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VEREIT Inc (VER) Q1 2019 Earnings Call Transcript

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VEREIT Inc (NYSE: VER)
Q1 2019 Earnings Call
May. 8, 2019, 1:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the VEREIT First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. (Operator instructions) After today's presentation, there will be an opportunity to ask questions. (Operator instructions) Please note this event is being recorded.

I would now like to turn the conference over to Bonni Rosen, Head of Investor Relations. Please go ahead.

Bonni Rosen -- Head of Investor Relations

Thank you, Gary. Thank you for joining us today for the VEREIT 2019 first quarter earnings call. Joining me today are Glenn Rufrano, our Chief Executive Officer and Mike Bartolotta, our Chief Financial Officer.

Today's call is being webcast on our website at vereit.com in the Investor Relations section. There will be a replay of the call beginning at approximately 2:30 p.m. Eastern Time today. Dial-in for the replay is 1 (877) 344-7529 with the confirmation code of 10130427.

Before I turn the call over to Glenn, I would like to remind everyone that certain statements in this earnings call, which are not historical facts will be forward-looking. Various actual results may differ materially from these forward-looking statements, and factors that could cause these differences are detailed in our SEC filings including the quarterly report filed today.

In addition, as stated more fully in our SEC reports, VEREIT disclaims any intent or obligation to update these forward-looking statements except as expressly required by law.

Let me quickly review the format of today's call. First, Glenn will begin by providing a business and operational update, followed by Mike presenting our quarterly financial results. Glenn will then wrap up with closing remarks. We will conclude today's call by opening the line for questions.

Glenn, let me turn the call to you.

Glenn J. Rufrano -- Chief Executive Officer

Thanks, Bonni, and thanks for joining our call. We're pleased with our operational results for the quarter, AFFO per diluted share was $0.18, year-to-date acquisitions totaled $125 million and dispositions totaled $244 million. Net debt to normalized EBITDA was reduced from 5.9 to 5.7 times. Last year, we repurchased $50 million of stock an average price of $60.94. Year-to-date, we have sold $42.5 million through our ATM at an average price of $8.42. And we have formed an institutional partnership, including six VEREIT industrial assets totaling $407 million expected to close by the end of May.

Leasing for the quarter was very active at 847,000 square feet and occupancy ending at a healthy 98.9%. In addition, same-store rent was, up 0.9%. Of our 847,000 square feet of leasing activity 815,000 square feet were renewals with 237,000 square feet early renewals. For renewals we recaptured approximately 102% of prior rents. Notable renewal activity included 397,000 square feet of office, 224,000 square feet of retail, including eight bank branches.

The beginning of 2019 has seen elevated store closings, compared to 2018 with roughly 6,000 announced along with 2,800 openings. Large portion of the closures were due to bankruptcies of Payless and Gymboree of which we have no exposure, they're not in our merchandise categories. Another big component was ShopKo, we have only one small hometown location. Family dollar owned by Dollar Tree announced they would seek to close as many as 390 of their 8,000 stores, while opening 550 and renovating a 1,000.

To date, they have indicated 18 of our 388 stores would be closed or 0.1% of ARI. 14 of the stores related to close or in master lease and have a range of 8.1, the 13.5 years of remaining term. Four stores have four years or less with the earliest being two years. As you can see, there will be no near-term impact on our cash flows.

Moving to our transaction activity. We find ourselves in a reasonable macro environment. Interest rates remain muted and appears to be a healthy debt and equity market bolstering activity. That is a bad stuff, year-to-date acquisitions totaled $125 million and included our preferred retail merchandise categories Home & Garden, Home Furnishings and Fitness. Dispositions have outpaced acquisitions at $244 million, which included a large office sale for $139 million at the end of April. This property is located in El Segundo, California, with the tenant vacating and with the redevelopment opportunity. We are able to sell this property at a very attractive $400 a square foot. The lease was expiring in 2019 and we will reduce our lease rollover exposure for the year from 2.3% to 1.5%. Out top ten tenants now represent 27.1% and we continue to call restaurants, office, flat leases and non-core. As important, we are focused on our debt balances. We've reduced net debt to normalized EBITDA from 5.9 times to 5.7 times.

