Q4 2019 Earnings Call

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Good day, and welcome to the American Finance trust fourth quarter and year-end 2019 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press star. There's one on your touchtone phone to withdraw your question, please press * then two, please note this event is being recorded. I would now like to turn the conference over to a Louise Porto Executive Vice President, please go ahead.

Your operator. Good morning everyone and thank you for joining us. This call is being webcast in the investor relations section of Athens website at ww.w American finance office joining me today on the call to discuss the results are Michael while chief executive officer Katie Kurtz Chief Financial Officer and Zachary pomerantz senior vice president Asset Management off the following information contains forward-looking statements, which are subject to risks and uncertainties with one or more of these risks or uncertainties materialize actual results, May differ materially from those expressed or implied by the forward-looking statements.

For all of you to our SEC filings, including the annual report on form 10-K for the year ended December 31st, 2019 filed on February 26th, 2020 and all authors 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 or made only as of the date of this call as stated in our SEC filings a thin disclaims any intent or obligation to update or revise these girls looking statements except as 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 off. These measures should not be considered in isolation or the substitute for our financial results prepared in accordance with gaap a Reconciliation of these measures to the most directly comparable gaap measure is available in Iraq was released on alter the call over to our CEO Mike. Well Mike, thanks Louisa. Good morning, and thank you all for joining us today a year-and-half ago. We announced that American Finance Trust Bank would become publicly traded opening up significant opportunities for the company to grow our experiential retail Focus portfolio through improved access to Capital markets.

We suggested to step would better position us.

To pursue Acquisitions that enhance and diversified are already high quality portfolio a compelling opportunity existed for a retail focused read with high credit for calling tenants and a good balance of both stability and growth after completing our first full year as a publicly traded company. I'm happy to report that we've capitalized on these objectives and concocted it 2019. Well positioned to carry this momentum into twenty-twenty and Beyond

you're over a year. We're proud to report increases in Revenue cash noi adjusted ebitda and a f f o r a f f o for the full year 2019 was 29 cents per share compared to ninety eight cents per share in 2018 for the fourth quarter a f f o was twenty four cents per share versus $0.23 per share in the fourth quarter of 2018 and twenty two cents in the third quarter 2019 the nine and 5% quarter-over-quarter increase in per share a f f o was driven by three point two thousand dollars in additional rent from third-quarter Acquisitions, including two point six million dollars from the acquisition of the dialysis portfolio on the last day of the third quarter.

full year 29

18 cash noi increased 9% year-over-year to 231 million dollars revenue from tenants increased 3% to $300 for the full year 2019 and annual adjusted ebitda increased 5.1% to 201 million dollars.

As we've discussed previously Athens Focus continues to be on strategic Acquisitions that enhance the growth profile of the company and that are partially supported by proceeds from the dispositions of non-core low Growth Properties. We delivered a strong year of Acquisitions as our team closed on over 420 million dollars of single-tenant properties off at a weighted average cap rate of 7.8% and a weighted average cash cap rate of 7.2% We continue to improve the portfolio by opportunistic wiring service-oriented retail properties with long-term leases these Acquisitions, not only exhibit an attractive yield but strong fundamentals to over 85% of the properties acquired in 2019 and 82% of the properties acquired since 2017 are least two service-oriented retail tenant and have lease durations averaging over.

412.6 years

Athens recent acquisitions improve the portfolios overall diversification weighted average lease term and property mix while delivering a nearly one hundred percent occupancy level jobs are single-tenant portfolio. We remain enthusiastic about the service retail sector and intend to continue acquiring these types of assets. Like we have over the past three years during which time we've grown total single-tenant acquisition volume by an average growth rate of 69% per year.

We believe that Athens portfolio is of the highest quality and has more credit-worthy tenants and a higher concentration of service retail than the portfolio of other net Lee Spears them are single tenant assets 82% of straight-line rent comes from investment-grade and implied investment-grade tenants, including one hundred percent of our top 10 tenants portfolio. Why month, please refer to our earnings release for more information about what we consider to be implied investment-grade tenants,

Are weighted average?

Please term is 10.8 years and 82% of single-tenant retail rent comes from service retail tenants in 2019. We also strategically sold twenty five properties for gross proceeds of 132 million dollars and a gain of twenty three point seven million dollars on net proceeds of thirty nine point four million dollars including five properties off in the fourth quarter for total gross proceeds of 16.3 million dollars of which approximately 6.3 million dollars was used to repay related debt. We all thought so too large properties during the year one office and one Warehouse that had upcoming lease expirations that were not expected to be renewed and they didn't fit into our retail strategy game.

