American Finance Trust, Inc.
Q3 2018 Earnings Call Transcript

Published: 11 Nov 2018

[Operator:]

Good morning and welcome to the American Finance Trust Third Quarter 2018 Earnings Call Conference Call and Webcast. [Operator Instructions]. I would now like to turn the conference over to Louisa Quarto, Executive Vice President. Please go ahead.

[Louisa Quarto:]

Thank you, Operator. Good morning everyone and thank you for joining us for AFIN's third quarter 2018 earnings call. 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 quarter's results are Michael Weil, Chief Executive Officer, Katie Kurtz, Chief Financial Officer and Zachary Pomerantz, Senior Vice President, Asset Management The discussion today will include certain statements and assumptions which are not historical facts. They are forward looking in nature and are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward looking statements are subject to certain assumptions and numerous risk factors that could cause AFIN's actual results to differ materially from these forward looking statements. We refer all of you to our SEC filings for a more detailed discussion of the risk factors that could cause these differences. Also during the call we will use the term investment grade rating which includes both actual investment grade ratings of the tenant or implied investment grade rating. Implied investment grade ratings include ratings of the lease guarantor or the tenant parent regardless of whether or not the parent has guarantee of the tenants obligation under the lease. Implied investment grade ratings are determined using Moody's proprietary analytical tool which compares the risk metrics of the non-rated company to those of a company with an actual rating. The ratings information is as of September 30, 2018. We also use the terms service retail, traditional retail and anchor tenant in today's presentation. We define service retail as single tenant retail properties leased to tenants in the retail banking, restaurant, grocery, pharmacy, gas and convenience fitness and auto services sectors. Traditional retail include single tenant retail properties leased to tenants in the discount retail, home improvement, furniture specialty retail, auto retail and sporting goods sectors. We define anchor tenant as a tenant occupying 10,000 or more square feet in a multi-tenant property. Occupancy represents the percentage of square footage of which the tenant has taken possession divided by the respective total rentable square feet as of the date indicated. Executed occupancy includes occupancy as of September 30, 2018 as previously defined. As well as all leases executed by both parties as of September 30, 2018 where the tenant has yet to take possession of the space as of such date. Any forward looking statements provided during this conference call are made only as of the date of this call. As stated in our SEC AFIN disclaims any intent or obligation to update or revise these forward looking statements except as expressively required by law. Also during today's call we will discuss non-GAAP financial measures which we believe can be useful in evaluating the company's financial performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most recent directly comparable GAAP measure is available in our earnings release and Form 10-Q. I'll now turn the call over to Mike Weil, our CEO.

[Michael Weil:]

Thank you, Louisa. We appreciate everyone joining us for today's earnings call. I'm going to start with some high level comments about the quarter and then I'll turn it over to Katie and Zach to provide additional financial and real estate details. I'm happy to report on a strong quarter for American Finance Trust. We listed our stock on the Nasdaq, steadily executed on our acquisition strategy, opportunistically sold assets and continued to lease up space in our multi-tenant portfolio. AFIN has a well-diversified portfolio made up of single tenant and multi-tenant primarily service retail properties located across the U.S. At the end of the quarter we own 616 properties of portfolio occupancy of 94.2% and average contractual rent growth of 1.4% per year driven by the 80.1% of our leases that include rent escalators. The weighted average remaining lease term for the portfolio is 8.6 years up from 8.3 years last quarter. Our focus remains on service retail which means properties you likely visit personally at least once or twice a week such as restaurants pharmacies, gas and convenience stores and retail bank branches. Our 582 property single tenant portfolio includes all of these types of assets as well as more traditional retail locations such as discount retail, home improvement and auto retail stores. Retail makes up 57% of our $11.8 million square foot single tenant portfolio while 22% of the portfolio consists of industrial and distribution facilities. Occupancy across the single tenant portfolio is almost 99% with a weighted average remaining lease term of 10.7 years and 1.2% average annual rent escalators, 78.9% of the strength straight line rent is derived from investment grade or implied investment grade tenants. We believe the single tenant portfolio provides a solid foundation for AFIN to continue to grow in the future. Our multi-tenant portfolio builds upon and nicely compliments the single tenant net lease portfolio. The balance of store concepts in our multi-tenant portfolio is designed to drive shoppers to the centers. The 49% of rent coming from experiential and e-commerce defensive [ph] properties. Our 34 property 7.4 million square foot multi-tenant portfolio has an executed occupancy of 87.5% with a weighted average remaining lease term of 5.1 years and 1.6% average annual rent escalators. Although we faced a few recent bankruptcies we're excited about the upcoming tenant additions to the multi-tenant portfolio that Zach will discuss. We're pleased with the portfolio and believe AFIN's long duration leases and high credit quality tenants will continue to drive shareholder value as we continue growing the portfolio. I'll turn it over to Zach for a quick overview of third quarter real estate acquisition, disposition and leasing activity.

