ADC
#Thank you, Keith.
Good morning, everyone, and thank you for joining us for <UNK> Realty's first-quarter 2016 earnings call.
Joining me this morning is <UNK> <UNK>, our Chief Financial Officer.
We are pleased to report that 2016 is off to a strong start.
In the first quarter we invested over $38 million in 13 high-quality retail net-lease properties.
Of those 13 assets, we acquired 12 through our acquisition platform for a total investment of $33.3 million.
The acquired properties are located in nine states and are leased at 13 national and super regional tenants operating in nine diverse retail sectors, including the entertainment retail, specialty retail, quick-service restaurant, discount and auto services sectors.
The properties were purchased at a weighted-average cap rate of 7.9%, with a weighted-average remaining lease term of approximately 7 years.
Our first-quarter acquisitions combined with our robust pipeline puts us well on our way to achieving our targeted 2016 acquisition volume of $175 million to $200 million.
We are currently conducting diligence on a number of opportunities comprised of both individual assets as well as portfolios.
On to the development front, we continue to see more opportunities to deleverage our unique capabilities for a number of national and super regional retailers.
As previously announced, the Company completed its Hobby Lobby project in Springfield, Ohio during the first quarter of 2016.
The property, which is shadow anchored by Walmart is located in a dominant retail trade area and is subject to a new 15-year lease.
The development was completed ahead of schedule at a total cost of approximately $5 million.
In addition to the Company's recently completed Hobby Lobby development, construction has commenced on our previously announced Burger King in Far West, Utah.
The development has a total cost of approximately $1.6 million and is the inaugural project of our previously disclosed partnership with Meridian Restaurants to develop up to 10 Burger King locations.
The Company will own a 100% fee interest in the property upon the project's completion and we anticipate rent to commence in the third quarter of this year.
Subsequent to quarter end, we commenced construction on our second Burger King project in partnership with Meridian in Devils Lake, North Dakota, which, like Far West, will be subject to a new 20-year lease.
These projects are in addition to our Wawa in Orlando, Florida; our Chick-fil-A in Frankfort, Kentucky; as well as our Starbucks in Wakeland, Florida, all of which are currently under construction.
We also continue to make significant progress in our partner capital solutions platform.
Our three differentiated external growth platforms give us the capability to work with retailers at various points in their growth cycles.
An ability that has positioned us as a comprehensive solution and an uncommon and differentiated growth model in the net-lease sector.
As we continue to leverage our three external growth platforms, we look forward to updating you as these opportunities take shape.
We have maintained our discipline, bottoms-up underwriting approach emphasizing real-estate fundamentals.
We continue to couple that emphasis with a top-down focus on e-commerce, resistant and retail sectors.
Our industry-leading portfolio is wholly concentrated in retail net-lease properties and represents a very well diversified mix of tenants, retail sectors, and geography.
As of March 31, 2016, our growing retail net-lease portfolio spanned 42 states and consisted of 291 properties with leading tenants that operate in over 25 distinct retail sectors.
By nearly any measure, our portfolio continues to be among the strongest in the net-lease space.
It is comprised almost exclusively of national and super regional retailers with over 50% of annualized rents coming from tenants with an investment-grade credit rating.
In addition to our current acquisition, development, and partner capital solutions opportunities, we continue to believe that our portfolio has unique value that is attributable to our ground-leased assets where the Company is a fee-simple owner and ground-lessor to leading retailers.
With over 80% of our total base rental income derived from these ground leases, we feel that the portfolio presents an extremely appealing risk-adjusted investment for our shareholders.
Currently 88% of these ground leases are with tenants that have investment-grade credit ratings, including JPMorgan Chase, McDonald's, Aldi, PNC, Walmart, Lowe's and Wawa.
These assets are a direct reflection of the value that we can add through our development platform.
Overall, portfolio-occupancy rate remained 99.5% at the end of Q1.
Hence, our [core] portfolio continues to be effectively fully occupied and has a weighted-average remaining lease term of 11.2 years.
These metrics demonstrate a stable and long-term asset base.
As we look to our lease maturity schedule, we are in a fantastic position to maintain strong occupancy levels throughout the remainder of 2016 and into 2017.
