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American Finance Trust, Inc (NASDAQ:AFIN)
Q1 2020 Earnings Call
May 8, 2020, 9:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the American Finance Trust First Quarter 2020 Conference Call. [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 Louisa Quarto, Executive Vice President. Please go ahead.

Louisa Quarto -- Executive Vice President

Thank you, operator. Good morning, everyone. And thank you for joining us. 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 Katie Kurtz, 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, 2019 filed on February 27, 2020 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 detailed 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 our CEO, Mike Weil. Mike?

Michael Weil -- Chief Executive Officer, President and Chairman

Thanks, Louisa. Good morning, and thank you all for joining us today. From all of us at American Finance Trust. We hope that you and your families are healthy and safe during this unprecedented global crisis. The health and safety of our communities, our tenants, their customers and our employees, contractors and vendors remains a top concern of ours. Last night, we reported first quarter results that highlight the strong momentum we had coming into this year. Going forward, we continue to have a high degree of confidence in our long-term outlook that reflects the resilience and capabilities of our team and the financial strength of our portfolio.

However, given the concern surrounding the COVID-19 pandemic, we'll will start this call with an overview of the initiatives taken to navigate this period of uncertainty. Beginning in early March, we took proactive steps to prepare for and actively mitigate the inevitable disruption this virus would cause. And we're pleased with the initial results. We enacted safety measures both required and recommended by local and federal authorities, including work remote policies, cooperation with localized closure or curfew directives and social distancing measures.

We remain in direct contact with our tenants, cultivating open dialogue and deepening the relationships that we have carefully developed through prior transactions and historic operations, which we consider to be one of our most important strengths. Thanks to these conversations and the strenuous due diligence and underwriting standards our team has adhered to over the last several years. We've had tremendous success in our rent collection during this pandemic.

For the month of April, AFIN collected nearly 79% of the cash rents that were due across the portfolio, including 97% of the cash rent receivable from the top 20 tenants and over 92% of the cash rent payable in our single-tenant portfolio. Of the April cash rent remaining, rent deferral amendments have been approved for 4% of the unpaid rent while rent deferrals with respect to an additional 16% of the unpaid cash rents are currently in negotiation. Our proactive discussions with tenants have allowed us to understand potential challenges and work together to achieve mutually agreeable resolutions, not all tenant requests ultimately result in modification agreements nor is the company foregoing its contractual rights under the lease agreements.

So far, the typical deferral amendment differs payment of approximately 30% of the rent due for three months and is repaid within the first half of 2021. The data to support these negotiations with tenants as well as other metrics we're using to actively manage our portfolio during these times is readily available to our teams because of technological and system investments AFIN has had access to over the last several years.

We strive to be a good partner to our tenants during this unprecedented situation and continue to value the importance of our long-term relationships. Helping our tenants remain physically healthy, secure and position for growth over the long term is the best thing we can do as landlords to secure our own long-term cash flow stability and steady value creation. Thanks to a history of prudent underwriting, our high quality portfolio is significant leased to investment grade rated or implied investment grade rated tenants.

Among our single-tenant assets, 66% of straight-line rent comes from investment grade and implied investment grade tenants, including 80% of our top 10 tenants portfoliowide. Once we emerge from this crisis, we're confident that our long-standing approach to asset selection and our unrelenting work will yield an even stronger position from which to capitalize on opportunities that are sure to arise from such a widespread disruptive event. We see very little risk that any completed deferral agreements will not be collected due to the financial strength and credit worthiness of our portfolio tenant roster.

The company has also taken additional steps to enhance our financial flexibility and minimize risk during this uncertain time. As a result, liquidity comprising cash on our balance sheet and availability for future borrowings under our credit facility totaled $215 million at the end of the first quarter, favorably positioning the company for the future. In March, we drew on our credit facility to enhance our liquidity position as the scope of the crisis became apparent.

Additionally, the Board approved a change in the common stock dividend to an annualized rate of $0.85 per share or quarterly $0.21 per share beginning in the second quarter of 2020. Our first quarter AFFO was $0.23 per share. We believe this action was prudent in the current environment in order to preserve capital and we'll strengthen AFIN's cash flow by $6.8 million per quarter. In April, the Board adopted a short-term stockholders right plan to discourage the accumulation of our stock through open market trading as a result of the current volatility in the trading price of our shares.

