Global Net Lease Inc (GNL) 2017 Q1 法說會逐字稿

Good morning and welcome to the Global Net Lease first-quarter 2017 earnings call. (Operator Instructions). Please note, this call is being recorded.

I would now like to turn the conference over to Mr. Matthew Furbish, GNL's Vice President of Investor Relations. Please go ahead.

Thank you, Amy. Good morning, everyone, and thank you for joining us for Global Net Lease's first-quarter 2017 earnings call. With me today is Scott Bowman, GNL's President and Chief Executive Officer; and Nick Radesca, GNL's Chief Financial Officer, Treasurer, and Secretary. This morning's call is being webcast at globalnetlease.com in the Investor Relations section.

I'd like to remind everyone that certain statements and assumptions in this earnings call which are not historical facts will be forward-looking, and are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain assumptions and risk factors which could cause GNL's actual results to differ materially from these forward-looking statements. The risk factors that could cause these differences are more fully discussed in our filings with the SEC.

In addition, the forward-looking statements included in this conference call are only made as of the date of this call; and, as stated in our SEC reports, GNL disclaims any intent or obligation to update or revise these forward-looking statements, except as expressly required by law.

Now, I'd like to turn the call over to GNL's CEO, Scott Bowman. Scott?

Thank you, Matt. Good morning, everyone, and thank you for joining today's call. I'm joined by our CFO, Nick Radesca; and together we'll review GNL's first-quarter 2017 results, provide a portfolio update, as well as provide insight into our key 2017 initiatives.

Let me begin by saying that I'm pleased to report that GNL hit the ground running in the first-quarter 2017 following the close of our acquisition of Global II at the end of 2016. We've made substantial progress on our stated objectives for the year, and continue to work diligently to position GNL for sustained, long-term growth.

In the first-quarter 2017, we completed the integration of the Global II portfolio. We completed acquisitions of three properties and sold one property. We paid off the remaining balance of our EUR52.7 million mezzanine facility which was assumed as part of the Global II acquisition and carries with it an 8.25% interest rate, resulting in $3 million in annualized savings. And we completed a 1-for-3 reverse stock split at the beginning of March.

We reported net income attributable to stockholders of $7.4 million, up 14.5% year-over-year; net operating income of $55.6 million, up 12.8% year-over-year; and core FFO of $34.2 million, up 14.5% year-over-year. In just a moment, Nick will discuss our financial results in greater detail.

Looking at our portfolio activity, as I just mentioned, in the first quarter we acquired three properties in the US for a total purchase price of $30.3 million at an average cash cap rate of 7.2%. The properties are high-quality distribution facilities located in the US with long-duration leases. Two are new construction assets, and the third completed a remodel in Q1 of this year. We also closed on the sale of a suburban US office property for $13 million at an exit cash cap rate of 10.1%.

I'd like to provide an update on the asset recycling program we initiated in Q2 of 2016. We sold the final asset identified as part of this program in Q1 2017. In total, we sold 35 properties, generating gross proceeds of $123.4 million over the past three quarters, at an average exit cash cap rate of 7%.

Highlights of the program include removing from our portfolio big-box retail stores in the US; selling our only hotel property located in the Netherlands, which effectively eliminated the other category from our property type mix; selling a suburban office building; eliminating the only two medical services offices from our portfolio; and reducing our discount retail footprint. We began 2016 with 142 Family Dollar and Dollar General stores. And at year-end, we owned 115.

We are encouraged by the current environment in our target markets. While we have the flexibility to invest in both the US and European markets, we're currently focused on acquiring assets in the US, with all first-quarter assets in new or recently remodeled distribution facilities located in the US.

Our pipeline is also focused on the US-based assets, primarily distribution and industrial facilities. We're maintaining our guidance of $150 million to $200 million in acquisitions, and $50 million to $75 million in dispositions over 2017, as we continue to fine-tune and grow our best-in-class portfolio. This will allow us to begin lowering the mix of office properties, which increased with the acquisition of Global II, from approximately 59% back toward historical levels around 50%, as well as increase our mix of industrial and distribution assets.

