Earnings Transcript for RTL - Q1 Fiscal Year 2022

Operator: Greetings. And welcome to the Necessity Retail REIT First Quarter 2022 Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I'd like to turn the conference over to your host, Louisa Quarto, Executive Vice President. Ma’am, please go ahead.

Louisa Quarto : Thank you, operator. Good morning, everyone. And thank you for joining us. This call is being webcast in the investor relations section of RTLs website at www.necessityretailreit.com. Joining me today on the call to discuss the results are Michael Weil, Chief Executive Officer and Jason Doyle, Chief Financial Officer. Following information contains forward-looking statement, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize actual results may differ materially from those expressed or implied by the forward-looking statement. We refer all of you to our SEC filings, including the annual report on Form 10-K for the year ended December 31, 2021 filed on February 24, 2022, and all other filings with the SEC after that date for more detailed discussion of the risk factors that could cause these differences, or otherwise impact our business. Any forward-looking statement provided during this conference call are only made as of the date of the call. As stated in our SEC filings, RTL disclaims any intent or obligation to update or revise the forward-looking statement except as required by law. Also, during today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating the company's financial performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. Reconciliation of these measures to the most directly comparable GAAP measure is available in our earnings release, which is posted on our website at www.necessityretailreit.com. Please also refer to our earnings release for more information about what we consider to be implied investment grade tenants, a term we will use throughout today's call. I'll now turn the call over to Mike Weil, Mike.

