Global Net Lease Inc (GNL) 2023 Q1 法說會逐字稿

Good day, and welcome to the Global Net Lease First Quarter 2023 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded. I would now like to turn the conference over to Curtis Parker, Senior Vice President. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us for GNL's First Quarter 2023 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, 2022, filed on February 23, 2023, 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 measure is available in our earnings release and supplement, which are posted to our website. Please also refer to our earnings release for more 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, Curtis, and thank you to everyone for joining us on today's call. We had a strong start to the year, completing a large accretive acquisition and demonstrating continued strong renewal and expansion leasing activity as we continue to advance our differentiated international and domestic strategy.

We've maintained occupancy of 98% across the portfolio, and nearly 60% of our long-term leases are with investment-grade tenants based on annualized straight-line rent. Since the beginning of 2020, approximately 80% of GNL's acquisitions have been industrial or distribution assets, which comprise 55% of our portfolio at the end of the first quarter. 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.

In this rising interest rate environment, GNL continues to benefit from predominantly fixed rate debt, which minimizes the impact of rate increases and a sophisticated hedging program designed to minimize negative impact to our cash flow from foreign exchange instability and a stronger U.S. dollar. In the first quarter, our AFFO was $39.8 million or $0.38 per share, a decrease from the first quarter of 2022, but on a constant currency basis when we applied the average monthly currency rates from the first quarter 2022, first quarter revenues would have been up by $3.2 million to $97.5 million. Our AFFO was negatively impacted by the strengthening of the U.S. dollar relative to the euro and pound compared to the prior year. We think our unique global capabilities, strong balance sheet and best-in-class real estate assets continue to support GNL's positive performance.

In the first quarter, we leased over 675,000 square feet through 7 lease extensions at a positive 4.2% spread over the previous leases. These new leases, which were set to expire soon, now have a weighted average remaining lease term of 7 years. The year-to-date renewal and expansion leasing adds $39.6 million of new net straight-line rent over the new lease terms. As these leases were signed during the quarter, our first quarter results do not include the full impact of these renewals. Rather, we believe that the renewed leases for properties that the company owns in the U.S., U.K. and Germany and that are leased to investment-grade tenants, such as the U.S. government and Capgemini, will have a positive long-term impact on our portfolio. Thanks to our leasing efforts, our portfolio, only as 2% of leases expiring during the balance of this year with 73% of our leases not expiring until 2028 or later.

In January, we completed an over $75 million accretive acquisition of 8 properties leased to Boots UK Limited, a subsidiary of Walgreens. As we have discussed, although we are not focusing on retail assets, we were able to acquire these properties, which total over 323,000 square feet and have 11.5 years of lease term remaining at an extremely attractive 10.6% going-in cap rate. Walgreens is rated BBB and Baa2 from S&P and Moody's, respectively, and we are happy to have their credit in our portfolio at such a favorable cap rate. As always, we will continue to evaluate the acquisitions and dispositions that we believe maximize the value of our portfolio.

At quarter end, our $4.6 billion 317-property portfolio had a weighted average remaining lease term of 7.8 years. Geographically, 236 of our properties are located in the U.S. and Canada, representing 61% of annualized straight-line rent revenue. We own 81 properties in the U.K. and Western Europe, which generate 39% of annualized straight-line rent. Our portfolio is well diversified with 140 tenants in 52 industries, with no single industry representing more than 12% of the whole portfolio and no tenant exceeding 5% of the portfolio based on annual straight-line rent. Approximately 95% of our leases feature annual rental increases, which increased the cash rent that is due over time from these leases. Based on straight-line rent, approximately 60.5% of our leases feature fixed rate escalations, 27.1% have escalations that are based on the consumer price index, and 7% have escalations based on other measures.

At the end of the first quarter, our assets were composed of 55% industrial and distribution, 40% office and 5% retail, with 60% of annual straight-line rent coming from investment-grade or implied investment-grade tenants. Our differentiated investment strategy continues to deliver value, and we remain focused on growing our portfolio by acquiring highly dependable single-tenant industrial and distribution properties in North America and Europe. Our successful lease renewals speak to the mission-critical nature of the properties that we own, where the weighted average remaining lease term is nearly 8 years. We are well positioned for the future, and I look forward to building on our progress through 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 first quarter of 2023, we recorded revenue of $94.3 million with a net loss attributable to common stockholders of $6 million. FFO and AFFO for the first quarter was $31 million and $39.8 million, respectively, or $0.30 and $0.38 per share. On a constant currency basis, applying the average monthly currency rates from the first quarter of 2022, revenues in the first quarter of 2023 would have been up by $3.2 million year-over-year to $97.5 million.

