Q2 2020 Global Net Lease Inc Earnings Call

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Okay and welcome to the global that leasing second quarter 2020, <unk> earnings Conference call.

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Hi.

Thank you operator, good morning, everyone and thank you for joined he has Ritchie <unk> second quarter 2020, <unk> earnings call. This call is being webcast in the Investor Relations section of GE <unk> website at Www dot well that meets Dot com.

Joining me today on the call to discuss the quarter's results or Jim Belton, <unk>, Chief Executive Officer, and mattress, Yeah, Chief Financial Officer.

The following information contains forward looking statements, which are subject to risks and uncertainties.

Why more of these risks or uncertainties materialize actual results may differ materially from those expressed or implied by the forward looking statements.

Well all of your tore asked me filings, including the form 10-K for the year ended December 31st 2019 filed on February 28, 2020, and all other filings with the FTC. After that date for more detailed discussion other risk factors that could talk these differences.

Any forward looking statements provided during this conference call all media the data this call as stated in our if you do filings do you get all disclaims any intention or obligation to update or revise these forward looking statements except as required by law.

Also during today's call will discuss non-GAAP financial measures, which we believe can be useful in evaluating the companys financial performance.

Measures should not be considered an isolation or the substitute for financial results prepared in accordance with yeah.

Reconciliation of these measures and the most directly comparable GAAP measure is available in our earnings release and supplement what turned out to draw website at www Dot global net lease dot com.

Welcome to refer to our earnings release for more information about what we consider to be implied investment grade tenants in terms of used throughout todays call I'll now turn the call or New York Videojet analysis Jim.

Thank you Louise good.

Good morning, everyone and thanks again for joining us on today's call.

I think it's safe to say that the second quarter was unlike any quarter I'd be experience in my long career.

Despite the challenges that covert has presented I'm proud of our solid performance.

For the quarter, we collected over 98% of cash rents that were payable, including 99% of the cash rent payable primark top 20 tenants.

We attribute this excellent collection rate in large part to our historic emphasis on credit quality underwriting and due diligence actually relationships, we have built with our tenants over the years.

On a geographic basis do you know collected 99% of the cash rent payable from our UK based assets, 100% from our other European tenants and 96% from our U.S. based assets.

While we have been successful collecting rent throughout the koby crisis I'm equally excited about our achievements on other fronts over the same time.

We negotiated and closed on two significant financing transactions during the second quarter and in early July as we completed the last step in the refinancing of all of our European debt with a 70 million euro loan in France, which was fixed the swap agreement at the excellent interest rate of two and a half.

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We also closed on 88 million of loans at an excellent interest rate of 3.4 or 5% collateralized by our won't pull corporation assets located in the U.S.

We completed eight new acquisitions, all in the U.S. and all industrial or office properties for an aggregate total of 31 million, bringing our total year to date acquisitions to almost 145 million.

The second quarter acquisitions had an average remaining lease term was 18.1 years and were acquired at a weighted average cap rate of 8.4 or 5%.

We remain actively engaged in the acquisition marketplace and continue to evaluate opportunities since the onset of coated the overall deal flow has softened and although it's a buyer we have adjusted our cap rate targets from historical precedent in many cases current sellers have not yet made similar changes to their pricing expectation.

We believe that overtime, we will see bids in asks converged to establish a new potentially more attractive normal.

Our 3.9 billion 296 property portfolio is nearly fully occupied at 99.6% leased with a weighted average remaining lease term of 8.9 years up from eight years, a year ago. We have no 2020 lease expirations and contractual rent growth is embedded in over 93 per se.

Our leases.

231 of our properties or in the Western Canada, and 65 are in the UK and Western Europe, representing 65% and 35% annualized rent revenue respectively.

Our property mix continues to evolve and is currently 48% office, 47% industrial in distribution and 5% retail.

Compared to 53% office, 41% industrial in distribution and 6% 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, 65% of straight line rent come from investment grade or implied investment grade tenants.

Industrial and distribution assets have been an increasingly significant segment of our portfolio growing by nearly 15% year over year to make up 47% of our current assets when measured by straight line rent.

This shift was particularly for two I guess in advance of the Cobot 19, pandemic, where industrial and distribution business is somebody you Western Europe were among the least affecting and some of the first employers to bring employees back to work.

