FrontView REIT, Inc. (FVR) Earnings Call Transcript & Summary

Good day, everyone, and welcome to this FrontView REIT, Inc., Q3 2024 Earnings Conference Call. [Operator Instructions] Please note, this session may be recorded, and I'll be standing by. It is now my pleasure to turn the conference over to Timothy Dieffenbacher. Please go ahead, sir.

Good morning, everyone. I'm joined today by Stephen Preston, Chairman, Co-CEO and Co-President; and Randy Starr, Co-CEO and Co-President. Before I turn it over to Steve, please note that we will make certain statements that may be considered to be forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to these forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in this morning's press release. Thank you, and let me turn it over to Steve to start our presentation.

Thank you, Tim. Good morning, everyone. Welcome to FrontView's first earnings call as a public company. For those that are new to FrontView, FrontView is an internally managed net lease REIT that acquires, owns and manages primarily outparcel properties that are net leased to a diversified group of tenants. FrontView went public in early October to access public capital to fund our growing pipeline of acquisitions that I'll discuss in more detail shortly. FrontView is differentiated by an investment approach focused on outparcel properties that are in prominent locations with direct frontage on high-traffic roads that are highly visible to consumers. As you know, we will be talking about our third quarter '24 earnings today. So those numbers are reflective of FrontView as a private company and are relatively unrelated to FrontView on a go-forward basis as a public company. Before jumping into the portfolio, on the top of everyone's mind is probably our ability to source acquisitions and accretively grow the portfolio. We have definitely demonstrated that ability since going public in early October. We have acquired $22.5 million thus far in the fourth quarter of properties and are under PSA who would acquire an additional approximately $81.4 million of properties, totaling approximately $103.9 million of properties, all at a blended cash cap rate of approximately 7.9%. We expect to close in excess of $75 million of acquisitions during Q4. In addition to these properties, we currently have a very strong pipeline under PSA negotiation, and we feel very good about closing on $50 million in the first quarter of 2025. Further, we anticipate the acquisition pipeline to continue to build from here. A few additional stats on the $103.9 million of properties noted above. One, properties with frontage, 100%; two, number of properties, 31; three, average property price, approximately $3.35 million; four, average remaining lease term, over 10 years; five, investment-grade percentage, approximately 30.8%; six, number of new tenants, 11; and finally, number seven, number of new states, 3, bringing our total to 34. From an acquisition pricing standpoint, we have been pleased with where we've been transacting at what we believe to be elevated cap rates relative to the market, a testament to our buyer approach and our ability to demonstrate surety of close in a fragmented marketplace. Using our nationwide relationships and networks, we expect to continue to source attractive acquisitions at above-market cap rates. All that being said, we can see the market tightening a bit and anticipate that our average cap rate for the first quarter of 2025 could slightly come off the high 7s and move more into a mid-7s number. Following the shoe being exercised, we were sitting with approximately $93 million of cash on the balance sheet, along with a $250 million revolving line of credit that has 0 drawn under the facility. This is expected to provide us with a healthy supply of liquidity to execute our business plan to continue with accretive acquisitions well into 2025. Shifting to the portfolio highlights. Our portfolio continues to perform very well. As of September 30, our portfolio consisted of 278 freestanding properties with an average remaining lease term of just under 7 years. We are heavily diversified across 31 states and 96 metro areas. We are pleased to keep a very diversified portfolio with no overexposure to any one tenant. At quarter end, our largest tenant exposure was 3.4% of ABR, and we expect that number will decline several basis points with the upcoming closings in the fourth quarter. Occupancy was strong at approximately 99% and rental collections on contractual rent were also strong at approximately 99% for the period, generally in line with our historical ranges of 98% to 99%. One of our differentiating qualities as a management team is our ability to successfully repurpose assets and bring them back online. As outparcel owners, we generally do not sell off our vacant assets. Rather, we prefer to take the time to re-lease or re-tenant the assets, which we believe ultimately creates the best long-term value for our shareholders. In these situations, there is a little short-term pain for long-term gain, so to speak, as we incur some tax and insurance costs to carry the assets while we re-lease. As we continue to scale and grow the asset base, we anticipate seeing this current drag decline. On our noted watch list, we expect to be taking back 1 TGI Fridays, 2 Hooters and a small car dealership in Orlando situated at a very busy intersection. We also received notice that our Freddy's Steakburger in Jacksonville will be closing, though a new lease is already being negotiated with a new national tenant. In the aggregate, these assets only account for about 2% of ABR, and we fully expect to repurpose these assets, bringing them back online relatively quickly with an improvement to the bottom line. These are the assets we like to have, assets with frontage, which are sought after by tenants and that can be quickly repurposed to create long-term shareholder value. During the quarter, we did not sell any assets, and we do not anticipate selling any assets during the fourth quarter of 2024. We plan to look at selling an asset or 2 off in the coming quarters during 2025 that we believe will generate low cap rates in the marketplace, allowing us to spread quite positively when compared with where we were acquiring today. Our balance sheet is very strong, and our revolving line of credit has the full capacity of $250 million available. We also do not have any debt maturities in the near term other than our ABS debt, which will be repaid in December of this year through our floating rate delayed draw term loan that we already have in place. Thank you, and let me turn it over to Tim for more detail on the quarterly numbers and guidance.

