Global Net Lease, Inc. (GNL) Q1 2022 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Global Net Lease First Quarter 2022 Earnings Call. [Operator Instructions] Please note, this conference 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 First Quarter 2022 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, 2021, filed on February 24, 2022, 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 the 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 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 detailed 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 our CEO, Jim Nelson. Jim?

Thanks, Louisa, and thank you to everyone for joining us on today's call. I am pleased to share that GNL is well positioned for a strong 2022 based on the acquisitions and leasing pipelines we are building, and the recast of our corporate credit facility at improved pricing subsequent to quarter end. Our high-quality mission-critical net lease portfolio is performing well, with occupancy of 98.7% and 100% rent collection. We are advancing our differentiated international and domestic strategy by increasing portfolio concentration in industrial and distribution assets, successfully extending and expanding leases and building a pipeline of accretive acquisitions, while evaluating strategic disposition opportunities on an ongoing basis. Since the beginning of 2020, over 81% of GNL's acquisitions have been industrial and distribution assets, increasing GNL's ownership to this highly dependable asset class up from 46% to 55% of the portfolio. We continue to drive growth as year-over-year cash NOI for the first quarter increased by more than 7% to $87.2 million, and AFFO increased by more than 9% to $44.3 million. AFFO per share was $0.43, and we paid dividends to common stockholders of $0.40 per share. Our portfolio debt is 87.6% fixed rate, providing added certainty in a period of rising rates. The first quarter also illustrated the value of our efficient hedging program, which minimized the impact of turbulence in the euro and the pound on GNL's results. Our unique global capabilities, strong balance sheet and best-in-class portfolio continue to drive GNL's excellent performance. Turning to leasing activity. In the first quarter, we executed 2 lease renewals and 3 renewal and expansion leases, totaling 1.2 million square feet and $54 million of net new straight-line rent over the new weighted average remaining lease term. We signed 2 tenant renewal and expansions in France with Auchan for over 170,000 square feet. These leases are for 11 years and total $15 million of net new annualized straight-line rent. Closer to home, we signed a lease renewal and expansion with Lippert in South Bend, Indiana, for a total of over 780,000 square feet on a 16-year term and for $16 million in net new annualized straight-line rent. I am particularly proud of our successful leasing activity over the last quarter and the growth it provides for GNL. These renewed leases contributed to a year-over-year increase in portfolio weighted average remaining lease term despite the passage of a full year. On a square foot basis, 70% of our leases expire after 2026. Our $4.6 billion, 309-property portfolio has a weighted average remaining lease term of 8.4 years. Geographically, 235 of our properties are in the U.S. and Canada and 74 are in the U.K. and Western Europe, representing 61% and 39% of annualized straight-line rent revenue, respectively. Our portfolio is well diversified with 137 tenants in 50 industries, with no single industry representing more than 12% of the whole portfolio based on annual straight-line rent. Over 94% of our leases feature annual rental increases, including based on straight-line rent, 59% that are fixed rate and 28% that are adjusted based on the consumer price index. As we mentioned, we continue to expand the concentration of industrial properties in our portfolio. At the end of the first quarter, our assets were comprised of 55% industrial and distribution, 42% office and 3% retail compared to 49% industrial and distribution, 46% 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, almost 62% of annual straight-line rent comes from investment-grade or implied investment-grade tenants. After closing on almost $0.5 billion worth of acquisitions in 2021, and we are beginning this year with continued activity. Our forward acquisitions pipeline totals $111.9 million and includes 1 industrial property in the U.S. for $13.4 million, which closed on April 19, 2022, and 1 office and 3 industrial properties for $98.5 million, subject to LOIs. Combined, these acquisitions have a weighted average cap rate of 7.5% and with over 14.5 years of lease term remaining. Our team is also evaluating strategic disposition opportunities and searching for additional acquisition targets that meet our stringent investment requirements. Management continues to diligently evaluate domestic and international sale leaseback transactions to generate superior risk-adjusted returns. Subsequent to quarter end, we recast our corporate credit facility with a new $1.45 billion revolving credit facility that has a 4.5-year term and improved pricing that is 15 basis points lower than the facility it replaced. Our recast facility, acquisitions pipeline and successful leasing activity, along with the reputation we have earned over the last few years as a premier sale-leaseback partner for mission-critical industrial and office properties, positions GNL for strong 2022 and beyond. With that, I'll turn the call over to Chris to walk through the financial results in more detail before I follow up with some closing remarks. Chris?

