Earnings Call Transcript - GNL Q3 2020

Operator, Operator

Good afternoon. And welcome to the Global Net Lease Third Quarter 2020 Earnings Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Louisa Quarto, Executive Vice President. Please go ahead.

Louisa Quarto, Executive Vice President

Thank you, operator. Good afternoon, everyone, and thank you for joining us for GNL’s third quarter 2020 earnings call. This call is being webcast in the Investor Relations section of GNL’s website at www.globalnetlease.com. Joining me today on the call to discuss the quarter’s results are Jim Nelson, GNL’s Chief Executive Officer; and Chris Masterson, GNL’s Chief Financial Officer. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. We refer all of you to our SEC filings, including the Form 10-K for the year ended December 31, 2019, filed on February 28, 2020, and all other filings with the SEC after that date, for a more detailed discussion of the risk factors that could cause these differences. 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 also refer to our earnings release for more information about what we consider to be implied investment grade tenant, 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

Thank you, Louisa. And thanks again to everyone for joining us on today’s call. In the third quarter, our high-quality global portfolio of industrial and office net lease properties continued to demonstrate its strength, remaining largely unaffected by the ongoing pandemic. For the quarter, we collected over 97% of the original cash rent that was payable, including 99% of the cash rent payable from our top 20 tenants, which represents almost half of our total annual cash rent. Our historic emphasis on credit quality, underwriting, asset selection, and due diligence have all helped shape a portfolio that continues to perform well. On a geographic basis, GNL collected 99% of the rents payable from our UK-based assets, 99% from our other European tenants, and 96% from our U.S.-based assets. To be clear, when we provide rent collection statistics, we are comparing to the total rent payable and not reducing the expected rent in the denominator by any negotiated deferrals or making any other adjustments. As our portfolio continues to perform well, I am also excited about the progress we made on other fronts this quarter. We closed on $88 million of loans at an interest rate of 3.45% collateralized by our Whirlpool Corporation assets located in the U.S. We also completed a three-property sale-leaseback with Johnson Controls, an investment-grade diversified technology and multi-industrial leader that specializes in products, technologies, software, and services for buildings. Johnson Controls was ranked number 399 on Fortune’s Global 500 list in 2019. The office and industrial properties are located in the United Kingdom and Spain and were acquired for $23.4 million at a 7.98% weighted average cap rate. At closing, Johnson Controls signed new 12-year leases that include annual escalators of 1.5%. Our total year-to-date acquisitions now exceed $168 million at a weighted average going-in cap rate of 7.1%, a weighted average cap rate of 8.5%, and a weighted average remaining lease term of 18.5 years. Thanks to the direct relationships we’ve built with developers, landlords, and tenants, we have a massive forward acquisitions pipeline of over $158 million. The pipeline consists primarily of industrial acquisitions that we expect to close before the end of the year, at a weighted average going-in cap rate of 6.5%, a weighted average cap rate of 7%, and a weighted average remaining lease term of more than nine years. These potential acquisitions are emblematic of the future growth and focus of the GNL portfolio. Our closed and pipeline acquisitions currently total over $325 million for 2020 at a weighted average going-in cap rate of 6.9%, a weighted average cap rate of 8.1%, and with a weighted average lease term of 15.8 years. 89% of these acquisitions by purchase price fall under industrial and distribution property categories. The work we have done to grow the portfolio and collect rent during the pandemic contributed to recording a quarter-over-quarter increase in total and per share AFFO. For the third quarter, AFFO per share was up 4.5% to $0.46 per share from $0.44 per share last quarter. The Company distributed $35.8 million in common dividends to shareholders in the quarter, or $0.40 per share. Our $4 billion, 299-property portfolio is nearly fully occupied at 99.6% leased, with a weighted average remaining lease term of 8.7 years, up from eight years a year ago, thanks to our recent acquisitions where we have acquired attractive, long-dated industrial and distribution assets. We have no 2020 lease expirations, and contractual rent growth is embedded in over 93% of our leases. 231 of our properties are in the U.S. and Canada, and 68 are in the UK and Western Europe, representing 63% and 37% of annualized rent revenue, respectively. Our portfolio is well-diversified with 127 tenants in 47 industries with no single industry representing more than 10% of the whole portfolio, based on straight-line rent. Our property mix continues to evolve and is currently 48% office, 47% industrial and distribution, and 5% retail, compared to 52% office, 43% Industrial and distribution, 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 65% of straight-line rent comes from investment-grade or implied investment-grade tenants. Industrial and distribution assets have been an increasingly significant segment of our portfolio, growing to 47% of our current assets when measured by straight-line rent. Our industrial acquisitions have included the sale-leaseback transactions we completed with Whirlpool Corporation in the U.S. and Italy, as well as other industrial acquisitions totaling over $100 million year-to-date. These properties are leased to tenants such as CSTK, Metal Technologies, Klaussner Industrial, and NSA. Other significant tenants in this segment include Finnair, Auchan, and Grupo Antolin. We are always seeking accretive acquisitions that meet our investment criteria. While our primary focus has been and will continue to be on industrial and distribution assets, we will continue to evaluate adding single-tenant mission-critical office properties leased to investment-grade tenants similar to those that currently populate our portfolio. With that, I’ll turn the call over to Chris to walk through the operating results in more detail, before I follow up with some closing remarks.

