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American Finance Trust, Inc (AFIN) Q2 2019 Earnings Call Transcript

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American Finance Trust, Inc  (NASDAQ: AFIN)
Q2 2019 Earnings Call
Aug. 08, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the American Finance Trust Second Quarter Earnings Call. [Operator Instructions]

I would now like to turn the conference over to Louisa Quarto, Executive Vice President. Please go ahead.

Louisa Quarto -- Executive Vice President

Thank you, Operator. Good morning, everyone, and thank you for joining us for AFIN's second quarter 2019 earnings call. The call is being webcast in the Investor Relations section of AFIN's website at www.americanfinancetrust.com

The following information contains forward-looking statements which are subject to risks and uncertainties. To 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 31st, 2018 filed on March 7, 2019 and all other filings with the SEC after that date, for a more detailed discussion of the risk factors that could cause these differences. Any forward-looking statements or portfolio information provided during this conference call are only made as of the date of this call, as stated in our SEC filings, AFIN disclaims any intent or obligation to update or revise these forward-looking statements or portfolio information except as required by law.

During today's call, we will discuss 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 our financial results prepared in accordance with GAAP. Reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release. Supplement and Form 10-Q, all of which is posted on our website at www.americanfinancetrust.com

I'll now turn the call over to our CEO, Mike Weil.

Michael Weil -- Chief Executive Officer, President and Chairman of the Board of Directors

Thanks, Louisa. Good morning to our shareholders and other participants, and thank you for joining us. With me today on the call are Katie Kurtz, our Chief Financial Officer; and Zach Pomerantz, Senior Vice President of Asset Management.

I will provide an overview of our strong second quarter results and discuss the ongoing success we're having building out our best in class portfolio. Katie will provide additional financial details and Zach will discuss our leasing, asset management and pipeline in greater detail and then we will take all questions. We believe that the attentive and active management of our portfolio through acquisitions, dispositions and redeployment of net sales proceeds complements the rent growth that is embedded in our leases to result in a truly best in class portfolio. During the quarter, we increased our AFFO to $30 million or $0.28 per share, up 12% or $0.03 per share over the first quarter of 2019.

For the first six-months of 2019, we recorded AFFO per share of $0.53 per share and FFO of $0.48 per share. We also completed through a subsidiary, our first Asset Backed Security offering with a $242 million eight year weighted average term deal with a weighted average interest rate of 4.2%.

The Class A-1 notes, received a AAA rating from Standard and Poor's and the Class A-2 notes were rated A. Finally, we had an active quarter of real estate transactions continuing our portfolio management strategy that we believe will benefit the portfolio in the future. This quarter, we maintained our focus on service retail with the acquisition of 32 properties for almost $70 million, all of which are leased to service retail tenants.

Tenants of the newly acquired properties include Pizza Hut, Mountain Express convenience stores and for Fresenius. We now own 53 Pizza Huts, whose parent company Yum Brands recently reported a very strong quarter based in part on their Pizza Hut segment posting a 2% rise in the same-store sales and a 18% increase in operating profit. Similarly, ExxonMobil and Chevron, whose fuel is sold at Mountain Express,

reported increased profits in the second quarter as well.

We believe our strategy of owning service retail assets is insulated from the potential impact of unpredictable and rapidly changing trade policies and will continue to grow this segment of our portfolio. Zach, will provide more detail on our acquisitions later in the call and we'll also speak about our leasing activity in the single and multi-tenant portfolios.

I'd like to take a moment to discuss the dispositions we completed this quarter. We will remain net buyers of real estate, but in the second quarter we closed on some opportunistic sales we want to highlight. As we've said in prior calls, we'll selectively sell assets from our portfolio when we can do so opportunistically in order to redeploy net proceeds into a creative acquisitions that meet our long term goals, we'll also consistently evaluate our portfolio to identify potential strategic sales that will have a positive impact on the company as a whole. In the second quarter, we completed both of these types of transactions. We sold a distribution center, an office building and two vacant bank branches formerly leased to SunTrust, along with six occupied SunTrust bank branches. The distribution center we sold was leased to C&S Wholesale Grocers and had only 4.2 years remaining on the lease.

The asset was rent paying but was mostly dark and the lease was not expected to be renewed. By selling the property with four years of rent remaining, we believe we maximize the value of the property and booked a $2.5 million gain with a total return of almost 25% during the time we were the owner.

The office property we sold was leased to American Express travel related services and located in Salt Lake City, Utah. This asset had less than one year of lease term remaining and American Express had notified us that they were not going to renew the lease.

