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American Finance Trust, Inc (NASDAQ:AFIN)
Q3 2020 Earnings Call
Nov 5, 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 Third Quarter 2020 Earnings Conference Call. [Operator Instructions]

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. Could 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. We have also refer to our earnings release for more information about what we consider to be implied investment-grade tenants, a term we'll use throughout today's call.

I'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

Thank you, Louisa. Good morning, and thank you all for joining us today. Last night, we released third quarter results that highlight the resilience of our best-in-class portfolio, which is focused on necessity-based retail assets that are net leased to predominantly investment-grade and implied investment-grade tenants. We significantly improved rent collection across our portfolio through October 31, 2020, collecting 92% of the third quarter cash rent due, up from 86% collected for the second quarter. As the United States continues to emerge from the uncertainty brought on by the health crisis and economic challenges, the country experienced during the first half of the year our portfolio has demonstrated improving metrics and strength. Contributing to improved rent collection was a significant increase in rent collected in the multi-tenant segment of our portfolio, which represents approximately 30% of our total straight-line rent. As of October 31, 2020, multi-tenant collection was 82% of the third quarter cash rent due, up from 67% collected for the second quarter. The improvement in multi-tenant rental collection complements the 97% of rent we collected in the single-tenant portfolio, and the 97% of the rent we collected from our top 20 tenants in the third quarter. This trend is continuing into the fourth quarter as we collected over a 94% of October cash rent portfoliowide. To be clear, all rent collection percentages are calculated based on the original rent we would have expected to receive before COVID started. It's not adjusted for negotiated deferrals or other amendment. It also reflects the expiration of rent deferral agreements where tenants have resumed paying full rent. Throughout the pandemic, our occupancy has remained stable, and we haven't been affected by any material bankruptcies, unlike many of our peers who have seen numerous bankruptcies of important tenants in their portfolios. Turning to our strong quarter of earnings. AFFO per share increased to $0.23 in the third quarter, roughly 15% more than last quarter and an increase over the AFFO from the same period in 2019.

Dividends paid in the quarter were equal to $0.21 per share. Through quarter end, we've negotiated lease extensions with 23 tenants that averaged 36 months in exchange for rent deferrals or credits that have a weighted average duration of five months, resulting in a net increase in cash rent of $44.1 million over the new lease terms. These extensions, however, have a short-term impact on AFFO, representing $2.7 million or $0.02 per share during the third quarter that would have been due during the period if those leases had not been renegotiated. Regardless, we're excited about adding over $40 million of additional rent and the long-term benefits it provides to our stockholders. And remind you that the majority of the deferrals had ended by the third quarter of this year. Year-over-year, we've grown our portfolio by over 100 properties and 800,000 square feet, and increasing annualized straight-line rent by $10 million to $274.5 million. Occupancy is currently 94.2%, and our real estate investments at cost totaled $3.9 billion. Due to our disciplined underwriting, our high-quality portfolio is significantly leased to investment-grade-rated or implied investment-grade-rate tenants. Among our single-tenant assets, 62% 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 from single tenants has expanded 300 basis points year-over-year to 69% of our portfolio total, and has increased 8% since we listed in 2018. AFIN's acquisition efforts are focused on single-tenant service and necessity retail assets that have long remaining lease terms and contractual rent increases. We closed on 38 such assets in the third quarter, which, combined with our pipeline, totals 108 property acquisitions for $220.1 million at a weighted average cash cap rate of 7.9%, a weighted average cap rate of 8.6% and 14.2 years of weighted average remaining lease term.

