The Necessity Retail REIT, Inc. (NASDAQ:RTL) Q2 2022 Earnings Conference Call August 4, 2022 11:00 AM ET
Company Participants
Louisa Quarto – Executive Vice President
Michael Weil – CEO
Jason Doyle – CFO
Conference Call Participants
Mitch Germain – JMP Securities
Bryan Maher – B. Riley Securities
Barry Oxford – Colliers
Operator
Greetings and welcome to The Necessity Retail REIT Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is been recorded.
I would now like to turn the conference over to your host, Louisa Quarto, Executive Vice President. Please go ahead.
Louisa Quarto
Thank you, operator. Good morning, everyone, and thank you for joining us. This call is being webcast in the Investor Relations section of RTL’s website at www.necessityretailreit.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, 2021, filed on February 24, 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 or otherwise impact our business.
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 performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. Reconciliation of these measures to the most directly comparable GAAP measure is available in our earnings release, which is posted on our website at www.necessityretailreit.com. Please also refer to our earnings release for more information about what we consider to be implied investment grade tenants, a term we’ll use throughout today’s call.
I will now turn the call over to Mike Weil. Mike?
Michael Weil
Thank you, Louisa. Good morning and thank you all for joining us today. We believe that we are well positioned to be the dominant retail REIT in the industry, now that we’ve completed the acquisition of the transformation of $1.3 billion open-air shopping center portfolio that we announced at the end of last year. As anticipated, the accretive transactions we’ve completed contributed to recording one of our best quarters ever, with year-over-year AFFO per share growth of over 11% to $0.29 per share in the second quarter, or 32% compared to the fourth quarter of 2021, the last period prior to the acquisition of the open-air shopping center portfolio. We believe our preeminent retail portfolio is well positioned for meaningful capital appreciation and that our dividend provides shareholders a very compelling current yield.
Furthermore, second quarter highlights include revenue growth of over 43% year-over-year to $116.9 million, an increase in cash NOI of nearly 30% over the same period last year to $86.3 million, and net debt to EBITDA that was unchanged quarter-over-quarter. Importantly, our portfolio remains free of the tenant bankruptcies that have impacted other retail property owners, a testament to the strength of our underwriting and our intentionally constructed a tenant roster. The necessity-based nature and high percentage of investment grade tenants in our portfolio, provide dependable long-term cash flows and we believe the potential for continued rental growth remains through the leasing up of available space.
Our balance sheet includes primarily fixed-rate long-term debt that is insulated from significant exposure to today’s higher interest rate environment. This is due to the assumption of in-place fixed-rate debt for some of our acquisitions, combined with the steps we took last year to lock in interest rates and extend our weighted average remaining debt maturity while rates were more favorable. Our weighted average debt maturity is 4.6 years and 83% of our total debt is fixed rate. We’ve demonstrated an ability to successfully delever in the past and expect that we’ll do the same now that the CIM portfolio is fully acquired.
We intend to resume our deleveraging initiative through a combination of methods that may include, among others, the strategic sale of properties, continued leasing efforts at multiple recently acquired assets that have upside potential, and opportunistically raising equity over time. Year-to-date, we have disposed 13 properties totaling nearly $300 million of aggregate contract sales price. And we have a disposition pipeline for another 10 properties totaling nearly $100 million of assets. All, or a portion of the proceeds from these dispositions will be used to repay debt and thereby lower our net debt to EBITDA.
As it stands today, our strong portfolio is very well positioned in the current economic environment. Through our acquisitions, combined with the sale of an office campus earlier this year, we have created a pure-play retail REIT, reducing exposure to office assets to approximately 1% of our portfolio. The percentage of our straight-line rent derived from Sunbelt states has grown by over 15% to 55%. Our tenant diversification has been enhanced with less than 30% of portfolio straight-line rent coming from our top 10 tenants, down from almost 40% at the end of last year. Approximately 22% of our multi-tenant rent now comes from grocery-anchored shopping centers, a segment that remains incredibly strong, thanks to well-known anchor tenants with long-term leases.
We believe the transactions we’ve completed this year show that RTL is a necessity retail-focused REIT and that our portfolio reflects Where America Shops every day. At quarter end, our $5.1 billion portfolio was comprised of 1,056 properties with portfolio occupancy of 90.8% and a weighted average remaining lease term of 7.2 years. Annualized straight-line rent increased 34% year-over-year to $383.1 million and the square footage of our portfolio grew over 45% to approximately 29 million square feet.
