Q3 2022 Necessity Retail REIT Inc Earnings Call
Good morning, and welcome to the necessity retail re third quarter of 2022 earnings call.
At this time, if anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.
I would now like to turn the conference over to Curtis Parker Senior Vice President. Please go ahead.
Thank you operator, good morning, everyone and thank you for joining US. This call is being webcast any investor relations section of Rtl's web site at Www dot necessity retail rate dot com.
Me today on the call to discuss the results are Michael while President and Chief Executive Officer, and Jason Doyle Chief Financial Officer.
All the information it contains forward looking statements, which are subject to risks and uncertainties she'd wander morpheus rest square uncertainties materialize actual results may differ materially from those express or implied by the forward looking statements.
S J C filings, including the annual report on Form 10-K for the year ended December 31st 2021 filed on February 24th 2022, and all other filings with the S. C. C. 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 the skull.
[noise] stayed in our SEC filings Rtl's disclaims any intend to our obligation to update or revise these forward looking statements except as required by law.
Also during today's call. We will just have non-GAAP financial measures, which we 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 gap.
Conciliation of these measures to the most directly comparable gap measure it's available in our earning Israelis, which is posted on our web site.
Please also refer to our earnings release for more information about what we consider to be applied investment grade tenants are trembley, what used throughout today's call.
Now turn the call over to Mike while Mike. Thank you Curtis good morning, and thank you all for joining us today.
We had an excellent third quarter highlighted by leasing over 1 million square feet, including new leases and lease renewals and completing the C. I N portfolio acquisition.
Most notably we grew a F F O per share by 18% when compared to the fourth quarter of 2021, the last four full quarter prior to the C. I N portfolio transaction.
In all the quarter was among the most successful quarters, we've had since our listings in terms of leasing which was strong and increased occupancy at our open air shopping centers, which reflects the ongoing strength of the U S. Retail sector. We believe our preeminent necessity based retail portfolio is well positioned for meaning.
[noise] full capital appreciation with a dividend provide shareholders a very compelling current yield.
Furthermore, compared to our peers, we believe that our portfolio provides tremendous upside that we would expect to offset any perceived short term economic uncertainty.
The financial press.
Press has broadly touted the resilience of the U S retail sector, including in a featured article in the Wall Street Journal in early October .
Declared that U S. Retail quote is enjoying its biggest revival in years and quote.
Retail vacancy fell to its lowest level in 15 years in the second quarter of this year, while asking rents at U S shopping centers were 16% higher than five years ago.
For the first time since 1995 more stores opened and closed in the U S last year with that trend expect continue in 2022, even in the face of possible economic headwinds.
Of course this comes as no surprise to us as we have long believed that necessity retail is a real reliably strong sector of the economy that offers compelling reasons for investing in its underlying real estate.
We continued to see results from the significant commitment we've made over the last year to building a world class asset management team.
I'm very pleased with the third quarter results. This team achieved recording more leasing activity measured by square feet than in any prior quarters since 2018 or.
[noise] executed leases as a quarter and plus leasing pipeline as of October 31st would raise occupancy in our Multitenant segment to 92.8% up from 89.4% at the end of the second quarter is executed at least as commands and assuming all of the sign letters of intent lead to definitive.
Leases.
Executed leases in the third quarter totaled over 1 million square feet. This.
This includes over 500000 square feet through 41, new leases in our Multitenant portfolio with $3.5 million of annualized straight line ran and over 550000 square feet on 42 lease renewals in our multitenant portfolio, representing $8.4 million in annualized straight line.
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As of the quarter and the lease renewals had a positive spread of 7.7% between the previous rant and the rent payable under the terms of the renewal.
Ah leasing pipeline as of October 31st including leases executed. After the end of the third quarter consisted of over 368000 square feet and $5 million an annualized straight line ran over a weighted average lease term of 11.2 years.
During the first nine months of the year in our Multitenant portfolio, we signed leases for over 1.9 million square feet.
This consist of 70, new leases totalling almost 800000 square feet and over $6.5 million, an annualized straight line rent and.