We remain opportunistic with respect to our acquisition pipeline and are selectively approaching potential new acquisitions. Retail makes up 71% of the 11.8 million square foot single-tenant portfolio based on straight-line rent, with the balance comprised of 15% distribution and 14% office properties. Of the retail portion, 82% are service retail properties that we believe to be necessity-based in nature and more resistant to e-commerce. Occupancy across the single-tenant portfolio is over 99%, with a weighted average remaining lease term of 10.6 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. Consistent with our own observations in the single-tenant space, Matthews Real Estate Services recently published a report titled, "the value of a drive through". We've been pleasantly reminded during the pandemic, how much value resides in an existing easy-to-use drive-thru feature for many types of retail businesses, like pharmacies, banking and especially quick service restaurants, or QSRs. Since March, QSRs have been an indispensable point of food distribution, as people have turned to drive-throughs for prepared meals that can be procured in the safest manner possible. On average, 50 million Americans eat at QSRs every day, with 70% of QSR sales utilizing a drive-through concept. In our portfolio, we own 169 QSR properties, 80% of which have a drive-through based on straight-line rent. Within our QSR portfolio, we've collected 97% of October rents from tenants such as Starbucks, Burger King, Chick-fil-A and Sonic. We believe this was an attractive asset class before the pandemic and are encouraged that others are now seeing this value as well. We'll continue to evaluate additional QSR opportunities, where national brands are well operated by corporate or large creditworthy franchise tenants.

Our 33 property, 7.2 million square foot multi-tenant portfolio, has occupancy of 85.9% as of September 30, 2020. During the third quarter, we were able to focus on leasing in the multi tenant portfolio, executing a new 10-year deal with discount retailer Five Below, for nearly 10,000 square feet that will add over $159,000 in annual base rent. We also have a pipeline of 14 new long-term leases with executed letters of intent for nearly 121,000 square feet or 1.7% of the total multi-tenant portfolio. The pipeline is expected to add $1.9 million of new annualized rents with a weighted average lease term of 10 years. Although leasing has slowed temporarily, we're excited about the pickup in the third quarter, and we expect to have positive absorption through the end of the year. In addition to our focus on leasing up available space, as we mentioned earlier, we recorded a significant increase in rent collected in this portfolio during the third quarter as deferral agreements ended and retail businesses ramped up operations that incorporate COVID-compliant procedures. Moving to our balance sheet. We now have no significant near-term debt maturities remaining in our capital structure, with 76% of our debt maturing in 2025 or later. In the third quarter, we completed a transformational $715 million CMBS financing that locked in rates at a time when rates are historically low. In this transaction, we completed the refinancing of our existing $497 million CMBS loan and certain property on the company's credit facility borrowing base with a new 5-year CMBS loan. The interest rate on the new loan is fixed at 3.79%, 57 basis points lower than the rate on the prior CMBS loan. We also entered into another financing transaction with Bank of Texas to borrow $125 million in a syndicated balance sheet loan on three buildings in Bridgewater, New Jersey, that serve as the U.S. headquarters for Sanofi, the multinational investment-grade pharmaceutical company.

This loan capitalized on historically low interest rates and Sanofi's investment-grade credit to replace the prior financing. We now have 5-year financing fixed by swaps at an interest rate of 3.27%, 189 basis points lower than the previous rate of 5.16%. The these two transactions extend our weighted average debt maturity to five years as of September 30, 2020, from 3.3 years as of June 30, 2020. The third quarter was successful for AFIN, as we improved our balance sheet while we addressed our near-term debt maturities and capitalized on historically low interest rates. At the same time, we improved rent collection and increased AFFO over last quarter, an objective that remains important to us. Without question, our portfolio of necessity-based retail is outperforming under the worst economic conditions imaginable. Our team has done a great job managing the variables we control throughout this crisis. And have benefited greatly from the work we've been doing for many years, building a company with a best-in-class portfolio that's diversified, composed of high-quality tenants and long-term leases that include contractual rent increases.

I'll now turn the call over to Katie, to take us through the third quarter financial results and the strength of our balance sheet.