We now have no remaining lease maturities in 2016.
Last, but not least, I would like to thank our many loyal shareholders for their continued support.
Through a combination of share price appreciation and dividend growth, the Company realized a total return of nearly 15% in the first quarter of 2016, representing one of the highest total shareholder returns in the retail net-lease space.
With that, I will turn it over to <UNK> to discuss our first-quarter 2016 financial results.
<UNK>.
Thanks, <UNK>.
Good morning, everyone.
Let me first run through the cautionary language.
As a reminder, please note that during this call we will make certain statements that may be considered forward-looking under federal securities law.
Our actual results may differ significantly from the matters discussed in any forward-looking statements.
In addition, we discuss non-GAAP financial measures including funds from operations or FFO and adjusted funds from operations or AFFO.
Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release.
As we announced in yesterday's press release, total rental revenue including percentage rents for the first quarter of 2016 was $18.7 million, an increase of 28.2% over the first quarter of 2015.
G&A expenses were approximately 10.1% of total revenue for the quarter as compared to 10.6% in the first quarter of 2015, a 48 basis-point decrease year over year.
We continue to expect decreases in corporate operating leverage as we grow the Company and realize operating efficiencies through increased scale.
FFO for the quarter was $12.7 million, which was an increase of 27.2% over 2015.
Similarly, AFFO was also $12.7 million, an increase of 26.5% year over year.
On a per share basis, FFO increased 8.5% over the prior year's results to $0.61 per share and AFFO increased 7.9% to $0.61 per share.
During the quarter, we repaid an $8.6 million mortgage secured by three Wawa properties in March which represented our only debt maturities in 2016.
Also in the quarter, the Company issued 53,886 shares of common stock through its ATM program realizing gross proceeds of approximately $2.1 million.
We believe the ATM program is an efficient tool for us to reduce our overall cost of capital, improve timing and efficiency of raising capital and helps improve the liquidity of our stock.
We continue to maintain one of the more conservative balance sheets in the industry and as of March 31, 2016, total debt to enterprise value was approximately 30.3% and net debt to recurring EBITDA was approximately 5.3 times.
Our fixed-charge coverage ratio, which includes principal amortization, was a strong 3.5 times.
These metrics are consistent with our targeted leverage and coverage levels and signify considerable capacity for future growth.
Finally, on April 15, the Company paid a dividend of $0.465 per share to stockholders of record on March 31, 2016, which represented a 3.3% increase over the $0.45 per share quarterly dividend declared in the first quarter of 2015.
Since its IPO, the Company has paid 88 consecutive cash dividends.
Our payout ratios for the quarter were 77% and 76% for FFO and AFFO respectively, which are at the lower end of the Company's target ranges and reflect a very well-covered dividend.
We are very pleased with how 2016 is progressing and believe we are well-positioned to perform at a high level through a combination of consistent execution, balance sheet strength and our emphasis on delivering attractive, risk-adjusted total shareholder returns.
With that, I'd like to turn the call back over to <UNK>.
Thank you, <UNK>.
To wrap up, first quarter represented another strong quarterly performance for our Company.
Our strategy has remained consistent and we've continued to grow and diversify our best-in-class retail net-lease portfolio while maintaining our capabilities to our industry-leading balance sheet.
We are quite enthusiastic about our opportunities for the remainder of 2016 and beyond.
At this time, we would like to open it up for questions.
Good morning, <UNK>.
Sure.
I think, first, it is a very small sample size.
To read anything into the lease term in that $33 million in acquisitions would do us a disservice.
I tell you, with that small sample size, it gives us the opportunity to articulate on some specific transactions that we executed on in the first quarter.
Specifically, we did a small portfolio working in conjunction with Aaron's Rents where they took over those stores from a franchisee.
We acquired the real estate.
These are Walmart, Wawas, fantastic underlying real estate there, but they took over from a distressed franchisee; we had the ability to acquire that real estate with new buildings.
Secondly, we acquired our first Dave & Busters in Austin, Texas.
Again, really a fantastic piece of real estate, high performing store.