The Board believes that this plan, along with other recently announced actions is in the best interest of the company. We believe that while over the long term, the global economy will rebound, the short-term reality across the US will be challenging. We expect that the financial strength and credit worthiness of the tenants in our portfolio will offset the potential effects of this crisis and will continue to position AFIN well in the long run. Although, we are likely still in the early stages of this economic event, we're pleased with the resiliency our portfolio has shown so far in these uncertain times.

Turning to the first quarter results. We recorded year-over-year increases in revenue from tenants, NOI and adjusted EBITDA. For the first quarter, cash NOI was $59 million versus $55.7 million in the first quarter of 2019. The 5.9% year-over-year increase was driven by the significant acquisitions that AFIN completed during 2019. First quarter 2020 adjusted EBITDA increased 8.6% year-over-year to $50 million, and revenue from tenants increased 4% to $74.6 million.

During the first quarter, AFIN completed the acquisition of 31 properties totaling $90 million of contract purchase price. The weighted average cap rate for these acquisitions was 8.4%, with a weighted average remaining lease term of 16.8 years. We have closed on one asset in the second quarter, which combined with our pipeline of definitive agreements in place totaled 35 additional acquisitions for $44.7 million at a weighted average 8.1% cap rate, and over 16.2 years of weighted average remaining lease term. We've taken a prudent stance with our acquisition pipeline and are evaluating historical cap rates. We are carefully determining appropriate risk adjusted cap rate targets for potential new acquisitions going forward, and we'll ensure that all assets meet our revised criteria.

Turning to portfolio metrics. Annualized straight line rent has increased 12.7% year-over-year after a very active year of acquisitions. We're pleased with the progress our acquisitions have made to further our strategy of acquiring diversified retail assets leased on a long-term basis to high quality tenants. Retail makes up 71% of the 11.6 million square foot single-tenant portfolio, with the balance comprised of 16% distribution and 14% office properties. Occupancy across the single-tenant portfolio is over 99.3% with a weighted average remaining lease term of 10.9 years and 1.3% average annual rent escalators.

There were very minimal near-term lease expirations in this portfolio, with only 10% of leases expiring within the next four years. We've continued to cultivate a high concentration of investment grade or implied investment grade tenants with 66% of the annualized straight line rent in our single-tenant portfolio leading this high quality standard. Additionally, we continue to reduce our exposure to any one tenant through our acquisitions and dispositions. In the first quarter and the beginning of the second quarter, we sold four Truist formerly SunTrust Bank branches for gross proceeds of $9.5 million and are under contract to sell two more.

Additionally, eight of the Truist branches we own will become First Horizon National Corp branches. As part of the transaction, Truist was required to enter into in order to gain regulatory approval for the merger between SunTrust and BB&T that created Truist.

First Horizon National Corp is a strong regional investment grade rated operator with approximately 300 branches. After this conversion completes and the dispositions under contract are completed, our exposure to Truist will be 6.2% of our portfolio of straight line rent, down significantly from 8.9% at the time AFIN listed in 2018. Our 33 property 7.2 million square foot multi-tenant portfolio complements our single-tenant net leased portfolio in quality with an occupancy of 87.3% as of March 31, 2020, up from 84.8% in first quarter 2019.

Annualized straight line rent is up to $88 million from $87 million a year ago. During the first quarter, we continued to focus on leasing up available space and renewing leases with top tenants. In the quarter, we signed three new leases and seven lease renewals, helping to increase the portfolio occupancy and rent. At NorthPark Center and Patton Creek, new long-term leases will add over $120,000 in annual rent, while lease renewals will add nearly $200,000 in additional annual rent and extend the weighted average remaining lease term.

Katie, will you walk us through the financial results in more detail, please?

Katie Kurtz -- Chief Financial Officer, Treasurer and Secretary

Thanks, Mike. First quarter 2020 revenue was $74.6 million, a 4.3% increase from $71.5 million in the first quarter 2019. The Company's first quarter GAAP net loss attributable to common stockholders was $9.2 million versus $3.2 million in the same quarter 2019. And NOI was $62.3 million, a 6.1% increase over the $58.7 million we recorded for 2019.