Thanks, Steve, and welcome, everyone. I'll start by going through our post-IPO capital structure. In total, we generated $253 million of net proceeds from the offering, which we used primarily to repay in total, the $166 million of borrowings outstanding on our previous revolver and term loan. We retained approximately $83 million in cash, which we expect to use to fund acquisitions and for other corporate purposes. Concurrent with the IPO closing, we entered into a new $250 million revolving credit facility and a $200 million delayed draw term loan. Both term loans have an initial duration of 3 years with 2 1-year extension options and bear interest based on adjusted SOFR plus an applicable margin of 1.2%. We also retained our $253 million of ABS notes that mature at the end of December and bear interest at a fixed rate of 3.4%. While ABS facilities are not typically found in public REIT capital stacks due to the inflexible nature of the arrangement, we felt that it was prudent to run the ABS facility through maturity beyond our IPO and capture the remaining rate differential afforded to us by the note's AA S&P credit rating. We plan to fully draw the term loan to repay the ABS notes when they mature at the end of December, together with available cash on hand and borrowings under our new revolving credit facility. With a post-IPO pro forma leverage ratio of 3.9x, together with full $250 million of capacity available to us on our new revolving credit facility, we believe we have ample liquidity to fund the growing pipeline of accretive acquisitions Steve highlighted earlier in our call. Our $93 million of available cash allows us to execute on our growth strategy during the quarter without having to draw on our line until the end of December. Turning to guidance for the fourth quarter. Please understand that we will not provide guidance for 2025 during this call. And on a go-forward basis, we will only provide annual guidance beginning with our earnings release in the spring of 2025. We expect to report AFFO per share of between $0.32 and $0.34 per share for the fourth quarter based on a number of key assumptions. As Steve highlighted, we've been methodically building our pipeline of accretive acquisitions with over $100 million closed or under contract as of the date of this release. The important thing to highlight relative to these properties we have under contract is that these deals already have a signed PSA, so it's not necessarily a question of whether we'll close these deals. To the extent conditions push certain closings into the early part of 2025, they'll still have a significant impact on 2025 growth rates. That said, based on progress to date, we anticipate closing more than $75 million in acquisitions by the end of the quarter. Also, as Steve highlighted, we don't have any planned dispositions for the quarter. We're also guiding cash G&A to approximately $2.1 million. There may be small fluctuations in expenses, including G&A and property and operating expenses as we navigate the first quarter as a publicly traded company and determine the carrying costs on a small amount of vacant properties while we work on finding the best possible outcome that will provide the most long-term value for shareholders. AFFO for the fourth quarter will also benefit from the 3.4% fixed rate ABS notes that, as I mentioned, will be replaced with our delayed draw term loan in late December. Lastly, at our Board meeting earlier this week, our Board declared its first quarterly dividend of $0.215 payable to shareholders of record as of December 31, 2024, payable on or before January 15, 2025. This dividend represents an AFFO payout ratio of approximately 65% as we'll look to reinvest as much retained earnings as we can into our growth pipeline. We anticipate paying a quarterly dividend prospectively with a target AFFO payout ratio between 65% and 75%. With that, I'll turn it back to Steve to finish off the call.