Michael Weil : Thanks, Louisa. Good morning. And thank you all for joining us today. The first quarter illustrated the effectiveness of our growth strategy as we closed on over $800 million of open-air anchored, grocery anchored and power centers and completed the sale of an office property lease to Sanofi in New Jersey. Both transactions were part of the series of transformational transactions we announced in December. Including closing subsequent to the end of the quarter. We've now acquired all but two of the shopping centers and expect to close these this month. Our first quarter transactions were immediately accretive to AFFO per share, as we anticipated. AFFO per share grew over 9% to $0.24 per share compared to the fourth quarter of 2021. These acquisitions only partially benefited our first quarter results as closings occurred at different dates throughout the quarter. We've created a pure play retail REIT reducing exposure to office assets to less than 1% of our portfolio. We added diversification by reducing the concentration of straight-line rent derived from top 10 tenants from 38.6% in the fourth quarter of 2021 to 29% this quarter. Finally, we've grown the percentage of our straight-line rent from Sunbelt states by almost 18% to 57.1% from less than 40%. In addition to AFFO per share, our first quarter results reflect not only the impact of our first quarter acquisitions, but also the leasing and acquisition activity we completed last year, as well as the careful management of our balance sheet. Jason will provide additional detail, but I want to mention a few highlights. First quarter revenue increased by nearly 20% year-over-year to $94.9 million, and cash NOI grew by over 16% to $73.6 million. Importantly, our first quarter results only partially include the benefit of the acquisitions completed last quarter, which represents about 60% of the total $1.3 billion portfolio of acquisitions, as measured by purchase price. As previously noted, the multitenant acquisitions completed in the first quarter closed at different dates, notably in February and March for the CIM assets and therefore only proportionally contributed to our results. The multitenant acquisitions completed in the first quarter contributed $8.3 million of actual NOI. Upon closing the last of the 81 property portfolio acquisition, we anticipate that the CIM portfolio will add over $113 million of annualized straight-line rent. Finally, the disposition of the Sanofi buildings occurred at the very beginning of the quarter, and thus meaningfully contribute to first quarter NOI. At quarter end, our $4.7 billion portfolio was comprised of 1,029 properties, with portfolio occupancy of 91.4% and a weighted average remaining lease term of 7.4 years. Annualized straight-line rent increased 21% year-over-year to $346 million, and our portfolio grew 33% to 26.2 million square feet. Our single tenant assets are 53.9% investment grade rated, and 38.1% of anchor tenants in our multi-tenant portfolio, or investment grade or implied investment grade rated. Based on straight-line rent. 64.4% of leases across the portfolio include contractual rent increases, which translate to an annual portfolio wide rent increase that average is 1% per year, and also includes leases that have increases based on the consumer price index. We own properties in 47 states and the District of Columbia and our tenants operate across 40 different industries, with no single state or single industry representing more than 10% of our portfolio based on straight-line rent. As of April 15, and including the open-air shopping centers that we closed at the end of April for $277.8 million, our forward acquisition pipeline totaled $532.4 million based on contractual purchase price, and an 8.6% weighted average cap rate and with 5.9 years of average lease term remaining. In addition to the remaining open-air shopping centers, the pipeline includes an additional nine primarily service retail properties that are under contract for a total of almost $18 million. Our robust acquisitions are supplemented by significant leasing activity. For the first quarter, our total leasing activity exceeded 325,000 square feet, including new leases, renewals, executed leases and pipeline. In the first quarter, we signed leases for over 12,000 square feet of space, and annualized straight-line rent of $158,000 in our multi-tenant portfolio. In the first quarter, we also completed 18 lease renewals in the multi-tenant segment of our portfolio, including six with anchor tenants that total 250,000 square feet and $2 million of annual base rent. Executed occupancy, which includes leases that have been signed, but where the tenant hasn't yet taken possession of the space is comprised of seven new leases that totaled 78,000 square feet and $1.2 million of annualized straight-line rent over a weighted average lease term of nine years. Our leasing pipeline includes 16 new leases that totaled 86,000 square feet and $1.6 million dollars of annualized straight line-rent over a weighted average lease term of 10 years. Before turning to our balance sheet, I wanted to revisit the debt transactions we completed last year in light of the current interest rate environment. In part through the issuance of unsecured notes while rates were favorable 84.2% of our debt was fixed rate as of the end of the quarter. We also extended our weighted average debt maturity to 5.3 years from 4.5 years at the end of the first quarter of 2021. With U.S. interest rates on the rise, locking in favorable rates for such a substantial portion of our debt, and for a longer period was a prudent strategic decision. At quarter-end, our net debt to gross asset value was 46%. As we discussed previously, our balance sheet has been temporarily utilized to accommodate the acquisition of the open-air portfolio, which we firmly believe is a critical growth opportunity for the company. With the portfolio acquisition substantially complete, we intend to resume our deleveraging initiative through the sale of $250 million of assets that we've identified to hold for sale, potentially providing proceeds to begin to reduce leverage back to previous pre-closed levels. In addition, we've identified 13 assets that have strong leasing potential through which we began to develop a leasing pipeline immediately upon closing. We've demonstrated an ability to successfully deliver in the past and expect that we'll be able to do the same in the future. We also issued approximately $78.3 million of common stock through a combination of $24.9 million issued through our ATM program at an average price of $9.02 per share, and $53.4 million in issuance to affiliates of the CME Group, in connection with the CIM portfolio acquisitions completed during the quarter. We remain confident in the long-term prospects for Necessity-based retail real estate, especially in the single tenant and open-air shopping center space. The shopping centers we've acquired recently, are intentionally located in suburban markets with strong demographics and traffic counts. With Necessity Retail tenants like grocery stores and quick service restaurants, these centers are conveniently located between home and work and are where America shops every day. Well located and well positioned retailers as a whole have experienced a renaissance over the last two years, as in-store shopping is approaching pre pandemic levels. You need to look no further than major U.S. retailers’ own earning calls for evidence of the importance of physical stores to these brands’ long-term strategies. From Walmart, where orders coming into stores have increased eightfold in two years to Target where growth in digital sales has been matched by growth in physical stores, the message is that continued growth will come through omnichannel operations, and that store accounts will continue to increase to meet demand from consumers. Net absorption continues to improve. A recent CBRE research report highlighted, that retailers leased almost 100 million square feet more space in 2021 than they vacated and TJ Maxx and Burlington Stores have disclosed plans to open over 100 new stores each this year, and to grow their total store accounts by between 30% and 50% overtime. The significant momentum we carried into this year has continued to grow in the first quarter. With the addition of the remaining a creative multi-tenant shopping centers, the power of our platform, and our relationships with national retailers can fully be harnessed to create opportunities for portfolio growth. We're well positioned to be one of the premier acquirers of high quality service retail properties. We've already experienced significant year-over-year growth thus far in 2022. And we look forward to the remainder of the year. I'll turn it over to Jason Doyle to take us through the numbers in greater detail. Jason?

Jason Doyle : Thanks, Mike. First quarter 2022 revenue was $94.9 million, up 19.9% from $79.2 million in the first quarter of 2021 and up 15% from $82.5 million in the fourth quarter of 2021. The company's first quarter GAAP net income was $39.9 million, compared to losses of $40.2 million in the fourth quarter of 2021 and $9.4 million in the first quarter of 2021. NOI was $75.8 million, an $8.6 million increase from the $67.2 million we recorded for the fourth quarter of 2021 and a 15.3% increase over the $65.7 million of NOI we reported in the first quarter of 2021. For the first quarter of 2022, our AFFO attributable to common stockholders was $30 million, or $0.23 per share, that's compared to $0.21 per share for the same period in 2021. First quarter AFFO increased 24.3% to $31.8 million or $0.24 per share unchanged compared to the first quarter of 2021 and then 9.1% increase over the $0.22 reported in the fourth quarter of 2021. As always, reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release, supplement and Form 10-Q. We ended the first quarter with net debt of $2.3 billion at a weighted average interest rate of 3.7% and net debt to gross asset value of 46%. At March 31, the components of our net debt included $378 million drawn on our credit facility, $1.5 billion of outstanding secured debt, $500 million of senior unsecured notes and cash and cash equivalents of $82.1 million. The amount drawn under our credit facility represents the entirety of our floating rate debt. Liquidity, which is measured as undrawn availability under our credit facility, plus cash and cash equivalents stood at $254.9 million. That's based on our March 31, cash balance and borrowing availability. We drew approximately $100 million on the credit facility to fund the acquisitions from CIM in April. The company distributed $26.7 million in common dividends to shareholders in the quarter, or $0.21 per share. With that I'll turn the call back to Mike for some closing remarks.

