Arcturus Therapeutics Holdings Inc.
Q3 2012 Earnings Call Transcript

Published: 30 Oct 2012

[Operator:]

Good morning on behalf of American Realty Capital Trust and its senior management I would like to welcome you to the company’s Third Quarter 2012 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions). I would now like to turn the conference over to William Kahane, Chief Executive Officer of American Realty Capital Trust. Mr. Kahane, please go ahead.

[William Kahane:]

Thank you operator. Welcome everyone and thank you for participating in American Realty Capital Trust’s third quarter 2012 earnings call. I am pleased to be joined today by Nick Schorsch, your Chairman and Brian Jones, our Chief Financial Officer. Before we begin two reminders. First, during this call, we will make certain comments that would be considered to be forward-looking statements under federal securities law. The company’s actual future results may differ significantly from the numbers discussed in any such forward-looking statements. Second, with regard to the pending merge with Realty Income, we stand by our prior public statements as contained in an earlier press release and 8-K filing. Our agenda for the call is as follows. I will briefly touch on several highlights from Q3 including stock price performance, real estate portfolio and pricing. Then, Brian Jones will review ARCTs third quarter operating results including an overview of recent events. Nick will add a few comments on the merger and then we will open up the call to questions related to our third quarter activity. ARCT outperformed the market and its peer group in Q3 2012. Following strong performance in the first half of the year, ARCT had another impress quarter. We posted solid financial results and outperformed the broader equities market and the majority of our triple net peers. ARCT returned over 9% for the third quarter on a total return basis out performing both the S&P 500 and the Russell 2000 by 300 and 400 basis points respectively. Additionally, ARCT outperformed the MSCI REIT index by over 900 basis points and a portfolio of its triple net peers by 374 basis points on a total return basis. Moreover, since ARCT listed its chairs on the NASDAQ in March 2012, through the end of the third quarter, it has returned almost 16% outperforming S&P 500, the Russell 2000, the MSCI REIT index and the portfolio of its triple net peers. ARCT’s property portfolio remains stable. As of September 30, 2012, the company owned 507 free standing single tenant net lease properties totaling 15.8 million rentable square feet located in 43 states plus Puerto Rico. This compares to 405 properties totaling 13.2 million square feet a year ago. ARCT’s portfolio is comprised of 63 corporate tenants operating in 20 distinct industries. The weighted average remaining primary lease term of the portfolio is 12.7 years with negligible lease expirations in the next five years. 74% of our annualized rental income is derived from tenants with investment grade ratings from a major credit rating agency. The company’s goal has always been to maintain a high level of investment grade tenancy while growing tenant diversity. Today, approximately 90% of the company’s tenants are rated by a major national credit rating agency. In Q3, we purchased over $30 million in new acquisitions at an average capitalization rate of 8.38% bringing the total portfolio tenant base to 63 high quality primarily in investment grade tenants. During the nine months ended September 30, 2012 ARCT acquired 10 family dollar retail properties, seven will Ruby Tuesday restaurants, four Bojangles' quick service restaurants, three tractor supply retail properties, one advanced auto parts retail property and expansion spaces to a previously acquired FedEx distribution facility and a Lockheed Martin facility, all 100% occupied for a total purchase price of $43.2 at an average capitalization rate of 8.43%. Gross leasable area for these buildings totaled approximately 240,000 square feet. Cash rents on the 368 Q3 same store properties increased 0.9% to $31.5 million. The company, since its inception has had no lease turnover, no dark stores or lease renegotiations. ARCT’s real estate portfolio continues to perform according to our acquisition underwriting and operating budgets and provides sufficient lease revenue to support our annualized dividend. In fact, our earnings growth prompted ARCT’s board of directors to vote an increase in its dividend by over 2% from $0.70 to $0.715 annualized and pay monthly. Brian will now present our financial results for the quarter. Brian?

