FrontView REIT Inc (FVR) 2024 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the FrontView REIT, Inc., Q4 2024 Earnings Conference Call. (Operator Instructions) This call is being recorded on Thursday, March 20, 2025. I would now like to turn the conference over to Tim Dieffenbacher, CFO. Please go ahead.

Good morning, everyone, and welcome to our year-end earnings call. I'm joined today by Stephen Preston, Chairman, Co-CEO, and Co-President; and Randy Starr, co-CEO and Co-President.

Before I turn it over to Steve, please note that we will make certain statements that may be considered looking statements in our federal securities laws. The company's actual results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to these forward-looking statements in the future. 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 yesterday's press release.

With that, I'll turn it over to Steve.

Great. Thank you, Tim. Good morning, everyone. Welcome to FrontView's Q4 2024 earnings call. We are excited to review our first quarter as a public company after our IPO in October of 2024. As a reminder, FrontView is an internally managed net lease REIT that acquires, owns, and manages properties with frontage on high-traffic roads that are highly visible to consumers. Over the last two quarters, we have demonstrated our ability to accretively grow the portfolio.

During Q4 2024, we acquired $103.4 million of properties at an average cap rate of 7.93% and a weighted average lease term of 11 years. So far, in Q1 2025, we have closed on $37.9 million of property at an average cap rate of 7.8% and have an additional $18.2 million under contract at an average cap rate of 8.25%.

As previously mentioned, we expect to close approximately $50 million of acquisitions during Q1 '25. Although we previously guided to a Q1 '25 cap rate of 7.5%, we expect to close these assets at an approximately 7.9% to 7.95% average cap rate exceeding prior guidance by about 40 to 45 basis points as we are sourcing more accretively than expected as the marketplace continue to remain slightly imbalanced.

As we look forward to the rest of 2025, we are still quite pleased with our ability to acquire an above-market cap rates, a testament to our buyer approach and ability to demonstrate surety of close in a fragmented marketplace. Although we have seen a slight tightening in the marketplace at this time, through the second quarter of 2025, we still believe we will acquire above the 7.5% cap rate mark.

As we get into the second half of the year, there could be additional tightening if more capital opens up and debt financing for the buyers we typically compete against becomes more attractive. We will provide more direction on the back half of 2025 cap rates as we get a little deeper into the year.

Our balance sheet is strong, and we believe we have sufficient liquidity to fund our planned 2025 investment activity of approximately $175 million to $200 million. Of course, we are monitoring our stock price and have the ability to make adjustments to our acquisition cadence very quickly should such actions become sensible.

A few additional stats on the Q4 2024 acquisition: number of properties, 29; average property price, $3.6 million; number of new tenants, 12; number of new estates, 4; 95% corporate and only 5% franchisee; investment-grade percentage, approximately 27%.

We purposely did not acquire IG tenants in the pharmacy space or properties that could otherwise be IG, but did not meet our frontage requirements. At the end of 2024, we had $68.5 million drawn on our $250 million revolving line of credit. We anticipate having sufficient borrowing capacity under our facility to fund our investment activity for the year coupled with our ability to reinvest surplus cash flow and generate accretive funds from the sale of properties. We sold a Freddy's during Q1, prompted by the closing of our only other Freddy's in Jacksonville at a sales price of [2050], which was higher than our original purchase price and represented a cap rate of 6.9%.

Moving now to portfolio highlights. Our portfolio continues to perform well. As of December 31, our portfolio consists of 307 freestanding properties with an average remaining lease term of over 7 years. We are heavily diversified across 35 states and 109 metro areas. We are pleased to keep a very diversified portfolio with limited exposure to any one tenant. At quarter end, we decreased our largest tenant exposure by about 50 basis points from 3.4% of ABR to 2.9% of ABR.

Occupancy was strong at approximately 98% with seven assets vacant and rental collections on contractual rent were also strong at approximately 98% for the period, generally in line with our historical ranges. One of our differentiating qualities as a management team is our ability to successfully repurpose assets and bring them back online. Although anyone can sell off vacant assets quickly, we will also take the time to either sell, release, or re-tenant troubled assets to maximize economics, which we believe ultimately creates the best long-term value for our shareholders.

