Global Net Lease Inc (GNL) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Global Net Lease Fourth Quarter and Full Year 2017 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to [Leland O'Connor], Senior Vice President. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us on GNL's Fourth Quarter 2017 Earnings Call. This call is being webcast in the Investor Relations section of GNL's website at www.globalnetlease.com. Joining me on the call today is James Nelson, GNL's Chief Executive Officer; and Chris Masterson, GNL's Chief Financial Officer, for a discussion of the quarter's results.

The discussion today will include certain statements and assumptions which are not historical facts. They're forward looking in nature 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 numerous risk factors that could cause GNL's actual results to differ materially from these forward-looking statements. We refer all of you to our SEC filings for a more detailed discussion of the risk factors that could cause these differences. Any forward-looking statements provided during this conference call are only made as of the date of this call. As stated in our SEC filings, GNL disclaims any intent or obligation to update or revise these forward-looking statements, except as expressly required by law.

Also, during today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating the company's financial performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our earnings release.

I will now turn the call over to James Nelson, GNL's President and Chief Executive Officer.

Thank you, [Leland], and thanks again, everyone, for joining our call today.

2017 was a pivotal year for GNL in repositioning our company, especially from a capital-structure perspective, as we had -- as we closed on a transformative acquisition of Global II at the end 2016. In 2017, we were able to recast our credit facility, extend out our debt maturities, while keeping the interest cost very close to the same, and access multiple avenues of capital through the common and preferred equity markets as well as the CMBS market. With all this accomplished, we were positioned to focus on accelerating our growth by identifying and closing on a number of investment opportunities that fit well into the GNL portfolio. Based on all of these accomplishments, we are excited for what 2018 has in store for GNL.

Since the end of last year, the company has disclosed several other significant transactions. First, GNL took steps to grow its portfolio size by about 10% through the addition of almost $300 million in primarily investment-grade, net lease distribution and industrial properties all in the United States. The $18.6 million acquisition of 1 distribution property has already closed, and we have signed definitive agreements to acquire additional properties, totaling $274 million, and covering a combined 3.5 million square feet. These properties are 100% leased to almost 84% investment-grade or implied investment-grade tenants. In addition, as described in our earnings release, the financial credit and capital structure improvements made in 2017 have already given GNL a significant jump-start in 2018.

Turning to our financial performance. We finished up the year with an excellent quarter. Our AFFO for the fourth quarter was $35 million, up 20% from the prior year fourth quarter. In fact, our Q4 AFFO accelerated during the quarter as a result of our balance sheet restructuring efforts during the second half of the year, which better positions the company for accretive growth. Chris will go into more details shortly regarding our financial performance.

Touching on the capital structure side. During 2017, we continue to add to the work we have done on repositioning our balance sheet during the last 6 months. During the fourth quarter, we priced a $28.8 million add-on to our preferred stock. The add-on follows our initial preferred stock raise of $106.5 million. Combined the 2 preferred equity capital raises totaled $135.3 million over the last 4 months of the year. We see the preferred market as a good complement to our capital-raising initiatives as it helped us continue to buy and finance assets at attractive cap rates. In addition, during the fourth quarter, we completed a new CMBS facility, raising a $178 -- $187 million in proceeds. The 10-year CMBS carries a fixed rate of 4.4% and extends our maturities. With a much improved liquidity profile, we were able to make progress on our acquisition efforts.

Our portfolio is performing well. We now have 321 net lease properties, equaling $3.2 billion in real estate investments. We have properties located in 7 countries, leased to 100 tenants across 41 industries, and comprising over 22 million total square feet. Our percentage of investment-grade or implied investment-grade tenants improved to 76%, which remains well above any of our peers in the industry. Occupancy ticked up 10 basis points to 99.5% compared to the end of the September quarter.