[Brian Jones:]

Thank you Bill and good morning everyone. I am happy to report that third quarter 2012 results are in line with our budgets and guidance. I will comment briefly on our financial statements and describe our financial results for the quarter. Starting with the income statement. Total revenue increased 27% in the third quarter 2012 over the same quarter in 2011 to 46.1 million from 36.2 million. The increase reflects over $328 million of new acquisitions over the past 12 months. Net operating income for the third quarter was 43.3 million compared to 34.7 million for 2011. Operating expenses for the quarter totaled 32 million excluding listing and merger expenses. Depreciation and amortization expense was 26.3 million of that, an increase of 6.5 million over the comparative quarterly period. Listing and merger related cost totaled 68 million including accrual of 63.2 million of incentive listing fee and 4.9 million of cost related to the pending merger with realty income. As we have reported since our inception, the former sponsor earned compensation in connection with our listing equaled to 15% of shareholder returns through the listing in excess of return of shareholder capital plus a 6% annual of non-compounded return. The incentive listing fee of 63.2 million was paid on October 12, and we accrued a 100% of the incentive listing fee expense in the third quarter. General and administrative expenses for the quarter were 1.6 million in line with our annualized budget. Non-cash equity based compensation expense was 800,000. As we reported on last quarter’s call, we secured a $235 million permanent term loan led by Wells Fargo Securities on July 2nd, 2012 which replaced the $200 million interim term loan. Interest expense for the quarter was 10.5 million up 345,000 over 2011. On a related note, our coverage ratios remained strong with interest coverage at 3.9 times and fixed charge coverage at 3.5 times. Net debt to total market cap is approximately 33.5% and net to annualized EBITDA is approximately 5.8 times. For the quarter, net loss to common shareholders was 64.5 million or $0.41 per share. Excluding listing and merger costs, we had net income of 3.6 million or $0.02 a share. This compares to a net loss in 2011 of 5.7 million or $0.03 a share. Funds from operations or FFO for the third quarter was 29.5 million or $0.19 per share compared to 17 million or $0.10 per share in 2011. Adjusted funds from operations or AFFO for the third quarter was 30.1 million or $0.19 a share compared to 22.7 million or $0.13 a share in 2011. Significant adjustments from FFO to AFFO continue to include elimination effects of the listing internalization and merger related costs, depreciation, straight line rents, amortization of deferred financing costs and equity based compensation. Briefly turning to the balance sheet. At quarter end, we had 511 million of mortgage debt, 235 million of permanent term loan and 202 million of revolving credit line outstanding. At quarter end, the effective annualized rate on a revolver was 2.47% and the effective annualized rate on the term loan was 2.61%. One area where we have been particularly active recently is in the repurchase of joint venture non-controlling interest. As of September 30th, we had purchased 11.5 million of those interest and to date; we have repurchased a total of 22.1 million. We have an agreement from 100% of our joint venture investors for us to repurchase the remaining non-controlling interest which should be completed shortly. With that I'll turn the call over to Nick for comments on the merger. Nick?

[Nick Schorsch:]