We remain focused on maintaining a highly diversified property portfolio. As of quarter-end, GNL's portfolio encompassed 312 net leased properties, or $3.1 billion in real estate assets by purchase price. We now have properties located in seven countries, leased to 94 tenants across 40 industries, and comprising over 22 million total square feet. At quarter-end, key metrics for the portfolio were 100% leased: 50.6% in the US, and 49.4% in Western Europe based on annualized straight line rent. And our property mix, based on annualized straight-line rent, was approximately 59.1% office, 31% industrial and distribution, and 9.9% retail.

Moving to our tenant base, we finished the quarter with 76.7% investment grade, inclusive of implied investment grade-rated tenants, and a weighted average remaining lease term of 9.5 years. In addition, our top 10 tenants comprised of 37.5% of annualized straight-line rent. Approximately 90.3% of our leases by annualized straight-line rent have either fixed or index-linked rent escalators, and we have no leases rolling before 2020; and as we look out five years, less than 4% of our leases by straight-line rent rolling before 2022.

I'd like to highlight the impact of free rent burnoff in 2017. In the second quarter 2017, over $1.25 million of incremental rent will be realized in Q2 versus Q1 2017 as a result of free rent burnoff. For Q3, the incremental rent will be approximately $500,000 above Q2; and Q4 is approximately $180,000 above Q3. For 2018, we will realize an additional $2.8 million versus 2017 in incremental rent as a result of free rent burnoff in 2017.

GNL is well-positioned, with limited exposure to underperforming retailers due to its quality underwriting standards. Despite a number of retailers reporting significant closures and bankruptcies, we're pleased to report that GNL has no retail tenants with reported bankruptcies, with all tenants paying rent. We attribute this limited exposure to two factors: our disciplined approach to tenant underwriting to mitigate risk, and our active monitoring of tenants' operating performance and credit profiles.

GNL maintains a commitment to strong corporate governance. On March 23, we announced that Jim Nelson joined our Board as a fifth independent director and Chair of the Audit Committee, bringing the number of GNL's independent board members to five out of the six-member Board. Jim brings with him significant board and audit committee experience, and we welcome his expertise as we continue to grow the company. As a reminder, we added a fourth independent director, Lee Elman, to the GNL Board in the fourth-quarter 2016.

Before I hand it over to Nick, let me touch on yesterday's presidential runoff election in France. The victory by now-President-elect Macron gives the Eurozone a strong supporter in France. President-elect Macron's win is widely expected to reduce uncertainty around France's commitment to the European Union and the euro. With regard to our portfolio in France, let me remind everyone that GNL owns seven properties in France, representing approximately 5% of straight-line rent. And 100% of our tenants are investment-grade, inclusive of implied investment grade.

Now, let me turn the call over to Nick.

Thank you, Scott, and good morning, everyone. As you saw in today's release, we posted another solid quarter, our first full quarter of results since the acquisition of Global II at the end of the fourth quarter of last year. I'll note that the merger has gone as smoothly as anticipated, and GNL is receiving the benefit of both the portfolio's stable cash flows as well as an enhanced risk profile from increased diversification.

Looking at our results, we reported for the first-quarter 2017 net income attributable to stockholders of approximately $7.4 million, which was up 14.5% year-over-year; net operating income of $55.6 million, up 12.8% year-over-year; NAREIT-defined funds from operations of $33.5 million or $0.51 per share, up 11.7% year-over-year; core funds from operations of $34.2 million or $0.52 per share, up 14.5% year-over-year; adjusted funds from operations of $34.5 million, up 6.7% year-over-year; and we ended the quarter with $72 million in cash and cash equivalents.

A reconciliation of GAAP net income to the non-GAAP measures can be found starting on page 8 of our earnings release, as well as other GAAP financial information.

As we discussed in our last earnings call, our debt restructuring initiative is a priority for GNL in 2017, which includes improving our balance sheet metrics, extending the average remaining term of our debt, and increasing the mix of unsecured debt. The goal of the restructuring is both to prudently manage our cost of capital, as well as to position the Company to secure an investment-grade rating.

Accordingly, we took a significant step in our restructuring effort by paying down the remaining EUR52.7 million mezzanine facility that carried an interest rate of 8.25%, assumed as part of the Global II acquisition, fully extinguishing this higher-cost debt obligation. At quarter-end exchange rates, this will provide quarterly interest expense savings of approximately $750,000 per quarter on a go-forward basis.