In these situations, there is usually a little short-term AFFO pain for long-term gain as we incur tax and insurance costs to carry the assets through the process. As of today, on our previously noted watch list, we have already taken back or expect to take back one Freddy's, two TGI Fridays, one World Auto, four Hooters, three On The Borders, and a JOANN Fabrics, representing about 4% of our ABR at the end of the year.

We are very pleased with our progress to date to repurpose or sell off these assets, bringing income back online relatively quickly. We are already in negotiations to lease or sell half of these properties. In addition to these negotiations, we believe that two of our four Hooters could be candidates to remain leased post-Hooters bankruptcy, so we are already in discussions to sell both Hooters should they come back. Based upon current negotiations, we expect that a substantial majority of these properties should be back online in late 2025 at meaningful recovery rates.

Most of these portfolio issues have stemmed from the sit-down fast casual space, which is clearly having performance issues in general. We have continued to reduce our exposure to this asset class over the years and believe that our portfolio should come out stronger as a result. Our exposure to the sit-down fast casual space at the end of Q3 2024 was 19.3% of ABR, and that figure has already declined to approximately 15% at the end of Q4 2024 with the expectation of further declines continuing into 2025.

The pharmacy space has also been challenged for some time with significant store closings, and we have been reducing our exposure there as well. We currently only own three Walgreens properties and four CVS properties, representing just 3.3% of our combined ABR. We have one Walgreens expiring in 2025 that we expect will not renew, and we do not have any CVS properties expiring in 2025.

These tenants hitting all at one time is a historical anomaly. And just because tenants are on a watch list, there is not necessarily an expectation that they would become or come offline from an income standpoint, especially all at one time.

We fortunately own and operate properties with Frontage, which are sought after by tenants and can generally be repurposed or recycled in relatively short order when the situation arises. We do not have any debt maturities in the near term, and we recently locked in our $200 million term loan for 3 years at a SOFR rate of 3.66%, representing an all-in borrowing rate of 4.96%.

Lastly, given the makeup of our capital structure, as the market knows, our earnings are a bit more sensitive to short-term SOFR swings until we achieve greater scale.

Thank you, and let me turn it over to Tim for more detail on the quarterly numbers and guidance.

Thanks, Steve. I'll begin by discussing our financial results for the quarter, followed by an overview of our capital markets activities and our guidance for 2025.

In 2024, we reported AFFO per share of $0.33 in line with our guidance. Order benefited from our 3.4% fixed rate ABS notes, maximizing AFFO dollars, and allowing us to return more cash to shareholders in the form of dividend.

As we highlighted in our earnings release and in prior releases, we repaid the ABS notes in full on December 30. On a pro forma basis, assuming the repayment of the fixed rate notes at the beginning of the quarter, AFFO per share would have been $0.27, which, as we've highlighted on previous calls, an appropriate basis for reflecting future growth expectations.

Our G&A and property leakage figures came in better than expected, reflecting our conservative views to minimize surprises as we season as a publicly traded REIT. We are extremely pleased with our acquisition volumes in the quarter at above market cap rates. Thanks to our ability to capitalize on our niche market. We expect these to contribute significantly to 2025 growth rates.

We have recognized approximately 200 basis points of bad debt during the quarter, all on watch list properties, which we view as a short-term impact to AFFO that we anticipate resolving during 2025. We concluded the year with a net debt-to-EBITDA ratio 5.2x, underscoring our prudent approach to leverage and a robust balance sheet. In terms of capital markets activities, fourth quarter was pivotal for us. The IPO capital enabled us to retire legacy debt and establish a more flexible capital structure.

As we've mentioned before, we secured a new $250 million revolving credit facility and a $200 million term loan, both on favorable terms. This enhanced financial flexibility positions us well to capitalize on future growth opportunities. As Steve highlighted, we fixed the term loan with interest rate swaps in an attractive all-in rate of 4.96%, over 60 basis points lower than our current revolver modeling.