16 of the properties we sold last year. We're Bank branches least to SunTrust bank now named truest bank, which were sold at a weighted average cash cap rate of 5.5 per month generating an eleven point two million dollar premium above the original purchase price.

as we just

Asked previously we've been able to take advantage of a 190 basis-point Arbitrage between the sale and the acquisition of new assets with longer lease duration and similar credit quality. This is also reflected in our acquisition pipeline, which has a weighted average calf rate of 8.8% and an average remaining lease term of 18.4 years. We've you these job opportunities as a creative sources of capital as we continue to focus on portfolio growth heading into twenty-twenty. We expect to be net buyers with a forward pipeline of eighty eight point five million dollars in retail Acquisitions. We favor service retail Concepts that are either unsuitable for online platforms such as gas stations and convenience stores dialysis centers and certain restaurant categories or those that greatly compliment online experiences by providing an omni-channel experience for customers.

retailers that initially you

Why's an online-only model have been rapidly adding physical locations to connect with more customers in the direct way that research has shown Millennial and Generation Y and Thursday customers prefer consulting firm found that eighty 1% of Generation Z Shoppers prefer to go to physical stores to shop and discover new products off Barbie Parker the popular I wear company that started out as an online-only retailer has over 100 stores across the u.s. And Canada and anticipates growing their store count by 35% this year smiledirectclub whose business model previously revolved around connecting customers to dentists has been opening locations across the country and recently teamed up with Walmart to put retail products in Walmart stores.

At the same time Walmart is becoming a leading omni-channel retailer who is competing successfully against Amazon by using their tremendous brick-and-mortar network of distribution centers and retail stores. There seems to be a broad acknowledgement that it's important for Brands to meet customers where there are already physically located in order to promote and sell their products and services wage. Perhaps more importantly these Trends suggest that very few internet-based quote direct consumer companies can grow their customer base sufficiently enough money to Pivot forward profitably without establishing some degree of brick-and-mortar presence.

as I noted earlier

Over the past year, we demonstrated an ability to access Capital markets and effective ways to drive our strategy in 2019. We completed a series a preferred class of stock an ABS or asset-backed security offering and utilize the at the market programs for Athens common and series a preferred stock. These offerings have brought a exposure to a wider set of institutional shareholders further three investment banks have issued research on the company in 2019. We raised 168.9 dollars billion dollars in preferred Equity. We also successfully completed an AVS offering issuing dual-class 242 million dollar long-term fixed rate notes rated Triple-A and a by Standard & Poor's

The weighted average interest rate on both classes of notes was 4.2%

S as accessing long-term fixed-rate financing through multiple channels allows us to effectively manage our high-quality portfolio and unlock value in the assets. We own will continue to have dialogue with financing partners and rating agencies as we consistently seek to optimize Athens capital structure. We're pleased with the overall position of the portfolio believe that long-duration leases and high-quality tenants will drive shareholder value and per share a f f o increases as we continue to grow the portfolio. We believe that a thin rack main compelling investment opportunity trading at a discount to our peers while offering a portfolio that has a higher concentration of actual or implied investment-grade tenants in a weighted average lease term of almost eleven years old.

Our dividend is attractive in an invite.

Where according to a recent Wall Street Journal article bond yields remain stuck at low levels and yield Focus investors are allocating to reads for income in 2026 will continue to tell our story to the institutional and Retail investors who don't yet know our value proposition while making further progress on metrics such as dividend coverage and net income ratio with that. I'll turn it over to Zach for an overview of our 2019 real estate activity. Thanks Mike at the end of the year. We own eight hundred nineteen properties with portfolio occupancy of 94.6% and a weighted average remaining lease term of 8.8 years as Mike mentioned revving you from tennis increased 3% to our Acquisitions and the average contractual off both of the portfolio which remains at 1.3% per year driven by 80% of our leases that include rent escalators. We are pleased with the impact our 2019 real estate activities made to further our strategies.

owning a diversified portfolio or

retail assets placed on a long-term basis to high-quality tenants

retail makes up 69% of 11.3 million sqft single-tenant portfolio up from 59% at the end of 2018 with the balance comprised of 16% distribution property and 15% office properties occupancy across a single-tenant portfolio is nearly one hundred percent with a weighted average remaining lease term of 10.8 years and 1.3% average annual rent escalators wage. There are very minimal near-term lease expirations in this portfolio was only eleven percent of lease is expiring within the next five years.