The store is already in percentage rent.
Really Main & Main for Dave & Busters in a unique location with underlying real-estate attributes.
I think, all in all, reading into the shorter least term of 6.9 years isn't indicative of what you will see from us for the remainder of the year.
Hey, <UNK>.
It is <UNK>.
Historically, the Company has used the ATM as bridge financing to fund the acquisition pipeline.
And then, over the longer term, they have sourced long-term debt capital to pay that line down or equity.
You should expect that we will take a similar approach and we are evaluating the debt capital markets right now for long-term financing to pay down the line of credit.
Yes, I think for a tenure private placement, you're in the low- to mid-4%s all in.
There has been a little bit of volatility in the tenure treasury of late and it has run up, but pricing has not moved too much.
Spreads tend to come in as the tenure bounces around.
We continue to maintain an active stance in terms of disposing of net-lease assets, really what we deem non-core net-lease assets with a focus on reducing our pharmacy concentration.
We did not have any dispositions close during the first quarter.
We are looking toward Q2 through Q4 of potentially realizing some of those transactions and recycling those proceeds.
Yes, that is fair.
I think, you can see our Walgreens count, our Walgreens exposure specifically came down 70 basis points just as a function of the growth in the underlying portfolio and the growth in the denominator.
We stated before, pretty clearly, that we are going to take an active stance in reducing that concentration and not only allow the Company to grow out of that position.
It is a difficult market really driven by 1031 purchasers' endpoint timing of dispositions.
We're confident that we will be able to transact on the disposition front on some of those assets through the remainder of the year.
That is a great question, Rob.
We have been pretty clear that our driver is not when we make investment decisions, whether or not a retailer carries an investment-grade credit rating.
We're really looking for national and super regional retailers, many of which carry investment-grade credit ratings and many of which are unrated.
As we've talked about, historically, and commented on the call today, we just wrapped up another Hobby Lobby.
We have a Chick-fil-A in the ground currently in Frankfort, Kentucky.
Those are unrated retailers, but I think, if you ran them through, we are pretty confident actually, if you ran them through a Moody's risk calc, where you would see us dive into their balance sheet, they would be investment grade.
So we're not imputing any credit ratings for any retailers either.
We are using the traditional ratings definition.
Our focus is really maintaining that national and super regional retailer perspective.
It is focusing on main retail corridors.
I think investment-grade exposure as we transacted, you mentioned, as we transact on the acquisition disposition, development and partner capital solutions front, we will vacillate.
I think our goal is to maintain a significant piece of our portfolio as investment grade, but we definitely do not have a hard line of 50% or anything of the sort.
I'd see turmoil in the private markets, or any turmoil that you're referring to currently in the markets, that doesn't have an impact in the present.
That could play out in the future.
Laith Hermez and his team here, our Chief Operating Officer, is doing a fantastic job working with retailers on development opportunities.
We're seeing growth in our pipeline.
These projects take an average of 24 months to bring to fruition.
We're seeing both external growth opportunities, but also internal, embedded growth opportunities in context of our own portfolio currently.
We have additional outlot opportunities.
We have additional redevelopment opportunities that we are currently looking at and working on and we look forward to really bringing everybody up to speed on those, hopefully in the next quarter.
We are going our discussion shortly with the board regarding the dividend.
Our current payout ratio is both on an AFO and AFFO basis of 76% or at the lower end of our stated range.
Our range has typically been 75% to 85%.
As <UNK> mentioned in the prepared remarks, that implies the ability for future growth.
We've always wanted to maintain consistency and predictability with the dividend, maintain a conservative payout ratio, but a payout ratio that our shareholders continue, really a payout yield that our shareholders continue to enjoy.
The board will be discussing the future dividend in the near term.
We look forward to continue to have the ability to raise the dividend in quarters and years to come.
Thanks for the quick question George.
So the $33 million, in the first quarter we had talked historically about bringing an approximately $25 million transaction forward into Q4.
We feel like our Q1 run rate of $33 million plus that $25 million transaction we brought forward would've brought us to about $55 million to $58 million for the first quarter.
I wouldn't read into the Q1 run rate of the Q1 that $33 million and us that as a run rate.
