VEREIT, Inc.
Q3 2018 Earnings Call Transcript

Published: 6 Nov 2018

[Operator:]

Good day and welcome to the VEREIT 2018 Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Bonni Rosen, Head of Investor Relations. Please go ahead.

[Bonni Rosen:]

Thank you for joining us today for the VEREIT 2018 third quarter earnings call. Joining me today are Glenn Rufrano, our Chief Executive Officer and Mike Bartolotta, our Chief Financial Officer. Today's call is being webcast on our website at vereit.com, in the Investor Relations section. There will be a replay of the call beginning at approximately 11

[Glenn Rufrano:]

Thanks Bonni and thanks for everybody joining us today. We are pleased with the results for the quarter. AFFO per diluted share was $0.18. Net debt to normalized EBITDA was 5.7 times down from 5.8 times last quarter. To-date, acquisitions totaled $346 million and we completed $440 million of dispositions. We’re narrowing our guidance, our AFFO guidance range from $0.70 to $0.72 to $0.71 to $0.72 and we’ve made progress on our civil litigation. Occupancy for the quarter increased to 99.1%. Same-store rent was up 0.3%. Excluding the effects of an early lease renewal same-store rents would have been 0.9%. During the quarter, we had 992,000 square feet of leasing activity of which 385,000 square feet were early renewals. Notable transactions included six casual dining properties, six bank branches, and expense in an expansion for an office property. Including all renewals, we recaptured approximately 96% of prior rents and for early renewals we recaptured a 102% of prior rents. In comparison to 2017 retail bankruptcies and store closings have been much lower. However, there have been a few that have occurred recently; one of the more notable was Sears, Kmart, of which we had no stores. There was also Brookstone National Stores and some negative news on David’s Bridal all of which we’ve no exposure. Mattress Firm announced in October and we do have 37 stores, representing 0.5% of income. We are in ongoing discussions with them at this time. We also had two major hurricanes this season. Fortunately there was no major damage that impacted our financials. Turning to transactions, third quarter acquisitions totaled 99 million and 67 million acquired subsequent to the quarter. These included retail properties in our merchandising categories such as home furnishings, convenience and fitness. For the year acquisitions totaled 346 million of which 80% were retail and 20% industrial. Third quarter dispositions totaled 191 million with 56 million subsequent to the quarter; dispositions for the year now total 440 million of which a majority were targeted to flat leases, Red Lobster and office. Red Lobster is now below 6%, and we sold 98 million to date at the lower end of our targeted range of 100 million to 150 million; we had an opportunistic sale of a $62 million industrial property at 5.1% cap rate, leased to a tenant with a riskier credit profile; we continue to be cautious on acquisitions with the uncertainty in the interest rate environment, as important we are focused on our debt balances; we now intend to keep acquisitions and dispositions approximately same for the year. In August we repaid 598 million of principal outstanding related to the 2018 convertible notes, that came due using our line of credit. Subsequent to the quarter we issued 550 million unsecured bond and paid down the revolver. We have no debt coming due in 2025 and this maturity fit nicely in our debt schedule at a seven year mark. With $900 million term loan available to us to pay off the $750 million coming due in February of next year we have no major maturities until the end of 2020. Before Mike reviews our financial results let me provide a brief update on litigation; tax depositions have been taken place since January and must be completed by the end of this year; the next Status Conference will be held with the court scheduled for November 29, 2018. As we’ve mentioned previously the judge has set a trial date of September 9, 2019 and we continue to have discussions with the SEC; the company has entered into a series of agreements, dated September 30th through October 26, 2018 to settle 12 of 13 pending opt-out actions; eight of the settled opt-out actions, representing approximately 11% of the common stock and swaps were settled for an aggregate payment of 85 million, and the remaining four settled opt-out actions, representing approximately 7% of the outstanding common stock and swaps were settled for an aggregate payment of 42.5 million; including the previously announced settlement with Vanguard the company is now settled claims brought by plaintiffs representing approximately 31% of VEREIT’s outstanding shares of common stock and swaps for a total of 217.5 million. The company retains the right to pursue any and all claims against the other defendants in the litigations and/or third parties, including claims for contribution for amounts paid in the settlements. Additional details regarding pending litigations can be found in our 10-Q filed today. Let me now turn over the call to Mike.