Katie Kurtz -- Chief Financial Officer, Treasurer and Secretary

Thanks, Mike. Third quarter 2020 revenue was $78.5 million, up from $74.9 million in the second quarter of 2020 and a 7.7% increase from the $72.9 million in the third quarter of 2019. The company's third quarter GAAP net loss attributable to common stockholders was $7.1 million compared to a net loss of $21.8 million in the second quarter of 2020 and a net loss of $2.9 million in the third quarter of 2019. NOI was $64.3 million, a slight increase from the $62.4 million we recorded for the second quarter and a 6.3% increase over the $60.5 million of NOI we reported in the third quarter of 2019. For the third quarter of 2020, our FFO attributable to common stockholders was $25.6 million or $0.24 per share, unchanged from the $0.24 per share for the same period in 2019 and up from $0.21 per share in the second quarter of this year. Third quarter AFFO was $25.5 million or $0.23 per share compared to a second quarter AFFO of $0.20 per share and $0.22 per share in the third quarter of 2019. As always, a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release, supplement and Form 10-Q. As Mike mentioned, we had an important quarter for our balance sheet. We completed the refinancing of our formal -- former $497 million CMBS loan and certain properties on the company's credit facility borrowing base with a new 5-year $715 million CMBS loan. We also completed a 5-year $125 million syndicated balance sheet low refinance of our Sanofi property. We ended the third quarter with net debt of $1.8 billion at a weighted average interest rate of 3.8% and net debt to gross asset value of 42%. The components of our net debt includes, $305.9 million drawn on our credit facility, $1.5 billion in outstanding secured debt and cash and cash equivalents of $86.3 million. The drawn amount on our credit facility is our only floating rate debt. Liquidity, which is measured as undrawn availability under our credit facility plus cash and cash equivalents, stood at $150.7 million based on our September 30 cash balance and borrowing availability.

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, Katie. Through the continued hard work and dedication of our team, we were able to complete two very large financing transactions that derisked our portfolio while collecting over 92% of the cash rent payable in the entire portfolio, a 6% improvement over the second quarter. We collected 97% of rent in the single-tenant portfolio and 82% of cash rent in the multi-tenant portfolio by working directly with our tenants. We'll reap the benefit of these efforts in many future quarters, along with the continued outperformance of our investment-grade portfolio. We believe we're well positioned to capitalize on opportunistic acquisitions and accretive leasing as we build a pipeline of future deals. We see tremendous opportunity in our stock at the current price, and we believe there's enormous value relative to our portfolio of high-quality tenants with long-term leases, where we've continued to collect almost all of the cash rent due throughout a pandemic and increased AFFO by 15% per share quarter-over-quarter. I continue to be proud of our accomplishments this quarter and since inception. I look forward to closing out 2020 as strong as we started it and discussing the value we see in AFIN with many of you at NAREIT in a few weeks.

Operator, please open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Bryan Maher with B. Riley Securities. Please go ahead.

Bryan Maher -- B. Riley Securities -- Analyst

Katie and the team, thanks for all that information. A couple of questions from me. When we think about the assets that you're acquiring, can you drill down a little bit more granularly on what specifically types of service retail assets or brands or QSRs you've been gravitating to? And who are the sellers? And are there expectations changing here as we kind of get toward the end of 2020?

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

Hey, Bryan. Good morning. And thanks, as always, for your question. I'm going to be a little bit vague just because I think we are in an area that not a lot of our peers are in. So we continue to focus on single-tenant net lease. We continue to focus on what we think of as necessity retail or the type of businesses that require the customer to go to the brick-and-mortar location. As you've seen in some previous quarters, we've branched out a little bit into automotive supply and repair, which I think in tough economic markets continue to be a very safe place to invest money as people need to maintain their cars and maybe not be so quick to trade them in and buy again. So that continues to be an interesting opportunity for us. One of the things that we've continued to avoid that I do think is worth bringing up, as we look at the portfolio, in our top 20 tenants, we don't have any fitness, we don't have any furniture and we don't have any theaters. And that will continue to be a theme that we follow. That's not been a change. That's something that we've always felt was a little bit of a risky area to acquire in. QSRs continue to be very interesting to us. And the way I would describe the sellers, QSRs, the sellers tend to be operators, obviously, and they're structuring the deals that we do as sale leasebacks. They're using the proceeds because the strong operators see this opportunity or this time as an opportunity to grow their businesses by acquiring smaller, maybe not as well-capitalized operators of similar QSRs. So I think we're going to see the number of franchise operators, probably decline as there will be an accumulation of larger operators, and that's where we see great opportunity.

