Q4 2022 Necessity Retail REIT Inc Earnings Call
Good morning, and welcome to the necessity REIT retail REIT fourth quarter and year in 2022 earnings call at.
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I would now like to turn the conference over to Curtis Parker Senior Vice President. Please go ahead Sir.
Thank you operator.
Everyone and thanks, you for joining us this call is being webcast in the Investor Relations section of <unk> website at Www dot necessity retail REIT dot com joining.
Joining me today on the call to discuss the 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 who Atari SEC filings, including the annual report on Form 10-K for the year.
Year ended December 31, 2021 filed on February 24th 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.
The annual report on Form 10-K for the year ended December 31, 2022 will be filed subsequent to today's call.
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 RTL disclaims any intent or obligation to update or revise these forward looking statements, except as required to do so 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 and operating performance. These measures should not be considered in isolation or as a 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 our earnings release, which is posted on our website.
Please also refer to our earnings release for more information about what we consider to be implied investment grade tenants a term we will use throughout today's call.
I will now turn the call over to our CEO , Mike Weil Mike.
Thanks, Curtis and good morning, and thank you all for joining US today, we had a great year at RTL in 2022, we were extremely active completing accretive acquisitions and strategic dispositions, while successfully signing new and renewal leases with tenants.
Our strong execution drove occupancy higher in both segments of our portfolio and for RTL as a whole.
The positive effect that these efforts are starting to have is evident in the excellent results I'm pleased to share with you today as.
As we begin 2023 rtl's portfolio is stronger than ever we're committed to fortifying our balance sheet and we're well positioned to continue creating value for our shareholders.
During the year, we acquired the $1 $3 billion portfolio of open air power centers and grocery anchored shopping centers at an attractive cap rate.
Reduced our portfolio exposure to office assets to less than 1% and were extremely successful at leasing up available space and renewing leases with existing tenants across our portfolio.
The growing team that supports our portfolio contributed to strong year over year leasing results as occupancy in the single tenant segment increased by 3% to a total of 99, 3%.
Occupancy in our multi tenant portfolio increased by two 2% to a total of 89, 8%.
Total occupancy increased by <unk>, 5% to 93, 7% from 93 point too.
This growth is reflected in a 19% increase in full year 2022, <unk> to $140 million compared to 2021, and importantly translated to fourth quarter a F. F O per share growth of 23% to 27, when compared to the same quarter of 2021.
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As we previously communicated we completed over $400 million of dispositions during 2020 to sharpening our focus on retail properties lowering our net debt by $51 $9 million and reducing our net debt to adjusted EBITDA ratio by <unk> six times to $9 one <unk>.
<unk> from nine seven times at the end of the third quarter as we successfully did in 2021 prior to the large 2022 acquisitions.
Executed leases in our multi tenant portfolio totaled nearly 660000 square feet for the fourth quarter. This includes over 114000 square feet through 13, new leases with $1 $5 million of annualized straight line rent combined with over 545000 square feet on 40.
One lease renewals representing over $6 $5 million in annualized straight line rent.
As of quarter end, the lease renewals had a positive spread of four 7% between the previous rent and the rent payable under the terms of the renewal.
Our leasing pipeline as of January 31, 2023, including leases executed after the end of the fourth quarter consisted of over 450000 square feet and nearly seven $4 million in annualized straight line rent.
During the full year 2022, and our multi tenant portfolio, we signed new and renewed leases for over $2 6 million square feet.
This consists of 83, new leases totaling over 880000 square feet and $8 $1 million in annualized straight line rent and 138 lease renewals totaling over $1 7 million square feet and $23 million in annualized straight line rent.
The renewals had a positive lease spread of six 4%.
With our executed leases as of quarter end plus leasing pipeline.
Occupancy in our multi tenant segment would rise to 92, 4%.
As executed leases commence and assuming all of the signed letters of intent lead to definitive leases are multi tenant occupancy would be at the highest level it's ever been.
At year end, our $5 1 billion portfolio was comprised of 1044 properties with portfolio occupancy of 93, 7% executed occupancy of 95, 4% and a weighted average remaining lease term of seven two years up from seven years at the end of the <unk>.
Third quarter.
Annualized straight line rent increased 33% year over year to $383 $6 million and our portfolio grew 40% to $27 9 million square feet.
As of the quarter and the tenants of our single tenant assets are 53, 8% actual or implied investment grade rated and 37, 2% of our anchor tenants in our multi tenant portfolio are actual or implied investment grade rated based.
