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

Good day, and welcome to American Finance Trust Fourth Quarter and Year-end 2020 Earnings Call. (Operator Instructions) Please note, this event is being recorded.

I would like now to turn the conference over to Louisa Quarto. 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 Katie Kurtz, 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. We will discuss implied investment-grade tenants. Please refer to our earnings release for more information about what we consider to be implied investment-grade tenants.

Also during today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating the company's financial performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. Reconciliation of these measures to the most directly comparable GAAP measure is available in our earnings release.

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

Thanks, Louisa. Good morning, and thank you all for joining us today. Yesterday, we reported strong fourth quarter and full year results that reflect significant momentum in acquisitions, leasing, capital markets activity and proactive asset management that we've carried into the new year. Despite the challenges presented by the pandemic, we were able to deliver on the objectives we identified last February before COVID-19. We successfully grew our portfolio, increased per share AFFO, increased dividend coverage and completed several transactions that resulted in significant long-term improvements to our capital structure.

Our adviser has strengthened our management team to add significant shopping center leasing experience by bringing on industry veterans, Don Foster and Stephanie Drews. We launched a second series of preferred stock at a lower dividend rate than our prior offering and built new and deeper relationships with our tenants as we proactively work to navigate the last year together.

We've produced consecutive quarters of rent collection growth, a metric that we believe has become an important barometer of our success. Rent collection increased from 87% in the second quarter to 93% in the third quarter and finally, to 96% in the fourth quarter. To be clear, all rent collection percentages are calculated based on the original rent, we would have expected to receive before COVID started. It's not adjusted for negotiated deferrals or other amendments.

Our high collection rate also reflects the expiration of rent deferral agreements where tenants have resumed paying full rent. Our rent collection success is due to the way we've constructed our portfolio. We target necessity retail properties, subject to long-term leases with investment-grade or implied investment-grade tenants. We continued to acquire properties that met this high standard throughout 2020, ultimately completing an aggregate $218 million of acquisitions.

Over 75% of our 2020 acquisitions are leased to necessity retail tenants based on contract purchase price. We acquired 107 properties at a weighted average cash cap rate of 7.9%, a weighted average cap rate of 8.6% and with a weighted average, 14.3 years of remaining lease term at closing.

Looking ahead, we have a growing forward acquisition pipeline for the new year. As of February 15, we have $38.6 million of forward acquisitions under contract at a weighted average cash cap rate of 7.3% and a weighted average cap rate of 8.8%. Though we prefer corporate guarantors on our leases, we thoroughly underwrite franchisees as well, which has allowed us to avoid any impact from the bankruptcy of NPC International, a large franchisee of Pizza Hut and Wendy's that is a tenant at properties held in a number of other REIT portfolios. We do not own any properties leased to NPC International.

At year-end, our $4 billion portfolio was comprised of 920 properties, with portfolio occupancy of 93.9% and a weighted average remaining lease term of 8.8 years. Annualized straight-line rent increased 4.9% year-over-year to $280 million from $267 million because of our acquisitions and leasing efforts. Year-over-year, the portfolio grew 4.3% to 19.3 million square feet. 70% of our top 20 tenants have investment-grade or implied investment-grade credit. Based on straight-line rent, 78% of leases across the portfolio include contractual rent increases, averaging 1.3% per year.

Our portfolio has 2 distinct but complementary components, 887 single-tenant properties and 33 multi-tenant power centers. Occupancy in the single-tenant portfolio was 9.4% at year-end, with 10.5 years of weighted average remaining lease term. The composition of our single-tenant portfolio based on straight-line rent is 60% service retail, 12% traditional retail, 15% distribution and 13% office, which is primarily 1 property, which serves as the U.S. headquarters for Sanofi. 62% of the straight-line rent in this portfolio comes from investment-grade or implied investment-grade tenants. Since 2017, all of our acquisition activity has been in the single-tenant portfolio.

Year-over-year, single-tenant assets have increased to 70% from 67% of our overall portfolio based on straight-line rent. Although the single-tenant portfolio is primarily comprised of net leases, where the landlord has no or very few maintenance or other responsibilities and is primarily leased to investment-grade or implied investment-grade tenants, that doesn't mean there's no management required for a successful operation.