In summary, we've worked hard to lay the foundation to transform our debt profile in 2017, and will continue to provide updates throughout the year.

Turning to our balance sheet: as of the end of the first quarter, the Company had total combined net debt of $1.39 billion, including $763.3 million of outstanding mortgage debt, and $698 million on the credit facility. Our net debt to EBITDA improved to 7.2 times. And our interest coverage ratio of 4.6 times, based on annualized first-quarter 2017 adjusted EBITDA, remains among the top in our peer group.

Our enterprise value was $2.98 billion, based on the March 31 close price of $24.08 per share, resulting in a net debt to enterprise value of 46.5%. As of March 31, the Company's total debt had a weighted average interest rate of 2.7%, comprised of 76.4% fixed-rate and 23.6% floating-rate debt. Further, our liquidity position remains strong, with approximately $72 million of cash and cash equivalents, and $33 million available under our corporate revolving credit facility.

Notably, GNL's portfolio remains well positioned to weather rising interest rates driven by the Federal Reserve policy, with 19.2% of our outstanding debt denominated in US dollar, and the remaining 80.8% in pounds sterling or euro. As previously mentioned, 90.3% of our leases by annualized straight-line rent possess contractual rent increases tied to fixed and/or indexed escalators. Thus, we effectively have a natural hedge from interest rate movements that correlate to strengthening fundamentals in the US.

That said, let me provide a few comments about what we are seeing in Europe and the UK, and how we position the Company to manage volatility in these markets. Over the past 12 months or so, there have been a number of geopolitical developments that have increased focus on the UK and other markets across Europe, including most recently the French presidential elections. Markets thus far have been highly resilient to these events. And there has been far less volatility than expected in the UK following the Brexit vote. However, we are always actively working to manage any risks posed from currency or interest rate movements to our assets and their underlying cash flows.

Over the quarter, our hedging program, which I will explain in a little more detail in a moment, was successful in mitigating the effect to our portfolio and net cash flows. While uncertainty remains on the future path of the UK and Europe, let's briefly look at the 2017 outlook for the two largest economies in Europe. The UK Office of Budget Responsibility is now forecasting 2% GDP growth for 2017. For the other large economy in Europe, the German government is currently forecasting 1.5% GDP growth for 2017. Further, commentary from leaders in the Eurozone and the UK has signaled the intention to remain accommodative in monetary policy.

In terms of how these events may affect our portfolio, GNL's strategy has always been to position ourselves to mitigate identifiable risk to the portfolio. For our UK and European portfolio, that means being well positioned to limit the impact of currency and interest rate movements resulting from any geopolitical events. To accomplish this, the Company employees a comprehensive, three-part hedging program designed to mitigate risk to our cash flows, risk to the value of our assets, and interest rate risk born by volatility in the euro and pound sterling.

The first leg of the program utilizes a basket of hedging instruments, including foreign exchange futures, foreign exchange swaps, and foreign exchange options to hedge foreign exchange risk to our net cash flows produced by our UK and Continental Europe properties. Over the past year and into the first quarter, given the volatility in the euro and pound sterling, our hedge strategy has been effective.

In addition, with foreign exchange options in the mix since the fourth quarter of 2016, we not only have protection against severe downturns in euro and pound sterling exchange rates versus the US dollar, but we also participate in the upside movements in those exchange rates.

The second part of the program utilizes interest rate swaps to effectively fix the interest on our floating-rate debt. Given the current interest rate environment across the euro and UK, these are highly cost-effective tools that mitigate the impact of interest rate fluctuations on our interest expense.

And third, we maintain our use of asset liability matching, intended to match the cost of our European assets with borrowings in the same currency. This natural hedging allows the net US dollar values of foreign-denominated assets and liabilities to remain neutral by offsetting fluctuations in one against the other. And to reiterate, approximately 81% of our total outstanding debt is either euro- or pound sterling-denominated.

Now let me turn the call back over to Scott for some closing remarks.

Thank you, Nick. After a transformative 2016, GNL has gotten off to a strong start in 2017. We continue to be pragmatic in our approach. For 2017, we have a few important initiatives well underway, starting with the restructuring of our debt stack that we believe will position GNL well toward our goal of securing an investment-grade rating. This initiative -- coupled with our goal of $150 million to $200 million in acquisitions, and $50 million to $75 million in dispositions -- will put GNL in a very strong position, and sets the foundation for continued growth.

