Necessity Retail REIT Inc (RTL) 2021 Q1 法說會逐字稿

Good morning and welcome to the American Finance Trust First Quarter 2021 Earnings Call. (Operator Instructions) The conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Louisa Quarto, Executive Vice President. Please go ahead.

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 other 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 this 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 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'll now turn the call over to Mike Weil, our CEO. Mike?

Thanks, Louisa. Good morning, and thank you for joining us today. Our first quarter results highlight the resilience of our best-in-class portfolio, which is focused on necessity-based retail assets that are net leased to predominantly investment-grade and implied investment-grade tenants. While our intentionally constructed portfolio was designed to withstand potential downturns in the economy and be resistant to e-commerce, we never anticipated being tested by a global pandemic. In that context, I'm pleased that AFIN's portfolio is returning to or has surpassed pre-pandemic metrics on a number of fronts, including AFFO per share, cash NOI and portfolio occupancy, demonstrating its strength and resilience over the last 4 quarters.

AFFO per share was $0.24 for the first quarter, up from $0.23 in the first quarter last year. Cash NOI increased to $63.1 million, up from $59 million in first quarter 2020. Our portfolio occupancy at quarter end was 94.9%, up from 94.7% at the end of the first quarter 2020 and 93.9% at the end of last year. Multi-tenant leasing pipeline occupancy is 88.5%, an increase from 87.3% at the same time last year and 88.2% at the end of the prior quarter. From a balance sheet perspective, we lowered our weighted average interest rate by 40 basis points to 3.8% and increased our weighted average debt maturity by 1 year to 4.5 years.

Our rent collection continues to improve across the portfolio. We collected over 99% of the first quarter cash rent due, up from 96% in the fourth quarter. Collecting nearly all of the cash rent payable in a quarter is consistent with our pre-pandemic experience and is reflective of the level of rent collection we anticipate in the near future. Contributing to improved rent collection was a significant increase in rent collected in the multi-tenant portion of our portfolio, which represents approximately 30% of our total straight-line rent.

As of March 31, 2021 multi-tenant collection was 99.1% of the first quarter cash rent due, up from 88% collected during the fourth quarter and 83% in the third quarter. The improvement in multi-tenant rent collection complements the nearly 100% of rent we collected in the single-tenant portfolio and nearly 100% of rent we collected from our top 20 tenants in the first 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 payments, we collected 98% of the original cash rent due in the total portfolio during the first quarter.

Year-over-year, we've grown our $4 billion portfolio by 77 properties and 800,000 square feet, increasing annualized straight-line rent by $11 million to $285 million. Occupancy is currently 94.9%, up from 94.7% a year ago, driven by an aggressive approach to the asset management led by Jason Slear, Don Foster, and Stephanie Drews. Through the combined efforts of our team and our third-party leasing brokers, we've seen a great uptick in activity, leading to executed leases and a robust pipeline of forward leasing deals. Despite increased activity, we remain disciplined underwriters, and our high-quality portfolio is significantly leased to investment-grade rated or implied investment-grade rated tenants. Among our single-tenant assets, 61% of straight-line rent comes from investment-grade and implied investment-grade tenants, including 73% of our top 20 tenants portfolio-wide.

We continue to grow the single-tenant segment of our portfolio as a percentage of rent. Annualized straight-line rent from single tenants has expanded to 70% of our portfolio and has increased 9% since we listed in 2018. AFIN's acquisition efforts are focused on single-tenant service and necessity retail assets that have long remaining lease terms and contractual rent increases. We closed on 7 such assets in the first quarter, which, combined with our pipeline, totals 33 property acquisitions for $72 million at a weighted average cap rate of 8.2% and 14.5 years of weighted average remaining lease term. We take a disciplined and opportunistic approach to acquisitions and have targeted acquisitions that we believe provide superior risk adjusted returns.