Our single-tenant assets are over 52% actual or implied investment grade rated and 41% of anchor tenants in our multi-tenant portfolio are actual or implied investment grade rated. Based on straight-line rent, 61.6% of leases across the portfolio include contractual rent increases which increase the cash that is due under the leases over time. We own properties in 47 states in the District of Columbia, and our tenants operate across over 40 different industries, with no single state or single industry representing more than 10% of our portfolio based on straight-line rent. One traditional triple-net industry that has been in the news lately, pharmacy, is not significantly represented in our portfolio and comprises less than 2% of our portfolio straight-line rent.
Over the last year, we’ve expanded our team to include significant resources dedicated to leasing available space in our portfolio and renewing or extending leases with existing tenants. At the end of the second quarter, our executed leases, plus leasing pipeline, would raise occupancy in our multi-tenant segment to 89.4%, up from 88.8% at the end of the first quarter, assuming all of the signed letters of intent lead to definitive leases, which is not assured. Executed leases include 10 new leases, five of which are with anchor tenants that total over 119,000 square feet and $1.8 million of annualized straight-line rent over a weighted average lease term of 10 years. Our leasing pipeline consists of 19 new leases for over 165,000 square feet and $2.4 million in annualized straight-line rent over a weighted average lease term of 11 years.
We also completed 38 multi-tenant lease renewals during the second quarter, totaling over 420,000 square feet and $5.4 million of annualized straight-line rent, bringing our total for the first half of 2022 to 56 renewals, totaling almost 600,000 square feet and $8.2 million of annualized straight-line rent.
The first half of this year has been very successful, as proven by the results reported for the second quarter. Jason will walk through the numbers in greater detail, but our results affirm our belief in necessity-based retail real estate, especially in the single-tenant and open-air shopping center space. With tenants such as grocery stores and quick-service restaurants, our properties are conveniently located between home and work and are Where America Shops every day. We believe we’re well positioned to be one of the premier acquirers of high-quality service retail properties and look forward to the remainder of the year.
I’ll turn it over to Jason Doyle to take us through the numbers in greater detail. Jason?
Jason Doyle
Thanks, Mike. Second quarter AFFO increased 31.7% to $38.5 million compared to a year ago. AFFO per share of $0.29 is up 11.5% compared to the second quarter of 2021 and 32% compared to the fourth quarter of 2021, the quarter before we began acquiring the open-air shopping centers. Our second quarter FFO was $35.7 million or $0.27 per share, up over 17% compared to the same period in 2021.
Second quarter 2022 revenue was $116.9 million, up 43.3% from $81.6 million in the second quarter of 2021. The company’s second quarter GAAP net loss of $56.3 million was primarily due to impairment charges taken during the quarter. NOI was $89.4 million, a 31% increase over the $68.2 million of NOI we reported in the second quarter of 2021. As always, a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release, supplement and Form 10-Q.
We ended the second quarter with net debt of $2.7 billion at a weighted average interest rate of 3.8% and net debt to gross asset value of 50.6%. At June 30, the components of our net debt included $488 million drawn on our credit facility, $1.8 billion of outstanding secured debt, $500 million of senior unsecured notes and cash and cash equivalents of $69.4 million. 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 equivalent stood at $108 million, based on our June 30 cash balance and borrowing availability. The company distributed $28.6 million in common dividends to shareholders in the quarter, or $0.21 per share.
With that, I’ll turn the call back to Mike for some closing remarks.
Michael Weil
Thanks, Jason. The first half of 2022 was transformational for RTL and our team did a phenomenal job completing the closings and transitioning the acquired assets to our platform. The 10 million-plus square feet we’ve added present significant opportunities for leasing growth, and our team is actively engaged with high-quality potential tenants from coast to coast. Our year-to-date transactions have grown per share AFFO by 32% since the end of last year, as we expected, and our primarily fixed rate debt is locked in for the long term.
We’re focused on being a dominant pure-play retail REIT and continuing to be Where America Shops. We are looking forward to stock price appreciation and the lasting impact this year’s acquisitions will have for our shareholders, while continuing to pay a very compelling dividend.
Thank you for joining us this morning. And operator, please open the line for questions.
Question-and-Answer Session
Operator
At this time, we will be conducting a question-and-answer session. [Operator Instructions] The first question is from the line of Mitch Germain with JMP Securities. Please go ahead.
Mitch Germain
Hi. Good morning.
Michael Weil
Hey, Mitch. Good morning.
Mitch Germain
Thank you. Wanted to just to address, if I could, dispositions. In the 1Q presentation you had indicated $250 million of planned sales and now in the updated presentation, it says around 98. I think you did 30 in the quarter. So can you just walk me through what’s the game plan for disposing assets going forward?
