Earnings Transcript for RTL - Q3 Fiscal Year 2021

Operator: Good morning and welcome to American Finance Trust Third Quarter 2021 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to Louisa Quarto, Executive Vice President. 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 AFIN’s website at www.americanfinancetrust.com. Joining me today on the call to discuss the results are Michael Weil, Chief Executive Officer and Jason Doyle, Chief Financial Officer. The following information contains forward-looking statements, 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 statements. We refer all of you to our SEC filings, including the annual report on Form 10-K for the year ended December 31, 2020 filed on February 25, 2021 and all of the filings with the SEC after that date for a more detailed discussion of the risk factors that could cause these differences. Any forward-looking statements provided during this conference call are only made as of the date of the call. As stated in our SEC filings, AFIN disclaims any intent or obligation to update or revise these forward-looking statements, 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. A reconciliation of these measures to the most directly comparable GAAP measure is available in our earnings release. 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 will now turn the call over to Mike Weil. Mike?

Michael Weil: Thank you, Louisa. Good morning and thank you all for joining us today. The third quarter was an impressive quarter for AFIN as we continue to grow our earnings and optimize our balance sheet, while posting very strong results. We had a 30.4% increase in AFFO per share to $0.30 for the third quarter, up from $0.23 last year. Cash NOI grew 37.9% to $75.7 million from $54.9 million in the third quarter of 2020 and the same-store NOI increased $9.3 million to $72.9 million over the same period. We continued to reduce leverage by further lowering our net debt to adjusted EBITDA to 6.8x, an improvement of 1.5 turns since the beginning of the year. Our improved balance sheet contributed to the success of both the oversubscribed $500 million unsecured senior corporate notes offering and the corporate credit facility upsize recast an amendment we completed during the quarter. We demonstrated the power of our platform this quarter through a series of transactions related to some of our Truist Bank properties. We were able to negotiate the termination fee at 12 of our Truist Bank branches for a one-time $10.4 million lease buyout fee, which is included in our third quarter revenue and thus in our disclosed AFFO for the quarter. The leases that were bought out had an average of 7 years of lease term remaining and the fee we negotiated is equal to 80% of the remaining total rent across the lease periods. Within weeks of beginning to market the terminated bank branches, 6 are already under contract to be sold and LOIs have been executed for 3 more for a total of $8.3 million. We expect the sale price and lease termination fees for these 9 properties to total $15.5 million, $1 million more than we paid for the property 7 years ago. The remaining 3 properties are currently being marketed. The termination in sales further reduced the percent of our portfolio leased to Truist to 5.3% and we anticipate redeploying the proceeds from the fees and property sales into accretive new acquisitions that will further diversify our portfolio. The Truist transaction could not have been successful without great execution by our team. Our team also delivered a major achievement this quarter in the form of our first issuance of unsecured debt. Through a private placement, we issued $500 million in senior unsecured notes in an offering that closed on October 7. Standard & Poor’s Ratings Services and Fitch Rating both issued a rating of BB+ on the notes. The 7-year notes are due in 2028 and have an effective interest rate of 4.5%. We are very pleased with the market’s reception and demand for the notes offering, which was upsized from $400 million to $500 million and was oversubscribed by institutional investors. The notes offering, marks an important milestone for AFIN as we solidify our capital structure for the long-term and focus on increasing our access to unsecured debt. In connection with the notes offering, we obtained corporate credit ratings of BB+ and BB from Fitch and S&P, respectively, with stable outlooks. We believe the ratings demonstrate our consistent operating performance, strong occupancy and rent collection rates during the pandemic, high-quality tenant roster, geographic diversity and increasing exposure to necessity retail properties. We believe that our continued focus on de-leveraging the balance sheet, improving occupancy at the multi-tenant properties and our disciplined acquisition strategy will merit revisiting these ratings in the future with an objective of obtaining an investment-grade rating for the company. Prior to the notes offering, we also completed an amendment and recast of our corporate credit facility on October 1. This recast increased commitments from $540 million to $815 million in order to capture the benefit of an active corporate syndication market and the resulting favorable terms and pricing. The maturity date of this facility was extended from 7 