We have a high concentration of investment-grade or implied investment-grade tenants as 82% of the Angela straight-line rent in our single-tenant portfolio is derived from these high-quality tenants up 5% year-over-year lastly, we grew our single kind of portfolio to 786 Properties or 67% of the total portfolio straight-line rent at the end of 2019 off from 593 properties and 64% of straight-line rent at the end of 2018.

all of the transaction

This completed in 2019 and in fact all the transactions completed since first quarter 2017 were single-tenant and at least assets.

Complementing the single tenant net lease portfolio are are multi-tenant retail assets large anchor tenant leases share many leads features of our single-tenant portfolio leases, but are supplemented by smaller in line tenants that month for rent growth and an ongoing balancing of store Concepts that can be responsive to retail Trends. We believe that the flexible unit size and negotiable lease terms that are centers attract both experiential and service Representatives, please send us have a symbiotic relationship with anchor tenants where the smaller businesses benefit from the Shoppers drunks the anchor and the frequency with which Shoppers visit a tenant such as arms theory help traffic to Anchor tenants such as Ross Best Buy and HomeGoods,

Are composite retail portfolio is consistent with what we see as the direction retail is headed which is deliver a convenience and optionality to Consumers. We believe that the multi-tenant properties off.

Offer an opportunity for growth and occupancy and rent that complement to single-tenant assets are 33 property 7.2 million-square-foot multi-tenant portfolio has occupancy of 87.1% as of December 31st, 2019 with 1.3% average annual rent escalators.

Annualized rate Lane rent is up to $89 million from eighty eight million a year ago. We continue to focus on leasing of available space and renewing leases with reforming tenants in the portfolio as evidenced by our current wage average remaining lease term of 4.9 years. This is only slightly less in the 5.1 year average. We reported a year ago, despite the passage of 12 months execute an occupancy off your end was 88.3% executed occupancy includes 86,000 square feet of leases. Where rent has yet to commence such as a 61,000 square-foot lease with Dick's Sporting Goods at San Pedro cross that will add over six hundred thousand dollars in annual base rent even will continue to pursue and growth through our multi-tenant leasing program.

Over the past two years has experienced de Minimus tendons involved including bankruptcies that resulted in the termination of rent payments. We believe this is in large part due to our strategic focus on credit worthy tenants off and active tenant monitoring program on average where rent was lost due to bankruptcy the Lost run average only 7% of the portfolio SLR from the prior rent-paying quarter of an aggregate these bankruptcies totaled less than 42% of our annualized straight-line rent and each represented an opportunity to negotiate leases with new tenants at current market rents. We would like to find out that we have no exposure to troubled Art Van the parent company of Wolf Furniture, which is a significant tenant and a number of other retail folks reads, Katie. Will you walk us through the financial results in more detail?

Exactly. We were.

Corded total revenue for the year ended December 31st, 2019 of two hundred ninety-nine point seven million dollars at 3% increase compared to $291 in the prior-year fourth-quarter revenue was 76.2 million a 2% increase from 75.1 million in the fourth quarter 2018. The company's 2019 gaap net loss was 3.1 million vs. 37.4 million and 2018 and full year 2019 and month with $247 at 4.2% increase over the 237 Point 1 million dollars lie recorded for 2018.

Who we are at the photo was ninety eight point six million or 93 cents per share compared to the 91.6 million and 87 cents per share in 2018 and 8% increase for the fourth quarter of 2019. Our ffo attributable to Common stockholders was twenty two point four million dollars or Twenty One cents per share with who year was a hundred four point nine million dollars or ninety nine cents per share compared to $103.98 per share in 2018 with 1.8 percent increase year-over-year and fourth quarter a f f o was 25.2 million or 24 cents per share compared to fourth quarter 2018 AFL of 23 tonnes per share as always a Reconciliation of gaap. Net income to non-gaap measures can be found in our earnings release supplement and form 10-K.

we ended the

Fourth quarter with net debt of one point six billion dollars at a weighted average interest rate of 4.3% the components of our net debt include 333.1 million strong on our credit facility 1.3 billion of outstanding Mortgage Debt and cash and cash equivalents of 81.9 million dollars headquarters and interest rates on our Mortgage Debt were all leaving only the drawing on our credit facility facility as floating liquidity, which is measured as under on availability under our credit facility plus cash and cash equivalents stood at 232.8 million month of December 31st, 2019.

