Q1 2023 Necessity Retail REIT Inc Earnings Call
Good morning, and welcome to the necessity retail REIT fourth quarter and year end 2022 earnings call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
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I would now like to turn the conference over to Curtis Park Parker Senior Vice President. Please go ahead.
Thank you operator.
Everyone and thank 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 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 to our SEC filings, including the annual report on Form 10-K for the year ended December 31 2022.
On February 23, 2023, 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 they impact our business.
We look 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 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 performer.
Since 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.
He's 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.
Now I'll turn the call over to Mike while Mike.
Thanks, Curtis and thank you all for joining US today, we continued to make great progress on some of our key strategic objectives during the first quarter <unk>.
Including leasing available space renewing leases with existing tenants enhancing our balance sheet through strategic dispositions and reducing our net debt by approximately $29 million from the prior quarter.
As of March 31, 2023 our high quality portfolio features a top 20 tenant roster that is 64% investment grade or implied investment grade with no one tenant representing more than 4% of annualized straight line rent.
The portfolio also boast strong exposure to Sun belt States, where we own where we own properties that generate 57% of our portfolio wide annualized straight line rent.
In addition to the $400 million of property dispositions, we completed last year, we have over $180 million of dispositions that we've already completed or have in our pipeline.
In line with our comments on prior calls we plan to use the net proceeds from these sales to continue improving our balance sheet by reducing our net debt as we have in the last two quarters.
Our focus on dispositions and leasing is designed to improve our leverage ratios, including net debt to adjusted EBITDA over the long run the modest increase in this ratio in the first quarter compared to the fourth quarter of 2022 is due in part to nonrecurring revenue items received during the fourth quarter in general.
Administrative expenses expenses that are frequently elevated in the first quarter due to year end audit and legal expenses, we anticipate that as in prior quarters. These will normalize over the remainder of the year, we believe that our asset management and disposition efforts will have the intended deleveraging effect.
These elevated costs abate.
The significant commitment we've made to asset and property management continued to deliver results are executed leases as of quarter end plus leasing pipeline as it may 1st well raise the occupancy in our portfolio to 94.5% up from the actual occupancy of 93, 7% at the end of the fourth.
Quarter and increased straight line rent by $7.7 million, assuming executed leases commence and signed LOI is lead to definitive leases on their contemplated terms.
New and renewal leases signed during the first quarter totaled over 1 million square feet. This includes 274000 square feet across 26, new leases in our multi tenant portfolio with a combined $4 million of annualized straight line rent plus 722000 square feet on 14th.
For lease renewals in our multi tenant portfolio, representing $7.4 million in annualized straight line in straight line rent and nearly 103000 square feet on 23 leases representing $6 $3 million in annualized straight line rent in our single tenant portfolio.
The results of our leasing continue to illustrate the quality of our assets driving higher leasing rates even in the current environment.
As of quarter end, the multi tenant lease renewals had a spread of plus 12.7% between the previous friend and the rent payable under the terms of the renewal demonstrating the strong renewal demand end market for our suburban multi tenant assets.
In 2022, the spread on lease renewals wasn't attractive six 4%.
The upwards trajectory of this spread is encouraging and consistent with the demand we're seeing for the quality of our shopping centers.
This strength has carried over into the second quarter, we have a robust leasing pipeline as of May 1st which includes leases executed. After the end of the first quarter of over 500000 square feet for $7 $1 million in annualized straight line rent in the multi tenant portfolio.
Although the portfolio continues to perform at a very high level with continued strong leasing activity and positive spreads on renewals. We have had a few tenants, whom we're working through some challenges.
To give you an update at.
As previously disclosed in our 10-K Tom's King a large regional operator of Burger King franchises filed for chapter 11 in January and Mountain Express a large regional operator of gas and convenience properties filed on March 23 2023.
In each of these cases, we're evaluating leasing and sale proposals on an individual property basis with the goal of maximizing long term value for shareholders.
Let's look at each tenant separately and what we've been doing in response to their proceedings.
