Global Net Lease, Inc. (GNL) Q4 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Global Net Lease Fourth 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. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us for GNL's fourth quarter and year-end 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. Throughout today's call we will use the term implied investment grade with respect to tenant. Please refer to our earnings release for more information about what we consider to be implied investment grade. 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, both of which are posted to our website at www.globalnetlease.com. 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. I am extremely proud of how GNL has performed throughout the year of unprecedented change and dislocation in the market. Our resilience through the last year is a testament to the strength of our strategy, including the deliberate construction of our portfolio, our focus on mission-critical industrial distribution of our office properties, and the execution of our prudent strategy in prior years to reduce our exposure to other asset classes, such as retail. From this solid base, we launched our inaugural unsecured notes offering in the fourth quarter. The notes received an investment grade rating from S&P of BBB minus, and a rating from Fitch of double BB plus. We continue to acquire high-quality accretive assets and build momentum headed into 2021. This morning, Chris and I will briefly discuss all of these initiatives, as well as our fourth quarter and full 2020 results before taking your questions. Our best-in-class $4.3 billion portfolio consists of 306 properties in the United States, Canada, the UK and Europe that are diversified across 130 tenants and 48 separate industries. Our property mix is currently 49% industrial and distribution, 46% office and 5% retail. Portfolio occupancy at the end of the year was 99.7%, with a weighted average remaining lease term in 8.5 years, as of December 31, 2020. 67% of our annualized straight line rent is derived from investment grade or implied investment grade tenants. Compared to our peers, our occupancy is unmatched and the weighted average remaining lease term in the portfolio is among the best in the sector. We also believe the credit quality of our tenants compares favorably to our peers. With no near-term expirations and with embedded contractual rent growth in 94% of leases, we believe our diversified portfolio remains stable and well-positioned to create value over the long-term for our shareholders. Rent collection for GNL remained at or above 97% in the second, third and fourth quarters of 2020. Because of the strategic importance of many of our assets, our tenants credit quality, our proactive approach to collection and our strong relationships with our tenants. In the fourth quarter, we collected 99% of the cash rent due across our portfolio, including 99% in the UK, and 100% in the rest of Europe. We collected 100% of the cash rent due from our top 20 tenants, representing almost half of our annual cash rent. I want to be clear that all rent collection percentages we discuss are calculated based on the original rent, we would have expected to receive before COVID started and they're not adjusted for negotiated deferrals or other amendments. We are very pleased with the acquisitions we made during the year, all of which were industrial, distribution and mission-critical office assets. In total, we closed on over $460 million of acquisitions. The weighted average cap rate for these acquisitions was 7.9%, with a weighted average remaining lease term of 14.5-years of closing. The fourth quarter was particularly active as we closed $292.8 million of transactions, that will eventually contribute over $21 million of annualized straight-line rent to our portfolio. Many of these acquisitions closed in late December, and as a result did not meaningfully contribute to our fourth quarter or full year results. One of the largest acquisitions in the fourth quarter was a four property U.S. Industrial portfolio, including three properties leased to DST Output, LLC, a wholly-owned subsidiary of Broadridge Financial Solutions, Inc. The property is leased to SKF USA, a wholly-owned subsidiary of AB SKF, the world's largest bearing manufacturer and distributor. The 1.3 million square foot portfolio is geographically diversified with properties in California, Missouri, New York and Connecticut, and features three mission-critical production facilities and the state-of-the-art manufacturing facility. The in place net leases have 1.8% average annual rent escalations, and a weighted average remaining lease term of 9.1-years. In addition to acquisitions, we were also active signing strategic lease extensions in 2020. In Helsinki, we signed an early lease extension on two leases with our implied investment grade tenant Finnair, the flag carrier and largest airline in Finland and majority owned by the Finnish government. We extended the lease term by 6.4 years for over 650,000 square feet, representing 1.8% of our portfolio. Closer to home in Germantown, PA, we signed a long-term lease extension with the GSA, which is backed by the full faith and credit of the U.S. government. This lease is for almost 15,000 square feet and it was extended by 8.3-years. In total, we negotiated and completed 12 such extensions for over 1.6 million square feet or 4.3% of our portfolio. These extensions collectively increased the weighted average remaining lease term at these properties to 10.8-years from 4.7-years. These extensions also reduce the concentration of leases scheduled to expire in 2024 from 17% to 12%. And we had no lease expirations in 2020 that were not renewed. Addressing lease expirations three years in advance as part of our aggressive and proactive approach to asset management. From our tenants' perspective, signing early and long-term lease extensions signals the mission-critical nature of these properties and our tenants' commitment to remaining in their space long-term. The result of all these efforts produced year-over-year growth and adjusted EBITDA, total revenue, NOI and dividend coverage. Adjusted EBITDA increased by 6% year-over-year to $248.7 million in 2020, compared to $234.5 million in 2019. Total revenue for the year rose 7.8% to $330.1 million from $306.2 million in the prior year. Net operating income also grew 7.1% to $297.7 million, from $277.9 million in 2019. In the fourth quarter, we completed a $500 million senior unsecured note offering. The notes have an effective interest rate of 3.75% and mature on December 15, 2027. Standard & Poor's rating services issued an investment grade rating of BBB minus on the notes, and Fitch Ratings rated the notes BB plus. GNL also received the corporate credit rating of BB plus from both S&P and Fitch. The notes were well received by the market and we were pleased with the demand for the offering. The rate achieved during a period of historically low interest rates and the credit ratings both on the notes and on the company. We believe that the success of the transaction is a testament to our hard work to enhance GNL's primarily investment grade portfolio over the past several years, robust rent collection throughout the pandemic, and disciplined acquisition focus. The notes allowed us to repay in full our outstanding borrowings under a revolving credit facility, pay off $88 million of secured debt and partially repay our term loan, all while adding new long dated debt. The seven-year notes also increased our weighted average debt maturity to 5.4-years as of the end of the year. By strengthening and diversifying our balance sheet and obtaining corporate level credit ratings, we are laying the foundation for GNL's continued growth and ability to issue unsecured notes on attractive terms in the future. We remain committed to executing on our global investment strategy, by leveraging our unique capacity to acquire assets throughout Europe and North America. Last year was a testament to the effectiveness of our strategy. We believe we will build on the substantial momentum we're carrying into 2021. We expect that momentum to dovetail with continued improvement in global economic conditions, and ultimately drive a very successful year. We believe we remain well-positioned to take advantage of evolving real estate markets and benefit from the added diversification, that comes with holding a balanced portfolio of global assets located in numerous economic regions. We believe 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. We will continue to execute on our strategy in 2021 and beyond, as we grow GNLs global and diversified portfolio. I'll turn the call over to, Chris, to walk through the operating results in more detail, and then I will follow-up with some closing remarks. Chris?