[Zachary Pomerantz:]

Thanks, Mike. We closed on $119 million of service retail, education and medical office properties during the quarter, these 62 properties have a weighted average remaining lease term of 16.2 years and fits [ph] perfectly into our single tenant net lease model. These acquisitions further enhance our geographic credit and property tech diversity. During the quarter seven new leases commence representing almost 95,000 square feet and 19 leases were renewed our amended for a total of almost 154,000 square feet. Our multi-tenant executed occupancy stands at 87.5% at the end of the quarter. During the quarter we sold one of our fully stabilized centers and Elder-Beerman and Toys“R”Us two anchor tenants each vacated their spaces. We have a forward multi-tenant pipeline a 15 new leases and renewals for 183,000 square feet including a new lease for the former Elder-Beerman location. We are very excited to have been able to find a great replacement tenant and at home a retail chain specializing in home decor products. While monitoring the health of Elder-Beerman we determined that there was a high probability of getting the space back and proactively look for a replacement tenants. Due to the strength of the location in Ohio we were able to negotiate attractively lease terms at home on a timely basis while keeping our capital commitment low. On the disposition side in September we closed on a sale of Westlake crossing in Humble, Texas. This is a center where we had increased NOI by 18% as owner and lease up the property to 100%. As a fully stabilized asset we felt we had maximized value and it was an opportune time to sell the property and invest those proceeds in service oriented single tenant retail. Similarly from the single tenant portfolio we sold four vacant SunTrust properties in the quarter. There are 21 of these properties remaining representing 0.5% of AFIN's portfolio as of the end of the third quarter. Mike I'll turn it back to you.

[Michael Weil:]

Thanks, Zach. We were very active in the third quarter on the acquisitions front while maintaining a pipeline of over $100 million of single tenant assets. We continue to improve AFIN's portfolio by acquiring service oriented retail properties with long term leases. We have described AFIN as an opportunistic seller of real estate and the work we're doing with our SunTrust properties is a great example. We're currently under contract to sell eight occupied SunTrust at a 5.4% cash cap rate. These properties have a remaining lease term of nine years. We can redeploy the proceeds from these sales into our current acquisition pipeline where we're buying at a weighted average GAAP cap rate of 7.8% with over 16 years of average lease duration. By executing on these transactions we're not only capturing the difference in cap rates which flow straight to the bottom line but simultaneously reducing our exposure to SunTrust and extending our average lease term. Finally in October we announced a $125 million increase to the commitments under our credit facility to $540 million which had $98 million available for acquisitions and other corporate uses as of September 30, 2018. And the expansion of the lending group to add Compass Bank and Synovus Bank. The expansion of this facility is further evidence of the confidence the banking community has in AFIN and affords AFIN flexibility for future acquisitions. With that I'll turn the call over to Katie to walk us through operating results in more detail and then I'll follow up with some closing remarks.

[Katie Kurtz:]

Thanks, Mike. We ended the third quarter with net debt which is total debt less cash and cash equivalents of $1.4 billion at a weighted average interest rate of 4.5%. The components of our net debt include $260.7 million drawn on the corporate credit facility, $1.2 billion of outstanding mortgage debt and cash and cash equivalents of $60.3 million. At quarter's end interest rate on our mortgage debt were all fixed leaving only amounts drawn on our credit facility as floating. Liquidity which we measure as undrawn availability under our credit facility plus cash and cash equivalents so that $158.4 million at September 30, 2018. The company's net debt to gross asset value or total assets plus accumulated depreciation and amortization was 38% and net debt to annualized adjusted EBITDA was 7.2 times at September 30. We reported third quarter revenue of $74.9 million as compared to $71.1 million for the second quarter 2018. Our FFO attributable to stockholders was $7.9 million and our AFFO was $24.6 million for the third quarter 2018. The decrease in FFO attributable to shareholders in the third quarter was mainly due to onetime charges associated with the listing of the company on the Nasdaq in July. As always a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release supplement and Form 10-Q. I'll turn the call back to Mike for some closing remarks.

[Michael Weil:]

Thanks, Katie. After the October 10th conversion of the Class B1 shares to Class A shares over 75% of our shares are now trading and by the time we speak again 100% of AFIN shares will have become tradeable after the Class B2 shares automatically convert to CLASS A shares no later than January 15, 2019. We picked up our first analyst coverage at BMO [ph] and will remain active in the real estate community including leaving after this call to head out to [indiscernible] to meet with institutional investors and analysts. We continue to operate with a conservative balance sheet and we own 616 properties across the United States. We have a portfolio that is highly diversified by tenant, geography and asset type, a strong credit worthy tenant base and experienced management team. We are well-positioned to identify, assess and capitalize on opportunities across a wide set of markets in order to continue to grow the company. We will remain proactive and disciplined in our acquisition strategy to identify compelling opportunities to acquire assets that fit within our investment model. We will maintain a near term focus on service retail and other properties defensively positioned against competition from e-commerce relative to traditional retail in order to continue to drive shareholder value. Our team looks forward to continuing to lead the AFIN effort to enhance long term value for our stockholders. Operator, please open up the line for questions.

[Operator:]

[Operator Instructions]. Our first question will come from Jeremy Metz from BMO Capital Markets. Please go ahead.