We had 41 leases with Tom's King at the end of the fourth quarter in January nine of these leases were terminated and another four were terminated after Q1.
The remaining 28 of these leases were assumed in our current on their rent. We expect these 28 locations to remain leased through the process.
Of the 13 terminated leases, we're negotiating new leases with new tenants and five of the properties and actively marketing to sell or lease the other eight.
Regarding mountain Express it remains early in the process.
As of May one none of our 71 leases had been formally rejected by the court. However.
However, there is a pending motion to reject 28 of the leases.
Been actively engaged with the tenant to collect past due and current rent in April rent was received for the 43 locations not currently in front of the court.
We're in discussions with potential operators to lease or buy all 71 properties.
In March our tenant American car Center filed for chapter seven liquidation.
We proactively regain possession of all 16 properties that we own that were previously leased to American car like termination of our master lease on April 13th.
We've been extremely active in marketing these properties and have received robust interest.
To date five properties are already in sale negotiations six properties have active leasing interest and the other five are being actively marketed.
Finally bed bath and beyond and its subsidiaries, which represent only one 4% of our total annualized straight line rent filed for chapter 11 bankruptcy proceedings in April .
Along with its subsidiaries bed Bath is a tenant with 19 leases at 17 of our shopping centers totaling approximately 505000 square feet as of March 31 2023.
These properties are in desirable locations with a lot of backfill activity and we've been actively working with replacement tenants for these properties for some time.
As of May one, we've already signed one lease and three O and three loi's with another 10 L O I submit it to replace the current tenant.
It is still operating and paying rent in the space.
The remaining properties are being actively marketed.
Another of our T. L. Six store experience has been maintaining a broad and diversified portfolio.
At quarter end, our $5 billion portfolio was comprised of 1039 properties with executed occupancy plus leasing pipeline of 94, 5% up from 91, 8% a year ago and weighted average remaining lease term of seven one years.
We own properties in 47 states and the district of Columbia, and our tenants operate across 39 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.
Annualized straight line rent increased over 8% year over year to $374 $9 million and the square footage of our portfolio grew over 5% year over year to approximately $27 6 million square feet.
In large part due to the acquisition, we completed last year.
As of the quarter and the tenants in our single tenant portfolio, where over 58.5% actual or implied investment grade rated and 36, 4% of anchor tenants in our multi tenant portfolio, where actual or implied investment grade rated.
Based on straight line rent 65, 1% of leases across the portfolio include contractual rent increases, which increased the cash that is due under the leases over time by approximately 1.1% per year on average at.
At quarter end, 57% of our portfolio straight line rent was derived from sunbelt markets and over 63% of our top 20 tenants, where actual or implied investment grade rated.
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 the potential for continued rental growth remains through leasing up available space.
At quarter end, our long term debt had a weighted average maturity of three eight years and was 84% fixed rate and had weighted average interest rate of 4.4%.
We proactively locked in rates during the historically low interest rate environment before rates began to rise significantly insulating us from exposure to today today's rising interest rate environment.
We increased NOI and cash NOI by $10 $9 million and $9 $5 million respectively.
Actively compared to the same quarter of 2022, and adjusted EBITDA grew by over 15% to $74 million.
We have demonstrated an ability to successfully delever in the past and expect that we will do so again throughout this year.
Through may 1st we disposed of $72 $4 million of properties and we have a disc disposition pipeline of over $100 million by contract sales price, including property subject to purchase and sale agreements and nine non binding letters of intent and assuming all dispositions close on their contemplated terms.
All or a portion of the proceeds from these dispositions is expected.
It can be used to repay debt and lower our net debt to adjusted EBITDA ratio.
I'll turn it over to Jason Doyle to take us through the numbers in greater detail Jason.
Thanks, Mike.
First quarter revenue was $113 6 million up 19, 6% from $94 9 million in the first quarter of 2022 with a net loss of $18 8 million.
First quarter E. F. F O was $30 5 million or <unk> 23 per share down a penny compared to the first quarter of 2022.