Thanks, Jim. We posted improved financial results for both Q4, 2020, annual and quarterly results in comparison to the prior year. As Jim mentioned, for 2020, we reported a 6% increase in adjusted EBITDA and a 7.8% increase in revenue, with net loss attributable to common stockholders of $7.8 million. FFO was $130.9 million or $1.46 per share, and AFFO was $160.5 million or $1.79 per share. The company paid common stock dividends of $155.1 million or $1.73 per share in 2020. Revenues increased primarily due to rental income from acquisitions. As always, a reconciliation of GAAP net income to the non-GAAP measures can be found in our earnings release and supplement. In the fourth quarter, revenue increased 13.5% to $87 million on a year-over-year basis. FFO was $22.7 million or $0.25 per share, and AFFO was $40.1 million or $0.45 per share. During the quarter, the company paid common stock dividends of $35.8 million. Our balance sheet ended the fourth quarter with net debt of $2.2 billion at a weighted average interest rate of 3.3%. Our net debt to adjusted EBITDA ratio was 8.5 times at the end of the year, primarily due to the late fourth quarter closing of almost 300 million of properties. The earnings from these acquisitions had little impact on actual NOI for the quarter, contributing only $1.6 million. The weighted average maturity at the end of the fourth quarter of 2020 was 5.4-years. The components of our debt include $111.1 million on the multi-currency revolving credit facility, $303 million on the term loan, $1.4 billion of outstanding gross mortgage debt and $500 million on our senior notes. This debt was approximately 95.8% 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 3.7 times. As of December 31, 2020, liquidity was approximately $218.8 million, which comprises $124.2 million of cash on hand, and $94.5 million of availability under the credit facility. Our net debt to enterprise value was 54.5%, with an enterprise value of $4 billion based on the December 31, 2020 closing share price of $17.14 for common shares, $26.16 for Series A preferred shares, and $25.40 for Series B preferred shares. As a quick update to the hedging program, we have continued to use our hedging strategy to manage our exposure to fluctuations in interest rates and in local currencies, against the U.S. dollar for our European portfolio. Regarding currency hedging, the company has used and may continue to use foreign currency derivatives to manage its exposure to fluctuations in GBP and USD and euro to USD exchange rates. With that, I'll turn the call back to Jim for some closing remarks.

