Global Net Lease Inc (GNL) 2018 Q2 法說會逐字稿

Good day, and welcome to the Global Net Lease Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, that this event is being recorded.

I would now like to turn the conference over to Louisa Quarto, Executive Vice President. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us for GNL's Second Quarter 2018 Earnings Call. This call is being webcast in the Investor Relations section of GNL's website at www.globalnetlease.com. Joining me today on the call to discuss the quarter's results are James Nelson, GNL's Chief Executive Officer; and Chris Masterson, GNL's Chief Financial Officer.

The discussion today will include certain statements and assumptions which are not historical facts. They are forward-looking in nature and are being made pursuant to the safe harbor provision 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.

Also during the call, we will use the term investment grade rating, which includes both actual investment grade ratings of the tenant and implied investment grade ratings. Implied investment grade can include ratings of the lease guarantor or the tenant's parent, regardless of whether or not the parent has guaranteed the tenant's obligation under the lease. Implied investment grade ratings can also include ratings determined using a proprietary Moody's analytical tool, which compares the risk metrics of the nonrated company to those of a company with an actual rating. The ratings information is as of June 30, 2018. 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'll now turn the call over to our CEO, Jim Nelson.

Thank you, Louisa. And thanks again to everyone for joining us on today's call. I will start by providing a brief recap of our results and some color on acquisitions and then Chris will go into more detail regarding our quarterly financial performance.

I'm happy to report that our second quarter results, much like our first quarter, demonstrated the steady performance of our existing portfolio and solid execution of our acquisition strategy.

Our second quarter revenue was $71 million, which reflects an increase of $6 million or 9.2% over the same quarter last year. Our core FFO attributable to common stockholders increased to $41 million and our AFFO decreased slightly on a year-over-year basis. However, it is up $500,000 when compared to the first quarter of 2018.

The increase in revenue is attributable to both contractual rent bumps from existing tenants and GNL's ongoing acquisition activity. Through the first 6 months of the year, GNL acquired $161.1 million of the $307.3 million previously announced 2018 acquisition pipeline. In their first year within the portfolio, these 13 closed assets will contribute $12.6 million in additional rental revenue.

Since the end of the second quarter, we closed an additional $21.4 million of the $307.3 million I just mentioned and we are under contract to acquire 1 property for $54 million, which is slated to close in the next few weeks and an $11 million distribution facility scheduled to close during the third quarter. Neither of these properties were part of our previously disclosed pipeline. When added to the pipeline, this brings us to nearly $372 million in total acquisitions closed during 2018 or set to close by year end.

GNL's investment grade or implied investment grade tenants remain strong at 79% of the portfolio and our occupancy remained 99.5% at the close of the second quarter. As anticipated, we moved GNL geographic property mix based on annualized straight-line rent, slightly more towards the US to roughly 51% US and 49% Europe. While our property mix was at 56% office, 35% industrial and distribution and 9% retail.

Let me take a moment to share some details on the properties we acquired in the second quarter. GNL closed on 7 properties during the quarter for $97.6 million. The properties represented over 1.6 million square feet and are located within the central United States. They have a weighted average going in capitalization rate of 7.59%, equating to a weighted average GAAP capitalization rate of 8.05% and a weighted average remaining lease term of 10 years.

The first property is a cross stock distribution facility located in Black Foot, Idaho, leased to FedEx Freight, a leading provider of less than truckload freight services throughout the US, Canada, Mexico, Puerto Rico and the US Virgin Islands. The tenant's parent company and guarantor is FedEx Corporation, which has an investment grade rating of BAA2 and BBB from Moody's and S&P. The property aids the tenant in fulfilling its last mile distribution strategy. The building was purchased at a price equating to an average GAAP capitalization rate of 6.76% with a remaining lease term of 14 years.

Next is a portfolio of 5 net lease industrial properties leased to a leading steel service supplier, which serves clients throughout the Midwestern US and Canada. These 5 industrial assets total nearly 1.4 million square feet and they are located in Michigan, Ohio and Indiana. The tenant has an implied investment grade credit rating of BAA3 on Moody's Analytics. The buildings were purchased at a price equating to a weighted average GAAP capitalization rate of 8.19% with a remaining lease term of 10 years.

