Global Net Lease, Inc. (GNL) Q1 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the Global Net Lease First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will 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, Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us for GNL’s first quarter 2020 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, 2019, filed on February 28, 2020, 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, supplement and Form 10-K, all of which are posted to our website at www.globalnetlease.com. 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, Jim Nelson, our CEO.

Thank you, Louisa. And thanks again to everyone for joining us on today’s call. Before we start our discussion on GNL’s quarterly results, I would like to express our hope that you, your families and colleagues remain healthy and safe during these unprecedented times and offer our heartfelt appreciation for the heroic efforts of the healthcare and frontline workers, who are leading the efforts to address the effects of the COVID-19 pandemic. We are encouraged by the improving situation and see many signs of strength and resiliency across our portfolio. While our priority is the health and safety of our tenants, teams and business partners, our focus remains on preserving and driving long-term value for our stockholders. Although this call will discuss our first quarter 2020 results, I think the best place to begin is where everyone is currently focused, which is on COVID-19 and any potential impact the pandemic has had on our portfolio. We are pleased to report that as of April 30, 2020, we’ve collected over 98% of cash rents that were payable during the month, including 100% of the cash rent payable from the top-20 tenants in our portfolio. Our historic emphasis on credit quality, underwriting and due diligence is making a tremendous difference in our portfolio’s performance. Further, we are in contact with the tenants that constitute the remaining 2% of rent, and we continue to look to collect this outstanding balance. On a geographic basis, GNL collected 100% of the cash rent payable from our UK-based assets, 99% from our other European tenants and 96% from our U.S.-based assets. While there is still much unknown and we cannot predict the full economic impact of this pandemic, we believe our balance of mission-critical industrial and distribution assets, limited retail exposure and high investment-grade rated concentration will continue to perform as underwritten. We believe we will emerge from this crisis, well positioned to capitalize on the opportunities that inevitably arise from such a widespread disruptive event. As previously disclosed, GNL has taken steps to enhance our financial flexibility and manage risk during this uncertain time. As a result of these steps, liquidity or cash on our balance sheet and availability for future borrowings under our credit facility totaled $366.6 million at the end of the first quarter, which we believe favorably positions the company for the months ahead. In March, we drew on our credit facility to enhance our cash position as the scope of the crisis became apparent. Additionally, the Board approved a change in the common stock dividend to an annualized rate of $1.60 per share or quarterly $0.40 per share beginning in the second quarter 2020. Our first quarter AFFO was $0.44 per share. We believe that this action was prudent in the current environment and will strengthen GNL’s cash flow by over $12 million per quarter as we prioritize preservation of capital. In April, the Board adopted a short-term stockholder rights plan to discourage the accumulation of our stock through open market trading. The Board believes that the plan, along with our other recently announced actions are in the best interest of the company. We believe that GNL’s solid foundation continues to position us well for the long run. We remain committed to executing on our global investment strategy of acquiring and owning a portfolio of well-diversified properties leased long-term to high-quality tenants who consider these properties to be critical to their business operations. Given our platform that spans from North America to Europe, our capital resources and evolving real estate markets and macroeconomic conditions, we believe we will be well-positioned to capitalize on select opportunities as they arise. While we may still be in the middle innings of a global health crisis, we believe our portfolio has shown impressive resiliency thus far, and will continue to demonstrate its strength as we move ahead. Turning now to the first quarter. We acquired 10 properties for an aggregate contract purchase price of $114 million, including the completion of the Whirlpool sale-leaseback we discussed on our last call. The acquisitions located in the U.S., Canada and Italy have an average remaining lease term of 18.9 years and were acquired at a weighted average cap rate of 8.5%. We also signed lease extensions for 4 properties leased to Finnair, the flag carrier and largest airline in Finland and majority-owned by the Finnish government. We were able to extend the weighted average remaining lease term on the properties from 4.7 years to 11 years, providing further stability and increased cash flow to GNL. Including these closings, our $3.8 billion, 288 property portfolio is nearly fully occupied at 99.6% leased, and has a weighted average remaining lease term of 9 years, up from 8.1 years a year ago. We have no 2020 lease expirations and contractual rent growth is embedded in 94% of leases. 