Global Net Lease Inc (GNL) 2021 Q2 法說會逐字稿

Good afternoon, and welcome to Global Net Lease Second Quarter 2021 Earnings Call. (Operator Instructions)

Please note, this conference 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 afternoon, everyone, and thank you for joining us for GNL's Second Quarter 2021 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, GNL's Chief Executive Officer; and Chris Masterson, GNL's Chief Financial Officer.

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 Form 10-K for the year ended December 31, 2020, filed on February 26, 2021, 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 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 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 measures is available in our earnings release and supplement, which are posted to our website at www.globalnetlease.com. Please also refer to our earnings release for more detailed information about what we consider to be implied investment-grade tenants, a term we will use throughout today's call.

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

Thank you, Louisa, and thanks again to everyone for joining us on today's call. I am pleased to report that GNL had an excellent quarter, highlighted by cash NOI growth of 21.1% to $85.5 million. AFFO of $0.44 per share and the ongoing construction of a robust forward acquisition pipeline, including the acquisition of the McLaren Group's headquarters in April that we discussed on last quarter's call. Our year-to-date closed and forward pipeline acquisitions exceeds $380 million of contract purchase price at a weighted average cap rate of 9.7% and a weighted average remaining lease term was 16.9 years.

The acquisitions consist of 10 properties, 6 of which are located in the U.S. and total over 1.3 million square feet. Since closing on the McLaren headquarters, early in the quarter McLaren has sought and obtained a B- credit rating from Fitch, effective upon the closing of McLaren's recent senior secured notes offering. The sale-leaseback transaction that we completed was the catalyst from McLaren to reconstitute their balance sheet and issue senior secured notes. You may recall that the attainment of a credit rating of B- or higher was one of the 2 conditions for a potential rent reset with McLaren.

The other condition was that GNL refinanced the debt on the property within 3 years. The company is under no obligation to complete a refinancing of this loan and has no immediate plans to do so. Our forward acquisitions pipeline includes 2 industrial properties leased to Pilot Point Steel and a 90,000 square foot learning center leased to Walmart in Bentonville, Arkansas that we anticipate closing later this year.

Our team is also evaluating strategic disposition opportunities and searching for additional acquisition targets that meet our stringent investment requirements. We continue to have strong leasing success. And to that list, we can add our FedEx facility in Bohemia, New York, where we have executed a nonbinding LOI to extend their 158,000 square foot lease for 5 years. We have very minimal lease expirations in the next 2 years and have actually reduced the percent of rent expiring through the end of 2023 by 3% since this time last year.

I am very pleased with the stability in our portfolio and the way we have been able to reduce our exposure to potential lease expirations, thanks to the mission-critical nature of many of our properties and our strong acquisitions underwriting. The vast majority of our leases don't expire until after the end of 2025. Our $4.6 billion, 311 property portfolio is nearly fully occupied at 99.7% leased, with a weighted average remaining lease term of 8.5 years at the end of the quarter.

Geographically, 239 of our properties are in the U.S. and Canada and 72 are in the U.K. and Western Europe, representing 60% and 40% of annual straight-line rent revenue, respectively. Our portfolio is well diversified with 135 tenants and 48 industries with no single industry representing more than 12% of the whole portfolio based on annualized straight-line rent. We also continue to increase the concentration of industrial properties in our portfolio. At the end of the second quarter, our assets were 52% industrial and distribution, 43% office and 5% retail compared to 47% industrial and distribution, 48% office and 5% retail a year ago.

Contributing to our success is our focus on tenant credit, industrial acquisitions and retail dispositions over the last several years. Across the portfolio, over 64% of annualized straight-line rent comes from investment-grade or implied investment-grade tenants. Finally, GNL's performance has, in many measures, returned to or exceeded metrics we reported before the pandemic. Superior execution by our team and the strength of our portfolio contributed to continuing growth in adjusted EBITDA, cash NOI and AFFO. Portfolio occupancy has ticked up to 99.7%, as has the percentage of our leases expiring after 2025, which is almost 70%. Exposure to industrial and distribution assets has also increased over 5%, while we collected all of the original cash rent that was payable for the third quarter in a row, underscoring the quality and resilience of our existing portfolio. Our historic emphasis on credit quality, underwriting, asset selection and due diligence have all helped shape a portfolio that continues to perform well.

GNL is well positioned to deliver a strong second half of 2021 and continue to grow through accretive acquisitions and through strategic dispositions. Our strong balance sheet and mature capital structure helped to keep financing costs low, and our hedging program protects our nondollar denominated cash flows from exchange rate risk. With that, I'll turn the call over to Chris to walk through the operating results in more detail before I follow-up with some closing remarks. Chris?