Looking ahead to 2025, we are initiating AFFO per share guidance in the range of $1.20 to $1.26. Key assumptions underlying this guidance include: real estate acquisitions between $175 million and $200 million; property dispositions ranging from $5 million to $20 million; bad debt expense anticipated to be between 2% and 3% of cash NOI, inclusive of properties already noted on our watch list; non-reimbursed property and operating expenses projected between $2 million and $2.6 million; and lastly, total cash, general and administrative expenses estimated between $8.9 million and $9.5 million.

This projected growth is driven by our ability to acquire assets at above market cap rates. As Steve mentioned, our disciplined underwriting and sourcing of assets outside the competitive public REIT landscape are key differentiators. For the full year as a public company, we had in our capital structure optimized post-ABS note repayment, we're well positioned to execute on our acquisition strategy and achieve meaningful AFFO per share growth in 2025.

We remain committed to returning capital to shareholders. Our Board has declared a quarterly dividend of $0.215 per share for the first quarter, reflecting a prudent annualized payout ratio that balances shareholder returns and reinvestment into our high-growth strategy.

Thank you for your attention. I'll now turn it back to Steve for closing remarks before opening it up for a Q&A session.

Thanks, Tim. Let me leave you all with the comment as we continue to build this company going forward. We are always going to use our best judgment to try to make the right decisions for our shareholders to maximize long-term value for the company. We have demonstrated our ability to provide outsized growth by exploiting our market niche with prudent capital allocation. We decided to take a chunk of interest rate risk off the table to fix $200 million of debt. With SOFR spread of 3.66%, we are quickly and effectively addressing our current watch list.

With that, I will turn it back to the operator for the Q&A portion of our call today.

(Operator Instructions) Ronald Kamdem, Morgan Stanley.

Just two quick ones for me. One, I just wanted to talk a little bit more about the acquisition pipeline. Obviously, over $100 million 4Q, some deals at the end of the quarter. I think I heard you say you could continue to get sort of above market sort of cap rates, which is very impressive. Just can you talk a little bit more about sort of the activity, cap rate trends, what industries are you leaning into? I'd just love to hear more about the pipeline.

Randy Starr. Thanks for tuning into us and happy to discuss the pipeline, which continues to be very robust. We continue to acquire on average in the high 7s from a cap rate standpoint, given the current market conditions. But also given our market niche and what we would call our entrepreneurial approach to sourcing new acquisitions, which creates pricing arbitrage.

From a tenant mix standpoint, we are targeting strong credit, proven operators in essential services, health and wellness, and we are purposely avoiding casual dining and pharmacy, as Steve alluded to on earlier. We're also very cautious, I would say about car washes at this time given the oversaturation of the market. So the specific sectors, which we've acquired with that include medical, dental, veterinary services, automotive services, convenience stores, fitness, finance as well as a couple of Dollar Tree stores that met our frontage, traffic count, and real estate criteria.

Out of the 29 properties acquired in Q4, only two were technically franchisees and the rest were company-operated stores. And I think importantly, we have also received financials, if you include the publicly traded companies for 98% of new acquisitions since the IPO. And from a cap rate standpoint, as Steve mentioned, cap rates remain fairly consistent in the private investor market where we saw them and really where we saw the two in Q4.

Should the Fed, I think, recommence rate cuts, we would expect cap rates to adjust slightly downward. We are seeing those like tightening overall in the institutional space, especially for widely marketed deals from the national brokerage firms. But as a reminder, our market niche is working with the many smaller and midsized brokerage firms across the country that specialize in smaller transactions usually dominated by the private buyers.

Great. That's super helpful. My second question was just on sort of the tenant health. I mean I think I saw the occupancy was down quarter-over-quarter. I'm assuming that's some of the store closing and so forth. When you think about the guidance for this year for the bad debt, I guess, is that addresses most of the stuff for this year? Like how do we think about this year versus like a historical year and the amount of time before you sort of get through all these closures and resolutions and so forth. So just a little color on the tenant health. The bad debt guidance this year versus what we should expect in a regular run rate year.

It's Tim. So historically, I would have looked at debt expectations around that 1% to 2% range. Obviously, this quarter end and in Q1, a lot of these tenants had hit fairly unexpectedly and not what we expect on a go-forward basis. So guidance for the year is to have bad debt in that 2% to 3% range. Vast majority of that relates to those tenants that Steve had highlighted on the call, with a little bit of buffer for one, maybe two tenants to have some difficulties during the year.

