Global Net Lease, Inc. (GNL) Q3 2020 Earnings Report, Transcript and Summary

Good afternoon. And welcome to the Global Net Lease Third Quarter 2020 Earnings Call. All participants will be in a 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. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for GNL’s third 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 and supplement, 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 tenant, a term we will use throughout today’s call. I’ll now turn the call over to our CEO, Jim Nelson. Jim?

Thank you, Louisa. And thanks again to everyone for joining us on today’s call. In the third quarter, our high-quality global portfolio of industrial and office net lease properties continued to demonstrate its strength, remaining largely unaffected by the ongoing pandemic. For the quarter, we collected over 97% of the original cash rent that was payable, including 99% of the cash rent payable from our top 20 tenants, which represents almost half of our total annual cash rent. Our historic emphasis on credit quality, underwriting, asset selection and due diligence have all helped shape a portfolio that continues to perform well. On a geographic basis, GNL collected 99% of the rents -- of the cash rent payable from our UK-based assets, 99% from our other European tenants and 96% from our U.S.-based assets. To be clear, when we give rent collection statistics, we are comparing to the total rent payable and not reducing the expected rent in the denominator by any negotiated deferrals or making any other adjustments. As our portfolio continues to perform well, I am also excited about the progress we made on other fronts this quarter. We closed on $88 million of loans and interest rate of 3.45% collateralized by our Whirlpool Corporation assets located in the U.S. We also completed a three-property sale leaseback with Johnson Controls, an investment grade diversified technology and multi-industrial leader that specializes in products, technologies, software and services for buildings. Johnson Controls was ranked number 399 on Fortune’s Global 500 list in 2019. The office and industrial properties are located in the United Kingdom and Spain and were acquired for $23.4 million at a 7.98% weighted average cap rate. At closing, Johnson Controls signed new 12-year leases that include annual escalators of 1.5%. Our total year-to-date acquisitions now exceed $168 million at a weighted average going-in cap rate of 7.1%, a weighted average cap rate of 8.5%, and a weighted average remaining lease term of 18.5 years. Thanks to the direct relationships we’ve built with developers, landlords and tenants, we have a massive forward acquisitions pipeline of over $158 million. The pipeline consists of primarily industrial acquisitions that we expect to close before the end of the year, at a weighted average going-in cap rate of 6.5%, a weighted average cap rate of 7% and a weighted average remaining lease term of more than nine years. These potential acquisitions are emblematic of the future growth and focus of the GNL portfolio. Our closed and pipeline acquisitions currently total over $325 million for 2020 at a weighted average going-in cap rate of 6.9%, a weighted average cap rate of 8.1% and with a weighted average lease term of 15.8 years. 89% of these acquisitions by purchase price fall under industrial and distribution property categories. The work we have done to grow the portfolio and collect rent during the pandemic contributed to recording a quarter-over-quarter increase in total and per share AFFO. For the third quarter, AFFO per share was up 4.5% to $0.46 per share from $0.44 per share last quarter. The Company distributed $35.8 million in common dividends to shareholders in the quarter, or $0.40 per share. Our $4 billion, 299-property portfolio is nearly fully occupied at 99.6% leased with a weighted average remaining lease term of 8.7 years, up from eight years a year ago, thanks to our recent acquisitions where we have acquired attractive, long-dated industrial and distribution assets. We have no 2020 lease expirations, and contractual rent growth is embedded in over 93% of our leases. 231 of our properties are in the U.S. and Canada, and 68 are in the UK in Western Europe, representing 63% and 37% of annualized rent revenue, respectively. Our portfolio is well-diversified with 127 tenants in 47 industries with no single industry representing more than 10% of the whole portfolio, based on straight-line rent. Our property mix continues to evolve and is currently 48% office, 47% industrial and distribution, and 5% retail, compared to 52% office, 43% Industrial and distribution, and 5% retail a year ago. Contributing to our success is our focus on tenant credit, industrial acquisitions and retail dispositions over the last several years. Across the portfolio, over 65% of straight-line rent comes from investment grade, or implied investments grade tenants. Industrial and distribution assets have been an increasingly significant segment of our portfolio, growing to 47% of our current assets when measured by straight-line rent. Our industrial acquisitions have included the sale leaseback transactions we completed with Whirlpool Corporation in the U.S. and Italy, as well as other industrial acquisitions totaling over $100 million year-to-date. These properties are leased to tenants such as CSTK, Metal Technologies, Klaussner Industrial and NSA. Other significant tenants in this segment include Finnair, Auchan and Grupo Antolin. We are always seeking accretive acquisitions that meet our investment criteria. While our primary focus has been and will continue to be on industrial and distribution assets, we will continue to evaluate adding single tenant mission critical office properties, leased to investment grade tenants similar to those that currently populate our portfolio. 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. For the third quarter 2020, we recorded adjusted EBITDA of $63.6 million, up from $58.3 million in the third quarter of 2019. We also reported a 6.1% increase in revenue to $82.7 million from $77.9 million with net loss attributable to common stockholders of $0.5 million. FFO and AFFO for the third quarter were $34.5 million and $40.9 million, respectively, or $0.39 and $0.46 per share, compared to $0.44 and $0.47 per share in the third quarter of 2019. The Company paid common stock dividends of $35.8 million or $0.40 per share 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 third quarter with net debt of $1.8 billion at a weighted average interest rate of 3.1%. Our net debt to adjusted EBITDA ratio was 7.2 times at the end of the quarter. The weighted average debt maturity at the end of the third quarter 2020 was 5.1 years. The components of our debt include $264 million on the multicurrency revolving credit facility, $421.6 million on the term loan, and $1.4 billion of outstanding gross mortgage debt. This debt was approximately 91% 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 3.8 times. As of September 30, 2020, liquidity was approximately $392 million. Our net debt to enterprise value was 51.8% with an enterprise value up $3.5 billion, based on September 30, 2020, closing share price of $15.90 for common shares, $25.70 for Series A preferred shares and $25.19 for Series B preferred shares. This ratio continues to be impacted by the market disruption that took place across the industry, starting in the last half of February. With that, I’ll turn the call back to Jim for some closing remarks.