Thanks, Jim. For the second quarter of 2021, we recorded adjusted EBITDA of $73.2 million, up from $61 million in the second quarter of 2020. We also reported a 22.8% increase in revenue to $99.6 million from $81.1 million with net loss attributable to common stockholders of $2.4 million. FFO and AFFO for the second quarter were $44 million and $42.8 million, respectively, or $0.46 and $0.44 per share compared to $0.39 and $0.44 per share in the second quarter of 2020.

As always, a reconciliation of GAAP net income to the non-GAAP measures can be found in our earnings release. On the balance sheet, we ended the quarter with net debt of $2.3 billion at a weighted average interest rate of 3.4%. Our net debt to adjusted EBITDA ratio was 7.8x at the end of the quarter. The weighted average debt maturity at the end of the second quarter 2021 was 4.7 years. The components of our debt include $500 million in senior notes, $167.9 million on the multicurrency revolving credit facility, $293.5 million on the term loan and $1.5 billion of outstanding gross mortgage debt. This debt was approximately 92% fixed rate, which is inclusive of floating rate debt with in-place interest rate swaps.

The company has a well cushioned interest coverage ratio of 3.4x. As of June 30, 2021, liquidity was approximately $268.5 million. The company distributed $38.1 million in common dividends to shareholders in the quarter or $0.40 per share. Our net debt to enterprise value was 51.4%, with an enterprise value of $4.5 billion based on the June 30, 2021, closing share price of $18.50 for common shares, $26.79 for Series A preferred shares and $27.50 for Series B preferred shares.

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

Thank you, Chris. We had a very good second quarter, reflecting the impact of the acquisitions we have made year-to-date. I'm proud of the growth we reported in AFFO, adjusted EBITDA and cash NOI in the second quarter and our continued collection of all the cash rent payable across the portfolio. In the second half of the year, we will continue to evaluate opportunities to enhance our portfolio through accretive acquisitions and select dispositions as well as capitalize on historically low interest rates and our extensive capital markets experience to further strengthen our balance sheet. We have had an exciting and encouraging quarter, and I look forward to keeping this momentum going.

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

(Operator Instructions)

Our first question is from Bryan Maher with B. Riley Securities.

You made a comment in your prepared comments about evaluating positions. Without getting specific, can you give us an idea of kind of the asset type and/or geography that would kind of rise to the top of that list?

Well, there's only a couple that we're looking at right now. And Chris, do you have any color on that?

Sure. So in terms of the properties that we're looking to dispose, one of them is the vacant property that we've had for the last few years and evaluating the opportunities there, a sale at this point, seems like the best option. And then in terms of just the overall level, there are a couple of office properties that we are looking at, none of them are material in size, though.

And Bryan, if you remember, I've said this several times, we are opportunistic sellers of retail. So if we do see any good opportunities to sell our retail, we will. As you know, we look at reducing our retail exposure over the long term.

Great. And then on the AFIN call earlier today, Michael, while I was talking about potentially pursuing at least a rating, if not an investment-grade rating. And I think you guys are BB+ by S&P. Do you guys give that any thought, what would be the benefits for you? And what do you think you need to do to get that if you were to pursue it?

Well, we certainly have taken a good look at that. I mean, as you remember, the bond offering, we did in last December, was rated by S&P at BBB-. And we are working towards an investment-grade rating over time.

And I don't know, maybe for Chris. You guys already borrow at substantially low rates. Do you see any lower interest rate benefit from doing that? Or would you guys be interested in borrowing on these rates?

So there definitely would be benefits of being investment-grade from a borrowing percentage. First, the rates do come down on our credit facility, if we are investment-grade by 2 rating agencies. And then obviously, as we tap the unsecured market, which we plan to do in the future, the rates will obviously be better there for us.

And just last for me on that topic, not to be the dead horse, but if you guys decided to go that route, do you think that you would pursue that in some type of financial engineering way? Or would you be willing to wait to do it, over time, as EBITDA grows organically?

I think it makes more sense to do it over time. We've been working towards it. A lot of the metrics have improved over time. The rating agencies really like our portfolio. They like the strength of our properties and our tenants. So there are a few other things that we need to accomplish, but they'll be accomplished over time.

Our next question is from Craig Mailman with KeyBanc Capital Markets.