We're pretty confident we are going to be able to hit the $175 million to $200 million guidance that we put out earlier.
I will tell you we've got quite a significant pipeline right now.
As I mentioned, both individual one-off assets through multiple different sourcing channels that we typically find assets through as well as some small portfolio opportunities.
All of these are, of course, subject to customary diligence.
We're seeing a lot of opportunities across all three of our external growth platforms, not just acquisitions.
And it is great to see the traction in the marketplace and then being able to leverage those platforms, not only on the discrete basis though, but leverage those platforms and produce a really superior risk-adjusted opportunities to what we see in the market.
The cash yields were in the upper 7%s as well there.
They were due frankly to their shorter term nature of those; the cash yields were only about 10 to 15 basis points up there.
Generally, we've always stated that our development yields, minimally we looked a 250 basis-point spread.
That is on a float, on a variable basis a 250 basis-point spread above market cap rates.
If we're going to undertake a typical two-year development project, we are going to be looking for that amount of cushion before we embark on a site selection, entitlements and construction.
Our development yields, I will tell you today are in the upper 9%s and 10%s.
We're really achieving yields here on fresh 20- and 15-year terms on these transactions that are with some fantastic retailers and great opportunities.
That is a function of the value creation process that we undertake with development.
Yes, we haven't given guidance just because of the variable nature of development and the timing.
We don't control the timing.
Many of these projects are going through entitlement, permitting and site-selection process.
To date, we have announced approximately $7.3 million in development.
We anticipate additional announcements coming later this year, hopefully as soon as Q2.
Then we will see how the pipeline materializes throughout the course of the year.
It's tough to pin down actual commencement days and we historically haven't announced the project until we effectively have a shovel in the ground.
Great, this is <UNK>.
The non-cash comp spiked in Q1 because, for the first time, the board took their fee in stock and that stock was granted in January, so we expensed that stock comp in January.
That will not be indicative of the run rate, but that is what it is due to.
That is for the entire year and that was a decision they chose to make.
They had the option to take it in cash, but they all chose to take it in stock.
That is on the individual level.
I think it is a testament to, frankly, the belief in the execution and the strategy.
Every board member chose to take their board fees this year in stock rather than cash.
I think that is a great statement for the Company as well as the board members.
Typical tenants, national tenants don't provide store-level sales.
I'll tell you that we do everything we can in our diligence and in our investigative powers to understand the store-level performance and we often do understand the store-level performance.
For example, the Dave & Busters transaction I mentioned in Austin, that store is effectively now in percentage rents.
So we understand the store-level performance as well as the coverage there, which is well North of 2.5 times.
Most of it is anecdotal; it will come through tenant interviews, our relationships with retailers and their real estate departments well as everything from our diligence on the ground at the store manager level.
So, store-level coverage, we're not writing these leases, especially in the first quarter.
We are not writing the leases, we're taking, subject to them.
And most national retailers are not providing that store-level data.
Frankly, I don't think we are seeing a significant portfolio premium today as we saw on years past.
I think portfolios today, there are opportunities where portfolios are trading potentially even at discounts.
So the days of the portfolio premiums really driven by some of the large-cap peers as well as the non-traded vehicles snapping up assets left and right are essentially gone.
The opportunities we typically look at our either small-sale leasebacks with retailers that we have the ability to then develop for and work with on an organic basis to leverage our balance sheet and execute on a sale leaseback.
But then, also, on a go-forward basis to work on organic development and work with the real estate departments on their net new storing strategies.
Or diversified portfolios diversified by tenant-sector geography as well as lease term.
Those are what we call mixed bag portfolio.
The days of the portfolio premium really driven by the non-traded entities out there, I think we are past those days.
No.
So, we are confident that our existing platform can aggregate $175 million to $200 million in unique opportunities net-resale opportunities that are a traditional to atypical to the market.
We mentioned on the last call, we got a similar question, our cost of equity has improved, our cost of capital has improved, but that's not going to change our bottoms-up underwriting approach.
At the margin, does it give us the ability on the margin to transact.