Our industrial acquisitions have included the sale leaseback transactions, we completed with Whirlpool Corporation in the U.S. in Italy, as well as other industrial acquisitions totaling over 87 million year to date.

These properties are leased to tenants such as C.S.T.K. metal technologies Klausner, industrial and I'd say other significant tenants in the segment include and air Ocean and Grupo and children.

No we are always seeking accretive acquisitions that meet our investment criteria.

Our focus has been and we'll continue to be on industrial and distribution assets, along with opportunistic acquisitions of single tenant mission critical office properties leased to investment grade tenants similar to those that currently populate the office segment of our portfolio turning to our financial highlights our portfolio produced year over year.

Increases in revenue from tenants and net operating income.

Total revenue was up 6.6% 81.1 billion and net operating income grew 6.1% to 73.3 billion from 69.1 million of the second quarter, 2019, and 2% from 71.9 million the previous quarter.

On a per share basis, a AFFO decreased year over year to 44 cents per share.

The company distribute to 35.8 million in common dividends to shareholders.

Oh was 39.8 million.

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.

Thanks, Jim.

We posted improved financial results for the second quarter compared to the prior year.

The second quarter 2020, we reported adjusted EBITDA of 61 million compared to 58.6 million in 2019.

As Jim mentioned, we also reported a 6.6% increase in revenue to 81.1 million from 76.1 million.

With net income attributable to common stockholders of 1 million.

I phone aerosols decreased slightly to 35.1 million and 39.8 million, respectively were 39 cents and 44 cents per share due to increased interest expense and additional shares that were issued over the last year.

The company paid common stock dividends 40 cents 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 second quarter was not that a 1.8 billion at a weighted average interest rate of 3.2%.

Our net debt to adjusted EBITDA ratio was 7.2 times at the end of the core.

The weighted average debt maturity attended the second quarter 2020 was 5.2 years, which is an improvement from 4.6 years at the close of the 2019 second quarter.

Opponents I've heard that include 344.6 million on the Multicurrency revolving credit facility.

403.7 million on term loan and 1.3 billion outstanding gross mortgage that.

This that was approximately 92% fixed rate, which is inclusive of floating rate that was in place interest rate swaps.

Company has a well Christian interest coverage ratio of 3.9 times.

As of June Thirtyth, 2020 liquidity was approximately 331.1 million.

Our net debt to enterprise value was 50.1% within enterprise value of 3.5 billion based on June Thirtyth 2020 closing share price of $16.73 per common shares.

$24 in 31 cents for series, a preferred shares and 22 hours a 95 cents for series B preferred shares. This ratio was impacted by the market disruption that took place across the industry starting in the last half in February.

With that I'll turn the call back to Jim for some closing remarks.

Thanks, Chris.

I'm very encouraged by all that we've accomplished in the second quarter. Despite the challenging circumstances, we had a great quarter distributing 35.8 million in common dividends to shareholders generating a if I fell 39.8 million and successfully collecting over 98% of cash rent payable based on the foundations we built.

Through our underwriting and the relationships, we formed with our tenants [noise].

All of these calls over the last several years, we have been emphasizing our portfolio is built to be durable.

Results this quarter bear this out.

Based on this I hope that our existing stockholders realized that this quarter was an excellent proof of concept and that potential stockholders recognizing the value potential. We believe is still present in our stock, particularly given our very limited risk exposure.

We will continue to focus on our business plan, while executing on the activities that are critical to our ongoing success like arranging favorable financing and maintaining our hedging strategy. We look forward to continuing these efforts in the second half of this year and hope all of you have an enjoyable unhealthy rest of the summer as always thank you for your continued.

Support with that operator, we can open the line for questions.

We will now begin the question and answer session to ask your question you May Press Star then one on your Touchtone phone.

Are you using a speakerphone. Please pick up you had said we're pressing the keys.

Withdraw your question. Please press Star then too.

My first question today will come from Brian Bear with B. Riley FBR. Please go ahead.

Good morning, Jim and Chris I appreciate the comments I'm just two questions.

First on the non payers of range can you tell us how you're handling that are they being offered deferrals over what period of time and what are the terms of those and then I have a second question.

Sure I can take that so it's roughly only about a dozen tenants and what we've been doing for these tenants is we've deferred the rep portions of the rent. So in some cases, it's just been the second quarter and.

