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spk05: Good morning, and welcome to the Necessity Retail REIT fourth quarter and year-end 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Luisa Corto, Executive Vice President. Please go ahead.
spk06: Thank you, operator. Good morning, everyone, and thank you for joining us for the Necessity Retail REIT's first earnings call following our rebranding from American Finance Trust. This call is being webcast in the investor relations section of the RTL website at www.necessityretailreit.com. Joining me today on the call to discuss the results are Michael Weil, Chief Executive Officer, and Jason Doyle, Chief Financial Officer. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. We refer all of you to our SEC filings, including the annual report on Form 10-K for the year ended December 31, 2021, filed on February 24, 2022, and all other filings with the SEC after that date, for 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, RTL disclaims any intent or obligation to update or revise these forward-looking statements except as required by law. We will discuss implied investment grade tenants. Please refer to our earnings release for more information about what we consider to be implied investment grade tenants. 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. I'll now turn the call over to our CEO, Mike Weil. Mike?
spk01: Thanks, Louisa. Good morning, and thank you all for joining us today. for our first call as the necessity retail REIT, where America shops. As we have continued to grow and evolve our platform, the acquisition of the $1.3 billion portfolio of open-air shopping centers necessitated a natural rebranding of the company as our pro forma portfolio grew to $5.2 billion of assets and our office exposure was reduced to only 1%. To date, we have already completed the initial closing, representing $547 million of the total purchase price. We funded the purchase with $350 million of cash on the balance sheet, including $261 million of proceeds from the Sanofi office disposition at a 6.38% cash cap rate, a draw of $170 million under our credit facility, and the issuance of approximately $27 million of the company's Class A common stock to affiliates of the CIM Group, the sellers of the property. Subsequent to Q4 2021, we have also issued $24.9 million of common stock on our ATM program at an average price of $9.02 per share, bringing our total equity issued subsequent to the fourth quarter to over $50 million. the ATM proceeds will be used to pay down debt. Earlier this month, we completed our name change to the Necessity Retail REIT and started trading under the ticker RTL in order to better reflect the focus of the company and emphasize our commitment to necessity-based retail properties that include gas and convenience stores, quick service restaurants, as well as grocery stores, just to name a few. Our new name and ticker became effective in connection with the closing of the first tranche of the Open Air Shopping Center portfolio. RTL is now the preeminent REIT focused on necessity-based retail properties. We'll discuss the impact of the portfolio acquisition momentarily, but to begin, I'd like to highlight the strength of our fourth quarter and full year financial and operating results, which laid the foundation for us to pursue the $1.3 billion portfolio acquisition. Fourth quarter revenue from tenants increased by over $5 million year over year to $82.5 million. Cash NOI grew by over 9% to $64.1 million, and full-year AFFO increased by over 20% compared to last year. We closed on the acquisition of 69 properties in 2021 for a total of $180 million at a weighted average cash cap rate of 7.6% and a weighted average cap rate of 8.3%. We completed over 100 multi-tenant lease renewals in 2021, totaling 1.1 million square feet, including 27 in the fourth quarter with a weighted average new lease term of six years at pre-pandemic rent levels. We also signed nine single-tenant lease extensions that totaled approximately $7.2 million in net straight-line rent over the new lease terms. As we discussed last quarter, we were also successful in negotiating a series of transactions related to 12 of our truest bank properties, where we collected a $10.4 million lease termination fee in the third quarter. During the fourth quarter, we disposed of four of these properties and we have agreements in place to sell seven of the remaining eight dark properties. In total, we closed on the sale of 13 properties in 2021, for an aggregate contract price of $18.9 million. At year end, our $3.9 billion portfolio was comprised of 976 properties with portfolio occupancy of 93.2% and a weighted average remaining lease term of 8.6 years. Annualized straight line rent increased 2.9% year over year to $288.2 million and our portfolio grew 4% to 20 million square feet. 66% of our top 20 tenants have investment grade or implied investment grade credit. Based on straight line rent, 81% of leases across the portfolio include contractual rent increases, averaging 1.2% per year. We own properties in 47 states and the District of Columbia, and our tenants operate in 40 different industries, with no single state or single industry representing more than 11% of our portfolio based on straight line rent. Our forward acquisitions pipeline totals $1.4 billion based on contract purchase price at an 8.6% weighted average cap rate with 5.1 years of average lease term remaining. Beyond the $1.3 billion Open Air Shopping Center portfolio, The pipeline includes an additional 21 primarily service retail properties as of January 31, 2022. As noted earlier, we completed the acquisition of 44 of the open-air properties on February 11, 2022. Our team's hard work and the quality of our real estate contributed to leasing demand from new and existing tenants, delivering strong results in