Thanks, Jim. For the first quarter 2022, we recorded adjusted EBITDA of $75.7 million, up from $68.1 million in the first quarter of 2021. We also reported an 8.7% increase in revenue to $97.1 million, up from $89.4 million, with net income attributable to common stockholders of $5.5 million. FFO and AFFO for the first quarter were $45.6 million and $44.3 million, respectively, or $0.44 and $0.43 per share. 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 quarter with net debt of $2.3 billion at a weighted average interest rate of 3.4%. Our net debt to adjusted EBITDA ratio was 7.7x at the end of the quarter. The weighted average debt maturity at the end of the first quarter 2022 was 4 years. The components of our debt include $500 million in senior notes, $260.3 million on the multicurrency revolving credit facility, $274.6 million on the term loan and $1.4 billion of outstanding gross mortgage debt. This debt was approximately 88% 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 3.6x. As of March 31, 2022, liquidity was approximately $225.9 million. The company distributed $41.6 million in dividends to common shareholders in the quarter or $0.40 per share. Let me share some of the details on the credit facility Jim mentioned earlier. The facility will be administered by KeyBanc, N.A., and includes 2, 6-month extension options. The interest rate on the credit facility adjusts based on the leverage ratio, with a minimum rate of 1.3% over the currency-specific benchmark rate and a maximum of 1.9% over the currency-specific benchmark rate. We proactively replaced the prior facility more than a year early to take advantage of an active corporate syndication market and lock in certainty on terms and pricing. With favorable pricing and an expansion feature that could increase the facility size to nearly $2 billion, we believe the transaction strengthens our balance sheet and provides flexibility for continuing our strategy of acquiring high-quality industrial, distribution and office properties. Our net debt to enterprise value was 54.8%, with an enterprise value of $4.3 billion based on the March 31, 2022, closing share price of $15.73 for common shares, $25.54 for Series A preferred shares and $25.05 for Series B preferred shares. With that, I'll turn the call back to Jim for some closing remarks.

Thank you, Chris. I'm very pleased with our progress and accomplishments during the first quarter, including the lease renewals and expansions that added $54 million of net new straight-line rent on 1.2 million square feet of our portfolio. The credit facility recast we advantageously completed after quarter end secures acquisition flexibility for years to come. We are well positioned to continue to execute on accretive and exclusive transactions that will further enhance our portfolio. With that, operator, we can open the line for questions.

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

A couple of questions for me. With what we're seeing in the capital market, interest rates, where your share trading, is that impacting your appetite for acquisitions for 2022 at all?

Well, I wouldn't say it affects our appetite I think we're being cautiously optimistic and really focusing on buying high-quality properties at accretive prices. And we continue to do that year-over-year as you guys have seen.

And you mentioned evaluating dispositions. Can you give us a little bit of color on what the criteria would be for something that would kind of fit in that bucket, maybe the size of dispositions you're thinking about geographies, whether it's North America or Europe?

Well, we constantly review the portfolio and stay in very close contact with our tenants. So we haven't really put anything up for sale. We haven't publicly stated something. But I think, Bryan, if you look back a few years and you look at the property we sold in Germany, where we knew the tenant was moving out in a few years, and it was going to be very difficult to turn it into a multi-tenant property from a single-tenant property. And we had 3 offers just without even listing the property for sale. So we try to be proactive and really keep the portfolio in the best shape that we possibly can.

Great. And 2 more for me. Are you seeing any impact on any of your Western European tenants on the geopolitical issues going on in Eastern Europe?

Absolutely not. We've had no ill effect from what's going on in the war zone within any of our properties in Europe. Our tenants are still paying 100% of their rent. We're still talking to them about rent renewals and expanding properties. So I think we're in really good shape in Europe. Unfortunately, the situation in Eastern Europe is not great, but we don't own any properties in Eastern Europe. Our properties are all in Western Europe within countries with very good sovereign credit ratings.

And last for me, we're seeing on some of the office REITs that we track, and office has been the subject of great debate, right? Are people going to renew? Or are they going to renew the same amount of space, what have you? But we've actually seen a greater pickup in leasing activity from tenants seeking out early renewals to try and lock in kind of rates before they fear that when their leases come due in a couple of years, the rates will be even higher. I know you have 11% or so coming due in 2024. Are you hearing from many of those tenants looking to do something early?