But we expect that once we're through this slug of tenants that will return to normalcy. So we're looking forward to -- we think that at the end of 2025, vast majority of these will come back online. So we're excited about that. But obviously, understand that there's a little bit of headwinds that we have to face in the near term.

John Kilichowski, Wells Fargo.

Maybe if I could just kind of go back to the last question. I was hoping we can kind of drill into the most recent press release on the names and the vacancies and kind of timing. And then, Tim, maybe if you could just expand upon the last point you made, the bad debt guidance. I'd love to know out of those assets that went dark in the first quarter, what's included and what's that buffer room that you're leaving for yourself on the bad debt side for names that weren't included in the press release?

Sure. Let me just touch base quickly on sort of where we sit and what we think from a timing standpoint. And ultimately, we want to be conservative with the projections. But we're currently in negotiations with 6 different users for 12 of those assets. And we've got two that are LOI sales. We've got one that is a lease that's being negotiated.

And then we also have three that are currently under contract. The three -- just for context, if the three assets that are currently under contract moved to close, and we receive those proceeds and reinvest those proceeds, we're expecting a little over 30%-plus, maybe 32%, 34% of the 4% of ABR to come back a line just with those three alone.

So I think we see some very good opportunity to bring back these assets and then to bring them back at very meaningful recovery rates. And if you look at -- we're sort of right in line. But if you look at adding the two LOI sales, and the one lease, we're looking at close to 50, if not more, percent of that lost rent coming back online. So we feel like we're in a good place, addressing it very quickly.

And again, I think it's a testament to not only the team, but the team has deep rooted experience in the real estate space, and this is not something that we're not able to do and execute on and the assets themselves help make the team look a little bit better when you're taking properties back.

And John, just kind of touch the kind of progression from Q4 to Q1. So just kind of referencing Steve's 4% of ABR, you have essentially a stratification, 2% that occurred in Q4, and then those were out of ABR and then another 2% that occurs in Q1 of '25. And so, when you think relative to the guidance range that we put out for bad debt of 2% to 3% is essentially incremental 25 to 50 basis points of bad debt that we have in our guidance.

Okay. That was very helpful. And then, Steve, just kind of on those newer updates in terms of the re-leasing time, how much of that is included in guidance. I don't know when you've had those conversations with those tenants not potentially releasing. But maybe if you hit the high end of that, would that be above and beyond maybe what your current guidance includes? Or is that roughly at the high end of guide?

Yeah. So what I would say is we're trying to be pretty conservative with the timing of when these assets could come back online. And we're estimating for the purposes of our guidance that we're pushing a lot of that back into the later part of 2025. And if, for example, these three contracts that we're talking about that would be pretty substantial, for 3 of these 12 assets come back, the expectation if they all continue to make, they'd be coming back online well before the end of the half year. I think we've got some navigation there that can help us if the leasing continues to go at the pace.

Dan Guglielmo, Capital One Securities.

On the acquisition side, how does the underwriting for the new leases compare with the in-place lease portfolio looks like the lease terms are longer, but are the yearly escalators still in that 1.7% to 2% range? And are most of them full triple-net coverage?

Yeah. I would say that the rental increases are consistent with where we've been historically in between 1.5% to 2%. And I would say that our -- from a credit standpoint, I think we're very pleased, as I mentioned. I think Steve mentioned about 95% are corporate credits. We've been receiving financials literally for almost 100%, about 98%. It is a mix of absolute net, and we would technically call double net where the landlord may have limited responsibility such as roof or structure. But the leases are typical for what you'd see in the outparcel net lease space.

Great. And then I know you all have great standing relationships with the brokers and are very plugged in there. Can you just give us a sense of who the primary sellers of properties are right now?

Yeah. So we -- that's a great question. I'm glad you asked that. We continue to see a lot of motivated sellers in the private investor market space, and these typically are individual sellers at least in the market that we compete in, the traditional REIT market, they will sometimes they're buying from other institutions who have major portfolios that they're trying to divest it, but that's not where we compete. And we're actually seeing, which is helping us less buyers in our specific competitive landscape currently.

