Global Net Lease, Inc. (GNL) Q1 2021 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Global Net Lease First Quarter 2021 Earnings Call. All participants will be in listen-only mode. [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 first quarter 2021 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, 2020 filed on February 26, 2021 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 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 will 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 pleased to report that GNL had an excellent quarter, highlighted by AFFO of $0.44 per share, cash NOI growth of 14.6% to $80.9 million, and the ongoing construction of a robust forward acquisition pipeline, including the acquisition of the McLaren Group’s Headquarters that we announced a few weeks ago and which closed on April 28, 2021. For the quarter, we collected substantially all of the original cash rent that was payable, including 100% of the cash rent payable from our top 20 tenants, which represents almost half of our total annual cash rent, underscoring the quality and resilience of our existing portfolio. Our historic emphasis on credit quality, underwriting, asset selection and due diligence of all helps shape a portfolio that continues to perform well. On a geographic basis, GNL collected 100% of the cash rent payable from our UK, European and North American assets. Our year-to-date, closed and forward pipeline acquisitions exceed $250 million of contract purchase price at a going-in cap rate of 9.3% and a weighted average remaining lease term of 19.4 years. The acquisitions consist of 6 properties, half of which are located in the U.S. and half in England and total almost 900,000 square feet. The pipeline acquisitions are primarily industrial assets with some office and R&D components. The largest of these acquisitions is the McLaren Group Global Headquarters, which closed on April 28, 2021 at a contract purchase price of £170 million, or $236 million. This three property sale leaseback is an excellent addition to GNL’s portfolio and illustrates our ability to source large scale global opportunities at what we believe to be well below replacement costs. We are very pleased to have been able to collaborate and work with the management team of the McLaren Group to effect this transaction. The campus is being acquired at a going-in cap rate of 9.5% and an average cap rate of 10.8%. The annual base rent is subject to a one-time contingent adjustment, which only occurs upon a McLaren Holdings Limited corporate credit rating enhancement to be minus or equivalent from one of S&P, Moody’s or Fitch by May 2023 and if the company refinances the debt incurred to acquire the property by December 2024. If these conditions are not met, the adjustment will not occur. Company is under no obligation to complete a refinancing of this loan and we do not expect to do so during the first year in the lease. Additional information regarding this transaction will be available in our 10-Q when it’s filed. The new 20-year triple net lease includes annual rent escalations, with a floor of 1.25% and a ceiling of 4% based on CPI, which has averaged 1.9% annually over the last decade. The state-of-the-art buildings were designed by renowned architect, Norman Foster, have won numerous awards and obtained carbon standard recognition from the Carbon Trust for their environmentally conscious features. The acquisition exemplifies the strength of GNL’s global presence and our ability to execute accretive sale leaseback opportunities in a competitive marketplace. We believe our global presence as a leading net lease REIT will continue to provide attractive acquisition opportunities that complement our best-in-class portfolio. Our $4.3 billion 306 property portfolio is nearly fully occupied at 99.7% leased, with a weighted average remaining lease term of 8.3 years at the end of the quarter. Geographically, 237 of our properties are in the U.S. and Canada and 69 are in the UK and Western Europe, representing 65% and 35% of annualized rent revenue respectively. Our portfolio was well-diversified with 130 tenants in 48 industries, with no single industry representing more than 12% of the whole portfolio based on straight line rent. Our property mix continues to evolve and it’s currently 49% industrial and distribution, 46% office and 5% retail compared to 47% industrial and distribution, 48% office 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 66% of straight line rent comes from investment grade or implied investment grade tenants. Our portfolio was focused on long-term triple net lease of single tenant properties and we have minimal 2021 lease expiration. That being said, we have signed a non-binding Letter of Intent or are under agreement on 4 lease renewals for 626,000 square feet that would extend leases with these tenants by over 6 years. Included in this group is an executed lease with Shaw Development, a Baa1 tenant in Naples, Florida to extend the 12 years and have signed Letter of Intent for a lease extension with Ocean [ph] on implied Baa3 tenant in Bordeaux, France for 9 years. Although we frequently discuss our extensive acquisition success, it should be noted that our team is capable of the full scope of services need to operate, manage and grow a portfolio of this size, including the less visible leasing asset management, legal accounting and report work that keeps everything running smoothly. Superior execution by our team and the strength of our portfolio contributed to continuing quarter-over-quarter growth and adjusted EBITDA cash NOI and AFFO. Cash NOI increased to $80.9 million for the first quarter of 2021, up from $71 million in the first quarter of 2020. For the quarter, AFFO per share was $0.44 per share equal to the $0.44 per share we reported in the first quarter of 2020. The company distributed $36.2 million in common dividends to shareholders in the quarter or $0.40 per share. With that, I will 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 first quarter 2021, we recorded adjusted EBITDA of $68.1 million, up from $60.1 million in the first quarter of 2020. We also reported a 12.8% increase in revenue to $89.4 million from $79.2 million, with net loss attributable to common stockholders of $832,000. FFO and AFFO for the first quarter were $38.9 million and $40.4 million respectively or $0.42 and $0.44 per share compared to $0.43 and $0.44 per share in the first quarter of 2020. The company paid common stock dividends of $36.2 million or $0.40 per share for the quarter. As always, the 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 billion at a weighted average interest rate of 3.3%. Our net debt to adjusted EBITDA ratio was 7.4x at the end of the quarter. The weighted average debt maturity at the end of the first quarter 2021 was 5.1 years. Components of our debt includes $500 million in senior notes, $125.9 million on the multi-currency revolving credit facility, $289.8 million on the term loan, and $1.4 billion of outstanding gross mortgage debt. This debt was approximately 96% fixed rate, which is inclusive of floating rate debt with in-place interest rate swaps. Company has a well cushioned interest coverage ratio of 3.6x. As of March 31, 2021, liquidity was approximately $350 million. Our net debt to enterprise value was 49.9%, with an enterprise value of $4 billion based on the March 31, 2021 closing share price of $18.06 for common shares, $26.66 for Series A preferred shares, and $25.55 for Series B preferred shares. With that, I will turn the call back to Jim for some closing remarks.