At quarter-end, our geographic property mix shifted slightly more towards the U.S. to roughly 49% U.S. and 51% in Europe, while the property mix was at 59% office, 31% industrial and distribution and 10% retail. As we've discussed on prior calls, we'd like to see both of those metrics continue to shift more towards the U.S. and be focused on industrial and distribution properties, which our recent acquisitions and pipeline reflect.

Turning to acquisitions. We continue to build our pipeline. During the fourth quarter, we closed on nearly $61 million in acquisitions and made progress towards our goals. As such, during the quarter, we acquired 8 properties located in the U.S., including 7 industrial and distribution assets. For the full year, we added on 12 properties for $98.8 million. The strong fourth quarter helped us to achieve the overall net asset growth target of $75 million to $150 million based on acquisitions less dispositions.

Looking at the investment landscape, we continue to see opportunities to grow the portfolio. We have an active pipeline with a number of great opportunities. We continue to focus on remaining disciplined in our acquisition strategy by executing on accretive deals that we believe are the right fit for the company.

Let me now talk briefly about our transition on the European side for Moor Park Capital. As described in our January 16 announcement, our Board has determined that our European operations be centralized and handled directly by our adviser. This step gives our adviser enhanced control in Europe through additional acquisitions, asset management and property management staff dedicated to GNL on the ground in the markets we are targeting abroad. I'd like to reiterate here, we've always been closely involved in managing the European portfolio, and have a European management team with employees based in the U.K. and Luxembourg. As part of this transition, our adviser will engage a leading global third-party real estate services firm to assist with asset management, property management, leasing and investment functions.

With that, I'll turn the call over to Chris to walk us through operating results in more detail. Then I will follow up with a discussion on our pipeline and some closing remarks. Chris?

Thanks, Jim. We reported fourth quarter 2017 rental income of $62.6 million, which was up 2% from the prior quarter, and we reported adjusted funds from operations of $35 million, which was roughly flat with prior quarter. Rental revenues increased primarily due to rent received on the properties acquired during the fourth quarter.

As always, a reconciliation of GAAP net income to the non-GAAP measures can be found in our earnings release.

On our balance sheet, we ended the year with net debt of $1.5 billion at a weighted average interest rate of 2.9% and a weighted average maturity of 3.7 years. The components of our debt include $299 million on the multicurrency revolving credit facility, $229 million on our term loan and $992 million of outstanding gross mortgage debt. Our net debt to annualized adjusted EBITDA is 7x, with a strong interest coverage ratio of 4.6x. As of December 31, liquidity was approximately $167 million, comprised of $102 million of cash on hand and $65 million of availability under the credit facility.

Also, during the quarter, we issued an additional 1.4 million shares of 7.25% Series A Cumulative Redeemable Preferred Stock, for which we received net proceeds of $34.1 million. As we mentioned on our third quarter call, on October 4, 2017, we issued an additional 259,650 shares of preferred stock under the option granted to the underwriters and the 4 million share issuance in September. In addition, in December, we priced an add-on offering of 1.1 million shares of our Series A Preferred Stock.

As Jim discussed earlier, we closed on a CMBS facility, encumbering 12 U.S.-based properties, for $187 million of additional proceeds. The CMBS facility was another step in our efforts to transform our capital structure, extending our weighted average debt maturity at the time of closing from 3.1 years to 3.9 years. The proceeds were used to further pay down the unsecured facility in order to create additional capacity to fund future purchases as well as for general corporate purposes. The CMBS facility carries an interest rate of 4.37%, which brings GNL's weighted average interest rate to approximately 2.9%.

Let me now discuss the European side of our capital structure. We currently have 41 individual mortgage loans outstanding across the U.K. and Europe, and our objective is to refinance these loans. These initiatives will further GNL's goals in extending our maturities as well as simplifying and optimizing the capital structure.