Based on straight line rent 64, 7% of leases across the portfolio include contractual rent increases which increased the cash that is due under these leases over time by approximately 1% per year on average.
We own properties in 47 states and the district of Columbia, and our tenant to 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.
I am pleased to report that we don't own any kroger or Albertsons branded stores. These two companies as part of their proposed merger recently announced that between $250 and 300 their stores face an uncertain fate in response to antitrust concerns.
The necessity based nature and high percentage of actual or implied investment grade tenants in our portfolio provide dependable long term cash flows and we believe there remains potential for continued rental growth through leasing up available space.
At year end, our long term debt had a weighted average maturity of four one years and was 83, 6% fixed rate. After we proactively locked in rates during the historically low interest rate environment, we experienced last year, which minimizes risk from significant exposure to today's rising interest rate environment.
We have demonstrated an ability to successfully de lever in the past and expect that we will do the same again now that the open Air shopping Center acquisition is complete.
We recorded progress on our deleveraging initiative in the fourth quarter, reducing net debt to adjusted EBITDA ratio by <unk> six times to nine one times from nine seven times.
Over quarter.
Through the strategic sale of properties and continued leasing efforts at multiple recently acquired assets that have upside potential.
As we mentioned last year, we sold over $400 million of assets and in 2023, we have a disposition pipeline to sell approximately $70 million of properties 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.
Moving forward, we remain focused on the balance sheet, including our 2023 and 2024 maturities.
We're considering a combination of refinancing and the strategic sales of select assets.
The majority of the 2023 maturities relates to one specific highly desirable property in northern California. It remains our intention to sell the property, but we will do so at the right time and at the proper price in the meantime, we're focused on leasing up available space at this property to maximize its value.
As we've demonstrated in the past we have an ability to be disciplined when we add properties and the same holds true when we sell properties.
We believe that the significant momentum we built throughout last year and acquisitions dispositions and leasing activity has laid the foundation for continued growth at RTL, We had an outstanding year by any measure and we look forward to continuing to be where America shops.
I will turn it over to Jason Doyle to take us through the numbers in greater detail Jason.
Thanks, Mike for the year ended December 31, 2022, we reported total revenue of $446 4 million or.
A 33% increase compared to $335 2 million in the prior year.
Fourth quarter revenue was $118 4 million, a 44% increase from $82 5 million in the fourth quarter of 2021, the company's 2022, GAAP net loss was $105 9 million versus a net loss of $63 4 million in 2021 and full year 2022 N O.
<unk> was $344 9 million or 23.
A cent increase over the $279 7 million, we recorded for 2021.
Full year, <unk> was $125 6 million or <unk> 95 per share compared to $95 3 million and <unk> 83 per share in 2021.
For the fourth quarter of 2022, <unk> was $30 5 million.
Compared to $17 4 million for the fourth quarter of 2021.
Full year, <unk> was $140 million or $1 <unk> per share compared to a $118 million and $1 <unk> per share in 2021.
Increases of 19% and 4% respectively.
Fourth quarter, <unk> grew 32, 6% to $35 6 million or 22, 7% to $27 per share.
Compared to $26 8 million or <unk> 22 per share in the fourth quarter 2021.
As always a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release.
We ended the fourth quarter with net debt of $2 7 billion at a weighted average interest rate of four 4%.
<unk> of our net debt include $458 million drawn on our credit facility.
One 8 billion of outstanding mortgage debt.
$500 million of senior notes and cash and cash equivalents of $78 million.
Liquidity, which is measured as undrawn availability under our credit facility plus cash and cash equivalents stood at $118 7 million on December 31 2022.
With that I'll turn the call back to Mike for some closing remarks.
Thanks, Jason.
We had a very successful year in 2022 and every aspect of our business. Our team has been simultaneously executing on our strategy across acquisitions dispositions and asset management all year long.
The product of their work can be seen in our 2022 results and we've positioned RTL to continue to see the benefits for years to come.
The transactions, we completed enhanced our portfolio and our leasing pipeline is expected to increase our multi tenant occupancy to 92, 4% and at seven $4 million of straight line rent.
We plan to further reduce leverage with a forward disposition pipeline of over $70 million and expect to continue to strategically sell assets, where appropriate a disciplined we have demonstrated in the past.
We had a great year in 2022, which ended with an especially strong fourth quarter and look forward to continuing to build our company into the leading owner of necessity retail across the country as we move through 2023 and beyond.
Operator, let's open the line for questions. Please.
Thank you we will now conduct a question and answer session.
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One moment, while we poll for questions.
