Global Net Lease Inc (GNL) 2019 Q3 法說會逐字稿

Good morning and welcome to the Global Net Lease Third Quarter Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded. I would now like to turn the conference over to Louisa Quarto, Executive Vice President. Please go ahead, ma'am.

Thank you, operator. Good morning, everyone, and thank you for joining us for GNL's Third Quarter 2019 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 Jim Nelson, Chief Executive Officer; and Chris Masterson, Chief Financial Officer.

The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. We refer all of you to our SEC filings, including the annual report on Form 10-K for the year ended December 31, 2018, filed on February 28, 2019, and all other filings with the SEC after that date for a more detailed discussion of the risk factors that could cause these differences.

Any forward-looking statements or portfolio information provided during this conference call are only made as of the date of the call. As stated in our SEC filings, GNL disclaims any intent or obligation to update or revise these forward-looking statements or portfolio information, except as required by law.

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 GAAP net income to the non-GAAP measures can be found in our earnings release, supplement and Form 10-Q, all of which are posted to our website at www.globalnetlease.com.

I'll now turn the call over to our CEO, Jim Nelson.

Thanks, Louisa, and good morning, everyone. Thank you all for joining us on today's call and a special welcome to D.A. Davidson and Aegis Capital, who initiated coverage of GNL last month, increasing our coverage to 5 analysts.

We are pleased to report another quarter of year-over-year increases in rental revenue, cash NOI, adjusted EBITDA and AFFO. We had an extremely active quarter, including $102 million of primarily industrial and office acquisitions, which combined with another significant retail disposition progressed our strategic goals to increase our portfolio allocation to industrial properties and decrease our retail exposure.

We saw a year-over-year decrease in our net debt-to-EBITDA ratio. And we also signed an agreement with a Fortune top 150 tenant to buy a domestic and international portfolio of properties for a total of approximately $182 million before the end of the year. In total, we have $373 million of acquisitions in our pipeline, which brings our total pipeline plus year-to-date acquisitions to $697 million.

Finally, we improved our financial flexibility and ability to execute on acquisition opportunities as we expanded our credit facility to $1.2 billion and entered into a new loan at favorable interest rates that helped extend our weighted average debt maturity and will help fuel our continued growth.

Total revenue for the third quarter was $77.9 million, up 8.4% from $71.9 million in the prior year quarter. AFFO also increased to $40.2 million from $39.6 million in the third quarter of 2018 on the strength of our recent acquisitions. On a per share basis, AFFO was $0.47 per share compared to $0.57 per share during the same quarter last year due to a large termination fee received in the third quarter of last year and also the increased shares outstanding compared to last year, which were offered in order to fund our acquisition pipeline.

Cash NOI for the quarter was $68.6 million compared to $65.8 million in the same quarter 2018. EBITDA was $58.7 million in this quarter compared to $48.5 million in the third quarter 2018.

Overall, our 264 property portfolio is nearly fully occupied at 99.6% leased. 196 properties are located in the U.S. and 68 are in the U.K. and Western Europe, representing 59% and 41% of annualized rental revenue, respectively, roughly in line with our target to reach a geographic distribution of 60% U.S., 40% Europe. Our investment-grade or implied investment-grade tenants now make up over 71% of the portfolio. Please refer to our earnings release for more information about what we consider to be implied investment-grade tenants. Our property mix is currently 52% Office, 43% Industrial and Distribution and 5% Retail. The portfolio has a weighted average remaining lease term of 8 years with no near-term expirations.

During the quarter, we acquired 9 net lease assets comprising of about 921,000 square feet for a contract sales price of approximately $102 million. These assets are leased at an attractive going-in cap rate of 6.64% and a weighted average cap rate of 7.68%, with a weighted average remaining lease term of 17.1 years. These acquisitions included 7 industrial properties, an office building and a lab, which are all located in the United States. We are very pleased to be acquiring long-term leases at favorable cap rates while improving the mix of assets in our portfolio. I'd like to take a minute to review some of the highlights from these acquisitions.

The office and lab properties we acquired during the quarter are part of a 3 pack of properties leased to VIAVI Solutions in California. The tenant has an implied Baa2 credit rating, and the lease continues for 13 years. These assets total approximately 137,000 square feet and were acquired for a total contract sales price of $25.7 million. The industrial properties we acquired are leased to C.F. Sauer and SWECO and are located in Kentucky, South Carolina, California and Florida. C.F. Sauer is a cooking products business that makes extracts and other food products. SWECO is the world leader in particle separation and size reduction solutions. These industrial assets total approximately 790,000 square feet and were acquired for a total contract sales price of $76.3 million.

