Q4 2020 Global Net Lease Inc Earnings Call
Good morning, and welcome to the global net lease fourth quarter 2020 earnings Conference call. All participants will be on listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw from the question queue. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Louisa Quarto. Please go ahead.
Thank you operator, good morning, everyone and thank you for joining us for Gnl's fourth quarter and year end 'twenty 'twenty earnings call. This call is being webcast in the Investor Relations section of Gnl's website at Www Dot global net lease Dot com joining me today on the call to discuss the quarters result.
<unk> 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 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.
Throughout today's call, we will use the term implied investment grade with respect to tenants.
Please refer to our earnings release for more information about what we consider to be implied investment grade.
Any forward looking statements provided during this conference call are only made as of the date of this call I 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 the substitute for our financial results prepared in accordance with GAAP.
A reconciliation of these measures for the most directly comparable GAAP measure is available in our earnings release and supplement both of which are posted to our website at www Dot global net lease dot com.
I'll now turn the call over to our CEO, Jim Nelson Jim.
Thank you Louisa and thanks again to everyone for joining us on today's call I am extremely proud of how GNL has performed throughout a year of unprecedented change and dislocation in the market. Our resilience through the last year is a testament to the strength of our strategy, including the deliberate construction of our portfolio.
Our focus on mission critical industrial distribution and office properties and the execution of our proven strategy in prior years to reduce our exposure to other asset classes such as retail.
From this solid base, we launched our inaugural unsecured notes offering in the fourth quarter.
The notes received an investment grade rating from S&P, a triple B mind us an a rating from Fitch of double B, plus we continue to acquire high quality accretive assets and build momentum headed into 2021.
This morning, Chris and I will briefly discuss all of these initiatives as well as our fourth quarter and full 2020 results before taking your questions.
Our best in class for $3 billion portfolio consists of 306 properties in the United States, Canada, The UK and Europe that are diversified across 130 tenants in 48 separate industries.
Our property mix is currently 49% industrial and distribution, 46% office and five per cent retail.
Portfolio occupancy at the end of the year with 99, 7% with a weighted average remaining lease term of 8.5 years as of December 31 2020.
67% of our annualized straight line rent is derived from investment grade or implied investment grade tenants.
Compared to our peers, our occupancy is unmatched and the weighted average remaining lease term on the portfolio is among the best for the sector.
We also believe the credit quality of our tenants compares favorably to our peers.
With no near term expirations and with embedded contractual rent growth and 94 per cent of leases. We believe our diversified portfolio remains stable and well positioned to create value over the long term for our shareholders.
[laughter] rent collection for GNL remained at or above 97% in the second third and fourth quarters of 2020 because.
Because of the strategic importance of many of our assets our tenants credit quality, our proactive approach to collection and our strong relationships with our tenants in the fourth quarter, we collected 99% of the cash rent do across our portfolio, including 99% in the U K and 100% in the rest of Europe.
We collected 100% of the cash rent due from our top 20 tenants representing almost half of our annual cash rent.
I want to be clear that all rent collection percentages. We discuss are calculated based on the original rent we would have expected to receive before COVID-19 started and they're not adjusted for negotiated deferrals or other amendments.
We are very pleased with the acquisitions, we made during the year all of which were industrial distribution as mission critical office assets in total we closed on over $460 million of acquisitions.
The weighted average cap rate for these acquisitions was seven 9% with a weighted average remaining lease term of 14.5 years at closing.
The fourth quarter was particularly active as we closed $292 $8 billion of transactions that will eventually contribute over $21 million of annualized straight line rent to our portfolio.
Many of these acquisition was closed in late December and as a result did not meaningfully contribute to our fourth quarter. Our full year results one of the largest acquisitions from the fourth quarter was a for property U S industrial portfolio, including three properties leased to DST output LLC a wholly owned subsidiary.
Broadridge financial Solutions, Inc.
The property is leased to S. K S USA, Inc.
He owned subsidiary of a B S K, yes.
On the world's largest bearing manufacturer and distributor the one 3 million square foot portfolio is geographically diversified with properties in California, Missouri, New York, and Connecticut and feature three mission critical production facilities in the state of the art manufacturing facility. The in place net leases have one.