Our first quarter 2023 F. F O was $23 6 million or <unk> 18 per share and N. O Y was $86 7 million or 14, 3% increase over the $75 8 million of NOI, we reported in the first quarter 2022.
As always a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release supplement and Form 10-Q.
From a balance sheet perspective, net debt decreased to $2 7 billion in the first quarter down $29 million from the previous quarter.
And had a weighted average interest rate of four 4%.
Our net debt to gross asset value was 51.5% as of the end of the first quarter.
As Mike mentioned, although our net debt decreased our net debt to adjusted EBITDA ratio ticked up this quarter to $9 six times from $9 one times last quarter.
Specific cost that pushed up expenses include seasonal audit expenses and professional fees of approximately $1 million.
Previous quarter benefited from $1 2 million and lease termination payments and 1 million in operating expense adjustments, including a successful property tax appeal.
As of March 31st the components of our debt include.
$448 million drawn on our credit facility $1 8 billion of outstanding secured debt and $500 million of senior unsecured notes.
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 plus cash and cash equivalents stood at $89 7 million. That's based on our March 31, cash balance and borrowing availability.
The company distributed $28 5 million in common dividends to shareholders in the quarter or 21 cents per share.
F O per share was 23.
With that I'll turn the call back to Mike for some closing remarks.
Thanks, Jason we continue to execute on our asset management strategy with strong leasing results across the portfolio, including a $12, 7% spread on our multi tenant lease renewals in our multi tenant portfolio.
The dispositions, we've completed and the pipeline of future dispositions are expected to generate net proceeds that we can use to continue reducing our net debt.
She has improved by over $80 million since the end of the third quarter of 2022 are high quality tenants include grocery stores quick service restaurants, and other necessity retail properties that are conveniently located between home and work and are aware America shops everyday we believe we're well positioned to continue to bend.
It fit from a robust retail environment and a strong world class portfolio.
Thank you for joining us and operator, please open the line for questions.
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And one moment, please while we called for questions.
And our first question.
Coming from the line of Bryan Mayer with B Riley Securities. Please proceed with your question.
Thank you and good morning, Michael and Jason Hey.
I have a question for me is there any way to kind of quantify roughly what you think that the impact of the kind of issues that you walked through it might be on 2020 three numbers, you know, even assuming you're successful and kind of re leasing or selling those assets.
Yeah, there's probably some downtime.
Anything you can share with us in that regard.
Yeah.
At this time, no, but what I can tell you is the activity around these organizations and the interest in their properties.
Leads us to believe that the impact is going to be minimal over the course of 2023.
Burger King corporate immediately got very involved with the Tom's King situation and they have identified two operators that are taking over the majority of the portfolio.
So that is something that we were we were very glad to see mountain Express it's again, a little bit early to start giving you ideas of what's going on longer term. There if mountain express if theres going to be a transfer of operations through bankruptcy or or how we're going to to.
On that.
American car as I said in my earlier.
Comments 16 properties that we got back five are already engaged in purchase and sale agreement negotiations six properties are active in lease.
Lease negotiations so again.
I think the the biggest takeaway in the first quarter was there was a lot of activity a lot of positive activity as we talked about with the leasing and leasing pipeline getting the portfolio occupancy up to 94, 5%.
And then seeing revenue increase the spreads on renewals up over 12% so as.
As the positives.
Are coming in I think we have timing before we see some timing before we see the full impact in that.
And it will be a positive offset as we finish up some of these situations that we detailed in the prepared comments.
Okay. Thanks, we were a little surprised to see.
The volume the dollar wise of your transaction activity, both completed and pipeline.
When we looked at companies that we cover in the hotel space Office Industrial I mean, there's transaction markets are basically stalled.
Would you characterize it.
Being more along the lines of the assets that you're transacting or kind of more bite size, you know properties with very specific targeted buyers as your ability to transact there or is there something else going on.
No I think that it first of all it's a positive to the quality of the entire portfolio and we had identified some of these are strategic disposition targets.
The.
The industries are very solid the tenants are very solid.
And because they're leased on a on a longer term basis. The buyers felt that they were insulated from from changes.