Our AFFO was negatively impacted by the strengthening of the U.S. dollar relative to the euro and pound compared to the prior year. However, our comprehensive hedging program helped mitigate the negative impact of a strong dollar on our revenue. As always, a reconciliation of GAAP net income to non-GAAP measures can be found in our earnings release.

On the balance sheet, we ended the quarter with net debt of $2.4 billion at a weighted average interest rate of 4.4% and $119.2 million of cash and cash equivalents. Our net debt to trailing 12-month adjusted EBITDA ratio was 8.3x at the end of the quarter. The weighted average debt maturity at the end of the first quarter 2023 was 3.7 years. The components of our debt include $500 million in senior notes, $767.9 million on the multicurrency revolving credit facility and $1.3 billion of outstanding gross mortgage debt. This debt was approximately 57% 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 2.9x. As of March 31, 2023, liquidity was approximately $184.4 million. The company distributed $41.7 million in dividends to common shareholders in the quarter or $0.40 per share. Our net debt to enterprise value was 60.3% with an enterprise value of $4 billion based on the March 31, 2023 closing share price of $12.86 for common shares, $20.65 for Series A preferred shares and $20.92 for Series B preferred shares.

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

Thanks, Chris. The acquisitions and leasing we completed during the first quarter are great examples of how our team continues to execute on our acquisitions and asset management strategies, which we believe create value for our shareholders. Our best-in-class portfolio features long-term leases with investment-grade and other high-quality tenants, balanced asset classes and strong geographic and industry diversity.

With primarily fixed rate debt and comprehensive hedging strategies, we believe we are positioned to minimize the impact of ongoing interest rate and foreign exchange turbulence, allowing us to focus on creating value for shareholders. We look forward to continuing to create value in our portfolio through strategic acquisitions and dispositions through the rest of this year and working with our tenants to renew and expand their leases to meet our mutual goals.

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

(Operator Instructions) Today's first question comes from Bryan Maher with B. Riley FBR.

Maybe start off with a question for Chris. On the expense side, G&A was running a little bit hotter than we thought. Was there anything similar to what RTL reported this morning as far as seasonality goes that would have addressed that? And what do you think is kind of a good run rate here going forward? Is it kind of somewhere in the mid-4s for the balance of the year?

Sure, Bryan. So well, I guess to start off with the seasonality portion of the question. In the first quarter, typically, we do see potential increases due to finishing off the audit, some of the proxy costs and then completion of some of the tax work. So that's really what we were seeing in this first quarter. What I would say for the remainder of the year, stripping out the other litigation costs, we probably will end up seeing, on average, similar G&A to what we had last year.

Okay. But I'm assuming that litigation will be in there. Do you have any thoughts as to what that could be? And that will be in the G&A line, is that correct?

Correct, that will be in G&A line. I don't have an estimate for what the second quarter will be, but that's something where we'll make sure to keep breaking it out within our AFFO calculation. So you'll be able to see what those exact numbers are.

Okay. And then sticking with AFFO for a minute. I know that you guys do some hedging there. But net of hedging, what was your thought as it related to the AFFO per share impact for the quarter?

So the FX forwards, their impact for AFFO was about $1 million in the quarter.

Okay. And then maybe sticking with you, Chris, for a second. We noticed that the fixed rate component of the debt went from 70% to 67%. Is there anything going on there? Is that a conscious decision? Did something burn off that you didn't replace? Is it too expensive to replacing? What's the firm strategy there? It's a little towards the lower end at this point relative to most of the REITs we cover.

Sure. So what we're seeing there is as we've done some of these subsequent draws on the credit line, these draws -- for example, for the acquisition that we just had, those have not yet been fixed through swaps. We're currently evaluating adding on any potential swaps for these draws or once that could be coming up in the future related to refinancing. But that's not something that we've put in place yet.

Okay. And then last from me on the lease expirations coming up in 2024, which I think then mitigate a bit '25 through '27, and they're pretty easy then. What are the thoughts and ability to kind of get ahead of the 2024 lease expirations? And as far as you guys know, are there any known [s] that are material that we should know of?

Well, to answer the first part of that, we -- as you've seen, we're being very, very proactive on renewing and extending leases. So we will continue to do that. I think there's only 2% outstanding for 2023, and our guys are working on 2024, 2025 as we speak. So I think we will stay very proactive in lease renewals, and I think you'll see the results announced as we accomplish it. What was the other part of the question, Bryan, the last part?

Well, I think you pretty much addressed it all, Jim.

And our next question today comes from Michael Gorman with BTIG.

Maybe just continuing on that. Can you just walk us through what the remaining leases this year and next year, how they break down in terms of geography and kind of product type for the balance? And then maybe are there any 2024 expirations that also line up with any of the 2024 debt maturities?

Chris, do you have a breakout of that? I don't, in front of me.