Michael Weil
Yes. So the identified approximately $250 million of dispositions is still the plan from the CIM acquisition portfolio. So that will be occurring we anticipate throughout the course of this year. I think that we’ve disclosed what we have done year-to-date. And again, we were still pretty active closing the portfolio, but we have been simultaneously marketing for sale. So our commentary regarding dispositions from the CIM portfolio is unchanged. And then without — as we always have, we continue to look at disposition opportunities on a strategic basis outside of just the CIM portfolio.
Mitch Germain
So, the 98 is an incremental addition to the 250, is that the way to think about it?
Michael Weil
Yes.
Mitch Germain
Great. The impairment in the quarter, can I just get some perspective on what that’s associated with?
Michael Weil
Yes. Jason, would you walk Mitch through that?
Mitch Germain
Thanks, Jason.
Jason Doyle
Sure. Hi, Mitch. How are you?
Mitch Germain
So the write-down itself is a product of our change of our intent to hold versus intent to sell, as well as finding a responsible buyer for which we’d accept the offer. And what we found is shops at West End is in Minnesota, it’s highest and best to use is likely more in the mixed sort of lifestyle portfolio as opposed to what we’re traditionally operating here. And so a decision was made to strategically remove that asset from the portfolio and the sales should be going through in August or early September.
Jason Doyle
Got you. And I think, last question regarding sales. Mike, is your team seeing any headwinds in the asset sale market? Obviously, we’re hearing a bunch of landlords are pulling their product because of lack of demand or pricing. Any interruption that you’re seeing or things are business as usual?
Michael Weil
No, we have not seen that. We continue to see an active market and don’t have any hesitation about our plans that we’ve previously discussed. But since I’m really glad that you’re on the call today, Mitch, I appreciate you taking the time and it’s exciting, as we announced such a successful quarter to have you be a part of it with us.
Mitch Germain
I appreciate that, and certainly impressed with what you’ve been able to accomplish here. Last question on the leasing side. I want to just understand some of the terminology that you’re using with regards to the leases that have been executed. I believe it’s 119,000 square feet, that is both new and renewal, correct? That’s not incremental new square footage, or is that all new leasing, in addition to your renewal strategy?
Michael Weil
That is all new leasing.
Mitch Germain
Great. Excellent. Perfect. [Multiple Speakers] Thanks.
Michael Weil
Thanks, Mitch. And just to follow on to that question, the demand in the portfolio for additional space with both existing and new tenants continues to be very strong. As we talked about, we have the team in place within our platform to manage these assets very aggressively, and the — many of the national tenants enjoy having a larger relationship with existing landlords. We’ve worked well together and the opportunity both from a new leasing absorption as well as renewal has been very positive. And if I could just point out, of the 600,000 square feet of renewals that have been completed, they were completed at a 6% increase to the expiring lease. So, again, just overall, when you have shopping centers that are strategically located in strong suburban markets, which our portfolio is, the renewals become strategic for the tenants, they don’t want to leave those existing spaces, it’s where their customers know them to be, and we are able to really get that benefit. So very exciting what we’ve been doing overall in the portfolio and we’re looking forward to the balance of the year.
Mitch Germain
Thank you.
Michael Weil
Thanks, Mitch.
Operator
Thank you. The next question is from the line of Bryan Maher with B. Riley Securities. Please go ahead.
Bryan Maher
Good morning, Michael and Jason, and congrats on getting CIM fully done.
Michael Weil
Thanks, Brian.
Bryan Maher
As we have our discussion there about dispositions and I think, Jason, you mentioned $108 million of current liquidity. When we think about the back half of 2022, Michael, how would you characterize that? Would you characterize it as a net seller, a net acquirer, a capital recycler, how are you thinking about that?
Michael Weil
Well, I have to put it in perspective first Brian. We acquired $1.3 billion of properties in the first half of the year. So our overall 2022 will by far be a net acquirer. As we execute on the remainder of the strategic plan that we laid out when we announced the CIM deal, we will probably be close to neutral on acquisitions versus dispositions, maybe a little bit more of the dispositions. But we’re going to be strategic. What we’ve really seen in the last 30 days has been the completion of what I expected from a market switch. We pulled back from the market when we felt that there was too large of a gap between seller and buyer, we were not willing to stretch. We felt that the market had changed about six months ago and would continue. So we really did pull back. We’re now getting phone calls from brokers that want to know where will we bid, where will we buy and we’re very careful to be looking at distressed sellers, not distressed properties in what we acquire. So, no question that we are focused on dispositions. I think it’s a really terrific way to accomplish the goals that we’ve set forward for the portfolio from all types of perspective, but we will, where appropriate, look at new acquisitions as well.