A great example of this is a portfolio of properties previously leased to the gas and convenience store operator, White Oak. In early 2020, we identified the issues at 19 properties leased to this tenant. We proactively reached out through our network to a known operator, Imperial Reliance, as a potential replacement tenant and commenced aggressive negotiations and legal action against White Oak. In September, we negotiated with the former tenant to pay the past due rent and surrender all 19 properties back to AFIN. Imperial Reliance immediately took over operation at 18 of the 19 properties, and the remaining property was leased to HIFZA Trading.

After a short period of free rent, the 2 new operators began making 100% rental payments on their new 20-year leases, which included annual rent escalations and feature approximately $1 million more in straight-line rent than the prior leases. These properties are open and operating under BP, Conoco and Phillips 66 banners. Because of our aggressive negotiations, proactive management and extensive network, we were able to turn this situation into a long-term positive with stronger tenants and longer lease durations.

Our multi-tenant portfolio was 84.7% occupied at year-end, with 4.7 years of weighted average remaining lease term. Executed occupancy, combined with our leasing pipeline, is 88.2%, which includes 6 new leases for nearly 215,000 square feet, where we have executed letters of intent from new tenants and who we expect to take possession of their space in 2021. These pipeline leases are expected to add $1.6 million of new annual rent.

One of the leases in the pipeline is for a new 20-year anchor tenant at the Centrum, that will add 109,000 square feet of occupancy and $652,000 of annual base rent. This level of executed occupancy, combined with the leasing pipeline, is comparable to the first quarter of 2020 before any significant impact from COVID.

We're also in late-stage negotiations with a Fortune 100 tenant for 37,000 square feet at another one of our properties, further illustrating our continued performance and proactive leasing efforts.

In light of the challenges posed during 2020, I'm pleased with how we have continued to sign new and extended leases with our tenants such as the 4 new long-term leases we signed in the fourth quarter that will add nearly $520,000 of annual rent once commenced. It's especially rewarding when leases result from the relationships we've built through the proactive management of our portfolio.

A great example of this is one of our pipeline leases that recently commenced with DICK'S Sporting Goods. Based on our strong relationship, they signed a lease in January at Centennial Plaza for 50,000 square feet and opened a new concept store. For us to lease-up 50,000 square feet of retail space, especially now, illustrates our aggressive approach to portfolio management. The fact that DICK'S selected one of our properties for this concept store, speaks to the depth of our relationship and the quality of the center where it's located.

Our advisers strengthened their team recently with the addition of Stephanie Drews and Don Foster, who are focused on building relationships with the tenants of our multi-tenant portfolio, driving leasing initiatives, and proactively delivering key portfolio enhancements. Combined, they bring over 50 years of experience to our team, having previously managed 19 lifestyle shopping centers and mixed-use projects along with retail asset management experience. We believe the focus these 2 will bring to this segment will be accretive to AFIN as they step into these roles at an opportune time.

Year-over-year, we're proud to report increases to revenue, NOI and adjusted EBITDA. Revenue grew 1.8% to $305 million for the full year 2020, and annual adjusted EBITDA increased 2.2% to $205 million. NOI for 2020 increased to $253 million from $247 million in 2019. For the fourth quarter, AFFO was $0.24 per share, equal to the $0.24 per share we reported in the fourth quarter of 2019 and up 4.3% from $0.23 per share in the third quarter of 2020. The quarter-over-quarter increase in per share AFFO was driven by an increase in rent collection in the multi-tenant portfolio, where the tenants continued to see operating improvements throughout the year and less interest paid as supported by the refinancings we completed.

One of the accomplishments I'm most proud of in 2020 and has been our uninterrupted ability to continue to manage large, complex and accretive projects that significantly improved our balance sheet and will provide runway for our 2021 plans. We began working several quarters ahead of significant loan maturities to evaluate multiple options for replacing and improving on the terms of the existing loans. Only as a result of our early efforts, were we able to execute refinancings that lowered our weighted average interest rate to 3.8% from 4.3% year-over-year despite challenges related to COVID.

First and most significantly, early in the third quarter, we completed a $715 million CMBS refinancing. This loan primarily replaced an existing loan that only had 2 months of term remaining before its maturity and extended AFIN's overall weighted average debt maturity from 3.5 years to 5.1 years at the time of the completion. This loan is interest-only at 3.79% and essentially bottom-ticked the market last year for loans of this size and structure. A loan of this size requires a daunting amount of diligence, as it's secured by 368 single-tenant properties.