Our first question comes from Bryan Maher with B Riley. Please proceed.
Good morning, My uncle and Jason.
Hey, Brian .
Couple of questions first of all congrats on a really good quarter.
Pleasantly surprised.
Obviously.
He is doing quite well can you give us a little bit more color on the further ability to drive multi tenant occupancy.
And then as you kind of get up into the mid nineties on occupancy how are you thinking about driving rate.
Well.
The two go hand in hand, as you know and I appreciate the question.
First of all I do want to point out I was really pleased to see the single tenant occupancy at 99, 3%, which is frankly, where it should be.
So.
Very stable and that's the piece of the portfolio that we look for that predictability.
Pipeline.
Is very full for continued leasing in the open Air shopping center as I've spoken about before I think it's realistic.
To see this portfolio in the mid nineties.
For consistent multi tenant occupancy.
94% to 96%.
What that will do and this is becoming a.
Our regular point of update and something that I think is very important.
We have.
Lease growth in our renewals.
Positive NOI growth when we complete these renewals so the busier the shopping centers the more cars in the parking lots the more people in the stores the more valuable the center becomes too are retailing partners. They have also come to know us as a very capable landlord.
And a landlord that brings value to the real estate and there ultimately in those stores because they want to sell more of their goods and services. So that will just naturally continue to allow us.
To be at the top of the market.
For rental rates.
The longer term nationals are in there.
But when it comes time to renew they will want to keep their anchor locations, where we continuously see.
<unk> opportunity is with the regional and community tenants that benefit from the strong occupancy.
And we have the ability to increase their rent. So it's a very important dynamic and one that the asset management team continues to be very focused on we have the ability to be selective on what types of deals we want to put in.
Who that tenant is what the industry is is it complementary to the tenants that are already in that particular center.
What.
What does the Capex layout look like for us.
Because obviously, we're focused on net effective rents.
The more positive the impact of those rents obviously.
The greater the NOI impact and just overall good performance of the portfolio.
That's helpful. A lot of the companies that we cover have built in rent escalators of 1% to 2%.
ZIP code would the thought be that as you enter into renewals given how inflationary pressures have impacted.
One of your tenants that you as well to maybe up those.
We will certainly start there and in many cases, we will finish there.
With higher escalators.
But again.
It's a negotiation.
And it's going to come down to the overall value in the center of the value of that individual tenant there.
Their credit rating their guarantee et cetera. So it is certainly top of mind as we are looking at new leases.
And it's also not something that we've talked a lot about this quarter.
But as we look at potential new acquisitions.
We have a <unk>.
Different expectation for <unk>.
Annual escalators in this environment than we did three years or five years ago.
Great and then kind of set with a little bit into my next question.
Congrats on getting leverage down from 97, I think Tonight, one can you remind us right now.
One can you remind us what your leverage goal is.
Yes.
Before we did the open Air shopping center acquisition at the beginning of 2022.
We're right about seven five times $704 75.
And that is where we are focused.
On getting back to.
Okay, and then maybe last for me.
We continue to hear a lot about half owners when they go to refinance in the last half of the year across asset classes are going to have a hard time and assets are going to come to market. How are you thinking about those potential opportunities in conjunction with.
Your desire to further delever.
So were being very pragmatic about it and I think that it's important that we balance.
The.
Focus on lowering net debt to EBITDA with smart opportunities.
First and foremost we want to see the net debt to EBITDA continue to lower and I was really pleased that in this quarter.
We had a noticeable.
<unk> of that net debt to EBITDA and I think it's important that the market hears and sees that and continues to expect that from us.
There will be opportunities, we've always found ways to.
Be accretive in our acquisition approach.
Again in 2022, having acquired $1 $4 billion of assets and it wasn't about acquiring $1 $4 billion of assets. It's about all of the things that occurred during the course of the year.
Revenue was up 33% year over year cash NOI, 24%.
<unk> up 19% so.
We will continue to have that discipline to look at the overall portfolio to manage the goals of the company with accretive growth, but at the same time, Delevering and frankly with performance like this.
I am anticipating positive results in the equity market.
So that who knows that could give us some opportunity, but we're in no rush, having had a very active acquisition year in 2022 and being focused in the shopping center asset class, we have the opportunity to increase occupancy which will.
To grow NOI so.
We're just going to be very disciplined and grind through this portfolio at over 1000 properties.
Nearly $400 million of straight line rent there is a lot of organic activities that will continue to execute on.
Thanks, Michael.
Thanks, Brian .
The next question comes from Mitch Germain with JMP Securities. Please proceed.