Thank you Brian and good morning everyone. The purpose of today’s call is discuss ARCT’s third quarter financial results. But I would like to spend a few minutes and discuss the proposed acquisition and merger of ARCT by Realty Income. On September 6, just to remind everybody. ARCT and Realty Income signed a definitive agreement under which Realty Income will acquire all the outstanding shares of ARCT in a transaction valued at approximately $3 billion. Both company sports have unanimously approved the agreement following a shareholder vote by both companies, the transaction is expected to close during the fourth quarter of 2012 and early in the first quarter of 2013. Under the terms of the agreement, ARCT shareholders will receive a fixed exchange ratio of 0.2874 of Realty Income shares for each share of ARCT common that they own. Upon closing of the transaction, ARCT shareholders are expected to own approximately 25.6% of Realty Income shares. This creates size and scale, the combined company is expected to have strategic advantage over its competitors given its greater size and significantly lower cost of capital. Improved liquidity, by creating this and this larger entity, we improve liquidity as a result of equity market capitalization and increased stockholder base of the combined company. We have much better access to capital as ARCT is a newer company that combines entity, has access to multiple forms of capital given its investment grade balance sheet, the combined company will have a lower cost of debt capital than any of its competitors to fund external growth and at a lower cost. The diversification of the combined company because of the greater size of the portfolio, the diversification by asset class, industry tenant/operator whatever you want to look, however you want to look at it, more than any of the comparable companies in the net lease sector. This is an enormous company and well diversified. The investment grade rating of the company. This company has a split rating of BBB plus and the potential for inclusion, in major industries such as the S&P down the road are a significant possibility. Both FFO and AFFO are accretive on the merger. The merger is expected to immediately add accretion to Realty Income’s FFO and AFFO which will result in a $0.13 announced dividend type merger. In addition, the G&A savings, the combination of the two companies create a significant savings of annual G&A costs of approximately $4 million on an immediate basis. To summarize, the benefits of the combination have been described by both companies and include creating the best publicly trade net lease REIT which would make Realty Income the 18th largest REIT and this would also be the largest REIT by a factor of two in an industry where scale and size and cost of funds matter. Realty income will be financial stronger than any of its competitors and position to grow, earnings increased dividend and generate strong risk adjusted total returns for the shareholders. Realty income also has an extraordinary track record of 18 years of continuous monthly dividend and quarterly dividend growth together with very strong overall share price performance. ARCT’s shareholders following the merger will own a portfolio of increased size and diversity and with access to multiple forms of capital and an investment grade balance sheet. This is a significant improvement or the capability of our assets to generate growth by merging with realty incomes balance sheet. Our focus has always been on value creation. ARCT is committed to our shareholders; we remain focused on operating and maintaining the ARCT portfolio to the highest standards as we approach the confirmation of this merger. Our long term goal has always been to provide our stakeholders with the premier net leased portfolio, diversified by tenant, industry and geography producing defensive and durable dividends, utilizing a low cost of capital and generating continuing and continued earnings growth. The transaction will redefine the notion of durable defensible dividends for our shareholders by allowing them to become owners on a very favorable basis of the largest and I believe now the best, public traded net lease REIT in the real estate industry. American Realty Capital Trust is committed to its shareholders and we will remain focused on operating this company and its real estate portfolio as we approach the completion of this merger. Before we open it up to questions I’m going to turn the call back to Brian to provide a quick update on legal proceedings pertaining to the announced merger. Brian?

[Brian Jones:]

Thanks Nick. After the announcement of the merger on September 6, 2012 we had eight different shareholder transactions and/or shareholder derivatives to complaint filed two in New York and six in Maryland. The places involve complex issues of law and fact and have not yet progressed to a point where we can reasonably predict their outcomes. Estimate damages that might results on the cases or predict to the effects, the final resolutions it could have on our business, financial condition or results of operations. We continue to strongly believe these allegations are without merit and intend to seek dismissal of the law suits for failure to state a valid legal claim. If the cases are not dismissed on motion, we will vigorously defend ourselves against these allegations. We will now open it up to questions pertaining to third quarter financial results. On the advice of our legal counsel questions pertaining to the merger will be addressed once the final proxy has been published. Operator?

[Operator:]

(Operator Instructions). Our first question comes from Thomas Mitchell of Miller Taba. Please go ahead.

[Thomas Mitchell:]

I have a couple of questions, I mean the first, I think that the first is begins with a comment to be followed by a question. I think you should realize that everybody who was not an individual holder in ARCT before always was able to buy all the realty income stock they wanted to buy at any time without having the advantage of ARCT and selling for stock rather than free cash. So for those holders it doesn’t necessarily represent a big advantage to suddenly be told that they are going to get the equivalent of a $0.56 dividend and at the same time that they are going to own a stock that trades significantly or expected to be significantly higher price to fund some operations ratios and what they bought in the first place. When we look at that and think of that, my biggest question here is what is the driving factor in doing a stock for stock deal instead of a deal for cash?

