Global Net Lease, Inc. (GNL) Q4 2022 Earnings Report, Transcript and Summary

Hello, and welcome to the Global Net Lease Fourth Quarter and Full Year 2022 Earnings 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, today's event is being recorded. And now, I'd like to turn the conference over to [Curtis Parker] (ph), Senior Vice President. Please go ahead.

Thank you, operator. Good morning, everyone and thank you for joining us for GNL's fourth quarter 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 annual report on 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. The annual report on Form 10-K for the year ended December 31, 2022 will be filed subsequent to today’s call. 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 and operating 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 measures is available in our earnings release, which is posted to our website. 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 our CEO, Jim Nelson. Jim?

Thanks, Curtis, and thanks again to everyone for joining us today to discuss a very successful year and a strong fourth quarter. We demonstrated the resiliency of our portfolio in 2022 despite rising inflation and interest rates, and a demanding year across the global economy. In fact, for the full year, GNL's common stock outperformed the S&P 500 by 11% and our peer group by 32%, both on a total return basis. We believe this performance affirms and shows continued opportunity for capital growth and dividend income as we continue to grow our best-in-class portfolio, which is built to perform across economic cycles. Foundational to our strategy year in and year out is leasing and last year was no different. In 2022, we significantly strengthened our portfolio with the completion of 12 lease renewals and four tenant expansion projects. These leases and expansions totaled 3.8 million square feet or nearly 10% of our portfolio and resulted in 154 million net new straight line rent over the new weighted average remaining lease term of 9.2 years, up from 3.7 years. At year end, our portfolio was 98% occupied and had an eight year weighted average remaining lease term. We finished the year with a strong fourth quarter of leasing. During the quarter, we completed a lease renewal for approximately 156,000 square feet and a tenant expansion project that increased annual straight line rent by over $700,000. This progress has carried into the early part of 2023. As subsequent to the quarter end, Rheinmetall, one of our tenants in Germany, exercised a five year extension of their 320,000 square foot lease with no tenant improvement expenses incurred by GNL. Thanks to the efforts of our leasing team. The portfolio only has 2% of leases expiring in 2023 with 77% of our leases not expiring until 2027 or later. Let me repeat that. 77% of our leases will not expire until 2027 or later. At year end, our best-in-class $4.5 billion global portfolio consisted of 309 properties in the United States, Canada, the U.K. and Europe, diversified across 138 tenants and 51 separate industries. Our property mix at the end of the year was 56% industrial and distribution, and 41% office, with the remainder long term lease to retail tenants. Portfolio occupancy at year end was 98% with a weighted average remaining lease term of eight years and 60.5% of our annual straight line rent was derived from investment grade or implied investment grade tenants. Our portfolio's occupancy rate weighted average remaining lease term and credit quality compares very favorably to our investment grade rated peers. Nearly 95% of our leases feature annual rental increases, which averaged 1.2%. The benefit of which is included in our straight line rent. These increase the cash rent due under these leases over time, including based on straight line rent, 63% that are fixed rate and 26% that are based on the consumer price index and may include certain floors or caps. With an ideal mix of property types, limited near term expirations and embedded contractual rent increases in most of our leases we believe we are well positioned to continue to create shareholder value. In 2022, we completed three property acquisitions for $33.3 million. The industrial and office properties we acquired are leased to Executive Mailing Services and Scottish Ministers, both with investment grade credit and MMG. These properties were acquired at a weighted average cap rate of 7.7% and had a weighted average remaining lease term of 13.6 years at the time of closing. We strategically limited our acquisitions during 2022 relative to previous years. We patiently waited while seller expectations adjusted to meet market conditions, electing not to overpay for new acquisitions and instead focusing on lease renewals and expansions in our mission critical focused portfolio. Our patience has paid off as subsequent to year end we completed a $75 million acquisition of eight properties leased to Boots UK Limited, a subsidiary of Walgreens. Although we are not focusing on retail assets, we were able to acquire these properties, which total over 323,000 square feet and have 11.5 years of lease term remaining at an extremely attractive 10.6% going in cap rate. Walgreens is rated BBB and BAA2 from S&P and Moody's, respectively. And we are happy to have their credit in our portfolio at such a favorable cap rate. As always, we continually evaluate the portfolio to maximize value. To that point, last year, we strategically disposed of three properties in the U.S., UK and Europe for $56 million that we believe had reached maximum value for us. We remain committed to executing on our global investment strategy by leveraging our unique capacity to acquire assets leased to high quality tenants throughout North America and Europe, and then building relationships with those tenants to help facilitate renewals and expansions to meet our mutual goal. We closed out 2022 with strong operational momentum, which will propel GNL to another strong year in 2023. 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 and our focus on industrial and distribution assets. We will continue to execute on our strategy in 2023 and beyond as we grow GNL's global and diversified portfolio. Now, I'll turn the call over to Chris to walk through the operating results in more detail and before I follow-up with some closing remarks. Chris?