[Mike Bartolotta:]

Thanks, Glenn and thank you all for joining us today. We had a good quarter achieving $0.18 AFFO per diluted share and we’ll focus on earnings from continuing operations for this call. In the third quarter revenue was essentially flat compared to last quarter. Net loss was better by 749,000 primarily due to higher gain on the disposition of real estate of 39.5 million, partially offset by the accrual of higher litigation settlements with 127.5 million in Q3 versus 90 million settled in Q2, along with 6.7 million of higher impairment expenses. FFO per diluted share decreased $0.04 from $0.08 to $0.04. Mostly due to slightly lower revenue the higher litigation expenses from acute -- accrued settlement mentioned previously along with 2.2 million lower other income and 5.2 million lower gain on the extinguishment of debt partially offset by 1.1 million lower G&A and 1 million of lower interest expense that was driven by lower amortization of debt net premiums and deferred financing costs. AFFO per share was the equivalent to last quarter at $0.18 with a slight increase in cash rental income offset by slightly higher cash interest expense; G&A decreased by 1.1 million to 15.2 million versus 16.3 million for the second quarter; mostly due to certain equity compensation that is recorded in the second quarter. As discussed as part of the Cole Capital sale, we entered into a transition services agreement with CIM the purchaser of our prior Cole non-traded REIT business, whereby we provide certain contracted services through March 31, 2019 and as you know at closing 100 employees moved over to CIM and in August CIM hired approximately 40 of the company’s staff who were providing part of the transition services. We expect that between now and the end of our agreement CIM will be able to become fully disengaged from VEREIT’s operating support; as the transition agreement winds down, we would anticipate that our G&A run rate could at first increase due to the overhead and other expenses that were being absorbed by the transition agreement until we can implement any changes that may ultimately be necessary. During the quarter there were 13 million of litigation related expenses, bringing the total gross amount for year to about 52. As you can see we are trending towards the higher end of our estimated range and could be above our target of 55 million and 65 million for this year. For the quarter we also accrued 127.5 million for the 12 additional opt-out settlements recently announced. There can be no assurance as to whether or how the opt-out settlements may affect any potential future resolution of any pending lawsuit. The company has not reserved amounts for the SEC investigation, the ongoing class action and the remaining opt-out litigation because it believes that any probable loss or reasonably possible range of loss is not reasonably estimable at this time. Turning to the third quarter real estate activity the company purchased 23 properties for 99 million at a weighted-average cash cap rate of 7.4% and subsequent to the quarter the company purchased five properties for 67 million; during the quarter, we disposed 35 properties for 181 million. Of this amount 174 million was used in the total weighted-average cash cap rate calculation of 6.3%, including 49 million of net sales of Red Lobster. The gain on the third quarter sales was approximately 46 million. In addition, the company sold certain legacy CMBS investments during the quarter for an aggregate sales price of 10 million. Subsequent to the quarter the company disposed of nine properties for an aggregate sales price of 41 million and disposed of certain legacy investments and mortgage related securities for an aggregate sales price of 15 million. On August 1st the company repaid 598 million of principal outstanding related to the 2018 convertible notes, which was temporarily funded using borrowings under our 2 billion revolving facility. As of the quarter end we have drawn 793 million on our revolver. During the quarter we also reduced secured debt by 95 million. Subsequent to the quarter the company completed a 4.625%, 550 million bond issuance on October 16th and used the net proceeds to repay borrowings under the revolver which will be 252 million as of September 30th on a pro forma basis. As Glenn has mentioned the seven year bond fit nicely into our maturity schedule and now gives us the optionality of utilizing our 900 million unsecured delayed draw term loan for our $750 million bond that’s coming due in February of next year; our net debt to normalized EBITDA decreased to 5.7 times from 5.8 times our fixed charge coverage ratio remained healthy at 3 times and our net debt to gross real estate investment ratio was 39%; our unencumbered asset ratio was 75%, the weighted average duration of our debt was 4.2 years and 86 percentage fixed as of September 30th, but it was 95% fixed on a pro forma basis for the bond issuance. And then with that I’ll turn the call back to Glenn.