Thanks, Tim. Let me leave you with a comment on the marketplace as we continue to build this portfolio going forward. The outparcel marketplace remains quite fragmented and has historically lacked institutional buyers and is comprised primarily of smaller, individual, less sophisticated buyers, including 1031 buyers where closing execution can be an issue. Having our steady state of capital as a public company allows us to provide that surety of close, thereby separating us from other buyers and giving us the opportunity to purchase assets at above market cap rates. We are excited to continue to expand the already strong pipeline by new and repeat purchasing opportunities. We believe that FrontView is well situated to fund our remaining 2024 and 2025 acquisitions. With that, I will turn it back to the operator for the Q&A portion of our call today. Thank you.

[Operator Instructions] We'll hear first from Anthony Paolone at JPMorgan.

I guess my first question revolves around the watch list and some of the credit items you pointed out. So I just want to clarify, the ones you noted, are those done deals that you're getting back or they're just on the watch? Just wanted to make sure I understood.

Yes, they are on the watch. We believe that we will be getting those assets back. We're working through the -- with the specific tenants at this time, but officially on the watch with the expectation that they're coming back.

All right. I was just going to say is there anything just more broadly that you're watching beyond those, either tenant or category-wise?

Yes. No, I think we continue to watch On The Border. We have 3 On The Border assets. They are currently not delinquent in rent, but watching them. And then I don't think it's a surprise that everyone is watching the pharmacies. So we're watching the Walgreens and the CVS. We have low exposure there and have been reducing our exposure over time and feel good about the remaining pharmacies that we do have -- or the remaining Walgreens we have.

Tony, Randy Starr, real quick, and also to add to what Steve said of our $100-plus million under contract and under PSA negotiation now. As Steve mentioned, we have 0 pharmacy and 0 fast casual. So both of those will be continually reducing exposure.

Okay. Got it. And that kind of leads to the second one. Just on the pipeline, can you just talk a bit more about what property types comprise it? Any notable tenants? Were these all lined up one by one or any sort of smaller groups of assets? Just a little more color around those items?

Yes. So good question. So continuing our tradition, it's highly diversified, our pipeline, and it's diversified across a number of sectors that you tend to see in the outparcel industry. I'll give you some examples, medical, dental, automotive, education, cellular and finance to name a few. We also, as Steve mentioned, have 11 new tenants, and it's diversified across 18 states. And in terms of -- most of these were sourced 1 or 2 or 3 at a time. It's really how we source deals from, I would say, our strong brokerage relationships, which we've been cultivating since we formed the REIT in 2016, 2017, but also repeat sellers. We do have a small portfolio of a really strong, and we're very excited about this in urgent care of a few properties, but the majority of these are sourced 1 or 2 at a time and hand selected.

Okay. And just last item on just that pipeline. Just any comment on the embedded bumps that come with it?

I would say, sticking with what we look at the -- I would say, 99% have rent bumps either annual or 10% every 5 years, pretty custom in the industry. And I would say probably continuing our average of about 1.7% annual bumps per year in line with the portfolio.

Our next question will come from John Kilichowski at Wells Fargo.

Congrats on a successful launch and first publicly reported earnings here. I'll start with the fourth quarter guidance. Could you just give us some color on maybe the low and the high end in terms of what you're contemplating around acquisition volumes and yields? And then maybe anything else materially variable in there?

Yes. John, thank you for the comments. So if you think about where we are today, obviously, we're pretty close. We're halfway through the fourth quarter. So we feel really good about the guidance range. When it comes to the volume of acquisitions, the cap rates on those acquisitions, generally speaking, they're not going to move the needle too much, just given how far we are into Q4. So really, as I think about the downside risk, upside potential is really just thinking about portfolio costs and G&A, just trying to get our way through the first quarter as a publicly traded company. We think we know about all the costs, but there could be some that pop up. So I think that's really the only risk of upside or downside is, what does the cost profile look like.

Okay. Got it. And then, Steve, a comment that you made sort of as you're thinking about cap rates moving from fourth quarter into the early part of 2025. I know it's early for a full year view. But I guess, how does that differ from maybe where we were a couple of months ago? Has your view on cap rates changed at all looking out over the next 3 to 6 months?