In 98 lease renewals totaling over 1.1 million square feet and $16.5 million in annualized straight line ran the lease renewals had a positively spread of 7.1% at quarter end. Our 5.2 billion dollar portfolio was comprised of 1050 properties with executed.
D C plus leasing pipeline of 93.9% in a weighted average remaining lease term of seven years.
Annualized straight line ran increased almost 38% year over year to $392.3 million and the square footage of our portfolio grew over 43% to approximately 28.8 million square feet and.
In large part due to the acquisition of the C. I N portfolio.
As of the quarter and the tenants of our single tenant assets are over 54% actual or implied investment grade rating and 40.4% of anchor tenants in our multitenant portfolio are actual or implied investment grade rate it.
Based on straight-line rent, 63.9% of leases across the portfolio include contractual rent increases, which increase the cash that is do under these leases overtime by approximately 1% per year on average.
We owned properties in 47 states and the district of Columbia, and our tenants operate across 40 different industries with no single state or single industry, representing more than 10% of our portfolio and no tenant representing more than 4% of our portfolio based on straight line rent.
The necessity base nature and high percentage of actual or implied investment grade tenants in our portfolio provide dependable longterm cash flows and we believe the potential for continued rental growth remains through lease up of available space.
At quarter end, our long term that had a weighted average maturity a 4.3 years and was 83% fixed rate. After we proactively locked in rates during the historically low interest rate environment, we experienced last year, which insulates us from significant exposure to today's rising interest rate environment.
We've demonstrated an ability to successfully delever in the past and expect that will do the same now that the C. I N portfolio acquisition is closed.
We intend to resume our deleveraging initiatives through the strategic sale of properties and continued leasing efforts at multiple recently acquired assets that have upside potential.
During the first nine months of the year, we dispose of over $330 million of mostly non-core properties and have a disposition pipeline of over $250 million, assuming all dispositions clothes on their contemplated terms.
All or a portion of the proceeds from these dispositions is expected to be used to repay debt and lower our net debt to EBITDA ratio.
I'll turn it over to Jason Doyle to take us through the numbers in greater detail Jason.
Thanks, Mike the company's third quarter revenue was 116.2 million up 26.4% from $91.9 million or the third order of 2021 with a net loss of 56 and a half million incurred in the corner.
Third quarter, a F F O was $34.2 million or 26 cents per share up 18% compared to the fourth quarter of 2021, the last full quarter prior to the <unk> transaction.
This quarter's results reflect nearly the full impact from the acquisition of the C. I N portfolio and did not include any lease termination fees, which had previously increased revenue and a F. F O and both the third quarter of last year and the second quarter of this year by 10.4 million and $5.7 million respectively.
Our third quarter 20, twenty-two F. F. L was 29.4 million or 22 cents per share and NOI was $88.1 million or 12.2% increase over the 78 and a half million dollars a N O Y we reported in the third quarter of 2021.
I was always a reconciliation of GAAP net income the non-GAAP measures can be found in our earnings release supplement and form tango.
We ended the third quarter with net debt of 2.8 billion at a weighted average interest rate of 4.2% in net debt to gross asset value of 51.5%.
At September 30th the components of our that included 478 million drawn on our credit facility 1.8 billion of outstanding secured that and 500 million of senior unsecured notes.
The amount of thrown under a credit facility represents the entirety of our floating right that.
Liquidity, which is measured as undrawn availability under a credit facility lost cash and cash equivalents stood at 81 million. That's based on our September 30th cash balance and borrowing availability.
The company distributed 28.3 million in common dividends to shareholders and the order or 21 cents per share a F. F O per share was 26 cents.
With that I'll turn the call back to Mike for some closing remarks.
Thanks, Jason.
Our third quarter results reflect the benefits of the CIM transaction and the continued performance of our portfolio and affirm our belief in necessity based retail real estate, especially single tenant properties and open air suburban shopping centers.
With tenants such as grocery stores and quick service restaurants are properties are conveniently located between home and work and or where America shops every day.