[Nick Schorsch:]

Let’s just talk about that. If we had a transaction that was a straight cash transaction, the value created for example realty income most recently announced a very, very cost efficient piece of five year paper. They announced about 2% cost of 350 million worth of debt that was issued post-merger. When you look at that transaction that’s highly accretive to our investors, if it was done on a cash basis our investors would not get the benefit as the companies are combined. So when you look at the benefit to our investors because there is no cap, and no collar this allows our stock to move upward with their stock otherwise it strictly becomes almost an our play where the upside is capped at the stock price and we didn’t feel after extensive negotiations with reality income that that advantage should be given to realty income not our shareholders because as you probably realize a cash transaction is less expensive for realty income because they can borrow the money at 2% or at 2.5% or 3% then it is if they were to do a stock transaction because the stock has obviously a higher cost on a balance sheet basis that it does, than cash does for them. So I think when you look at it overall we want to see and as our investors will own 25.6% of the new entity they obviously also have the ability to sell it. Those investors have the ability to sell the stock at a price and there have been as you probably know there has been over a 100 million shares trade since the merger was announced and the average trading price was at or above that $12.21 strike that value would have been eradicated for those shareholders. So it's a very important aspect to allow our shareholders to have a choice and also to have the benefit of the bargain which is that they do have the choice of keeping the stock not taking paying taxes because many of them have a lower basis than $12 and they have a tax free conversion in staying in the realty income but this gives the investor the choice not realty income or our board, it gives the investor the choice.

[Thomas Mitchell:]

OK, there is a rationale there that makes good sense now, my other questions is one that you may or may not want to answer, but in theory you really starting not that long ago but say five years ago just to throw it out, you put together what seems to be a much better looking portfolio than the average net lease REITs portfolio. Obviously it's a symbol that was care and we’re able to realize for certainly your initial investors and for many other investors including investors on the IPO and afterwards a very reasonable gain, is this something that the American Realty Capital family of companies would in theory go back in and try to do again after this deal is done.

[Nick Schorsch:]

Well I think that circumstances. Everybody tries to recreate every great home run in baseball and everybody wants to replicate the perfect play and the perfect feel. The fact is that we build these portfolio. This portfolio is specifically underbuilds leadership was stewarded from creation, we acquired all these assets. We then managed the portfolio to create real value by diversifying in industries and tenants that were durable we had eight upgrades in the underlying assets. We bought in a time when most people were afraid to buy and we were buying in LA ’09 and ’10 and if you look at the portfolio makeup over the years we were buying consistently and repeatedly and the objective was to maximize value but part of this solution to the maximizing value was creating an aggregated portfolio of diversified investments that could sustain and build dividends over the long haul. The second aspect of it because it became attractive to a potential suitor was not necessarily the intended outcome but it clearly was the outcome and when realty income became such suitor we as the management team in the board had to look seriously at that and the proxy spells this out pretty clearly, the process took a long time and the fact that we went public and created value again and if you look at the return since the public listing on March 1, they were pretty specular as Bill mentioned we have had over 20% growth in the underlying stock price since we came in public and so the fact is that we had two good transactions one being building a great company, two becoming a public company and trading well in the eyes of the investor which is our goal but ultimately whether we can or would do it again is a whole another discussion because I think our realty is right now, we are focused on this transaction, executing it precisely and efficiently and making sure that we create the maximum value for our investors here and now.

[Operator:]

(Operator Instructions). There are no further questions at this time. So I would like to turn the conference back over to Mr. Kahane for any closing remarks.

[William Kahane:]

Thank you operator. First and foremost let me thank those if you who are able to join the call this morning, we appreciate that of course and we on behalf of our management team are very much looking forward to the continuing performance of American Realty Capital Trust. You can be certain that we will steward these assets carefully and professionally on behalf of our shareholders and that our primary objective always remains to create value for our shareholder base. Ladies and gentlemen thanks so much for your attention.

[Operator:]

This concludes our conference. Thank you for attending today’s presentation. You may now disconnect.