don’t know. Thank you very much. That’s all my questions.

Your next question is coming from Chris Lucas [Capital One Securities]. Please announce your affiliation. Then post your question.

Capital One Securities. First off, Steve, Jay, congratulations to both of you. I just had a couple of quick follow-up questions. Kevin, I guess, we’ve seen rates move in the last few weeks. Just curious as to what you’re seeing in terms of maybe go back to the 30-year debt you priced back in October, what would that cost you today? And what is sort of the 10-year kind of money cost look like today? Do you have a sense?

Yes, fair point. Yes. So as why I mentioned in my comments, we were glad we issued a lot of long-term debt last year. Our last issuance 30-year was a 3% coupon. Today, if we did that, I think that would be in the mid-threes. So a solid 50, maybe a little bit more basis points higher in rates than where we just issued not too long ago, not too many months ago. And then 10-year debt today for us is probably in the high-twos, the way I think about it. And so yes, it’s definitely more expensive. Good news is, we are – like I mentioned, I think, in another question earlier, we’re well funded for 2022 acquisitions. So, we really don’t need to do anything on that front this year.

Okay. And then, I guess, Steve, just thinking about a couple of questions. One is, is that, will your role be backfilled at some point either internally or externally?

Yes. My whole role, no. I’ll keep some of the responsibilities. We’re currently evaluating all the responsibilities I have, and then over time, I’ll start shedding some of those responsibilities, and it could be internally or externally. All things will be evaluated.

Okay. So – and then just in terms of the cap rate environment, I mean, you talked about how competitive it was in the fourth quarter. Just wondering about – sort of trying to understand your thinking as it relates to sort of your expectations for cap rates for 2022, given – we’ve definitely seen rates move, who knows where they move higher or whatever. But I just trying to wonder, how soon do you expect or do you expect any sort of reaction to higher long-term rates as part of the sort of cap rate equation in 2022?

Yes. In 2022, our expectation is that cap rate overall of our portfolio that we acquire will be compressed some. Yes, there’s been a little bit of a rate increase in the near term, but truth is, deals get priced or it takes 90 days to clear the market. Until the rates stay up and are sustained for six months, nine months, I’m not expecting any cap rate change increase. Again, we’ve got a touch. There’s a lot of new capital in the market. So, you’re seeing the cap rates stay a little bit lower.

Okay. And then my last question relates to sort of the business environment for some of your core areas, like restaurants. You’ve seen some IPOs. I think it’s more on the way. I guess just curious as to the acceptance or the opportunity that those kinds of businesses have with the public markets today, does that help your opportunity with them? Or is that a nonissue? I’m just kind of curious as to sort of how the landscape changing on the restaurant front might impact your transaction?

When we look at acquisitions, we’re looking not only at the credit, the real estate fundamentals and the tenant’s ability to pay rent. If the rent is low enough, we’re going to do the deal. That’s how we – when we look at risk, we reduce rent, we don’t increase the cap rate. But yes, we’re seeing a lot more restaurant activity, casual dining specifically. I mean QSR has been pretty robust for the last 18 months, but now we’re starting to see because some private equity groups are going into the casual dining sector that we’re starting to see a few more opportunities there.

Okay, great. Thank you. Appreciated this morning.

Your next question is coming from Linda Tsai [Jefferies]. Please announce your affiliation. Then post your question.

Hi, I’m from Jefferies. Let me add my congrats as well to Jay and Steve. Steve, would you consider adding nonretail to the portfolio at any point?

Hey, every quarter, every board meeting, we talk strategy and we evaluate our strategy continuously. Jay feed into my head over the years is every day wake up and think of some other stuff we can do, and we always kind of circle back that we’re experts in retail real estate. But yes, the option is always in the future when we evaluate that we could expand our asset class, but currently, we’re just looking at retail.

Thanks. And then in terms of LA Fitness and AMC, how are you feeling about the outlook of these concepts?

As far as LA Fitness, very comfortable. They’ve rebounded nicely, and in particular, because they have the subscription model on their revenue, and meaning if the government says you’re open, you can charge 100% of your revenue. AMC, that’s – I think, a short term, we’re very comfortable because they’ve raised so much money, but the theater industry has proven that they’re back. The good news is, our portfolio – our theater portfolio, we averaged about $10.5 million per asset, which means our rent is extremely low at those sites. So once they rebound operationally, they’ll be able to sustain the rent opposed to in recent years where a lot of the deals were done at $25 million in the theater industry. We took a step back for probably three years in the theater industry. So, we’re very comfortable with our theater holdings.

Thanks. And then just a final question. On the $80 million to $100 million of dispositions you’re forecasting, how do you think the mix would be in terms of vacant boxes versus occupied? And then how might the blended cap rate compared to 2021, 6.1%?

I expect the blended cap rate most likely will be lower in 2022 than 2021. But how we view dispositions is a one-third going to be vacant, one-third are going to be opportunistic, meaning somebody is willing to pay a ridiculously low cap rate to own it. And third, kind of a portfolio management that we’re trying to get ahead of the curve of active portfolio management in the future where we feel that asset is at risk because we’re looking to repeat the rent. So we’ll divest it.

Thank you.

There are no further questions in queue. I would now like to turn the floor back over to Jay for any closing comments.

Thanks, Holly, and thank you to all the folks who offer their congratulations. So speaking on behalf of Steve, both of us very much appreciate that. In closing, I do want to emphasize that every aspect of National Retail Properties is in a great position to address the future. From a balance sheet that has tremendous capacity, as Kevin discussed, to fund new investments to, as Steve discussed, tenant relationships that generate high-quality properties and stable income and to the management and board leadership enhancements that we’ve talked about that put the right people in the right seats. For the long term, this company is poised for future growth and success. And I want to thank you all again for joining us today. All the best.

Thank you. Ladies and gentlemen, this does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.