months to 4.5 years and includes two extension options as well as an accordion feature that could, subject to certain conditions, expand the facility to $1.25 billion. Through this recast and the notes offering, we’re laying a foundation for AFIN’s continued growth in years to come by building sustainability and flexibility into our balance sheet. The success of these transactions and the many prior successes we’ve discussed since our listing in 2018 is a reflection on our team’s hard work to enhance and grow AFIN’s primarily investment-grade portfolio through strong leasing results and disciplined acquisition focus. Our total portfolio has grown by 20% to almost $4.2 billion in assets since the listing and added almost $50 million in annualized straight-line rent. At the same time, we’ve completed multiple transactions in the ABS and CMBS markets and continued to diversify our tenant pool. In addition to this growth, our high-quality portfolio remains comprised of a majority of leases where tenants are investment-grade-rated or implied investment-grade-rated. As of September 30, 2021, among our single-tenant assets, 58.2% of straight-line rent comes from investment-grade and implied investment-grade tenants. Portfolio-wide, 66% of our top 20 tenants are investment-grade or implied investment-grade. Our focus on high-quality tenants and proactive portfolio management, have helped us avoid any material bankruptcies despite the ongoing evolution of the retail industry. Our focus has long been on necessity retail properties. Recent data showing that foot traffic has increased over 27% year-over-year and the expectation that holiday spending this year will increase close to 10% has encouraged other sophisticated investors to increase their exposure to retail as well. In the third quarter, we closed on 32 such properties for an aggregate contract purchase price of $86.5 million. Combined with first half acquisitions and our forward pipeline, we anticipate completing 74 property acquisitions for the full year at a total contract purchase price of $225.2 million, a weighted average cap rate of 8.4% and with 11.1 years of weighted average remaining lease term at the time of closing. Retail comprises 82% of the 12.4 million square feet single-tenant portfolio based on straight-line rent, with the balance consisting of 11% distribution and 7% office properties. Of the retail portion, over 80% are service retail properties that we believe to be necessity-based in nature and more resistant to e-commerce. As of September 30, occupancy across the single-tenant portfolio is over 96%, with a weighted average remaining lease term of 10.4 years and 1.3% average annual rent escalators. Our 33-property, 7.2 million square foot multi-tenant portfolio has executed occupancy plus leasing pipeline of 89.9% as of September 30, 2021, an increase from 86.1% a year ago. Our team’s hard work and the quality of our real estate resulted in an uptick in leasing demand from new and existing tenants and delivered strong results in the third quarter. We’ve executed 15 new leases that are expected to add $1.7 million of new annualized straight-line rent over time as rent commences. We’re also building a robust leasing pipeline that, if definitive agreements are executed, will result in an additional $500,000 of new annualized straight-line rent and would increase net occupancy in this portfolio to 89.9% if and when the tenants take occupancy. Year-to-date, our team has completed 86 lease renewals that total over 900,000 square feet with a weighted average renewal lease term of 5 years. Since the beginning of the year, we’ve increased occupancy in the multi-tenant portfolio by a total of 3.2% to 87.9%. Moving to our balance sheet, we have minimal near-term debt maturities in our capital stack. And as mentioned earlier, we further reduced our net debt to adjusted EBITDA to 6.8x by the end of the third quarter. 90% of our debt matures in 2025 or later, and our weighted average debt maturity is 5 years. At the same time, the weighted average interest rate of our debt has decreased by 20 basis points to 3.6%. 89.7% of our debt is fixed rate, locking in rates in an environment of historically low interest rates. With the completion of the note issuance and credit facility recast, 24.9% of our debt is now unsecured. We constantly monitor our balance sheet and the markets for opportunities to improve and enhance our capital structure. Demonstrating the resilience of the portfolio, we collected 99% of the original cash rent payable for the quarter. Consistent with prior quarters, all rent collection percentages are calculated using the original rent we would have expected to receive before COVID started as the denominator. The numerator includes cash rent and deferred rent payments received during the quarter. Excluding the impact of deferred rent, we collected 97% of the original cash rent due in the total portfolio during the third quarter. AFIN had another excellent quarter in all measures, from balance sheet enhancements to acquisitions to strong leasing in the multi-tenant portfolio and growth in AFFO. We delivered results that meaningfully improved AFIN’s balance sheet and credit profile. I’ll turn it over to Jason Doyle to take us through the numbers in greater detail. Jason?

