Global Net Lease [GNL] Conference call transcript for 2022 q2
2022-08-04 16:00:29
Fiscal: 2022 q2
Operator: Greetings and welcome to the Global Net Leaseâs Second Quarter 2022 Earnings Call. 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.
Louisa Quarto: 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 the 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 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?
Jim Nelson: 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 the 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 minimize 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 eight lease renewals and two tenant expansion projects totaling 2.6 million square feet. The leasing as $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 two lease renewal as with FedEx for properties in New York and Texas, that totaled over 325,000 square feet, and that paid $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 continue to engage with our tenants building on the relationships we have established over the years in order to extend leases well in advance of the explorations 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 UK and Western Europe, representing 62% and 38% of annualized straight line rent revenue respectively. Our portfolio is well diversified with approximately 140 tenants and 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 because our focus on tenant credit, industrial acquisitions and non-core 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 two industrial and one office properties for 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 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 totaled over $104 million of purchase price, and they have a weighted average cap rate of 8% with 18.5 years of lease term remaining. We sold one property in the UK during the second quarter, and have agreed on terms to sell two 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 eight 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?
Chris Masterson: Thanks, Jim. For the second quarter 2022 we recorded revenue of $95.2 million with a net loss attributable to common stockholders for $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 months adjusted EBITDA ratio was 7.8 times 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% fixed rate which is inclusive of floating rate debt was in place interest rate swaps. The company has a well cushion interest coverage ratio of 3.5 times. 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 Jun 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.
Jim Nelson: 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: Thank you. At this time, we'll be conducting a question and answer session. Our first question comes from the line of Bryan Maher with B. Riley Securities. Please proceed with your question.
Jim Nelson: Good morning Brian. How are you?
Bryan Maher: Good afternoon. Good. Thanks for all those comments. 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 impacts both the total revenues and the AFFO? Are you hedging somewhere in between? If you could explain that a little bit better that'd be great.
Chris Masterson: 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. That really helps offset some of the decrease that we saw in revenue.
Bryan Maher: Okay. So we don't see it in revenue, we do see it on the AFFO line?
Chris Masterson: Corrected. It does flow through AFFO.
Bryan Maher: Great, thanks. And then on the acquisition outlook. I'm sure Jim, you see every day the bid ask spread seems to widen the bid between the buyers and the sellers. Are you seeing anything in market dynamics that changes your acquisition outlook over the next two to four quarters?
Jim Nelson: That's the perfect question Brian. 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 rates environments. So what we've been seeing lately, and our deal flow is really, really picked up is the bid ask are 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're 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.
Bryan Maher: Yes, thanks for that. And then just lastly, for me on dispositions. I think that you said on your prepared comments that you sold one property in the UK, and you had two more under agreement and you mentioned the $50 million number. Is that for the one in the UK or is that for all three? And what can .
Jim Nelson: That's all of them together. Correct, Chris. And what it is -- this property 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, that which we're doing and we will redeploy that capital into our continued focus on industrial and distribution properties.
Bryan Maher: Perfect. Thank you very much.
Jim Nelson: Thank you, Brian.
Operator: Thank you. Our next question comes from line of James Villard with Ladenburg Thalmann. Please proceed with your question.
James Villard: Yes, just -- just one as a few follow ups on your comments. Are you seen any difference in the bid in the ask I guess versus USA, I mean, U.S. versus European assets?
Jim Nelson: I mean, obviously, as I said the U.S. the cap rates are rising nicely in our opinion. So they're 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 property, because 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, year and a half, we've been seeing very good cap rates on the stuff we've been purchasing in Europe. So we believe that will continue and we will opportunistically buy in Europe as we find the right properties.
James Villard: Yes. And just one more on that. I mean I guess is the volatility and currency as well as interest rates having any impact on your ability to close just in this year on any acquisitions?
Jim Nelson: 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 UK, 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.
James Villard: Yes, that's a great color. And I guess, just as we looking to finish in 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?
Jim Nelson: 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. As I said earlier we have a very, very strong deal flow right now. So we're very optimistic about this year.
James Villard: Okay. That's helpful. I appreciate it. Thank you.
Chris Masterson: Sure. Sure. Thank you.
Operator: Thank you. Our next question comes from a line of Mitch Germain with JMP Securities. Please proceed with your question.
Jim Nelson: Good afternoon Mitch.
Mitch Germain: Good afternoon. Yes , your CPI length leases do any of them have caps or the pure CPI?
Jim Nelson: Chris you want to respond to that.
Chris Masterson: Sure. Some of them do have caps. Typically, if they do have a cap, it would be about 4%. But they do vary from least to lease.
Mitch Germain: 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?
Chris Masterson: Well Mitch I think it's important to note that I mean, everybody's aware of the current rate of inflation. So what that does is it makes us a lot easier to negotiate a higher annual increase because everybody realized 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.
Mitch Germain: Last question for me. What's the plan for the debt maturities?
Jim Nelson: Sure. So I guess, to start, we only have about 40 million maturing this year.
Mitch Germain: sorry about that.
Jim Nelson: Right. So we're currently evaluating that next year. And the big item that that's coming up is the UK bulk loan and we've been looking into a lot of different options for this. Definitive answer right now, but that's something we'll keep you updated on as we move closer to making a final decision.
Mitch Germain: The likelihood is you'll continue to keep that debt in Europe, or do you are you still evaluating exactly how you want to?
Chris Masterson: 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 looked at, as we get closer to these maturities, we're looking at all the different options we have, be it bonds, mortgage debt or 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 the point where we ready to do it.
Mitch Germain: Right. Fantastic. Thank you.
Jim Nelson: Sure. Thank you.
Operator: Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Nelson for any final comments.
Jim Nelson: Yes, thank you operator. I want to thank everybody for joining us on today's calls. 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 what it is. So with that operator, we can close the call. Thank you, everybody.
Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