For the first quarter of 2020, our FFO attributable to common stockholders was $23.7 million or $0.22 per share. First quarter AFFO was $25.2 million or $0.23 per share compared to the first quarter 2019 AFFO of $0.25 per share. AFFO was down slightly compared to the fourth quarter, which was $0.24 per share. We typically experienced an increased costs in the first quarter due to the 10-K and Annual Meeting of shareholders.

Additionally, the majority of our $90 million in acquisitions during the quarter closed in March with an acquisition for $28.8 million closing on the last day of the quarter. 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 first quarter with net debt of $1.6 billion at a weighted average interest rate of 4.2%. The components of our net debt include $483.1 million drawn on our credit facility, $1.3 billion of outstanding secured debt, and cash and cash equivalents of $175.7 million.

Our cash balance at the end of the quarter was mainly driven by the $135 million drawn on our credit facility in March to enhance liquidity as Mike mentioned earlier. At quarter events, interest rates on our mortgage debt were all fixed leaving only the drawn amount on our credit facility at floating. Liquidity, which is measured as undrawn availability under our credit facility plus cash and cash equivalents stood at $215 million at March 31, 2020. The company's net debt to gross asset value or total assets plus accumulated depreciation and amortization was 38.8%.

With that, I'll turn the call back to Mike for some closing remarks.

Michael Weil -- Chief Executive Officer, President and Chairman

Thanks, Katie. With a strong first quarter reflected in our financials, we know that the real test of 2020 will be how we respond to the challenges that arise in the remainder of the year. While there are a number of factors out of our control, I believe we've taken bold and decisive action that is also prudently measured to enhance our ability to respond to new developments as they arise.

I'm very proud of our team for showing great dedication, focus and expertise. Through our hard work and the tenant relationships we've developed, our first quarter was successful and we believe our second quarter is off to a good start. I'm also very appreciative of the continued support of our banking partners over the last few weeks.

Despite working remotely, our team and our partners have continued to work effectively to maintain the momentum that AFIN carried into the start of the year. When the appropriate time comes, we believe there will be opportunities to capitalize on the current market disruption, and we intend to be well positioned to act on these opportunities. We're committed to working with our tenants and relentlessly pursuing the best interest of the company. I look forward to sharing further updates with you in our next quarterly call.

Operator, please open the line for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Bryan Maher of B. Riley FBR. Please go ahead.

Bryan Maher -- B. Riley FBR -- Analyst

Good morning, Michael and Katie. Hope you guys are doing well in these difficult times.

Michael Weil -- Chief Executive Officer, President and Chairman

Hi, Bryan.

Bryan Maher -- B. Riley FBR -- Analyst

Shifting, just some discussion on the tenants. Is there any particular tenant type in the portfolio that has been more of a concern or asked more for deferrals than others within the portfolio?

Michael Weil -- Chief Executive Officer, President and Chairman

Well, Bryan. First, let me just reiterate a couple points that I made in my opening comments. Our top 20 tenants, which represents about 56% of the straight line rent performed at a tremendous level. And I think that really highlights where we've allocated our money and the quality of the tenants in the portfolio. The focus on quick service restaurant with primarily drive through capability proved to be a very valuable part of this portfolio. And rent collection from those tenants was very high.

So I would say overall, the diversity in the portfolio really drove home the value and was significant in us being able to collect such a high percentage of the rent in April. And I do want to point out that at 79% through the end of April, I think that's a great milestone. But as you know, April is the first month of the quarter. We continue to be in active discussions with the tenants that we've listed as in negotiation. They are large national tenants primarily, and we expect deals will be reached with those tenants.

We continue -- they obviously are large and they run their process alongside our process. We go back and forth. We're making great progress. I'm really encouraged by where we are with them. And when we do reach deals with them, we expect them to be retroactive to April. So we'll continue to update second quarter results. But I think we're really well positioned, all things considered for the second quarter.