Chris Masterson, CFO

Thanks, Jim. For the third quarter 2020, we recorded adjusted EBITDA of $63.6 million, up from $58.3 million in the third quarter of 2019. We also reported a 6.1% increase in revenue to $82.7 million from $77.9 million with a net loss attributable to common stockholders of $0.5 million. FFO and AFFO for the third quarter were $34.5 million and $40.9 million, respectively, or $0.39 and $0.46 per share, compared to $0.44 and $0.47 per share in the third quarter of 2019. The Company paid common stock dividends of $35.8 million or $0.40 per share for the quarter. 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 third quarter with net debt of $1.8 billion at a weighted average interest rate of 3.1%. Our net debt to adjusted EBITDA ratio was 7.2 times at the end of the quarter. The weighted average debt maturity at the end of the third quarter 2020 was 5.1 years. The components of our debt include $264 million on the multicurrency revolving credit facility, $421.6 million on the term loan, and $1.4 billion of outstanding gross mortgage debt. This debt was approximately 91% fixed rate, which includes floating rate debt with in-place interest rate swaps. The Company has a well-cushioned interest coverage ratio of 3.8 times. As of September 30, 2020, liquidity was approximately $392 million. Our net debt to enterprise value was 51.8% with an enterprise value up $3.5 billion, based on September 30, 2020, closing share price of $15.90 for common shares, $25.70 for Series A preferred shares, and $25.19 for Series B preferred shares. This ratio continues to be impacted by the market disruption that took place across the industry, starting in the last half of February. With that, I’ll turn the call back to Jim for some closing remarks.

Jim Nelson, CEO

Thank you, Chris. I’m very encouraged by all that we have accomplished in the third quarter. We believe that our portfolio has been intentionally constructed to continue to perform brilliantly through this short-term economic disruption, as evidenced by collecting 97% of the cash rent payable in the third quarter. We believe that we are specifically positioned for long-term growth and future success, building upon our strong foundation of nearly 100% occupancy, long-weighted average remaining lease terms, high percentage of investment-grade tenancy, and focus on resilient property types. We resumed our accretive acquisition program and are thoughtfully rebuilding a large acquisition pipeline, currently totaling over $325 million of high-quality closed and pipeline acquisitions. We have ample liquidity to act on accretive opportunities and no near-term debt maturities. We remain committed to executing on our business plan and on the activities that are critical to our ongoing success. We look forward to continuing these efforts in the fourth quarter and delivering a strong finish to the year. With that operator we can open the lines for questions.

