VEREIT (VER) Q2 2018 Earnings Conference Call Transcript

VEREIT (VER)
Q2 2018 Earnings Conference Call
Aug. 3, 2018 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the VEREIT second-quarter 2018 earnings conference call and webcast. 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, SVP, investor relations. Please go ahead.

Bonni Rosen -- Senior Vice President, Investor Relations

Thanks, Michelle. Thank you for joining us today for the VEREIT 2018 second-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 p.m. Eastern Time today. Dial-in for the replay is 1-(877)-344-7529, with the confirmation code of 10121516.

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. VEREIT's 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 with the closing remarks. We will conclude today's call by opening the line for questions.

Glenn, let me turn the call over to you.

Glenn Rufrano -- Chief Executive Officer

Thanks, Bonni, and thank you for joining our call. We are pleased with the results for the quarter. AFFO per diluted share was $0.18. To date, acquisitions totaled $254 million and we completed $232 million of dispositions.

We also repurchased $50 million of stock through the year. We entered into a new $2.9 billion credit facility which includes a nine-month $900 million delayed-draw term loan. Net debt to normalized EBITDA was 5.8 times. Year-to-date results are in line with our guidance.

Occupancy for the quarter increased to 98.8%. Same-store rent was up 0.5%. Excluding the effects of the early lease renewal executed in the fourth quarter, same-store rents would have been 1.1%. During the quarter, we had 2.2 million square feet of leasing activity, of which 1.7 million square feet were early renewals.

Notable transactions included the affirmation out of bankruptcy of two Southeastern Grocers retail locations and an industrial facility in Jacksonville, Florida. Including all renewals, we recaptured approximately 98% of prior rents. These leases have built-in increases and for early renewals, we have extended the weighted average lease term by seven years.

Turning to transactions. Second-quarter acquisitions totaled $41 million and $74 million subsequent to the quarter. These included retail properties in our specified categories such as discount, hobby, home, convenience, and fitness, as well as a portfolio of specialized industrial properties. For the year, acquisitions totaled $254 million, of which 80% were retail and 20% industrial.

Second-quarter dispositions totaled $56 million, with $39 million subsequent to the quarter. Dispositions for the year now total $232 million, of which half were targeted at our diversifiers, Red Lobster and office.

For the first half of the year, U.S. investment in commercial properties approximated $240 billion, a healthy transaction market. We had $11.5 billion of single-tenant properties offered to us. Valuations for our asset types have generally been stable.

However, we are being cautious on all acquisition activities.

In May, we had the option of extending our $2.3 billion credit facility for one year. We chose instead to recast a new $2.9 billion facility, which included a nine-month $900 million delayed-draw term loan at reduced pricing. We appreciate the support our banking partners continue to give us.

Before Mike reviews our financial results, let me provide a brief update on litigations. We continue our discussions with the SEC regarding the resolution of potential civil charges it may bring with respect to certain matters stemming from the announcement made on October 29, 2014, as we mentioned last quarter. On June 11, we announced that we entered into a settlement agreement with Vanguard for $90 million. Vanguard's holdings accounted for approximately 13% of VEREIT's outstanding shares of common stock held at the end of the period covered by the various pending shareholder actions.

Depositions have been taking place since January. At the June 11 status conference, the judge ordered fast deposition to be completed by year-end and also set a trial date for September 9, 2019. The next status conference with the court is scheduled for November 29, 2018. Additional details regarding pending litigation can be found in our 10-Q filed today.

Let me turn the call over to Mike.

Mike Bartolotta -- Chief Financial Officer

Thanks, Glenn, and thank you all for joining us today. We had a good quarter, achieving $0.18 AFFO per diluted share. We will focus on earnings from continuing operations for this call. In the second quarter, revenue was up slightly compared to last quarter.

Net loss was $74.7 million versus net income of $29 million last quarter. The $103.7 million decrease in net income was mostly due to the $90 million settlement, along with $5.6 million in higher impairments this quarter, $6.2 million lower other income, and $11.5 million lower gain on disposition of real estate assets, partially offset by a $5.2 million gain on the extinguishment of debt in Q2 and $4.5 million lower litigation costs.

