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American Finance Trust, Inc (NASDAQ:AFIN)
Q2 2020 Earnings Call
Aug 6, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the American Finance Trust Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Louisa Quarto. 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 31st, 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 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 the 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 of the Board of Directors

Thanks, Louisa. Good morning, and thank you all for joining us today. Last night, we reported second quarter results that highlight the strength and resiliency of our primarily investment-grade and implied investment-grade necessity-based retail net lease-focused portfolio. During the quarter, there was full of global disruption. We met these challenges head on by proactively engaging with our tenants early in the pandemic and collecting over 84% of the cash rent due in the second quarter, while progressing important non-COVID related objectives.

Many of you have inquired about the status of our upcoming debt maturity over the last year. We're excited to report that we've completed a transformational $715 million CMBS financing that extended our near-term debt maturity while locking in a historically low interest rate. Through this transaction, we completed the refinancing of our existing $497 million CMBS loan, which had two months remaining until maturity and certain properties on the company's credit facility borrowing base with a new five-year CMBS loan. The interest rate on the new loan is fixed at 3.74%, 62 [Phonetic] basis points lower than the rate on the prior CMBS loan. In completing this loan, we derisked our portfolio by extending AFIN's weighted average remaining debt term to 4.9 years from 3.3 years and pushed out 70% of our debt maturities until after 2024, providing further flexibility to our capital structure. As you can imagine, with over 400 site visits across the country in the depth of this pandemic, completing this financing was a herculean task undertaken by our team and the lender.

Turning to rent collection. Our team has been working directly with tenants to navigate through this unchartered territory over the last few months, deepening relationships that will last far longer than the pandemic. Thanks to these efforts and the credit quality of our portfolio, we collected 84% of the original cash rent due for the second quarter of 2020, including 94% of the original cash rent due in the company's single-tenant portfolio and 96% of the cash rent due from our top 20 tenants. For the month of July, collection rates have continued to trend upward as 88% of the original cash rent due for the month has been collected to-date, including 96% in the single-tenant portfolio and 72% in the multi-tenant portfolio as some of the initial rent deferral agreements ended on June 30, and those tenants are now back to paying 100% of their original rent.

Our team engaged directly with tenants to create value for company by negotiating extensions in exchange for partial rent deferrals or credits. During the quarter, this initiative resulted in lease extensions with 12 tenants, which on average, extended existing leases by 36 months in exchange for only four months of rent deferrals or credits. The incremental net cash rent we expect to receive from this work totals almost $29.1 million.

There were COVID related legal expenses incurred this primarily related to lease deferrals and other tenant negotiations of approximately $1.6 million. The majority of these charges impacted AFFO, and we reported AFFO of $21.2 million or $0.20 per share in the second quarter compared to $0.23 per share last quarter. In the third quarter and going forward, we expect not only a continued increase in rent collection as existing deferral agreements end and tenants resume paying rent in full, but also a decrease in legal fees incurred, which should be in line with previous quarters.

Year-over-year, we've grown our portfolio by over 140 properties and 1.2 million square feet, increasing annualized straight-line rent by $22 million per year to $272 million. Occupancy has increased 90 basis points to 94.3% and our total real estate investment at cost is just under $4 billion. Due to our commitment to prudent underwriting, our high-quality portfolio is significantly leased to investment-grade rated or implied investment-grade rated tenants. Among our single-tenant assets, 63.3% of straight-line rent comes from investment-grade and implied investment-grade tenants, including 80% of our top 10 tenants portfoliowide. We continue to grow the single-tenant segment of our portfolio as a percentage of rent. Annualized straight-line rent for multi-tenant retail tenants has decreased 400 basis points year-over-year to only 31% of our annualized straight-line rent and has decreased 800 basis points from the 39% of rent that came from multi-tenant retail at listing.

AFIN's acquisition efforts continue to be focused on single-tenant service and necessity retail assets that have long remaining lease terms and contractual rent increases. We closed on three such assets in the second quarter, which combined with our pipeline of definitive agreements in place, which totals 45 property acquisitions for $75.4 million at a weighted average 8.7% cap rate and over 15 years of weighted average remaining lease term. We're taking a prudent stance with our acquisition pipeline and are carefully determining appropriate risk-adjusted cap rates for potential new acquisition targets going forward.