Operator, Operator

Our first question comes from Bryan Maher with B. Riley Securities.

Bryan Maher, Analyst

Good afternoon, Jim and Chris. A couple of questions. With the uptick in COVID over in Europe and the UK, are you seeing any vagaries in the portfolio of assets over there, or is it still kind of status quo?

Jim Nelson, CEO

We haven’t really seen anything. It still seems to be very much status quo, from everything that we’ve seen and everything that we’ve heard.

Bryan Maher, Analyst

Okay. And just on the Johnson Controls acquisition. How is that deal sourced, and do you see more like that in the near term?

Jim Nelson, CEO

It was sourced through our normal channels. And we’re always looking for those types of acquisitions. I think, one thing that we’ve seen in the third quarter was we’re starting to see a lot more deals in Europe than we’ve been seeing for a while, and good deals. So, we’re watching those very carefully. And in the U.S., the pipeline has picked up quite a bit also. So, as you can see by what we just quoted, the pipeline is pretty robust for this year.

Bryan Maher, Analyst

And does that skew industrial or office?

Jim Nelson, CEO

It skews industrial, definitely skewing primarily industrial.

Bryan Maher, Analyst

And then, the tenants that you have had rent deferral issues with, and I know it’s de minimis. But, was there a common denominator as far as asset type or tenant type that crossed this?

Jim Nelson, CEO

That’s a really good question, Bryan. And we’ve looked at that quite a bit. And there really hasn’t been any specific area that’s outweighed any other area. So, we’re very pleased with that. It doesn’t seem like there are issues in any particular sector in the properties that we own.

Bryan Maher, Analyst

Got it. And just two more quick ones, on the G&A. It came in a good dip below our estimate for the third quarter. Is there something going on there, or was it just higher in the second quarter because of COVID and rent deferral, legal stuff that you had to do or leased up? What’s a good run rate there, maybe better for Chris?

Chris Masterson, CFO

So, what I would say there is third quarter was a little higher, primarily from a legal perspective. COVID, as you mentioned, was one of the key drivers. And third quarter is a little more normalized than it definitely looked in the second quarter.

Bryan Maher, Analyst

So, more like 2.5 million to 3 million, not 3 million to 3.5 million?

Chris Masterson, CFO

Correct.

Bryan Maher, Analyst

Okay. Lastly, when we examine the dividend payout ratio on a FAD basis for our model next year, it appears to be in the mid to high 80s. I suspect that with an 11-plus percent yield, you’re unlikely to increase that dividend. What level are you comfortable with as you continue to increase FFO?

Chris Masterson, CFO

We’re really comfortable where it’s at now and we’re really comfortable with it drifting lower. As it stands right now, we have no plans to raise the dividend. But we discuss this every quarter with the Board. And I think we’re in really good shape with the dividend coverage and with the dividend payout, going forward.

Bryan Maher, Analyst

Great. Thank you. That’s all for me.

Chris Masterson, CFO

Thanks, Bryan.

Operator, Operator

The next question comes from John Massocca with Ladenburg.

John Massocca, Analyst

Good afternoon. John, my reception might be a bit patchy, but I wanted to discuss the portfolio. Considering today's pipeline and also the transactions under letter of intent, we know the cap rate for those. What are you observing regarding cap rates for other acquisition opportunities? Are they around the 7% mark? Is this consistent with what we see for the transactions under letter of intent, or are they changing? Any insights you can provide would be appreciated.

Jim Nelson, CEO

I think, we can say fairly reasonably that the range goes between 6.5 and 7.5. So, I think 7 would be a good number, if you were looking to round it off. But, those are usually the ranges that we trade in. Sometimes, we could buy something too for an 8, 8.5 cap rate. It really depends. But, we’ll probably remain in the same range going forward that we’ve been for the last few years, actually.