For 2022, revenue was $378.9 million with a net loss attributable to common stockholders of $8.4 million. As a reminder, in 2021, we had revenue benefits of approximately $14 million that we did not have in 2022 due to a significant termination fee and receivable recorded for certain costs from a tenant. For the year ended December 31, 2022 we recorded $288.1 million in adjusted EBITDA, FFO of $166.9 million or $1.61 per share, an AFFO of $172.9 million or $1.67 per share. The company paid common stock dividends $166.8 million or $1.6 per share in 2022. In the fourth quarter, revenue was $93.9 million. FFO was $23.6 million or $0.23 per share and AFFO was $42.2 million or $0.41 per share. During the quarter, the company paid common stock dividends of $0.40 per share. As always, a reconciliation of GAAP net income to the non GAAP measures can be found in our earnings release and supplement. As Jim mentioned, ongoing foreign exchange volatility impacted our results as the U.S. dollar strengthened relative to the euro and the pound. We gained some benefit from our comprehensive hedging program which helped reduce the impact of these currency moves by $5 million. On a constant currency basis, when we applied the average monthly currency rates from the fourth quarter 2021, revenues would have been up by $4.9 million to $98.8 million in the fourth quarter 2022. Using the constant currency concept year-over-year, revenues would have been up by $15.4 million to $394.2 million. Our balance sheet ended the fourth quarter with net debt of $2.3 billion at a weighted average interest rate of 4%. Our net debt to adjusted EBITDA ratio was 8.5 times at the end of the year. The weighted average maturity at the end of fourth quarter 2022 was 3.9 years. The components of our debt includes $670 million on the multi-currency revolving credit facility, $1.2 billion of outstanding gross mortgage debt and $500 million on our senior notes. This debt was approximately 7% 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 2.9 times. As of December 31, 2022, liquidity was approximately $192.3 million, which comprises $103.3 million of cash on hand and $89 million of availability under the credit facility. With that, I'll turn the call back to Jim for some closing remarks.

Thank you, Chris. I am very pleased with our leasing accomplishments last year and proving that we cannot only acquire assets but accretively manage them as well. Although volatile exchange rates weighed on our results, our comprehensive hedging strategy helped to minimize the impact of this turbulence, while our primarily fixed rate debt insulated GNL from rising interest rates. We will continue to be selective in our acquisitions and dispositions and seek to strengthen our portfolio organically through tenant expansions and lease renewals. We have already completed a significant acquisition and a large lease renewal this year, and I'm looking forward to maintaining our momentum throughout 2023. With that, operator, we can open the line for questions.

Yes. Thank you. At this time, we will begin the question-and-answer session. [Operator Instructions] And the first question today comes from Brian Maher with B. Riley Securities.

Good morning, Jim and Chris.

Good morning, Bryan.

Occupancy was just a little bit lighter than we thought coming in 98%, not a big deal, down 6 bps. Is there anything going on there that we should be aware of?

No. There's nothing material going on there. We have one tenant that vacated. We are in the process of selling that property. It is under LOI, but nothing material going on.

Okay, great. And then on the leasing activity, I know that you really don't [Technical Difficulty] much going on this year. And as Jim highlighted, 77%, I think, 2027 and beyond, but I think you have maybe 10% in 2020, is it possible or do you have dialogue going with any of those tenants to kind of get ahead of that?