Coordinating site visits, inspections and all of the other important diligence steps in the depth of the pandemic was -- excuse me, in the depths of the pandemic was remarkable.

We extended our refinancing success in the third quarter when we completed $125 million refinancing of 3 buildings in New Jersey that serve as the U.S. headquarters for Sanofi. The existing debt on this property was maturing in 4 months, and we were able to secure a new 5-year financing fixed by a swap at an interest rate of 3.26%, which is 190 basis points lower than the debt it replaced. Combined, the lower effective interest rates on these 2 transactions supported a $1 million decrease in fourth quarter interest expense compared to the prior quarter and extended our weighted average debt maturity, which is currently at 4.8 years compared to 3.8 years at year-end of 2019.

Finally, in the fourth quarter, we successfully closed on our 7.375% Series C cumulative perpetual preferred stock offering. We raised over $88 million in gross proceeds through the offering including the proceeds from the over allotment option. The Series C shares priced at a lower effective dividend rate than our prior Series A offering. The net proceeds from the offering will help us capitalize on high-quality necessity-based acquisition opportunities we see in the marketplace as reflected in our forward acquisitions pipeline.

We're pleased with the overall position of the portfolio and believe that long duration leases and high-quality tenants will drive shareholder value and per share AFFO increases as we continue to grow the portfolio. We believe that AFIN remains a compelling investment opportunity with a valuation significantly below peers, while offering a portfolio that has a high concentration of actual or implied investment-grade tenants and a weighted average lease term of 8.8 years.

Before I turn it over to Katie, I'd like to address the 8-K we filed earlier this week. As you've seen, Katie will be stepping down as CFO of AFIN. Her resignation is not related to any disagreements or disputes with management of the company. I'd like to thank Katie for her hard work over the years and wish her well in her future endeavors.

We simultaneously announced the appointment of Jason Doyle as AFIN's new CFO, effective upon Katie's departure. Jason previously served as Chief Accounting Officer of Global Net Lease, a $4 billion publicly traded net lease REIT, an affiliate of AR Global. Jason's been with AR Global since 2018, and we're extremely excited to bring him on board as AFIN's new CFO. Our deep bench of premier talent at AR Global is a testament to this successful transition, and we're eager to have Jason join the AFIN team.

With that, I'll ask Katie to walk us through the financial results in more detail.

Thanks, Mike, and thank you for the kind words. For the year ended December 31, 2020, we reported total revenue of $305.2 million, a 1.8% increase compared to $299.7 million in the prior year. Fourth quarter revenue was $77.2 million, a 1.3% increase from $76.2 million in the fourth quarter 2019.

The company's 2020 GAAP net loss was $46.7 million versus a net loss of $3.1 million in 2019. And full year 2020 NOI was $252.9 million, a 2.4% increase over the $247 million we recorded for 2019.

Full year FFO was $97 million or $0.90 per share compared to $98.6 million or $0.93 per share in 2019. For the fourth quarter of 2020, our FFO attributable to common stockholders was $25.5 million or $0.23 per share. Full year AFFO was $98 million or $0.90 per share compared to $104.9 million or $0.99 per share in 2019. Fourth quarter AFFO was $26.1 million or $0.24 per share compared to fourth quarter 2019 AFFO of $25.2 million or $0.24 per share.

As always, a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release.

We ended the fourth quarter with net debt of $1.7 billion at a weighted average interest rate of 3.8%. The components of our net debt includes: $280.9 million drawn on our credit facility, $1.5 billion of outstanding mortgage debt and cash and cash equivalents of $102.9 million. Liquidity, which is measured as undrawn availability under our credit facility plus cash and cash equivalents, stood at $228.9 million on December 31, 2020.

The company's net debt to gross asset value or total assets plus accumulated depreciation and amortization was 40.2%, and the net debt to annualized adjusted EBITDA was 8.1x at December 31, 2020, compared to 39.2% and 7.7x, respectively, at the end of 2019.

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

Thanks, Katie. We had a very productive year in 2020, and we look forward to continuing to execute on our strategy in 2021 and beyond. We've delivered on the plans we laid out previously, such as growing our portfolio and increasing dividend coverage. And successfully navigated a challenging year. We continue to grow and optimize our intentionally constructed portfolio of single-tenant and multi-tenant assets focused on necessity retail properties. Our strong portfolio though includes quick service restaurants, many with drive-thru lanes that have been an increasingly important and COVID-friendly venue for food distribution, underscoring the durability of our necessity-based strategy.