Swings in the market. So it was very encouraging for us we certainly don't feel that we're selling at discounts.
Discounts.
And.
Where we agreed to go forward, we felt that it was at full value and and good for the overall strategy. So I again I just think it's an endorsement you know where were seeing really strong leasing activity new tenants coming in we're seeing long renewals at increased ran.
It's over the expiring leases and we're seeing the ability to dispose of some.
Some assets, where we see appropriate so again I think it is just a highlights what we're so excited about in the overall portfolio.
Okay, just two more quick ones, one case and as it relates to the G&A costs coming in a little bit ahead of where we were thinking you know we did notice that you know there is seasonality kind of last year fourth quarter 'twenty one of the first quarter of 2022.
Coming in here at 10, and a half million that you would you be disagreeable with the statement that somewhere in the mid to high eights as a better run rate for G&A for the balance of the year.
Yes, I think if you look back on our history and you do see that seasonality in the fourth quarter and in the first quarter. So something in that range that youre talking about is probably a better estimate on a go forward basis.
Okay, and just lastly, it seems like most of your lease expirations for this year.
Our or pretty close to being addressed its only 3% left there. So you know 2020 for 2025 and you got 8% or 9% is what do you think is the prospect for getting a head start on those Uh huh.
Its numbers in the next couple of few quarters.
It's exactly what we historically have done and will continue to do we start active renewal conversations about 24 months out.
Some of the national retailers may choose to wait until it's a little bit closer you know, preferring 18 to 12 month window.
But the asset management focus is on.
Keeping the good tenants in place, making sure that where were positioned long term and as you saw last year and first quarter of this year, where we're executing on those renewals or in some cases extensions.
With very attractive spreads.
Is again, a testament, we have been very focused over the last year as you know and as everybody has seen an.
On increasing occupancy in the overall portfolio and these are well situated properties, primarily sunbelt really strategically located within the communities and the retailers don't want to lose those spaces.
So they're doing what they need to do to continue to be open and operating where their customers know they are in shopping centers that is convenient for the community shopper and yes, we will continue to to exercise those renewals.
And continue to grow the portfolio.
Thank you that's all for me.
Alright, Thanks, Brian .
And our final question comes from the line Mitch Germain of JMP Securities. Please proceed with your questions.
Good morning, Mitch Ah Hey, good morning Hum.
I appreciate all the color on the bankruptcies and what you guys are doing to address them well. It seems like Burger King was the only one that impacted the first quarter results is that a good way to.
Consider that.
On the properties that were rejected the 28 properties that definitely had an impact on the first quarter, but were because we took those back and we're actively marketing them.
And also in the quarter with American car Center that was also an impact in the first quarter, but as I've I've talked in generalities about the activity around the American car Center properties.
On the the leasing and disposition opportunities are.
Our where we're seeing them very clearly to be above.
Above.
Where we purchased these properties.
With.
Names I can't give color at this point, Mitch, but national names by them, both from the rental market as well as the new car dealership level.
That.
Will I expect be noticeable in the second quarter I think a lot of what we were talking about this quarter.
Is really being guided by nothing more than timing.
As I think will will.
Be very excited to report on events next quarter relate it to what we talked about today.
Right I guess you match, you mentioned that some of the mountain.
Rent payments were on deferral is there a way to go.
Quantify where we stand there.
That is being sorted out in their bankruptcy proceedings.
The 43 locations that have not been identified as potential.
To be rejected in the termination or in the bankruptcy.
Those 43 stores are rent paid.
Because that's part of the proceeding so we received the April rent and we anticipate going forward that will receive.
The future rent and as this is resolved so the majority of the locations just to be specific 43 of the 71.
We received the full April rent payment.
Gotcha Okay.
You redeemed some debt post quarter, obviously put it on the line is there a long term plan for those are you know previous mortgages.
Yes, there is and in that long term plan is to do something.
That looks more permanent.
But I think it's it's pretty evident.
Right now is not the the ideal time to.
Put.