Before Mike reviews our financial results, let me provide a brief update on litigation. On April 17th, a status conference with the court was held for the judge denied the motions for summary judgment and set a scheduled for expert discovery. Year-to-date, the company has entered into a series of agreements to settle claims with shareholders, who decided not to participate at class members for approximately $28 million.

In total, the company has now settled claims of shareholders representing approximately 35.3% of VEREIT outstanding shares of common stock held at the end of the period for approximately $245 million. As you're aware, the judge has set a trial date for September 9th. Additional details regarding pending litigation can be found in our 10-Q file today.

Let me now turn the call over to Mike.

Michael J. Bartolotta -- Executive Vice President and Chief Financial Officer

Thanks, Glenn. And thank you all for joining us today. We had a solid quarter, achieving AFFO of $0.18 per diluted share. And as usual, we'll focus on earnings from continuing operations for this call.

For the quarter rental revenue increased $3.6 million or 1% to $316.8 million, net income increased $43 million to $71 million primarily due to $48.4 million of insurance recoveries along with lower depreciation and amortization of $16.5 million, partially offset by our lower gain on the disposition of real estate of $15 million and the $9.1 million restructuring charge taken in Q1 of 2019. This charge is associated with rightsizing our operations due to the ending of the Cole Capital transition services agreement at the end of March.

FFO per diluted share increased $0.03 from $0.16 to $0.19 mostly due to the Q1 insurance recovery, partially offset by the restructuring charge and $7.5 million of lower other income, which was due to Q4 2018 gain on the sale of certain mortgage-related securities and the unexpected receipt of a prior fully reserved receivable in Q4.

AFFO per share increased approximately $0.5 to $0.18, mostly due to higher revenue and a lower cash G&A of $2.1 million. The G&A decrease quarter-over-quarter was primarily due to the customary higher year-end compensation and other accrual adjustments that we noted in Q4. Also as mentioned last quarter, we anticipated taking an $11 million restructuring charge in 2019, of which approximately 80% relates to reducing space in our Phoenix and New York offices. So far we have taken $9.1 million, the total restructuring amount includes roughly 40% of non-cash items; such as the write-off of leasehold improvements and fixed assets of the Phoenix office.

During the quarter, they were $14.7 million of litigation-related expenses. In addition, subsequent to the quarter, we settled additional shareholders out of the class for approximately $12.2 million, which was accrued in the first quarter expenses. As we mentioned last quarter, we received $48.4 million of insurance proceeds bringing the litigation related line item in the financials to a net positive of $21.5 million in Q1.

Turning to our first quarter real estate activity, the company purchased eight properties for $81 million at a weighted average cash cap rate of 6.8%. In addition, the company invested $4.5 million in one build-to-suit project. Subsequent to the quarter, the company acquired three properties for $44 million.

During the quarter, we disposed of 22 properties for $62 million of this amount, $59 million was used in the total weighted average cash cap rate calculation of 6.9%; including $25.2 million of net sales of Red Lobster. The gain on the first quarter sales was approximately $11 million. In addition, the company sold certain legacy mortgage-related investments during the quarter for an aggregate sales price of $8 million. And then subsequent to the quarter, the Company disposed of 14 properties for $173 million.

We continue to strengthen our balance sheet and remain very liquid. In February, we utilized the remainder of our delayed drawn term loan to pay the $750 million bond, which matured and we also entered into an interest rate swap fixing the interest rate on the $900 million term loan at 3.84%. In addition, secured debt was also reduced by $2.4 million during the first quarter.

Our net debt to normalized EBITDA ended at 5.7 times. We are updating our net debt to normalized EBITDA target from approximately 6 times to a range of 5.7 to 6 times. Our fixed charge coverage ratio remained healthy at 3 times and our net debt-to-gross real estate investments ratio was 39%. Our unencumbered asset ratio was 75%, the weighted average duration of our debt was 4.5 years and we're 97% fixed.