As a quick update to our hedging program, we have continued to use our hedging strategy as a way to offset movements in interest rates and local currencies for our European portfolio. Shortly after the quarter closed, we placed new forward contracts to hedge our future exposure to the euro and British pound. The euro contracts hedge an additional EUR 5 million of cash flows from the first quarter of 2019 through the first quarter of 2021. The British pound contracts hedge an additional GBP 10 million of cash flows from the second quarter of 2018 through the first quarter of 2021. These hedges are consistent with our disciplined strategy of layering hedges against 2 currencies over upcoming quarters to manage our exposure to both currencies.

I'll turn the call back to Jim for some closing remarks.

Thanks, Chris. Before taking your questions, I would like to take a few minutes to discuss our acquisition activity and pipeline.

Subsequent to the quarter-end, we closed an $18.6 million acquisition of a distribution property and signed definitive agreements to acquire $274 million of net lease distribution and industrial properties, leased to an approximately 86% investment-grade tenants or implied investment-grade in North America, comprising 3.5 million square feet. These acquisitions, subject to customary closing conditions, will have a significant impact on our portfolio, increasing our geographic concentration in the U.S. as measured by weighted annualized straight-line rent from 50% to roughly 54%, while also increasing our industrial and distribution property mix to 37% from 32%.

I would like to highlight 3 of the acquisitions under contract: the first of these acquisitions will be a newly reconstructed 606,000 square foot industrial and cold storage property, with a 10-year lease with Penske Logistics, a supply chain management and logistics service company. The guarantor of the lease, Penske Truck Leasing Company, L.P., is an investment-grade and rated Baa2 by Moody's. The purchase price reflects a GAAP NOI cap rate of 6.71%. The property is expected to be delivered by October 2018 and features state-of-the-art technology for Penske's operations, clear heights of plus or minus 34 feet, 105 exterior truck doors and 17 electronically operated rapid-rise overhead doors. The property is located in Michigan, 20 miles southwest of Detroit and 25 miles east of Ann Arbor.

The second acquisition is a 668,000 square foot consumer production distribution center for Rubbermaid, with a new 10-year lease to its parent company, Newell Brands, an American worldwide maker of consumer and commercial products. Newell Brands is investment-grade rated by Moody's, with a rating of Baa3. The property is located in Akron, Ohio, within close proximity of Rubbermaid consumer production facility. We were able to execute on this acquisition at a GAAP NOI cap rate of 7.43%, and the lease contains red escalators of 1.75% per year.

The third significant acquisition comprises of 5 industrial buildings, leased for 10 years and covering 1.4 million square feet that serve Contractors Steel Company. Contractors Steel Company is a complete steel service center, serving steel users throughout the Midwest and Canada. It is also investment-grade rated by Moody's, with a rating of Baa3. The lease will be for 10 years across the 5 properties, and we were able to execute on this contract at a GAAP NOI cap rate of 8.19%.

These acquisitions highlight an important quality of our company: the ability to source investment opportunities by leveraging direct relationships with landlords and developers in off-market transactions. We believe this allows the company to achieve better-than-market cap rates, generating better results for the portfolio and earnings. These acquisitions are a testament to our disciplined acquisition strategy and focus on finding deals in the U.S. industrial and distribution segment, which we believe provide a compelling opportunity for GNL. We are excited by these transactions and believe they demonstrate our desire to grow the business and drive stronger earnings and cash flows.

In summary, 2017 was transformative, as we ended the year with new leadership, a much stronger balance sheet and a very robust pipeline of acquisition opportunities that are starting to be realized. We accomplished a number of different initiatives such as closing and integrating the Global II portfolio, recasting our unsecured line of credit, adding access to new sources of capital through the issuance of preferred equity and the CMBS market.

Looking forward, we are focused on continuing to scale and diversify our portfolio accretively by increasing our industrial and distribution property ownership in the United States and by looking for opportunities in Europe, and believe the pipeline that's been assembled is a tremendous start. We have a veteran management team who have operated through many market cycles and understand how to effectively navigate the cyclicality of both the real estate market and the equity markets. We continue to work to provide shareholders with a portfolio that sustains -- with a portfolio that supports and sustains steady long-term growth.