The traditional supply of [1031] exchange buyers have decreased slightly compared to years past due in large part to the sustained high interest rates and traditional bank financing is often difficult for the smaller private buyer that really creates pricing opportunities for institutional quality buyer like FrontView that can execute and close quickly and reliably.

But we also continue to acquire properties that we lost technically lost the first time around when we were looking at them due to pricing but where the buyer who was originally chosen was not able to perform. And now that puts front you back in the driver seat and that puts us in a very favorable position from a pricing arbitrage standpoint.

So I would say the majority of sellers we're seeing are private sellers. And many of them have distress in other parts of the portfolio and the market uncertainty now with the political climate obviously isn't helping in a lot of people's psyches, so that create that puts us into some very favorable situations on the pipeline.

(Operator Instructions) Anthony Paolone, JPMorgan.

Good morning, guys. You guys have Nahom on for Tony this morning. I guess my first question, I guess, given the current cost of equity for you guys, I guess, what's the runway? Or how far are you guys willing to push your leverage to pursue accretive acquisitions?

So I'll take that. Obviously, where the share price is today and what that implies from a cost of equity perspective, it's not great. What I would say is we monitor our costs every day with the share price fluctuations. On the road show past conference call as we discussed that our ideal leverage profile is 6 times net debt to EBITDA over time, which may mean that we could go above 6 times, we could be below 6 times.

And so, we -- just given the current share price, we're not racing towards any equity offerings at this point in time. But we do have and we do feel that we have enough runway to get through the year and get us into the beginning of next year, while staying in the 6 times range. What I would say relative to our cost with -- just looking at our guidance range of $1.20 to $1.26, or [23] at the implied midpoint.

If you look at our weighted average cost of equity, it's not very conducive to an equity offering today. but we're not far away from having 75 basis points to 100 basis points of accretion, which is really where we target from a spread investing perspective. So we're very confident with these tenant-related issues. I think if you look at the implied cap rate that we're trading at right now, around 9%, I think we would all agree that that's not characteristic of the true underlying value of the portfolio.

And so, we're excited to put some of these time related things behind us and hopefully have some share price adjustments. But we feel we have plenty of runway to execute this year. And as we've said in the past, we're certainly very sensitive to the share price. And if some of these share price headwinds continue, we have levers that we can pull, which includes peeling back on our acquisition activity to make sure that we continue to have enough liquidity and runway and to continue to prudently allocate capital.

Got it. Okay. And last one for me. It looks like the expected G&A costs for the year are just a little higher than what was previously expected, I guess. Is that adding -- is that from adding people to like the acquisitions team or just, I guess, other ancillary costs?

Yeah. No, thanks for the question. It has absolutely no impact from additional head calculated matters. We stand by our previous sentence there that we think we're a platform that's poised to grow with the existing infrastructure. We may add a few lower-level positions such as a property manager, accountant, and things like that, but no significant hires. The uptick that you're seeing in that G&A guidance is really just a holistic view of all of the costs of running a publicly traded company. And so that's the primary driver.

Ronald Kamdem, Morgan Stanley.

Hey, just a quick one. I wanted to make sure I understood it correctly. So just how many vacant boxes are you -- do you have and that you plan to open by the end of the year? And I guess the question is just if you're still in lease negotiations, isn't that kind of fast, right? What gives you confidence that you can get those opened by the end of the year. Hopefully, that makes sense.

Yes, sure, of course. Yes, we're right now in lease negotiations on one of the assets and the remaining are sales. Sales typically come back online a little bit quicker, and we think that's going to be a balance going forward with these 12 assets. So thus far, we've got a little bit more of a preponderance on the sales side.

The leases typically will take based on sort of fixturing periods and lease negotiations and permitting periods, they can extend out a little bit longer certainly than the sales. So we expect that we'll have a little bit more on the sales side for the back 6 that are in discussions. And a lot of those are discussions on the sales side as well.

Thank you. We have no further questions. I will turn the call back over to Stephen Preston for closing comments.

Okay. Thank you all again for your support in FrontView. We look forward certainly to seeing everyone very soon. And wherever you're going, please make sure you go in health and safety. Take care and thank you all.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.