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American Finance Trust, Inc.?(NASDAQ: AFIN)

Q2?2021 Earnings Call

Aug 5, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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Good morning, and welcome to the American Finance Trust Second Quarter 2021 Earnings Call. [Operator Instructions]

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

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Louisa Quarto -- Executive Vice President

Thank you, operator. Good morning, everyone, and thank you for joining us. This call is being webcast in the Investor Relations section of AFIN's website at www.americanfinancetrust.com. Joining me today on the call to discuss the results are Michael Weil, 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, 2020, filed on February 25, 2021, 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 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, 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. A reconciliation of these measures to the most directly comparable GAAP measure is available in our earnings release. Please also refer to our earnings release for more information about what we consider to be implied investment-grade tenants, a term we will use throughout today's call.

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

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

Thanks, Louisa. Good morning, and thank you all for joining us today. Our second-quarter results highlight the strength, predictability, and performance of our best-in-class necessity-based portfolio, especially our single-tenant assets that are net leased to predominantly investment-grade and implied investment-grade tenants. We continue to derisk our balance sheet using all the tools at our disposal, such as the asset-backed securities we issued during the quarter and the commencement of an initiative to reduce net debt to adjusted EBITDA. We believe these efforts will result in an investment-grade rating over time.

We meaningfully lowered net debt to adjusted EBITDA to 7.4 times from 8.3 times during the last quarter. after paying down maturing mortgages and growing adjusted EBITDA. The growth in adjusted EBITDA was driven in part by robust leasing in the multi-tenant portfolio, combined with our focus on controlling costs that lower G&A. The factors also contributed to a per-share AFFO increase of 30% to $0.26 for the second quarter, up from $0.20 last year.

Cash NOI grew 19.5% to $65.4 million from $54.7 million in the second quarter of 2020, and the same-store NOI increased $2.3 million to $64.5 million over the same period, driven in part by substantial leasing momentum in the multi-tenant segment of our portfolio.

At quarter-end, total portfolio occupancy was 94.9%, up one point from 93.9% at the end of last year, and our $4.1 billion portfolio has grown by 92 properties and one million square feet since the end of the second quarter of 2020. Annualized straight-line rent has increased $14 million to $286 million. We've accomplished this performance in an environment that is showing increased competitive activity, yet we remain disciplined underwriters. This is reflected in our high-quality portfolio where a majority of our leases are with investment-grade rated or implied investment-grade rated tenants and the fact that we have avoided any material bankruptcies in our portfolio. As of June 30, 2021, among our single-tenant assets, 61% of straight-line rent comes from investment-grade and implied investment-grade tenants, including 70% of our top 20 tenants portfoliowide.

I'd like to take a moment and focus on the lease expiration schedule for our portfolio. Based on annualized straight-line rent as of June 30, our full-year exposure to expiring leases is only 2% in each of our multi-tenant and single-tenant portfolios. Please refer to our filed 10-Q for further information on events following this reporting period. Our long-duration leases and staggered lease expirations provide us with ample opportunity to extend near-term leases, near-term maturity monitoring and early engagement with current or potential replacement tenants has long been a part of our asset management strategy, in some cases, starting two years before a lease is set to renew allow sufficient time to navigate a positive outcome for all parties.

No single property in our 939 property portfolio that has less than two years of remaining lease term, represents more than 2% of our annualized straight-line rent, providing further diversification to complement our staggered lease expirations. Our two largest tenants, Truist and Sanofi have weighted average remaining lease terms of 8.1 years and 11.5 years, respectively.

Our portfolio's diversification is supported by our acquisition efforts, which are focused on retail assets that have long remaining lease terms and contractual rent increases. We closed on 17 such assets during the second quarter, which, combined with first-quarter acquisitions and our forward pipeline, total 63 potential property acquisitions in 2021 for $196.7 million at a weighted average cap rate of 8.4% and 11.3 years of weighted average remaining lease term. We take a disciplined and opportunistic approach to acquisitions and have targeted acquisitions that we believe provide superior risk-adjusted returns. Since 2017, we have acquired over 500 properties with a weighted average remaining lease term at acquisition of 16 years and a weighted average cap rate of 8.1%. 77% of the properties we've acquired have been service retail properties.

