Q2 2020 American Finance Trust Inc Earnings Call

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Good morning, and welcome to the American financed Trust second quarter 2020, <unk> earnings Conference call.

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I would now let's turn the conference over to Luisa Court, though please go ahead.

Thank you operator, good morning, everyone and thank you for training. This call is being webcast in the Investor Relations section of <unk> website, Www Dot American finance dotcom.

Joining me today on the call to discuss with all our Michael while Chief Executive Officer, Katie Kurtz Chief financial.

The following information contains forward looking statements, which are subject to risks and uncertainty.

More and more of these risks or uncertainties materialize actual results may differ materially I'm not expressed from <unk>.

These statements.

We're all of you used to our assay filings, including annual report on form 10-K adhering to number 31st 20, Nike filed on February 27, 2020, and all other filings with the FTC after that date or more detailed discussion other factors that could cause these different.

Any forward looking statements provided during this conference call are only need as the data this call.

They did in north you'd be filing aten disclaims any intention or obligation to update or revise these forward looking statements except as required by law.

During today's call will discuss non-GAAP financial measures, which we thought they can be useful in evaluating the companys financial performance.

These measures should not be considered a nice occasion when it comes to chip our financial results prepared in accordance with gap.

A reconciliation of these measures to the most directly comparable GAAP measure is available in our earnings release.

Please also refer to our earnings release for more information about what we consider to be imply investment grade a traditionally used throughout todays call I'll now turn the call arbitrage CEO, Mike while Mike.

Thanks, Luisa good morning, and thank you all for joining us today.

Last night, we reported second quarter results that highlights the strength and resiliency of our primarily investment grade and implied investment grade necessity based retail net lease focused portfolio.

During a quarter that was full of global disruption. We met these challenges head on by proactively engaging with our tenants early in the pandemic and collecting over 84% of the cash rent due in the second quarter.

Well progressing important non kobin related objectives.

Many of you have inquired about the status of our upcoming debt maturities over the last year. We're excited to report that we've completed a transformational 715 million dollar CMBS financing that extended our near term debt maturity, while locking in a historically low interest rate.

Through this transaction, we completed the refinancing of our existing 497 million dollar CMBS loan, which had two months remaining until maturity and certain properties on the company's credit facility borrowing base with a new five year CMBS loan.

The interest rate on the new loan is fixed at 3.74% 62 basis points lower than the rate on the prior CMBS loan.

In completing this loan we de risked our portfolio by extending agents weighted average remaining debt term to 4.9 years from 3.3 years and pushed out 70% of our debt maturities until after 2024, providing further flexibility to our capital structure as you can imagine.

And with over 400 site visits across the country in the depth of this pandemic completing this financing was a herculean task undertaken by our team and the lender.

Turning to rent collection, our team has been working directly with tenants to navigate through this unchartered territory over the last few months deepening relationships that will last far longer than the pandemic. Thanks to these efforts and the credit quality of our portfolio, we collect it 84% of the original cash rent due for the second quarter.

2020, including 94% of the original cash rent due in the company single tenant portfolio and 96% of the cash rent due from our top 20 tenants.

For the month of July collection rates.

Continued to trend upward as 88% of the original cash rent due for the month has been collected to date, including 96% in the single tenant portfolio.

And 72% in the Multitenant portfolio at some of the initial rent deferral agreement ended on June Thirtyth and those tenants are now back to paying 100% of their original rent.

Our team engage directly with tenants to create value for the company by negotiating extensions in exchange for partial rent deferrals or credits.

During the quarter. This initiative resulted in lease extensions with 12 tenants, which on average extending existing leases by 36 months in exchange for only four months of rent deferrals or credits.

The incremental net cash rent, we expect to receive from this work totals almost $29.1 million.

There were kobin related legal expenses incurred this quarter, primarily related to lease deferrals and other tenant negotiations of approximately $1.6 million. The majority of these charges impacted I AFFO and we reported AFFO of $21.2 million were 20 cents per share in the second quarter.

Compared to 23 cents per share last quarter in the third quarter and going forward. We expect not only a continued increase in rent collection as existing deferral agreement and and tenants resumed paying rent in full but also a decrease in legal fees incurred which should be in line with previous quarters.

Year over year, we've grown our portfolio by over 140 properties and 1.2 million square feet.

Increasing annualized straight line rent by $22 million per year $272 million.

Occupancy has increased 90 basis points to 94.3% and our total real estate investment at cost is just under $4 billion.