the fourth quarter and for all of last year. In 2021, we completed 50 new leases totaling over 412,000 square feet and $3.7 million annual base rent. Also in 2021, we completed 104 lease renewals at our open-air shopping centers, totaling 1.1 million square feet and at rent levels that were within 5% of what we were seeing before the pandemic. In our pipeline, we have an additional 46,000 square feet of leasing that would further increase multi-tenant occupancy to 89.4% and add over $1 million of new annualized straight-line rent over a weighted average lease term of eight years, assuming definitive agreements are reached and tenants take delivery of space. In order to maintain this momentum, and in light of the open-air shopping centers we're adding to our portfolio this year, AR Global hired four new dedicated team members who are focused on leasing, property management, construction, and asset management to bolster our in-house capabilities and create value for shareholders at our shopping centers. Our advisor also added 13 multi-tenant accountants to our dedicated multi-tenant accounting department. Turning to our balance sheet, at year end, our net debt to gross asset value was 40%, and net debt to annualized adjusted EBITDA was 8.2 times, as our balance sheet temporarily repositions in advance of the open-air portfolio acquisition this quarter. During the last year, we completed an offering of $500 million of senior unsecured notes with a coupon rate of 4.5%. opportunistically locking in seven-year financing during a period of historically low interest rates. We also completed a corporate credit facility recast with a 15 basis point margin decrease and increased commitment size of $815 million. Looking ahead to this year, when the Fed has already indicated the potential for rate increases, the work we did last year appears even more valuable to the bottom line of the company. Our debt was 100% fixed rate as of year end, and the work we completed last year extended our weighted average debt maturity to 5.6 years from 4.8 years at the end of 2020. Understanding the value of the portfolio acquisition, the disposition of the office campus, and the clear trajectory for necessity-based retail, we were pleased that both S&P and Fitch maintained their initial ratings of double V plus on our notes. As we have previously discussed, we expect to partially fund the open-air shopping center acquisition through assumed property level debt and borrowings under our credit facility, which we anticipate will result in a near-term increase in leverage. We anticipate resuming our deleveraging initiative through the sale of $250 million of assets that we've identified and intend to hold for sale, potentially providing proceeds to reduce leverage back to previous levels. We may also opportunistically issue equity over time as an additional tool to return to leverage levels consistent with recent quarters. In fact, in 2021, we utilized our common stock ATM program to sell over 14.7 million shares for gross proceeds of $130.6 million. We achieved great success in our deleveraging initiative over the last few years and expect that we'll be able to do the same in the future. Moving to our significant subsequent events, back in December, we announced an immediately accretive series of transactions. First, we agreed to acquire an 81 property, nine and a half million square foot portfolio of 79 open air power anchored and grocery anchored shopping centers and two single tenant retail properties for $1.3 billion at a 7.2% cap rate. This portfolio provides a tremendous opportunity to increase RTL's diversification, scale, and earnings growth potential with pandemic-tested assets that generated annualized straight-line rent of $113.4 million as of September 30, 2021. On a pro forma basis, we expect our open-air portfolio to generate 22% of its total straight-line rent from grocery-anchored shopping centers and that 43% of total portfolio straight line rent will come from high growth markets, primarily in Sunbelt states. Occupancy at the shopping centers we're acquiring was 90.9% as of September 30, 2021, which will increase RTL's overall open-air shopping center executed occupancy plus pipeline to 90.3% on a pro forma basis. At the same time, we also announced that we had signed an agreement to sell a portfolio of three office buildings in New Jersey that were leased to Sanofi for a total contract price of $261 million. This equated to a 6.4% cap rate and was more than $10 million above the original purchase price of the properties. We completed this disposition last month, providing accretive proceeds to help fund the shopping center acquisitions. Importantly, this disposition reduces, on a pro forma basis, the proportion of RTL's rent that comes from office assets to 1% from 7% of our annualized straight line rent, effectively eliminating this non-core asset class from our portfolio. Combined, the accretive $1.3 billion acquisition of open-air shopping centers and the Sanofi portfolio disposition will create the preeminent REIT focused on necessity retail with $5.2 billion of assets, 1,056 properties, and a pro forma annualized straight line rent of $384.4 million. The pro forma portfolio is 92.2% occupied, and the transactions are expected to be immediately accretive to AFFO per share. Top 10 tenant concentration improves by 9%. And RTL will be balanced between single tenant properties at 48% of annualized straight line rent and open air properties at 52%, which we believe increases the growth prospects for RTL. These transactions and our new name clearly identify RTL's investment focus and position the company for sustained growth. Our focus has long been on necessity-based retail properties and building a portfolio of retail assets that are credit worthy and highly resistant to economic cycles, as we believe these assets provide