We completed several significant refinancing transactions that derisked our balance sheet and meaningfully impacted our weighted average remaining debt term. The lower effective interest rate on these refinancings supported a $1 million decrease in fourth quarter interest expense compared to the prior quarter. Going forward, we'll continue to maintain our steady and deliberate approach to growing our portfolio through high-quality accretive acquisitions.

We'll seek to sustain high occupancy levels at our properties, execute long-term leases with predominantly investment-grade and implied investment-grade tenants and maintain our current embedded contractual rent growth. We continue to see attractive opportunities in both retail real estate and the capital and financing markets, and we'll actively pursue these types of accretive transactions in the near future when we identify them.

We're encouraged by the news of continued vaccine development and rollout, which will only benefit the performance of this portfolio as we all look forward to a return to normal. I sincerely hope we all have good news on this front by the next time we speak, but I'm confident that AFIN's portfolio will continue to perform well while the COVID crisis abates.

Operator, please open the line for questions.

(Operator Instructions) Our first question comes from Frank Lee with BMO.

Mike, you mentioned in your remarks the 2 new dedicated multi-tenant asset managers that will focus on driving leasing initiatives and key portfolio enhancements. Can you talk about some of the initiatives that are underway? And any changes on how you're going to approach leasing in order to help drive occupancy?

Yes. I think -- first of all, thanks for joining us today, Frank. Don and Stephanie come with years of experience in the industry, everything from lifestyle centers to power centers, et cetera. And most importantly is, they have direct relationships with the national retailers from their years in the industry. We will be able to -- we've always worked with them, and a great example of that is the new lease that we executed with DICK'S Sporting Good on their new concept. Stephanie was integral in bringing that deal to conclusion so quickly, getting them in place and open. And frankly, our experience has always been people like doing business with people that they know. And being able to be direct with the landlord, the owner, is important.

So we're not taking a slash-the-price approach by any means. We are certainly holding to market deals. But we're able to respond very quickly. We're able to provide what is required, both from the real estate and also from the legal perspective. And it's just a continuation of what was already in place, but obviously, I see great opportunity in the multi-tenant portfolio. And some of the results, even in just the fourth quarter, I think, are worth talking about again. Execution of the 4 new leases, that will generate $520,000 of annual rent. And I want to highlight the 6 new leases, the 215,000 square feet that are in the pipeline, they're executed letters of intent. So that's not early conversations or indications. That's -- we executed the letter of intent in the quarter. We're moving to lease, and that's a very, very high probability of completion. And represents about $1.6 million of annual rent.

You heard me talk in prior calls about the upside potential of the multi-tenant portfolio and why we think that power centers are certainly a part of our necessity retail focus. They're key to the communities where they're located. And adding $2.1 million roughly of annual rent, once these leases commence, is valuable, and will pay -- it will be an earnings driver.

So Don and Stephanie are welcome additions to the team. We're very excited about it, and I think this will be the first of many quarters where we have positive news to report.

Okay. I appreciate that color. And then my second question is on the acquisition side. How does the pipeline look beyond assets that you have under contract? And then how should we think about the acquisition mix this year? Any changes to sectors or industries that you'll be focused on versus recent quarters?

Thank you, again, Frank. First of all, I think the sectors that we've been focusing for the last couple of years have really proven to be valuable. As we prepared for today's call, it was very exciting to see that even through 2020 with the devastating impact of the pandemic. Our financial results are pretty much back to where they were pre-COVID, which is tremendous. Now it's very valuable.

So we've intentionally built this portfolio. Again, I really like the necessity retail focus. We wanted to be resistant to changes in the economy, which are always something that have to be considered. We really focused on credit of the tenants as well as their -- what their businesses were. We focused on retailers with omnichannel presence that did a great job in e-commerce and also in their brick-and-mortar retail locations, and that has continued to pay off. We've all seen the benefit of the drive-thru aspect.

