Global Net Lease Inc (GNL) 2022 Q2 法說會逐字稿

Greetings, and welcome to the Global Net Lease Second Quarter 2022 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Louisa Quarto, Executive Vice President. Thank you. You may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for GNL's Second Quarter 2022 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 this quarter's results are Jim Nelson, GNL's Chief Executive Officer; and Chris Masterson, GNL's 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 Form 10-K for the year ended December 31, 2021, filed on February 24, 2022, 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 the 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 measure 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?

Thanks, Louisa, and thank you to everyone for joining us on today's call. Our high-quality, mission-critical net lease portfolio continues to perform well with occupancy of 99% and complete cash rent collection for the seventh consecutive quarter. We are advancing our differentiated international and domestic strategy by increasing portfolio concentration in industrial and distribution assets, successfully extending and expanding leases and building a pipeline of accretive acquisitions.

Since the beginning of 2020, over 82% of GNL's acquisitions have been industrial and distribution assets, increasing GNL's ownership of this asset class to 55% of the portfolio. We believe our best-in-class portfolio is well positioned for meaningful capital appreciation and that our dividend provides shareholders a very compelling current yield. Early in the second quarter, we completed a recast of our corporate credit facility with a new $1.45 billion revolving credit facility that has a 4.5-year term, improved pricing that is 15 basis points lower than the facility it replaced, helping to ensure we can continue executing our growth strategy in the coming years. Importantly, 76% of our debt is fixed rate, providing meaningful certainty in a period of rising rates.

In the second quarter, AFFO grew by 5% year-over-year and 1.6% quarter-over-quarter to $45 million, with AFFO per share of $0.43. We paid dividends to common stockholders of $0.40 per share in the second quarter. The second quarter also continued to illustrate the value of our comprehensive hedging program, which minimized the impact of ongoing turbulence in the euro and the pound on GNL's results and permitted us to focus [on] creating value for shareholders in our portfolio. With this protection in place, we were insulated from currency fluctuations that would have decreased our AFFO by nearly $1.5 million. Our unique global capabilities, strong balance sheet and best-in-class real estate assets continue to support GNL's positive performance.

In the second quarter, our leasing momentum continued. Year-to-date, we have completed 8 lease renewals and 2 tenant expansion projects, totaling 2.6 million square feet. The leasing adds $102 million of net new straight-line rent over the new weighted average remaining lease term. Included in this leasing activity was a 10-year lease renewal with the GSA for a 28,000 square foot facility in Rapid City, South Dakota; and 2 lease renewals with FedEx for properties in New York and Texas that total over 325,000 square feet and that pay $29 million in annualized straight-line rent. Thanks to our leasing efforts, our portfolio only has 1% of leases expiring this year and almost 74% of our leases do not expire until 2027 or later.

We continued to engage with our tenants, building on the relationships we have established over the years in order to extend leases well in advance of their expirations whenever possible. At the quarter end, our $4.5 billion 311-property portfolio has a weighted average remaining lease term of 8.3 years. Geographically, 237 of our properties are in the U.S. and Canada and 74 are in the U.K. and Western Europe, representing 62% and 38% of annualized straight-line rent revenue, respectively. Our portfolio is well diversified with approximately 140 tenants in 50 industries with no single industry representing more than 12% of the whole portfolio based on annual straight-line rent.

Almost 95% of our leases feature annual rental increases, which increase the cash rent that is due over time from these leases. Based on straight-line rent, approximately 60.9% of lease escalators are fixed rate, 26.2% are based on the consumer price index and 7.5% are based on other measures. As we mentioned, we continue to expand the concentration of industrial properties in our portfolio. At the end of the second quarter, our assets were composed of 55% industrial and distribution, 42% office and 3% retail compared to 52% industrial and distribution, 43% office and 5% retail at the end of the second quarter 2021.

Contributing to our success is our focus on tenant credit, industrial acquisitions and noncore retail dispositions over the last several years. Across the portfolio, over 62% of annual straight-line rent comes from investment-grade or implied investment-grade tenants. In the second quarter, we completed the acquisition of 2 industrial and 1 office properties for a total purchase price of $33.3 million. The industrial properties are located in the U.S. and the office property is a strategically located building that is leased to the Scottish Ministers and an Aa3 credit. These properties were acquired at a weighted average cap rate of 7.7% and at 13.6 years of lease term remaining.