We are excited for the future, and believe that our unique ability to access US and European real estate and capital markets, coupled with an interest coverage ratio among the top of our peer group, and ample liquidity, will continue to drive strong organic growth in our portfolio.

That concludes our prepared remarks, so let's go ahead and open up the call for questions. Amy?

(Operator Instructions). David Corak, FBR.

Good morning. Could you talk a little about the Gramercy European portfolio that recently transacted? Maybe how that compares to your European assets, and your thoughts on pricing?

Sure. Thanks, David. So Gramercy recently announced that they have a European JV that they've sold for in the range of $1 billion. They had a minority stake in that JV. And very interestingly, made up of distribution and office assets, largely, went at a 6.2% cash cap rate. We think that this result reinforces the value of European portfolio of GNL and helps to highlight the fact that GNL likely does not receive a full valuation in our current stock price for the quality and value of the European portfolio. And we continue to see very positive indications out of the European market that would lead us to believe that we continue to have appreciation in our portfolio. And post- the French election, we could even see that continue further.

Okay. Sticking with Europe, can you comment a little bit on the capital flows maybe that you guys -- or even your advisor, the Moor Park guys, have seen into European real estate and your market specifically, those -- in that sweet spot that you guys target in Europe, that $25 million to $75 million kind of range?

We've seen an interesting evolution, David, since last June where there was a little bit of a wait-and-see in the markets, especially in the UK, to understand valuations. But, clearly, there have been inflows. Not only Moor Park, but ourselves have received numerous inbound inquiries about assets we have in our portfolio at very interesting valuations. Although we are a long-term holder of real estate, so we feel good about the assets that we hold. And also that we've started to see increased inflows into the market as the stability has continued to improve, as there's been limited uncertainty.

And as you think about with regard to the French election, this follows the Dutch elections. So clearly the tide is moving toward EU support, and those elections clearly enhance that and should only create added value. There is liquidity and availability of money in Europe as well, so there is a supportive environment to do real estate transactions. And there's money, both from Europe as well as the US and Asia, coming into the European sector this point.

Okay, that's good color. Thank you. And then obviously you guys have started on the acquisitions path now. Can you talk a little about what's attracting you to industrial/distribution kind of assets in the US versus other net lease type product in the United States?

There's a few things. Number one, and I think first and foremost, the advantage of the GNL strategy is to be able to invest on both sides of the Atlantic opportunistically, based upon market conditions. And we've seen a widening in the US that has made it an opportunistic time for us to invest and increase our US portfolio. And specifically within the distribution sector, where we have bought all of our first-quarter assets and have a big piece of our future pipeline, we've seen a widening that makes this very interesting to us when you look at the cash cap rates versus our cost of debt today. And as we continue to deploy capital, we will continue to evaluate this.

It's also, David, part of our strategy to bring back the office mix to about 50%, and increase distribution and industrial back up towards its high 30s, 40s percent. And we feel like that will be a good stage one as we continue to evaluate the mix of our portfolio and continue to allow GNL's best-in-class portfolio to evolve.

Okay. Well, you just answered my next question. But I guess part B of that question was just are you comfortable with the parity between US and Europe now? Or would you see that shifting a little bit, and do you have a timeline on that?

We've been comfortable with the parity of US and Europe. Right now, based on what we see, we are more focused on the US and we could move back toward as much as 60% in the US. Again, it really depends, as we continue to strategically take advantage of both the markets, and see where we can create the most value for our shareholders.

Okay. And then just going back to retail, obviously there's been a string of retail bankruptcies of late. We had some pretty well-publicized drama last week with one of the retail-focused net lease REITs. You guys are a little under 10% retail now. Can you just talk a little bit about your comfort level with the specific tenant and industry bases that you have? And then may be specifically talk about discount retail and how you think that fits into the broader retail picture at this point?

Sure, David. So, let's start with our outlook on retail. We are very diligent in not only our underwriting process, but also in continuing to evaluate our portfolio and our tenants. Part of the effort to have our asset recycling program, which we completed in Q1 and announced in Q2 of 2016, was to reduce some of our retail exposure. Not only did we reduce discount retail, which I'll talk more about in a second, from 142 Family Dollar and Dollar General stores to roughly 115, but we also sold off the only big box retail stores we owned in the US because we felt like that was a vulnerability for us that we were able to eliminate, and we chose to do so.