Retail comprises 71% of the 12.5 million square foot single-tenant portfolio based on straight-line rent, with the balance consisting of 16% distribution and 13% office properties. Of the retail portion, 83% are service retail properties that we believe to be necessity-based in nature and more resistant to e-commerce. Occupancy across the single-tenant portfolio is over 99% with a weighted average remaining lease term of 10.4 years and 1.3% average annual rent escalators. There are very minimal near-term lease expirations in this portfolio with only 14% of leases expiring within the next 4 years.

Our 33-property, 7.2 million square foot multi-tenant portfolio has executed occupancy of 88.2% as of March 31, 2021, an increase from 85.2% last quarter and 87.3% a year ago, even through the course of the pandemic. The high-quality centers in our multi-tenant portfolio are desirable real estate in good communities where people want to shop. As mentioned, this quarter, 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 first quarter. We've executed 8 new leases that are expected to add $1.4 million of new annual rent over time as rent commences.

Among the leases that were executed were 3 anchor tenants, including 2 10-year, 25,000 square foot Burlington Coat Factory locations at the shops at Shelby Crossing and Montecito. We're also building a robust leasing pipeline that, if definitive agreements are executed, will result in an incremental $250,000 of new annual rent and include an investment-grade grocery tenant. The pipeline leases total almost 26,000 square feet and would increase net occupancy in this portfolio to 88.5%.

Moving to our balance sheet. We have minimal near-term debt maturities in our capital structure after closing several significant refinancing transactions last year at lower interest rates than the loans they replaced. 77% of our debt matures in 2025 or later, and our weighted average debt maturity has increased 29% year-over-year to 4.5 years. At the same time, the weighted average interest rate of our debt has decreased by 10% to only 3.8%. Finally, 82.6% of our debt is fixed rate, locking in rates in an environment of historically low interest rates. We constantly monitor our balance sheet and the markets for opportunities to improve and enhance our capital structure.

AFIN had an excellent first quarter in all measures, from nearly full rent collection to strongly leasing in the multi-tenant portfolio. As a result, we reported year-over-year improvements in our balance sheet and performance metrics, including AFFO per share. We expect that the ongoing rollout of COVID-19 vaccines nationwide will support a return to normalcy for our tenants, the benefits which will accrue to AFIN and our shareholders.

Before turning it over, I'd like to welcome Jason Doyle to our earnings calls. As we mentioned last quarter, Jason was appointed CFO for AFIN in February and officially became our Chief Financial Officer last month. We're excited to have Jason on board and know that he's already stepped into his new role without missing a beat.

Jason, will you please take us through the financial results?

Thanks, Mike. And I'm very happy to be here. First quarter 2021 revenue was $79.2 million, up from $77.2 million in the fourth quarter 2020 and a 6.2% increase from the $74.6 million in the first quarter of 2020. The company's first quarter GAAP net loss attributable to common stockholders was $9.4 million compared to a net loss of $9.2 million in the first quarter of 2020. NOI was $65.7 million, a $1.7 million increase from the $64 million we recorded for the fourth quarter and a 5.6% increase over the $62.3 million NOI we reported in the first quarter of 2020.

For the first quarter of 2021, our FFO attributable to common stockholders was $22.6 million or $0.21 per share compared to $0.22 per share for the same period in 2020. First quarter AFFO was $25.5 million or $0.24 per share compared to $0.23 per share in the first 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 ended the first quarter with net debt of $1.7 billion at a weighted average interest rate of 3.8% and a net debt to gross asset value of 40.4%. The components of our net debt include $280.9 million drawn on our credit facility, $1.5 billion of outstanding secured debt and cash and cash equivalents of $84.2 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 $218.5 million based on our March 31 cash balance and borrowing availability.

With that, I'll turn the call back to Mike for some closing remarks.

Thanks, Jason. We had a very productive quarter and look forward to continuing to execute on our growth strategy. We continue to optimize our intentionally constructed portfolio of single-tenant and multi-tenant assets focused on necessity retail properties. Year-over-year, we've maintained the strength of our portfolio and improved our balance sheet, which now features a lower weighted average interest rate and longer weighted average remaining loan term.

