FrontView REIT Inc (FVR) 2025 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the FrontView REIT, Inc., second-quarter 2025 earnings conference call. (Operator Instructions) This call is being recorded on Thursday, August 14, 2025.

I would now like to turn the conference over to Pierre Revol, CFO. Please go ahead, sir.

Thank you, operator, and thank you, everyone, for joining us for FrontView's second-quarter 2025 earnings call.

I will be joined on the call by Steve Preston, Chairman and CEO; Drew Ireland, our Chief Operating Officer, will be available for Q&A. Before we get started, I would like to remind everyone that this presentation includes forward-looking statements. Although we believe these forward-looking statements are based on reasonable assumptions, they are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from those currently anticipated due to a number of factors. I refer you to the safe harbor statement in our most recent filings with the SEC for a detailed discussion of risk factors relating to these forward-looking statements.

This presentation also contains certain non-GAAP financial metrics. Reconciliation of non-GAAP financial metrics to the most directly comparable GAAP metrics are included in the exhibits furnished to the SEC under Form 8-K, which include our earnings release and supplemental package. These materials are also available on the Investor Relations page of our company's website, along with our investor presentation.

I'm now pleased to introduce Steve Preston. Steve?

Thank you, Pierre, and good morning, everyone. As a reminder, for our new investors, FrontView is a diversified net lease REIT that primarily focuses on high-visibility frontage properties, typically with smaller box sizes, which are leased to household name tenants. As of June 30, our portfolio consists of 319 properties leased to 334 tenants operating across 16 industries. Our portfolio maintains excellent diversification, no tenant representing more than 3.3% of ABR.

Before providing an update on our operations, I would like to formally welcome Pierre Revol as our Chief Financial Officer. Pierre brings extensive experience within REITs, having led corporate finance, investor relations, and capital markets for both public and private REITs as well as being a former buy-side REIT investor. Pierre's expertise will bolster FrontView's financial strategy, including capital markets execution, balance sheet management, communications, and operational excellence. I am thrilled to have him on the team. With his addition, our executive team is complete and optimized to operate and scale our business.

Turning to the portfolio. We ended the quarter with occupancy of 97.8%, up from approximately 96% last quarter. We made exceptional progress in a remarkably short timeframe on the 12 previously disclosed properties with troubled tenancies. This is now resolved and behind us. Of the 12 properties, we sold three during the quarter and one post quarter for $11.8 million and over 89% recovery on the original purchase price.

We re-leased five properties for $687,000 in annualized base rent with a WALT of 10.8 years. By combining the value of the new leases with the reinvestment of disposed properties, we have already recovered approximately 65% of the aggregate prior rent from just these nine assets. Only three assets remain with one under contract to sell, one with buyer interest and one with national tenant interest. The successful resolution highlights the strength of our underlying high-quality real estate, which is characterized by high visibility frontage locations appealing to various users, allowing us to retenant, repurpose or sell assets in order to maximize value for each location. Outside of these assets, the tenants in our portfolio are performing as expected with negligible credit loss and no material additions to our watch list.

During the second quarter, we acquired five properties for approximately $17.8 million at an average cash cap rate of 8.17%. The weighted average remaining lease term for these properties was approximately 11 years with average annual escalators of approximately 2.4% and an economic yield of 9.35%. From an industry perspective, we continue to add diversification, including adding financial, medical, discount retail, automotive and logistics distribution. In terms of property dispositions, we sold nine properties for $22.7 million during the quarter. Five were occupied properties, generating proceeds of $11.6 million and an average cash cap rate of approximately 6.75%.

These properties had an average weighted lease term of eight years. Our current target dispositions are assets with lower WALTs or less optimal concepts. Additionally, we sold four vacant properties during the quarter, recovering approximately 90% of the original purchase price, with these funds being redeployed into income-producing properties. These asset sales demonstrate the continued desirability and liquidity of our real estate assets and highlight the meaningful spread between our implied cap rate of approximately 10% versus where our assets are transacting in the market.

Looking at net investment, we were net sellers this quarter, and our net debt to annualized adjusted EBITDA fell to 5.5 times with an LTV of less than 40% using consensus estimates for NAV. As we look forward to the remainder of the year, we've adjusted our net capital deployment guidance. On the capital front, we are increasing our capital recycling by raising our disposition guidance to $60 million to $75 million and reducing our acquisition target to a range of between $110 million and $130 million.

On the acquisition front, we will remain selective, pursuing high-visibility properties with strong credits and attractive valuations. Our pipeline of opportunities remain strong, and we believe we will be able to accelerate acquisitions if supported by our capital recycling plan or an improved cost of capital. Going into the third quarter, we see cap rates trending around 7.5%. On the disposition front, we have an active pipeline of assets with less optimal concepts and/or lower WALTs, where we currently anticipate that the cap rates should be 50 to 75 basis points lower than those in our acquisitions, while improving key portfolio metrics, including WALT and industry composition. In summary, we have a strong team of real estate and capital markets professionals in place to lead us forward, a high-quality portfolio of liquid real estate assets and a pipeline of investments and dispositions that will further enhance our portfolio.

