Global Net Lease, Inc. (GNL) Q3 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Global Net Lease Third Quarter Earnings Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there’ll be an opportunity to ask questions. [Operator Instructions]. Please note, this event 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 morning, everyone, and thank you for joining us for GNL's third quarter 2018 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 James Nelson, GNL's Chief Executive Officer; and Chris Masterson, GNL's Chief Financial Officer. The discussion today will include certain statements and assumptions which are not historical facts. They are forward-looking in nature and are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain assumptions and numerous risk factors that could cause GNL's actual results to differ materially from these forward-looking statements. We refer all of you to our SEC filings for a more detailed discussion of the risk factors that could cause these differences. Also during the call, we will use the term investment grade rating, which includes both actual investment grade ratings of the tenants and implied investment grade ratings. Implied investment grade can include ratings of the lease guarantor or the tenant parent, regardless of whether or not the parent has guaranteed the tenant's obligation under the lease. Implied investment-grade ratings can also include ratings determined using a proprietary Moody's analytical tool, which compares the risk metrics of the non-rated company to those of a company with an actual rating. The ratings information is as of September 30, 2018. 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 expressly 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 recent directly comparable GAAP measure is available in our earnings release. I will now turn the call over to our CEO, Jim Nelson.

Thank you, Louisa, and thanks again to everyone for joining us on today's call. I will start by providing a brief recap of our results and some color on acquisitions, and then, Chris will go into more detail regarding our debt refinancing and our quarterly financial performance. Our third quarter results reflect continued execution of our long range strategic plan to build a diversified global net lease portfolio and deliver an attractive return to our investors. We had another solid quarter with continued momentum across the portfolio. Third quarter revenue core FFO and AFFO all increased on a year-over-year basis. For the quarter revenue increased 11% to $72 million, which is inclusive of the $3 million lease termination fee. Our core FFO increased 16% to $38 million and our adjusted funds from operations or AFFO was up 14% to $39.6 million, inclusive of the $3 million lease termination fee, which exceeded our distributions paid to common stockholders this quarter of $36.7 million. Through the first nine months of the year, we acquired 17 assets for $266 million, which we previously announced and as of today our remaining 2018 pipeline stands at 127 million. In the first full year within the portfolio the 17 closed assets will contribute approximately $20 million in additional annualized straight line rental revenue. To reach our growth in rental income goals we expect to strategically utilize the capital markets. This can include debt as well as common and preferred stock. During the quarter we raised 95 million gross proceeds in common stock and refinanced all of our UK mortgage loans with the new credit facility at what we believe are favorable terms. Chris will provide more details in his section of the call. A quick comment on our view towards the disposition. While we do not have any properties that were classified as assets held for sale, we are opportunistic sellers and with any sales we would look to redeploy those funds into growing our portfolio. The quality of our portfolio remains strong in all metrics. Our investment grade or implied investment grade tenants make up 77% of the portfolio. Occupancy was at 99.5% at the end of the quarter. Our geographic mix based on annualized straight line rents sits at roughly 52% US and 47% Europe, while our property mix was 55% office, 36% industrial and distribution, and 9% retail. Our 336 net leased properties provide consistent cash flow to support the company's current dividend. In terms of acquisitions in the third quarter, we continued to add great real estate at attractive cap rates having four assets located within the United States, which are in line with our strategy of increasing exposure to industrial and distribution assets. Once again, we have proven our ability to source and execute on the attractive deals in our pipeline while taking advantage of our ability to access capital within the public markets. The first property is a 669,000 square-foot distribution facility leased to Rubbermaid located in Akron, Ohio. Founded in 1968 Rubbermaid is a manufacturer of innovative solution-based products for commercial and institutional markets worldwide. The guarantor Newell brand is a worldwide provider of consumer and commercial products. Newell brands has a Standard & Poor's credit rating of BBB minus and a Moody's rating of Baa3. The second property is a triple-net lease 456,000 square-foot corporate headquarters and manufacturing facility located in New York State. The building is leased for 20 years to a furniture manufacturer which creates both commercial grade workplace furniture and high quality, ready-to-assemble furniture for the home. The company carries a Moody's implied credit rating of Ba1. The third property is a newly constructed 29,000 square-foot distribution facility double-net leased to FedEx Freight for a term of 15 years. The building is located in Greenville, North Carolina. FedEx Freight a business segment and wholly-owned subsidiary of FedEx Corporation is a leading provider of less than truckload freight services. The fourth acquisition is a newly constructed Class A commercial office building net leased for 12 years to a subsidiary of NetScout; the property measures 145,000 square feet and is located in Allen, Texas. Founded over 30 years ago NetScout the guarantor is a leading provider of application and network performance management products. The company offers solutions that enable enterprises, service providers and government agencies to monitor, manage and protect their networks and applications. The guarantor has a Moody's implied credit rating of Ba3. We believe these terms are representative of the attractive deals our acquisitions team is able to identify and we will continue to execute on our long-term strategy to grow our global diversified portfolio. Our demonstrated ability to underwrite transactions with an eye toward long-term value is what continues to set GNL apart in the net lease sector. Through the first three quarters of 2018 GNL acquired 17 properties, which have a weighted average going-in cap rate of 7.40% and an average GAAP cap rate of 7.87%, with a weighted average remaining lease term of 11.2 years. With that, I’ll turn the call over to Chris, who will walk us through operating results in more detail and then I will follow-up with some closing remarks. Chris?