And with that, I'll turn the call back to Glenn.

Glenn J. Rufrano -- Chief Executive Officer

Thanks, Mike. Since 2015, we've completed over $11 billion of capital transactions to reshape VEREIT. We continue to focus on capital allocation and capital cost by selling assets; such as the El Segundo office building and recycling into assets that enhance the portfolio, managing our balance sheet to investment grade status thereby reducing the cost of our bank and bond debt, and selling flat leases, which capital can be more productive in our balance sheet.

This quarter we have demonstrated two additional methods of working our capital to benefit VEREIT. One, by issuing equity through our ATM at an advantageous spread to the buyback just last year; and the second, by using internal assets to seed an institutional partnership providing lower-cost capital and a business growth format. The institutional partnership was formed with the objective of creating an increasing portfolio of investment-grade industrial properties. The traditional 80-20 structured partnership will initially include six % VERIT industrial assets totaling approximately $407 million at a cap rate just under 6%. The partnership is expected to close by the end of May. Our latest market activity is intended to create value within our balance sheet by adding to our asset base, a high return on capital business and reducing debt levels and attractive cost of capital.

I'll now turn open the line for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Sheila McGrath with Evercore ISI. Please go ahead.

Sheila McGrath -- Evercore ISI -- Analyst

I guess, Glenn, I wanted to ask you about the industrial JV. Are you still committed to the diversified approach with retail, industrial and office? And what do you envision the ideal sector mix for VEREIT?

Glenn J. Rufrano -- Chief Executive Officer

We are committed to diversification Sheila. Within the boundaries that we talked about, we're still about 40% retail, roughly 20% restaurants, 15% to 20% office and 15% to 20% industrial. We have been taking our office down to the lower end of that range, as you can see with the large office building we sold this quarter. And we'd like to keep industrial within that range as well, that 15% to 20%. The partnership isn't intended to change diversification. It's actually intended to potentially provide more investment grade, industrial assets for us. But the pricing is pretty tough, but with the partnership we can participate in the growth of that business line.

Sheila McGrath -- Evercore ISI -- Analyst

And for modeling purposes, when should we assume that starts? And are there related fees to VEREIT?

Glenn J. Rufrano -- Chief Executive Officer

Well, we're expecting to close by the end of the year with the $407 million -- by I'm sorry at the end of May with the $407 million, and that will be about $340 million in proceeds to us. The fee stream, I would say is a commercial partnership fee stream, property management fees, asset management fees, a promoted interest and on future deals and acquisition fee. The growth of this, we're not sure of. We have a partner that we believe -- and its an offshore partner. At this time we have confidentiality and so we're not exposing some of the detail. We will when we close. The growth of the partnership will depend upon good assets to purchase, together we hope to put together a reasonable sized portfolio.

Sheila McGrath -- Evercore ISI -- Analyst

Okay. Thank you.

Glenn J. Rufrano -- Chief Executive Officer

Thank you.

Operator

The next question comes from Anthony Paolone with J.P. Morgan. Please go ahead.

Anthony Paolone -- J.P. Morgan -- Analyst

Yes. Hi, thanks and good afternoon. Just broadly, can you talk about, you know, you did a little bit of equity getting closer to maybe something happening on the litigation front, and you've now got the industrial joint venture. Just the ability to move toward a more consistent flow of acquisition or investment activity? Like, do you think the team is in place? Like, are we moving in that direction?

Glenn J. Rufrano -- Chief Executive Officer

Yes, we certainly hope so, Tony. I'll start off with the first part of the question. On the equity and it's positioning as we look at asset allocation, we have three very important guidelines: accretion, dilution, portfolio of quality. We're continuing to have portfolio quality, and continuing to have a very good balance sheet, certainly investment grade. When we issued equity this quarter at $8.42 a share, it's approximately 7% enterprise value. And if you look at the dispositions we've had it's approximately 6%, 8% to 7%. And if you then take into consideration the partnership we're putting in place it's just below 6%. And if you were to use cap rates as an indication of cost of capital, and I think it's pretty close for us, not the exact best, but it's pretty close, I think we've put together a good mix of cost of capital to minimize any dilution to bring our balance sheet north and that's the thought process behind the allocation of capital this quarter.