[Glenn Rufrano:]

Thanks, Mike. We’ve continued to maintain a very liquid and flexible balance sheet. Our successful bond offering, which is four times over-subscribed reflected the market’s confidence in our business plan. This allowed us to pay down our line of credit which would have a pro forma capacity of 1.7 billion; in addition, our $900 million term loan is available to pay out the $750 million bond coming due in February of next year. This leaves us with no major maturities coming due until December 2020. We’re closely monitoring our debt balances and continue to unencumber our assets as we are cognizant of the settlement payments we've been making. With that I’ll now open up the call to questions.

[Operator:]

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mitch Germain of JMP Securities. Please go ahead.

[Mitch Germain:]

Just remind me Glenn the timing with regards to the transition agreement, I guess what I'm kind of thinking it seems like potentially when that burns off there may be some severance or some additional charges until you find some people, places for people and then potentially some operating leverage after that, so just trying to understand, kind of how that impacts your financials when I am looking out?

[Glenn Rufrano:]

I’ll let Mike answer some of that but let me just start by saying Mitch, there are no people issues, the transition where we have about 140 people that went over to Cole, were very much Cole related people and the work they did, we have roughly 175 to 180 left, who are the people that have been working at VEREIT. So there -- the team is here and we have everybody we need moving forward from an infrastructure standpoint as we speak. In terms of the transition timing, Mike?

[Mike Bartolotta:]

I mean it ends Mitch in March of 2019 where we’ve been working well with CIM and over time bits and pieces, another 40 people recently went over and we would envision by the end of that time it will end, to your point, there will be some period of time when there’ll be -- we’ll need to be making some adjustments and that we’re working on that as we move up to that point in time.

[Mitch Germain:]

And then Mike while I have you, just how do I think about the coupon on the debt coming due versus what your cost of a term loan would be?

[Mike Bartolotta:]

Well right now we’re planning that the term loan is going to be today I think at today’s rates we would be at about 3.4%, because that’s what our revolver is at and it’s potentially the same and right now that loan that's coming due is 3% so unfortunately it's the usual negative arbitrage at the moment as some of this all debt is rolling off and new debt is coming on.

[Mitch Germain:]

But the potential would be to swap that, or fix that rate so potentially would be a greater gap, I got you. Okay?

[Mike Bartolotta:]

Sure. It could be and we just did our seven year and we did our seven year at 4.6, little bit over between 4.6, 4.7. I mean if you would have swapped something for either seven to 10 years, you can assume we would be somewhat similar.

[Mitch Germain:]

Now with regards to acquisitions did I hear that it was going to be flat on the year so would that imply that acquisitions would be greater than dispositions in the fourth quarter?

[Mike Bartolotta:]

They may be slightly, that would be how the algebra would work, the key is that we’re not going to have acquisitions in excess of dispositions Mitch and we still have as you can see we are able to make our guidance this year. The reason for that is to keep our debt down.

[Mitch Germain:]

So acquisitions won't be higher than dispositions but not necessarily flat. I got you meaning you could have a greater amount, okay. And then last question for me with regards to the dispositions. I guess you said you’re kind of at the low end of your Red Lobster target, you still have some office, how should we think about moving forward, what your approach to dispositions will be is it going to be more opportunistic like that industrial property or is it going to be more or less kind of a similar to the types of assets that you’ve been focusing on over the last 18 to 24 months?