Despite returning to pre-pandemic results and essentially complete rent collection, our stock price has yet to return to the levels it was trading at in February of 2020. For this reason, and given our healthy dividend yield, we believe our company represents a truly compelling current valuation. Going forward, we'll continue to maintain our steady and deliberate approach to growing our portfolio through high-quality accretive acquisitions.

We look forward to a continued return to operational normalcy for our tenants and anticipate further benefits to AFIN from the successful vaccine rollout across the U.S. We look forward to continuing the type of accretive activity we've highlighted today and anticipate a very strong year for AFIN.

Thank you for joining us today. I look forward to your questions. Operator, please go ahead.

(Operator Instructions)

Our first question comes from Bryan Maher of B. Riley Securities.

Welcome, Jason. And first, congratulations on all the successes you guys have had over the past couple of quarters. I'm not quite so sure most of the buy side would have anticipated that just a year ago. So kudos.

First question I have. On the multi-tenant portfolio, we were pleasantly surprised to see the uptick in executed occupancy there. I believe last quarter, you announced that you had added 2 industry veterans to kind of spearhead that. Can you talk a little bit about the approach that they're taking and the type of tenants that they're pursuing and where you think this occupancy can go over the next year or 2?

Yeah. Thank you. So Don Foster and Stephanie Drews have been with us now coming up on 3 quarters, and their impact has been significant. They're working very closely with Jason Slear, who heads up our retail platform. The biggest change, besides the fact that they're industry veterans, as you said, they're very plugged in. They have direct relationships with many of the national retailers. I think that the more that can be done in-house, the better the results potentially can be, time-wise, response-wise, nothing gets missed in the cracks or -- so their focus is every day, all day. One of the first things that we asked both of them to do was evaluate the third-party brokers that were representing the vacancy in the portfolio. Many of those brokers were doing a great job, maybe needed a little bit more direction, whatever it may be.

But there was a percentage of the assigned brokerage work that we needed to make changes. We needed to bring in a different group. Sometimes it just gets stale, whatever the case may be. So that's been the most exciting change for us in the multi-tenant portfolio. The who question is really unchanged. We continue to look at -- again, these are typically anchor tenants in power centers. So whether it's the discount apparel, whether it's the hobby, home decor or specialty grocer, those fit our centers beautifully. They have immediate impact in the community and to the rest of the tenants. So I anticipate that we're going to continue to make positive occupancy announcements in the multi-tenant portfolio.

And I really do think, if we're talking next 4-quarter time frame, we will see this portfolio -- I anticipate that we should be able to get into the low to mid-90% occupancy range. And as we've talked prior, occupancy is a real focus of ours because it's such a driver of NOI. It's obviously long term, very valuable. And it also makes renewals of other tenants, both anchor and in line smaller tenants, much better, higher rents, et cetera, because of traffic. So Don, Stephanie and Jason are really having a positive impact on the portfolio.

Great. And then as it relates to your Truist Bank branches, is there any new thoughts there? Is there a market for those assets? Or are you just happy kind of holding those to maturity and kind of clip in the coupon?

Bryan, I don't know that I would -- first of all, yes, we are very happy with Truist. We think they're doing a great job in the market. Their merger has gone seamlessly, and they're a very important tenant. As we sit today at about 6% of straight-line rent, I'm not in any urgent thought that we need to sell further, but we certainly will opportunistically dispose. And just to give you an idea, in our portfolio, we don't have dark Truist branches. They are all open and operating. They average in the neighborhood of $100 million per location in deposits which, again, is a very high deposit metric.

So we believe that these branches will continue to be important to the Truist network. And we're -- we watch it very closely, but my short answer is we're probably happy at the moment. But I don't know -- we have 10-plus years of remaining average lease term, and we will continue to look opportunistically at the entire portfolio.

Great. And just last for me. Are there any soft spots in the portfolio, whether it's a tenant or a type of asset that you might wish you had a little less of at this point? Or are you pretty comfortable with everything in there?