[Alex Nelson:]

This is Alex Nelson on for Jeremy. In terms of the acquisition pipeline beyond the $104 million under contract can you talk about what the shadow pipeline looks like beyond that? Should we expect a similar level of activity and I guess again from a pricing perspective how competitive is it out there today?

[Michael Weil:]

So we don't publish the pipeline before it's at a stage of signed LOI but I can tell you without hesitation that we continue to see these same types of opportunities in the further out pipeline continuing to focus on primarily single tenant service retail at these types of cap rates that you've come to see from us on a regular basis. The market remains for a buyer very opportunistic. So we're confident that we can continue to provide acquisitions in-line with what we have published so far.

[Alex Nelson:]

On the multi-tenant portfolio on the occupancy side it looks with some of the what is it 183,000 square feet that your negotiations for now that will bring you up to about 90% occupied. Do you still expect to get to the 93% leased range by the end of the year? Can you talk about the breakdown between where box and anchor occupancy is today versus where small shop occupancy is and how much of the occupancy uplift is on the anchor side?

[Michael Weil:]

Yes, I'm going to break your question into two as you asked it and I'll ask Zach to answer the second half of it. I just want to clarify as we have talked about pro-forma occupancy of the multi-tenant we still are confident that we will be in the low to mid-90% I think 93% is a fair target but I don't believe that we said it would be by year-end 2018 but that it would be in 2019 when that would occur. I'm really pleased with the response that Zach has had as we brought opportunities to the market from a backfill standpoint and we're very excited for these new tenants to come in. They have been a number of well we've been anchored tenants as well as in-line tenants but obviously we get the greatest pickup from the anchor tenant. So Zach would you like to provide Alex some details?

[Zachary Pomerantz:]

Well yes I mean we've had a lot of [indiscernible] from the anchor side and we mentioned obviously earlier in the call about the at-home lease that were excited to be signed in short periods of time. As far as big box versus in-line occupancy we don't disclose the breakout of those two and it's something that we're discussing internally but it's not something we have put out to-date but we do continue to see interest on both sides of the big box and inline tenants spaces that we're in the market leasing.

[Alex Nelson:]

I guess just one more for me. On the delta between the dispositions and acquisitions, with the 5.4% cap rate on the SunTrust assets, with the remaining portfolio of the 130 SunTrust properties remaining how much more that you guys look into prune down when you look at the pipeline that you have and how accretively the transactions are?

[Michael Weil:]

So Alex we're really excited about the opportunity here with dispositions around the occupied SunTrust portfolio. As you recall SunTrust is currently our largest tenant at 9% we haven't identified publicly how much of that we are selling but we are looking at it very strategically and we think that there's a continued opportunity to dispose of these assets. Over a longer period of time I'd be very comfortable with SunTrust in the 5% range that could be 6% it could be 4%, I think SunTrust is a great tenant, they're very solid bank, their performance has been right in-line with expectations. So I don't feel urgency to do it but what I do see is a great additional potential capital source for the company and I do want to point out as you're probably familiar our SunTrust leases we signed a 10 year, 12 year and 15 year leases when we renewed the portfolio so what we've sold in the third quarter are from the shortest pool of assets. So I just want to communicate that I think there's potentially equal or more value to other assets in the portfolio that we haven't set out to sell the longest term or maybe the best assets. So I think it's a great opportunity for AFIN, again to look at strategic dispositions and redeployment into higher yielding , very good service retail assets.

[Operator:]

[Operator Instructions].

[Michael Weil:]

Alison, while we are waiting to see if there are any other questions I did receive a couple of questions one in particular regarding share buyback, an update that was requested and I'm going to rely on what was published in our third quarter 10Q. We reported in the 10Q that we did not buy back shares in the third quarter and we feel very strongly that we have greater long term opportunities in deploying our capital into the type of real estate that's shown in the acquisitions that were closed in the third quarter as well as in the pipeline. And then as far as into the future we won't be making comments other than to just tell you that we do have a board approved share buyback program and we will continue to evaluate all of the company's options throughout this quarter and future quarters.

[Operator:]

Ladies and gentlemen this will conclude our question and answer session. At this time I'd like to turn back to Ms. Louisa Quarto.

[Louisa Quarto:]

Thanks, Alison. Before I turn it back to Mike for his closing remarks we've been asked whether a replay of the call will be available and it will one hour after the end of the call through February 6 of next year. Please dial 877-344-7529 and reference conference number 101-25488, a replay of the webcast will also be available on our website. We filed an investor presentation, a copy of which is available in the Investor Relations section of our website at www.americanfinancetrust.com. As always we encourage shareholders and financial advisors who have account specific or general questions about the company to call our Investor Relations Group at 866-902-0063, for assistance. Mike I'll turn the call back over to you for your closing remarks.

[Michael Weil:]

Great. Thanks, Louisa. I'd like to thank everyone for joining us today. I hope that our stockholders share in our view of the strength of the company and the potential for growth that we see in the future. We look forward to the potential inclusion in the RMZ Index later this month and the increased institutional ownership that inclusions will bring. Well day to day changes in stock price will occur our focus will remain where it should be. On the operations of the company and the execution of our strategy. We look forward to continuing to tell the AFIN story to a growing audience. Thank you Alison.

[Operator:]

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