Our acquisition pipeline is comprised of approximately $71 million of triple-net industrial property. Combined with the properties we have already acquired, these properties total over $104 million of purchase price and have a weighted average cap rate of 8% with 18.5 years of lease term remaining. We sold 1 property in the U.K. during the second quarter and have agreed on terms to sell 2 additional properties that would bring total dispositions to over $50 million for the year. The value in our differentiated investment strategy is clear, and we remain focused on acquiring single-tenant industrial and distribution properties in North America and in Europe. We will continue to grow our portfolio by focusing on the highly dependable industrial and distribution asset class.

Our successful lease renewals and expansions speak to the mission-critical nature of the properties that we own, where over 62% of the rent is derived from investment-grade tenants and where the weighted average remaining lease term exceeds 8 years. We are well positioned for the future, and I look forward to building on our progress throughout the rest of the year.

With that, I'll turn the call over to Chris to walk through the financial results in more detail before I follow up with some closing remarks. Chris?

Thanks, Jim. For the second quarter of 2022, we recorded revenue of $95.2 million with a net loss attributable to common stockholders of $5.8 million. FFO and AFFO for the second quarter were $49.5 million and $45 million, respectively, or $0.48 and $0.43 per share. 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 3.5% and $111.2 million of cash and cash equivalents. Our net debt to trailing 12-month adjusted EBITDA ratio was 7.8x at the end of the quarter. The weighted average debt maturity at the end of the second quarter 2022 was 4.3 years. The components of our debt include $500 million in senior notes, $558.9 million on the multicurrency revolving credit facility and $1.4 billion of outstanding gross mortgage debt. This debt was approximately 76% of 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 3.5x.

As of June 30, 2022, liquidity was approximately $197 million. The company distributed $41.6 million in dividends to common shareholders in the quarter or $0.40 per share. Our net debt to enterprise value was 57% with an enterprise value of $4.1 billion based on the June 30, 2022 closing share price of $14.16 for common shares, $23.51 for Series A preferred shares and $23.57 for Series B preferred shares.

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

Thank you, Chris. I'm very pleased with our progress and accomplishments during the second quarter, including our earnings growth, acquisitions and leasing activity. The credit facility recast we advantageously completed secures our acquisition flexibility, and we are well positioned to continue to execute on our strategy and grow our best-in-class portfolio for years to come.

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

(Operator Instructions) Our first question comes from the line of Bryan Maher with B. Riley Securities.

I did miss, and maybe I don't know if Chris can elaborate on the hedging component of the European assets. I think that that's kind of where we were off in our revenues for the quarter. And is the hedging -- does that impact both the total revenues and the AFFO? Or are you hedging somewhere in between? If you could explain that a little bit better, that would be great.

Sure. So on the call, we had mentioned the $1.5 million of the positive hedging impact. That's the actual realized gains that we had on the FX forwards that settled during the quarter. That comes through the gains on derivatives line, and that does positively impact AFFO. So that really helps offset some of the decrease that we saw in revenue.

Okay. So we don't see it in revenue. We do see it on the AFFO line.

Correct. It does flow through AFFO.

Great. And then on the acquisition outlook, I'm sure, Jim, you see every day, the bid ask spread seems to widen a bit between the buyers and the sellers. Are you seeing anything in market dynamics that changes your acquisition outlook over the next 2 to 4 quarters?

That's the perfect question, Bryan. If you remember on our last call last quarter, I said we were being extremely careful in deploying funds right now because of the rising interest rate environment and the changing in cap rates, which usually occurs during rising interest rate environment. So what we've been seeing lately, and our deal flow is really, really picked up, is the bid ask of both -- basically, what we're looking at is a much better cap rate for our benefit and we're also looking at a much better annual increase in those rents. We're looking -- whereas before, maybe we were looking at 1%, 1.5% on an annual basis. Now we're looking at anywhere from 1.5% to 3.5%, which on a GAAP basis on the rent for the period of the lease really makes it much more accretive.

So I think our caution is starting to pay off. I think we're very optimistic about what the rest of the year will bring based on the deals that we're seeing and we're working on. So I think that should answer your question. I'm extremely encouraged by the rising in cap rates and the number of properties that we're actually seeing right now.

Yes. And then just lastly for me. On dispositions, I think that you said on your prepared comments that you sold one property in the U.K. and you had 2 more under agreement, and you mentioned a $50 million number. Is that for the one in the U.K.? Or is that for all 3? And what compelled it?