A couple other cases, it's been a couple of months in the third quarter and what we're doing is we're having the tenants pay us back in those amounts in 2021 and in some cases, it's over the course of three months and up to 12 months, but we're not abating or ranch, where we are going to get paid back into.

21.

Okay, but to date no rents have been abated is that correct.

Correct.

Having no absolutely fine.

Okay and then my second question, it's kind of a two parter, but Jim you insinuated in your prepared comments the G.N. else made some changes to its expectations and that may be sellers have not can you elaborate on what those changes or that you're making it is it strictly operate.

They are type of asset on location of the asset and are you seeing any opportunities yet for distressed that that yeah, mainly in the office side and when I say distressed not acid itself, but maybe the owner who is trying to raise capital that might be attractive to you.

Well, thanks, Brian and good morning to you also you know what we're seeing we're actually starting to see a a greater deal flow right now we're starting to see a lot more properties, whereas I think for the last three four months a number of sellers.

Pulled off the market took there probably is off the market because they wanted to see where prices settle okay.

You know we're looking we're so we're still buying the same types for properties that we've been buying for the last three years last two and a half years, you know, we're buying high quality industrial distribution properties and we're buying select office properties in secondary markets.

With mostly investment grade tenants and you know I think a price wise you know weird.

Looking more at the prices on the office properties.

And in some cases, we've gotten back on deals that asked for higher cap higher cap rates, because we thought that you know the build there was just a little more risk than there was in the past, but they didn't know when I look at our portfolio when looking at the high quality tenants that we have you know, we're still very confident with what we own and we're very confident.

And what we're buying so I think all in all you know it is status quo and we're going to continue forward.

Cap rates will adjust the you know usually they had just periodically as interest rates go up and down and I think we'll see a similar similar type of process you know because of cold it but I still think you know the things will get back to normal Ed you know will continue executing on our business plan as we have.

Great. Thank you.

Thanks, Brian.

And the next question will come from Michael Gorman with BTI Ji. Please go ahead.

Thanks, Good morning, I Wonder if you could just starting like a big [laughter] come warning I was wondering if could just talk a little bit about the the collection rates, obviously very strong across the board I'm just wondering about 96% in the U.S. is that is that attributable because if I recall correctly, but that's the most of where the legacy retail is low.

Okay that right. So is that what was driving the lower not relatively lower number in the U.S. versus the UK in Europe.

I don't know if like we could actually say that I mean, you know that there's no one sector that the the deferrals have been focused on.

No, it's pretty much spread a little bit across the board. So I wouldn't say that I would just say you know that the U.S. It seems seems to have been hit a little harder than Europe House and a you know the way that the U.S. government is dealing with things you know German either back to work, France, they're back to work. The UK you know is still open.

In a little slower I think than they expected than we expected, but our tenants in the UK or are still doing well. So I don't think weakened we can really say that it's primarily from retail in America I. Just don't think that's the case I think it's pretty much spread across the board.

Alright ours I mean, let me, let me defined that our retail [laughter].

[laughter] you know retailer the U.S. has been hit pretty hard, but our retail is still doing pretty good.

Great. Good to hear and then can you just talk about you know as you start to see the transaction market settle a little bit and people start to come back out what the competition looks like a cross your opportunity set obviously I would imagine industrial you're starting to see more competition on the buyer side, but just maybe what you're seeing competitive.

Unfair.

Well, you know where our balance sheet is very strong as as we stated you know we have the ability to close on transactions around the world.

You know, where we're still looking and seeing things that are within the parameters that we set you know all along.

I think we're being extremely selective because of cope with 19, but we're still finding you know excellent types of deals to to bid on or or too you know to try to acquire so I don't think right now prices have changed that much you know good investment grade tenants in buildings skill command, a little bit better price and that's what we.

Focus on but you know we're still finding things I think if you look at what we bought you know in the second quarter. You know we there was it a what was it Chris it's a cap rate was 8.51 total close so far in 2020. The average cap rate is 8.51 with 810.8 years remaining lease.

Term I mean, that's pretty darn good. So I think we're still able to find great value out there with really good tenants.

That's helpful. Great. Thanks, one last one maybe for Chris I'm, obviously to favorable financing transactions one in the quarter. One afterwards, you talked about lot of liquidity on the balance sheet. Just how you guys are thinking about the the cost of equity here and then kind of how long.

You want to keep the cash balance versus the line of credit.