Delivering the accretion we expect it from the C. I M transactions and successfully accelerated the pace of leasing across our portfolio to grow multitenant occupancy to almost 93%, including our leasing pipeline.
We believe we're well positioned to be one of the premier acquirers of high quality necessity retail properties and look forward to the lasting impact we expect our successful acquisitions and leasing activity will have for shareholders, while continuing to pay a very compelling dividend.
Thank you for joining us this morning, and operator, please open the line for questions.
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One moment. Please so we pull for questions. Thank you.
Our first question is coming from the line of Bryan Mayer Wispy Riley Securities. Please proceed with your questions.
Hey, Brian's mind, England. Thanks.
Thanks for all those comments so far a couple from me.
On the disposition activity is that mainly being driven by delevering or would you expect there to be some capital of recycling and in a perfect world assuming you could get what you want for the things you're selling you know how how deep is that pool of assets.
[noise] well as we've talked about from the beginning of the announcement regarding the C. I M acquisition.
We felt that there were some some really great opportunities from a.
Recycling standpoint, and of course, we've committed to lowering net debt to EBITDA dispute strategic dispositions were going to be one leg of the strategy that we will utilize to drive net debt to EBITDA down the the market for quality.
Real estate continues to be active obviously, there's there's been some pull back but again.
Mmm good properties find buyers.
So.
It's no different than how we thought about it from the beginning Brian where we're just strategically looking at the portfolio. You've heard me talk about where we see this this intrinsic value of of disposing of the plant in Northern California again, we we acquired the C. I N portfolio at an average.
719 cap rate M and we believe that we will execute on a transaction disposing of the plant at a cap rates significantly lower so real value creation, there and again I I think that the execution of our state it <unk>.
<unk> regarding net debt to EBITDA will just continue to make this portfolio even greater than it already is and I think you heard some things today you know the leasing activity in the portfolio is being very strong the the positive spreads on renewal leasing up seven per cent.
<unk> just goes against what people have have thoughts or wondered the the performance of the asset management team, that's led by effort and professionalism and the quality of the real estate is so attractive to not only existing tenants, but new tenants.
You know I've talked about the importance of driving occupancy and we again continued to have really significant net absorption. So these all go hand in hand, and we we just are really pleased it's an exciting quarter for us to be talking about.
Thanks, and and maybe sticking on the the leasing angle for a moment.
Yeah, you've had a lot of success, you know, bringing up the occupancy at the multi and it properties. You know are there some particular asset or Kenny type that's driving those occupancy games and are you starting to see anybody pushed back on you know rate increases as the economy has gotten a little squirrelly.
No we haven't seen that at all and as as evidence just alone in the the renewal leasing where where over 7% on a per square foot basis from where the expiring leases were so good real estate is very valuable.
To retailers, we continue you know.
Our whole theme is necessity retail and where America shops. So we continue to see the discount apparel, we continue to see the home improvement the auto repair.
These tenants the the.
The statements that they're all making publicly about opening more.
More stores in 2022 and their plans for 2023 remain very positive and just as a side note Brian in our portfolio.
We don't have any albertson's or Kroger grocery stores and and we've all been reading about you know that that proposed merger and you know how that might look all I know is it's not in our portfolio and it has no effect on us and you know artwork in our multi.
Tennant portfolio, 23% of our straight line ran is generated by grocery anchored but again it is not albertson's or Kroger, which just gives us more reason to be excited about what we have and the way the portfolio is positioned it is core to suburban them.
America, and where America shops.
Thanks, and just last for me I I know that you have you know red escalators in your you know the bulk of your Lisa I think they're around one per cent or so you know what's going on with in place.
Have you guys given any thought to bumping up those annual Red escalators and how do you think that would be received thanks yeah.
You know the again you have to remember the the portfolio construction with with such a high percentage of investment grade or implied investment grade national retailers [noise] for the most part they will insist on contractual ran escalators that are that are negotiated at the time.
Of the the Leafs, so I don't think I don't think it <unk>.
Likelihood, but I do believe you know as we see in the lease renewals as we as we as look to the market ranks, they're they're very strong and holding up and overall as we think about historical periods of inflation the value of a cough.