Absolutely. Our guys are really being very proactive and very focused on rent renewals and also the expansions we've been doing. So you'll see quite a bit more happening this year also.

Okay, thanks. And we were interested in that Walgreens Boots acquisition and picking up some retail. Do you -- and I know, Jim, you said on your prepared comments that that's not a focus. But if you were presented with more at such an impressive cap rate, would you go down that road?

That's a really good question, Bryan. With the investment grade rating for the tenants, I mean, it was -- and the cap rate, it was a very compelling acquisition. So as you know, we are opportunistic buyers. So if something else came along like that, we certainly would take a very close look at it.

Okay, great. And that segues well into my last question. As far as opportunity goes, when you're looking out to what you're being shown or what you think you're going to see in 2023, are there better opportunities do you think in the U.S. or in Europe this year?

Again, that's a great question. I think both. I think in Europe, we're in a rising interest rate environment, so cap rates are getting much better in our favor. Same thing in the U.S.. So we will be and we are very, very selective in what we're bidding on. And I think we'll see quite a few opportunities this year for sure in both the Europe and the U.S.

Maybe one last one if I may. That was an impressive cap rate in the U.K. And I know that you were patient last year, but do you think that we can see more cap rate acquisitions this year pretty steadily between maybe the 8.5% and 10%, 10.5% ranges. Is that the new kind of area that you're looking at and expect to get?

Well, there's two answers to that. One, going in cap rate, I'm expecting or seeing stuff, let's say, 7.5% to 8.5% and the GAAP cap rate again is a bit higher. So I think you're pretty close in the range that you're asking about. And that's what we're seeing and that's how we're bidding.

Thank you. That's all for me.

All right. Thanks, Brian.

Thank you. And the next question comes from John Massocca with Ladenburg Thalmann.

Good morning.

Hey, John. Good morning.

So maybe following up on that last question, as you think about kind of cap rates in the acquisition market, how is that impacting the property type mix? I guess, are some of these higher cap rates can you apply that to what's available to purchase on the Industrial segment? Or is it more going to be in the retail and office or even I would [Multiple Speakers].

I wouldn’t say that. Our focus is still on industrial and distribution type of properties and that's the majority of the stuff we're looking at and that we've bid on. So I think we're going to maintain our focus going forward as we have the last five years. And again, the one-offs like the Boots acquisition, we will certainly take a look at and if it looks as good as this one did, we would act on it. But again, we still are really focused on industrial and distribution properties and we are finding some really good potential properties to buy out there.

Okay. And then in terms of the in place portfolio, sorry if I missed it, but just kind of thinking back on some of the lease renewal activity. Broad strokes, where was that new leases relative to kind of prior leases on a cash rent basis?

On cash rent basis, very consistent. We didn't have anything materially different.

Okay, perfect. And then Chris, while I have you. On the debt side of things, just any updated thoughts on refinancing the U.K. and the German mortgage debt, is it thought process to put that on the line or if you were to try to do kind of refinancing similar -- with similar types of debt to what you have today, what would the pricing be on a kind of fixed interest rate basis?

Well, what [indiscernible] to start is that, the thought process would be to put them on the line and give us flexibility so that we can continue to evaluate the markets and see if there are other financing opportunities. But I would say definitely using the credit facility in the short term. In terms of the rates, it's a little difficult to tell, fixed where they would land. But I would say that they're definitely coming in higher than where the current debt is at this point.

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

Thanks, John.

Thank you. And the next question comes from Mitch Germain with JMP Securities. Q - Mitch Germain Good morning.

Good morning, Mitch.

Thank you for your time. Just, Chris, furthering that comment that you just said in terms of putting the debt on your line, do you have the availability to do that?

Yes, we do. We have a significant amount of capacity at this point. I think it's about almost $700 billion or $800 billion in capacity. That's $700 million or 800 million. Sorry.

Understood what you're saying. And you can use all that though, right? There's no restrictions in terms of…

There are no restrictions. We're able to add the properties and to use that capacity.