Thank you, Chris. I’m very encouraged by all that we have accomplished in the third quarter. We believe that our portfolio has been intentionally constructed to continue to perform brilliantly through this short-term economic disruption, as evidenced by collecting 97% of the cash rent payable in the third quarter. We believe that we are specifically positioned for long-term growth and future success, building upon our strong foundation of nearly 100% occupancy, long-weighted average remaining lease terms, high percentage of investment grade tenancy and focus on resilient property types. We resumed our accretive acquisition program and are thoughtfully rebuilding a large acquisition pipeline, currently totaling over $325 million of high-quality, closed and pipeline acquisitions. We have ample liquidity to act on accretive opportunities and no near-term debt maturities. We remain committed to executing on our business plan and on the activities that are critical to our ongoing success. We look forward to continuing these efforts in the fourth quarter and delivering a strong finish to the year. With that operator we can open the lines for questions.

[Operator Instructions] Our first question comes from Bryan Maher with B. Riley Securities.

Good afternoon, Jim and Chris. Couple of questions. With the uptick in COVID over in Europe and UK, locked down or locking down or maybe locking down like, are you seeing any vagaries in the portfolio of assets over there, or is it still kind of status quo?

We haven’t really seen anything. It still seems to be very much status quo, from everything that we’ve seen and everything that we’ve heard.

Okay. And just on the Johnson Controls acquisition. How is that deal sourced, and do you see more like that in the near term?

It was sourced through our normal channels. And we’re always looking for those types of acquisitions. I think, one thing that we’ve seen in the third quarter was we’re starting to see a lot more deals in Europe than we’ve been seeing for a while, and good deals. So, we’re watching those very carefully. And in the U.S., the pipeline is picked up quite a bit also. So, as you can see by what we just quoted, the pipeline is pretty robust for this year.

And does that skew industrial or office?

It skews industrial, definitely skews, primarily industrial.

And then, the tenants that you have had rent deferral issues with, and I know, it’s de minimis. But, was there a common denominator as far as asset type or tenant type that crossed this?

That’s a really good question, Bryan. And we’ve looked at that quite a bit. And there really hasn’t been any specific area that’s outweighed any other area. So, we’re very pleased with that. It doesn’t seem like there are issues in any particular sector in the properties that we own.

Got it. And just two more quick ones, on the G&A, it came in a good dip below our estimate for the third quarter. Is there something going on there, or was it just higher in the second quarter, because of COVID and rent deferral, legal stuff that you had to do or leased up? What’s a good run rate there, maybe better for Chris?

So, what I would say there is third quarter was a little higher, primarily from a legal perspective. COVID, as you mentioned, was one of the key drivers. And third quarter is a little more normalized than it definitely looked the fourth quarter -- sorry, second quarter.

So, more like 2.5 million to 3 million, not 3 million to 3.5 million?

Correct.

Okay. And then, just lastly, when we look at the dividend payout ratio, on a FAD basis in our model for next year, kind of gets to the -- I don’t know, mid to high-80s on a FAD payout ratio. And my suspicion is, within 11-plus-percent yield, you’re not going to raise out -- to raise that dividend. But, where are you comfortable seeing that drift down to, as you continue to grow FFO?

We’re really comfortable where it’s at now and we’re really comfortable with it drifting lower. As it stands right now, we have no plans to raise the dividend. But we -- this is something we discuss every quarter with the Board. And I think we’re in really good shape with the dividend coverage and with the dividend payout, going forward.

Great. Thank you. That’s all for me.

Thanks, Bryan.