As we look at the dollar stores, we feel good about those stores. They are, in value, call it $1 million to $2 million per location. They tend to be focused on a very local markets, not big footprints, and less impacted by online businesses because of the type of assortment and how they feed into their markets. So, overall, we feel pretty good about our retail assets. In addition to the dollar stores, there's also a mix of do-it-yourself stores in both the UK and Germany, similar to what a Home Depot would be. We feel great about those assets; and a mix of some other small portfolio of assets.

We do own a group of fast service restaurants in Puerto Rico, which was probably going to be your next question, David. They are all Yum! Brand: so Kentucky Fried Chicken, Pizza Hut, et cetera. And we feel good about those. We continue to monitor them. And we'll continue to monitor them, and talk with you more in second quarter about those assets as well. And the last thing, David, just dollar stores today, after the sales that we've had, combined, account for about 4% of our straight-line rent.

Okay, that's helpful. A couple for Nick, and then I'll yield the floor. So I'm sure things are progressing down the rating -- with the ratings agencies. Maybe it is later this year; maybe it's next year. But do you think there's a nearer-term -- what can we think about in terms of the debt stack? What can that look like, given your ability to borrow on both sides of the pond? In terms of just terming out the revolver with maybe bank debt, is that still an option? And any thoughts on pricing around anything you're looking at today would be helpful.

Let me start by reiterating: our current revolving credit facility has a maturity at the end of July of 2017. And there is still another 12-month extension that we can exercise on that facility. Our intention is to have something to announce prior to that extension date. And we are in active discussions with lenders that are currently in that facility, and some others. As we said last quarter, we do see an interest from the banks in terming out a portion of any refinance credit facility. And we believe the pricing is consistent with what the pricing would be on the facility itself to have a term of four or five years on the debt.

Okay, that's helpful. And then just in terms of leverage, are you guys working -- work towards a specific leverage target that you could share with us? How do you think about your cash flow leverage as it stands today, and where you'd like to be going forward?

I think we looked at it more as we'd like to trend towards something 7 times, or slightly below. But the exact date we get there is not certain. And that depends on what we see in the marketplace for acquisitions, as well as what's available to us on our credit facilities. But our discussions and planning to become investment-grade-rated all lead to, in the next call it 18 months, having that number in a range that the agencies are very, very comfortable with.

That makes sense. All right, thank you very much, guys.

David Kramer, [GNL].

I had two questions. The first one is relating to -- you mentioned the recycling program and selling off a number of assets. And if I'm not mistaken, I think you indicated the exit cap rate was a little bit over 7%. And I think you mentioned that you recently sold one property with an exit rate -- cap rate of about 10%. Could you comment on -- those sound, without me knowing that market, sound like high cap rates, i.e., cheap sale prices, perhaps. So could you comment on that? And also on how you made out with the sales overall? In other words, whether there was a calculation of rate of return over the holding periods at the asset level?

Sure. Thanks, David. First off is the final asset, which was the asset that had the 10 cap on it, is included in the overall 7%. Obviously there are -- some of the assets in that portfolio that were sold sub-6, and the highest was the one that we announced in this quarter at 10%. And it was also a mix of being really more focused on cleansing the portfolio; as we wanted to fine-tune based upon current market conditions, and the makeup or the construction of the portfolio. And so, reducing retail exposure, eliminating big box, based upon over the last two or three years' evolution of the performance of big-box retailers. I'm sure you've seen some of them go out. But also many of them want to reduce footprints, et cetera. We eliminated that exposure. And so we felt very good about the 7 exit cap rate overall.

We have not communicated an exit IRR, so I really can't go there. But we feel very good about the pricing compared to what we had modeled out for these assets; and have been able to, with partnership with Nick -- be able to redeploy this capital, partly taking out high-cost debt, as well as being able to put it into the acquisition pipeline in first quarter of the year.

The second part of the question, based on what we own in the assets and what we sold them for, we did recognize in 2016, for the year, a $13.3 million gain on sale of investments. And this year, for the first quarter, we had a total, I believe, on this one asset of a $400,000 gain, even at that 10.1%.