Maybe for Chris, just to start out. The $5.2 million, the reimbursement of financing costs from McLaren, does that amortize back into AFFO over any certain period of time? Or how should we think about that? Because it seemed like a bit of a wash from an AFFO perspective this quarter?

So that will not amortize back into AFFO in the future. This is like just a case where the accounting for the revenue is just different than the expense portion. So they don't naturally net out. So what you'll see is just here, there's the onetime backout of that amount, and you won't see that backed out or any reference to it in future periods.

But there'll still be -- the benefit will still be a topline going forward?

It will still show onetime.

The revenue for the remainder of this year, onetime. Okay. Okay. And then just, Jim, looking at what you guys have under contract for kind of the balance of the year, it's skewing a little bit more office. Is that just the nature of kind of what you guys are seeing on the opportunity set and the pricing that's going on in industrial, that office may look a little bit better here for the near term?

Well, I -- again, I think it's a matter of opportunities more than anything else. Our focus is primarily on industrial and distribution. But when we see like this Walmart learning center, I mean, Walmart is a fantastic tenant. It's an excellent property that we got at a very good price. So it makes sense to buy it. And the same thing with Trafalgar Court, which is in Guernsey, the island of Guernsey. And it's a fantastic building. It has Northern Trust and Aztec Group, which is a huge financial service company as tenants.

And it was just -- it was compelling to buy it. It was a very, very good price. So -- and a great property with good leases in place. So it made a lot of sense to do that. But we are still focused on industrial distribution, and we will maintain that focus going forward.

Okay. And you guys hit the ATM a little bit in the quarter, I think, $51 million raised. Do you guys feel like you have enough capital here? Or how much runway do you feel like the capital you have and liquidity you have gives you? And would you kind of take a step back here and maybe wait until some of the benefit of those acquisitions roll through and maybe positively impact the share price before coming back?

Well, we -- the ATM has been really effective for us, as you know. I mean it's a great way to raise capital. It's a low-cost compared to some other ways to do it. And it's very efficient because you can raise capital sort of when you need it, assuming the ATMs are in demand at any given time. So we continue to look at our growth, what we need to grow, what we need to buy these properties, and we will probably use the ATM as necessary going forward.

(Operator Instructions)

And our final question is going to come from James Villard with Ladenburg Thalmann.

Yes, I guess most of my questions have been answered, but can you give us some more color on the opportunities you're seeing in the investment-grade office space? And kind of how the cap rates have kind of trended as there's kind of this delay of return to work.

Well, that's a really interesting question. We've seen, on the industrial distribution side, a little bit of compression in cap rates. But remember, a lot of our acquisitions are relationship driven. So we have a very strong pipeline of relationship-driven properties that we look at to buy. So we're not really chasing after deals. We're not really chasing after low cap rate deals. I mean, we do have a very, very, very serious underwriting metrics that we use. So we don't deviate from that very much unless there's something compelling about the property. But as you can see, there's a couple of office properties in the pipeline, right now, that will close in the next quarter, either this quarter or early Q4.

And they were very compelling properties. As I said earlier, the Walmart learning center was a great property, Trafalgar Court, our asset manager in London went to see the building. He says it's the nicest building on Guernsey, and we got it at a very good -- very, very good terms, price and terms. So we're going to continue doing what we've been doing for the last 4 years. We do have a focus on industrial distribution. You will see a lot more of that than you'll see office. But when we see something compelling in the office sector, we -- and it's priced right, we will close on it.

Are you seeing, I guess, better still somewhat scared to bid, I guess, bid down the cap rate, kind of where we are in the pandemic?

You're talking about office still?

Yes. Still on office.

I've said this on previous calls, we're in a very unique position with the office properties that we own. We don't have office properties in the major metropolitan areas. So a lot of our tenants, they're not using public transportation to commute to work. And they're in suburbs or second tier cities. So it's a very different situation than in the major metropolitan areas.

So we're in a much -- and if you look back at rent collection, we've collected, even during the early year of the pandemic, we collected roughly 99% of all our cash rents. So we're in a very good position with the office properties that we have. And our tenants, they pay their rent, they're happy, and they're going back to work at different points of time, but they're usually headquarter building or something that's very important to the tenant. So we're in a very comfortable position with the office properties that we own and what we're looking at to buy.

We have reached the end of our question-and-answer session. I would like to transfer the conference back over to James for closing remarks.

Yes, I just want to thank everybody for listening in today. Global Net Lease continues on its path of accretive growth, and we're very happy with our results, and we look forward to talking to you next quarter. Thank you all very much. Bye-bye.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.