Michael Weil : Thanks, Jason. We're well on our way to making 2022 a transformational year for RTL. The accretive open-air anchored, grocery anchored and power center acquisitions we completed this quarter helped to grow our AFFO per share over last quarter to $0.24, despite only owning the assets for a partial quarter. Weighted average debt maturity increased to 5.3 years from 4.5 years, and fixed rate debt increase to 84.2% locking in interest rates at favorable rates. We're focused on being a pure play retail REIT and where America shops through our successful acquisition and leasing activity and have minimized our exposure to office assets. We've already seen the positive impact of the transactions we completed in the first quarter and eagerly look forward to the lasting impact the remaining acquisitions will have throughout the rest of the year. Thank you for joining us this morning. And operator, please open the line for questions.

Operator: Thank you very much. At this time, we will be conducting our question-and-answer session. [Operator Instructions] We have a first question from the line of Bryan Maher with B. Riley Securities. Please go ahead.

Bryan Maher : Yes. Good morning, Mike. Good morning, Jason. Congratulations on some really solid execution in the first quarter. Pretty impressive. So we were a little surprised, though, when we saw the release that you actually made some other acquisitions in addition to CIM. We thought that you might take some time to digest CIM may focusing on deleveraging, which I'm sure you're planning to. But what is it about those assets that you acquired outside of CIM and other ones in the pipeline that have you going down that road?

Michael Weil : So, Bryan, most of those acquisitions were in the pipeline as a part of our normal operation prior to the CIM transaction. So we were really just going ahead with the contractual obligations. As I look at the general market, we are monitoring, we're looking at the types of deals that we like to buy at Necessity Retail REIT. But we have, for the most part taken a pause on new deals, as we've just seen. I guess it's the divergence, cap rates are compressing. At the same time that interest rates are rising, that is not surprising in the beginning of a period like this. It takes the market, maybe one to two quarters before we see it catching up and cap rates starting to widen again. So we're certainly not aggressively pursuing deals in the market. If we have a relationship with a prior tenant, and they're looking to do something and have come back to us because of the relationship, we're certainly going to take a hard look at it. But as you correctly pointed out, we have been very focused on integrating the assets that we acquired through the CIM transaction. We've had great response with the tenants. We've continued to really focused on new leasing and lease renewals. And that's going to continue to be an important part of NOI growth in the portfolio. So it was really a successful quarter. The asset management team and the accounting teams, all really came together worked really hard, made sure that everything was in place. And as you can see from the results, it was a good indication of what we expect to come.

Bryan Maher : And just sticking with the deleveraging for a moment. Is the plan to still get down to about 7 to 7.5 times?

Michael Weil : Yeah, nothing has changed in our plan. We think that that is a reasonable place for us to track to. Ultimately as I've said before, longer term goals would be to see Necessity Retail REIT do the things that are necessary to achieve an investment grade rating. But as we said last quarter, we thought that the positive impact of the CIM portfolio warranted us taking the action steps that we did, bringing this portfolio in really creating that absolute focus on retail, both single tenant and multi-tenant. And we will resume the efforts and actions to lower the portfolio leverage.

Bryan Maher : Thanks. And just last for me. I think you said that you've identified 13 properties with strong leasing. We did notice a little bit of a downtick in the occupancy for the quarter. Are those properties within the CIM portfolio, what's the timing there and how much do you think you could get that occupancy uptick?

Michael Weil : It’s in both the existing portfolio and the CIM portfolio, as you will recall. We increased our asset management platform in anticipation of this CIM transaction. So we've been able to have more people on the ground, working the assets. We've also seen tremendous reaction from national retailers really looking to expand their physical footprint. So the activity has been strong. If we look at the leasing that includes our pipeline. And when we included in pipeline, Brian, we have a pretty high level of surety that it will come to be, where we have positive absorption. And as we continue to look through this calendar year, we're very close, including the pipeline to overall 90% occupancy. And we can break it out for you. Part of that slight dip that you mentioned, was the CIM portfolio that we acquired, did have slightly lower occupancy than our existing portfolio. So that was factored into the purchase, and how we're looking at driving occupancy, that is new opportunity for us. We didn't lose deals, and we didn't lose existing tenants, which is what I really focus on.