We continue to take advantage of available opportunities to recycle capital and optimize our mix of asset types and credits. During the third quarter, we continued to act on this type of opportunity, selling a total of 33 properties, including a portfolio of 32 Family Dollar retail stores, which were sold for a gain at 7.25% cap rate, reducing GNL's retail concentration. Last quarter, we sold 62 Family Dollar stores.

As a part of the company's active tenant evaluation and disciplined asset management strategy, we determined that eliminating our current exposure to Family Dollar would be the best for the portfolio. Upon evaluation, we were no longer comfortable with Family Dollar's underperforming financials. More broadly, retail assets are not our focus, and we felt this disposition was appropriate and increases the quality of our portfolio. The balance of the retail assets in our portfolio are performing, and we do not expect to dispose of these assets in the near term. We will continue to evaluate disposition going forward, as we do for all of our assets and tenants.

As we continue to grow and refine our asset mix, we are focused on acquiring primarily industrial, distribution and some select office properties. At the end of the quarter, we agreed to terms on a significant U.S. and European sale-leaseback transaction with a Fortune top 150 investment-grade tenant. This $182 million portfolio was a great fit for us and demonstrates the strength and expertise of our global capabilities to source, execute on transactions such as this. Inclusive of this portfolio, we have a total of $373 million of attractive assets, which we anticipate closing in the fourth quarter, which will bring our total 2019 acquisitions to approximately $697 million at a 6.88% going-in cap rate, a 7.76% average cap rate and 14 years of average lease duration.

Recently, I along with several other members of our management team were able to attend EXPO REAL conference in Munich. This is the largest real estate conference in Europe and brings together over 24,000 real estate professionals, including owners, brokers and lenders and service providers. This was a great opportunity to efficiently build on our existing relationships and make new connections with vendors from all over Europe.

With that, I'll turn the call over to Chris to walk through the operating results and our balance sheet in more detail. And then I will follow up with some closing remarks. Chris?

Thanks, Jim. Third quarter revenue was $77.9 million, up 2.4% over the second quarter 2019 figure. And FFO was $37.9 million, up 3% over the second quarter. Moving on, core FFO grew 0.7% over the second quarter to $38.6 million. And AFFO was $40.2 million, up 0.4% over the prior quarter. AFFO per share was flat quarter-over-quarter due to an increase in the weighted average number of shares outstanding. During the quarter, we paid common stock dividends of $45 million.

On our balance sheet, we ended the third quarter with net debt, which is debt less cash and cash equivalents, of $1.6 billion at a weighted average interest rate of 3% per annum. Our weighted average debt maturity has lengthened to 5.7 years at the end of the third quarter, an improvement from 3.8 years at the close of 2018 third quarter. This includes $122.8 million of debt that matures in 2019. The components of our debt include $101.4 million on the multicurrency revolving credit facility, $392.5 million on the term loan and $1.4 billion of outstanding gross mortgage debt. This debt was approximately 93% fixed rate, which is inclusive of the floating rate debt with in-place interest rate swaps, an improvement over the quarter ended June 30, 2019, where 84.6% was fixed.

Our net debt-to-annualized adjusted EBITDA improved to 6.7x from 6.9x in the third quarter of 2018, with a strong interest coverage ratio of 4.1x. As of September 30, 2019, liquidity was approximately $407 million, which is comprised of $306 million of cash on hand and $101 million of availability under our revolving credit facility.

GNL's net debt-to-enterprise value was 45%, with an enterprise value of $3.5 billion based on September 30, 2019, closing share price of $19.50 for common shares and $25.60 for Series A preferred shares.

During the third quarter, we entered into a CMBS loan to finance 12 properties located in the United States. The 10-year $204 million loan carries a fixed interest rate of 3.65%. We also utilized our ATM programs during the third quarter, raising a gross total of $128 million. Approximately $110 million of this was common equity. The remaining $18 million was in our Series A preferred stock. Finally, with respect to dividend, we paid dividends equating to $0.5325 per common share for the quarter.