Necessity-focused retail makes up 71% of the 11.7 million square foot single-tenant portfolio with the balance comprised of 15% distribution and 14% office properties. Occupancy across the single-tenant portfolio is over 99%, with a weighted average remaining lease term of 10.8 years and 1.3% average annual rent escalators. There are very minimal near-term lease expirations in this portfolio, with only 10% of leases expiring within the next four years. In the second quarter, we continued our previously discussed Truist redeployment initiative, continuing to reduce our exposure to any one tenant through our acquisitions and dispositions. Today, Truist, formerly SunTrust makes up only 6.5% of our straight-line rent, down from 8.9% at the time of AFIN's listing in 2018. In the second quarter, we sold four Truist bank branches for gross proceeds of $9.2 million. Additionally, after June 30th, eight of the Truist branches we own became First Horizon Bank branches. First Horizon Bank is a strong regional investment-grade rated operator with approximately 300 branches. Once complete, our exposure to Truist will be 6.2% of our portfolio straight-line rent as of June 30th, down significantly from 8.9% at the time AFIN listed in 2018.

As a reminder, since we began this initiative, we've sold 26 occupied Truist bank assets at a weighted average cash cap rate of 5.6%, generating net proceeds of $49.8 million. Net proceeds from these sales were among the sources of funds for our robust acquisition program, where acquisitions have had a weighted average cash cap rate of 7.2% since the start of 2018. During the same period, we increased our portfolio level weighted average lease term from 8.1 years to 8.9 years. Our 33 property, 7.2 million square foot multi-tenant portfolio complements our single-tenant net lease portfolio in quality with an occupancy of 86.2% as of June 30th, 2020, up 110 basis points from 85.1% in the second quarter of 2019. In our second quarter negotiations with tenants responding to the impacts of COVID, our lease modifications equated to $1.9 million of short-term rent deferral or credits in exchange for over $31 million of additional rent. In total, the net cash rent pickup related to these extensions was $29.1 million.

Katie, will you take us through the rest of the second quarter financial results?

Katie Kurtz -- Chief Financial Officer, Treasurer and Secretary

Thanks, Mike. Second quarter 2020 revenue was $74.9 million, a slight decrease from $74.6 million in the first quarter of 2020 and a decrease from the $79.1 million for the second quarter of 2019. The company's second quarter GAAP net loss attributable to common stockholders was $21.8 million compared to a net loss of $9.2 million in the first quarter of 2020 and a net income of $7.9 million in the second quarter of 2019. NOI was $62.4 million, a slight increase from the $62.3 million we recorded for the first quarter. For the second quarter of 2020, our FFO attributable to common stockholders was $22.2 million or $0.21 per share. Second quarter AFFO was $21.2 million or $0.20 per share compared to first quarter AFFO per share of $0.23.

As Mike mentioned, net loss was impacted by $1.6 million in COVID related legal expenses, giving effect to the AFFO adjustment for COVID related lease disputes outlined in our 10-Q, AFFO was impacted by $1.4 million of COVID related legal expenses, mainly associated with the negotiation and execution of near-term rent deferrals and credit, which in some cases were in exchange for long-term lease extension. 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 $1.7 billion at a weighted average interest rate of 3.8% and net leverage of 40.3%. The components of our net debt include $503.1 million drawn on our credit facility, $1.3 billion of outstanding secured debt and cash and cash equivalents of $136.7 million. At quarter-end, interest rates on our mortgage debt were all fixed, leaving only the drawn amount on our credit facility as loading.

Liquidity, which is measured as undrawn availability under our credit facility plus cash and cash equivalents, stood at $162.7 million based on our June 30th cash balance and borrowing availability, giving effect to the closing of our credit facility amendment and CMBS loan on July 24. Subsequent to quarter-end, we entered into a financing transaction and borrowed $715 million in a commercial mortgage-backed security financing. The CMBS loan is interest-only at an interest rate of 3.74%, has a five-year term and is secured by 368 single-tenant properties. Of these, 223 properties were previously collateral for a loan that had less than two months of term remaining at the time we closed this new transaction and an effective interest rate of 4.36% as of June 30th, 2020. All, but one of the remaining properties were financed on AFIN's corporate credit facility.