Sure, but I think, as we look forward in 2016, our core focus and our disciplined underwriting approach is still going to drive all of the investment decisions that we make.
Thank you.
Good morning, <UNK>.
I think from 30,000 feet, we've seen the confidence improve.
We are coming out, obviously, out of the great recession; consumer spending has improved marginally.
I think consumer confidence, obviously, has improved.
It really varies by sector and tenant.
We obviously do not see the big-box retailers out there doing Greenfield projects.
That said, we see sectors, such as the fast food sector, such as the auto parts sector and a number of others that are out there aggressively looking for new opportunities.
These are not prerecession number of openings.
Our focus is working with the retailers that fit within our investment profile, that fit within that e-commerce resistant lens and that we can feel like we can partner with on a go-forward opportunity and deploy meaningful capital and be a material piece of their growth.
Does that make sense, <UNK>.
It is hard to look forward.
I tell you if you look at net-lease retail, you effectively---+ most retailers except some of the smaller mall-based retailers and the traditional mall anchors will all look at freestanding formats.
Whether that is a junior box, you see freestanding Bed, Bath and Beyonds, you see freestanding T.
J.
Maxx and HomeGoods combo stores today.
So most retailers, who will go in a shopping center, unless they are a small tenant that feeds off of a traditional grocery anchor, will also look at freestanding formats.
It frankly becomes a function of occupancy costs to develop a freestanding store rather than go in line can be more offensive for them.
I think the freestanding nature of assets, when you look at the visibility, the access, the parking, the ingress, the egress, the retail synergy that you can drive with a traditional freestanding net-lease format is really a dominant format in the retail landscape today.
Coupled with one other thing, I think you see a lot of retailers, in this omni channel world that we're in today, looking to add drive-throughs, really pick-up windows.
Walmart has been very aggressive in adding pick-up windows.
If you want a pick-up window, you either need an end-cap or you need to be freestanding to allow for the circulation as well as the vehicular traffic to access an exterior wall.
I think, as retailers look forward in 2016 and beyond and they are looking in the omni channel world, how their e-commerce presence, online ordering, physical pick up, more and more retailers are going to realize the benefits of net-lease retail.
I think we are going to see more of it, frankly.
Thanks, <UNK>.
Good morning, Tao.
I think, as we touched on, I think reducing overall pharmacy is the only thing that we can point to.
Pharmacy exposure and specifically, Walgreens, in the portfolio today.
We are looking at what we believe and we're confident is the best net-lease portfolio in the country.
It is 100% retail It is over 50% investment grades; it's got north of 11 years weighted-average lease term.
We have zero lease expirations remaining in 2016.
We have had the opportunity since we launched the acquisition platform in 2010 and the partner capital solutions platform in 2012 to construct this portfolio anew.
When you look at the retail landscape today and the stress retailers that are having challenges and or filing for bankruptcy, we have no exposure to them, because, frankly, since we launched the platform, we've stayed away from them.
We did not believe in the strategy, their merchandising strategies; we did not believe in their execution.
When you look across that landscape today, we do not have any Sports Authorities in our portfolio.
We do not have any office supply stores in our portfolio.
We have been very specific with our investments in targeted sectors and then targeted leading retailers in those sectors.
I think the results are today what you see and that portfolio, again, we believe it is industry-leading.
We are focused on the one piece that I mentioned is reducing our pharmacy concentration which we think is a great opportunity to divest and redeploy that capital on an accretive basis throughout the year.
Overall rent coverage for the portfolio where we have tenants that report, which are traditional sale leasebacks, typically with a franchise restaurant, is well over 2%.
That is really our threshold.
We have one restaurant in the portfolio, that we acquired as part of a small portfolio transaction at the end of 2014.
It was a Sonic restaurant that we immediately put on the market and disposed, sub-6% cap.
I think was about a 5.5% cap that did not meet that coverage threshold.
If we're going to enter into a lease transaction, typically a sale leaseback where we have rent coverage, we are targeting any rent coverage north of 2 times.
Thank you.
With that, we would like to thank everybody for joining us this morning and we look toward to speaking to you again when we report our second-quarter results.
Thank you, everybody.