Jason Doyle: Thanks Mike. Third quarter 2021 revenue was $91.9 million, inclusive of the previously mentioned Truist termination agreement of $10.4 million. That’s up from $81.6 million in the second quarter of 2021 and up 17.1% from the $78.5 million in the third quarter of 2020. The company’s third quarter GAAP net loss attributable to common stockholders was $6.4 million, compared to losses of $7.4 million in the second quarter of 2021 and $7.1 million in the third quarter of 2020. NOI was $78.5 million, a $10.3 million increase from the $68.2 million we recorded for last quarter and a 20% increase over the $64.3 million of NOI we reported in the third quarter of 2020. For the third quarter of 2021, our FFO attributable to common stockholders was $30.3 million or $0.25 per share as compared to $0.24 per share for the same period in 2020, an 8.3% increase. Third quarter AFFO increased 41% to $36 million or $0.30 per share, compared to $0.23 per share in the third quarter of 2020. As always, a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release, supplement and Form 10-Q. Building on Mike’s balance sheet comments, we fully repaid mortgages related to [indiscernible] at Shelby Crossing with borrowings under the credit facility during the third quarter. Subsequent to the quarter end, we repaid approximately $186 million under our senior unsecured revolving credit facility and $125 million of additional mortgage notes. Further, we added to our liquidity, which provides flexibility in funding future property acquisitions and for other general corporate purposes. The 7-year notes and credit facility recast, combined with previously discussed financing transactions, improve our weighted average debt maturity to 5.7 years today, up from 3 years at the end of the second quarter of 2020. We ended the third quarter with net debt of $1.7 billion at a weighted average interest rate of 3.6% and a very modest net debt to gross asset value of 38.9%. At September 30th, the components of our net debt included $186 million drawn on our credit facility, $1.6 billion of outstanding secured debt and cash and cash equivalents of $99 million. The amount drawn under our credit facility represents the majority of our floating rate debt. Liquidity, which is measured as undrawn availability under our credit facility plus cash and cash equivalents, stood at $407 million based on our September 30 cash balance and borrowing availability. The company distributed $25.2 million in common dividends to shareholders in the quarter or $0.21 per share. With that, I will turn the call back to Mike for some closing remarks.

Michael Weil: Thank you, Jason. The third quarter was one of our strongest quarters since our listing in 2018. We achieved excellent results, not only in our portfolio and company financials, but also in our initiatives to diversify our balance sheet, de-lever the company and obtain a corporate credit rating. In the last four quarters, we have successfully navigated the pandemic, maintaining near-complete cash rent collection and increasing occupancy in our multi-tenant portfolio, where we also added two dedicated experienced managers. We reduced net debt to adjusted EBITDA to 6.8x, reduced the weighted average interest rate on our debt to 3.6% and extended our weighted average debt maturity to 5.7 years from 4.8 years a year ago. Over the same period, we have acquired $150 million of properties, increased the service retail makeup of our top 20 tenants to 66% and maintained a weighted average remaining lease term of more than 8.5 years. We are positioned as strong as we have ever been since listing. We believe we can execute on the steps necessary to elevate the strong initial credit ratings we received to investment-grade ratings over time. Our initial entry into the unsecured credit market through the notes offering we completed provides additional diversity and flexibility to our balance sheet in order to continue to build and grow our portfolio, which we believe is among the strongest in our sector. We continue to maintain our steady and deliberate approach to growth via high-quality accretive acquisitions and expect to end the year with over $200 million of properties added to our portfolio. Our leasing team has generated significant leasing interest in the multi-tenant portfolio, where our occupancy continues to climb with the addition of national retail tenants. I am very excited about everything AFIN has accomplished this quarter and this year, and we expect to carry this momentum through December and into next year. Operator, please go ahead and open the lines for Q&A.

Operator: [Operator Instructions] Our first question is from Barry Oxford with Colliers. Please proceed.

Barry Oxford: Great. Thank you so much. Michael you alluded…

Michael Weil: Hi Barry.

Barry Oxford: Yes. How are you doing? Mike you alluded to in the call the attractiveness of retail and retail coming back and investors being more and more interested in your property type.

Michael Weil: I am sorry, Barry. I don’t know if it’s my line or your line, but you are breaking up.

Barry Oxford: Can you hear me now, Michael? Is that better?

Michael Weil: Try again, yes, I didn’t hear the end of the question. Sorry.

Barry Oxford: Yes. No, that’s okay. So, I am looking at the competitive acquisition market. Are cap rates in ‘22 that you are going to buy, are they going to be a little bit lower than what you typically have gotten just because of the competition?

Michael Weil: Great. Thank you. I did hear that. So no, we are going to remain very disciplined. And we have already been showing that discipline in 2021. There are certainly opportunities to overpay. I am seeing – and I am surprised by what I am seeing from some buyers in the market on a pretty consistent basis. We continue to rely on the developer direct deals that we have been doing, the somewhat off-market deals. With net lease, Barry, as you know, with what you pay for the property is where you are going to own it because the single-tenant net lease just doesn’t have the upside that the multi-tenant does with vacancy lease-up. So, we continue to follow the disciplined underwriting that we have always followed that people have always commented on and wondered how we have done. So, you will continue to see discipline in our acquisition strategy as it relates to single-tenant net lease.

Barry Oxford: Great. No, that’s great. And then as it relates going forward to acquisitions, I hear you talking a little bit more about multi-tenant. Are we going to see more multi-tenant transactions from you in ‘22 or not necessarily?