Finally, we are well equipped with a strong balance sheet to execute on our pipeline of opportunities to accelerate external growth when there is an attractive spread to our cost of capital.

With that, I'll turn the call to Pierre to go through the quarterly numbers and guidance. Pierre?

Thank you, Steve. I appreciate the warm introduction. It is a privilege to join the FrontView team and contribute to enhancing the platform for long-term value creation.

Before diving into the quarterly update and guidance, I want to highlight a few new disclosures that we believe will be beneficial to shareholders. In our supplemental materials, we are providing more detailed information for both our investments and dispositions, breakdown of our NAV components and annualized adjusted cash NOI. Additionally, we have also expanded our tenant disclosures to include our top 60 tenants, offering greater insight into the portfolio.

As Steve highlighted, it was a very positive quarter on several fronts, including accretive net capital deployment and portfolio performance. Our cash rents in the second quarter were $15.7 million, which includes $15.5 million in base rent and $163,000 in percentage rent, an increase of $600,000 or 4% from last quarter, primarily driven by the acquisitions completed in the first quarter and increased percentage rents.

Our total revenue increased $1.3 million sequentially to $17.6 million, which includes straight-line rent, other income and other noncash revenue. Our non-reimbursable property costs or leakage was $275,000 or approximately 1.8% of base rent. This includes some recoveries and expenses and would expect normal leakage to be closer to $500,000 on a quarterly basis.

Turning to G&A. We reported $3.3 million in expenses this quarter, which included approximately $1.1 million in nonrecurring costs, primarily related to onetime legal expenses pertaining to the former CFO investigation, along with other nonrecurring fees. Excluding nonrecurring items, our G&A for the quarter was approximately $2.2 million compared to $2.8 million in Q1. Adjusted cash G&A for the quarter totaled $2 million, a reduction of roughly $200,000 from Q1.

Looking ahead, we see full year cash G&A, excluding nonrecurring charges, to be approximately $8.8 million, reflecting a $200,000 reduction from prior guidance on both the high and low end. Driven mostly by improved cash NOI, lower cash G&A, AFFO per share increased $0.02 or 6.7% quarter-over-quarter to $0.32. We declared a quarterly dividend of $0.215, representing a 66% payout ratio on AFFO per share.

Turning to the balance sheet. We ended the quarter with $118.5 million drawn on our revolving credit facility and $200 million on our term loan. We currently have approximately $140 million of liquidity comprised of $131.5 million revolver capacity and $8.4 million of cash on hand. In addition, our revolving credit facility includes a $200 million accordion feature, which we may elect to exercise at our discretion, subject to customary conditions. Our $200 million term loan is fully hedged through initial maturity at a rate of 4.96%.

The revolving credit facility bears interest at a floating rate of adjusted one-month SOFR plus 1.2%, with an effective rate of 5.63% as of June 30. Both the revolver and the term loan include two 12-month extension options subject to customary conditions, which can be -- which can extend the final maturity to 2029.

From a leverage standpoint, we ended the quarter at 5.5 times net debt to annualized adjusted EBITDAre, a 0.2 turn reduction from Q1, primarily driven by increased disposition activity and lower operating costs. Our fixed charge coverage ratio remains strong at 3.3 times, and our balance sheet is conservatively positioned with LTV slightly below 35%, utilizing consensus applied cap rates of 7.1%. With our revised net capital deployment guidance, we do not expect a meaningful increase in leverage, staying between 5 times and 6 times net debt to adjusted annualized EBITDAre.

Turning to guidance. As Steve highlighted, we're lowering our acquisition range to $110 million to $130 million, at the midpoint of $120 million, raising our disposition range from $60 million to $75 million at the midpoint of $67.5 million. At the midpoint, this represents a $15 million reduction in acquisitions and a $37.5 million increase in dispositions. While we continue to maintain an active pipeline of both fronts, this shift reflects a deliberate capital recycling strategy, preserving liquidity, managing leverage and enhancing portfolio quality. Additionally, we are narrowing our AFFO per share guidance range to $1.22 to $1.24, driven primarily by the revised capital allocation plan.

Looking ahead, we remain focused on continually enhancing the portfolio and maintaining balance sheet discipline.

Steve, back to you for closing remarks.

Thanks, Pierre. As I mentioned earlier, we have the right team to execute, bringing both real estate and capital markets expertise. Our portfolio consists of high-quality fronted real estate in strong demand, allowing us to proactively manage and maximize value. We've enhanced our disclosure with a refreshed supplemental and investor presentation, providing investors more relevant data. As we move into the second half, we'll remain disciplined capital allocators, expanding our capital recycling program to deliver accretive financial and portfolio gains while maintaining a strong and flexible balance sheet.