223 of our properties are in the U.S. and Canada, and 65 are in the UK and Western Europe, representing 65% and 35% of annualized rent revenue, respectively. Our property mix is currently 48% office, 47% industrial and distribution, and 5% retail compared to 53% office, 39% industrial and distribution, and 8% retail a year ago, a reflection of our focus on industrial acquisitions and retail dispositions over the last year. We believe that this emphasis on industrial acquisitions and the reduction of our exposure to retail has aided our success in the current environment, as has our focus on tenant credit. Across the portfolio, 66.7% of straight-line rent comes from investment-grade or implied investment-grade tenants, including 90% of our top 10 tenants. Going forward, we are adopting a prudent stance with potential acquisition opportunities as we reevaluate historical cap rates during this uncertain time. We are carefully determining the appropriate risk adjusted cap rate targets for potential new acquisitions going forward, and we’ll ensure that all assets meet our revised criteria. Taking a look at financial highlights, we are pleased to report year-over-year increases, and adjusted EBITDA revenue from tenants and NOI. Adjusted EBITDA increased to $60.1 million in the first quarter 2020, and total revenue was up 5% to $79.2 million. Net operating income also increased 5.5% to $71.9 million from $68.1 million in the first quarter 2019, and 1.2% from $71 million in the previous quarter. On a per share basis, AFFO decreased year-over-year to $0.44 per share, but this was primarily due to preferred dividends on our Series B preferred shares, which were issued in the fourth quarter the proceeds of which were largely used to help fund acquisitions during the first quarter of this year. AFFO per share was flat over the fourth quarter of 2019. 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. We posted improved financial results for the first quarter compared to the prior year. For the first quarter 2020, we recorded EBITDA of $60.5 million compared to $55.7 million in 2019. As Jim mentioned, we also reported a 5% increase in revenue to $79.2 million from $75.5 million with net income attributable to common stockholders of $5 million. Revenues increased primarily due to rental income from significant acquisitions completed in 2019. FFO increased 6.5% to $38.6 million and AFFO increased slightly to $39.8 million. Our AFFO per share decreased year-over-year primarily due to increased preferred dividends related to the Series B preferred offering, which was largely deployed into acquisitions in the first quarter. The company paid common stock dividends of $47.6 million for the quarter. 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 first quarter with net debt of $1.7 billion at a weighted average interest rate of 3.1%. Our net debt to adjusted EBITDA ratio was 7.1 times at the end of the quarter. The weighted average maturity at the end of the first quarter 2020 was 5.4 years, which is an improvement from 4.2 years at the close of 2019 first quarter. The components of our debt include $399.2 million on the multicurrency revolving credit facility, $395.5 million on the term loan, and $1.3 billion of outstanding gross mortgage debt. This debt was approximately 90% fixed rate, which includes a floating rate debt with in-place interest rate swaps. The company has a well-cushioned interest coverage ratio of 4.1 times. As of March 31, 2020, liquidity was approximately $366.6 million, which comprises $343.4 million of cash on hand and $23.2 million of availability under the credit facility. Our net debt to enterprise value was 55%, with an enterprise value of $3.1 billion based on the March 31, 2020 closing share price of $13.37 per common shares, $20.27 for Series A preferred shares and $19.89 for Series B preferred shares. This ratio was impacted by the market disruption that took place across the industry starting in the last half of February. As a quick update to the hedging program, we have continued to use our hedging strategy to protect a portion of our rental income from currency fluctuations and offset some movements in interest rates for our European portfolio. As volatility increased at the end of the first quarter, we saw the benefit of these hedges as our cash flow remained steady despite significant movements in the exchange rates, the euros and pounds against the dollar. In the quarter, we had a realized gain of $1 million from our FX forwards, further illustrating their benefit. With that, I’ll turn the call back to Jim for some closing remarks.