That's all of them together. Correct, Chris? And what it is is...

Yes.

It's properties that we're being very proactive on, which we've done before in the past. If you remember, we sold a large property in Germany a few years ago because we knew a tenant was going to be moving out and we had a bunch of unsolicited offers. It's pretty much the same thing here. We've had a number of offers on a property where we know the tenant is leaving in 2024. So it seemed like the appropriate time to sell it, which we're doing, and we will redeploy that capital into our continued focus on industrial and distribution properties.

Our next question comes from the line of James Allen Villard with Ladenburg Thalmann.

Just as a few follow-ups on your comments. Are you seeing any difference in the bid and the ask, I guess, versus U.S. -- I mean U.S. versus European assets?

Well, I mean, obviously, as I said, the U.S., the cap rates are rising nicely in our opinion. So we'll -- there are better -- there are much better deals out there at the current time. And looking ahead, I think we'll continue to see that. I think we may see distressed sellers, not necessarily distressed properties that -- we don't buy distressed properties. But there may be distressed sellers because of the rising interest rate environment. So we're prepared to take advantage of that.

In Europe, I haven't seen much change yet. But again, for the last year, 1.5 years, we've been seeing very good cap rates on the stuff we've been purchasing in Europe. So we believe that that will continue, and we will opportunistically buy in Europe as we find the right properties.

Yes. And just one more on that. I mean are you -- I guess, is the volatility in currency as well as in interest rates having any impact on your ability to close just in this year on any acquisitions?

Well, it hasn't as of yet. We haven't bought anything in Europe so far this year. Well, we did buy one property in the U.K., the Scottish Ministers property, but that wasn't a large property. But it hasn't affected us at all negatively and we don't expect it to. Rates in Europe are still extremely low and it makes certain acquisitions very attractive. So we will continue to follow up on potential European deals and close the best ones.

Yes. That's great color. And I guess just as we look to finishing the year, you gave some updated pipeline acquisition information. Is there any other deals that you have in front of you? I mean, do you think it's a rational expectation that you could close more than you have signed under LOI this year?

Well, as you know, we don't give guidance. But I can say that our deal flow is extremely robust right now. And you can look historically and I think get a better answer. But we historically have closed a lot of properties in the fourth quarter. We -- as I said earlier, we have a very, very strong deal flow right now. So we're very optimistic about this year.

(Operator Instructions) Our next question comes from the line of Mitch Germain with JMP Securities.

Your CPI-linked leases, do any of them have caps or are they pure CPI?

Chris, do you want to respond to that?

Sure. Some of them do have caps. Typically, if they do have a cap, it would be about 4%, but they do vary from lease to lease.

Great. Any pushback on lease structure for any of the acquisitions you're doing with regards to -- or even lease renewals that you're doing with regards to CPI, lease term? Anything that is evolving or changing these days?

Well, Mitch, I think it's important to note that, I mean, everybody is aware of the current rate of inflation. So what that does, it makes us a lot easier to negotiate a higher annual increase because everybody realizes that we're going to probably live with higher inflation at least for a few years. So it has actually -- as far as negotiating to buy things, it's actually been a positive for us.

Got you. Last question for me is what's the plan for the debt maturities?

Sure. So I guess to start, we only have about $40 million maturing this year. So...

I meant for next year. Sorry about that. Yes.

Right. So we're currently evaluating that next year. The big item that's coming up is the U.K. bulk loan, and we've been looking into a lot of different options for this. (inaudible) a definitive answer right now, but that's something we'll keep you updated on as we move closer to making a final decision.

The likelihood is it'll -- you'll continue to keep that debt in Europe? Or do you -- are you still evaluating exactly how you want to...

Well, the pound debt will remain in pounds, right, Chris, and the euro debt will remain in euros because that's the natural hedge. But as we look at -- as we get closer to these maturities, we're looking at all the different options we have, be it bonds, mortgage debt or our credit facility. I mean we have a lot of optionality. So we're currently exploring what will be the best way to refinance that debt at that point where we're ready to do it.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Nelson for any final comments.

Yes. Thank you, operator. I want to thank everybody for joining us on today's call. We had some really good questions, which I hope answered some of the questions that those of you listening have. And thank you again for your support of Global Net Lease. We get up every day and we work hard to continue to make this the great company that it is. So with that, operator, we can close the call. Thank you, everybody.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.