Q2 2022 Necessity Retail REIT Inc Earnings Call
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Yes.
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Yeah.
I would now like to turn the conference Oh, what do your host Lucy I'll call it too.
Good day Vice President.
Please go ahead.
Operator, good morning, everyone and thank you for joining us.
It's being webcast in the Investor Relations section of our fields website at Www dot the specialty retail REIT dotcom.
Joining me today on the call to discuss our results are Michael Weil, President and Chief Executive Officer, and Jason Doyle Chief Financial Officer.
The following information contains forward looking statements, which are subject to risks and uncertainties should one or more of these risks or uncertainties materialize actual results may differ materially from those expressed or implied by the forward looking statements.
We refer all of you to our SEC filings, including the annual report on Form 10-K for the year ended December 31, 2021 filed on February 24, 2022, and all other filings with the SEC. After that date for a more detailed discussion of the risk factors that could cause these differences are otherwise impact our business.
Any forward looking statements provided during this conference call are only made as of the date of this call.
As stated in our SEC filings Archie I'll disclaims any intent or obligation to update or revise these forward looking statements except as required by law.
Also during today's call, we will discuss non-GAAP financial measures, which they believe can be useful in evaluating the company's financial performance.
These measures should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP.
A reconciliation of these measures to the most directly comparable GAAP measure is available in our earnings release, which is posted on our website at www dot necessity retail REIT dotcom.
Please also refer to our earnings release for more information about what we consider to be implied investment grade tenants.
We always throughout today's call.
I'll now turn the call over to Mike while Mike.
Thank you Louisa and good morning, and thank you all for joining US today, we believe that we're well positioned to be the dominant retail REIT in the industry now that we've completed the acquisition of the transformational $1 $3 billion Open Air shopping center portfolio that we announced at the end of last year.
We anticipated the accretive transactions, we've completed contributed to recording one of our best quarters ever with year over year <unk> per share growth of over 11% to 29 per share in the second quarter or 32% compared to the fourth quarter of 2021.
Last period prior to the acquisition of the open Air shopping center portfolio.
We believe our preeminent retail portfolio is well positioned for meaningful capital appreciation and that our dividend provides shareholders a very compelling current yield.
Furthermore, second quarter highlights include revenue growth of over 43% year over year to $116 $9 million, an increase in cash NOI of nearly 30% over the same period last year to $86 $3 million and net debt to EBITDA that was unchanged quarter over quarter.
Importantly, our portfolio remains free of the tenant bankruptcies that have impacted other retail property owners, a testament to the strength of our underwriting and our intentionally constructed tenant roster.
The necessity based nature and high percentage of investment grade tenants in our portfolio provide dependable long term cash flows and we believe the potential for continued rental growth remains through the leasing up available space.
Our balance sheet includes primarily fixed rate long term debt that is insulated from significant exposure to today's to today's higher interest rate environment.
This is due to the assumption of in place fixed rate debt for some of our acquisitions combined with the steps. We took last year to lock in interest rates and extend our weighted average remaining debt maturity while rates were more favorable.
Weighted average debt maturity is four six years and 83% of our total debt is fixed rate.
We've demonstrated an ability to successfully de lever in the past and expect it will do the same now that the CIM portfolio is fully acquired.
We intend to resume our deleveraging initiative through a combination of methods that may include among others the strategic sale of properties.
<unk> leasing efforts at multiple recently acquired assets that have upside potential and opportunistically raising equity over time.
Year to date, we have disposed of 13 properties totaling nearly $300 million of aggregate contract sales price and we have a disposition pipeline for another 10 properties totaling nearly $100 million of assets.
All or a portion of the proceeds from these dispositions will be used to repay debt and thereby lower our net debt to EBITDA.
As it stands today, our strong portfolio is very well positioned in the current economic environment.
Through our acquisitions combined with the sale of an office campus earlier. This year, we have created a pure play retail REIT, reducing exposure to office assets to approximately 1% of our portfolio.
The percentage of our straight line rent derived from Sunbelt states has grown by over 15% to 55%.
Our tenant diversification has been enhanced with less than 30% of portfolio straight line rent coming from our top 10 tenants down from almost 40% at the end of last year.
Approximately 22% of our multi tenant rent now comes from grocery anchored shopping centers.
Segment that remains incredibly strong thanks to a well known anchor tenants with long term leases.
We believe the transactions. We've completed this year show that RTL is a necessity retail focused REIT and that our portfolio reflects where america shops everyday.
At quarter end, our $5 $1 billion portfolio was comprised of 1056 properties with portfolio occupancy of 98% and a weighted average remaining lease term of seven two years.