Well, as I'm sure you know, we are very proactive on lease renewals. So we will reach out to tenants well in advance of exploration. So -- and as you've seen by what we publicly stated, we've been pretty successful in lease renewals, and we expect that to continue.

Our next question is from Todd Thomas with KeyBanc Capital Markets.

I just wanted to go back to investments a little bit. And I was wondering if you could discuss price trends that you're seeing in the market for properties that you're targeting? And also, can you comment on the composition sort of between industrial, office as you look ahead, where you're seeing the most opportunity today?

Well, to answer the second part of your question first, as we stated, since beginning of 2020, over 80% of our acquisitions have been in the industrial and distribution space. Fortunately, it's a huge market, and we're very well positioned with the sale and leaseback market. A number of our tenants have asked us to do sale and leasebacks on other properties in our portfolios. So we're very, very comfortable with where we're going and we're going to continue focusing on industrial and distribution. Now remind me again the first part of your question, I'm sorry.

Just price trends, how cap rates are trending, if you're seeing any change at all in acquisition yields?

Well, I think people are starting to respond to the rising in interest rates with where cap rates are. As you know, we've seen quite a bit of compression over the past couple of years, but we're starting to see those markets firm up, and prices and cap rates beginning to rise. So I think, normally, historically, the cap rates follow interest rates rising by about 6 months, but we're actually starting to see a bit of that right now.

Okay. And then in terms of funding investments throughout the balance of the year, can you just discuss a little bit more about how you're thinking about the various sources of capital that you have, dispositions, cash, you're sitting on a little bit of cash today, availability on the line. Can you just maybe talk a little bit more about funding investments, how we should think about that? And also, can you share where you see leverage sort of shaking out at the end of the year?

Go ahead and take that, Chris.

I can jump in. Sure. So I guess, first place to start is at the end of the quarter, we had about $225 million in liquidity between cash and availability. So that rate there is obviously a great source for us for funding acquisitions. We also have about $56 million in dispositions, which we expect to close on over the remainder of this quarter. So between those 2 sources, I mean, I think that's a lot of capital for us to work with. In terms of leverage, we are comfortable with where our leverage is now, obviously, because of the strength of the portfolio, the investment-grade tenants, the cash rent collection. That being said, we're not going to be looking to really push that higher. In general, historically, we've been running in the low 7s in the net debt to adjusted EBITDA. And really kind of that's the range that, I would say, we expect to be operating in.

Our next question is from Mitch Germain with JMP Securities.

Chris, maybe since you were talking about debt and leverage. Obviously, the debt markets here are -- have been a little volatile. What about the ability to issue debt or even refinance to debt that you've got in Europe right now? Talk to me maybe about the condition of the lending environment there?

Sure. Well, so that is something that we're constantly evaluating the upcoming maturities that we do have, especially in the U.K., which is next year, it matures, some in Europe mature in the following year. So I mean we've been reaching out and looking at our alternatives. And I mean we still have some favorable options, and we're going to keep monitoring and making sure that when the time is right that we can take advantage. I would tell you, in the short term, we do have the ability to draw on our credit facility in many different currencies. And that is also something that we've consistently taken advantage of. So we have a lot of options that we are evaluating outside.

Okay. Got you. And just the last comment you talked about net debt to EBITDA in the low 7s. Obviously, given where you are right now, would that imply that dispositions will be higher than acquisitions for the remainder of the year?

No, I wouldn't say to imply that. Right now, what we have is $56 million in dispositions and nothing else that we have reported or have under agreement.

Our next question is from James Villard with Ladenburg Thalmann.

Just, most of my questions have been answered. Just 1 follow-up. Can you give us some more color on your acquisition pipeline, kind of some of the names and kind of your thoughts on them?

Well, the ones that you can see in our investor presentation, there's a building in Glasgow, Scotland, Scottish Ministers, which is a government tenant and it's 1 of their big call centers, and it's a very long lease. We bought it at very attractive terms. And then the other is a 3-property package from [Ascent Home Fragrances], which -- actually Scottish Minister’s closed, when did it close? It closed yesterday. And the other one, there's a signed LOI on which we're waiting to close.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Jim for closing comments.

Thank you, operator. And I want to thank everybody for joining us on today's call. We work very hard to have a good, solid, consistent company. And we're very happy that you all joined us today. So thank you very much, and have a good weekend. Bye-bye.

This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.