Your last part of the question is. Do we have the machine in place? Absolutely, we have bought over $4 billion -- we disposed of over $4 billion of assets, bought a $1.5 billion. We've put the portfolio in really good shape. We have a good balance sheet and as important as all of that, we've maintained a really good team for us to grow once we get over this year, yes.

Anthony Paolone -- J.P. Morgan -- Analyst

Okay, and right now as you'll get deal, let's say outside of the industrial area, where's the sweet spot as you see it in terms of cap rate and type of tenant credit profile?

Glenn J. Rufrano -- Chief Executive Officer

We're -- in terms of tenant credit profile, we're about 41% investment grade and by the way in the industrial portfolio, we have 153 assets, 52% investment grade. So we have a good investment grade portfolio there as part of the industrial format. We this quarter, as you can see we bought assets at about 6.8%. And we bought them in merchandise -- retail merchandise categories that we really like and that's been a big part of all our acquisitions. If it's retail, it has to be in the merchandise categories that are in our investor presentation, and you can take a look at all our tenants. This quarter, it was Home & Garden, Home Furnishings and Fitness. Last year, if you go back and take a look about 70% of our assets are retail, 30% industrial and we would like to think that mix will continue into this year.

Anthony Paolone -- J.P. Morgan -- Analyst

Okay. And then just on the industrial joint venture and you did mention, having a much larger portfolio than what the initial seed assets are. Any chance of putting more into that? Or what was kind of the magic with the initial few assets?

Glenn J. Rufrano -- Chief Executive Officer

When you start a relationship as we are, you like to start it comfortable capital relationship, $400 million was a reasonable amount of assets for us to put in. It was a reasonable amount of assets for our partner take on. We'll continue the partnership to buy -- invest in industrial assets. There is no exclusivity, but we clearly want to with this partner -- continue the partnership in its format within industrial investment grade. Your point is that we buy assets in the outside or can we put assets inside? We could do either. Our initial foray, we believe, we will be buying assets outside of our portfolio.

Anthony Paolone -- J.P. Morgan -- Analyst

Okay. And last question, I may have missed this. Was there any change to the September trial date?

Glenn J. Rufrano -- Chief Executive Officer

No.

Anthony Paolone -- J.P. Morgan -- Analyst

Okay, thank you.

Glenn J. Rufrano -- Chief Executive Officer

Thank you.

Operator

The next question comes from RJ Milligan with Baird. Please go ahead.

RJ Milligan -- Robert W. Baird -- Analyst

Hey, good afternoon. Just found the joint venture given the competitive market for industrial assets. How do you get comfortable increasing your exposure at this point in the cycle? And do you think we're in the early stages or later stages of the industrial cycle?

Glenn J. Rufrano -- Chief Executive Officer

Well, certainly at investment grade triple net long-term lease -- with triple net long-term leases. Those cap rates are fairly low for us as we sit here right now to your point. But with the partner, who is comfortable with lower cap rates and high grade long-term investment leases, we can be competitive. It's a little different business we're in than Prologis. Prologis is going to be in the turn state business tried to get 3%, 4%, 5% growth a year in our business as you know, it's far less than that. But it's long term, it's safer and our partners looking for long-term safe income streams.

RJ Milligan -- Robert W. Baird -- Analyst

Okay. Just a follow-up on Tony's question about contributing more assets. Is that potentially a source of capital to fund any judgments or set future settlements?

Glenn J. Rufrano -- Chief Executive Officer

Well, I'm not going to address the second part of that. But the first part of that is -- could we -- the fact that we have 153 assets with 51% or 52% investment grade means we could certainly do that and it's possible. It's not determined at this point, but it's possible.

RJ Milligan -- Robert W. Baird -- Analyst

Okay, that's it from me. Thanks guys.