The company's net that's gross asset value or total assets plus accumulated depreciation and amortization was 39.2% and the net debt to annualized adjusted even a 7.7 times at December 31st, 2019 compared to Thirty 8.6% and 7.4 times respectively at the end of 2018. We were active in boy a quality and debt Capital markets in 2019 raising common and preferred equity and successfully completing our inaugural issuance of 242 million and AVS notes month or two separate underwritten offering. We raised 116.9 million of preferred Equity while through 8 p.m. Programmed. It's been raised 31.6 million in common stock and fifty two million in stock as Mike and I have previously discussed these Capital markets transactions were contemplated with the goal of deploying the proceeds into new accretive acquisitions. We purchase 423 birth.

and in total acquisition start

A 2019 with that I'll turn the call back to my person closing remarks. Thanks Katie. We encourage you to follow it on Twitter at underscore read for a selection of news and research articles that are relevant to our company. I believe we had a very productive year in 2019. And we look forward to continuing to execute on our strategy in 2020 and Beyond. We've delivered on the plans. We laid out previously and it taken advantage of the expanded access to Capital and financing markets that are available to a listed company. We've used this expected access to grow and optimize our highly differentiated portfolio of single-tenant and multi-tenant assets focused on service retail.

Going forward will continue to maintain our steady and deliberate approach to Growing our portfolio through high-quality accretive Acquisitions will seek to sustain Hai aapke chut sea levels that are 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 financing markets and expect to continue to be active in these areas in the near future. We look forward to sharing further updates on our progress with you in our next quarterly update call operator. Please open the line for questions. We will now begin the question-and-answer session to ask a question. You may press star one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys if at anytime your question has been addressed and you would like to withdraw your question, please.

Store than to at this time. We will.

Pause momentarily to assemble our roster.

And our first question comes from Jeremy menez of BMO Capital markets, please go ahead.

Good morning. How you doing? Good. Just wanted to start first, you know on the multi here Zach. Maybe you can just give some color change the dip in occupancy. We saw I think you know go back to the last quarter. You talked a little bit about some temp or holiday leasing that was propping it up a little bit. So I think part of that is maybe just those tenants flowing out. So just exactly what happened here. And at this point within that 87% occupancy you have how much at this point? It's temporary been short-term, you know less than a year or month to month type of Leasing.

Good morning. Thanks. So, yes, the the the dip from last quarter is a result of the temporary seasonal occupancy that we discussed over all that. That was the only temporary seasonal actually do we had in the portfolio of the time? So the rest of it is, you know normal leasing activity and as we continue to you know grow into the the new leases. Hey, it's Mike. Let me just jump in for a minute. Um, if you remember the call from the third quarter and the materials that that supported that call reported occupancy at the end of the third quarter was 89.1% and 2.4% of that was disclosed as seasonal that short-term leasing that you just referenced. Um, which if you do the math takes us down to 86.7% on long-term leases. So when you compare fourth quarter to third quarter, we've increased again the long-term occupancy of the multi 10 a.m.

portfolio and if you go

Back to first quarter 2019. We started at 84.8% So we've had four quarters of consistent steady growth in the multi-track portfolio with what we consider to be very valuable long term tenancy that not only raises the overall occupancy, but increases the value at each power center, and I I expect that you'll continue to see that Trend in the upcoming 2020 quarters.

Yeah that helps. I just wanted to just make sure was all kind of bad temperature in which it sounds like it definitely was. So I appreciate that Katie. You talked a lot about the money you have a lot of maturity is coming up this year pretty significant portion of the debt stack. So how should we think be thinking about the timing and refi expectations there where you look to take out additional wage needs to kind of help fund the next layer of Acquisitions be on the liquidity you have today.

Thank you.

Hi Jeremy, we do have a larger maturity coming due in September of this year. It's something that Mike and I have been focused on for some for some time. Now. I think that we consider a pretty much normal course in terms of our portfolio and the kind of debt that we have on that portfolio. So we are actively managing that and negotiating how we will refund check that out before September and making sure that we have enough time to do that. We're also feeling really good about the rates right now that that debt was on our books at over 4% rates have come in since that that was put on our books. So we're looking forward to some betterments in terms of interest rates from a pooling additional money out. That sucks Mike and I will be talking about you know, we are really happy with where our balance sheet is right now and where our leverage levels are right now, so we'll be keeping that in mind as we refi that that

All right.