dependable cash flows and incremental earnings growth over the long term. Since 2017, 95% of our acquisitions have been retail assets, and we remain confident in the long-term prospects for necessity-based retail real estate, especially in the single-tenant and open-air shopping center space. Well-located and well-positioned retailers as a whole have experienced a renaissance over the last two years. Supporting evidence for this strength includes new store openings that are on pace to exceed closings for the first time since 2016, and a net increase in lease space of almost 100 million square feet in 2021. Two-thirds of shoppers report that they have returned to pre-pandemic shopping behaviors, and as CBRE reports, quote, Signs point to activity remaining very strong in 2022 as many retailers look to capitalize on the market to address increased consumer demand for physical retail, end quote. The big online retailers have taken notice and continue to adopt physical retail as they realize the value in brick and mortar locations that are convenient to their customers. Amazon recently announced that they are planning to expand their physical presence to include clothing stores, that blend the company's online and offline shopping experience. Additionally, Wayfair and Warby Parker have also announced plans to enter and expand their physical retail presence, supplying further evidence that the future is not a debate between online and offline shopping, but a hybrid of both. Retailers continue to focus on omnichannel retail strategies and giving consumers the best of both worlds. We believe that physical retail has cemented its need in the consumer cycle. Consumers want to try on items, see them in person, and touch the product before making a purchase. This, of course, doesn't even take into account essential goods such as gas, groceries, and other services that are components of RTL's portfolio. Our belief in the necessity-based retail sector is further cemented by our corporate rebranding. We believe that the significant momentum we built throughout last year in acquisitions, new and renewal leasing activity, capital markets issuance, and asset management projects laid the foundation for the transformative acquisitions and dispositions we just discussed. RTL had an outstanding year by any measure, and the transactions we've already completed in 2022 are a phenomenal way to start a new year. Our rebranding to the Necessity Retail Wreath is complete and is a clear signal to the market of our corporate focus on necessity-based retail. We look forward to closing on the remainder of the open-air shopping centers and completing the integration of this pandemic-tested portfolio with our existing high-quality open-air and single-tenant assets to truly be where America shops. I'll turn it over to Jason Doyle to take us through the numbers in greater detail. Jason?
spk02: Thanks, Mike. For the year ended December 31st, 2021, we reported total revenue of $335.2 million. That's a 9.8% increase compared to $305.2 million in the prior year. Fourth quarter revenue was $82.5 million, a 6.8% increase from $77.2 million in the fourth quarter of 2020. The company's 2021 gap net loss was $63.4 million versus a net loss of $46.7 million in 2020. And full year 2021 NOI was $279.7 million, a 10.6% increase over the $252.9 million we recorded for 2020. Full year FFO was $95.3 million, or $0.83 per share, compared to $97 million and $0.90 per share in 2020. For the fourth quarter of 2021, our FFO was $17.4 million, compared to $25.5 million for the fourth quarter of 2020. Full-year AFFO was $118 million, or $1.02 per share, compared to $98 million and $0.90 per share in 2020. Fourth quarter AFFO was $26.8 million, or $0.22 per share, as compared to $26.1 million, or $0.24 per share in the fourth quarter 2020. As always, a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release. We ended the fourth quarter with net debt of $1.8 billion at a weighted average interest rate of 4%. The components of our net debt include $1.5 billion of outstanding mortgage debt, $500 million of senior notes, and cash and cash equivalents of $214.9 million. Liquidity, which is measured as undrawn availability under our credit facility, plus cash and cash equivalents stood at $429.1 million on December 31, 2021. With that, I'll turn the call back to Mike for some closing remarks.
spk01: Thanks, Jason. We had a very productive year in 2021, including the completion of a $500 million notes offering and a recast of our corporate credit facility to take advantage of the historically low interest rate environment. We closed on over $180 million of acquisitions, and we were very successful signing new leases and lease renewals across the portfolio. Looking ahead, we're well on our way to making 2022 a transformational year for RTL. Our dedicated focus on necessity-based retail properties is reflected in the acquisition of $1.3 billion of open-air shopping centers, the sale of the Sanofi office portfolio, and our rebranding to the necessity retail REIT. We look forward to starting to see the positive impact of these transactions in first quarter 2022. and throughout the rest of the year while we continue to execute on our retail strategy. We'll pursue accretive acquisitions that feature high-quality investment-grade and implied investment-grade tenants and continually evaluate our portfolio for disposition and deleveraging opportunities in order to maintain optimal portfolio composition, diversification, and leverage. We've made a major commitment to leasing across our open-air shopping center assets because we believe that growth in the retail sector will continue for the foreseeable future and that our necessity-based retail strategy will remain fruitful for a long time. Thank you for joining us this morning, and operator, please open the line for questions.