Glenn J. Rufrano -- Chief Executive Officer

Thank you.

Operator

The next question comes from Mitch Germain with JMP Securities. Please go ahead.

Mitchell Germain -- JMP Securities -- Analyst

Thank you. Glenn, is there anything else that you own asset category that might fit a JV type of construct in the future?

Glenn J. Rufrano -- Chief Executive Officer

Mitch, you know we -- this concept started because we had a series of groups approached us about doing or participating in a partnership with them. And I would tell you that the two property type that we have had the most contact with people from the outside for industrial and office.

Mitchell Germain -- JMP Securities -- Analyst

So does that leave the door open for potentially another JV down the road?

Glenn J. Rufrano -- Chief Executive Officer

It does, if we were -- if we thought it was beneficial to us. But remember it's capital allocation. It has to have a good accretive or dilution -- or at least dilutive effect. We have to maintain portfolio quality and it has to have a positive effect on our balance sheet, if we can meet those criteria, there is a possibility.

RJ Milligan -- Robert W. Baird -- Analyst

Got you. I'm curious, if your definition of non-core when you think about assets to sell. Does that definition have flexibility depending upon some of the condition of some of your customers or the outlook of maybe some of your customers even though if they're sitting potentially in one your core segments? I'm just curious about kind of what that definition is?

Glenn J. Rufrano -- Chief Executive Officer

Sure. Well actually we did sell some non-core this quarter. So let me go through a couple of those. We had a Denny's restaurant that we thought was in a off location. And we're not -- I was not comfortable with that and it became non-core. We also have very few -- but we have a few shopping centers, a smaller shopping centers. This quarter for instance, we sold a small shopping center called Melrose Park at a low 7s cap rate. And then another concept that could be non-core, could be some bank branches where we're not comfortable with the long-term nature of them. So those are three different property types that we had classified as non-core for this quarter alone.

Mitchell Germain -- JMP Securities -- Analyst

Great. Last one from me, I know that you -- I appreciate your commentary about store closings and some of your exposure too. Some of the troubled retailers. And I'm curious if you know if there's any change in terms of how you want to potentially looking to call some exposure to certain customers or retail segments over the course of the rest of the year?

Glenn J. Rufrano -- Chief Executive Officer

We're always thinking about that, Mitch. It's matter of fact, Paul, Tom and I and our whole team will be heading to Las Vegas Saturday to REcon. And we have a full schedule of meetings with series of retailers to probe as much as we can to understand their businesses and so we're constantly thinking about what we should call and actually we -- I think we'll get some good information in a week.

Mitchell Germain -- JMP Securities -- Analyst

Thank you.

Glenn J. Rufrano -- Chief Executive Officer

Thank you.

Operator

The next question comes from Chris Lucas with Capital One Securities. Please go ahead.

Chris Lucas -- Capital One Securities -- Analyst

Hey, good afternoon, Glenn and everyone else. On the -- on guidance for the rest of the year, you're running right now, I guess net negative on investments at least from what was reported in the release today plus the JV $400-ish million, call it roughly. Are you still expecting to be sort of net flat for the year on acquisitions, dispositions?

Glenn J. Rufrano -- Chief Executive Officer

Alright, I would put the JV -- the partnership to the aside. Our guidance is $250 million to $500 million on acquisitions and $350 million to $500 million on dispositions. That's part of it we are holding to right now outside of that, we do have the partnership. And even with that partnership and we believe will be in the $0.68 to $0.70 range.

Chris Lucas -- Capital One Securities -- Analyst

Okay. And then on the partnership, Glenn, the assets that were contributed. How do they compare the sort of the rest of the industrial portfolio? Was there any sort of specific criteria used to pull those specific assets out?