Annualized straight line rent increased 34% year over year to $383 $1 million and the square footage of our portfolio grew over 45% to approximately 29 million square feet.
Our single tenant assets are over 52% actual or implied investment grade rated and 41% of anchor tenants in our multi tenant portfolio are actual or implied investment grade rated.
Based on straight line rent 61, 6% of leases across the portfolio include contractual rent increases, which increased the cash that is due under the leases overtime.
We own properties in 47 states and the district of Columbia and are tending to operate across over 40 different industries with no single state where single industry, representing more than 10% of our portfolio based on straight line rent.
Traditional triple net industry that has been in the news lately pharmacy is not as is not significantly represented in our portfolio and comprises less than 2% of our portfolio of straight line rent.
Over the last year, we've expanded our team to include significant resources dedicated to leasing available space in our portfolio and renewing or extending leases with existing tenants.
At the end of the second quarter, our executed leases plus leasing pipeline would raise occupancy in our multi tenant segment to 89, 4% up from 88, 8% at the end of the first quarter, assuming all of the signed letters of intent leads to definitive leases, which is not assured.
Executed leases include 10, new leases five of which are with anchor tenants that total over 119000 square feet and $1 $8 million of annualized straight line rent over a weighted average lease term of 10 years.
Our leasing pipeline consists of 19, new leases for over 165000 square feet and $2 $4 million in annualized straight line rent over a weighted average lease term of 11 years.
We also completed 38 multi tenant lease renewals during the second quarter totaling over 420000 square feet and $5 $4 million of annualized straight line rent.
Bringing our total for the first half of 2022 to 56 renewals totaling almost 600000 square feet and $8 $2 million of annualized straight line rent.
The first half of this year has been very successful as proven by the results reported for the second quarter Jason.
Jason will walk through the numbers in greater detail, but our results affirm our belief and necessity based retail real estate.
Especially in the single tenant in open Air shopping center space.
With tenants such as grocery stores and quick service restaurants are properties are conveniently low quick located between home and work and are aware of America shops everyday.
We believe we're well positioned to be one of the premier acquirers of high quality service retail properties and look forward to the remainder of the year.
Turn it over to Jason Doyle to take us through the numbers in greater detail Jason.
Thanks, Mike.
Quarter end, that's all increased 31, 7% to $38 million compared to a year ago.
They have oh per share 29 cents is up 11, 5% compared to the second quarter of 2021, and 32% compared to the fourth quarter of 2021 quarter before we began acquiring the open air shopping centers.
Our second quarter at <unk> with $35 7 million or 27 cents per share up over 17% compared to the same periods in 2020 one.
Second quarter, 2022 revenue was $116 $9 million.
Three 3% from 81 6 million in the second quarter of 2021.
The company's second quarter GAAP net loss of $56 3 million was primarily due to impairment charges taken during the quarter.
NOI was $89 4 million.
31% increase over the $68 2 million of NOI, we reported in the second quarter of 2021.
As always a reconciliation of GAAP net income and non-GAAP measures can be found in our earnings release supplement and.
Thank you.
We ended the second quarter with net debt of $2 $7 billion at a weighted average interest rate of three 8% and.
Our net debt to gross asset value of 56%.
At June 30th components, the Barnett that included.
488 million drawn on our credit facility $1 8 billion about panic secured debt.
500 million of senior unsecured notes.
Cash and cash equivalents of $69 $4 million.
The amount drawn under our credit facility represents the entirety of our floating rate debt.
Liquidity, which is measured as undrawn availability under our credit facility.
Cash and cash equivalents.
So did a $108 million based on our June 30th cash balance and borrowing availability.
The company distributed $28 6 million in common dividends to shareholders in the quarter or 21 cents per share.
With that I'll turn the call back to Mike for some closing remarks.
Thanks, Jason.
The first half of 2022 was transformational for RTL and our team did a phenomenal job completing the closings and transitioning the acquired assets to our platform.
The 10 million plus square feet, we've at it presents significant opportunities for leasing growth and our team is actively engaged with high quality potential tenants from coast to coast.
Our year to date transactions have grown per share a F. F O by 32% since the end of last year as we expected and are primarily fixed rate debt is locked in for the long term.
We're focused on being a dominant pure play retail REIT and continuing to be where America shops.
Going forward to stock price appreciation and the lasting impact this year's acquisitions, we'll have for our shareholders, while continuing to pay a very compelling dividend.
Thank you for joining us this morning, and operator, please open the line for questions.
Yeah.
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One moment please poll for questions.
Okay.
The first question is from the line of.
Mitch Germain with JMP Securities. Please go ahead.
Hi.
Good morning, Hey, Mitch good morning.