Bryan Maher -- B. Riley FBR -- Analyst

Right. And I didn't want to take away from the 79%, which was definitely, I think we and others were pleasantly surprised by that. But to your point on your discussions of this remaining 16% and in addition to the ones that have already entered into the deferral agreements with you. Kind of what is the tone of those conversations? I mean it seems like some have been quite good, I'm not referring to your portfolio in particular but others that have been kind of defiant like Cheesecake Factory saying, we're just not going to pay rent. So what is the tone you're seeing with the people you're talking to?

Michael Weil -- Chief Executive Officer, President and Chairman

We have engaged in a very productive way both from the landlord side and from the tenant side. We all understand what we're going through as a -- an economy. So to take an approach of all or nothing, take it or leave it, from both sides makes no sense. Yes. We have certain legal rights under the lease. We could simply insist on certain things and threaten default and X, Y and Z. And you know as well as we know that's not a productive outcome.

We have long-term leases with these very important tenants in our portfolio, and as I said in my comments, we have found the ability to partner with them. Their problems are their problems. Our focus is our focus. We want to collect rent. That's our job. That's what our shareholders expect of us. But in reaching some deferment -- deferral agreements, I think it was very positive. I think it continues to build on the relationships that we have with these tenants, and -- come on, in a retail portfolio, there is nothing more valuable than having great relationships with strong national retail tenants.

So I think our team had the right attitude and the right focus, and I'm very appreciative on the tenant side that they also came to the table, looking to work out something that was necessary for them, but also accomplished what we needed as a landlord.

Bryan Maher -- B. Riley FBR -- Analyst

Great, that's helpful. And then how are you thinking about weighing your desire to preserve liquidity both because of the unknowns and maybe for better opportunities down the road versus acquisition opportunities you're seeing right now kind of day to day. How do you think and weigh those two things?

Michael Weil -- Chief Executive Officer, President and Chairman

On a case-by-case basis, Bryan, I have to tell you, I have not seen many potential acquisitions that were attractive to me, so far in this quarter. Sellers are holding on to yesterday's cap rates. As a buyer, we have additional risk profiles that we're evaluating. We had some deals that were still in due diligence, money still refundable that we had conversations with the sellers. And frankly, we weren't satisfied with the outcome. So we chose not to move forward. As Katie mentioned, we have $215 million of availability. That's very important to us right now.

When we see -- it could be tomorrow, it could be in months from now. But when we see the opportunities for the types of tenants that we've historically bought that are priced where we think they should be priced, we will be very engaged in that potential acquisition. But for the time being, our focus remains finishing up some of the lease negotiations that are progressing very well, on continuing to stay in touch with tenants to continue the rent collection process, and really these are unknown times for all of us. And there was something very reassuring about a strong cash position. I was very pleased and grateful to the work the Board did regarding dividend reduction for the second quarter.

I think it's the right thing to do at this time, and as Katie mentioned, it's a $6.8 million per quarter savings to the company. If you look at the earned AFFO in the first quarter of $0.23 in the second quarter and going forward on a quarterly basis, we will be paying a $0.21 dividend. So, again I think that was very prudent and that's how we've decided to approach this new world that we're working through right now, a very conservative, prudent, engaged manner. We talk to our tenants every day. We have follow-ups, and I think that that is going to really be important as we finish and continue through 2020.

Bryan Maher -- B. Riley FBR -- Analyst

That's terrific. And we were definitely pleased to see the measured movement in the dividend as opposed to cutting it to $0.00 or $0.01. I think that your shareholders were appreciative. Just kind of lastly for me and on behalf of one of your shareholders, who has emailed me, is there any status on the mortgage refinancing for the balance of 2020 debt?

Michael Weil -- Chief Executive Officer, President and Chairman

Bryan, there is nothing that I can publicly disclose at this point other than we are fully engaged with a banking group. We remain confident that this will be a positive outcome for AFIN, and as we move forward and have an appropriate public disclosure, we will be sure to communicate that to the market.

Bryan Maher -- B. Riley FBR -- Analyst

Thank you, and good luck with the second quarter.

Michael Weil -- Chief Executive Officer, President and Chairman

Thanks, Bryan. Talk to you soon.

Operator

[Operator Instructions] The next question is from Jeremy Metz of BMO. Please go ahead.

R. Jeremy Metz -- BMO Capital Markets -- Analyst

Hey guys, I'm on with Frank Lee here.