8% average annual rent Escalations and a weighted average remaining lease term of nine one years.
In addition to acquisitions we.
We were also active signing strategic lease extension from 2020.
In Helsinki, we sign on early lease extension on two leases with or implied investment grade tenants finnair, the flag carrier and largest airline in Finland and majority owned by the Finnish government we.
We extended the lease term by $6 for years for over 650000 square feet, representing one 8% of our portfolio closer to home in Germantown T. A we signed a long term lease extension with the GSA, which is backed by the full faith and credit on the U S government.
This lease is for almost 15000 square feet at an extended by eight three years.
In total we negotiated and completed 12, such extension for over one 6 million square feet or for 3% of our portfolio.
Lease extensions collectively increased the weighted average remaining lease term at these properties to 10 eight years from for seven years.
These extensions also reduce the concentration of lease is scheduled to expire in 2020 for from 17% to 12% and we had no lease explorations in 2020 that were not renewed.
Addressing lease explorations three years in advance as part of our aggressive and proactive approach to asset management.
From our tenants perspective, signing early and long term lease extensions signals of the mission critical nature of these properties and our tenant's commitment to remaining in their space long term.
The result of all these efforts produced year over year gross and adjusted EBITDA total revenue NOI and dividend coverage adjusted EBITDA increased by 6% year over year to $248 $7 million for 2020 compared to $234 $5 million in 2019.
Total revenue for the year rose seven 8% to $331 million from $306 $2 million in the prior year net operating income also grew seven 1% to $297.7 million from $277 $9 million from 2019.
In the fourth quarter, we completed a $500 million senior unsecured note offering.
Let's have an effective interest rate of 375 per cent and mature on December 15th 2027.
Standard <unk> Poors rating services issued an investment grade rating of Triple B minus on the notes and Fitch ratings raised the notes double B plus.
GNL also received a corporate credit rating of double B plus from both S&P and Fitch notes were well received by the market and we were pleased with the demand for the offering the rate achieved during a period of historically low interest rates and the credit ratings, both on the notes and on the company.
We believe that the success of the transaction is a testament to our hard work to enhance gnl's, primarily investment grade portfolio over the past several years robust rent collection throughout the pandemic and disciplined acquisition focus.
The most allowed us to repay in full our outstanding borrowings under our revolving credit facility pay off $88 million of secured debt and partially repay our term loan all while adding new long dated debt. The seven year notes also increased our weighted average debt maturity to five point for years as at the end of the year.
By strengthening and diversifying our balance sheet and obtaining corporate level credit ratings. We are laying the foundation for <unk> continued growth and ability to issue unsecured notes on attractive terms in the future.
We remain committed to executing on our global investment strategy by leveraging our unique capacity to acquire assets throughout Europe and North America.
Last year was a testament to the effectiveness of our strategy. We believe we will build on the substantial momentum we're carrying into 2021, we expect that momentum to dovetail with continued improvement in global economic conditions, and ultimately drive a very successful year, we believe we remain well positioned to take.
These are 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.
We believe our demonstrated ability to underwrite transactions with an eye towards long term value is what continues to set GNL apart in the net lease sector. We will continue to execute on our strategy in 2021 and beyond as we grow Gnl's global and diversified portfolio.
I'll turn the call over to Chris to walk through the operating results in more detail and then I will follow up with some closing remarks, Chris.
Thanks, Jim we posted improved financial results for both Q4 2020 annual and quarterly results in comparison to the prior year.
As Jim mentioned for 'twenty, 'twenty, where we recorded a 6% increase in adjusted EBITDA on a seven 8% increase in revenue with net loss attributable to common stockholders of $7 8 million.
<unk> was $130 9 million or $1 46 per share and <unk> was $165 million or dollar and 79 per share.
The company paid common stock dividends of $155 1 million or $1 73 per share in 2020.
Revenues increased primarily due to rental income from acquisitions.
As always a reconciliation of GAAP net income for the non-GAAP measures can be found on our earnings release and supplement.
In the fourth quarter revenue increased $13 five per cent to $87 million on a year over year basis.