Thank you, Chris. We had a very good first quarter building on the strength of our carefully constructed best-in-class mission-critical portfolio. The senior unsecured notes we closed in the end of the fourth quarter at a 3.75% coupon enhanced our capital structure by locking in rates in a historically low interest rate environment and provided valuable experience for the construction of potential future issuances. Our $257 million forward pipeline of completed and pending acquisitions at a weighted average 10.5% cap rate will continue GNL’s growth trajectory and the long waited average lease duration of these assets ensure that they will enhance our portfolio for a long period of time. We are excited about the acquisition of the McLaren Headquarters and proud to have McLaren as a true partner in the state-of-the-art facility. Rent collection remains at nearly 100% and we reported superior first quarter adjusted EBITDA and cash NOI compared to last year. We will continue to pursue additional accretive acquisitions and believe that the outstanding performance of our best-in-class global portfolio will continue to contribute to growth in our future quarterly results. With that, operator, we can open the line for questions.

Thank you. [Operator Instructions] Our first question comes from Bryan Maher from B. Riley Securities. Please go ahead.

Good afternoon, Jim and Chris and thanks for all that color. Couple of quick ones for me. I think you had something fallout of the pipeline maybe in the first quarter. Is that the case and what was the color behind that?

I don’t remember the details offhand, but one potential acquisition did fallout, you are right, Bryan.

Okay. And then on the McLaren acquisition, which is really interesting and was a little surprised by how high the cap rate was on that, is that like a company-specific built type of asset? I realized that it’s a long-term lease and everybody knows McLaren, but can you give us a little color as to exactly what is involved in that? Is it office space? Is it office and R&D? What exactly is in the $200 million something?

Well, in the facility, there is 3 buildings, they have R&D, they have manufacturing, quite a big manufacturing and the race team is also – the racing business is also in the property and then there is some office space. So, it’s a large property, it’s what, 900,000 square feet. So, it’s a campus, but the campus consists of those three different types of sectors in the property itself.

And how was the deal sourced? And I asked that because you and I both know there is a lot of money out there private equity and others chasing yield, looking for office, looking for industrial and you continue to ferret out these things at attractive cap rates that my other companies I cover are a little surprised about. So, how did you source that deal and what does your pipeline look like kind of outside of what you’ve already disclosed?

Well, the pipeline, we are still looking at a very robust pipeline for this year and we continue to work very hard on identifying new properties to buy. The McLaren deal came to us through some members of management who actually knew the management team at McLaren and had relationships with them. So, obviously, when we heard that they were selling this headquarter property, we expressed our interest and bid on it and got it. It was a long process. We worked on this for quite a while, the end of last year, beginning of this year. And ultimately, we were the successful buyer of the property.

And then just…

And it’s a – Brian, it’s a really beautiful property. It’s an amazing campus. There is so much potential for this campus. If we ever needed to re-rent all or part of it, I mean, it’s just an amazing property and a great location.

Well, I think that there will be a great Investor and Analyst Day forthcoming to that campus sometime in the upcoming year.

Yes, but it will have to be analysts that like to drive race cars. So we will see. We will see who wants to go.

And then just lastly on the liquidity, I think I heard you guys say that it was about $350 million at the end of the quarter, but you just spent a slug of that. How do you think about capital raising over the next couple of quarters, a) relative to your stock price, and b) relative to what you have in your back pocket that you are looking to acquire?

Sure, I will take that. And I guess to start from a liquidity perspective I would say we are still in a comfortable position in terms of that $350 million, the really only material items after the quarter have been the dividend payments and then the equity on this McLaren transaction. So, we still do have a strong amount of liquidity. That being said, looking forward and capital raising, I mean really that’s just going to be kind of an as appropriate basis. And as we kind of build up the pipeline and see our needs and then really see what the market looks like and make sure we do it at the right time.

And you are not seeing any changes to where you guys can kind of borrow at that attractive level?

It’s been pretty consistent from a borrowing perspective.

Great. Thanks. That’s all for me.