Yes. No, I think what would like to say there is we're actually coming in a little bit higher than we had planned a couple of months ago, certainly in the fourth quarter. And we're very happy with a number of the acquisitions that we had acquired. And remembering that we're buying these differently sort of as the bigger institution sort of going up against the little guy and providing surety of close. So we found a lot of opportunities to take advantage of that in the fourth quarter, which helped push cap rates up. And we think certainly, that is going to continue. But as you continue to move into Q1, there was a little bit of, let's just say, low-hanging fruit that we were able to capitalize on. And as a result, we think that cap rates for the first quarter will come in a little bit. We've got a pretty good line of sight right now into the pipeline that we expect will be closing into Q1, and I think a good bulk of that hopefully closing into the earlier parts of Q1. So we feel good saying sort of that mid-7s coming down just a little bit. And obviously, if we've got those opportunities to acquire those same assets at elevated cap rates based on those situations, we're going to continue to do so.

Okay. Great. And then last one for me, just the term fees. Could you break down what those were and if there's any that are embedded into your 4Q guide?

John, could you repeat that question?

Yes. Just on the term fees in the quarter, could you break down what comprised of that $747,000 number? And then kind of part 2 of that would be if there's any term fees that are baked into your 4Q guide?

Got it. You're talking about lease termination fees. Yes, sure. I'm going to answer it kind of backwards. So generally speaking, we don't forecast lease termination fees just given they're not part of our core business, and that's also why we added back for AFFO purposes. We do not take the benefit of lease termination fees, even though they are a replacement essentially of lost rents. So we had about $747,000 during the quarter, primarily split between 2 tenants. One of them, just as we've talked about before, really good real estate, already have a lease in place with one of our top tenants at full replacement cost. So really happy about that. And then the second one related to a cellular tenants who was in a multi-tenant location that we terminated, still working through re-leasing that property, but still have another tenant within that property that's leased and paying rent right now.

Joshua Dennerlein with Bank of America, you have our next question.

This is Farrell Granath on behalf of Josh Dennerlein. I wanted to ask, of your pipeline, I was curious how much of that was either pre or post IPO in the sourcing?

Farrell, I would say it's a combination. I would say we -- when we met you all in August, we were starting to really source the pipeline and kicking it off, I would say, mid- to late August. And so we've been able to source it, I would say, quite quickly and efficiently and taking advantage of our favorable position in the market. So I would say probably about 50-50 has been pre-IPO and then post-IPO. We are very excited to have the ability to now source deals and leverage our position in the market. So -- and as I mentioned to you all when we met, the more you transact, the more you see. And this is a very opportune time now. There are sellers across the country who have been holding on hoping that rates would have fallen faster than they have, and many are now in a position where they do need to sell, and it puts us in a very favorable position.

Great. And I guess a follow-up on that, especially in your strategy of sourcing, how you receive a lot of inbound or repeat sellers? Have you seen an uptick in that since going public?

Yes. So good question. We are seeing a number of our transactions are with repeat sellers, and that has continued. We've been sourcing from repeat sellers literally since we really started because our ability to transact efficiently and close and have a transparent process, sellers remember that, and it's highly efficient for them, and we expect that to continue. So yes, I would say a meaningful percentage of our pipeline are from repeat sellers, and we expect that to continue.

And sorry. And have you seen any increase, I guess, from either inbounds or inquiries coming towards your team following your IPO?

Yes. Absolutely, we have. And especially the more active you are in the market, the more you see. So we expect that to continue. So the answer is yes.

We'll move forward to Dan Guglielmo at Capital One Securities.

The first one on the transaction side. I know historically, there have been many domestic private buyers in the outparcel market. So have you seen more of those buyers reenter now that short-term rates have started to fall? Or have they kind of stayed on the sideline?

Yes. No, I think the general volume of buyers has remained over the last several months relatively static. We have not seen an uptick or an increase with the recent cuts. I think that it takes a little bit of time for these rate cuts to flow into the system and then make their way down the food chain to that level and type of smaller buyer that we're seeing. So no, there has not been any big uptick with the recent rate cuts.

And I would add just one thing to that. A lot of these smaller buyers rely on the middle market and smaller community banks, which are not aggressive in lending right now. So I would say there's a lack of liquidity for the smaller buyers. And again, this is a very opportune time for us.