<unk> was $22 7 million or <unk> 25 per share as I saw was $40 1 million or <unk> 45 per share.
During the quarter the company paid common stock dividends of $35 8 million.
Our balance sheet ended the fourth quarter with net debt of $2 2 billion at a weighted average interest rate of three 3%.
Our net debt to adjusted EBITDA ratio was 8.5 times at the end of the year, primarily due to the late fourth quarter closing of almost 300 million of properties.
The earnings from these acquisitions had little impact on actual NOI for the quarter contributing only $1 6 million.
The weighted average maturity at the end of the fourth quarter 2020 was $5 for years.
The components of our debt include $111 1 million on the multi currency revolving credit facility $303 million on the term loan $1 4 billion of outstanding gross mortgage debt and 500 million on our senior notes.
This debt was approximately 95, 8% 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 three seven times.
As of December 31, 2020 liquidity was approximately $218 8 million.
Which comprises $124 2 million of cash on hand, and $94 5 million of availability under the credit facility.
Our net debt to enterprise value was 54, 5% with an enterprise value of $4 billion based on the December 31, 2020 closing share price of $17.14 per common shares $26.16 for series, a preferred shares and $25 40 for series B preferred shares.
As a quick update to the hedging program. We have continued to use our hedging strategy to manage our exposure to fluctuations in interest rates and in local currencies against the U S dollar for our European portfolio.
Regarding currency hedging the company is used and may continue to use foreign currency derivatives to manage its exposure to fluctuations in GBP and USD and euro to USD exchange rates with that I'll turn the call back to Jim for some closing remarks.
Thank you Chris.
I'm very proud of the way that GNL didn't just weather the storm that was 2020, but actively sought and execute on opportunities to enhance our portfolio and balance sheet.
We sourced and closed on over $460 million of accretive acquisitions, we obtained our own credit rating and issued $500 million of unsecured debt that we received an investment grade rating from S&P, a triple B minus an a rating from Fitch a double b plus.
We didn't slow down our pursuit of these objectives during the pandemic and we were able to issue. These notes in a low interest rate environment and an attractive coupon. We signed early in long term lease extend terms based on the mission critical nature of our assets and extended all of the leases that expired in 2020, a true testament to our tenants commitment to their space.
And the relationships we have built on.
Stock performed well last year, and we believe that improving global economic conditions will benefit well constructed companies like GNL going forward. We will continue to maintain our focus on industrial distribution and mission critical office acquisitions that are accretive to our portfolio and capital markets transactions that will support our future growth.
Emboldened by the outstanding performance of our institutional grade portfolio and are poised to continue our success in the coming year and beyond with that operator, we can open the line for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on you touched on so if you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two.
Our first question is from Nate Crossett of bear embark. Please go ahead.
Hey, good morning, guys. Thanks for taking my question.
Good morning.
I know you guys don't give formal guidance, but I was just wondering if you could give you know broad strokes in terms of how we should be thinking about acquisition volume deal flow U S versus your debt.
Industrial versus office.
And then your kind of expectation for pricing and re leasing spreads.
Great question, there's a lot of different a lot of different answers embedded in that question for.
First of all let me say that we have a very robust pipeline and as you can see how we ended last year in the fourth quarter. We can definitely say that you know we we expect this year to be a very good year as far as acquisitions Chris.
Chris Why don't you take a couple of the other points.
Okay.
Sure.
Right. So as Jim said very very strong pipeline. Unfortunately in terms of what we can actually disclosed it's what we have under agreement but.
But there is a lot more that we are working on both both the U S and Europe.
As Jim mentioned global earlier in the script from when it comes to leasing.
What are you, saying, we've completed 12 lease extensions over the past year, that's something that we are continuing to work on.
And as we've done this we've been very successful and really keeping ourselves at a market rate and building an extension to these lease it. So that that's added a lot of value I think to the portfolio.
And let me talk about let me talk a little bit about U S versus Europe, we continue to look in both places.
As you can see by what we bought in the last couple of years, you know we were buying very high quality assets in Europe.
Whirlpool and Johnson controls have been to two companies, we bought a number of assets from in Europe. We continue to look on the U S. We have a very very robust pipeline also and I think if you look back at what we bought in the last three years, probably at least two thirds to three force have been.