[Mike Bartolotta:]

It’ll start out to be strategic, as we’ve been so far Mitch and at 5.9 we’re lower, than in with Red Lobster we’re still not at the 5s, we’d like to get it down closer to the 5, so we expect to continue to sell some of those as you mentioned 98 million so far our target this year is 100 to 150 and it will be in that target for the year I am pretty sure. Office, we’re about 9.4, 9.5, 19.4, 19.5. We continue wanting to bring that down, so we will strategically continue to sell some office as well and then flat leases we see good accretion by selling flat leases. We have continued to be selling CBS Walgreens in the six -- 6.25% range, so we will continue with those three programs as we see the strategic side of our business fitting the portfolio confines that we wrap around our portfolio. And then from an opportunistic standpoint we’ll always be opportunistic, if we find an asset that -- any asset we have it for sale if there's someone who wants to pay a price we think is a very good price we will continue to look at those as well.

[Mitch Germain:]

And is there any potential sales of credit that you construe to be maybe riskier here today planned?

[Mike Bartolotta:]

Yes, we have always used that as part of our disposition program, but as you know Mitch we will really not talk about who we think is good or bad. That’s an internal review but absolutely yes.

[Operator:]

[Operator Instructions] Our next question comes from Chris Lucas of Capital One Securities. Please go ahead.

[Chris Lucas:]

Glenn just a couple of follow-up questions, on the -- I know you’re not giving 2019 guidance but as we think about next year's as it relates to net acquisitions should we be thinking flat or net negative for next year?

[Glenn Rufrano:]

We really haven't determined the game plan yet, we’re reviewing a combination of acquisitions and dispositions but a key element here will be our debt balances and our settlements Chris, so we're going to be taking all those in the consideration, we will have a certainly a view between now and our next call and we may be able to talk a little bit about that but at this point we’re holding our acquisitions and dispositions guidance for a little longer because we like to be thinking about it.

[Chris Lucas:]

And then on the -- thinking about how you're managing the balance sheet as it relates to the term loan I guess a couple of questions there, one is your approach at this point to let it float or will you be looking to swap and then maybe a second question on the term loan is just simply what are the prepayment opportunities there as it relates to sort of down the road is it repayable at any time or is it after a three year period or how does that work?

[Glenn Rufrano:]

It’s repayable in any context, yes.

[Chris Lucas:]

So it's about…

[Glenn Rufrano:]

And then -- yes, yes, yes. And then right now pro forma with that seven year bond we’ve about 4.4% floating-rate so we’re pretty low. We’ll have some more longer-term floating-rate as we think about our final capitalization and we will give some more guidance on that as we pull down that $900 million.

[Chris Lucas:]

And then on the seven year -- does fit into your debt maturity schedule nicely but at 10 year would have as well, I guess maybe if you could walk-through sort of the conversations you had internally as it relates to 7 versus 10?

[Glenn Rufrano:]

We looked at both as you would expect; there was a little turmoil in the market at the time we did this; and we look at the slopes of both seven and 10 years and since we had a choice -- we were fortunate to have a choice, but we felt that the risk return on the seven year relative to the slope that occurred in at that time was in our benefit. We got a very good spread on the seven year. I don't think we would've got the same level of spread advantage on the 10. Duration was a very big issue, that three years is a very big issue over the last three weeks.

[Chris Lucas:]

And then last question for me just Mike thanks for the color on the transition agreement. I guess just wanted to make sure I understand to as it relates to the agreement with CIM is there any likelihood of any kind of earnout from that process once it’s completed?

[Mike Bartolotta:]

We hope so I mean one of the reasons we’ve a six year period Chris is we recognize that there’d be some fine tuning at CIM Cole for a period of time but after that we hope and expect that we can get some of that earn out, now obviously we booked none of it, just to make sure there’s nowhere its booked but we thought long and hard and that’s why it’s six years.

[Operator:]

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

[Glenn Rufrano:]

Thank you everybody for being on the call; we know it’s a very active period of time when NAREIT going on. I am not a trustee, I am not sure the timing of NAREIT was exactly good for all of us; we are heading on -- getting on a plane now and we will see everybody out in San Francisco over the next couple of days. Thank you.

[Operator:]

The conference is now concluded; thank you for attending today’s presentation; you may now disconnect.