The next question comes from John Massocca with Ladenburg.

Good afternoon. Hey, John, if I’m a little bit spotty here, I don’t know how good my reception is. As we think about the portfolio -- so the pipeline today and maybe even outside of the pipeline, you have those two stated transactions that are kind of under LOI, we know the cap rate on that. Where are you seeing cap rates maybe for other acquisition opportunities? Are they kind of in that 7% range? Is this same for the stuff that’s under LOI, or is it trending lower, trending higher? Just any color there would be helpful.

I think, we can say fairly reasonably that the range goes between 6.5 and 7.5. So, I think 7 would be a good number, if you were looking to round it off. But, those are usually the range ranges that we trade in. Sometimes, we could buy something too for an 8, 8.5 cap rate. It really depends. But, we’re -- probably will remain in the same range going forward that we’ve been for the last few years, actually.

Okay. And then, maybe touching on some of the European lockdowns again, but more from the perspective of investment opportunities. Is that potentially a gating factor on investments, either just kind of structurally, because it’s harder to close deals, do all the due diligence, or even maybe because it creates more uncertainty and tenants -- or potential tenants are a little less willing to transact? Could that impacts kind of volumes going forward?

I think, it might just slow down the process a bit, because having inspections done and everything is slowing down again. So it may -- and this is in Europe, we’re talking about. It may slow things down a bit. But, I don’t think -- I don’t think it’ll impact the volume, because I think people have a mindset of getting back to work and getting deals done. So, I think, the mindset certainly has changed over the last nine months to where people really want to get back to work. The inconvenience of being shut down is something that people work with. But, I think we’ll still see deals close. I think it just may take a little longer to get them close.

Okay. All my other questions have been addressed. So, that’s it for me. Thank you very much.

Thanks, John. Take care.

[Operator Instructions] Next question comes from Michael Gorman with BTIG.

Thanks. Good afternoon.

Hey. Good afternoon, Michael.

Jim, I was just wondering if you could give a little bit of more color, you were talking about very select office acquisitions. Has the way you’ve looked at underwriting office or the conversations that you’re having with potential tenants, changed as a result of the pandemic, or has your definition of what is actually mission-critical, as you’ve had conversations with either existing tenants or potential tenants, has that changed as a result of the impact of work-from-home during the pandemic?

It’s a really great question, and certainly very, very good for this particular time with COVID and everything. We’ve been very, very careful for the last three years and everything that we’ve bought regarding office. The type of office that we own is primarily what we consider mission-critical, which are like headquarter buildings or buildings that are extremely important to the tenant. And our rent collection certainly demonstrated that our philosophy has worked pretty well, and that the properties really are critical to the tenant, a very important, which I know a lot of people say that, but our rent collection certainly demonstrates that ours are. Looking forward, I think, we set a target three years ago to buy a lot more industrial and distribution properties, which we’ve done. And it’s been very, very effective, and good for the portfolio. And I think, as we move forward, we have a very strong criteria for anything we buy. And any office properties that we may buy will certainly have to fit into that essential to the tenant and certainly investment grade credit quality tenants. And, remember, most of our offices are in secondary markets, our office buildings are in secondary markets. So, what we find is you don’t have people going to work on public transportation, which is a big risk, people driving themselves to work. You have headquarter buildings where -- these are important buildings to the tenant. And I think -- and this is from feedback that we received, I think a lot of the way the tenants look at it, at least our tenants, is even up to 15% of the people want to work from home. It just gives them the opportunity to spread people out a little bit more in the facilities that they have. So, I think looking ahead, we do have a very resilient type of office portfolio, and I think it will continue to perform well. And I think anything that we add to that, you certainly can put in the same category. Long winded answer, but I hope I answered your question.

Definitely, that’s helpful. And then, maybe both for you and for Chris, because it kind of touches on the funding side of things. You have some exposure in the retail side, which is clearly not a focus for the Company going forward. That I think -- just based on commentary we’re hearing from other companies, would be pretty attractive in the disposition market right now, in terms of the QSRs, and in terms of some of the discount retail assets. I’m just wondering how you’re thinking about potential dispositions out of that retail bucket, maybe not because of any type of underperformance, but just because it’s an attractive source of capital, and maybe a good time to rotate those funds into longer term, more core type holdings for the Company. How do you think about that?

Well, as you know, we’ve been reducing our retail holdings for the last few years. I would look at us as an opportunistic seller. And I think, the reasons you put out are good reasons, and also we’re really not our retail focused REIT. So, we will continue to be an opportunistic seller going forward.

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

Thank you, operator. I want to thank everybody for joining us on today’s call. It’s always a pleasure to present to you. We think this was an excellent quarter for GNL. It demonstrated the resilience of our portfolio. And, we’re very proud of what we’ve accomplished. So, I’d like to thank you again for joining us. And with that, operator, you can close the call.

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