Bryan Maher : Thank you.

Michael Weil : Thanks, Bryan.

Operator: Thank you. We have a next question from the line of Barry Oxford with Colliers. Please go ahead.

Barry Oxford : Great. Thanks, guys. Michael, to build on the opportunity for the leasing. I know it's hard to tell, but where do you think occupancy could be by year-end so that we can kind of have an idea how to build that model out as far as contributing NOI from the vacant space.

Michael Weil : Barry, nice to talk to you. Thanks for joining.

Barry Oxford : Yeah, no worries.

Michael Weil : As you know, we've never given guidance. So I really need to think through how to give you the way to think about that. We continue to have positive absorption in the quarters, we're seeing the -- we're seeing the trends to be in-line with what we saw last year. And at I still think that this portfolio will be in the mid-90 occupancy, whether that's 93-94. And we should be able to get there during the course of the next, I would say four to six quarters.

Barry Oxford : Right. Mike, you gave us pretty good caller. The seven leases that you said are getting ready to take occupancy you said you had like 16 out. I mean, that's a pretty good clip. I mean, do you think he can kind of keep that clip up?

Michael Weil : I do. I do.

Barry Oxford : That helps. That helps.

Michael Weil : Yeah, as we've indicated these properties are really well located in strong suburban markets. We've got a significant exposure to the Sunbelt markets and we have a very active asset management platform, will have a large presence at ICSC this year. We've really come to the market with the Necessity Retail REIT being where America shops, we've expanded our relationship with existing national tenants. So yes, we're very positive on where we can go with this.

Barry Oxford : Great, great. Switching gears, and sticking with the timing theme, you indicated about $250 million out for sale. Is there a timing on that? Is that going to be more towards the back of the year? Or could we see it more in the middle of the year?

Michael Weil : As it looks now, I think that's going to be in the second half of the year.

Barry Oxford : Okay. Okay. And then, on the disposition front, are there properties in the CIM portfolio that you feel just don't fit, and that could also be another source of dispositions. Or when you look at the 81 properties, you're like -- look, Barry, we see opportunity, and just about all of them.

Michael Weil : So, Barry, I've talked about it last quarter also. And we feel the same way. The CIM portfolio was very high quality, open-air shopping center. So, we really like the portfolio that we acquired. There are a couple of assets that that we think, have significant value from a disposition standpoint. And that view hasn't changed. One of them is called the plant out in San Jose, just a very valuable piece of real estate with a great shopping center on it. So we'll continue to look strategically for the most part, we intend to own and operate these portfolio or these properties. Because we see real upside and addition to NOI, but there are a few that we will look at for sure.

Barry Oxford : Okay, great. Appreciate the color. Thanks, guys.

Michael Weil : Thanks, Barry.

Barry Oxford : Yes, yes.

Operator: Thank you. We have next question from the line of Mitch Germain with JMP Securities. Please go ahead.

Michael Weil : Hi, Mitch.

Mitch Germain : Hey, what's going on? What's so different about the two remaining properties that you're acquiring versus, the remainder of the CIM portfolio? Seems they're significantly bigger size value? Is there any characteristics you can point to?

Michael Weil : No, it's just for these two assets, they have very specific loan assumption process. One of them requires rating agency review. Just that was part of the original loan doc, it has nothing to do with the buyer or the seller. And it's just taking a longer period of time. And the other -- the other loan is held by a LifeCo. And their process has just been a little slower than some of the servicers that we've had to deal with. But we don't see it as problematic. It's just been slightly different timing.

Mitch Germain : Got you. And then correct me if I'm wrong, but I thought the original expectation was you were going to be assuming some debt. And it didn't appear at my last review, is that -- should I think about that the majority of the remaining purchase prices on debt assumption or how ---

Michael Weil : Yes?

Mitch Germain : Okay. Got you. Okay. That's it for me. Thank you.

Michael Weil : Yeah, yeah. Nothing changed, Mitch, in how the acquisition was constructed. And different pieces had different characteristics.

Mitch Germain : Appreciated.

Michael Weil : All right. Thanks, Mitch.

Operator: Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to turn the call back to Michael Weil, CEO for closing remarks. Over to you, sir.

Michael Weil : Right. Thank you. Well, again, thanks, everybody. We always appreciate you taking the time out of your day to hear the update. Necessity Retail REIT, the quarter, we started the year was very productive. We anticipate continuing to post these results with the completion of the acquisition. And we look forward to talking to you. We'll either see you hopefully at NAREIT or ICSC. So thank you for your time this morning.

Operator: Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.