Michael Weil -- Chief Executive Officer, President and Chairman

Hi, Jeremy. Hi, Frank.

R. Jeremy Metz -- BMO Capital Markets -- Analyst

So I just wanted to go back to the April collections. You know, the 92% in the single-tenant obviously particularly strong especially with the restaurant exposure at 16%. I guess to your comments and most of it is quick or limited service, but just so we're clear. The 92% comparable to what would have been contractually there, you would have expected in say March 1, or is there any sort of -- you know you alluded to some of the modifications you've already discussed, the 30% cut. Does any of that flowing into the denominator?

Michael Weil -- Chief Executive Officer, President and Chairman

No, it is not, Jeremy. That is the contractual -- 92% of the contractual rent due was paid and collected.

R. Jeremy Metz -- BMO Capital Markets -- Analyst

Okay. And then obviously we're a few days in but it is you know started -- so what's the early read on May? Do you actually think it's, is it -- given how much rent is typically due in the first couple of days? And are you, are you ahead of where you are or --

Michael Weil -- Chief Executive Officer, President and Chairman

Well, again -- I don't think it's -- I don't think I can give kind of day-to-day updates on rent collection because it is a process, but I will tell you that we expect the results in May. Again, time will tell and we will disclose appropriately, but we have no reason to believe that we won't see similar results or better, because as I talked about the 16% that's in negotiation. I, as I said, have high expectations for the outcome of that 16% and obviously a big chunk of that will be rent received when final workouts complete.

So I've never been in a situation before where I could say I'm looking forward to reporting results but again being as engaged as we are with all of the tenants in the portfolio, understanding what the environment is, we believe that we're going to continue to collect the high majority of our rent and that we're going to be able to continue to perform as you would expect.

R. Jeremy Metz -- BMO Capital Markets -- Analyst

Yeah, no, that's helpful. And then, one for Katie. I was just hoping you can walk through your cash flow and potential cash burn. Is there -- and if there is any just given the overall collections just even though they're strong just there obviously is a hole here and then just within that how should we think about the ability to continue to pay the dividend as it stayed at this level or even gets a little bit worse here, depending how those collections play out here, how should we think about all that? Thanks.

Katie Kurtz -- Chief Financial Officer, Treasurer and Secretary

Thanks, Jeremy. So from a cash flow perspective, I'll start by reemphasizing that we're sitting on $215 million of liquidity. And that's both cash and amount available to be drawn on our line. So that's number one, from a liquidity standpoint. Also as Mike mentioned, we did give a dividend cut down from $1.10 to $0.85, which is you know at $6.8 million per quarter, savings on cash flow compared to where we were in the first quarter. So that would be number two.

And then in addition to that, at that new dividend rate, as Mike mentioned, you know, we're at $0.21 per share per quarter, on the dividend. And our AFFO in the first quarter was $23 million. We've been in as he mentioned good conversation with our tenant. So, good cash flow and rent received at 79% in the first quarter. So you know, not, you mentioned the word hole, I wouldn't think of anything in terms of that. I think we're -- our balance sheet is well positioned. We have good liquidity, had a prudent move by our Board in the second, in the second quarter with the dividend. And Mike and I are feeling good for the second quarter.

R. Jeremy Metz -- BMO Capital Markets -- Analyst

All right, thanks for the time.

Michael Weil -- Chief Executive Officer, President and Chairman

Thanks, Jeremy.

Operator

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

Michael Weil -- Chief Executive Officer, President and Chairman

Well, thank you, Katie and thanks everybody for joining us today. It is a challenging time the world is facing and I hope everybody stay safe and healthy and that we all get through this together. We'll continue to provide updates. And as I think you've heard us over and over today in a tough market we are remaining very optimistic, because of the results that we've seen through April as well as the underlying value within the portfolio. So thank you all again for your time today and if you have any other questions, we look forward to following up. Bye.

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Louisa Quarto -- Executive Vice President

Michael Weil -- Chief Executive Officer, President and Chairman

Katie Kurtz -- Chief Financial Officer, Treasurer and Secretary

Bryan Maher -- B. Riley FBR -- Analyst

R. Jeremy Metz -- BMO Capital Markets -- Analyst

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