John Massocca, Analyst

Okay. Can we discuss the European lockdowns again, focusing on investment opportunities? Could these lockdowns serve as a barrier to investments, either structurally by making it more difficult to finalize deals and conduct due diligence, or perhaps due to increased uncertainty leading tenants or potential tenants to be less inclined to engage in transactions? Might this influence transaction volumes in the future?

Jim Nelson, CEO

I think it might slow down the process a bit since inspections are taking longer again in Europe. However, I don’t believe it will affect the overall volume because there seems to be a strong desire among people to get back to work and finalize deals. The mindset has shifted in the last nine months, and people are eager to return to business. While the inconvenience of being shut down is a challenge, I believe we will continue to see deals close, albeit possibly with a longer timeline.

John Massocca, Analyst

Okay. All my other questions have been addressed. So, that’s it for me. Thank you very much.

Jim Nelson, CEO

Thanks, John. Take care.

Operator, Operator

Next question comes from Michael Gorman with BTIG.

Michael Gorman, Analyst

Thanks. Good afternoon.

Jim Nelson, CEO

Hey. Good afternoon, Michael.

Michael Gorman, Analyst

Jim, I was just wondering if you could give a little bit more color. You were talking about very select office acquisitions. Has the way you’ve looked at underwriting office or the conversations that you’re having with potential tenants changed as a result of the pandemic, or has your definition of what is actually mission-critical, as you’ve had conversations with either existing tenants or potential tenants, changed as a result of the impact of work-from-home during the pandemic?

Jim Nelson, CEO

It’s a really great question and certainly very, very relevant for this particular time with COVID and everything. We’ve been very, very careful for the last three years and everything that we’ve bought regarding office. The type of office that we own is primarily what we consider mission-critical, which are like headquarter buildings or buildings that are extremely important to the tenant. Our rent collection certainly demonstrated that our philosophy has worked pretty well, and that the properties really are critical to the tenant, very important, which I know a lot of people say that, but our rent collection certainly demonstrates that ours are. Looking forward, I think we set a target three years ago to buy significantly more industrial and distribution properties, which we’ve done. And it’s been very, very effective and good for the portfolio. And I think, as we move forward, we have a very strong criteria for anything we buy. Any office properties that we may buy will certainly have to fit into that essential to the tenant and certainly to investment-grade credit quality tenants. And, remember, most of our office buildings are in secondary markets. So, what we find is you don’t have people going to work on public transportation, which is a big risk. People drive themselves to work. You have headquarter buildings where these are important buildings to the tenant. And I think, from the feedback that we received, a lot of tenants think that even up to 15% of the people want to work from home. It just gives them the opportunity to spread people out a little bit more in the facilities that they have. So, I think looking ahead, we do have a very resilient type of office portfolio, and I think it will continue to perform well. I think anything that we add to that you can certainly categorize in the same way. Long-winded answer, but I hope I answered your question.

Michael Gorman, Analyst

That's helpful. For both you and Chris, touching on the funding aspect, your exposure in the retail sector is not a focus for the Company moving forward. Based on what we're hearing from other companies, that sector might be attractive for disposition right now, especially regarding quick-service restaurants and some discount retail assets. I'm curious how you're considering potential dispositions from that retail segment, not necessarily due to any underperformance, but because it could be a good source of capital, and an opportunity to invest those funds into more long-term, core holdings for the Company. What are your thoughts on that?

Jim Nelson, CEO

Well, as you know, we’ve been reducing our retail holdings for the last few years. I would look at us as an opportunistic seller. And I think the reasons you mentioned are good reasons, and also we’re really not a retail-focused REIT. So, we will continue to be an opportunistic seller going forward.

Operator, Operator

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

Jim Nelson, CEO

Thank you, operator. I want to thank everybody for joining us on today’s call. It’s always a pleasure to present to you. We think this was an excellent quarter for GNL. It demonstrated the resilience of our portfolio, and we’re very proud of what we’ve accomplished. So, I’d like to thank you again for joining us. And with that, operator, you can close the call.

Operator, Operator

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