I am comfortable with the portfolio because of the diversity. Again, it's geographic, industry and individual tenant diversification that I think matters. The portfolio occupancy is approaching 95%. The single-tenant portfolio is, as we talked about, at essentially 100%, gives me really great comfort. Rent collection matches occupancy or exceeds occupancy. So the portfolio is performing.

We didn't have to do anything to support our tenants financially. We didn't make any loans to our tenants. We didn't do anything that was out of normal course. They've done a great job getting through the COVID period. They're open, they're operating, they're paying rent. And I'm pleased with the performance and the overall portfolio. So I think we're in really good shape.

Our next question comes from Frank Lee of BMO.

Mike, just want to touch on the 26,000 square feet of leases you currently have in leasing pipeline. How do the rents and concessions compare to, let's say, pre-pandemic levels?

We are in the exact range that we had underwritten these vacancies. These are not excessive concessions by any means, both on a free rent and TI. Now we haven't disclosed details, especially of the pipeline. So I want to be a little careful on what I do disclose. We are looking at some ways that we can talk about that in the future in how we disclose. But I'm very comfortable that these are marketed deals in some of the vacancies. Again, this goes back to the earlier question and comment regarding the value that Don and Stephanie are bringing. In several of the larger leases, they were competitive situations where we had, in some cases, 3 tenants wanting the same space.

So of course, that lets us be very competitive and certainly within market expectations. So I'll give you one example. We had one tenant that didn't want to take 100% of the vacancy, but they were pretty attractive from a credit and lease term perspective. But because we had a couple of other very interested and strong parties competing for the space, we were able to get our preferred tenant to take 100% of the space at the market rents because they didn't want to lose out. So again, the activity, the focus, the intel in the individual markets is incredibly valuable and will really drive positive results.

Okay. Great. And then this is the third quarter in a row where we haven't seen any disposition activity. You talked a bit about Truist. But how are you currently thinking about other strategic asset sales to help fund acquisitions or to manage exposure?

Well, I don't think -- first of all, I don't think we have any significant overexposure to any one credit. So we are looking at the portfolio. I do have an overview approach of looking at NOI and revenue from rental. So I got to say long-duration leases, contractual rent growth, investment-grade or implied investment-grade tenants, I think of it as very valuable income stream. And as we are seeing positive performance metrics in the portfolio, I will continue to tell you that we would be an opportunistic seller, but by no means are we aggressively looking to thin out the portfolio. I'd like to be growing the portfolio.

Okay. And then just last one for me. If we take a look at the slide you have in your presentation where you compare your current results to pre-pandemic levels, just curious, were there any metrics that you were particularly surprised by in terms of how quickly they returned back to previous levels?

Frankly, what I'm most pleased with, and I don't know that we're feeling full impact of it yet, but we will, the multi-tenant occupancy. It's something that you and I have talked about quite a bit. We are a very capable operator of multi-tenant retail properties, and this is going to be very valuable. So to have this level of activity in new leasing this early tells me that retail is strong. And I -- frankly, as you would imagine, for all the metrics to be so strong and positive and to be back to pre-COVID levels, I'm looking hopefully and with real focus on seeing the -- I'd love to see the stock price come back up to match what I think is the quality of the portfolio.

So we continue to look aggressively at acquisitions. We're not chasing cap rates right now or ever, frankly. We like the industries that we're in. I'm very excited about what we're seeing in the multi-tenant. And rent collection is so important, as we all know. So to be at that almost 100% level is -- compliments to our team and how hard they've worked and the close relationships they've built with our tenants.

This concludes the question and answer session. I would like to turn the conference back over to Mr. Weil for any closing remarks.

Great. Well, again, thank you all for spending some time with us today. We are available. If anybody has follow-up questions, please feel free to reach out. And we look forward to a healthy and safe spring and summer and seeing the country really get back into a great place again. So thank you all again for joining us.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.