Thank you, Chris. I'm very proud of the way that GNL didn't just weather the storm that was 2020, but actively sought and executed an opportunity to enhance our portfolio and balance sheet. We sourced and closed on over $460 million of accretive acquisitions. We obtained our own credit rating and issued $500 million of unsecured debt that we received an investment grade rating from S&P of BBB minus and a rating from Fitch of BB plus. We didn't slow down our pursuit of these objectives during the pandemic, and we were able to issue these notes in a low interest rate environment and an attractive coupon. We signed early and long-term lease extensions based on the mission-critical nature of our assets, and extended all of the leases that expired in 2020. A true testament to our tenants' commitment to their space and the relationships we have built. Our stock performed well last year, and we believe that improving global economic conditions will benefit well-constructed companies like GNL. Going forward, we will continue to maintain our focus on industrial distribution and mission-critical office acquisitions that are accretive to our portfolio and capital markets transactions, that will support our future growth. We are emboldened by the outstanding performance of our institutional grade portfolio, and are poised to continue our success in the coming year and beyond. With that operator, we can open the line for questions.

[Operator Instructions] Our first question is from Nate Crossett of Berenberg. Please go ahead.

Hey, good morning, guys. Thanks for taking my question.

Good morning, Nate.

Good. Morning.

I know you guys don't give formal guidance. But I was just wondering if you could give, broad strokes in terms of how we should be thinking about acquisition volumes, deal flow, U.S. versus Europe, industrial versus office, and then your kind of expectation for pricing and releasing spreads?

Great question. A lot of different answers embedded in that question. First of all, let me say that we have a very robust pipeline. And as you can see how we ended last year, in the fourth quarter, we can definitely say that, we expect this year to be a very good year as far as acquisitions. Chris, why don't you take a couple of the other points?

Sure. So as Jim says, very, very strong pipeline. Unfortunately, in terms of what we can actually disclose, it's what we have under agreements. But there is a lot more that we are working on both the U.S. and Europe. As Jim mentioned a little bit earlier in the script, when it comes to leasing, we've completed 12 lease extensions over the past year, that's something that we are continuing to work on. And as we've done this, we've been very successful, and really keeping ourselves at market rates and building in extensions to these leases. So, that's added a lot of value, I think, to the portfolio.