Compounding annual escalator with a 20 year lease or a 15 year lease will continue to exceed period of high inflation that will taper off and we don't know at what point, whether it's in you know 612, 18 months, but I I am confident.
Didn't that the contractual ranked grow schemes. This portfolio the the clear visibility into earnings growth and again you know, we we had a a great a F. F. O result for the quarter, we have a paid paid dividend of 21 cents per share.
We earned 26 cents per share and as we talked about in the comment that 26 cents per share.
Didn't have any benefit or lift from one time things like termination fees. So we think that that's even <unk>.
More exciting and something that we're looking forward to seeing the continued growth from an organic standpoint in the portfolio.
Okay. Thank you Michael.
Thanks, Brian .
Oh, great guys just to build on the dispositions and and acquisitions is it fair to say 23 that you'll be more of a you'll be more on the net disposition side of things and paying down the debt, Ed and kind of pausing on acquisitions with the exception of opportune mystic opportunity.
DS or Michael Am I thinking about that wrong.
Well first of all of the morning, Barry It's good to talk to Yep Yep Yep.
Yep, you know I hate I.
Without giving.
Too much guidance or any guidance at all.
What I want already for [laughter], Yeah, Yeah, Yeah, Yeah, Yeah, Yeah, Yeah, Yeah, I mean, I got numbers I got boxes to fill in [laughter] first and foremost.
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Our job is to maximize the portfolio and we see opportunities.
To address some very important strategic items through strategic dispositions I have to tell you I never start off a year with my goal being to be a net seller I would believe in and look forward to opportunities.
That will continue to let this portfolio grow.
While still addressing the the committed focus on lowering net debt to EBITDA, but at the same time improving further the earnings in the portfolio. So we're gonna see what the what the economy presents I I think it's really hard to have a.
A clear picture of 23 right now just because there there are so many macro items going on you know.
We know the headlines but like every.
Period of of the economy their unique things that are happening right. Now you know I personally think that a lot of the inflation is being caused by supply supply chain issues that we've typically never had before which gives us a different dynamic which gives me belief that.
This could be a a shorter period of inflation you know that's caused by something unique than what we typically see in periods of inflation.
But we're gonna watch really closely and we're gonna pick our places you know I I wouldn't have told you at the end of 2021 or in the.
Well at some point in 2021, I didn't know that there was going to be such an exciting opportunity with a portfolio like C. I N, but it it checked the boxes and the box that that I'm focused on most continues to be not only earnings but driving net debt to EBITDA as we've spoken about.
<unk> on many calls prior.
Great. Thanks, Thanks for that color. That's helpful. Another question for me you know the occupancy you've driven really strong Ah occupancy not just this quarter, but over the past few quarters can you kind of keep driving that at that rate or what Barry thinks I'm, probably going to get a little tougher we will I will obviously be nudging occupy.
She upward, but probably not at.
Quite the speed that that that that that you have seen over the past few quarters.
Well I I think your logic is right just because the the higher the portfolio occupancy yet.
The.
I I've always talked about thinking that we we should be able to get into the 93% to 95% range.
And like I feel I've always felt strongly about it based on the quality of the real estate and the effort of this team and how we approach it and the relationships that we have with the retailers.
You know as I've said before retailers they they wanna be with landlords that create value an opportunity and we've shown that we can we continue to operate the centers in a at a very high level, we have relationships with with the retailers we we.
Talk to them about their strategic goals and and how we can be a part of that so.
We will continue to to see the occupancy increasing the portfolio, but every every large portfolio. You know there. There just comes a point, where you've kind of hit natural saturation I don't know, if that's 96 or 97, but we're.
Going to squeeze every last foot out of this portfolio because that's our job and I I look forward to continuing to have positive absorption numbers in in the upcoming earning seasons.
Perfect Great appreciate that that's all I've got for today, thanks, guys. Thanks.
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Our next question is from the line of Jodie Yadav with JMP Securities to assist you with your questions.
Oh. Thank you. Good morning, this is Judy iPhone.