spk05: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question is from Brian Maher with B. Reilly Securities. Please proceed with your question.
spk00: Hey, Brian. Good morning. How are you guys? Hope everything is well. Yeah. Thanks. How are you? Good. Quick question on the 250 million of the, I guess it's two asset sales that you expect to complete in 2022. Can you give us any more color on that? And also maybe for Jason, as it relates to leverage, can you remind us, you know, kind of where leverage was, where it kind of peaks out and where you think you might be by the end of 2022?
spk01: So I'll give you a little update on the acquisitions. We are very far along on the first and largest of those acquisitions. I expect that it will close in the first quarter, which would really be ahead of schedule. We thought it would be in the beginning part of Q2. the market has been as strong or stronger than we anticipated. And I can't give you more details than that other than we remain confident that this will be executed on quickly and at a result that people will be very pleased with.
spk00: So the first disposition property you already have an identified buyer and are moving to close. And the second one is that, do you have an identified buyer and or is that property being marketed already?
spk01: The second property, which is significantly smaller in the conversation of $250 million of dispositions, that has not yet been marketed publicly. nor do we have an identified buyer. But the large asset, as I said, is identified and is moving forward.
spk00: Great. And then maybe, Jason, on the leverage question, you know, where you were, where you are kind of peaking out, and where you think you might be at the end of 2022?
spk02: Sure. In terms of where we were, you know, if you're talking net debt to adjust the EBITDA, we were down in the low sevens to high sixes. We finished this quarter at 8.2 times, and I anticipate that we will, as we acquire these transactions and assume debt, that that number will fluctuate a little bit, but that with the deleveraging plans that we have in place, we should start to return to a more normalized leverage within the next, I would say, four to six quarters.
spk01: Yeah, Brian, our target, we expect that we should be right back down into that low seven times range like we had talked about before. We found this opportunity with the CIM acquisition to be so transformative and so valuable to the overall company. growing the portfolio to over $5 billion. We are very aware of our desire and the market's desire to continue to see us at that lower net debt to EBITDA. We will get back there. And again, this is just a temporary stage. And I think one thing that I just want to point out in all of this, as we think of the 2021 results full year. AFFO grew 20% as we talked about in the call itself. So those are the things that are really going to continue to make a difference in the overall portfolio. And now that we have this absolute clear focus on necessity retail and we will execute on our plan We expect to have a lot of activity in the first half of this 2022 calendar year as we drive back to those normalized levels.
spk00: Great. And just last for me, given such a big acquisition here in the first quarter, would it be safe to say that the acquisition appetite for the balance of 22 probably moderates and is the focus for 2022 limited? kind of integrating these acquisitions and ramping occupancy with the new hires you discussed in your prepared comments?
spk01: Yeah. So it's a great question that we've talked a lot about, and it certainly takes a lot of pressure off of the acquisition pipeline, as we've seen some compression, especially in the single-tenant side of the market. it'll allow us to continue to be very selective in what we do move forward with on the acquisition side. Our 2021 starting cap rate was about 7.6%. So again, those are the types of acquisitions that if we were to move forward, we would expect to be at those levels. But acquiring the 81 properties from the CIM portfolio. There is integration that's well underway. Our first closing was a few weeks ago. And with the additional staffing that we've brought on board, we continue to execute and You'll continue to see leasing in the portfolio. We're up 5.6 percentage points from Q420 to what we look at as our pro forma occupancy, which includes not yet executed, but deals that are far along. So there's a lot of things that are all being done. Acquisitions will, of course, continue to be something that we evaluate, but we'll be able to do it with a very high level of discipline.
spk04: Thank you, Michael. Thanks, Brian.
spk05: Thank you. Our next question is from Barry Oxford with Collier Securities. Please proceed with your question.
spk04: Hey, Barry. Barry, your line is now open.
spk07: I'm sorry about that. I had myself on mute. Hi, Michael. Looking at the ATM and getting your debt ratios back in line over the next four to six quarters, how much equity do you think you need to raise to make those numbers happen as far as modeling and how we should think about equity raise.
spk01: Yeah, I'm not able to really talk about future equity raises at this point. That will be one lever that we have available to us in this overall return to levels regarding net debt to EBITDA, but also we have to take into account The dispositions that we've identified as another source of deleveraging on top of the continued lease-up occupancy will be a driver of that as well. So we'll continue to be very selective and opportunistic as we view the market, but we have not announced a specific date amount or timing that we will be issuing equity because, again, there are a number of ways that we're going to be approaching the net debt to EBITDA.