Thank you.
Wanted just to address it.
I could dispositions.
And the one Q.
Presentation, you with it.
<unk> indicated $250 million of planned sales and now.
In the updated presentation. It says around 98, I think you did 30 in the quarter. So can you just walk me through you know what what's the game plan for disposing assets going forward.
Yes, so the.
The identified approximately $250 million of dispositions is still.
The the plan from the.
Yeah.
See I am acquisition portfolio, so that will be occurring we anticipate throughout the course of this year.
I think that you know we've disclosed what we have done year to date and again we were.
Still pretty active closing the portfolio, but we have been simultaneously marketing for sale. So our commentary regarding dispositions from the CIM portfolio is unchanged and then without as we always have we continue to look at dish.
Position opportunities on a strategic basis outside of.
Just the CIM portfolio.
So the 98 is an incremental addition to the 250 is that the way to think about it.
Yes.
Right.
The impairment in the quarter.
Can I just get some perspective on what that's associated with it.
Yes, Jason would you walk me through that thanks Jayson.
Sure Hi, Mitch how are you.
So the.
Right down itself is a product of our change of our intent to hold versus intend to sell as well as finding a responsible buyer for which we would accept the.
The offer and what we found is the shops at West end is in Minnesota.
Our highest and best use is likely more in the next.
Mixed sort of lifestyle portfolio as opposed to what were traditionally operating here and so a decision was made to strategically remove that assets in the portfolio and the sales would be going through in August or early September .
Got you and I think last question.
Regarding sales, Mike or is your team seeing any headwinds in the asset sale market. Obviously, we're hearing a bunch of landlords are.
Pulling their product because of lack of demand or pricing.
Any interruption that you're seeing or you know things are business as usual.
No we have not seen that.
We continue to see an active market and.
Don't have any hesitation about our plans that we've previously discussed but since I'm really glad that you're on the call today Mitch I. Appreciate you taking the time and it's exciting you know as we announce such a successful quarter to to have you'd be a part of it with us.
I appreciate that and certainly are impressed with what you've been able to accomplish here last question on the leasing side.
Wanted to just understand some of the terminology that you're using with regard to the leases that have been executed.
I believe it's a.
119000 square feet.
That is both new and renewal correct, that's not incremental new square footage or is that all new leasing in addition to your renewal strategy.
That is all new leasing.
Right excellent perfect Yeah, it's been a really nice exit.
Thanks, Mitch and just to follow on to that question.
The the demand and in the portfolio for additional space with both existing and new tenants continues to be very strong and as we talked about we have the team in place within our platform to manage these assets very aggressively.
And the many of the national tenants enjoy having a larger relationship with existing landlords. We've we've worked well together and the opportunity both from a new leasing absorption as well as renewal has been very positive and if I could just point out.
Of the 600000 square feet of renewals that have been completed and they were completed at a 6% increase.
To the expiring lease.
So again just overall when you have shopping centers that are strategically located in strong suburban markets, which our portfolio is there.
The renewals become strategic for the tenants they don't want to leave those existing spaces, it's where their customers know them to be and.
And we were able to really get that benefit so a very exciting what what we've been doing overall in the portfolio.
And we're looking forward to the balance once a year.
Thank you.
Thanks Mitch.
Thank you.
The next question is from the line of Bryan Maher with B.
B Riley Securities. Please go ahead.
Good morning, Michael and Jason and congrats on getting the I am fully done.
Thanks, Brian .
As you know.
They have a lot of discussion there about dispositions and.
You know I think Jason you mentioned $108 million of current liquidity.
When we think about the back half of 2022, Michael how would you characterize that would you characterize it is you know a net seller a net acquirer a capital recycler.
How are you thinking about that.
Well I.
I have to put it in perspective first Brian we we acquired $1 $3 billion of properties in the first half of the year.
So.
Our overall 2022 will by far be a net acquirer.
As we execute on the remainder of the strategic plan that we laid out when we announced the C. I M deal.
We will.
Probably.
Probably be close to neutral on acquisitions versus dispositions, maybe a little bit more of the dispositions but.
We're gonna be strategic what we've really seen in the last 30 days has been.
The completion of what I expected from a market switch.
We pulled back from the market when we felt that there.
There was too large of a gap between seller and buyer.
We were not willing to stretch we felt that the market had changed about six months ago and would continue.
So we really did pull back.
We're now getting phone calls from brokers that want to know where will we bid where will we buy and we're very careful to be looking at distressed sellers not distressed properties in what we acquire.
So no question that we are focused on dispositions I think its a.
Really terrific way.
To accomplish the goals that we've set forward for the portfolio from.