The additional property we closed during the quarter is a build-to-suit industrial distribution facility leased to Pioneer Hybrid International, Inc., which does business as DuPont Pioneer. The facility is located in close proximity to the tenant's production plants and key customers. The company is a leading developer and supplier of advanced plant genetics, agronomic support and services to farmers. The building was purchased at a price equating to an average GAAP capitalization rate of 7.27% and a remaining lease term of 10.5 years.

Subsequent to the quarter end on July 27, we closed on a 669,000 square foot distribution facility leased to Rubbermaid Incorporated and guaranteed by Newell Rubbermaid, Inc., which is rated BBB minus by S&P and BAA3 by Moody's. The building was purchased at a price equating to an average GAAP cap rate of 7.43% with a remaining lease term of 10 years. The tenant, Rubbermaid, was founded in 1968 and is a manufacturer of innovative solution based products for commercial and institutional markets worldwide. The parent company and guarantor, Newell Brands, has over 200 brands across 16 global divisions with products in nearly 200 countries and has over 45,000 employees worldwide.

Next I will discuss 2 acquisitions which are scheduled to close during the third quarter and were not part of the previously announced $307.3 million pipeline. First, it's a brand new office building located outside of Dallas, which is net leased under a 12-year term with an average GAAP cap rate of 7.36% to Netscout, a provider of application and network performance management. The contract purchase price is $54 million and the transaction is expected to close later this month.

The second is a FedEx distribution facility located in Greenville, North Carolina for $11 million, which is leased for 15 years with an average GAAP cap rate of 6.74%. The acquisition is expected to close by the end of the third quarter.

Each of the acquisitions made during the first half of 2018, along with the 3 additional deals, are excellent examples of GNL's strategy to acquire net lease properties, which serve a vital function to a credit worthy tenant to structure accretive transactions at attractive cap rates and to extend our overall weighted average remaining lease term. We believe that our demonstrated ability to underwrite transactions with an eye toward long-term value is what continues to set GNL apart from the net lease sector.

A quick comment on our view towards the dispositions. While we do not have any properties that were classified as assets held for sale, we are opportunistic sellers. During the second quarter, we sold one property for $20 million and we closely monitor our asset base, local market condition and near-term lease expirations to identify and capitalize on similar selling opportunities.

Before I turn the call over to Chris, I would like to give a brief update on the 18 portfolio assets located in Puerto Rico. Occasionally over the past year we've received inquiries as to the condition of these assets after Hurricane Maria. We are pleased to report a third party performed site visits and inspected each asset and all of the properties are open for business and in good working condition.

Please note these 18 assets account for only 65,000 square feet of our 25 million square foot portfolio and rent has remained current at all times.

With that, I'll turn the call over to Chris to walk us through operating results in more detail and then I'll follow-up with some closing remarks. Chris.

Thanks, Jim. As you mentioned earlier, we reported second quarter 2018 rental revenue of $71 million, up 9.2% from Q2 2017 period. And we reported adjusted funds from operations of $36 million, which is a slight decrease from the second quarter 2017.

Rental revenues increased primarily due to acquisitions and in place rent bumps. 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 second quarter with net debt, which is debt less cash and cash equivalents, of $1.6 billion at a weighted average interest rate of 3.1%. Our weighted average maturity has extended significantly on a year-over-year basis from 1.3 years at the end of the second quarter 2017 to 3.3 years at the close of the second quarter 2018. The components of our debt include $459 million on the multicurrency revolving credit facility, $225 million on our term loan and $976 million of outstanding gross mortgage debt. At quarter's end, our debt consisted of approximately 76% fixed rate, which is inclusive of floating rate debt with in-place interest rate swaps.

Our net debt to annualized adjusted EBITDA is 7.4x, with a strong interest coverage ratio of 4.2x. As of June 30, liquidity was approximately $107.5 million, which comprises $93.3 million of cash on hand and $14.2 million of availability under the credit facility.

The company's net debt to enterprise value is 51%, with an enterprise value of $3.1 billion based on the June 30, 2018 closing share price of $20.43 for common shares and $25.63 for series A preferred shares. Subsequent to the close of the second quarter, as part of its ongoing growth initiatives, GNL closed an upsizing of its unsecured credit facility of $132 million for the multi-currency revolving credit facility portion and EUR 51.8 million for the senior unsecured term loan facility portion. We used the proceeds from the borrowings under the term loan to pay down amounts outstanding under the revolving credit facility.