So I don't have all the specific names, but I do know that the lease maturities are split between both the U.S. and Europe. What I can say is also that we're not aware of any material vacancies or anything that really lines up with the debt maturing in terms of -- from a vacancy perspective.

And as you probably saw, we did a lease renewal for the really large ING office headquarters in Holland. So we are getting well ahead of renewals in Europe as we move along.

Got it. Got it. That's helpful. And then maybe just big picture, if we could step back for a minute, Jim. I think you laid out a lot of the positive points on the thesis and the portfolio for GNL. But kind of before the recent market volatility, you put about $2 billion to work over the past, call it, 5 years or so. But we've seen kind of a bit of a degradation in the AFFO run rate, FFO run rate. Can you just kind of walk through what the plan is or what your thoughts are strategically to get the FFO moving in the right direction as we move forward here, whether it's on the capital structure side of the equation, whether it's on additional acquisitions? Kind of what gets us moving back towards the mid-40s where we were back in 2021 and 2020?

I think it's a combination of all those factors. It's not any one individual factor that's going to make that work, but it's a combination of everything. It's strategic dispositions as we move along. It's repurposing that capital either to pay down debt or for other acquisitions. So it's a hard thing to put -- pin specifics on, but it's a combination of all those factors that will help us do that.

Okay. And then just thinking about the strategic dispositions, I mean how are you -- how do you approach that in terms of thinking about what types of assets would qualify? I mean if I just look at your weighted average cost of debt, like I would imagine the debt paydown would actually be dilutive at this point, right?

Well, at this point, yes. Again, it depends on the asset. And for example, we sold a very large asset in Germany a few years ago because we knew that they were moving out. It was the largest asset in the city that it was in. It was the largest office building. It would have been almost impossible to find a single tenant big enough to take it. To make it a multi-tenant building was extremely expensive because it was built for the specific tenant. So before we even put it up for sale, we had 3 offers to sell it, and we sold it to somebody who funnily enough is turning it into a hotel. So when we do strategic dispositions, there's usually a lot of other reasons behind it, not looking to pay down debt, but more strategic reasons specific to the property. So -- and again, if we do sell things and we buy things, we're buying things at really good cap rates right now. So one would think that anything we would buy with the funds from a disposition would be very accretive going forward. So that's really how we look at it.

Okay. Great. And then maybe just one last one. Just as we think about the debt markets between your various geographies. Any kind of material differences there in your ability to access debt across your markets that may influence either kind of how you pursue refinancings or how you look at anything that may pop up in the acquisition pipeline that may cause you to prioritize certain geographies over others?

Well, we still have quite a lot of room on our credit facility. Anything that needs to be refinanced, let's say, Europe, for example, we look at the cost of mortgage debt versus the cost of debt on our credit facility. And obviously, we choose what's best for our shareholders. So I don't really see any jurisdiction restrictions right now. Interest rates are still lower in Europe than they are in the U.S., but you really have to take a look at the spread and see what really works and what's really the most accretive type of acquisitions currently.

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

So maybe kind of continuing on the line of question around debt. I mean is the plan still today to take some of the more near-term expirations and place them on the credit facility? Or is there a potential to refinance? And if you were going to refinance those assets with kind of longer maturities, what would be pricing today?

Well, I mean, we look at it weekly. We follow it as quickly -- as closely as possible to see what terms of financing would be best for the portfolio and for our shareholders. So in today's world, it's less expensive to put these properties, the European properties, in particular, on the credit facility. But as we move forward with this, we will definitely let the market know.

Okay. And then in terms of the in-place portfolio, anything notable or any notable changes from a credit watch list perspective or anything just kind of noteworthy on it from tenant credit side of things?

Not really. I mean as you know, we have a credit committee, a credit watch committee that watches the companies in our portfolio. And fortunately, for us, the variety of businesses that we're in and the tenants that we have, they're all doing well, and we don't have anyone on credit watch right now so -- which I look at as a very positive.

Okay. And then you touched on it a little bit but maybe a little more color potentially on some of the lease renewals that occurred in the quarter. What about those assets specifically kind of allowed you to get those bumps in rent?

Well, timing-wise, there were a number of different types of properties. As we've talked about before, we're very proactive with lease renewals. In Europe, we sometimes go out 3 or 4 years in advance of a lease expiring and do renewals in the U.S. It's usually a little shorter period. GSA, for example, usually doesn't want to talk to you at least until the last year before they expire, and sometimes even a few months before they expire. So our guys are very, very proactive and constantly working with all of our tenants discussing their needs and renewal potentials. And at the same time, as we said before, a number of our tenants are looking to expand, so we work with them on helping them to expand the properties also.