Retail comprises 71% of the 12.6 million square foot single-tenant portfolio based on straight-line rent, with the balance consisting of 16% distribution and 13% office properties. Of the retail portion, 83% are service retail properties that we believe to be necessity-based in nature and more resistant to e-commerce. As of June 30, occupancy across the single-tenant portfolio is over 99%, with a weighted average remaining lease term of 10.1 years and 1.3% average annual rent escalators. Our 33-property, 7.2 million square foot multi-tenant portfolio has executed occupancy of 88% as of June 30, 2021, an increase from 86.2% a year ago. The well-positioned centers in our multi-tenant portfolio are desirable real estate in good communities where people want to shop.

Our team's hard work and the quality of our real estate resulted in an uptick in leasing demand from new and existing tenants and delivered strong results in the second quarter. We've executed 10 new leases that are expected to add $1.4 million of new annualized straight-line rent over time as rent commences. We're also building a robust leasing pipeline that, if definitive agreements are executed, will result in an additional $1.2 million of new annualized straight-line rent and at 72,000 square feet and would increase net occupancy in this portfolio to 89.1%.

Don Foster and Stephanie Drews have been leading our leasing initiative in the multi-tenant portfolio. Since they joined our team in the fourth quarter of last year, occupancy in the multi-tenant portfolio has seen a net increase of 139,000 feet of leased space. Our current executed and pipeline leases would, if fully executed, double this growth and increase the total occupancy in this portfolio by 4.4% since they joined the team. Not only have we signed quality tenants, such as two 10-year Burlington Coat Factory leases, we've also renewed over 600,000 square feet of leases in 2021, totaling over $7.7 million in annual rent. I'm very pleased with the direction this portfolio is headed and the contribution it has made to our performance this quarter.

Moving to our balance sheet. We have minimal near-term debt maturities in our capital stack, and we reduced our net debt to EBITDA to 7.4 times this quarter from 8.3 times last quarter. 90% of our debt matures in 2025 or later, and our weighted average debt maturity has increased by two full years to 5.3 years from 3.3 years in the same quarter of 2020. At the same time, the weighted average interest rate of our debt has decreased by 10 basis points to 3.7%. 91.4% of our debt is fixed-rate, locking in rates in an environment of historically low-interest rates.

We constantly monitor our balance sheet and the markets for opportunities to improve and enhance our capital structure. We executed on one such opportunity in the second quarter. We completed the issuance of $240 million in principal amount of investment-grade rated ABS notes with a weighted average interest rate of 2.9% and a weighted average debt maturity of 8.9 years. The note proceeds were used to repay $75 million of near-term maturing mortgage debt that had a 5.5% interest rate and also pay down $80 million on our credit facility. The remainder was used to fund subsequent debt pay downs, which freed up cash on hand to fund third-quarter acquisitions.

The notes, along with the notes we previously issued under the same master indenture are secured by a diversified pool of 357 net leased necessity-based single-tenant properties. This issuance demonstrates our ability to actively manage debt maturities and take advantage of the historically low-interest rate environment.

Finally, last quarter, we collected 100% of the original cash rent payable for the second quarter in a row. Consistent with prior quarters, all rent collection percentages are calculated using the original rent we would have expected to receive before COVID started as the denominator. The numerator includes cash rent and deferred rent payments received during the quarter. Excluding the impact of deferred rent payments, we collected 99% of the original cash rent due in the total portfolio during the second quarter.

AFIN had an excellent quarter in all measures from strong leasing in the multi-tenant portfolio and growth in per-share AFFO to the low-cost ABS issuance and decreasing net debt to adjusted EBITDA by almost one full turn. We delivered results that meaningfully improve AFIN's balance sheet and credit profile.

I'll turn it over to Jason to take us through the numbers in greater detail. Jason?

Jason Doyle -- Chief Financial Officer, Treasurer and Secretary


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Thanks, Mike. Second-quarter 2021 revenue was $81.6 million, up from $79.2 million in the first quarter of '21 and an 8.9% increase from the $74.9 million in the second quarter of 2020. The company's second-quarter GAAP net loss attributable to common stockholders was $7.4 million. That's compared to net losses of $9.4 million in the first quarter of '21 and $21.8 million in the second quarter of 2020. NOI was $68.2 million, a $2.5 million increase from the $65.7 million we recorded for last quarter and a 9.3% increase over $62.4 million of NOI we reported in the second quarter of 2020.