Real on distribution properties, and we will continue to have our focus very much in the same direction going forward.
So I guess all that helpful. So long term kind of the industrial per cent of the overall portfolio should we expect it to be kind of 60 40 plus longer term.
I think that's a fairly decent target I as you can see by at the end of 2020, we we have gone from being a little bit higher percentage in office to a higher percentage in office and industrial I'm, sorry, and in industrial and distribution. So we're definitely moving that direction very very nicely with our acquisitions.
Okay can you maybe just the last question can you kind of just talk about your office portfolio.
Honestly with Covid.
There are some structural question surrounding.
Maybe more so CBD office, but can you just kind of remind us why you think your portfolio is.
Well, you know kind of what the competition is like right now to be buying these types of losses that debt.
Well you know I'll answer the second part first there's always competition you know when it comes to buying good properties. We focus on you know very high quality and truly truly mission critical properties and I think the performance of our invest for great tenants at all of our tenants proves that these properties are.
Important to them and we continue you know we continue to purchase assets you know that really have the same the same metrics built around them. So I think we're in a very fortunate position with the assets that we have.
And certainly with the assets that we that we would buy in the future. We have a very disciplined underwriting process and you know all of these factors are very important you know when we buy a property. So as I said, we're very very confident of the quality of our portfolio office and industrial distribution end.
I think the plan has worked very well for us and we will continue to buy those accretive properties.
Okay. Thank you.
Thank you.
The next question is from Michael Gorman of B T. I D. Please go ahead.
Uh huh.
Yeah. Thanks, good morning.
Hey, Michael if you could just.
Hi, I was wondering if you could talk a little bit more I understand there's always competition for the high quality properties, but I just wonder.
If you saw a lull in the competition last year during some of the volatility and to the extent that some of that is coming back.
Maybe how that's influencing how you think about 2021.
Well I think personally I think we saw a number of our or of the recent our sector basically sitting on their hands.
Waiting to see what would happen you know we continue to be very very selective on what we bought.
We have very stringent underwriting.
Metrics that we're that we that we follow and we found we found great properties and we finished the year you know as as we said for with for over $460 million worth of acquisitions. I think you know because of the quality of our acquisition team our position on the market the huge volume of acquisitions that.
Our platform has done over $40 billion since 2007 and acquisitions that we have a real advantage you know we're known as a very good buyer, we buy a number of properties direct from you know from sellers in sale and leasebacks, we buy from developers. So we we really have in a lot of sense on upper hand it at.
How and where we play.
And you know, we're well known in the markets that we buy and so I think you know what even though competition may be coming back the U S really start real estate market is so huge that we certainly can find an abundance of good properties that meet our criteria and continue on.
On our acquisition pace.
Pace.
That's helpful. Thanks, and then I noticed your comment about truly mission critical and I thought that's interesting because it is a term that gets thrown around a lot.
And I do wonder as you as you kind of saw what happened in 2020 have you changed your definition of what that criteria.
Not really I mean as you can see it's worked well for US you know in the properties that we own and you know as we continue to add to the portfolio. You know following our same our same acquisition metrics. You know we should be able to continue to have those same types of mission critical properties.
Joining our portfolio as we move forward and we do have as I said, a very very robust pipeline and you know we expect to be able to continue doing what we've been doing very successfully.
Okay. Thanks, and then just one follow up for me and I apologize if I missed it but any color you can provide on those three leases that are set for exploration this year.
Chris you want to take that.
Sure I mean, all I can say is that we are actively working on those leases that are set to expire in terms of working on expansions. In addition to many other leases in both the U S and Europe that have even longer dated timeframe. So we are being very proactive in terms of getting ahead of these.
Lease exploration.
And remember those are those are three leases out of 306 properties. So we're not overly concerned but we are we are working on them.
For sure great. Thank you very much.
Thank you.
The next question is from John Masako with Ladenburg Thalmann. Please go ahead.
Good morning.
Hey, good morning, John.
Exactly the size of the pipeline, but if we kind of compare that obviously to what is under LOI in purchase and sale agreement.