Okay, great. That's super helpful. And then, I just -- I am curious, back to your comments on the Walgreens transaction. I mean you've been exiting retail. So is this just an opportunistic buy with a good credit? Or is this potentially maybe opening up another asset class that you could be allocated [Multiple Speakers]

No, I don't think, Mitch, I don't think we're opening up a new asset class. I think this was a one off that we just love the credit of the tenant and it was a big acquisition at a great cap rate. So it was hard to turn it down, but we're not focusing on retail and we're not set up a new category right now for anything like that. This was just an opportunity that came to us through our U.K. office. And when we took a good look at it, it was extremely compelling to buy at that going in cap rate.

Got you. Great --

And with close to 12 years left on the leases. So between those two, it was pretty compelling.

Got you. So I'm just curious about the funding plan for that transaction. You're just using cash on hand. And then how should we consider funding additional growth in terms of your -- using liquidity and what you have available to you? I mean, should we be considering some additional asset sales? I know you mentioned a vacant asset which probably is really going for land cost? So what are you considering in terms of putting a plan together from that perspective?

Sure. Well, the one asset that I mentioned earlier, that's actually pretty small asset in terms of dollar amount. But we do have the asset that we previously discussed, which we're looking to sell and that we had previously discussed about $60 million for that sale, so that's something that we're still marketing and looking to sell in 2023. So once that happens, I mean, that's a good chunk of liquidity. As you mentioned, we do have cash on hand availability on credit facility. So I mean those are options that we will intend to use.

And then do you think that you can deploy that capital accretively? I guess is the cap rate on the sale lower than what you think you can put it to work at? Is that the rationale behind that? Or are you getting rid of what could be a potential future problem?

Well, the one property that I mentioned, the larger one, that is a vacant property at this point and we do think that that's something we could sell and then invest accretively.

Understood. I forgot that was vacant. Thank you. I appreciate it.

All right. Thanks, Mitch.

Thank you. And the next question comes from Michael Gorman with BTIG.

Yes, thanks. Good morning. Jim, Just wanted to go back to the Walgreens Boots acquisition and I'm just kind of interested if you can walk us through right -- retail obviously hasn't been a focus. We've talked a lot about that. How does a deal like this come across your radar screen and go through the underwriting process considering it's not an area of focus and it's not where you've been talking about taking the company or taking the portfolio? How does that work just on a mechanical level?

That's a really good question, but the mechanics are really very much the same on any property that we buy. We have -- we've been getting a lot of exposure in England and in Europe after we did the McLaren acquisition. So our deal flow has really increased in Europe and in the U. K. So when this came across the desk, our team in Europe looked into it first. We love the credit of the tenant. And our underwriting team in the U.S. put together all the details. And as I said, it was a very compelling acquisition with a going in cap rate of 10.6%. So it's accretive, it's a high quality tenant and a long term lease. So our underwriting process is relatively the same on everything that we buy. And as you know, we have some retail and we've had retail in the portfolio. So it's not unusual, but it's not a core -- it's not a core asset class for us and we're not really focusing on retail at all right now.

Okay. And so -- sorry, I guess I missed that at the first part. The 10.6% that's the going in, that's not the GAAP yield on the transaction?

Well, this is a CPI based escalator. So for the GAAP yield, we don't have any kind of increase that we can include in the calculation. But ultimately, obviously, CPI will increase that value.

Right. So I'm just saying it's 10.6% from day one.

Correct.

Correct. That's why I said it was so compelling. For a good credit -- an investment grade credit tenant, it's an amazing going in cap rate. So we certainly wanted to take advantage of that.

And again, sorry if I missed this, I had a little trouble joining, but why is that, right? Like, why would a Walgreens package like this sell for an almost 11% going in yield?

It's a really good question. I think it's a combination of factors. I think the seller was motivated. I think we were there with an all cash offer. No financing terms or anything like that. So I think it was attractive to the seller and I think their basis was quite a bit lower. So they made -- they still made money on the sale and we bought it at very good price.

Okay. Thank you.

All right. Thanks.

Thank you. And the next question comes from Todd Thomas with KeyBanc Capital Markets.

Good morning, Todd.

Good morning. Just sticking with the U.K. acquisition, sorry if I missed this. A lot of commentary around the retail there, but were those all retail assets or was there something else mixed in, it seems like a pretty large portfolio, eight assets, 325,000 square feet. Just curious if you could just talk about the composition of it?

