American Finance Trust, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Feb 2021

[Operator:]

Good day and welcome to American Finance Trust Fourth Quarter and Year-end 2020 Earnings Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would like now to turn the conference over to Louisa Quarto. Please go ahead.

[Louisa Quarto:]

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.

[Michael Weil:]

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.

[Katie Kurtz:]

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 8.1 times at December 31, 2020, compared to 39.2% and 7.7 times respectively at the end of 2019. With that, I'll turn the call back to Mike for some closing remarks.

[Michael Weil:]

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:]

Our first question comes from Frank Lee with BMO. Please go ahead.

[Frank Lee:]

Hi, good morning everyone. Mike you mentioned in your remarks the two 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?

[Michael Weil:]

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 etcetera. 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 four new leases that will generate $520000 of annual rent and I want to highlight the six new leases the 215000 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.

[Frank Lee:]

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? Thanks.

[Michael Wei:]

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 omni-channel 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.

[Frank Lee:]

Okay. Thanks Mike. That’s all have. Thank you.

[Michael Wei:]

Yeah. Thank you, Frank.

[Operator:]

Our next question comes from Bryan Maher with B. Riley Securities. Please go ahead.

[Bryan Maher:]

Hi, Michael and Katie. Good morning.

[Michael Wei:]

Hi Bryan.

[Bryan Maher:]

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?

[Bryan Maher:]

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 six 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.

[Bryan Maher:]

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?

[Michael Weil:]

Yeah. 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.

[Bryan Maher:]

Great. Thank you. That's all for me.

[Michael Weil:]

All right. Thanks, Bryan.

[Operator:]

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

[Michael Weil:]

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.

[Operator:]

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