Sure. So I guess that the first part of the question and as you mentioned you may have a ton liquidity on the balance sheet. So I mean based on what we have in the pipeline than even what we're looking at I mean, we have a lot of cash to be able to use without having to tap.

Whether extended the equity or debt markets for some time I mean, obviously anything when it comes to equity will have to evaluate kind of on on a case by case basis, but we have a lot of cash to be able to use and then I mean, just in terms of thought the line of credit and the draw that we did at the end of March.

I mean at this point, we still think it's prudent to keep that cash on the balance sheet, we're going to continuously evaluate it but just given the current state of the economy and the virus progression and at least for enough the time being within gets that the smart thing to keep that cash, but also we're going to keep evaluating that also.

Excellent. Thanks for your time guys.

Thank you.

Thank you.

The next question will come from <unk>, Chris It with fair in Bird. Please go ahead.

Hey, guys keep it on for need So first would you want touching on the deal flow today versus a month ago and then on top of that you maybe talk about how the pipeline is rico bid terms.

Well I think I think as I said earlier, we're starting to see a lot more deals I think sellers are starting to adjust to the current situation. So we are looking at that more deals right now we're still being very selective which is prudent considering cove it and not knowing you know how long it'll be before a vaccine.

Or how viable vaccine will really be and then how long it'll take to vaccinate you know the population.

What was the second part of your question say it again.

So that was the deal flow, but as far as the pipeline today you touched on the size pre committed to getting close to those levels again.

Well, we haven't we haven't disclosed the pipeline so I can't really really talk too much about it yet, but you know if you if you follow us yields as we as we send out disclosures you'll see the pipeline.

But you know what we closed on so far this year you know it has been good then we will continue you know our business plan is to continue to grow the company and by you know high quality assets with great tenants. So we certainly will continue doing that.

Okay. Thanks and offer a follow up can you maybe touch on the off as part of your portfolio a little bit I mean, I'm sure you're aware, there's kind of a shift more working from home. So is there anything within the portfolio would be monitoring.

Well you know we don't you first of all let's take a look in the type of office that we have in the portfolio in the U.S. In particular, you know we have many times, there, they're saying well, they're all single tenant.

Properties, there all or many of them are investment grade their headquarters buildings, which are very important to the tenants and the way we look at it you know where we're not really so concerned because of the nature of these properties. These are people driving to work, they're not taking public transportation and even a 15 or 20% of the people.

Continue working from home after after the Cobot crisis is over I mean, we feel that I'll just give give our 10, it's a little more room and their buildings to spread people out a little more and be a little proactive against future future issues. So we're not really concerned also you know our tenants have budgeted. These buildings for very long terms of there and they're in their budget planning.

So you know they they do need I headquarter building and you know we're very happy to provide so we're very very comfortable and very confident about our retail properties or I'm, sorry, not a retail our office properties in the U.S., we had in Europe for that matter.

Perfect. Thank your time.

Sure. Thank you.

And the next question will come from John but sorry, with Ladenburg Thalmann. Please go ahead.

Good morning.

Hey, John Good morning.

Oh please.

So it's been a little choppy so no apologies.

Maybe touching a little more on cardiac tissue I find it was talking about a lot, but and I can't comment on the outside the pipeline.

Oddly at this point, but you can look at kind of what Thunder Ela why.

I'm not as much maybe the last quarter kind of prior quarters. How quickly does it take for you guys to close on things that maybe are under other wide or aren't under purchase and sale agreement.

And how might that potentially impact the cadence of additional I you know acquisition activity as you look into kind of to age 20.

Well you know I think I think we're very lucky in that regard because of our.

Our advisor I mean, we have tremendous resources at the advisory which were put forward and in doing red collections and reaching out with with the tenants. So that'd be advisor has really been a tremendous asset you know the strength and breadth and width of the advisors capabilities as far as closing transactions. You know we have we all have in house.

Legal we have the in house.

Our underwriting so you know we can close I'm transacts transactions pretty quickly so as the pipeline builds up you know we weaken in in a pinch we've closed in 30 days, probably 45 days. This is a good norm, but you know we have the capabilities to close on on assets very very rapidly as we find women as we you know we conclude.

The.

The sort of paperwork side of the transaction and the due diligence.

Okay, and then maybe touching on the office portfolio. It stands today and any kind of requests either you know in return for additional rang maybe permission.