Thanks, Chris. In closing, I am very proud of all that we have accomplished in the first quarter and our response to the outbreak of COVID-19 to date. I am encouraged by the success we had in April, collecting over 98% of the rent payable during the month at a time when many businesses were experiencing significant operating challenges. We have a dedicated hard-working team that is focused on making sure the company continues to perform during the crisis and emerges from it, ready to capitalize on new opportunities. We believe the consistent execution of our business plan and our focus on mission-critical industrial and distribution assets will continue to benefit our shareholders well into the future. As always, thank you all for your continued support. With that, operator, we can open the line for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Ben Zucker with Aegis Capital. Please go ahead.

Good morning, guys. Thanks for taking my question and congratulations on a strong April rent collections. Can you guys hear me okay?

We hear you fine, Ben. Thanks.

Great. I guess, I just wanted to get kind of a 30,000-foot view of the market in general and kind of activity in the market. Is there any kind of activity or assets still changing hands? Is there debt capital available or is this kind of a market environment where buyers, sellers, lenders, everyone’s kind of sitting on the sidelines in a wait-and-see mode right now?

Well, to answer both questions, let me start with the market. And there are still deals out there. Our underwriting team continues to review deals and look for the best possible deals with our new underwriting directives as we look at how the market has changed. And as far as financing, yes, there is financing available. The banks are open for business. And we continue to talk to them about ways to lower our interest rates, both on new loans and on existing loans. So, yes.

Okay. That’s helpful. And, I guess, since you led me there with interest rates, Chris, maybe this is for you, but with respect to your revolving credit facility, at yearend 2019, I think we were seeing a rate of like 2.8% on that line. And in your supplement, I saw that, that was up at 3.5% now. I’m just kind of wondering what that increase is related to?

So part of that increase had to do with the fact that we grew on the line in USD late in March. So as a result, we ended up having a heavier weight towards the USD rate on the line at the end of the period, which is higher than the euro.

Okay. That makes sense. That’s helpful. I guess, turning now to kind of the dividend and stuff like that and Board decisions, do you guys have any kind of repurchase program in place? If so, could you speak about your appetite for allocating capital there right now? And if not, could you maybe talk about what the Board discussions might have been around this topic, if any?

We don’t have a buyback plan in place right now. We believe that the best place for us to put our money is into high-quality revenue generating properties. And as you know, since Chris and I started work for the company almost 3 years ago, we focus on very high-quality industrial and distribution type of properties, which have performed very, very well up until now and continue to perform well.

Okay. That’s also helpful. I guess, just maybe – and maybe this is getting ahead of ourselves. So if it is, you can let me know, but your incentive fee, I guess, that’s in place as of now, had a component that was tied to earnings. And I’m just wondering if we should be thinking about that differently now that like a reduction to that hurdle rate to earn the incentive fee. And, I guess, since the dividend was lowered, I wasn’t sure if I should be thinking that those hurdles might be lowered as well.

You go ahead, Chris.

Sure. Well, I would say, I mean, at this point there is no, there has been no change to that incentive fee hurdle rate. So in terms of your modeling, I wouldn’t change anything now.

Okay, great. And then, I guess, I’ll ask if it’s okay, if you guys don’t have any comments in recognizing we’re only a few days into the month, but do you have any kind of indication or early look into how the May collections are progressing thus far, specifically with the tenants that haven’t already entered into some kind of lease modification for that like 30% deferral of current pay?

Well, it’s a little early to tell. If you take a look at our portfolio, I mean, we collected 98% of the rent for April. So we expect it to be as good or better going forward. If you look at some of our tenants, like if you look at the top-20 tenant list, we have FedEx, GSA, Penske, which is a huge cold storage facility serving the food industry, the supermarket industry, Quest Diagnostics, Trinity Health, Encompass Health, Sandoz, AT&T. I mean, we’ve got the right mix of tenants to – and as I said on previous calls, we’re uniquely positioned to weather the storm. So I think that’s a good way to look at it. Also, if you look at, 67% of our tenants are investment-grade or implied investment grade. I mean, that, again, speaks for itself. And again, the 98% of rents that we collected, I think if you look at our peers, it’s a significant number that we’ve collected. And I think we’ve done as good or better than most or all of our peers.

Yeah, I mean, I would certainly agree with that comment, and I think it’s a testament to your focus on kind of these mission-critical assets and also the industrial distribution assets that are probably doing quite well right now. And, I guess, the last one, and you kind of talked about it with new leases and discussions on – with Finnair. I was just wondering, is there an opportunity to really go and play some offense with like – with respect to sale leasebacks with some of these airline operators and European operators now that the airlines balance sheets are maybe getting a little bit strapped, and I’ve been seeing some deals in sale-leasebacks for like engine parts done on like Air France and other European characters. So I’m just wondering if there might be opportunity for you guys to take advantage of this dislocation and play some good offense maybe with like the airlines and struggled industries that could use a cash injection from a sale-leaseback.

That’s a really good question. I think, Finnair is a very unique situation, because it’s 60% owned by the Finnish government. So their survival is very important to the Finnish government. We don’t normally do high-risk investments. We are a very stable, very high quality. We look for companies with very strong balance sheets where the facilities are critical to their operation. So I wouldn’t say we wouldn’t look at something like that, but we look at a little more, I don’t know if boring is the right word, but we look at much more secured type of investments in the properties that we buy, really high quality companies with great investment-grade credit ratings for the most part.