Glenn J. Rufrano -- Chief Executive Officer

Well, we -- our partner, we're seeking to build the portfolio of investment grade. So these are investment grade tenants. As I mentioned there are six out of many, many more that we have. But the investment-tenants, their geographies provide a little diversification. Their sizes provide a bit of diversification. So we tried to create a portfolio that had some diversification in into itself recognizing that six assets will never be fully diversified. But we wanted to start there. And we were able to get satisfaction between our partner and ourselves. The important part is that what we both like to do is build this portfolio, so it is truly diversified in geography and tenants over a longer period.

Chris Lucas -- Capital One Securities -- Analyst

Is there going to be a mortgage or anything placed on the -- in this JV? Or how do you -- is there -- is that allowed in the JV? Sort of how do you think about the capital structure?

Glenn J. Rufrano -- Chief Executive Officer

It will. The assets in the partnership will have between 60% and 65% leverage.

Chris Lucas -- Capital One Securities -- Analyst

Okay. And then the last question on the JV for me. Just is it relates to sort of the fee side of it? How do you think about that -- is that incremental yield relative to sort of your use of equity or is it more -- is there really any profit on that sort of added responsibility, I'm just trying to understand how you guys think about it?

Glenn J. Rufrano -- Chief Executive Officer

No, no, absolutely. Remember these are assets that we'd be managing ourselves anyway. And so the fee stream, which would be the property management team and the asset management fee in this instance, would absolutely have a large component of profit. And I believe it proves the value of our infrastructure. This partner wants to invest with us because we now have to property manage and asset manage these portfolios. And we have great access to product. So the fee stream is the ability for this infrastructure of this company to create value for the shareholders.

Chris Lucas -- Capital One Securities -- Analyst

Okay, great. That's all I have this afternoon. Thank you.

Glenn J. Rufrano -- Chief Executive Officer

Thank you.

Operator

The next question is a follow-up from Sheila McGrath with Evercore ISI. Please go ahead.

Sheila McGrath -- Evercore ISI -- Analyst

Yes, I just wanted to check in on the -- how you look at the series of preferred on a longer-term basis. And the same question on how we should think of the convertible notes in 2020?

Michael J. Bartolotta -- Executive Vice President and Chief Financial Officer

Sheila, it's Mike, I'll take that one. I mean the preferred the answer we're going to give is one that we've said in the past, is that something we'll be looking at and seeing what we can do with them, but at the moment they only became pre-payable at no cost in January. And so we'll look at our options over time on that. When we take a look at the converts, the converts that are due in 2020 or actually due December 15, 2020. And so, again, that's something that we'll monitor as we go forward, but at the moment they are at a fairly reasonable rate there at 3.75 and so there's not too much at the moment we're doing anything early with them makes sense and our access to the markets and what have you. It's been pretty well proven in our past transactions, so we feel comfortable with that timing at the moment.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, thank you. And then one other question. Glenn, there was a new date in the 10-Q, August 19th related to the litigation. If you could just explain to us is that like a date that we should focus on that you might update the market on progress or there any other, kind of, trial updates along the way before September?

Glenn J. Rufrano -- Chief Executive Officer

The August 19th date Sheila is a pre-trial conference, my understanding is at that time, the court will likely address various pre-trial motions and discuss a schedule for trial. It's pretty normal procedure that and pretty normal meeting that occurs before a trial. So nothing abnormal there. If something did come out that we thought was relevant, we certainly would make it available.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, thank you.

Glenn J. Rufrano -- Chief Executive Officer

Thank you.

Operator

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

Glenn J. Rufrano -- Chief Executive Officer

Thanks everybody for joining us. I know there are -- some of you that we may be meeting at ICSC in a week and we look forward to that and NAREIT's coming up. Thanks, again. Have a good day.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 32 minutes

Call participants:

Bonni Rosen -- Head of Investor Relations

Glenn J. Rufrano -- Chief Executive Officer

Michael J. Bartolotta -- Executive Vice President and Chief Financial Officer

Sheila McGrath -- Evercore ISI -- Analyst

Anthony Paolone -- J.P. Morgan -- Analyst

RJ Milligan -- Robert W. Baird -- Analyst

Mitchell Germain -- JMP Securities -- Analyst

Chris Lucas -- Capital One Securities -- Analyst

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