Earnings Call Transcript - GNL Q4 2022

Operator, Operator

Hello, and welcome to the Global Net Lease Fourth Quarter and Full Year 2022 Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. And now, I'd like to turn the conference over to Curtis Parker, Senior Vice President. Please go ahead.

Curtis Parker, Senior Vice President

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?

Jim Nelson, CEO

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 of 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. 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 leases 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 derived from investment-grade or implied investment-grade tenants. Our portfolio's occupancy rate, weighted average remaining lease term, and credit quality compare 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 increases 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. 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 goals. 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 Masterson, CFO

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, and an AFFO of $172.9 million or $1.67 per share. The company paid common stock dividends of $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 of 2021, revenues would have been up by $4.9 million to $98.8 million in the fourth quarter of 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 the fourth quarter of 2022 was 3.9 years. The components of our debt include $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.

Jim Nelson, CEO

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.

Operator, Operator

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

Bryan Maher, Analyst

Good morning, Jim and Chris.

Jim Nelson, CEO

Good morning, Bryan.

Bryan Maher, Analyst

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

Jim Nelson, CEO

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.

Bryan Maher, Analyst

Okay, great. And then on the leasing activity, I know that you really don't have 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?

Jim Nelson, CEO

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.

Bryan Maher, Analyst

Thank you. We were interested in the acquisition of Walgreens Boots and possibly expanding into retail. Jim, you mentioned in your prepared remarks that this isn't a focus right now. However, if an opportunity with a significant cap rate presented itself, would you consider pursuing it?

Jim Nelson, CEO

That's a really good question, Bryan. With the investment-grade rating for the tenants and the cap rate, it was a very compelling acquisition. As you know, we are opportunistic buyers, so if another opportunity like that arises, we would definitely consider it closely.

Bryan Maher, Analyst

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?

Jim Nelson, CEO

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 Europe and the U.S.

Bryan Maher, Analyst

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?

Jim Nelson, CEO

Well, there's two answers to that. One, for 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.

Bryan Maher, Analyst

Thank you. That's all for me.

Jim Nelson, CEO

All right. Thanks, Brian.

Operator, Operator

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

John Massocca, Analyst

Good morning.

Jim Nelson, CEO

Hey, John. Good morning.

John Massocca, Analyst

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?

Jim Nelson, CEO

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.

John Massocca, Analyst

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?

Chris Masterson, CFO

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

John Massocca, Analyst

Okay, perfect. Chris, while I have you, could you share any updated thoughts on refinancing the U.K. and German mortgage debt? Are you considering putting that on the line, or if you were to pursue refinancing with similar types of debt you currently have, what would the pricing look like on a fixed interest rate basis?

Chris Masterson, CFO

Well, 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.

John Massocca, Analyst

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

Jim Nelson, CEO

Thanks, John.

Operator, Operator

Thank you. And the next question comes from Mitch Germain with JMP Securities.

Mitch Germain, Analyst

Good morning.

Jim Nelson, CEO

Good morning, Mitch.

Mitch Germain, Analyst

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?

Chris Masterson, CFO

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

Mitch Germain, Analyst

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

Chris Masterson, CFO

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

Mitch Germain, Analyst

Okay, that's very helpful. I'm curious about your comments on the Walgreens transaction. You've been exiting retail. Is this just an opportunistic purchase with good credit, or are you potentially exploring another asset class to allocate to?

Jim Nelson, CEO

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 loved 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 setting 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.

Mitch Germain, Analyst

Got you. Great.

Jim Nelson, CEO

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

Mitch Germain, Analyst

I'm curious about the funding plan for that transaction. Are you solely using cash on hand? How should we view funding additional growth in terms of your liquidity and available resources? Should we be considering any additional asset sales? I know you mentioned a vacant asset that is likely valued at land cost. What is your plan from that perspective?

Chris Masterson, CFO

Sure. Well, the one asset that I mentioned earlier is actually a 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 and availability on the credit facility. So I mean those are options that we will intend to use.