Jim, in this environment of boring means they occupied their space and pay their rents on time, I think these will be…

Absolutely. Absolutely. Absolutely.

…boring all day long. All right, guys. Well, that’s it for me. I’ll follow-up with you a little bit more offline. But thanks for taking my question. And again, congrats on what looks like a pretty good quarter for me.

Thanks, Ben.

Thanks, Ben.

The next question is from Barry Oxford with D.A. Davidson. Please go ahead.

Great. Thanks, guys. Looking at – or hearing some of your comments about risk-adjusted return parameters. Could you kind of expand on that and just kind of give us a sense where those have changed? And then give us a sense where you’re seeing the opportunities, U.S. versus Europe and maybe Italy.

You’re talking about the underwriting, correct?

I’m sorry, you cut out on me?

You’re asking about our underwriting process?

Yes. Exactly. And then where are cap rates going? Or where do you see the opportunities via cap rates?

If you look at what we bought in the first quarter, the 10 properties for an aggregate contract purchase price of $114 million, you look at – I mean, the remaining lease term was 18.9 years on an average at a weighted average cap rate of 8.5%. So I think that gives you an indication of the type of properties that we’re looking at. I mean, we always look at all the important elements of any property we want to buy, balance sheet, the finances of the company, the – if they’re investment-grade, the lease, the property, the area of the properties. And I think what happens now is you take a better look at cap rates, because I think they’re being adjusted, because of what’s going on in the world right now. And I think we’re just being very, very careful in putting capital to work. We want to do it in a very conservative, very careful manner. And what was the other half of your question? Was it location?

Yeah. I mean, are there any particular countries that are sticking out to you like, look, a country like Italy standing out to you on a risk-adjusted basis or not necessarily?

Not necessarily, I mean, the properties we bought in Italy were part of the Whirlpool transaction that we have discussed on an earlier earnings call. So that was in the process for quite a while with a Fortune 150 company. But I think we’re still primarily focused on the U.S. right now.

Okay. Great. Thanks so much for the color, guys.

Sure, Barry. Good to talk to you.

Yeah. Thanks.

The next question is from John Massocca with Ladenburg Thalmann. Please go ahead.

Good morning.

Good morning, John.

So the cash collection at 98%. I mean, was there any deferral requests kind of outside of that 2% that didn’t pay cash rent? Or have you had any deferral requests that have maybe indicated they may not pay in May?

Currently, we’ve had 6 tenants asked for deferrals. It represented about 1.2% of April rent. And the weighted average months deferred was 3 months, and they’ll begin paying it back in 2021 over 6 to 7 months. So there have been a very small number of deferrals requested.

But it sounds like the deferrals are going to be kind of a year – essentially, there’s a year gap between the actual rent that’s not getting paid on the deferrals.

Yeah, we haven’t seen that. We have not seen that.

No. I just meant that the payback, you said 2021. So…

Will begin in 2021. Yes. So the deferral is till the beginning of 2021, and then it will be to 6 to 7 months’ pay period for the deferral amount.

Okay. And then with the Finnair transaction, specifically, was that – what were maybe kind of the terms of that transaction? Can you just maybe give some color? Was there any kind of TIs that were associated with that? Or any kind of change to the previous rental agreement?

Chris, you want to talk about that?

Sure. So upfront we provide them with – about €4 million. And then we also had a slight reduction to the annual rent payments.

Okay. And then kind of lastly, I know we’ve kind of talked about the acquisition front a lot. But just to kind of clarify, I mean, you have a couple of transactions that are kind of in the pipeline today. If, let’s say, the markets and the kind of macro environment stayed unchanged and your cost of capital stayed unchanged. Would you kind of think that maybe that would result in maybe a pause to acquisition activity until things changed? Or do you think essentially as long as an investment opportunity meets these new parameters you’ve laid out that you can be kind of adding to that pipeline today?

Well, as we’ve stated, we have a very strong balance sheet right now, and we continue to look at properties. And if we do find things that meet our criteria, we have the ability to execute, and we will. So I think looking ahead, hopefully, the economy is getting back to normal or a new normal. And as things progress and hopefully get better, I think we can continue being very selective and continue acquiring very good property.

Understood. I appreciate the color. Thank you, guys, very much for the time. That’s it for me.

All right, John. Stay well.

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. I want to thank everybody for joining us on today’s call. We appreciate it, and we hope you all stay safe and stay well. Thank you, operator.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.