A significant sum of money would have been needed to retrofit and release the property, and the sale avoided that risk for AFIN while preserving a 17% total return on the initial purchase of the building while booking a $5.8 million gain. Both of these sales extended our average portfolio lease duration and reduced our exposure to property types that are outside of our retail focus, but temporarily impacted our portfolio occupancy level and NOI, while the proceeds are being redeployed.

As we have in prior quarters, we opportunistically sold six occupied SunTrust bank branches during the second quarter, which we plan to redeploy into a creative acquisitions. When we renegotiated the leases for the portfolio of SunTrust Bank branches, there were 10, 12 and 15 year lease terms.

Today most of the occupied SunTrust branches we've sold and all of the properties we are currently under agreement to sell have been from the Group of SunTrust leases that originally had a 10 -year term and which currently have approximately eight years of remaining lease term.

Therefore, as we sell properties, we're also extending the average lease term on the remaining SunTrust assets. The occupied SunTrust branches were sold at a weighted average cap rate of 5.4%. We're under contract to sell an additional five properties leased to SunTrust at a 5.5% weighted average cap rate for an aggregate price of almost $21 million.

The net proceeds of $12.8 million from the sale of these properties will be redeployed into our pipeline, primarily service retail assets, which has a weighted average cap rate of 7.6%. A 200 basis point spread over the properties we sold. As of June 30, our portfolio consisted of 704 properties located in 43 states and the District of Columbia. We believe our portfolio is best in class among our peers. Our single tenant portfolio, which makes up about two thirds of our straight line rent, has no lease expirations this year or next, approximately 4% through 2022 and less than 10% through 2025.

This is significantly less than our net lease peers were expecting at the end of last year. Similarly, we're confident in the credit quality of our leases. 82% of our top 10 tenants portfolio wide and 76% of our single tenant portfolio are leased to investment grade or implied investment grade tenants.

Please refer to our earnings release for more information about what we consider to be implied investment grade tenants. Additionally, we employ similar analysis and a robust credit watch program with the goal of early identification of credit risk in order to maximize the effectiveness of renegotiation, replacement of tenants or other strategic actions.

No tenant with more than 1% of our rent can be found in this list. Portfolio occupancy sits at 93.4% on 17.7 million square feet of rentable space. Across the portfolio, our leases include annual average rent escalators of 1.3% and have a weighted average remaining lease term of nine years, an increase from 8.8 years last quarter, and 8.6 years the quarter before that, despite the passage of three and six months respectively.

Our 671 property single tenant portfolio is 76% leased to investment grade tenants, up from 74% last quarter. Occupancy across the single tenant portfolio is 99.1%, with 1.3% average annual rent escalators and a weighted average remaining lease term of 11.3 years, up from 10.8 years in the first quarter. We're focused on growing the single tenant segment of our portfolio and continue to find creative opportunities that align with our investment objectives, including what we believe are attractive cap rates and long duration leases.

Our multi-tenant portfolio continues to meaningfully contribute to our service retail focus as we lease space to experiential and e-commerce defensive tenants. With 49% of rent coming from these types of tenants. We seek to drive foot traffic to traditional retail tenants.

Our 33 property, 7.2 square foot multi-tenant portfolio as an executed occupancy of 88% with 1.4% average annual rent escalators and a weighted average remaining lease term of 4.9 years. Across the multi-tenant portfolio with almost $88 million in annual straight line rent. Approximately 5% of leases expire within the next two years and only 4% of leases expire the year after that.

Our asset management team remains focused on renewing our minimal upcoming lease maturities and has found sustained success in their efforts as Zach will further discuss.

In the last few quarters, we've discussed the pending merger between SunTrust and BB&T. On July 30th, the shareholders of SunTrust approved the merger and I want to take the opportunity to reiterate the leases at the occupied SunTrust properties we currently own, all include 1.5% annual rent escalators. Further, AFIN is contractually entitled to receive rent payments from these SunTrust properties through the full duration of the lease term, which averages over 10 years remaining.

We will, of course, continue to monitor the merger and maintain a good relationship with the real estate professionals at the banks. Let me hand it over to Katie now to provide additional detail on our financial results. Katie?

Katie Kurtz -- Chief Financial Officer, Treasurer and Secretary

Thanks, Mike. We ended the second quarter with net debt, which is total debt, less cash and cash equivalents of $1.5 billion at a weighted average interest rate of 4.6%. The components of our net debt include $258 million drawn on the credit facility, $1.3 billion of secured mortgage debt and cash and cash equivalents of $91.2 million. Liquidity, which we measure as undrawn availability under our credit facility plus cash and cash equivalents, stood at $147.6 million at June 30, 2019.