FFO per diluted share decreased $0.09 from $0.17 to $0.08, mostly due to the Vanguard settlement, along with $6.2 million in lower other income, partially offset of the $5.2 million gain on the extinguishment of debt and $4.5 million lower litigation costs. AFFO per share was roughly flat at $0.18 quarter over quarter. G&A increased by $1.1 million to $16.3 million, versus $15.2 million for the first quarter, mostly due to certain equity compensation that is typically recorded in the second quarter. Litigation and other non-routine costs were $107.1 million for the quarter.

This included the settlement and approximately $17.2 million of legal costs, bringing the total for the year to $39 million.

As you can see, we are trending toward the higher end of our estimated range of $55 million to $65 million for the year and we will update this estimate if necessary in the third quarter. There can be no assurance as to whether or how the Vanguard settlement may affect any potential future resolution of any other pending lawsuit. The company has not reserved amounts for the SEC investigation, the ongoing class action, and the remaining opt-out litigation because we believe that any probable loss or reasonably possible range of loss is not reasonably estimable at this time.

Turning to our second-quarter real estate activity. The company purchased seven properties for $41 million at a weighted average cash cap rate of 7.2%. Subsequent to the quarter, the company purchased 14 properties for $74.2 million at an average cash cap rate of 7.1%. During the quarter, we disposed of 37 properties for $56.4 million.

Of this amount, $28.4 million was used in the total weighted average cash cap rate calculation of 7.4%, including $25.9 million in net sales of Red Lobster restaurants. The gain on second-quarter sales was approximately $6 million and subsequent to the quarter, the company disposed of 10 properties for an aggregate sales price of $39.3 million at an average cash cap rate of 6.8%. We also repurchased 5.6 million of our common stock under our $200 million stock-repurchase plan at a weighted average price of $6.95.

During the quarter we had net draws of $75 million on our revolving line of credit, including the $90 million settlement payment. As of quarter-end, we had drawn $195 million on our revolving line of credit, leaving $1.8 billion of capacity. We also reduced secured debt in the quarter by $45.9 million. As Glenn has mentioned, we entered into a new $2.9 billion credit facility, replacing our $2.3 billion facility.

The new facility is comprised of a $2 billion unsecured revolving line of credit and $900 million unsecured delayed-draw term, enhancing our liquidity and financial flexibility with upcoming debt maturities.

Subsequent to the quarter, we repaid $597.5 million of principal outstanding related to the 2018 convertible notes that came due August 1 from the revolver. The company is evaluating options for permanent financing, including borrowing on the delayed-draw term loan or the issuance of senior note offering. Our net debt to normalized EBITDA increased slightly to 5.8 times from 5.7 times. Our fixed-charge coverage ratio remains healthy at 3 times and our net debt to gross real estate investment ratio was 39%.

Our unencumbered asset ratio was 74%. The weighted average duration of our debt is four years and we are 96% fixed.

And with that, I will turn the call back to Glenn

Glenn Rufrano -- Chief Executive Officer

Thanks, Mike. Our liquidity focus has been on both the right and left side of our balance sheet. The left side, our properties are stable and well-diversified, with occupancy over 98% and a goal to increase unencumbered assets, which now represent 74%. The right side, our debt reflects metrics well within our investment-grade rating and we continue to have a great deal of liquidity.

Our new credit facility demonstrates the banks' confidence in our business model.

Market trends and fundamentals are generally positive. Range-bound interest rates and M&A activity have led to an upward momentum in REIT stocks. However, our share price multiples are still influenced by our last legacy issue litigation. On that front, the DOJ has indicated it will not bring criminal charges against the company.

We are in discussions with the SEC, and we have settled with one of our opt-out lawsuits. We will manage the remaining litigation and do so with our stakeholders' welfare in the forefront.

I will now open the line to questions.

Questions and Answers:

Operator

[Operator instructions]. The first question comes from Mitch Germain of JMP Securities. Please go ahead.

Mitch Germain -- JMP Securities -- Analyst

Hi. Good afternoon. So second-quarter acquisition volumes, I know it's picked up since then, but it was a little bit slow. Anything to do with that industrywide? Or was it just things materializing a little bit slower than you thought?

Glenn Rufrano -- Chief Executive Officer

It was just timing, Mitch. Nothing relative to the industry. As I mentioned, we have followed the growth in investment sales. With that $240 billion for the first six months, that's pretty healthy.