Due to our commitment to prudent underwriting our high quality portfolio is significantly lease to investment grade rated or implied investment grade rated tenants.

Among our single tenant assets, 63.3% of straight line rent comes from investment grade, an implied investment grade tenants, including 80% of our top 10 tenants portfolio wide.

We continue to grow the single tenant segment of our portfolio as a percentage of rent.

Annualized straight line rent for multi tenant retail tenants has decreased 400 basis points year over year to only 31% of our annualized straight line rent and has decreased 800 basis points from the 39% of rent that came from multi tenant retail at lifting.

Eight fans acquisition efforts continued to be focused on single tenant service and necessity retail assets that have long remaining lease terms and contractual rent increases.

We closed on three such assets in the second quarter, which combined with our pipeline of definitive agreements in place, which totals 45 property acquisitions for $75.4 million at a weighted average 8.7% cap rate and over 15 years of weighted average remaining lease term.

We're taking a prudent stance with our acquisition pipeline and our carefully determining appropriate risk adjusted cap rates.

For potential new acquisition targets going forward.

Necessity focused retail makes up 71% of the 11.7 million square foot single tenant portfolio.

With the balance comprised of 15% distribution and 14% office properties.

Occupancy across the single tenant portfolio is over 99% with a weighted average remaining lease term of 10.8 years and 1.3% average annual rent escalators.

We're very minimal near term lease expirations in this portfolio with only 10% of leases expiring within the next four years.

In the second quarter, we continued our previously discussed truest redeployment initiative continuing to reduce our exposure to any one tenant through our acquisitions and dispositions today truest formally Suntrust makes up only 6.5% of our straight line rent down from 8.9% at the time of eight.

Fins listing in 2018.

In the second quarter, we sold for Truest bank branches for gross proceeds of $9.2 million.

Additionally, after June Thirtyth eight of the truest branches, we own became first horizon Bank branches first Horizon Bank is a strong regional investment grade rated operator with approximately 300 branches once complete our exposure to truest will be 6.2% of our portfolio straight line rent.

As of June Thirtyth down significantly from 8.9% at the time Ace enlisted in 2018.

As a reminder, since we began this initiative we've sold 26 occupied truest bank assets at a weighted average cash cap rate of 5.6% generating net proceeds of $49.8 million.

Net proceeds from these sales were up on the sources of funds for our robust acquisition program, where acquisitions have had a weighted average cash cap rate of 7.2% since the start of 2018.

During the same period, we increased our portfolio level weighted average lease term from 8.1 years to 8.9 years.

Our 33 property 7.2 million square foot Multitenant portfolio complements our single tenant net lease portfolio in quality with an occupancy of 86.2% as of June Thirtyth 2020.

Up 110 basis points from 85.1% in the second quarter of 2019.

In our second quarter negotiations with tenants responding to the impacts of co bid our lease modifications equated to $1.9 million of short term rent deferral or credits in exchange for over $31 million of additional rent in total the net cash rent pickup related to these extensions.

It was $29.1 million.

Kt will you take the through the rest of the second quarter financial results.

Thanks, Mike.

Second quarter 2020 revenue was $74.9 million in play decreased from $74.6 million in the first quarter of 2020, and a decrease from the $79.1 million for the second quarter of 29 team.

The company's second quarter GAAP net loss attributable to common stockholders was $21.8 million compared to a net loss of $9.2 million in the first quarter of 2020, and a net income of $7.9 million in the second quarter of 29 Pete.

I know I was $62.4 million slight increase from the $62.3 million, we recorded for the first quarter [laughter].

Second quarter Twentytwenty, our assets out attributable to common stockholders was $22.2 million or 21 cents per share.

Second quarter, Epicel with $21.2 million or 20 cents per share compared to first quarter asked about pershare of 23.

As Mike mentioned net loss was impacted by 1.6 million encoded related legal expense it.

Giving effect to the asset that went out for coated related leap must be it outlined in our 10-Q and if that was impacted by 1.4 million up holding related legal expenses, mainly associated with the negotiation on execution of near term rent deferrals and credit which in some cases, where in exchange for long term lease extension.

As always a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release supplement and form 10-Q.

We ended the second quarter with net debt of $1.7 billion at a weighted average interest rate of 3.8% and net leverage of 40.3%.

Component the Barnett that included $503.1 million drawn on our credit facility 1.3 billion of outstanding cared that and cashing passion Cleveland of $136.7 million.