I see. Thank you. The other question is -- with the caveat that I acknowledge the comments at the beginning about forward-looking statements, and you can't predict, per se. But I had in number of clients in [Net Lease II] that were merged into this program. And their statement values were about $0.92 on the dollar before the merger and about -- from memory, about $0.73 on the dollar after the merger. Any comments on what might have caused the drop in statement value? And then secondly, any comments on outlook from the standpoint of setting reasonable expectations -- again with the proper caveats -- about what they may look forward to in terms of regaining some of their statement value to get closer to what they started with?

So David, for the second part of your question, obviously we can't predict future valuations in a public market. But we do think that all the things that we've talked about should set the foundation for GNL to have good opportunity to enhance value for shareholders. With regard to point one, there was a negotiation between GNL and G II boards of directors, the independent directors who form special committees, negotiating what they felt was fair pricing in the best opportunity for both companies in the acquisition. Both boards felt it appropriate to have shareholder votes on the transaction. It was required for the Global II side, but GNL also felt it was appropriate.

I just want to remind everyone that, while 93% of the GNL shareholders voted for this transaction, over 86% of the Global II shareholders voted, recognizing that GNL provided better long-term value. But that value started at a valuation based on multiples. And GNL did pay a slight premium to Global II for the multiple against their earnings to bring those shareholders into GNL. And as Nick and I have mentioned, we are working on a number of different initiatives that hopefully the market will recognize and provide enhanced valuations which will be good long-term for these shareholders.

Okay. Thank you.

Marc Berger, MKB Associates.

You said basically you're working on some enhanced values to increase the valuation of the Company. Why do you think we're not valued equal to our peers? What makes us different or delinquent in valuation?

Well, I think that, number one, is I think the entire net lease sector has taken a recent hit based upon the market volatility that we've seen over the past few weeks. Prior to that, GNL had been trading in the top quartile of its peer group and continued to do well. The reality is, GNL trades in a range of multiple with its peer group; above some, and below others. We would like to see GNL's valuation increase. We believe that the quality of GNL's portfolio, when you look at investment-grade tenant mix, which is high compared to anyone in our peer set, the strategic importance of many of the assets in our portfolio, the flexibility of US and Europe, the quality of the European portfolio only enhanced or validated by the recent Gramercy transaction.

And we will just continue to do the things that we are doing to be pragmatic and gain recognition. But today we sit within the goalposts of where our peer group trades. And like our peer group, we've had some impact recently. But we have been trading since the beginning of the year in the upper quartile of that group, if you go back and research that.

Okay. What about additional research on the Company? I don't see too many people that have coverage. Is part of your goal in the future to try to get some more coverage, and, therefore, more distribution of the stock among shareholders?

We are actively working with a number of different firms on research. Both Nick and I are engaged in that on a daily, really weekly basis. We do believe that you will see additional research coming online as people open up availability to add names. And we are working to make that happen as soon as it can. We do recognize that many institutional investors will look for research. And so we are appreciative of the firms that cover us, FBR, and look forward to having some other important firms covering GNL in the near future.

Last question: with regard to the dividend, do you have any forward thoughts as to -- based on the income coming in, what you would raise your dividend to? Or can we look forward to potential dividend raises in the near future, based on some of the items you have in the hopper?

We continue to evaluate our dividend with our Board. Our Board has reaffirmed the dividend through the end of this quarter, so through the June distribution. As you know, GNL pays distributions on a monthly basis. And we will continue to monitor and evaluate that with our Board. But, really, we can't go beyond that. There's no public direction at this time.

Thank you very much.

I believe that was our last question, Amy?

Yes. I show no further questions at this time.

Okay. Then thanks very much, Amy, and thank you all very much for joining us today. We look forward to continuing to update you soon. Have a great day.

Matt?

Thank you, Scott and Nick. Thank you, everyone, for joining us today. As always, our management team is available should you have any follow-up questions. If so, please don't hesitate to contact me directly at 917-475-2153. Have a great day.

Thank you, Mr. Furbish. As a reminder, this conference call will be available for replay beginning approximately one hour after this call. Dial-in for replay is 1-877-344-7529, with a confirmation code of 10106108. Again, the dial-in for replay is 1-877-344-7529, with a confirmation code of 10106108. The conference call is now concluded. Thank you for attending today's presentation. You may now disconnect.