If we get close to $500 billion for the year, we are in pretty good territory. We have seen no down lift or lack of lift in activity.

Mitch Germain -- JMP Securities -- Analyst

Are you seeing more competition? Or is it just still pretty consistent?

Glenn Rufrano -- Chief Executive Officer

Pretty consistent. A lot of activity. As I mentioned, we had $11.5 billion offered to us in the first half. A large variety.

Remember, we are in the small ticket market. A lot of small properties but some portfolios and sale-leasebacks as well.

Mitch Germain -- JMP Securities -- Analyst

I know there was a period of time where you were somewhat out of the acquisition markets but you still had the Cole engine that kept you fairly active on the deal side. Obviously, without that business connected to yours anymore, are you still getting the same looks at as many transactions? Or is there any particular investment that you may have to make to grow the acquisition team here?

Glenn Rufrano -- Chief Executive Officer

No, we are in good shape, Mitch. As you mentioned, we were not in the acquisition business right through the fourth quarter of 2016, from 2015 to 2016, but during that period of time, the same time, purchased over $1.5 billion of assets just for Cole. Just so you know, we continue to be in a transition with Cole and we are working together because are just doing the edges, Mitch. As you remember, back in 2015, we said portfolio goals, no more than 5% of tenant, 10% in industry, 10% in market, 30%, 40%, investment-grade rating, and so forth.

If you look at all our metrics, which you have in the supplemental, we are pretty close. We are a little out of whack in Red Lobster but that's coming in very quickly. We sold $58 million of Red Lobsters to date. We expect to sell between $100 million to $150 million this year.

So we will be in the fives, we expect by early next year and down at five by the end of next year. So we are in pretty good shape.

Mitch Germain -- JMP Securities -- Analyst

Great. Last one for me. Last year, we saw Amazon enter the grocery business. This year, it looks like they are making a potential push into the drug pharma business.

Any sort of implications you think in terms of that industry and how you are thinking about your exposures there?

Glenn Rufrano -- Chief Executive Officer

They certainly are a disruptor, aren't they? They enter a business and everything goes crazy. It's actually a little unbelievable. I will just start off by saying they are an important company. This is a difficult business, pharmacy business to get into.

There is market dominance here. CVS, Walgreens control about 50% of the market. They have complex logistics and there are regulations which are pretty difficult. They may get there.

The only thing I would say is that it's going to take time. And during that time, I would say what's going to happen, they are going to make Walgreens and CVS better retailers. Maybe they have made all retailers better retailers. They have tough competition.

Their competition is investment-grade, well-financed, and we'll see. I can't really predict but I can tell you that what we care about with all the disruption going on today is that in any retail category, we want the top tenants. We have the two top tenants. If you look at our supplemental, Walgreens has an average term of 11.3 years.

CVS has an average term of 13.5 years. So we have the best players and we have terms with those players.

We have really good real estate and above all, we diversify. That diversification is important. Now you did mention implications. So I am going to take you to one more because I have been reading about the fact that Amazon gets into the pharmacy business and all of a sudden cap rates on pharmacy go up to some extent.

I am not sure anybody has sold more pharmacy properties than we.

From 2015 through the end of 2017, we sold about $500 million of CVSes and Walgreens. And in 2017, we have sold or have an LOI or contract on another $45 million. So we have almost $550 million of product we can tell you about. In 2015, the average cap rate on those pharmacies was 6.1%.

In 2016, it was 6%. In 2017, it was 6.3%. We just sold one for 5.9% and the average on the $45 million we have now to be sold is 6.2%. Haven't seen a lot of change.

So when you say implications, there are two. One is to the industry, I think it will take longer term and we will see what happens. In terms of cap rates today, I would say, no implication.

Mitch Germain -- JMP Securities -- Analyst

Thank you.

Operator

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

Glenn Rufrano -- Chief Executive Officer

Thanks, everybody for joining us today and have a good weekend.

Operator

[Operator signoff]

Duration: 19 minutes

Call Participants:

Bonni Rosen -- Senior Vice President, Investor Relations

Glenn Rufrano -- Chief Executive Officer

Mike Bartolotta -- Chief Financial Officer

Mitch Germain -- JMP Securities -- Analyst

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