Great. I appreciate that. Yes, it sounds like a good environment. And then when thinking kind of through the broker network and then the robust kind of screening process for deals, are there certain states or regions that have been showing up more in that screening process than kind of you've seen historically?

So it's interesting, our pipeline is diversified across 18 states. And so we're continuing our tradition of being diversified literally across the country. So I would say we do not have a major presence, as you know, or really much of a presence at all on the West Coast. So I would say the Southeast, definitely, I would say the Mid-Atlantic and probably the Midwest, I would say, if you see. So I would say Southeast and I would include Texas with that -- from Florida to Texas and then up through Virginia and Maryland, and then I would say up and then the Midwest as well. So a big region in the country.

[Operator Instructions] Moving forward to Ronald Kamdem at Morgan Stanley.

Just 2 quick ones. Starting with the $0.33 in 4Q at the midpoint of guidance. Just wondering if there's any sort of one-timers, puts and takes, anything in there? Or is that sort of a good annualizing jumping off point as we're thinking about next year?

Yes. Thanks for the question, Ron. So I would think about it really, and as we kind of move forward into 2025, with the ABS facility that we have in place right now at 3.4% as that gets replaced with the delayed draw term loan, some borrowings on the revolver at the end of the year, there's certainly going to be some downward pressure just from a rate perspective. Obviously, with SOFR at 4.6% today, a lot of speculation where rates are going to go. It's certainly putting some drag. So I think that and what I would say to future, and obviously, we're still putting together 2025 forecasting what it looks like. But I think the way that I would suggest looking at our growth profile is really looking at it on a pro forma basis to say, had we replaced and refinanced that ABS facility at the beginning of the quarter, that would probably be the better way to think about prospective growth profile. So I think what you'll see is obviously a little bit of a dip in Q1 and then into Q2 and Q3 ratcheting back up. So unfortunately, the interest rate is putting a little bit of drag on that.

Great. Makes sense. And then just I wanted to switch gears to sort of the tenant. I think you talked about the watch list, which was super helpful. But I guess I'm wondering if you sort of take a step back, maybe remind us what the experience has been in terms of the bad debt. And then when you sort of sum it all up with this watches and so forth, how should we think about sort of that magnitude versus historical, and what it could be sort of next year?

Yes. Tim will talk specifically on the bad debt, and I'll just sort of conceptually talk about historically what has happened when we have taken assets back. And net-net, when you look at the assets that we've taken back over the time, really since inception, we're sitting at a net increase in value/income. So of course, again, as I mentioned, it can be a little bit of a short-term struggle as you're carrying assets. But at the end of the day, when we get these assets back, which are well-located assets with frontage that are desirable to a lot of tenants of the assets that we have across the portfolio and the assets that we're continuing to acquire, when we get something back, which obviously is not something that happens frequently, but we can actually repurpose that. And again, another differentiating factor sort of about our team versus a lot of others is our history in this space, like we are equipped and we are ready and we are able to take advantage of opportunities when we get an asset back and make improvements through retenanting, redeveloping or re-leasing. So we see those as opportunities. I think generally speaking, what we've seen, I don't think there should be any major changes to what we're expecting going forward. I think we had a tiny bit of bad luck over the last couple of months with a few of the tenants. And hopefully, those will roll back into the income statement here coming up in the next several months or into late '25. And we feel obviously very good about the pipeline, feel great about the quality of those tenants. And as you know, from an asset management standpoint, we are always actively in touch and have a lot of tenant outreach within that space. So we're continuing to monitor our asset base and tenants.

Yes. And just piggybacking off of that. So while we obviously have some tenants on the watch list and a little bit of -- we're expecting a little bit of an uptick in bad debt for Q4. But if we think about it on a full year basis, we're running at about 91 basis points as a percentage of cash NOI. So right in line with what we've typically expected around 1%. It ebbs and flows. So we'll obviously provide some more insights as we get into the beginning of the year and as we start to forecast 2025, but in line with historical run rates on bad debt.

And that was our final question from our audience today. I will turn it back to our management team for any additional or closing remarks.

Thank you, everybody, for your time today. We appreciate that, and we look forward to continuing to build the company and increase the asset base and look forward to reporting again soon.

Ladies and gentlemen, this does conclude today's conference, and we thank you all for your participation. You may now disconnect your lines.