No, they're all retail assets, they're all retail locations.

Okay. It's about [Multiple Speakers]

But Boots is like Walgreens in the States. They're big stores. They sell all kinds of things from prescriptions to food and everything in between. So they are relatively decent sized locations.

Okay. Got it. And then, Jim, can you just -- stepping back, maybe talk a little bit about the acquisition pipeline, just a little bit more. You had previously talked about a $65 million pipeline. It sounds like you're seeing some better opportunities. Maybe just a little more color on what you're seeing in terms of product type and maybe geographically where these opportunities are? And I guess you talked about pricing, but maybe just a little bit more there in terms of how prices are trending and what your expectation is?

Well, we're still seeing a lot of stuff in the U.S. Again, we're being extremely selective with the stuff that we go after. But we are seeing good deals with really good investment grade tenants in industries that we like. And we're very agnostic as far as where we buy across the U.S. So we're looking at stuff in the Northeast, in the Midwest, in the Southeast, it's pretty much all over the map as we always have. So we're not choosing any particular area. It comes back to our underwriting process where we've got high quality investment grade tenants, good businesses and good locations for them close to transportation and all the things that industrial distribution type of businesses need. So our underwriting really hasn't changed at all. And to answer the other part of your question, we are seeing cap rates rising. And again, they follow interest rates rising by a certain period of time, but it's definitely happening right now. I mean, we're seeing a lot of stuff where the ask is 7%, 7.5% where a year or two years ago the ask would have been 6%, 6.5%. So it is changing. It's getting better.

Okay. And I know you don't really provide much of -- much guidance or forecast here, but in terms of investments, right? Is there sort of a target or a way you could maybe bookend what you might be looking to do in 2023 from an investment standpoint?

Well, as you said, we don't give guidance. We've already done the $75 million acquisition already this year. So I have hopes that it'll be a good strong year for acquisitions. And we will also do certain strategic dispositions as things come up where it makes sense to sell a property and recycle that cash into new buildings. So I think it's going to be a decent year. I can't give you a number, but I think it's going to be a decent year and we're off to a good start.

Okay. And then, Chris, back to the debt maturities, can you remind us when the 2023 and 2024 maturities are during this year, next year? And also in terms of what month, I mean. And then you're talking about using the line. How should we think about managing your floating versus fixed rate debt balances? Would you consider swapping or permanently financing some portion of that? Or would the plan be to at this point maybe like you said just initially use the revolver and go from there?

Sure. So to the first point, in terms of the maturities in 2023, those are in the later portion of the year. Mostly in the third -- midyear June to third quarter range. 2024 it is kind of spread through the year. But what I would say is, as we move properties onto the line and refinancing using extra draws from the line. We're going to keep evaluating whether to add on additional swaps. I mean that's something we're discussing right now. We do need to look obviously the pricing and where the swaps come in. But what I would say is, in terms of the fixed versus floating where we are right now is probably something long term where we'll look to consistently stay, maybe even potentially slightly higher. So swaps will definitely be something we'll be using.

And putting this stuff on the credit facility is very useful because, as we all hope that towards the end of the year, early next year, interest rates will start coming down. So with properties on the credit facility, then it becomes easy for us once rates come down to a place where we could take things off the facility and put them in a longer term debt facility. But basically, we have to wait and see what happens as everybody else [indiscernible].

Right. Okay. That's helpful. And then just one last one on the revolver. The interest rate that we see here in the disclosures and your supplement, the 4.6%, is that a weighted average during the quarter or was that the effective rate at the end of the year?

So this is the rate effectively during the quarter.

Okay. So at the end of the year [Multiple Speakers] Got it. Right, during the quarter. Okay. That's helpful. Thank you.

All right. Thanks.

Thank you. And this concludes the question-and-answer session. I'd now like to return the floor to CEO, Jim Nelson, for closing comments.

Thank you everybody for joining us on today's call. It's our pleasure to give you the information on Global Net Lease. We thought it was a great year and we're looking forward to this year being a great year also. So thank you everybody. Have a good day. Bye bye.

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