Thanks, Jim. We reported third-quarter 2018 rental revenue of $69 million up 12% from Q3 2017 period, and we reported adjusted funds from operations of $40 million, which is an increase from the third quarter 2017. Rental revenues increased primarily due to acquisitions and a $3 million lease termination fee, which was related to the sale of an asset. As always a reconciliation of GAAP net income to the non-GAAP measures can be found in our earnings release. 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%. Our weighted-average maturity at the end of the third quarter 2018 was 3.8 years which is up from 3.1 years at the close of 2017 third-quarter. The components of our debt include $456 million on the multi-currency revolving credit facility, $286 million on our term loan and $984 million of outstanding gross mortgage debt. At quarter’s end our debt consisted of approximately 74% fixed rate, which is inclusive of floating rate debt with in-place interest rate swaps. Our net debt-to-annualized adjusted EBITDA is 6.9 times with a strong interest coverage ratio of 4.3 times. As of September 30th, liquidity was approximately $162 million which comprises $155 million of cash on hand and $7 million of availability under the credit facility. Our net debt-to-enterprise value was 48.9% with an enterprise value of $3.2 billion based on the September 30, 2018 closing share price of $20.85 per common shares and $25.07 per Series A preferred shares. As Jim initially discussed, as part of our ongoing growth initiatives, we closed an upsizing of our unsecured credit facility of $132 million for the multi-currency revolving credit facility portion and €51.8 million for the senior unsecured term loan facility portion. We used the proceeds from the borrowings under the term loan to pay down amounts outstanding under our revolving credit facility. During the quarter we closed the new five year £230 million or $293 million equivalent based on exchange rates on the date of closing, multi-property financing which encumbers 43 assets located in the United Kingdom. This UK multi-property financing of syndicated balance sheet loan led by Lloyds Bank closed on August 16, 2018 and replaced the individual property loans on 38 of those properties. As a quick update to our hedging program, we’ve continued to use our hedging strategy as a way to offset movements in interest rates and local currencies for our European portfolio. In regards to currency hedging, we employ a disciplined strategy of layering hedges against the two currencies over upcoming quarters to manage some of our exposure to both currencies. With that, I’ll turn the call back to Jim for some closing remarks.

Thanks, Chris. Year-to-date we’ve acquired 266 million in properties and we are not yet done, as we intend to close on an additional 126.6 million of acquisitions by year end. With 267 properties in the US and 69 in the UK and Western Europe, representing 53% and 47% of rental revenue, respectively, all pretty much fully leased with no near-term expirations, our portfolio is in great shape. From a portfolio diversification standpoint, upon the closing of the third quarter our industrial and distribution properties make up 36% of our portfolio, up from 31% a year ago in 3Q ‘17. Our domestic and international presence combined with our investment strategy and our advisors’ experience abroad give us a unique advantage. We are well-positioned to identify, assess and capitalize on opportunities across a wider set of markets as compared to most of our peers. We continue to demonstrate a proven ability to source investment opportunities by leveraging direct relationships with landlords and developers to identify off market transactions. We believe this allows the company to achieve better than market cap rates and more favorable terms that are generally available, generating improved results for the company and its shareholders. As we've shown this quarter we also have no trouble accessing capital in the equity or debt markets to finance the attractive deals we are able to execute on the favorable rates. And on the right side of the balance sheet we closed on two financings, the first is a multi-property financing for our UK assets and the second is an upsizing of our unsecured credit facility. Both of these were important steps in our ongoing long-term strategic plan to refinance our UK assets and extend maturities. We will remain proactive and disciplined in our acquisition strategy to identify compelling opportunities and to acquire net lease assets with a continued near-term focus on US industrial and distribution facilities in order to continue to drive shareholder value. We will also remain opportunistic when it comes to selectively adding to our international footprint. So to summarize, we are happy with the market opportunities, our growing portfolio, our ongoing ability to manage the right side of the balance sheet and maintain a healthy leverage profile, our strong real estate network from which we source opportunities, our ability to access the capital markets to finance acquisitions on a leveraged neutral basis and on our continued ability to execute and deliver steady results like growing AFFO per share. Overall, we are pleased with our performance and are opportunities and we will continue to enhance long-term value for our stockholders. With that, operator, we can open the line for questions.