As Mike touched on, one of our subsidiaries successfully completed in ABS or Asset Backed Security offering at the end of May, issuing $242 million of long-term fixed-rate note. The net proceeds from the sale of the notes were used to repay $205 million of indebtedness. The majority of which was amounts drawn on our corporate credit facility. The notes were issued in two classes and rated by Standard and Poor. The $121 million, seven year Class A-1 notes were rated AAA and carry an interest rate of 3.8%, $121 million 10-year Class A-2 notes were rated single A and carry an interest rate of 4.5%.

The weighted average interest rate on both classes of notes combined is 4.2%. On a consolidated basis, this debt issuance provides AFIN with additional flexibility and an attractive cost of capital and extends the weighted average life of our indebtedness from 3.8 to 4.1 years as of June 30, 2019. Accessing long-term fixed rate financing through multiple channels allows AFIN to effectively manage our high quality portfolio. The company's net debt to gross asset value or total assets plus accumulated depreciation and amortization was 39%, remaining neutral versus the first quarter.

Our debt to annualized adjusted EBITDA, adjusted for second quarter lease termination fee of $7.6 million was 7.9 times at June 30, 2019. We reported our our second quarter revenue of $79.1 million as compared to $71.5 million for the first quarter 2019. Our AFFO attributable to common stockholders was $24.4 million for the second quarter 2019, compared to $26.8 million in the prior quarter.

AFFO attributable to common stockholders with $30 million for the second quarter 2019 as compared to $26.3 million in the first quarter 2019. For the second quarter AFFO, was up 12% $0.28 on a per share basis compared to $0.25 on a per share basis for the first quarter of 2019. These increases were driven by a $7.6 million lease termination payment from Lowe's at one of our multi-tenant properties and were partially offset by $1.4 million of derivative termination costs associated with the ABS financing.

As always, a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release, supplement and Form 10-Q, all of which are posted on our website at www.americanfinancetrust.com.

The company paid dividends of $29.2 million or $0.275 per share during the quarter to stockholders of record as of April 10th, May 8th and June 10, 2019. I'll pass it over to Zach to discuss our real estate acquisition, dispositions and leasing activity in greater detail.

Zachary Pomerantz -- Senior Vice President of Asset Management

Thanks, Katie. We acquired $70 million of exclusively service retail properties during the quarter. The 32 properties we acquired have a weighted average remaining lease term of 15.8 years and total about 181,000 rentable square feet. These properties were acquired what we believed to be an attractive weighted average cash cap rate of 7.3%, and a weighted average GAAP cap rate of 8.3%. Acquisitions included portfolios of Fresenius, IMTAA, Pizza Hut and Mountain Express leased properties.

Since the beginning of 2017, we have close on 301 single-tenant acquisitions, of which 88% by annualized straight line rent are leased to service retail tenants. These 300 plus acquisitions have a weighted average remaining lease term of 17 years. As of the quarter-end, we had executed nine new leases totaling 73,950 square feet where the tenant has taken possession.

Our multi-tenant executed occupancy stands at 88% at the end of the quarter, which includes 10 leases totaling over 210,000 square feet where the tenant has not yet taken possession. A great example of our asset management strategy was a successful replacement of a dark Lowe's with an At Home and the 24-Hour Fitness who signed new 10 and 15 year leases respectively.

The approximately $7.6 million lease termination payment from Lowe's is expected to cover the approximately $6.6 million of estimated build out costs and free rent related to releasing the space. We are extremely pleased with the increase foot traffic, extended lease duration and manage capital costs achieved through this process.

Similarly, at Jefferson Commons in Louisville, Kentucky, we recently signed a new 10-year lease with ULTA to bring the center occupancy up to 99% from 94%. At Northwood Marketplace in North Charleston, South Carolina, we also signed a new 10-year leases with Aldi to replace and in-place Barnes & Noble with minimal downtime, generating substantial cash flow and positively impacting foot traffic at the center.

On a disposition side, as Mike touched on earlier. We sold 10 properties, 8 leased or formerly leased to SunTrust and American Express office and the CNS distribution center during the second quarter for gross proceeds of $93.6 million, of which $73.9 million was used to repay related debt.

Eight properties have leases in place and two were formerly leased to SunTrust. As of quarter end, we owned 131 occupied SunTrust branches, comprising 7.9% of our overall portfolio based on straight-line rent. The SunTrust Disposition Plan for Vacant Properties nears completion, with only one unoccupied branch remaining as of July 15th, which we are actively marketing, the sale of the American Express office reduced our office exposure to only 10% of our portfolio, two-thirds of which is one asset that is leased to Sanofi and New Jersey.