Michael Weil: I think that’s a reasonable possibility. I think that there is a – when you have a platform like we have, where we can asset manage the properties and where we can increase occupancy through our expertise, I think it’s very attractive. And retail is very strong. And we are committed to retail. We understand retail and how the brick-and-mortar married to e-commerce is extremely powerful. We are seeing tremendous results from many of our retail tenants that we watch very closely. So, we are a retail-focused – necessity retail-focused company, and we will evaluate different opportunities as they present themselves.

Barry Oxford: Great. Thanks. I appreciate the color guys.

Michael Weil: Alright. Thank you.

Operator: Our next question is from Bryan Maher with B. Riley Securities. Please proceed.

Michael Weil: Hi Bryan.

Bryan Maher: Good morning Michael and Jason and thanks for those comments, a decent amount to unpack there. I didn’t – I was trying to write as fast as I could, but I didn’t quite catch all of the Truist buyout commentary. So, $10.4 million you have got, there is 12 properties. I think you said six are in the contracts, three are under LOI?

Michael Weil: Yes. It’s now 8 of the 12 are under contract. The others are in the marketing – in marketing process. And frankly, three of the four have significant activity.

Bryan Maher: And I heard you say something about a $15 million number. What did that represent as far as sales proceeds, all 12 or just a portion of the 12?

Michael Weil: Jason Doyle, do you have – I am looking in my notes. But if you have that at your fingertips, would you?

Jason Doyle: Sure. The $15 million is – let me just pull it up here. I am sorry.

Michael Weil: It’s for the nine properties. We will send you the details, Bryan. I can send you the details so you have them. We expect the sale price and lease termination fees for these nine properties to total $15.5 million, which is a $1 million gain from what we paid.

Bryan Maher: Okay. So, between that and the termination fee, you are at around 26-ish plus three more to go. So, maybe you hit $30 million for those properties, is that…?

Michael Weil: No. The lease termination fee is in – is included with the sale price in the $15.5 million.

Bryan Maher: Okay. Alright. That’s helpful. Okay. And then the occupancy decline in the quarter, is that directly related to these assets?

Michael Weil: No. As we mentioned it, we talked about it last quarter as well. That’s really related to the United Healthcare property. That represents about 2% of the occupancy in the portfolio. As we think about the overall portfolio, that’s the only drop of significance in the single-tenant portfolio. Multi-tenant continued to grow. We finished the fourth quarter of ‘20 at 84.7% occupancy. When we take into account executed and LOI at the end of the third quarter, we are at 89.9%, so let’s call it 90% in the multi-tenant. So, the United Healthcare asset we have been actively marketing. We have it in the market. We are in conversation around sale and/or joint venture redevelopment, but that is an asset that we will be taking action on.

Bryan Maher: Okay. And then just one more kind of a two-part question for me. When you look at the acquisitions out in the marketplace there on the single-tenant side, is there any particular type of vendor, whether it’s auto parts or quick service restaurants or dialysis that you are skewing towards at the moment? And with what we are seeing on the inflationary side, are seller expectations starting to push higher as you enter into negotiations?

Michael Weil: I don’t think it’s related to inflation, Bryan. I think it’s related to a surge of interest in single-tenant net lease in the second half of 2021. So again, as I said to Barry, this is where the discipline really comes into play. We continue to source deals where products are acquired in the brick-and-mortar location. So, I don’t – what used to be the traditional single-tenant net lease type of properties, the pharmacies, etcetera, to me, there is just no reason to pursue those right now. They are at all-time cap rate lows. And I am seeing people buy them, and it’s just not for us. So, as you – if you look at our 2021 acquisition, it really continues to focus on service retail, and it will continue to do so. That’s where we see great value. That’s where we see continued foot traffic and we just won’t chase cap rates down because there is no reason to put that money out.

Bryan Maher: Thanks Michael.

Michael Weil: Thank you.

Operator: Thank you. This does conclude our question-and-answer session. I would like to turn it back to Mike Weil for closing comments.

Michael Weil: Great. Well, I just want to close by thanking everybody for their time this morning. As you can see from the third quarter results and the way the company is positioned into the end of the year and 2022, we are very excited about the direction and most excited about the performance. We continue to execute not only on the real estate side of our business, but on the balance sheet, as Jason Doyle and his team continue to position the company in such a great way. So, thanks for joining us. And we look forward to talking to everybody. And I know we have Nareit coming up, so we will see you all there as well. Thank you.

Operator: Thank you. This does conclude today’s conference. You may disconnect your lines at this time. And thank you for your participation.