Okay. And then Jim, just because you're on the Board, I mean, what's the thought process around the dividend today? It was just -- notably, the dividend payout was lower than AFFO. I know there's some seasonality stuff that's talked about on the G&A side and some moving pieces on currency, but just kind of any thoughts there would be helpful.

Well, our Board looks at the dividend every quarter. They've made no indication at all to us that they want to change it. We still have the ability to pay it with very little stress. And we look at the situation to continue to be positive with our ability to pay the current dividend.

And our next question today comes from Mitch Germain with JMP Group.

So with about, I don't know, $500 million or $600 million or so coming due over the next 2 years, it seems like you have to kind of keep your line availability open to potentially address that. Does that basically take you out of the acquisition markets at this point?

Not necessarily. We do have cash and availability beyond the refinancing of those properties. We've got plenty of room on the credit facility to -- if we wanted to, to refinance all of the European properties, and we will cross that bridge as necessary when they become due or before they come due. But I think we still have dry powder to do some acquisitions this year, assuming we find things that we like and that are substantially accretive as the Boots deal what feel was in the first quarter.

Got you. And if I look at that pipeline of deals today, is there any sort of trend? Is it -- obviously, you're investing in industrial, but is it more weighted toward Europe versus the U.S.? Anything that you could share?

No, we're still really agnostic as to location. It's really the quality of the tenants, the quality of the lease, the property, all the basic real estate factors that go into buying a property. And then, of course, how accretive it is when we buy it. So it really hasn't changed much. We like having the ability to go where prices are the best and the deals are the best. And I think that's one of the benefits of our diversification. So we will just continue doing what we've been doing. And there are good properties out there. We look at a lot. We're being very selective right now for the obvious reasons. But yes, we'll just continue doing what we've been doing well.

Got you. And last one from me. I believe you had a vacant property in Europe that was being marketed for sale or maybe under contract. Any update on that?

Yes, I think it was a property in Northern California. Wasn't it, Chris?

Yes, correct. And that we do have under contract, and we anticipate selling that hopefully during the second quarter.

(Operator Instructions) Our next question today comes from Todd Thomas with KeyBanc Capital Markets.

I just wanted to follow up first on the investment pipeline. Jim, it did sound like last quarter, you were seeing some better opportunities. And outside of what was previously announced, there wasn't a lot to discuss here more recently. So I was just curious if you could just speak to the pipeline today and discuss what you're sort of seeing there in terms of the appetite and product that you're seeing on the market for that.

That's a great question. Thank you. We still have a very robust pipeline. We look at a lot of deals. One thing that we've seen and a lot of our peers are seeing is cap rates finally are really starting to move in the right direction to make these acquisitions more accretive. So we're still sort of holding on, keeping our powder dry looking for the best ones that we see, and we're not in a big hurry to close deals. We're not going to chase deals just to buy things. But the pipeline is good. It's continually getting better as prices -- as cap rates are rising to meet sort of the demand by buyers. But we still have a very robust pipeline. As I said, this is a time, I think, to be careful and to really keep dry powder because the opportunities like Boots don't come along very often, like the Boots acquisition we did in the first quarter. But if we see more like that, we certainly have the ability to execute on them.

Should we expect to see the company more active during the year? Or do you think it's more of a 2024 from a timing standpoint, where we start to see activity and investment activity pick up again?

Well, as you know, we don't give guidance. But what I would say was I don't think we'll be at the level we were at in '19, '20 and '21.

Okay. And then, Chris, just back to the balance sheet, some discussion around the maturities and sources and uses to some extent. But can you walk through plans specifically around how you're thinking about handling the December '23 maturity. I understand the strategy, but you have today about $120 million of availability on the revolver with the $250 million maturity in December of this year. I believe you have some flexibility to expand the facility, but can you just walk us through the sources and uses over the next 12 months?

Sure. So what I would say in terms of the 2023 maturities, for now in the short term, the plan is to refinance them by pulling on to the credit facility. We do have plenty of room on the facility to add those properties. In the meantime, we'll obviously keep monitoring the markets and see if there are other opportunities for financing. I mean that is something in the past that we have done. But I mean, for now, we definitely plan on pulling them on to the credit facility.

And remember, the facility is about $1.5 billion. So the more we put on the facility, the more we can put on the facility.

Okay. Right. That's what I was going to follow up with. So how much additional capacity do you have today with the facility to the extent that you add additional collateral?

So the total line right now before it potentially could expand is about $1.5 billion. We have about half of that drawn at this point. So there still is a significant amount, over $700 million, that we're able to draw on the line.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Jim Nelson for any closing remarks.

Yes, I want to thank everybody for calling in today. We really appreciate your attendance and very good questions that were asked, and we hope we answered all of the questions that anyone in the audience may have. So thank you very much, and thank you, operator. This will be the end of the call. Thank you.

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