spk07: Right. Perfect. Perfect. Now, just carrying that a Do you feel like, look, Barry, we have enough preferred, or look, that might be another level, a lever that we might pull?
spk01: Again, that's something that would be decided at the board level with conversation and analysis. I do feel that we have an appropriate amount of preferred. It's probably not the direction that I would think we will go. But, of course, we like to keep all of our options available to us. But, again, I think we're fairly full on the preferred side.
spk07: Great, great. And I did have an occupancy for the portfolio, for the new portfolio, but you already answered that. It sounds like you guys are moving very nicely as far as pushing occupancy upward.
spk01: Yeah, we're really excited about the industry as a whole. We've seen great activity from the national retailers that we have relationships with already. They've been very active. We've all seen the data. Consumers have come back at pre-pandemic levels. And this... whole portfolio is really based on where America shops. So we're in great suburban communities and the activity in the shopping centers has been strong. The retailers now they want to be where the shoppers are. That's obvious. So we have high quality centers. We love the additional pickup of the grocery anchored shopping centers and The increased exposure in the Sunbelt markets, which we just think are incredibly strong. So the growth we've had in our occupancy, we expect that to continue to increase. So we're really excited about that.
spk07: Great. Great. Thanks for the color there. Thanks, guys.
spk04: All right, Barry. Thank you. Yep.
spk05: Our final question is from Brian Hollandin with Aegis Capital. Please proceed with your question.
spk03: Hey, Brian. Hey, guys. Thanks for taking my questions.
spk01: Of course.
spk03: You made a transformative acquisition and reduced your office exposure to 1%, both of which should drive long-term value, yet your stock price is going in the wrong direction. What do you think it will take to get shares back to pre-pandemic levels?
spk01: Thank you, Brian. It's going to be continued execution of the plan. I think that the last six quarters of execution have been very positive. I think the market has now accepted the fact that retail is a very strong asset class, and having the scale of the CIM acquisition merged into our already existing portfolio the strength and performance of the single-tenant portfolio, which has, across the whole company, a significant amount of investment-grade tenancy. As the markets continue to show the strength in the retail, as we continue to drive our occupancy and integrate the CIM acquisition, Those are the key areas that we know will have value. And as we did year over year, the focus is to grow AFFO. We went from $0.90 per share the year prior to $1.02 in 2021. That's a significant growth aspect. It comes from a lot of areas. Everything from accretive acquisitions to lease up, etc. And we've taken in 2021 the debt maturity out to 5.6 years. We're 100% fixed rate debt. So I think it's just a continued execution of our story. The rebranding, I think, was incredibly necessary, just because we want people to know what we are, and we'll continue to execute and put up the numbers.
spk03: Do you see inflation as staying elevated, and do you think tenants will agree to escalators tied to CPI in the near future? Sure.
spk01: So it appears as if we are going to have a period of inflation. I don't know exactly how long we should expect that. I'm watching and reviewing. But I think that was one of the important things about what we accomplished last year with recasting our credit facility, having 100% fixed rate debt, and the bond offering that we did. So stability. in the portfolio is very high. As far as the tenants, some tenants will agree to CPI increases. Most won't because we deal primarily with high credit tenants where we have fixed rate contractual annual escalators. That's just how this market operates. But what's interesting and what we can lose sight of is Over three, five, seven year periods, the value of annual compounding increases historically outpaces inflation. So we think we're positioned in the right way. We look at the tenant roster, the high percentage of investment grade or implied investment grade tenants. So as we're dealing with the Possibility of inflation. The important thing is the credit worthiness of our tenants is very high. The products that they deliver to the market are necessity-based, so customers will continue to shop at their stores, and the overall health of the portfolio will continue to be strong.
spk03: Thank you. And just a last one for me, a modeling question. A lot of moving pieces on the timing of the acquisitions and dispositions. What do you forecast for interest expense in 2022?
spk04: Brian, I know that we have a follow-up shortly.
spk01: I don't know if, Jason, if you have that handy right now.
spk04: If that's okay, Mike. We could do that in the follow-up. That would be great. All right. Thanks, guys. All right. Thank you, Brian.
spk05: We have reached the end of the question and answer session, and I will now turn the call over to Michael Weil for closing remarks.
spk01: All right. Well, thank you, Operator. And thanks, everybody, for joining us. I know there's a lot in the market today with global events, so we appreciate you taking some time. We're really excited about this transformation at the Necessity Retail REIT, and we look forward to talking to you again very soon. Thank you all.
spk05: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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