At the closing of the CMBS well, an aggregate of $499 million of proceeds was used to repay the existing mortgage on the property, and the balance was used to repay amounts outstanding under the company's corporate credit facility. The completion of this financing extends AFIN's weighted average debt maturity from 3.3 years to 4.9 years as of June 30th, 2020.

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

Thank you, Katie. We have successfully navigated a challenging quarter by engaging with tenants and staying focused on value creation across our asset management, acquisition, financing and legal departments. Through close coordination and collaboration with our tenants, we're able to collect 84% of the cash rent payable in the quarter. July rent collection exceeded the second quarter rate coming in at 88%, including 96% in our single-tenant portfolio and 72% in the multi-tenant portfolio, and we anticipate that this rate will continue to climb.

Through the continued hard work and dedication of our team and our banking partners, we were able to complete a very large and complex financing transaction that derisked our portfolio while giving us flexibility in the future to broaden our capital structure. The benefit of these efforts will continue to accrue in future quarters, along with the continued outperformance of our investment-grade portfolio that is highly diversified, both by tenant and geography with long remaining lease terms and annual rent increases in place.

I'm pleased with our accomplishments this quarter and look forward to answering any questions you might have about our results. 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 with B. Riley FBR. Please go ahead.

Bryan Maher -- B. Riley FBR, Inc. -- Analyst

Good morning, Michael and Katie.

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

Hey, Bryan.

Bryan Maher -- B. Riley FBR, Inc. -- Analyst

Two questions for you. One, when we look at your top 20 tenant list in your supplemental, and we go down the list and we kind of think about that in relationships to what we all see all day on CNBC regarding retail bankruptcies. It doesn't strike us as anybody in that list that really would be at risk. Is there any tenants in your portfolio maybe outside of the multi-tenant, which maybe there's one or two year that you have any concerns with or do you think you're set up to kind of weather the storm?

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

Yeah. First of all, Bryan, thank you, and always good to take your questions. Bankruptcy is something that we're all in the space focusing on. We meet regularly, and we've been reviewing the portfolio aggressively since the beginning of the portfolios construction. On the top 20, to directly answer your question, we feel that we're in really good shape and the top 20 represents about 55% of the total straight-line rent of the overall portfolio. We expect because of the business sector that the top 20 tenants are in as well as the corporate guarantees on the leases themselves that we're going to continue to be able to collect this rent.

And just as it relates to bankruptcy in general, because you're right. We hear so much about doom and gloom in the retail sector. And this portfolio, as we've said, very often and from the beginning, is built around essential retail and we continue to think that, that will do well. Many of the bankruptcies are more related toward what I think of as mall tenants than essential retail, the quick service restaurant sector that we've invested in heavily, the gas and convenience, the dialysis, you know the portfolio. It continues to do well. Truist is just humming along, having a great transition with their merger. We're very pleased with that. So overall, I think that we are very, very isolated from general bankruptcies.

Bryan Maher -- B. Riley FBR, Inc. -- Analyst

Great. And then my second question regarding acquisitions. When you look out at the landscape of what's going on, and there's a lot going on. Are there any sectors that you're not in now that you might contemplate moving into or is the plan to just simply stick to your knitting, stick with what's worked for you and not venture into new spaces.

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

I think this is a time to stick with our knitting. I like that expression. We are very actively reviewing deals that are in the market. And frankly, I just don't see the value at this moment. Sellers and buyers have not come to agreement on values right now. I think that we feel that markets have moved away from sellers and where we continue to see opportunity. Again, the service retail is really our focus and we will be active in the market. But when we see pricing that matches up with our expectations and the other side of that is, this is a time to really continue to take care of the relationships that we have in the portfolio. We're spending a lot of time, very positive, building relationships with the tenants.

And as we mentioned in our notes, the second quarter was one of the toughest quarters I can recall in my career, and we came out of it in very solid position. But what was really exciting to us was being able to work with tenants, hearing what they needed, finding ways to accommodate some of their needs, but most importantly, continuing to grow our portfolio as we talked about extensions related to some deferrals, generating almost $30 million of future cash rent, extending leases. And I just think it's the value of a very active asset management platform. Knowing our tenants, communicating with our tenants and being able to work out fair deals on both, our side and their side.