With that, I'll turn the call back to the operator to begin Q&A. Operator?

(Operator Instructions)

John Kilichowski, Wells Fargo.

I'm Sheryl, on for John. You narrowed the AFFO per share guidance range, but the midpoint remains unchanged despite another reduction in net investment volume. Can you walk us through what gives you the confidence in holding the midpoint flat?

Sure. I'll take that one. Essentially in the quarter, as you saw that the operations were pretty strong at $0.32. And so for the first half of the year, we are at $0.62. And when we look at the resolutions on the 12 properties discussed before, the performance of the existing tenants, we believe that for the back half of the year, we can probably do between $0.30 to $0.32 a quarter and targeting $0.31 seems very reasonable given what we see on the existing portfolio.

Okay. That's helpful. And one follow-up on the 9 resolved properties of the 12. Should we expect any adjustments to bad debt guidance going forward given the improved visibility on the leasing progress?

Sure. I'll take that as well. So on the bad debt guidance, we did not include it this quarter. It was essentially part of the original guide, which was reflecting those 12 properties. As Steve commented in his remarks, the portfolio outside these 12 has had de minimis credit losses.

So at this point, we're just not providing an update on bad debt guidance. But we think that for the remainder of this year, what we see is a very healthy portfolio, we look forward to resolving the remaining three properties with the responses from Steve and the portfolio is actually pretty healthy. And that's why despite reducing our net capital deployment meaningfully, you can still produce a very strong quarter third and fourth, and that's why we were able to increase the low end to $1.22.

Anthony Paolone, JPMorgan.

Welcome, Pierre, and I appreciate the incremental disclosure as well. First question is, as we think about acquisitions and dispositions over the balance of the year, how should we think about just the spread in cap rates between the two? I mean, you were able to produce a positive spread in the quarter. I'm just wondering if that's something you think can continue? And then also any incremental color on the acquisitions in the quarter, cap rates north of an 8% and also bumps north of 2%, which is higher than what we would typically see in net lease.

So just wondering kind of how you're achieving those.

Yes, sure. I'll take that. Thank you. Yes. No, we expect to see, as we mentioned earlier, about a 50 to 75 basis point differential between where we're selling assets and then where we're transacting into the marketplace.

And we expect that hopefully to continue throughout the year. With respect to call it, what we're buying, we're continuing to buy great assets with frontage from very motivated sellers. We achieve typically these outsized cap rates because we're not typically competing with institutions in the space. And if you remember, we've got that fragmented market where the buyers are typically small and they're unsophisticated. We've got great credit on these assets as well.

They're solid corporate credit, large operations with long-term operating businesses. And just to echo a couple of examples of a few of the assets. So La-Z-Boy, we bought that roughly at about a 7.5% cap with about 10 years left remaining. We bought Strickland Brothers as an example with 15 years left at about a 7.5% cap rate and a Range USA with about 18 years left and 8 cap rate. So these are all great assets, great corporate credits, and it's just a testament to how we continue to be able to buy into the marketplace.

And with respect to the escalators, those are just -- those are built into the leases, and we typically average about 1% to 2% across the portfolio. And it just so happened amongst this next that the escalators came in a little bit higher. There were a couple of assets that we acquired that had more than sort of that average 1% to 2% built into their lease.

Okay. Got it. And then just one other one, just maybe more of a clarifying item in your NAV buildup in the supplemental, the NOI number is higher than the base rent number. And I guess I would have just intuitively assumed that would be flipped given sort of some normalized leakage. But just wondering like what I'm missing there?

Yes, there's other income as well that's not part of the ABR. There's some interest income on loans that's also not part of the ABR. And so that was -- it's essentially just some of that net other income that was picked up in the NOI that's outside of the base rent.

Daniel Guglielmo, Capital One Securities.

So as mentioned in the commentary, you all are in an elevated recycling mode, but share prices changed fast with the right strategy and execution. So is there a certain share price level where you all would feel comfortable kind of flipping the switch and starting to become a more meaningful acquirer? Just curious how you all think about that math.

Sure. So there's actually a page in the investor presentation, where we highlighted that if we were to get a positive spread on our acquisitions, I think that this platform could really grow. There's not -- we have a robust pipeline for acquisitions and our assets are sought after by several investors. And I think that the opportunity to accelerate is certainly on the table, but we want to achieve an attractive spread. So if you're looking at a cap rate of roughly 7.5%, what Steve talked about in the call, you would want to make sure that the weighted average cost of capital is inside of that.

And that really is what's driving where we'll start to pivot more towards acquisitions.