Hi, Thank you Sir Thank you congratulations significantly things are bad.
At.
Just on that point can you elaborate if there was some specific times, maybe like national vacated is Clifford Luka awesome industry that you saw him all attraction.
So is it the.
The majority of of the leasing was with <unk>.
<unk> many of which are.
Investment grade or implied investment grade many of them already exist in the portfolio and just continue to expand but one of the exciting opportunities that we've always seen with suburban open air shopping centers is as your anchor tenants are so.
[noise] well positioned it really does drive higher rents and activity of the more local community or regional retailers and those are pieces of the puzzle that make a shopping center.
Critical to a neighborhood.
So we you know when we have this type of success in our leasing and we start to see the the occupancy levels, where we would expect them we can really curate.
Who's in the center N y.
What is the benefit of bringing this tenant verses that tenant and I I I don't want to name names, but we've had some some internal conversations about hey, the benefit of bringing national retailer X versus national retailer why are the following and when we look at.
Net effective rent and longterm value creation, and what does it do to the tenant mix in the center you know there's a there's a very analytical aspect and the more desirable your centers are the better your choices are.
So that's what's exciting to us and you know the the.
The mix of tenants you know, we we have 44 industries represented in the portfolio and those 44 industries have pretty much been in place for the last few years those are our bread and butter, we we really do follow the necessity retail aspect of.
The portfolio and we evaluate based on the the brick and mortar strategy of the retailer the the.
Recession resistance that we underwrite two of the retailer again, I'm I couldn't be more pleased with the.
Fact that we don't have bankruptcies in this portfolio, we continue to collect 100 per cent rent in this portfolio.
These tenants are here for the long haul because their businesses are relevant and they provide goods and services to the communities, where they're located and and that drives foot traffic and foot traffic, obviously drive sales and sales drives the tenants willingness to renew.
New add a positive 7% spread from where their previous lease was so it really is all tied together.
And it starts from having the relationships and knowing the markets and and understanding the communities where we're located.
Alright, thank you.
<unk> I'm not gonna ask about your physician.
That is convenient.
Right now on the market.
Seeing that that's.
Disposition timeline for that too.
Or is it <unk> I'm sorry I.
You you cut out a little bit I didn't hear the beginning part of your question. If you could re ask it.
Oh, sorry about that so I notice can can you <unk> the market right now so in terms of dispositions.
See any delay in the timeline of those $250 million worth of disposition or is it not.
Impacting considering Yap code for Ya.
I I would tell you that we are still on.
The same timeline as as we have been communicating to the market.
And as I've said before quality real estate.
Is transacting.
So we are comfortable that we will meet the the timing that we've put forth.
[laughter], thank you for that and.
Lastly, I, it's just a minute about $300 million worth of gas coming to you in 2023.
Is there any could you elaborate and it's actually like to add that next year.
Of course, there is.
And.
As you can probably see the majority of of that debt coming due in 2023 is is part of the debt.
On the property that we called the plant that we assumed from C. I M. So we think of a large part of that debt maturity will be addressed in the disposition naturally.
But the other analysis that we have looked at is if we choose to we could refinance all of that maturing debt using our unsecured line.
Or if the market is favorable we we could address it that way, but again it is something that is in our plans for 2023, we have a very clear path forward and we have great flexibility because of the availability of our unsecured.
Line as well as the.
Intended disposition of the plant.
That's all for me thank you for taking the classroom.
Alright, thank you.
Thank you at this time I'll turn the floor right to Mister Awhile for closing comments.
Alright, well, thank you operator, and again, thanks, everybody for joining us today. The the results of the company are very exciting and we have every expectation to continue to have positive performance.
I.
I think the the Q&A answers a lot of important questions and I appreciate everybody that spends the time understanding the company and necessity retail is really well positioned for for the future and the fact that we continue to see incredible foot track.
Thick and and growth in the industry really gets us excited to finish out this year strongly and for what's ahead next year. So thank you everybody.
Thank you. This will conclude today's conference may disconnect. Your lines at this time and thank you for your participation.