Bryan Maher -- B. Riley FBR, Inc. -- Analyst

Great. Thanks for the color. That's all from me.

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

All right. Thanks Bryan.

Operator

The next question is from Frank Lee with BMO Capital Markets. Please go ahead.

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

Good morning, Frank.

Frank Lee -- BMO Capital Markets -- Analyst

Hey, good morning Mike. Can you talk about what drove the occupancy decline within the multi-tenant portfolio compared to last quarter? And maybe how is the leasing pipeline looking and your expectation I guess on leasing done given the current market conditions.

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

Yeah. I think that we're all pretty aware that right now, the big national retailers are looking to stabilize their businesses in this COVID environment. So it's no surprise to me that leasing slowed significantly in the second quarter, but the deals that we've had in our pipeline are still very healthy and alive and we expect to have additional leasing throughout 2020 and certainly in 2021. This is an unusual quarter and I don't think there's any different color to provide other than rent collection was everyone's priority and retailers were looking at their businesses. There have been some interesting data.

When we look at retail, we have single-tenant, and we have power centers, and they're holding up very well through this pandemic. We're starting to see all of the markets reopening and we're seeing traffic in all of our centers. That's something that we've been watching very closely. Unfortunately, the sector that is taking the brunt of this impact is the mall sector, and it's not an area that we have any exposure. So I think that as a power center landlord, we'll see some benefits from what may be happening in the shakeout of the mall sector and I remain positive on our leasing activities, and we'll continue to bring new tenants into these power centers.

Frank Lee -- BMO Capital Markets -- Analyst

Okay. Thanks. And then just want to get your thoughts on the dividend with the payout ratio creeping over 100% this quarter. No legal fees has an impact here. But I just would like to get your current thoughts.

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

I think the decision that we made to reduce the dividend was the right decision. Katie and I and the Board spent a lot of time on that, and we are very comfortable with where the current dividend is. We did, as we talked about incur an unusually high legal G&A this quarter as we took care of some important lease amendments and had to really engage in a way that is extraordinary. So I expect to see G&A revert back to normalized levels in the third quarter. I think also, if you take into account, we lowered the cost of capital on the -- we call it the archer refinancing. You may have heard us refer to it that way. That's 62 basis points of savings. Interest rate was 4.36% on that archer loan. We refinanced at 3.74%. And obviously, we didn't have any benefit of that in the second quarter. We have another maturity that we're very active in refinancing that I'm excited to be able to talk about, I expect as part of our third quarter release.

So Frank, we're really focused on all the right things. We're protecting our rent. We're actively collecting. We're already exceeding our second quarter rates with about -- I think it's 86% collected through the end of July. So those are all very important aspects and will play into some opportunities that we're very excited about for the balance of 2020 and the performance of the portfolio. So this was a quarter where you just left it all out on the field, Frank. You did everything you had to do. You talked to as many tenants as possible. You collected the rent. Every penny mattered. And this team responded so well, we just -- every day engaged, looked at opportunities, followed up, worked things out with people, and I really do believe that it's positioned us between what we did on the debt side of the business, what we're doing on the rent side of the business. We're very focused on NOI growth in the portfolio and having a covered dividend. So I'm very optimistic. All things considered, as I said, probably the toughest quarter, I can remember in my career and really came out in good shape to finish 2020 in great shape.

Frank Lee -- BMO Capital Markets -- Analyst

Okay. Great. Thank you, Mike.

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

Yeah. Thanks Frank.

Operator

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

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

Well, thank you, Gary, and thanks for everybody for joining us today. As I said in my comments, with Frank, we are very excited for the second half of 2020. And just taking a minute before we finish the call. And this has been a terrible time for not only the United States, but also the world as we go through this pandemic, and I hope everybody is doing well and staying safe. Obviously, American Finance Trust is a high priority for us and something that we're very focused on. But we send our wishes out to everyone that you're healthy and safe, and we look forward to talking to you again later this year. So thanks, everyone.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Louisa Quarto -- Executive Vice President

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

Katie Kurtz -- Chief Financial Officer, Treasurer and Secretary

Bryan Maher -- B. Riley FBR, Inc. -- Analyst

Frank Lee -- BMO Capital Markets -- Analyst

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