Let me now discuss the European side of our capital structure. We currently have 62 individual mortgage loans for a total of EUR 667 million outstanding across the U.K. and Europe, and we expect to refinance these loans over the next year. Similar to what we have done with our U.S. debt, our objective is to extend maturities as we continue to simplify and optimize our 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. Recently, we placed new forward contracts to hedge our future exposure to the euro and British pound. The euro contracts hedge an additional EUR 4 million of cash flows through the third quarter of 2021. The British pound contracts also hedge an additional GBP 6.5 million of cash flows through the third quarter of 2021. These hedges are consistent with our disciplined strategy of layering hedges against the 2 currencies over upcoming quarters, to manage our exposure to both currencies.

With that, I'll turn the call back over to Jim for some closing remarks.

Thanks, Chris. Given that next week marks my first full year as CEO, I'd like to pause to reflect on what we have achieved over that time. I am truly pleased with the initiatives we have pursued. The team's efforts to deliver strong results and the momentum we have on the acquisition front to identify, negotiate and close transactions, which are consistent with our investment strategy and our accretive additions to our growing portfolio.

Over the past year, we have $372 million in acquisitions already closed or set to close before year end, including $65 million on top of the $307.3 million previously announced. With 264 properties in the U.S. and 69 in the U.K. and Western Europe, representing 51% and 49% of rental revenue respectively, this balance, our investment strategy and our advisors' experience abroad give us a unique advantage. We are well positioned to identify, assess and capitalize on opportunities across a wider set of markets as compared to most of our peers.

From a portfolio diversification standpoint, upon the closing of the second quarter our industrial and distribution properties make up 35% of our portfolio, up from 33% at the end of 2017. We continue to demonstrate a proven ability to source investment opportunities by leveraging direct relationships with landlords and developers to identify off-market transactions. We believe this allows the company to achieve better than market cap rates and more favorable terms than are generally available, generating improved results for the company and its shareholders.

We will remain proactive and disciplined in our acquisition strategy to identify compelling opportunities to acquire net lease assets with a continued near-term focus on U.S. industrial and distribution facilities in order to continue to drive shareholder value. We will also selectively add to our international footprint.

So to summarize, we are happy with the market opportunities, our growing portfolio, our strong real estate network from which we source opportunities and our continued ability to execute and deliver steady results. I look forward to continuing to lead the GNL effort to enhance long-term value for our stockholders.

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

(Operator Instructions) And our first question comes from Bryan Maher from B. Riley, FBR.

On the industrial assets that you've been acquiring, and I know you touched upon this briefly in your prepared comments regarding how you're sourcing those, but can you drill down a little bit more in detail there? And I ask because several of us cover industrial REITs that operate in the U.S. and it seems like everyone is scouring the landscape to find attractive industrial assets at decent cap rates, which are few and far between. So I guess we were a little impressed and curious as to how you came across the assets that you acquired in the second quarter.

Bryan, that's a great question. A number of these properties came from a developer that we've worked with for a number of years that had some of them were new properties and some were in his portfolio that he decided to sell. So it was an off-market transaction and we were very pleased that at the properties and the cap rates that we bought them at.

And then can you, and maybe again, you touched upon it, it's been a crazy morning with 6 conference calls. The capital availability before you would have to go back to the equity markets for acquisitions, where does that stand?

So at the end of the quarter, we had $93.3 million in cash and then we had $14.5 million in availability on the credit facility. We also -- and that's availability that we'd be able to draw immediately. We also do have a few additional assets that we could pledge to the facility to borrow. So we are pretty well capitalized at this point and as we come upon acquisitions, we will evaluate for each acquisition as to the appropriate way to fund it.

Can you give us kind of a sense of the size of the pledgeable assets expansion of that acquisition capability? Is it $50 million? Is it $100 million? Is it $500 million?

Immediately at quarter end we had approximately $40 million that we could have pledged.

And then given the success that you've had so far year-to-date and your current outlook for the balance of this year, and what you have in your pipeline that you haven't disclosed, what is the level of potential acquisition kind of upside from here that we might be able to see, and a range is fine, for the second half of this year and let's say maybe the first half of 2019? Is it the potential to add another $50 million, $100 million, $200 million to what we on this side of the table see at the moment?