Good afternoon, how are you.
Good Mitch How're you doing.
Thanks for taking my questions I, just want to make sure I didn't notice how much was sold volume wise I think we backed into a number in the quarter, but around $70 million to $75 million is that am I right or am I off on that number.
That's correct.
That is correct.
Okay, and so you are.
A combination of that free cash flow from operations wherever it might be.
That leverage <unk> got another $70 million for sale I guess that begs the question I know the markets arent that great, but why not try to you know.
Bring that.
<unk> ratio down even further and sell more.
We will continue to approach it on a very strategic way.
We do.
Disposal of about $400 million of assets in 2022, we.
Have talked about a pipeline of about $75 million and there is.
More that we're looking at and preparing to execute and disclose on.
So.
We will.
Meet the expectations I believe.
And again.
We want to have discipline.
As you said and pointed out the market Hasnt been.
That great in the fourth quarter from a.
From our view disposition from a buyer's view acquisition.
And I think it's improving and we will take advantage of that as the momentum returns to the market.
Okay great.
It's your debt maturities for 2023, I believe most of that was part of the acquisition about $290 million obviously.
Not an unreasonable amount of something that's I think something that you guys can adjust fairly routine.
Routinely, but what's the plan for that.
We've got plans in the works and I just want to.
Go back because your questions are really helpful. In specific but I don't want to lose sight of the value of all that we executed on not only in the quarter, but in 2022.
So we've got these assets we've increased the occupancy we've grown NOI as the small number of properties that need to be refinanced in 2023 and even into 2024.
We've actually grown the NOI at the property is making it.
Even easier to refinance we have capacity on our line in a net leverage.
Type of refinance so we.
The assets that do need to be refinanced some of them very well may be disposed off as I said in my earlier comments.
Sure.
So we're very comfortable we're proactive in this approach we don't see any issues with taking care of what needs to be done in 'twenty three 'twenty four as a refinancing.
Initiative.
That's helpful.
I did see in the 10-K, you had a tenant bankruptcy.
Can you share anything regarding that it looks like it's with subsequent to year end.
Yes, what I can share is having a 1044 properties.
In.
Not one tenant being even 4% of straight line rent I think that everybody is.
The same mindset that occasionally you're going to have a tenant that does run into a financial difficulty we have really strong relationships with our tenants.
And we're able to talk to them very early and position ourselves. This is great real estate and in many cases.
We will be able to either re tenant or resell, but I would.
Categorize it as.
Something that we take very seriously, but had no material impact on the quarter on the year and again I've always spoken about it Mitch I think.
You appreciated as well.
There's nothing better than diversification in our portfolio.
So we do have significant scale. We're in 40 different tenant industries, we've got a well diversified individual tenant roster and I hate to see any bankruptcy, it's something that I think we're very good at and have done.
Really.
Great job underwriting.
At acquisition.
And I think it's going to be something that.
We come through with.
No problem.
Great and then I guess last one for me I appreciate those comments.
Anything changed with your watch list I mean, obviously I know retail fundamentals are strong, but we are beginning to gain some insight on obviously, you've got a bankruptcy and we've had other tenants that you have I'm sure or facing some challenges. So has there been any change to kind of what youre seeing on the ground.
Well, we've taken a very active approach to our credit watch list over the last 10 years. So this is nothing new for us.
And again I think it really comes down to asset management and relationships with the tenants.
The real estate.
Is consistently well located with.
All of the real estate, we acquire we look for what is the reuse potential in that.
Slight chance that we have to put a new tenant in there so.
We're the watch list remains.
A regular part of our monthly activities.
But it's not something that we've seen create any higher levels of concern.
Thank you.
Alright, Thanks Mitch.
Thank you at this time I would like to turn the call back over to Mr. Michael Wilde for closing comments.
Alright, well, thank you operator, and again, thanks, everybody for taking the time to be with US today I think that the quarter has has really come together nicely. The year has been a great year for us and of course, we're very excited about this year current 2023, I do want to just end.
On.
Something that is very important to me and something that we're very proud of it the company our full year 2022 payout ratio was 80%.
<unk> per share was $1 six on an 85 cent dividend. So again, it's something that as we continue to grow the NOI and the <unk> in this portfolio.
Really.
Gives us.
Great comfort.
That the portfolio is performing that we've got the capability to continue.
To grow occupancy and drive NOI, even further so thanks, everybody for listening and if anyone has any questions. Please reach out and we look forward to talking to everybody. Soon thank you.
Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time and thank you for your participation and have a great day.