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Matt Boone of B. Riley FBR. Please go ahead.

Just to start off, can you provide us with some color as to how the assets in your acquisitions pipeline compares to the broader market from a pricing perspective, specifically what kind of spread are you getting from your off market acquisitions?

So I think you can see from the things that we’ve bought in the last quarter and over the last three quarters, we're buying things at very attractive cap rates and the numbers were in our earnings release and we reset them earlier. But we think that we have -- on edge we deal in an area of the market where we seem to do very well. I mean I am not really sure how our competitors are buying, but when I look at the cap rates that we’re able to buy properties that we’re very pleased.

And then kind of going off of that, can you comment on how the cap rates have trended in your core markets, and how that’s going to affect your external growth opportunities as we head into 2019?

I think the cap rates for us have been pretty stable in our core markets. We’ve seen as interest rates drift up a little bit, the cap rates are drifting up some time afterwards. There’s a lag in the timing but cap rates do follow interest rates up. So we’re very confident that we can continue to buy good properties at good cap rates.

And then I know the focus has been on expanding your US exposure feasibility with industrial assets, but do you think that we could see any additions to your European portfolio in 2019?

Well, we're always looking in Europe. We’ve people on the ground there that are constantly looking at properties and we are opportunistic buyers. If we found something that really fits with the parameters of how we buy properties, we certainly could execute on properties in the countries in Europe that we are in.

[Operator Instructions] Our next question comes from Brandon Travis of Ladenburg Thalmann. Please go ahead.

So following your recent pound denominated debt refinancing in the quarter, are you planning anything similar with your euro denominated debt and roughly speaking what kind of rates can we expect on any refinancing of that debt?

Sure. So yes we actually are planning a euro refinancing and something that we’re actively working on now. We don’t have any specifics right now to report. But we’re proactive moving forward with it and active in terms of rates. We’re expecting rates to come in pretty consistent with where they are now. So, I think it’ll be successful, and let me pass to Jim.

Yes. As you know I am sure rates in Europe have not gone up and in the euro have not changed but we are looking to extend the duration of our loans in euros.

And then do you still view your retail assets as potential disposition targets for invest into industrial on office?

Well right now we're very comfortable with the retail assets that we have, they’re all performing very well. So we don't feel any pressure to offer them up for sale but we are always reviewing the portfolio. And as I said we’re opportunistic buyers and we’re opportunistic sellers. So if at some point we felt it was warranted to sell those properties, we would certainly consider.

If you were to sell them, just broadly speaking, what kind of cap rates you can say you could achieve?

That’s a very good question. I don't have that answer for you right now but I can get back to you.

And then one last one, on the topic of cap rates, are you seeing any difference between distribution industrial properties and light manufacturing industrial properties right now?

I don't really see any difference between the two. We are buying both and we’re buying them at very similar cap rates.

Out of the two, is there one that you think could form a bigger portion of the portfolio, with the pipeline heading into 2019?

Well we’ve stated generally that we are looking to grow our industrial and distribution portfolio and we will continue to do that. I wouldn’t really say one would be better than the other but we’re constantly looking and again we’re opportunistic buyers so we buy the best value we can find on the best properties we can find with the best investment grade tenants we can find.

This concludes our question-and-answer session. I would like to turn the conference back over to Jim Nelson for any closing remarks.

Thank you, operator and thank you for everyone who listens in on the call. We will be talking to you next quarter. Thank you.