From all types of perspective, but we will.
Where appropriate.
Look at new acquisitions as well.
Okay. Thanks, and then in the past you've talked about you know getting the occupancy at the multi tenant open air product.
I think you're making some progress there.
89, and change out leases are signed I think you've talked in the past about getting that up into the low to mid nineties.
Or is that still the case and do you think that your current strategy that you're you're you're implementing I get you there and kind of what timeframe are you thinking about a couple of quarters and a 2023, how should we think about that.
So, yes, I I have said and I still do expect the multi tenant portfolio to be in the low to mid 90% occupancy range.
I think that we are definitely.
In moving in that direction and when we take into account executed occupancy in pipeline.
We're really.
Just about at 90%.
And we'll continue to see that drive.
Some of that will also.
Benefits from the strategic disposition strategy as we might sell a property that has lower occupancy, which is something that we've talked about in in the past.
So the timing to get into that range I do still think is really I would be comfortable in a in a two to four quarter type of conversation.
And you know the the team the asset management team has been very active and working with many national retailers as well as local retailers.
That are coming into the shopping centers and expanding their operations.
Okay and last for me you've made some discussion on this call and previously about trying to get the stock price to more adequately reflect value, which we would agree to and when we look at the dividend of 85 cents in the yield of 11% and a clear.
The market.
Maybe you had some concerns about that by our model, which needs to be updated for today numbers were kind of coming up at the mid eighties Fad payout ratio for this year mid Seventy's for next year with the you're adding and C. I am is there anything you can say or suggest as it relates to how people should get comfortable about that.
85 cent dividend is pretty rock solid.
Yeah, I would look at the the numbers I think they really are speaking for themselves in.
Earned versus paid out we've got some nice retained earnings as well generated within the portfolio.
<unk>.
And.
We have been consistently operating and growing this portfolio. We're seeing the performance continue to increase occupancy is a is a nice driver as well and when we look at the implied an investment grade rated tenants within the portfolio.
The weighted average lease term the fixed rate debt I think is a really important aspect that people need to take a look at where over 80% fixed rate debt in the portfolio and we have contractual.
Long term leases with rent growth. So gives me every reason to remain confident in the company's current.
Dividend strategy.
And I'm really excited to have calls like this and results like this so that people can can just see the portfolio performing at this level.
Great. Thank you.
Thanks, Brian .
Thank you.
The last question is from the line of Barry Oxford.
Please go ahead.
Good morning, Barry.
Great. Thanks, guys.
Getting back to the acquisition of Michael could you give us a little color on the acquisitions that you did in the quarter that was outside of the C. I am.
And yeah, you know kind of you know what what was the quality and what was the rationale there.
So it was a pretty quiet quarter, Barry altshuler, leading the one the $1 3 billion of C. I am properties.
We I'm just looking at that 17.5, $17 5 million.
Yeah, so that is a convenience and gas operator acreage dedications.
And you know it.
Operating.
<unk> that we're very comfortable with sale leaseback master leased and really fits the criteria that you've come to see us operate within.
From an acquisition standpoint.
Okay.
Perfect.
Michael I don't know if you broke this out but you did 12, 2% a a F O growth to Q over Q.
How much of that growth was responsible for C. I am or look Barry Yeah. It's you can't just break it out like that.
It's something that.
Let us take a look at how we can give you the information if its appropriate and we will get back to you.
Because it feels like it's at the very least it feels like it was a big deal.
Well, we talked about when we announced the CIM acquisition that there. It was an accretive acquisition immediately yes, I think that yes, we bought it right.
We negotiated a very.
Well balanced deal.
Most importantly, Barry and one of the things I'm most proud of with the company is we had a flawless integration and $1 $3 billion of properties 81 properties, we closed on time.
We continue to lease the portfolio our asset management team.
Did a great job integrating the portfolio, Jason Doyle and his team on the accounting side rent collection, we didn't Miss a beat and you know and I know in a large acquisition like this execution really matters. So you know, it's one thing to announce a deal it's another thing.
To execute on that deal to close it seamlessly to not lose momentum within the existing portfolio and then to be able to integrate and operate.
The new portfolio. So it was really a big accomplishment for the first half of 2022 and sets us up for a really strong performance.
I agree I agree thanks Scott.
Thank you Barry.
Okay.
Well. Thank you everybody for joining US again, it was a great quarter. We look forward to catching up will will be available for calls or questions. If anybody has any and please remember necessity retail REIT. It is where America shops, it's a portfolio that's performing a rig.
Well and we look forward to our continued success.
Into the future. Thank you all very much.
Yeah.
This concludes todays conference.
You may now disconnect your lines. Thank you for your participation.