According to that interest rates on our mortgage that we're all.

Leaving only the drawn on our credit facility has slowed.

Well quality, which is measure that I'm, drawing availability under our credit to Saudi <unk> cash and cash equivalent.

At $182.7 million based on our June thirtyth cash balance and borrowing availability, giving effect to the closing of our credit facility amendments and CMBS well on July 24.

Subsequent to quarter, and we entered into a financing transaction bar at $715 million and a commercial mortgage backed security filing.

The CMBS loan interest only an interest rate of 3.74% has a five year time and is secured by 368 single tenant property I'd be 223 properties were previously collateral for alone that have left in two months of term remaining at the time, we closed this need transaction.

And then effective interest rate of 4.36% as of June Thirtyth 2020.

All but one of the remaining properties, where finance on anything corporate credit facility.

The closing the CMBS well an aggregate of 499 million up proteins was used to repay existing mortgage on the property and the balance was used to repay amounts outstanding under the company's corporate credit facility. The completion of this financing.

Hmm is weighted average debt maturity from 3.3 years to 4.9 years hasn't June Thirtyth Twentytwenty.

With that I'll turn the call back to my personal closing remarks.

Thank you Katie.

We've successfully navigated a challenging quarter by engaging with tenants in staying focused on value creation across our asset management acquisition financing and legal departments through close coordination and collaboration with our tenants were able to collect 84% or the cash rent payable in the quarter July rent collection ICSI.

The second quarter rate coming in at 88%, including 96% in our single tenant portfolio and 72% in the Multitenant portfolio and we anticipate that this rate will continue to climb.

Due to continued hard work and dedication of our team and our banking partners. We were able to complete a very large and complex financing transaction that the restart portfolio, while giving us flexibility in the future to broaden our capital structure.

The benefit of these efforts will continue to accrue in future quarters, along with the continued outperformance of our investment grade portfolio. It is highly diversified both by tenant and geography.

With long remaining lease terms and annual rent increases in place.

I'm pleased with our accomplishments this quarter and look forward to answering any questions you might have about our results operator. Please open the line for questions.

We will now begin the question and answer session.

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At this time, we will pause momentarily to assemble our roster.

The first question is from Brian Mayor with B. Riley FBR. Please go ahead.

Good morning, Michael and Katie Ah Hey border.

Thank you too.

Two questions for you one when we look at your top 20 had it lets you know in your supplemental and would go down the list and we kind of think about that and relationships to what you know we all see all day on CNBC regarding retail bankruptcies, but doesn't like us if anybody in that list.

That really would be at risk is there any tenants in your portfolio, maybe outside of the multi tenant which you know maybe there's one or two year or that you have any concerns with the or do you think you're set up to kind of weather the storm.

Yeah.

First of all Brian Thank you and I'm always good to take your questions bankruptcy is something that we're all in the space focusing on we meet regularly and we've been reviewing the portfolio aggressively for since the beginning of the.

Portfolios construction.

On the top 22 directly answer your question you know, it's we feel that we're in really good shape and.

The top 20 represents about 55% of the total straight line rent of the overall portfolio, we expect because of the business sector that the top 20 tenants are in as well as the corporate guarantees on the leases themselves that we're going to continue to be able to collect this ran.

And.

And just as it relates to bankruptcy in general because you're right we hear so much about.

Doom and gloom and the retail sector and this portfolio as we've said very very often in from the beginning is built around a central retail.

And we continued to think that that will do well many of the bankruptcies are are more related towards.

What I think of as mall tenants than a central retail the quick service restaurants sector that we've invested in heavily the gas and convenience. The dialysis you know the portfolio. It continues to do well truest is is just humming along having.

A great transition with their merger, we're very pleased with that so overall I think that we are very.

Very isolated from general bankruptcies.

Great and then my second question regarding acquisitions, when you look out at the landscape of what's going on and there's a lot going on or are there any sectors that you're not in now that you might contemplate moving into or is the plan to just simply stickier knitting.

Stick with what's worked for you and not venture into new spaces.

I think this is a time to stick with our knitting I like that expression.

We are very actively reviewing deals that are in the market and frankly.

I just don't see the value at this moment sellers and buyers are have not come to agreement on values right now I think that we feel.

That markets have moved away from sellers and where we.

Continued to see opportunity again, the the service retail is really our focus and we will be active in the market boat when we see pricing that matches up with our expectations and the other side of that is you know this is a time too.