Bryan Maher -- B. Riley Securities -- Analyst

Great. And if memory serves me, I think this time last year or around this time, you had an uptick, I think, at some of your multi-tenant properties occupancies by doing seasonal rentals, maybe holiday type of tuck-ins for something that might have been vacant. Are you seeing that opportunity again this year for the fourth quarter?

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

Not like we did last year, Bryan, and it would have been primarily a Q3 event. We do have some short-term opportunities with holiday and Halloween. But again, due to COVID, there was much less of it. So these third quarter results, which I have to say, I'm really proud of. These are not based on short-term rentals like we experienced in years prior. I would have thought of that as icing on the cake, but this cake is fully baked with long-term leases.

Bryan Maher -- B. Riley Securities -- Analyst

That's a good way of putting it. Last for me. You guys have held up really well with COVID. And I like your comment about no bankruptcy tenant that's in the portfolios. But is there anything in the portfolio that is keeping you up at night or at least in the office a little bit later that you do have a concern about? And that's all for me.

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

Okay. Thank you, Bryan. So we have gotten on a more regular credit review basis. We were already on what I would consider to be an appropriate credit review. We do not anticipate any material bankruptcies based on the information that is in the market today on our tenants in the portfolio. I feel cautiously very good about the overall strength of the portfolio. As we always talk about, and sometimes, it feels like we say it too often, but now I don't believe we can say it enough. We have such high exposure to investment-grade or implied investment-grade tenants, 80% of the top 10 tenants are investment-grade, and they're performing. And I -- the longer this pandemic continues, the cautiously more optimistic I get that with the development of a vaccine, the economy is going to stay in this range for a little while. And then I think as we enter into 2021, I think there's reason to believe that we're going to start hearing positive economic news that will continue to benefit this portfolio. So again, I hate to be one to pat ourselves on the back, but I'm really proud of the team, the hard work and dedication to get the rent collection where it was. Overall, Q3, as we said, 92% of the cash rent collected. October trended above that at 94%. And then we're seeing the single-tenant net lease at 70% of the straight-line rent. So again, just incredible stability in the portfolio, and the performance is speaking for itself now.

Bryan Maher -- B. Riley Securities -- Analyst

Great. Thank you.

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

Thanks, Bryan.

Operator

[Operator Instructions] The next question is from Frank Lee with BMO. Please go ahead.

Frank Lee -- BMO -- Analyst

Hi. Good morning, everyone. For the 121,000 square feet of leases under LOI, how did the rents and lease terms compared to similar leases that were signed prior to the pandemic?

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

Hi, Frank. Good morning. So these are market leases, and we did not see significant economics or changes to the economics over historical leasing for these types of tenants, both the national and the local tenants. So 10-year term on average is what we're seeing. Good retailers, and we will, of course, be disclosing more information as we execute on these leases. But as I said in my comments, not only am I excited about this, but I believe that the fourth quarter, we will have even more positive news on absorption that will just continue to stabilize the multi-tenant portfolio, get it to where we all think it should be. And let it be a growth point in the overall AFIN portfolio on an earnings basis.

Frank Lee -- BMO -- Analyst

Okay. Great. And then just on -- touching on the disposition side, it looks like there were no sales in the quarter. What are your current thoughts on asset recycling plans and further potentially reducing some more Truist exposure?

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

I think that we have always been an opportunistic seller. We don't have any guidance out on future dispositions. I think of ourselves as a net acquirer of real estate. But there's always opportunity. I don't think these to have been the quarters, Q2, Q3, maybe even into 2021, where sellers are going to maybe maximize prices where they would have pre-pandemic. So I'm in no rush. Again, this portfolio is very stable, performing very well. And as I said, opportunistically, we will look at a disposition here or there, but nothing that will change us from a net acquirer.

Frank Lee -- BMO -- Analyst

Okay. Great. That's all I have.

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

All right. 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, again, I just wanted to thank everybody for taking some time to listen to our third quarter results. Katie and I and the team look forward to hopefully catching up with you at NAREIT. And as we enter into the end of the year and the holiday season, I hope everybody stays healthy, and enjoy some time with your family. So thanks, again, everyone. [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 Securities -- Analyst

Frank Lee -- BMO -- Analyst

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