Permanent debt on as the markets are still not settled.
We had the capacity on the line and we felt that this was a very smart.
Smart temporary placement for this debt.
And it gives us the flexibility that is important and we will continue to monitor the markets. You know I think even today. We this morning earlier got some great news about what looks like a cooling of inflation.
And some of these things could lead to a.
A more normal debt market so.
For the time being that was a decision we made that I think is justified gotcha.
Gotcha and then last for me Imperial are moved into the top tenant list top 10 tenant list I know no acquisitions were made by you guys. So is that something that.
There was some M&A that they were involved in is that the way to think about it.
Jason can you help me out with that because I don't see imperial in the top 10.
When I look in the wrong place.
Yes.
Oh, I'm, sorry, I'm, sorry, yeah. They.
They are top 10, they're there to 6% of straight line rent and.
Uh huh.
I'll get back to you on that.
Yep.
It was not through acquisitions, Mitch so it was.
It was just a.
Natural move within the portfolio.
Yes, I have it here Mike.
Imta to imperial assignments.
Okay. Yeah. So there was some something that happened where they took over at least that's what I figured but I just wanted to congrats yet perhaps yeah, great. Thank you. Thanks, Jason.
And we will actually take our next question from the line of Barry Oxford with our callers. Please proceed with your question.
Okay. Good morning Mary.
Good morning.
Real quick is just getting back to the mountain Express on the 43 leases do you and this might be too speculative to to to answer but do you think most of those 43 will be affirmed or look Barry just too speculative at this at this particular juncture.
Yeah, that's fine it's got to be a good sign that they are paying April rent that that's why I'm asking yeah.
Yeah, and I just can't it's not that I don't want to speculate I just don't know.
I I have ever every reason to be optimistic, but this is a process and I I can't comment on it right now.
Because of the bankruptcy, but I will tell you that we are very engaged in the creditors trust process and we are.
Firmly at the table and we will continue to work to resolve this frankly and in the best possible way for our property ownership in and our shareholders.
Right as you can.
Go through the re leasing process of of some of the property set that you'd get back is there some embedded mark to market that could actually benefit shareholders.
Once you go through the normal lease up time.
Yeah.
I would always what I would say that there is a.
Opportunity, especially in the quick service.
Restaurant sector to to see that type of pick up.
American car as I've already commented, we're seeing interest that is.
Consistently above where we acquired the properties or where we had leased the properties when we market we market for sale or lease so that we can attract the most possible interest and really negotiate every opportunity. So you know as as we've continued to focus on lease.
<unk> spreads with renewals as we've continued to drive occupancy and we're seeing the growth in our revenue and we were up almost 20% over last year on revenue our cash NOI was up about 13% over last year. So yes.
The value of this type of real estate is the location that's a part of the underwriting when we're.
We're acquiring and we are very optimistic about the opportunities here and I just thought that because there were some moving pieces. This quarter I wanted to spend the time and laid this out with the <unk>.
Tenants like Tom's King Mountain Express et cetera, so that those that that looked deeply at the portfolio can see things like you're asking that there is opportunity here and being very engaged in aggressive from an asset management standpoint, we will continue to backfill.
And continue.
The the revenue from these properties, it's obviously their desirable.
As at the same time, we will continue to focus on the continued occupancy of the overall portfolio, which is a great driver of revenue.
Revenue of NOI and of course earnings.
Perfect. Thanks for all that color Michael appreciate it.
Alright, Thank you yep.
Okay.
And we have reached the end of the question and answer session I will now turn the call back over to Michael Wilde for closing remarks.
Well. Thank you all very much for your time. This morning, I know, it's a busy part of the year for you we will continue to proactively.
Proactively.
Report on the success, we have in the portfolio, we think that the activity for 2023 is going to really put the company in an even better position, we will achieve the goals that we have highlighted and frankly I couldn't.
Express the the success that we're having in the lease up of the of the portfolio and we expect that to continue throughout 2023 and as you all know that.
That will unlock some great embedded value in the portfolio. So thank you all and we will continue to keep you posted.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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