Mitch Germain, Analyst

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?

Chris Masterson, CFO

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.

Mitch Germain, Analyst

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

Jim Nelson, CEO

All right. Thanks, Mitch.

Operator, Operator

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

Michael Gorman, Analyst

Yes, thanks. Good morning. Jim, I wanted to revisit the Walgreens Boots acquisition and would like to know if you can explain the process. Retail hasn't been a primary focus for us, as we've discussed extensively. How does a deal like this come to your attention and what does the underwriting process look like for it, given that it's not an area you've been planning to expand into or one you've been discussing as part of your strategy? I'm curious about the mechanics involved.

Jim Nelson, CEO

That's a really good question, but the mechanics are very much the same for any property we acquire. We've been gaining a lot of visibility in England and Europe since the McLaren acquisition, which has led to an increase in our deal flow in those regions. When this opportunity arose, our team in Europe investigated it first. We were impressed with the creditworthiness of the tenant, and our underwriting team in the U.S. compiled all the necessary details. It turned out to be a very attractive acquisition with a going-in cap rate of 10.6%. It's beneficial for us, features a high-quality tenant, and includes a long-term lease. Our underwriting process is quite consistent across all our purchases. While we do have some retail assets in our portfolio, retail is not a core focus for us at this time.

Michael Gorman, Analyst

Okay, I missed that part. The 10.6% that's the going-in cap rate, right? That's not the GAAP yield on the transaction?

Chris Masterson, CFO

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.

Michael Gorman, Analyst

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

Chris Masterson, CFO

Correct.

Jim Nelson, CEO

That's why I mentioned it was so compelling. For a high-quality credit tenant, it's an impressive starting cap rate. We definitely wanted to take advantage of that.

Michael Gorman, Analyst

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?

Jim Nelson, CEO

It's a really good question. I think it's a combination of factors. The seller was motivated and we presented an all-cash offer with no financing terms. This made it appealing to the seller, especially since their basis was significantly lower. They still made a profit on the sale, and we were able to purchase it at a very good price.

Michael Gorman, Analyst

Okay. Thank you.

Jim Nelson, CEO

All right. Thanks.

Operator, Operator

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

Jim Nelson, CEO

Good morning, Todd.

Todd Thomas, Analyst

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?

Jim Nelson, CEO

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

Todd Thomas, Analyst

Okay. It's about the U.K. acquisition.

Jim Nelson, CEO

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.

Todd Thomas, Analyst

Okay. Got it. Jim, can you talk a bit more about the acquisition pipeline? You mentioned a $65 million pipeline earlier. It sounds like you're discovering better opportunities. Can you provide more details about the types of products and the geographical locations of these opportunities? Also, you mentioned pricing; could you elaborate on how prices are trending and what your expectations are?

Jim Nelson, CEO

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.

Todd Thomas, Analyst

Okay. I understand you don't typically give much guidance or forecasts, but when it comes to investments, is there any specific target or a way you could outline what you might aim to achieve in 2023 from an investment perspective?

Jim Nelson, CEO

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.

Todd Thomas, Analyst

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 use the revolver and go from there?

Chris Masterson, CFO

Sure. Regarding the maturities in 2023, they are mainly scheduled for the latter part of the year, particularly between mid-June and the third quarter. For 2024, the maturities are spread throughout the year. As we bring properties onto the line and utilize additional draws from the line for refinancing, we will continually assess the need for adding extra swaps. This is currently under discussion. We need to consider pricing and the timing of the swaps. However, at present, our preference between fixed and floating rates is likely to remain consistent over the long term, possibly leaning slightly towards fixed. Therefore, we will definitely incorporate swaps into our strategy.

Jim Nelson, CEO

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.

Todd Thomas, Analyst

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?

Chris Masterson, CFO

So this is the rate effectively during the quarter.

Todd Thomas, Analyst

Okay. So at the end of the year.

Jim Nelson, CEO

All right. Thanks.

Operator, Operator

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.

Jim Nelson, CEO

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.

Operator, Operator

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