And I would like to just point out, again, I'm very proud of the team and how we handled this White Oak situation. It's probably a name many of you are familiar with, because they're spread throughout the net lease REIT sector. We identified very early on that they were having problems. I don't know -- I don't care to go into details of what those problems were or why, but leave it to say that we had concerns, they presented us an option where they actually expected us to invest more money in them. And to me, we always have to be very prudent and cautious. We don't want to put good money after -- into problems. So took a much different approach, and we took a very aggressive approach and I think that comes down to being an active asset manager.

The platform, AR Global, we have a terrific in-house counsel. And we were able to not only recover past-due rent that White Oak owed us, we didn't give them more money as they went to all of their landlords and asked for. And we took back control of the properties, and they're already re-leased to a great operator, primarily, 18 of the 19 went to Imperial. And again, I just think the value of such -- even with 920 properties, we have to know them all. And we do. And again, our single-tenant team is very strong. Our multi-tenant team, equally as strong. Our relationships with the tenants, very valuable. And I think it's got us in a great place at the end of the year and something that I look forward to for years to come.

(Operator Instructions) Our next question comes from Bryan Maher with B. Riley Securities.

Following on that line of questioning a little bit, but kind of drilling down on the segments a little bit more, is there anything that you're seeing out there relative to what you're used to, let's say, QSRs dialysis, key stores, that you're kind of skewing towards in your acquisitions for 2021?

I think that you'll see that we continue -- QSRs are continuing to be very valuable assets in the portfolio. As you've come to know, we have kind of an early position with the dialysis operators again, because of the necessity nature of the real estate. We continue to see great opportunities in the, as I've come to call it, DIY, the do-it-yourself car repair, the advanced autos, the O'Reilly's, et cetera.

These continue to be the types of businesses that even through COVID. And I do want to make a point that I do finally feel that we do -- we are at that light at the end of the tunnel kind of moment with COVID. And I don't mean that it's going to be gone tomorrow, but the vaccine announcements continue to be very, very positive. Many of the economists that I follow are talking about a V-plus-6 type of scenario, meaning 6 months after the rollout of the vaccines. And I really think of that as kind of December, January time frame. So I'm thinking midyear 2021, which is not that far away, we may still wear masks, and we still may be cautious with some of the activities that we do, but as far as getting back to what feels like more normal routine, I think that's in the not too far out future. I think you're going to continue to see the home repair centers doing well.

So I would say that we will continue in the direction that we've gone from 2019 and 2020. We will -- we're always looking at new opportunities. We're always working very hard with some of the legacy developers that we work with to see what direction they're going in. And then, of course, there are some great names out there, but we're going to continue to avoid them. One that's in the news constantly is a company like Chick-fil-A, right, we all love -- I shouldn't say we all, but many of us love their food, but the prices that they're trading just aren't logical to me. I don't see them having long-term benefit to our portfolio and our shareholders. So we'll continue to have that disciplined view, and we'll continue to find opportunities like we've had in the past couple of years.

Great. And then with what we've seen with more of an adoption of e-banking over COVID, do you have any updated thoughts on your Truist branches? Do you look to get rid of more? Do you think you sit tight on those? Can you give us an update on that?

Yes. We haven't made any announcements regarding changes to the Truist portfolio. As we've talked in prior quarters, I think we have it at a very appropriate level. They're about 6% on straight-line rent. They're an investment-grade credit. The stores continue to be open and operating. And as we sit today, we're very comfortable with the remaining lease term on this portfolio. So it's something, Bryan, that we'll continue to evaluate.

I think it's always great when your NOI consists of 6% of an investment-grade tenant that continues to operate. And these branches do have drive-thrus. They're extremely well-located in the kind of mid-Atlantic and southern markets. So plenty of opportunity there. And it is certainly an asset that if we chose to, I believe we could take to market. But as I said, having trimmed it all the way down to 6% from where it was, I think right now, it's just a great tenant to have in the portfolio, and we're very happy.

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

Great. Well, thank you, operator. Thank you, everyone, for joining us today. Katie and I are very pleased with the results for 2020. The company has done a very active and valuable job in protecting the portfolio and the NOI, and we're looking forward to a very successful 2021. It will be without Katie's leadership, and I just want to take a minute again and thank her for all that she's done. And we're very excited to have Jason Doyle as part of the team going forward. And any questions on that, we're happy to discuss. So please stay safe. We look forward to talking to you with our first -- end of first quarter results. And again, thanks for joining us today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.