To really continue.

To take care of the relationships that we have in the portfolio. We're spending a lot of time very positive building relationships with the tenants and as we mentioned in our notes you know the second quarter was one of the toughest quarters I can recall in my career.

And we came out of it in very solid position.

But what was really exciting to us was being able to work with tenants hearing what they need it.

Finding ways to accommodate some of their needs, but most importantly, continuing to grow our portfolio as we talked about.

Extensions relate it to some some deferrals.

While generating of almost $30 million of future cash rent extending leases.

And I just think it it's the value of a very active asset management platform.

Knowing our tenants communicating with our tenants and being able to work out fair deals on on both our side and their side.

Great. Thanks for the color that's all for me.

Alright, Thanks, Brian.

The next question is on frankly would be a bow capital markets. Please go ahead.

Morning, frankly.

Morning, Mike.

Can you talk about what drove the occupancy decline within the multitenant portfolio compared last quarter.

And maybe how is the leasing pipeline booking and your expectations gets on leasing done given the current market conditions.

Yeah, I think that you know, we're all pretty aware that right now the big National retailers are looking to stabilize their businesses in this cold it environment. So it's no surprise to me that leasing slowed significantly in the second quarter.

But the the deals that we had in our pipeline are still very healthy and alive and we expect to have additional leasing throughout 2020 and certainly in 2021. It's just you know this is a and.

Unusual quarter and I I don't think theres any any.

Different color to provide other than.

Rent collection was everyone's priority and retailers were looking at their businesses you know there there have been some interesting.

Data when when we look at retail we have single tenant and we have power centers and they're holding up very well through this <unk> pandemic, a we're starting to see all of the markets reopening and we're seeing traffic in all of our centers that something that we've been.

Watching very closely.

You know unfortunately, the sector that is taking the brunt of this impact is the mall sector and it's not an area that we have any exposure I'm. So I think that you know as a power center landlord, we'll see some benefits from what may be happening in the shakeout.

The mall sector and I remain positive.

On our leasing activities and we'll continue to bring new tenants into these power centers.

Okay. Thanks, and then just want to get your thoughts on the dividend with a payout ratio creeping over 100%. This quarter no no legal fees had some impact here. Please just would like to get your current thoughts.

I think the decision that we made to reduce the dividend was the right decision Katy Nai and the board.

Spend a lot of time on that and we are very comfortable with the where the current dividend is we did as as we talked about incur a unusually high legal DNA this quarter or as we took care of some important lease amendments.

And had to really.

Engage in a way that is.

Extraordinary.

So I expect to see DNA revert back to normalized levels in the third quarter. I think also if you take into account.

We lowered the cost of capital on the we call. It the Archer refinancing you may have hurt us refer to it that way.

That's 62 basis points of savings interest rate was 4.36% on that Archer loan we refinanced at 3.74, and obviously, we didn't have any benefit of that in the second quarter. A we have another maturity that we're very active in.

Refinancing that I'm excited to be able to talk about I expect as part of our third quarter release. So Frank we're really focused on all the right things. We're we're protecting our ran we're actively collecting you know we're already exceeding our second quarter rates with them.

It gets 86% collected through the end of July.

So.

Those are all very important aspects and we will play into some opportunities that we're very excited about for the balance of 2020.

And the performance of the portfolio so.

Yeah. It was you know this was a quarter where are you just left it all out on the field. Frank you know you did everything you had to do you talked to as many tenants as possible you collected the rent every every penny mattered.

And this team responded so well, we we just everyday.

Engaged looked at opportunities followed up work things out with people and I really do believe that it's positioned us between what we did on the debt side of the business. What we're doing on the rent side of the business. We're very focused on an ally growth in the portfolio and having a cover dividends. So.

So I'm very optimistic all things considered as I said, probably the toughest quarter I can remember in my career and really came out in good shape to finish 2020 in great shape.

Okay, great. Thank you Mike.

Yeah. Thanks, Mike.

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

Well, thank you Gary and thanks, everybody for joining us today as I said in my comments too with Frank I'm. We're very excited for the second half of 2020, and and just take a minute before we we finished the call and you know this has been a a terrible time for not only the.

United States, but also the world is as we go through this pandemic and I hope everybody is doing well and staying safe Obviously American financed trust is a high priority for us and something that we're very focused on but we send our wishes out too to everyone that you are healthy and safe.

And we look forward to talking to you again later this year. So thanks, everyone.

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

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