Sanofi is a AA rated credit, and the office campus we own is our US headquarters. The lease has 13.5 years remaining and includes 1.5% annual rent escalations. This is a high quality lease with a credit rated tenant and we believe it fits nicely in our portfolio. Our forward-looking acquisition pipeline as of July 15, 2019, consists primarily of service retail properties, including locations leased to IMTAA, Caliber Collision, Checkers and Mister Car Wash as well as traditional retail lease to Dollar General. The total purchase price for the pipeline, assuming we complete all of them, is approximately $38 million with a weighted average cap rate of 7.6% and a weighted average remaining lease term of 13.9 years. Combined with the properties we close in the first and second quarter. We have 117 properties either closed or in the pipeline at a weighted average cap rate of 8.1% and a weighted average remaining lease term of 15.9 years. We are excited about the opportunities we are currently seeing in the market and look forward to expanding our portfolio.

Mike, I'll turn it back to you.

Michael Weil -- Chief Executive Officer, President and Chairman of the Board of Directors

Thanks, Zach. The second quarter for AFIN was another quarter of steady execution on our portfolio strategy, with improved earnings for the company. Our first ABS offering was very successful and we were able to sell series A preferred stock above the issue price from last quarter, raising substantial funds for acquisitions at what we believe is an effective cost.

The property sales we closed were timely and ultimately beneficial to the company. While the acquisitions we made were entirely aligned with our service retail focus. We look forward to continuing to execute on our strategy in the second half of 2019.

Operator, please open up the lines for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Frank Lee of BMO. Please go ahead.

Frank Lee -- BMO Capital Markets -- Analyst

Hi, good morning, guys. Can you talk about what drove the decline in occupancy within the single-tenant portfolio?

Michael Weil -- Chief Executive Officer, President and Chairman of the Board of Directors

Hi, Frank, it's Mike. So the decline that you, you refer to is pretty minimal, but it does come from the sale of the two occupied assets that we spoke about, the American Express corporate center and the C&W cold storage. That was about 1.7 million square feet of occupied single tenant property, and as we redeploy that capital complete pipeline acquisitions, we expect to see that occupancy trend back up.

Frank Lee -- BMO Capital Markets -- Analyst

Okay. Thanks. And then on the disposition side, you sold a couple of larger non-core assets in the quarter. Are there any other larger assets you've identified as potential sale candidates that we should expect in the coming quarters?

Michael Weil -- Chief Executive Officer, President and Chairman of the Board of Directors

We don't typically disclose future sales. We have looked at the portfolio and I was very pleased with the execution on the American Express and the C&W facility. I think that, that's very consistent. Obviously, we like to see the long-term tendency. Of course, an occupied versus a dark is very important. So again, that was 1.7 million square feet. The American Express was about a 0.5 year [Phonetic] remaining lease term. The C&W was under five years, but was primarily dark. So, you know, really a great execution by Zach and his team as we continue to just take that slow and steady approach, high -- high touch asset management and really let the core assets perform. So that -- that's how we ended the quarter.

Frank Lee -- BMO Capital Markets -- Analyst

Okay. And then if we look at the debt that's expiring in 2020, you have roughly $550 million that is set to expire next year. What are your initial thoughts on addressing these upcoming maturities?

Michael Weil -- Chief Executive Officer, President and Chairman of the Board of Directors

That is something that we continue to update on a quarterly basis. As we said in the past, there we are just outside of what we think of as the opportune time as it relates to the seasons. These are all assets that I'm not concerned about refinancing. Our teams are analyzing. And, you know, with the completion that we talked about of the ABS securitization, I do believe that a part of that refinancing will be done through ABS. But I look at the CMBS market, which is wide open, interest rates are very competitive again, 10-year. Obviously, everyone on the call is aware of the low 10-year, which for a company like ours has tremendous benefits. We're seeing the market open and then again, on the flip side of that, in a yield starved market, AFIN really fits a great slot with so much of our portfolio lease long term to investment grade tenants to be able to pay the yield that we're paying is and should be very attractive to current as well as new investors.

Frank Lee -- BMO Capital Markets -- Analyst

Okay, great. Thank you.

Michael Weil -- Chief Executive Officer, President and Chairman of the Board of Directors

Thank you, Frank.

Operator

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

Michael Weil -- Chief Executive Officer, President and Chairman of the Board of Directors

Thank you, Andrea. Again, we appreciate everybody taking the time out of their busy schedules to join our call today. We continue to be excited not only about the results of this quarter, but as we continue to grow the portfolio and look forward to speaking to everybody again next quarter. If there are any follow-up questions, please reach out to Louisa Quarto. We're very happy to answer any questions that may arise.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Louisa Quarto -- Executive Vice President

Michael Weil -- Chief Executive Officer, President and Chairman of the Board of Directors

Katie Kurtz -- Chief Financial Officer, Treasurer and Secretary

Zachary Pomerantz -- Senior Vice President of Asset Management

Frank Lee -- BMO Capital Markets -- Analyst

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