To put additional capex, if somebody's office buildings in lieu of kind of changes that need to be put in place is it was all the covidien is that you know potential investment opportunity you know unit.

Able to invest in kind of from your own properties and how big potentially could that be added something you're looking at are getting a reverse inquiry about.

It's interesting in Europe, we've had a number of tenants reach out to us that are looking to expand their properties. So you know we are in conversations with a number of people about the potential for expanding existing facilities and in the U.S. you know as we get closer to explorations lease expirations, which you know there's still a few years away.

You know, we're beginning those conversations and it certainly is an area, where we could be could make good use of capital by putting investments into the properties. So I think you're 100% right I think we'll see a lot more of that going forward.

And I, if they specifically I mean, what's the appetite from tenants in any on your end in terms of maybe providing capital without additional rent, but potentially you know lengthen out that term on some of those office I started as opposite Cert. It's certainly an option you know one and we we look at all we look at all of these options as they come.

But you know we are in constant conversations with our tenants. So it's certainly something that we do consider.

Because of those conversations it's already at all over the last couple of months, given what's going on or is it been kind of.

Relatively similar to pretty Goldman.

Oh for US I think it's pretty relative to its been very similar to pre cove. It.

No. We do we like I said, we do have constant communication with our tenants and you know we respond relatively quickly to request and you know, it's an ongoing process, but I don't think it's accelerated for us because of Cogan.

Okay, and then just one last one you know and if you guys can't provide anything at this point that that's perfectly fine, but any color maybe on July collection broadly are specifically.

I haven't well one of the safe.

Right. So we haven't we haven't published a than the numbers yet for July, but what I would say, there's we're not seeing anything materially different.

[laughter] very helpful and that's it for me thank all very much.

Thanks, John.

The next question will come from.

With JMP Securities. Please go ahead.

Hi, guys.

Hi, good morning, Aaron.

Good morning, so 8% plus cap rates really strong wondering how that was split between the industrial in the office side Where's the spread at and then you know the low end of the range. The high end of the terms of cap rates that you're doing yields today.

Well.

Go ahead, Chris you can take that one.

Sure some I'm looking at E pipeline right now and.

There there isn't really the staying.

Difference from what I can see between the office industrial so it's all pretty consistent across the board.

Okay, and then you guys noted that it seems like industrial is gonna be.

You know have an incremental focus over office in terms of acquisition volume are you buy is that all towards the U.S. over Europe right now as though so many boyd it.

Well you know, it's it's been that way for the last couple of years, you know I think we bought a two thirds office one thing I'm, sorry, two thirds industrial Butte distribution and one third office for the last few years and it's been the majority has been in the U.S., but we're starting to see you know some pretty good deals in Europe right now you know your.

For a long time in Europe, the prices spiked really high the last few years pretty cold. So it was very difficult to find things that that met our underwriting criteria, but we're starting to see a lot more in Europe right now so I certainly wouldn't say we're focused on either country. You know as we're opportunistic buyers, where we find a really good property with a.

Great Great investment grade tenant I think you know we had as I said, we have the ability to to act. So we're certainly looking in both places and there are things we like in both places.

Right and then just the lid on the collection one more time, sorry to you know who the dead horse but.

Have you seen tenants asked or.

Deferrals or any assistance at an increasing pace that you had to push back on we'd get the collections, where you where you have them today or has the.

Income.

Inbound phone calls from tenants.

Not really changed and is reflective of the collection volumes.

Well I don't think much has changed I think you know, we we were proactive with our attendance. During this call. The crisis as I said, you know the advisor, but we put a lot of attention to reaching out and communicating with our tenants I think I think we've come to very good conclusions with the people that needed help. So you know we have not.

Had the deferral disk I mean, we've had the deferral discussion we have been abated anyways and I think you know that they've done a we've done a really good job as far as collecting the rents it it's obvious and it's working.

Gotcha.

Yeah, good job on the quarter. Thanks for the time.

Thank you very much here and take care.

Thanks Aaron.

And this will conclude our question and answer session I like to turn the conference Dr. James Wilson for any closing remarks.

Thank you operator, I want to thank everybody for joining us. This morning, we do appreciate your you're listening in your calling in and certainly we appreciate the questions asked.

And please everybody stay safe stay healthy and thank you bye bye.

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