Should we kind of expect the acquisition cadence this year to be kind of you know.
And for Q or.
Is there stuff, that's maybe kind of just just out of sight.
No not under LOI, not under PSA, but very close.
[laughter], that's a loaded question John.
I don't think I think it's too early to say the year is going to be backend loaded for sure. You know we have a lot of things that we're working on where a lot of things that we're looking at you know we don't give guidance, but you know all I can say is we expect this to be a very good year for acquisitions.
Okay, and then you.
There's been a lot of movements around kind of inflation expectations in the United States, maybe versus Europe, I mean, how has that potentially impacted where you see transaction volume.
Turning out this year geographically.
I know again I think it may be a little early to tell because you know.
Inflation fears are just starting to edge into the into the economy.
People are talking about them more than they have on a very long time, but I don't think I don't think our market has reacted dramatically to that at all.
In Europe, you know again, you know, we look to buy very very high quality assets.
And I haven't seen anything as far as as far as on effect.
In Europe at the present time, so we still remain optimistic and we think things will continue pretty much the way they have been.
Okay.
That's it for me. Thank you all very much.
John Thanks.
Thanks, Tom.
The next question is from Barry Oxford of D. A Davidson. Please go ahead.
Great. Thanks, guys. A quick question when I was looking at your acquisitions here in the fourth quarter, you mentioned the cap rate of six and a half going in and then I think seven two.
How quickly does that become a seven two cap rate because six five so a little on the low side for you guys.
Sure well, what I would say they are at in terms of the acquisitions that we had during the fourth quarter.
The escalators built in are roughly about two per cent a year on.
On average for these.
Acquisitions I don't have the exact time on we got to the seven to but that that's the escalator that would be working with here.
Is that seven two kind of on average over the lease period.
Correct that would be that lease period.
Okay perfect perfect. Thanks, so much that's all I had today.
Thanks, Barry Great.
Okay and if you have a question. Please press Star then one the next question is from Brian Mayor of B Riley Securities. Please go ahead.
Good morning, just most of my questions have already been answered, but we noticed the operating property operating and G&A expenses were a bit higher than our expectations for the quarter and maybe this is the best for credit is there anything going on with those numbers that we should think about in the fourth quarter numbers kind of a good run rate to look at for 2002.
One of course building in acquisitions as they go.
Sure. So I guess I'll start first with the proper property operating expenses. Obviously these fluctuate quarterly based on acquisitions and activity, but I think the key to point out here when you're looking at third quarter versus fourth quarter on the increase was roughly about $2 million, but the actual expense reimbursement revenue was off.
So up about $2 million, so when you're looking at that that net opex, it's effectively you're going to be flat quarter over quarter. So it doesn't have much earnings impact.
And then the second part of it in terms of G&A on the bump in the fourth quarter on taste, primarily driven by legal.
For fees that really work hard for the most part in conjunction with the lease extensions. So.
So obviously, that's something that added value to the portfolio.
But that's going to be an activity based item and and I would say don't don't assume that's a run rate unless were significantly working on lease extensions.
Great and then just one question for me on on the acquisition.
You guys have been pretty thorough with your answers so far but has there been any.
Meaningful change in your deal sourcing or where youre seeing opportunities from and are you seeing any stress levels on the part of the types of sellers, mainly as I'm talking about on the part of office either in Europe or in America, which could skew you to buy in one market over the other.
I don't think that debt, there's anything going on that would really skew us to buy in one market versus the other.
And I think if you're looking at the high quality type of mission critical properties that we buy I think there's still value. There. So I don't see that part of the office market, becoming depressed, but you know again, we follow it very closely you know, we're very careful with what we buy.
And I'm very confident that we can continue buying really high quality assets.
Through 'twenty 'twenty 'twenty, one and beyond.
Great. Thanks, Jim.
Alright. Thanks.
This concludes our question and answer session I would like to turn the conference back over to Jim Nelson for closing remarks.
Thank you operator, and thank you everybody for joining us on today's call are it's always a great pleasure to talk to you and to bring forward the results.
The GNL has accomplished so we thank you and we'll talk to you next quarter Bye bye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.