And let me talk about a little bit about U.S. versus Europe. We continue to look in both places. As you can see, by what we bought in the last couple of years, we're buying very high-quality assets in Europe. Whirlpool, and Johnson Controls have been to two companies. We bought a number of assets in Europe. We continue to look. U.S., we have a very, very robust pipeline also. And I think if you look back at what we've bought in the last three years, probably at least two-thirds to three-fourths have been industrial and distribution properties. And we will continue to have our focus very much in the same direction going forward.

So I guess, all that's helpful. So long-term, kind of the industrial percent of the overall portfolio, should we expect it to be kind of 60-40 plus longer-term?

I think that's a fairly decent target. As you can see, by at the end of 2020, we have gone from being a little bit higher percentage in office to a higher percentage in office and industrial. I'm sorry, in industrial and distribution. So we're definitely moving that direction very, very nicely with our acquisitions.

Okay. Maybe just last question, you kind of just talk about your office portfolio. Obviously, with COVID, there's some structural questions surrounding, maybe more so CBD office. But can you just kind of remind us why you think your portfolio has been well? And kind of what the competition is like right now to be buying these types of office assets?

Well, I'll answer the second part first. There's always competition, when it comes to buying good properties. We focus on very high quality and truly, truly mission-critical properties. And I think the performance of our investment grade tenants and all of our tenants proves that these properties are extremely important to them. And we continue to purchase assets that really have the same metrics built around them. So, I think we're in a very fortunate position with the assets that we have, and certainly with the assets that we would buy in the future. We have a very disciplined underwriting process. And all of these factors are very important, when we buy a property. So, as I said, we're very, very confident of the quality of our portfolio office and industrial distribution. And I think the plan has worked very well for us, and we will continue to buy those accretive properties.

Okay. Thank you.

Thank you.

The next question is from Michael Gorman of BTIG. Please go ahead.

Thanks. Good morning.

Hey, Michael.

Hi. I was wondering if you could talk a little bit more, I understand there's always competition for the high quality properties. But I just wonder if you saw a low in the competition last year during some of the volatility, and to the extent that some of that is coming back. And maybe how that's influencing how you think about 2021?

Well, I think personally, I think we saw a number of the recent our sector basically sitting on their hands, waiting to see what would happen. We continue to be very, very selective in what we bought. We have very stringent underwriting metrics that we follow. And we found great properties, and we finished the year as we said over $460 million worth of acquisitions. I think, because of the quality of our acquisition team, our position in the market, the huge volume of acquisitions that our platform has done over $40 billion since 2007 in acquisitions, that we have a real advantage. We're known as a very good buyer, we buy a number of properties direct from sellers and sale and leaseback. We buy from developers. So we really have, in a lot of sense, an upper hand at how and where we buy. And we're well known in the markets that we buy in. So, I think, even though competition may be coming back, the U.S. real estate market is so huge, that we certainly can find an abundance of good properties that meet our criteria, and continue on our acquisition pace.

That's helpful. Thanks. And then Jim, I noticed your comment about truly mission-critical. And I thought that's interesting, because it is a term that gets thrown around a lot. And I do wonder, as you kind of saw what happened in 2020, have you changed your definition of what lease criteria?

Not really. I mean, as you can see, it's worked well for us in the properties that we own. And as we continue to add to the portfolio following our same acquisition metrics, we should be able to continue to have those same types of mission-critical properties joining our portfolio as we move forward. And we do have, as I said a very, very robust pipeline. And we expect to be able to continue doing what we've been doing, very successfully.

Okay. Thanks. And then just one follow up for me and I apologize if I missed it. But any color you can provide on the three leases that are set for expiration this year?

Chris, you want to take that?

Sure. I mean, all I can say is that we are actively working on those leases that are set to expire, in terms of working extensions, in addition to many other leases in both the U.S. and Europe that have even longer dated timeframes. So, we are being very proactive in terms of getting ahead of these lease expirations.

And remember, those are three leases out of 306 properties. So we're not overly concerned, but we are working on them.

For sure. Great. Thank you very much.

Thank you.