Well, as you know and we've demonstrated, we have a very robust pipeline and we're always looking at deals. And we constantly look to enhance the diversity of our asset base by continuously evaluating opportunities in different geographic regions. So we will continue to do what we've been doing.

And then lastly, given the discrepancy and the increasing discrepancy between interest rates in the U.S. and in Europe, and your ability to finance kind of on both continents, how do you think about matching up your debt in Europe versus the U.S. relative to your assets in each market?

So we're actually a little more heavily weighted towards Europe at this point. I believe it's roughly 60/40, Europe versus U.S. And obviously as you mentioned, there are much more favorable borrowing rates in Europe in both the pound and the euros, but we are also able to use the leverage in Europe as a net investment hedge so we're able to help us reduce our net equity exposure. So that's really another benefit for us, weighting a little more towards Europe as opposed to the U.S.

I mean somebody who was on the hedge fund side might think, well heck, just borrow everything in Europe at much lower rates and invest in industrial assets in the U.S. and you'll mint money. I mean how do you think about weighing the 2 so that you don't go too far to the extreme? And I'm not suggesting that you go one way or the other, I'm just curious how you think about that internally.

We try to keep everything well balanced. I mean we have a well balanced portfolio now and well balanced debt. And we try to maintain that in our thinking and our forward looking.

No, I'm not talking about the level of debt. I'm talking about the debt that you have in Europe at a much lower interest rate than you would have in the U.S.

Right. Well we also need to make sure that we manage our exposure in Europe because if there are any, say large swings in currency or any rates, then that could expose us to some potential risk in the future that we're just not comfortable with. So we also need to look at it from the risk perspective, rather than just a right now and what the specific rates are at this time.

And our next question comes from John Massocca from Ladenburg Thalmann.

Kind of building on that last question, but maybe a little bit more from the acquisition side. As we look out past your current portfolio, and even into 2019, I know the current year has been focused on the U.S., but could there be more of a mix of European acquisitions in the pipeline as we go kind of beyond the stuff you've kind of currently given us?

Absolutely. We continually are looking at deals in Europe, we're very selective now. We're building this portfolio slow and steady growth. And as we see opportunities in Europe we will execute on it. Right now we're finding a lot of opportunities in the U.S., as you can see.

Has pricing in Europe kind of come more in line with what would be kind of investable for you? And I know, has the mix kind of potentially shifted as well because demand for U.S. industrial assets has been so strong? So on like a comparative basis Europe might be more attractive?

Well, on a comparative basis, Europe is very expensive. I think there's this similar type of demand in Europe for these types of properties that we see here. And they're certainly not any cheaper than they are here. There's no great advantage in buying them there right now as the prices are quite high. But we continue to look and as we find opportunities, we will certainly execute on them.

And then has your potential talk of tariffs affected your investment parameters at all for industrial assets? Is it changing maybe what type of industrial assets you're focusing on?

We've invested in what we consider the safest countries, the strongest sovereign debt countries in Europe and the U.S. And the type of assets that we own we don't see as being terrorist targets, but obviously we're always aware of that and any measures to safeguard our properties would certainly be considered.

And then on the build-to-suit front, I mean how much of a spread are you seeing between build-to-suits and acquisitions? And how much more opportunity do you think there is for build-to-suit in the kind of future acquisition pipeline?

That's a great question. We don't build-to-suit. We buy buildings that are completed with a tenant in place and the lease is signed. So it's for us, if the building is built -- if it's built to suit or not, if it has a tenant and a good lease and an investment grade tenant, we certainly would be very -- considered very interested in buying it.

Would you ever consider moving into the build-to-suit space?

It's not really what we do. We are triple net lease, single tenant investment -- mostly investment grade and that's really what we look towards doing for now and in the future.

(Operator Instructions) At this time, I'm showing no further questions, so this concludes our question-and-answer session. I would now like to turn the conference back over to Jim Nelson, CEO, for any closing remarks.

Thank you, operator. And thank you both for the great questions. We are really pleased that you guys ask such interesting questions. I'm glad we could answer them. We want to thank you all for joining the call and we look forward to continuing to grow Global Net Lease in a slow and steady and safe manner. And we'll talk to you all next quarter. Thank you.

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