Bryan Maher
Okay, thanks. And then in the past you’ve talked about getting the occupancy at the multi-tenant open-air product up. I think you’re making some progress there. 89 and change leases are signed. I think you’ve talked in the past about getting that up into the loaded mid-90s. Is that still the case and do you think that your current strategy that you’re implementing, get you there and in kind of what time frame are you thinking about? A couple of quarters, end of 2023, how should we think about that?
Michael Weil
So yes, I have said, and I still do expect this multi-tenant portfolio to be in the low to mid-90% occupancy range. I think that we are definitely in — moving in that direction. And when we take into account executed occupancy and pipeline, we’re really just about at 90% and we’ll continue to see that drive. Some of that will also benefit from the strategic disposition strategy, as we might sell a property that has lower occupancy, which is something that we’ve talked about in the past.
So the timing to get into that range, I do still think is really I would be comfortable in a two to four quarter type of conversation, and the team — the asset management team has been very active and working with many national retailers, as well as local retailers that are coming into the shopping centers and expanding their operations.
Q – Bryan Maher
Okay. And last for me, you’ve made some discussions on this call and previously about trying to get the stock price to more adequately reflect value, which we would agree to. And when we look at the dividend of $0.85 and the yield of 11% [ph], clearly the market maybe had some concerns about that. By our model, which needs to be updated for today, these numbers were kind of coming up with a mid-80s at the FAD payout ratio for this year, mid-70s for next year with the — adding in CIM. Is there anything you can say or suggest as it relates to how people should get comfortable that that $0.85 dividend is pretty rock solid?
Michael Weil
Yeah. I would look at the numbers, I think they really are speaking for themselves in earned versus paid out, we’ve got some nice retained earnings as well generated within the portfolio. And we have been consistently operating and growing this portfolio. We’re seeing the performance continue to increase. Occupancy is a nice driver as well. And when we look at the implied and investment grade rated tenants within the portfolio, the weighted average lease term, the fixed rate debt, I think is a really important aspect that people need to take a look at. We are over 80% fixed-rate debt in the portfolio and we have contractual long-term leases with rent growth. So gives me every reason to remain confident in the company’s current dividend strategy and I’m really excited to have calls like this and results like this, so that people can just see the portfolio performing at this level.
Bryan Maher
Great. Thank you.
Michael Weil
Thanks, Bryan.
Operator
Thank you. The last question is from the line of Barry Oxford with Colliers. Please go ahead.
Michael Weil
Good morning, Barry.
Barry Oxford
Great, thanks guys. Getting back to the acquisition, Michael, could you give us a little color on the acquisitions that you did in the quarter that was outside of the CIM, and kind of what was the quality and what was the rationale there?
Michael Weil
So it was a pretty quiet quarter, Barry, outside of completing the $1.3 billion of CIM properties. We –
Barry Oxford
I’m just looking at that 17.5 million.
Michael Weil
Yeah. So that is convenience and gas operator, eight locations. And an operator that we’re very comfortable with. Sale leaseback, master leased and really fits the criteria that you’ve come to see us operate within from an acquisition standpoint.
Barry Oxford
Okay, perfect, perfect. Michael, I don’t know if you broke this out, but you did 12.2% AFFO growth 2Q-over-2Q. How much of that growth was responsible for CIM, or look, Barry, it’s — you can’t just break it out like that?
Michael Weil
It’s something that — let us take a look at how we can give you the information, if it’s appropriate and we’ll get back to you.
Barry Oxford
Because it feels like a — at the very least, it feels like it was a big deal.
Michael Weil
Well, we talked about when we announced the CIM acquisition that it was an accretive acquisition immediately. I think that we bought it right, we negotiated a very well-balanced deal. Most importantly, Barry, and one of the things I’m most proud of with the company is we had a flawless integration. And $1.3 billion of properties, 81 properties, we closed on time, we continue to lease the portfolio, our asset management team did a great job integrating the portfolio. Jason Doyle and his team on the accounting side, rent collection, we didn’t miss a beat. And you know and I know in a large acquisition like this, execution really matters. So it’s one thing to announce a deal, it’s another thing to execute on that deal to close it seamlessly, to not lose momentum within the existing portfolio, and then to be able to integrate and operate the new portfolio. So it was really a big accomplishment for the first half of 2022 and sets us up for a really strong performance.
Barry Oxford
I agree, I agree. Thanks guys.
Michael Weil
Thank you, Barry.
Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Michael Weil for closing remarks.
Michael Weil
Well, thank you everybody for joining us. Again, it was a great quarter. We look forward to catching up. We will be available for calls or questions if anybody has any. And please remember, Necessity Retail REIT, it is Where America Shops. It’s a portfolio that’s performing really well, and we look forward to continued success into the future. Thank you all very much.
Operator
This concludes today’s conference. You may now disconnect your lines. Thank you for your participation.
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