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

Good morning. You talked about the size of the pipeline, but if we kind of compare that obviously to what is under LOI in purchase and sale agreement? Should we kind of expect the acquisition cadence this year to be kind of concentrated in 4Q? Or is there stuff that's maybe kind of just out of sight not under LOI not under PSA, but very close?

That's a loaded question, John. I don't think. I think it's too early to say the year is going to be back-end loaded for sure. We have a lot of things that we're working on. We have a lot of things that we're looking at. We don't give guidance, but all I can say is, we expect this to be a very good year for acquisitions.

Okay. And then there's been a lot of movements around kind of inflation expectations in the United States, maybe versus Europe. And how has that potentially impacted where you see transaction volume turning out this year geographically?

Again, I think it may be a little early to tell, because inflation fears are just starting to edge into the economy. People are talking about it more than they have in a very long time. But I don't think our market has reacted dramatically to that, at all. In Europe, again, we look to buy very, very high quality assets. And I haven't seen anything as far as an effect in Europe at the present time. So we still remain optimistic, and we think things will continue pretty much the way they have been.

Okay. That's it for me. Thank you all very much.

Thanks, John.

Thanks, John.

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

Great. Thanks, guys. Quick question. When I was looking at your acquisitions here in the fourth quarter, you mentioned a cap rate of 6.5 going in, and then I think 7.2. How quickly does that become a 7.2 cap rate because 6.5 is a little on the low side for you guys?

Sure. Well, what I would say there in terms of the acquisitions that we had during the fourth quarter, the escalators built in are roughly about 2% a year on average for these acquisitions. I don't have the exact time when we'll get to the 7.2, but that's the escalator that we'd be working with here.

Is that 7.2 kind of an average over the lease period?

Correct. That would be the average over lease period.

Okay. Perfect. Thanks so much. That's all I had today.

Thanks, Barry.

[Operator instructions] The next question is from Bryan Maher of B. Riley Securities. Please go ahead.

Good morning. Just most of my questions have already been answered. But we noticed property operating and G&A expenses were a bit higher than our expectations for the quarter. And maybe this is the best for Chris, is there anything going on with those numbers that we should think about? And are the fourth quarter numbers kind of a good run rate to look at for 2021, of course, building in acquisitions as they go?

Sure. So, I guess I'll start first with the property operating expenses. Obviously, these fluctuate quarterly, based on acquisitions and activity. But I think the key to point out here, when you're looking at third quarter versus fourth quarter, the increase is roughly about $2 million. But the actual expense reimbursement revenue was also up about $2 million. So, when you're looking at that, that net OpEx, it's effectively are going to be flat quarter-over-quarter. So, it doesn't have much earnings impact. And then the second part of it in terms of G&A, the bump in the fourth quarter, I would say is primarily driven by legal fees that really were occurred for the most part in conjunction with the lease extensions. So obviously, it's something that added value to the portfolio. But that's going to be an activity-based item, and I would say, don't assume that a run rate unless we're significantly working on lease extensions.

Great. And then just one question for me on the acquisition. You guys have been pretty thorough with your answers so far. But has there been any meaningful change in your deal sourcing or where you're seeing opportunities from? And are you seeing any stress levels on the part of potential sellers, mainly, as I'm talking about in the part of office, either in Europe or in America, which could skew you to buy in one market over the other?

I don't think that there's anything going on that would really skew us to buy in one market versus the other. And I think if you're looking at the high quality type of mission-critical properties that we buy, I think, there's still value there. So, I don't see that part of the office market becoming depressed. But again, we follow it very closely. We're very careful with what we buy. And I'm very confident that we can continue buying really high quality assets through 2021 and beyond.

Thanks, Jim.

All right. Thanks.

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

Thank you, Operator. Thank you, everybody, for joining us on today's call. It's always a great pleasure to talk to you and to bring forward the results that GNL has accomplished. So, we thank you and we'll talk to you next quarter. Bye-bye.

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