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

Thanks, Chris. We had an excellent quarter from a real estate perspective, and we believe we have put the pieces in place to finish the year very strong. The portfolio and the rental income generated by the portfolio continue to grow. We have a strong balance sheet that allows us flexibility to close on our $373 million of pipeline acquisitions of long-term lease, primarily industrial assets.

Selling the Family Dollar portfolio illustrates our disciplined asset management strategy and provides the opportunity to use the net proceeds to improve our asset mix. We anticipate growth in the portfolio, as the proceeds from our second and third quarter dispositions are fully redeployed, and we'll continue to be a net acquirer of high-quality, long-term net leased office, distribution and industrial assets.

Finally, as we have discussed, our ability to negotiate favorable financings in local markets and at the corporate level have extended our average debt maturity.

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

Thank you. Before we go to the question-and-answer session, I'd like to turn the call to Chris Masterson for a brief announcement.

Thank you, operator, and good morning, everyone. This is Chris Masterson, Chief Financial Officer of Global Net Lease. You just listened to our scripted remarks that we recorded a few days ago.

Before we begin Q&A, I want to let you know that Jim is taking care of a personal health issue and is unable to join us for today's Q&A. Jim expects to return to the office soon, and we wish him a speedy recovery.

Joining me today for the Q&A is Brian Mansouri, SVP of Acquisitions. Operator, we're ready for the first question.

(Operator Instructions) Today's first question comes from Ben Zucker of Aegis Capital.

Congratulations on posting some solid improvements in your core operating fundamentals. Real quickly, that impairment charge of $6.5 million, $6.4 million, what asset or assets was that related to?

So the property Achmea in the Netherlands, we actually sold it during the fourth quarter. And that was a property, they were still paying rent. The lease extended for 4 years. But they were going to be moving out, and we thought that the best option for us was to sell the property now and recycle the capital.

Okay. Great. And while we're talking about the Netherlands, could you just quickly give us kind of your view of the total market opportunity in the U.S. versus abroad currently? I think that your acquisitions over the first 6 months of the year had a strong, if not exclusive, bias to the U.S. But it looks like some of your 3Q and subsequent activity has picked up overseas a little bit. So just kind of wondering how you're viewing the comparative landscape right now between the 2?

Sure. So -- I mean, obviously, we're still looking at both the U.S. and Europe. And as you can see, what we found so far has been primarily based in the U.S., where we found the better deals. But there are some European acquisitions that are popping up on the radar, and it's something that we're going to keep monitoring. But as you can see, we have found some opportunities in Europe and outside the U.S.

Very helpful. And so Chris, you guys are really flushed with capital at the moment, and I'm trying to get a sense of what kind of full deployment looks like for you guys. So how much cash as a percentage of total company equity do you guys generally look to hold for just kind of corporate liquidity purposes? Obviously, this value is pretty elevated at the end of the quarter, especially with the pace and volume of the ATM program you guys were utilizing. But I'm just trying to get a feel for how kind of -- how far we can stretch portfolio growth with you guys?

Sure. So -- I mean probably a simple way to look at it is when we acquire properties, we typically look to lever them at 50%. So if you're doing modeling purposes, I would say, to build that in.

From a cash perspective, like you mentioned, we obviously were elevated at quarter-end. A lot of it had to do with the timing of capital raise and then some sales. But I think probably the easiest way to look at a cash position would be maybe to go back to some previous quarters. And in general, we have been pretty consistent in that ballpark of about $100 million in cash on the balance sheet. So I think the historical is probably the best way to look at it right now.

That's helpful. And then real quickly, lastly, just a little bit of housekeeping. With the preferred stock sales, do you have any idea kind of is the pace of sales that we saw in 3Q, is that something that you would be extrapolating out as we're trying to think about how the preferred interest expense line item should be moving? Or is this something that's a little bit more intermittent than that?

Well, I'd say that's very hard to say. I mean when it comes to issuing equity, it's going to be difficult to necessarily project, and we're going to evaluate kind of as needed and as the market is there.

And our next question today comes from Mitch Germain of JMP Securities.

Chris, obviously, you've been pretty opportunistic in using the European markets for some funding. You've got about a 60-40 mix. Are you kind of tapped out? Or is that a market that is -- or do you have to add some additional assets to be able to use European debt going forward?

Well, from a European debt perspective, we do have the ability to draw on the credit facility in euros and pounds, but it's also something that we want to make sure that we don't go too far one direction in a currency if we don't have assets to match up with it. Right now, I mean, I think we're comfortable where we stand. But we do have opportunities there if we need to tap into them.