At this point, though, just given where our implied cap rate is and our cost of capital, I think the most prudent way to manage the balance sheet is to execute on this recycling plan. We've seen that work for some of our peers. And I think that it could work for us just given the quality of our portfolio and maintaining leverage at low levels is important.

That's really helpful. And then a big part of the IPO pitch was the strength of the team's broker relationships and how those connections really help funnel frontage properties to you all. I know Randy was focused there in the Co-CEO role. So can you just talk about how you all are continuing to foster those broker relationships with a slower acquisition cadence? And then who's taking on that kind of liaison role now?

Yes, that's good thing. Let's just start with -- this is behind us, too, with respect to Randy and the CFO. And with respect to the acquisitions and dispositions, I think as we've mentioned before, our team has been in place since the IPO and was really handling a bulk, if not almost all of the acquisitions since the IPO. So they are in place and ready to meet our guidance.

Ronald Kamdem, Morgan Stanley.

Just staying on the investments a little bit. I think you said 7.5% on the cap rates. Maybe just talk a little bit more about, is that just cap rate compression? Is there a mix? And then any time we could sort of quantify the pipeline?

Is it $50 million? Is it $100 million? Like when you're ready to ramp, just how big do you think you can get?

Sure, you bet. I would just say with respect to kind of that state of the acquisition market, the market is fluid. And as we had mentioned that we do expect cap rates sometime in Q3, somewhere in that 7.5% range inside a little bit from where we've been acquiring. And I think that's a little bit of a testament to leverage being a little bit easier for buyers to obtain now a little bit less noise in the marketplace. So for some of these smaller properties from some of these smaller banks.

But there is still an unbelievable amount of opportunity for us. We've got a strong pipeline, and we can increase that pace of acquisition at any point in time. I think we had originally guided to roughly about $200 million for the year. In Q4 '24, we did over -- or about $100 million of acquisitions. And if we get that cost of capital back, we've got the team in place that I see no reason why we can't meet or exceed that prior guidance.

Great. Helpful. And then just going back on the tenant health conversation. Obviously, good progress on those 12 assets. And I can appreciate that bad debt is sort of de minimis outside of those.

But just on a long-term basis, when you're thinking about sort of the watch list and how things are trending, how should we think about what the long-term bad debt number we should be baking in?

Yes. So what I would say is really no material changes or additions to the watch list. We've -- as we mentioned before, we watch pharmacy just like everybody else, car wash, like everybody else. We prior mentioned that we had two Applebee's and a couple of Burger Kings that we're watching. Those are open and operating, a pair of gas stations.

But overall, everything is very healthy. As we look to see going forward, what I would highlight is that since we founded this business in 2016, we have had 47 lease expirations and only 7 have expired with 40 renewing to the same tenant, 3 renewing to a new tenant at 104% recovery rate, which is over a 90% renewal rate.

So when we look forward, we feel very good. And I'll just leave you with one other sort of tidbit here. If the 12 were stabilized in 2025 that we've been talking about, bad debt expense, as Pierre mentioned, would be negligible. And we'd be looking at somewhere in the 25 basis points, maybe 50 on the high side. So I think we feel like this portfolio is humming.

It's very strong right now. Performance is good. Collections are great, and we expect that, that's going to be something that continues with this portfolio, more in line with the historicals and not that anomaly we were just dealing with.

Daniel Yim, Bank of America.

Could you provide a little bit more context behind the new mortgage loan receivables found on the balance sheet?

Yes, sure, sure. So what I would say is that that's not a business that we are in. We actually made two loans on two assets that we sold. And it's a good way for us to achieve some good yield. We get about 8% interest rate baked into those.

And we actually, of course, know those properties pretty well. So it's a good way if something were to ever happen that we certainly don't expect it to that you get an asset back at a very good basis. So good way to get some extra income.

Got it. And then could you also elaborate on your decision to expand your top tenant list by another 20 tenants to 60 because I know it'd be pretty difficult to take that back in the future if needed.

We got nothing to hide, but Pierre will take it, and we love the actual disclosure.

Yes. I mean, look, I've noticed that for companies that have had issues with the cost of capital, transparency is helpful. And so I know that from history and like my previous company used to disclose 100 tenants. And this top 60, when you actually look down that list from 40 to 60, there's some really interesting tenants there, like you have a Starbucks, you have a couple of other IGs. There's very high-quality tenant roster.

And I think that added disclosure, I hope, will provide investors more confidence in terms of the quality of the tenant mix that supports these properties.

There are no further questions at this time. I'd like to turn the call back over to Mr. Steve Preston for closing comments. Sir, please go ahead.

Yes. Thank you. Thank you, everyone, for joining. We look forward to continuing to build from here. We've got a great team and a great portfolio and a very conservative balance sheet.

We will be at the Wells Fargo Conference coming up on September 8 and look forward to sitting down and visiting with anyone that would wish to do so, and that's in New York.

Be well and be safe and healthy.

Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.