And my can you maybe just talk about the the Acquisitions pipeline here just a little color around what you have out there and in particular the 8th birthday 8% cap rate. It just seems you know, unusually high usually that tends to draw some focus and point to possibly some enhanced risk in those days to just any sort of color on that and how active the pipelines would be helpful. So as of the end of January, it was an eighty-three million dollar pack line and it did have an average Gap cap rate of 8.8% starting cash. You can assume that because we haven't yet disclosed the starting wage cash cap rate of the pipeline, but we will in in the quarter but it's in line with where we have been buying deals. So don't read into the Dead.

as enhanced risk

Um read into the eight eight as we have been very focused on that 15 to 20 year range with contractual rent growth in line with what we typically see in that lease deals. So that's you know one and half to 2% type of of annual escalators. So these are are very similar to what we've been buying. If you look at the pipeline report, which was on page five of the investor deck you can see some of the names

We again underwrite everything in the same way and I will tell you that the the company is not chasing yield. The company is focused on high-quality long long term tenancy. And I think that you know there as you can see in the quarter from a occupancy standpoint the portfolio is often very well. We don't have additional bankruptcies that that we're dealing with and as we said in the script, uh, we're over 80% on a straight-line rent basis investment-grade or implied investment-grade rate at tenancy. So the portfolio we are very very comfortable with its ability out from a sustainability and credit standpoint.

Question for me is just sticking on investments on the opportunity to the disposition side. You've been active and made good progress going down the first exposure so should wage for that to continue here in 2020. Is there an outside Target that you have in mind say 5% or less? And then how should we think about additional strategic disposition at this point Beyond some of the truest statements on so as it relates to truest. I don't know that we have any desire to get below 5% on a straight-line rent. But again having not disclosed our disposition targets. I want to be a little bit vague there. I think for the quality of that credit the the merged BB&T SunTrust platform. It continues to be a uh a credit that we're very comfortable with wage.

for the

Rest of twenty-twenty, you know, I do think there are there are some I know they're internal discussions on some potential dispositions and Thursday. We're not disclosing that right now, but I do believe that one of our most important jobs something that we did very well in 2019 is strategic dispositions with very accretive redeployment and we're going to continue to look for those opportunities.

Thanks for the time.

Thanks, Jeremy.

Our next question comes from Boone of B Riley FBR, please go ahead. Hey guys. Good morning. I just got a quick questions for me. When is that a six thousand of executed square feet on them. Portfolio expected to commence?

Those leases will commence over the coming quarters. There's there's not an exact date that I can provide at this time. But well, let's see a little bit more specific. So Thursday executed lease is there in the free rent. And the commencement some of them will commence in the first quarter into the second quarter. So it is what I think of as near near term commencement. Okay. Thank you and then turning to the the current portfolio. It sounds like everything seems pretty good. There's very good qualities. No bankruptcies as you were saying but has there been any weakness at all from any of your tenants? That might be worth noting or is everything in pretty good shape as it stands right now.

Madam I'm really

Pleased with the condition of the portfolio from a credit standpoint as we've talked about on previous calls, we have had minimal to the point that I would say non material credit problems in the portfolio. If I go back over the last two years the whole portfolio is less than half a percent of straight-line rent that has incurred a bankruptcy off there had been some announcements in the the fourth quarter of retailers that that can commonly be found in a lot of net lease portfolios day that we have zero exposure to our top 10 tenants. Um,

Continue to perform and again 82% of the of the portfolio on a straight-line rent basis is investment-grade and the implied investment-grade. So we continue to expect this performance in twenty-twenty. Got it. Thank you. And then lastly for me as it relates to the Corona virus outbreak wage has that had any near-term impact at all in terms of the assets that you're underwriting for the for the way you expect the acquisition pipeline to shape up just primarily in the near-term

so madam

To start with a very short answer. No, but I'll I'll expand it. So coronavirus is obviously something that we're all very focused on what we're looking for information. Not only for the US markets, but for the global markets just because it's it is a an event of significance. I am certainly don't take it lightly. I do think as we're seeing every day in the news that there are certain new announcements and fax are tannins off or corporately guaranteeing the majority of our leases as I've said now, I think three times on today's call 82% of our straight-line rent is derived from investment-grade and employing investment-grade tenants. So that equates to me to very strong corporate tenants that are going to be able to continue to pay their rents and whether they have a game

some some

Short-term swings in their business as the US population deals with coronavirus long-term. They are going to withstand the office. And the the same healthy retail tenants that they've been up until the coronavirus. So we stay in touch with them or tenants and they are all proactively doing what they can do. But as far as our rent, it is not in jeopardy and we don't anticipate any problems in the near term as it relates to that.

Great. Thank you.

We are showing no further questions at this time. I would like to turn the conference back over to Mike while for any closing remarks. Well again, I just always like to thank you for taking the time and I join us today. We're very excited about the direction of the company 2019 was a terrific year for us, and we're we're excited going into twenty-twenty. If anybody has any follow-up questions, please feel free to reach out. We welcome your calls and look forward to seeing everybody soon in the year.

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