For the second quarter of '21, our FFO attributable to common stockholders was $25.1 million or $0.23 per share compared to $0.21 per share for the same period in 2020, a 9.5% increase. Second-quarter AFFO increased 35% to $28.7 million or $0.26 per share compared to $0.20 per share in the second quarter of 2020.

As always, a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release, supplement, and Form 10-Q. Building on Mike's balance sheet comments.

We ended the second quarter with net debt of $1.7 billion at a weighted average interest rate of 3.7% and net debt to gross asset value of 38.4%. The components of our net debt include $155.7 million drawn on our credit facility, $1.7 billion of outstanding secured debt, and cash and cash equivalents of $137.1 million. The amount drawn under our credit facility represents the majority of our floating rate debt. Liquidity, which is measured as undrawn availability under our credit facility, plus cash and cash equivalents stood at $389.7 million. That's based on our June 30 cash balance and borrowing availability. The company distributed $23.1 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 -- Chief Executive Officer, President and Chairman of the Board of Directors

Thanks, Jason. We achieved excellent results for the second quarter, both in our financials and the high level of activity across the company. Our portfolio is among the strongest in our sector, and we continue to maintain our steady and deliberate approach to growth via high-quality accretive acquisitions. The single-tenant and multi-tenant properties in our portfolio complement each other and result in what we believe to be a stronger retail portfolio than either segment on its own.

We're focused on continuing to strengthen our balance sheet and working toward obtaining an investment-grade credit rating. We believe this will facilitate additional capital structure diversification, which may include accessing the equity and unsecured debt capital markets to further derisk the company's balance sheet. I'm very excited about the direction that AFIN is heading and look forward to answering any questions you have.

Operator, please go ahead and open the line for Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Thank you. Our first question is from the line of Bryan Maher with B. Riley. Please proceed with your question.

Bryan Maher -- B. Riley -- Analyst

Great. Thank you and congratulations on a very strong quarter. Numbers looked really good. Two questions for me. Really, when it comes to occupancy and the improvement to be expected in the multi-tenant portfolio, you talked about getting to 89.1% over time, I'm assuming you would expect it to go even higher over a longer period of time. But what period of time are we talking about here? Is that kind of about year-end 2021? Is that first half of 2022?

And then as far as the big picture portfolio goes, where do you think we end up at the end of the year in occupancy, maybe give or take 50 bps?

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

Thanks, Bryan. So first of all, the leasing that has been driving the NOI growth in the portfolio, we've really seen pickup since the, I would say, fourth quarter of 2020. And I really give a lot of that credit to our internal team, which is led by Jason Slear. And then as I mentioned in my comments, Don Foster and Stephanie Drews, who -- just their continual focus and relationship and, frankly, knowledge has been a great asset to the company and one that I'm going to continue to expect positive results from.

When we talk about occupancy in the portfolio at the end of the second quarter, and we include the leases in our pipeline. And for us to put them in our pipeline, we have a high level of confidence that they will be executed. It gets us, as you mentioned, to that just over 89% level. I believe that this portfolio of multi-tenant shopping centers because of the quality of the real estate, the location and the communities, and just the fact that people like to shop. They like the physical experience of shopping, and we're giving them the right kind of tenant mix in the portfolio, they can complete numerous activities at these centers.

So I'm thinking that, as I've said before, we expect to see this in the low to mid-90s from an occupancy standpoint. And not giving guidance. I'm going to just be a little bit cautious as to the exact timing of that. But I think as you project out from what you've seen from December through the June 30 period, I do believe that you will continue to see that occupancy growth. And I do expect us by year-end to really start getting into that goal range of mid-90s.

Bryan Maher -- B. Riley -- Analyst

Okay. Great. And then as we think about your comments on deleveraging, and you've made some really good progress going from 8.3 to 7.4. But with a goal, I suspect, getting the investment-grade rating, where do you think you need to be from a leverage standpoint? And given that you already borrow at some pretty attractive rate, how much further can rates go down once you hit that investment-grade rating?