Got you. You talked about the Family Dollar sales reducing your exposure in retail, but you've still got about 5% retail and can potentially opportunistically use that retail to buy industrial. So I'm curious about your decision to conclude any sales in that segment for the time being?

Well, at this point, all of the tenants that we have in the retail space are performing. We're happy with them. We're going to obviously keep evaluating them. And if anything changes, then we may decide to make decisions, but right now, we're happy with what we have in the retail space.

Okay. And then just curious about the competitive landscape. Obviously, everybody wants industrial assets. I guess you have the ability to do a sale-leaseback deal that's a little bit unique in both U.S. and Europe. But I'm curious about your ability to source transactions? And how important are the local demographics in terms of your underwriting? Or are you really just talking -- looking more at credit lease term and other factors like that?

Well, I mean, honestly, we look at all of it. If any of the pieces are lacking or have problems, then typically, we probably wouldn't be able to close on it. So it's really -- we have to look at the full picture when we make an acquisition.

Got you. And then probably last question. It seems like from a funding perspective, with the cash on hand plus some debt, you're pretty good. What was the -- I might have missed it in your remarks, but I know that you raised equity. What was the average price on the last equity raise in the quarter?

I don't have the average price with me, but it's pretty consistent to where we raised it during the first quarter.

And our next question today comes from Bryan Maher of B. Riley FBR.

Yes. So kind of following up a little bit on the Europe. Nice to see you dipping your toe back in the market there. Are you seeing any movements in cap rates over there in any of the particular countries? And who are you sourcing acquisitions from? How are you being shown things to buy over there?

So actually, I'll pass that to Brian and he can give you a little more insight on that.

Sure. So as Chris mentioned, we're very active in evaluating opportunities overseas. I think the market, generally speaking, has been pretty consistent over the past few quarters. Obviously, capital is cheap, and that's driving cap rates, but everything has been pretty consistent as far as we've seen.

Okay. And here in the U.S., I mean, you've looked at and made some successful acquisitions in industrial, but I think probably everybody on this call knows that everybody seems to want industrial in the U.S. When it comes to the assets individually or in the small portfolios you've acquired, who are you bumping up against in the bidding process? And kind of how much are you underwriting relative to how much you're actually getting a deal done on?

A lot of what we're seeing in the market right now is coming from relationship-driven opportunities. So we're not butting heads with a lot of the big institutional competitors, which we think is great. We're sourcing our deals from long-standing brokers as well as developer relationships and also private equity sponsors on the sale-leaseback side.

(Operator Instructions) Today's next question comes from John Massocca of Ladenburg Thalmann.

So on the leverage side, you guys have kind of trended down in the last couple of quarters. I know some of that may be simply you raised some ATM in 3Q probably to prefund a pretty robust pipeline here for the rest of the year. But should we expect that to kind of stay at this level, maybe trend back up as you deploy the capital? Or just any kind of guidance on where you think leverage is going to trend here for the next 6 to 12 months would be helpful.

Well, what I would say here is that we're looking to be consistent. We did raise capital at the end of the quarter. Typically, from a net debt-to-EBITDA perspective, we were roughly about 7, and we're looking to remain consistent for now. Ultimately, in the long run, it's something we would like to bring down, but in the short term, we will be consistent.

Okay. So consistent with the current level, though, generally speaking?

Consistent with where we've been previously. This current level with the capital coming in at the end pulled it down a little bit.

Okay. And then do you have any update potentially on the timing for closing of the Germany office sales? Is that still a 2019 event or could that slip into 2020?

That's a 2019 event.

Okay. Perfect. And then more generally speaking, there was some office in both the pipeline that you closed this quarter. How much of that is kind of headquarters? Or is any of it more kind of, I guess, what people on the health care REIT side would call MOB or medical office kind of properties?

I'll pass it to Brian. He'll give you a little more detail.

Everything we're looking at in the office space is traditional office, either headquarter or administrative, so nothing that we're doing is medical office in any sense of the word. So yes, pretty consistent in terms of the types of office buildings that we're looking at.

And thank you, ladies and gentlemen. That concludes our question-and-answer session. I'd like to turn the conference back over to Chris Masterson for any closing remarks.

Okay. Well, thanks a lot for everyone for dialing in, and hopefully, we'll see some of you at NAREIT next week. Thanks. Goodbye.

Thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.