With that, operator, we can open the line for questions.

(Operator Instructions) The first question comes from Matt Boone of B. Riley FBR.

Just to start. I'm looking at your acquisitions pipeline for 2018. Can you give us a sense of what markets specifically these properties are located in?

Sure, Matt. This is [Leland O'Connor]. So the pipeline, we're in a couple of different places. And as we mentioned, you could see in the Investor presentation, there are a couple of the acquisitions, the Contractor Steel Company is a 5-Pack. But we've got a couple in Michigan, I think we've -- I think it's 5 properties in Michigan. LSI Steel Processing is in Chicago, Illinois, another 3 properties as well as, Jim just mentioned, Rubbermaid is in Akron, Ohio. So a little bit of concentration on this portfolio in the upper Midwest, with all these properties falling within Michigan, Ohio, Indiana and in Illinois as well.

Okay. That's helpful. And then kind of going forward, do you expect to complete additional acquisitions for the year? Or how should we be thinking about total acquisition volume and disposition volume for 2018?

Well, we definitely would like to acquire more properties. We are looking -- we have a robust pipeline. As you know, we don't give guidance, but we expect the year to be a good year for acquisitions.

Okay. Could you also provide us with an update on your expectations for international exposure, and where we can expect to see that go from here? As well as any update on your long-term goals for industry diversification? Specifically, do you plan to eliminate your retail segment altogether?

I don't think we plan to eliminate retail altogether as a lot of our retail holdings perform very well. We are looking in Europe. We haven't identified anything recently that we want to buy. But as we stated earlier, the pipeline in the U.S. is robust, and we were looking to expand the percentage to the U.S. over Europe a little bit, and that's happening through the acquisitions we're doing, and I think that will continue.

Okay. Cool. And then turning back to the pipeline, given where your stock is trading today, how do you plan to finance the acquisitions, be it with opportunistic asset sales, leveraging the ATM or issuing more debt and preferreds? And then going off of -- go ahead.

Well -- no, go ahead. I'm sorry.

I was just going to say, going off of that, could you also update us on your leverage targets for 2018?

Well, we look at everything that's available to us as far as how we can fund the acquisitions. So we look at every and all opportunity. And our leverage, we plan to keep roughly at 50%, and that should continue.

And with the leverage, currently where we stand, we're comfortable at that level, given the strength of the credit quality of our tenants. So we think that really gives us the full comfort over where we stand.

Yes, as I stated earlier, we have probably the largest percentage of investment-grade tenants of anyone in our sector. So that does give us a lot of comfort.

Okay. But then looking at the acquisitions, do you intend to be acquiring at a leverage-neutral? I apologize if I may have missed that before. But I'm just trying to think about where I should see that going?

Matt, when you say leverage-neutral, do you mean acquiring these markets with debt?

Right. Yes, 50-50 split essentially between debt and equity.

Again, I think, as Jim mentioned, we're going to look at it -- a lot of these acquisitions are closing over the year. Part of our strategy in 2017 was to free up some availability on the line of credit, and we've also got some cash on hand. So as we get closer to each of these acquisitions, whatever is best for the long-term goals of the portfolio and shareholders, we'll opportunistically close those acquisitions with a mix of different financing solutions. But we do intend to close them with some leverage.

Okay. And then one more. Could you please provide me with an update on where you guys stand with the ratings agencies? And whether or not you view attaining an investment-grade rating as an achievable goal for 2018?

Well, we've met with all 3 agencies. We are working towards that. As you saw last year, a number of things that were very helpful was how we've restructured the debt stack and everything, but we are working towards that. It's definitely attainable [with] what we have.

In addition, do you expect to tap the unsecured market this year?

It's too early to tell.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Jim Nelson for closing remarks.

Thank you, operator. Thank you all for joining us today. We look forward to providing an updated NAREIT coming up as well as our fourth quarter result in the winter. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.