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

Yes. Well, I think that's a great point. And it's not just about the rate because I think we've really done a great job of taking advantage of these historically low rates and securing that debt for long periods of time, taking our average debt maturity from about 3.5 to 5.5 years in this period. But I think it's more than just that. I think that there's an additional level of confidence that we will bring to the market with a net debt to EBITDA more in line with peers. And this quarter was a tremendous improvement for us, as you said, at 7.4 times. I don't -- 7.4 times, as you heard Jason say, represents portfolio leverage of 38%.

So for us, it's a real combination, I want to continue to see the NOI growth, which is going to be driven again by the opportunities we have in the multi-tenant portfolio. And I think as we start really focusing on the agencies and an investment-grade rating, we're going to learn more, and we're going to continue to drive that focus. I would imagine it's probably in the high 6s, low 7s minimum. But this quarter, I think, representing that significant change to 7.4 times while growing AFFO to $0.26 per share, shows what the opportunities are and what our focus is.

Bryan Maher -- B. Riley -- Analyst

Great. Thanks, Michael.

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

Thanks, Bryan.

Operator

[Operator Instructions] The next question is from the line of Frank Lee with BMO. Please proceed with your question.

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

Hey, Frank.

Frank Lee -- BMO -- Analyst

Hey, Mike. Good morning. Can you walk us through how you think about balancing deleveraging efforts versus sacrificing potential accretion from acquisitions by issuing equity at these levels?

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

Yes. I think the second quarter is a really good representation of how we think about it, Frank. It's something that we take very seriously and give a lot of thought to. Obviously, we don't want to just de-lever without careful consideration. But I think it's an important step for the company. You and I have talked about it. You've, in some of your commentary and notes, suggested bringing leverage down. And we've heard that not just from you.

So I'm really pleased and proud of the work that we did in the second quarter because, as I said in answering Bryan's question, not only did we bring net debt to EBITDA down to 7.4 times, which is almost a full turn. But we did so in a quarter where we saw AFFO growth to $0.26. So I think we're really focusing on the things that matter the most. And I just have to tell you how proud I am of the team and the work that got done this quarter.

Acquisitions, we were very focused and selective on what we bought and at what cap rate the leasing activity and the NOI growth being driven from the multi-tenant portfolio, the completion of the ABS securitization. So this was a really good quarter for us, and I'm really glad that you noticed that, and we appreciated your note last night.

Frank Lee -- BMO -- Analyst

Okay. Great. And just a follow-up on the last question. Is there a specific time frame? I know you said over time, but is there a time frame you have in mind where you'd like to get to the investment-grade level?

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

Yes. My time frames are always as soon as possible. That's not much of a -- we're going to start the process. We have started the process by knowing that we needed to address net debt to EBITDA. We'll see what the -- what we learned from the agencies in the third quarter. It will -- we'll see -- hopefully, it's within the kind of the four-quarter period, but we'll see.

Frank Lee -- BMO -- Analyst

Okay. And then just last one for me. You mentioned the 2% remaining expiring the multi-tenant portfolio this year. What are your thoughts on getting those renewed? Or how are discussions going?

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

I'm sorry, I missed the beginning of your question. Would you repeat it?

Frank Lee -- BMO -- Analyst

Yes. Just the remaining 2% of expirations left on the multi-tenant portfolio, thoughts on getting those renewed? And how are discussions going?

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

Discussions are going very well. We renewed about 700,000 square feet of multi-tenant leasing year-to-date. So again, it's -- the centers are very strong, the relationships we have with the tenants. Retail is back to pre-pandemic levels. And so I'm optimistic about the continued success in our renewals.

Frank Lee -- BMO -- Analyst

Okay. Great. Thank you, Mike.

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

Thanks. Bye, Frank.

Operator

Thank you. We've reached the end of the question-and-answer session. I'll now turn the call over to management for closing remarks.

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

Well, thank you, everybody, for joining us. Again, we're very excited about the second-quarter results. We appreciate your continued commitment to the company, and we look forward to talking to you now that earnings have been released.

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

Jason Doyle -- Chief Financial Officer, Treasurer and Secretary

Bryan Maher -- B. Riley -- Analyst

Frank Lee -- BMO -- Analyst

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