Thanks, Bryan.

The next question comes from Michael Gorman from BTIG. Please go ahead.

Thanks. Good afternoon.

Mr. Gorman, good afternoon to you.

If I could just stick with the kind of the acquisitions and cap rates, I am curious what kind of internal discussions you are having, obviously, we saw a pretty aggressive trade in the industrial space when the past couple of days seems like there is quite a bit of potential embedded value in some of your tenant base, especially with your top tenant being FedEx? Have you looked at the potential for kind of capital recycling, maybe taking some of those assets given the current market and given where you can source new acquisitions? It seemed to be like there would be a pretty significant cap rate spread there if you were to do some capital recycling, at this point, just as a way to raise equity? Have you guys talked about that internally?

Well, we always look at all of the different opportunities that are available to us. We have a very, very well performing portfolio. As you know, collecting 100% of our rents, 99.7% occupied, and we do have the ability to source capital as we need it. So, we do look at the opportunities and we respond appropriately. So, I don’t want to say we will sell properties or we won’t, but we are very, very happy with the portfolio that we have. It performs well. We are in the business of owning properties and paying dividends to our shareholders. And I think we do that very, very well.

No, for sure. I was thinking more if you could monetize a FedEx set of 47 and put it back into a new acquisition at over a 9, that’s pretty good value add, but I take your point. Second question is on the other side of the business, office, we have seen a lot go on there as well. You have got realty income talking about spinning off a pure-play, net lease office REIT, you’ve got a couple of other competitors looking to dispose of their office portfolios, maybe to spend another minute on what you are seeing in the office acquisition environment on a competitive front and maybe just on a product front as well?

Well, this is something again that we look at very carefully on a continuous basis. And fortunately, we are in a very good position with the properties that we own, with them being in secondary markets, which – if you look at people moving out of the cities, in some cases, that bodes very well for us and we do get inbound calls asking if we have office space available or buildings available. Secondly, we feel strongly that not everybody is going to stay home people are going to go back to offices and particularly the type of office, the office buildings that we own, where they are in secondary markets, the people mostly drive to work, they don’t – the COVID risk is really going away. And we haven’t really heard a lot or hardly anything from any of our tenants looking to reduce space. So, to wrap it all up, we are very comfortable with what we own and we don’t have a lot of concerns going forward for our particular office portfolio.

Great. That’s helpful, Jim. I appreciate it.

[Operator Instructions] Next question comes from John Massocca from Ladenburg Thalmann. Please go ahead.

Good afternoon.

Hey, John.

Hey, John.

In you prepared remarks, you mentioned some refinancing language around the McLaren transaction. I am sorry I missed most of that can you just clarify what that was?

Sure. So within the first 3 years of the transaction, if we refinance our current debt and McLaren also achieves a higher credit rating, then the rents that McLaren will pay annually will step down.

And I guess, what is that step down?

So effectively, it will step down. So we still have an approximately almost 9% cash on cash return.

If there is a step – so it’s just because the….

Correct.

Okay, okay.

Yes, okay.

No, you go ahead. Sorry if I wanted to – if I interrupted you.

No, no, go ahead. Go ahead. Chris covered it well.

Okay. And I think broadly speaking you mentioned a little bit kind of your bigger picture view on office, but I mean, what are you seeing maybe in terms of utilization, particularly in some of your UK assets if you are having conversations with tenants there, just in terms of that’s a market where are you have seen maybe a quicker return of people back to kind of pre-pandemic normal, I mean, is that playing out in your office portfolio in that geography?

Well, we have a lot of different types of properties in the UK. They have performed extremely well last year during COVID, paying 100% pretty much all year long. And we did a couple of deferrals where they rather than paying quarterly, they paid monthly, which wasn’t really a problem for us. And our portfolio in the UK is performing extremely well.

Okay. And then you mentioned some leasing and re-leasing within the portfolio, the two transactions, the Shaw Development and I am sorry if I mispronounced this, the Hawkins [ph] lease extension expansion that’s under potential LOI. I mean, where are rents trending with some of these re-leasings these are the ones under contract or the two as you mentioned?

Well, there is two things that you have to look at when we look at these lease renewals. We look at the increases over time. So, if you give them a slight bump or a couple of months free rent at the front of this and then you have got it going up anywhere 1% to 2% a year for another 9 or 10 years, it certainly makes up the difference. So, we look at the big picture. Sometimes we will have to do a little bit of tenant improvements. Sometimes they will ask for a couple of months free rent, but in general, the overall transactions have been favorable for us in the long-term.

Okay. And the two assets you mentioned are those industrial or office properties as a reminder?

What, Chris, you know, offhand what Shaw is?

I believe Shaw is industrial.

And I think Ocean [ph] is industrial also.

Ocean, sorry, I did horribly mispronounce that.

It’s okay.

That is it for me. Thank you both very much.

Alright. Thanks, John.

Thanks, John.

There are no more questions in the queue. 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 would like to thank everybody again for joining us today and we do appreciate your continued participation with GNL. And with that operator, we can close the call. Thank you.

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