Q3 2021 Global Net Lease Inc Earnings Call

Greetings and welcome to the global net lease third quarter 2021 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host Louisa quarto Chief I'm, Sorry, Executive Vice President. Thank you you may begin.

Thank you operator, good afternoon, everyone and thank you for joining us for Gnl's third quarter 2021 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 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, 2020 filed on February 26, 2021 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.

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 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 stop them, which are posted to our website at www Dot global net lease dotcom.

He's also refer to our earnings release for more detailed information about what we consider to be implied investment grade tenants are terminally used throughout today's call I'll now turn the call over to our CEO, Jim Nelson Jim.

Thank you Louisa and thanks to everyone for joining us on today's call I am pleased to report that GNL had a very strong quarter steadily making progress on our long term objectives are high quality mission critical net lease portfolio is performing as we expect with occupancy of over 99.

One, 1% and nearly 100% rent collection.

We are advancing our differentiated international portfolio strategy by continuing to close on accretive acquisitions, increasing portfolio concentration of industrial and distribution assets and successfully extending and expanding leases.

We continue to drive growth as the year over year cash NOI for the third quarter increased by more than 18% to $87 4 million.

Our acquisition pipeline remains robust through October 31st we have closed on over $380 million of acquisitions in 2021 at a weighted average cap rate of nine point, 74% and a weighted average remaining lease term of almost 17 years.

With the acquisitions, we have in our pipeline we are on pace to complete over 450 million of acquisitions for the year.

Along with our embedded rent growth, we are well positioned to drive earnings and cash flow growth going forward.

We continue to strengthen our balance sheet quarter over quarter annualized net debt to adjusted EBITDA improved to 7.4 times from seven eight times and a F. F O per share remained consistent at 44 cents.

Dividends paid to common stockholders were 40 cents per share our unique global capabilities strong balance sheet and best in class portfolio continued to drive Gnl's excellent performance.

One of the reasons, we remain confident in our strategy is our ability to source and close great acquisitions on attractive terms.

I wanted to take a few moments to provide some additional color on some of the recent transactions, we have closed including the acquisitions of Trafalgar Court during the third quarter and Walmart and pilot point still early in the fourth quarter.

Trafalgar Court property in Guernsey was acquired at a contract purchase price of $76 5 million.

Dollars based on the exchange rate on the day of closing.

When we agreed to acquire this property with a strong tenant base that is nearly 100% implied investment grade rated we negotiated an attractive 8.0% to 5% going in cap rate due to our near term lease expiration for significant tenants.

Prior to closing, we leveraged our strong asset management platform to secure a 15 year lease extension for the expiring tenants, representing 25% of the building space extending the weighted average remaining lease term for the property to 9.6 years from five eight years, we believe this extended lease as well as <unk>.

Preliminary lease extension discussions with the properties other major tenants gives.

It gives us the opportunity to unlock millions of dollars of value from the property.

We were invited to bid on Trafalgar Court because of our reputation in the U K and across Europe for our ability to come to terms and close on significant industrial and office acquisitions.

We have continually demonstrated that our team is unmatched when it comes to developing deal structure closing on time, and leveraging our expertise and relationships in local markets to appropriately finance our acquisitions. Notable recent European acquisitions of Whirlpool, where we acquired a portfolio of properties in the U S and Italy and.

Continuing through the Johnson controls and Mclaren acquisitions, we have shown the sale leaseback candidates time, and again that GNL as the partner of choice.

Early in the fourth quarter, we closed on the acquisition of the Walmart Learning Center in Bentonville, Arkansas, which serves as the primary digital and onsite training and development facility for Walmart Associates worldwide.

The new construction training center, we acquired as part of the company's New headquarters campus. Walmart has built out our learning center with cutting edge audio and visual capabilities Needless to say, we are very pleased to add Walmart. The number one company on the Fortune 500 list to our tenant roster and are happy to play a role in their ongoing investments into.

Their digital transformation.

Our forward acquisitions pipeline includes eight industrial properties in the U S and the Netherlands for over $70 million.

Combined with the acquisitions, we have closed year to date, we anticipate total 2021 acquisition activity to exceed $450 million at a weighted average cap rate of almost 9%.

16 years of lease term remain.

Our team is also evaluating strategic disposition opportunities and searching for additional acquisition targets that meet our stringent investment requirements.

Lease extensions remain a focus for our asset management team year to date, we have completed nine lease extensions and one tenant expansion project and executed one new LOI.

Leasing activity for the year, assuming the LOI leads to a definitive agreement totals 1.5 million square feet.

$15 7 million of annualized base rents on average the lease extensions have added almost five years of lease term and represent 4.0% of Gnl's total portfolio.

I am very pleased with the stability of our portfolio and the way we have been able to reduce our exposure to potential lease explorations. Thanks to the mission critical nature of many of our properties and our strong acquisitions underway.

The vast majority of our leases don't expire until after the end of 2025.

Our $4 6 billion 312 property portfolio is nearly fully occupied at 99, 1% leased with a weighted average remaining lease term of eight two years at the end of the quarter.

Geographically 239 of our properties are in the U S and Canada and 73 are in the UK and Western Europe, representing.

Representing 660% and 40% of annualized straight line rent revenue respectively.

Our portfolio was well diversified with 134 tenants 48 industries with no single industry, representing more than 13% of the whole portfolio based on annual straight line rent.

We also continue to increase the concentration of industrial properties in our portfolio at the end of the third quarter, our assets were 52% industrial and distribution and 43% office and 5% retail compared to 47% industrial and distribution.

Three 8% office and 5% retail a year ago.

Contributing to our success is our focus on tenant credit industrial acquisitions in retail dispositions over the last several years across the portfolio over 55% of annual straight line rent comes from investment grade or implied investment grade tenants.

<unk> is well positioned for a strong full year 2021, as we close on our pipeline of high quality acquisitions and continue to see the benefit of the significant acquisitions we made.

To date with that I'll turn the call over to Chris to walk through the financial results in more detail before I follow up with some closing remarks, Chris.

Okay.

Thanks, Tim for.

For the third quarter 2021 we recorded adjusted EBITDA of $75 2 million up from $63 6 million in the third quarter of 'twenty.

We also reported a 15, 8% increase in revenue to $95 8 million inclusive of a $2 2 million lease termination fee up from 82.7 million with net income attributable to common stockholders up $2 4 million.

S F O and <unk> for the third quarter were 44 million and $44 3 million, respectively, or 43, and 44 cents per share compared to 39, 10, and 46 cents per share in the third quarter of 2020.

As always a reconciliation of GAAP net income the non-GAAP measures can be found in our earnings release.

On the balance sheet, we ended the quarter with net debt of $2 2 billion at a weighted average interest rate of three 4%.

Our net debt to adjusted EBITDA ratio was seven four times at the end of the quarter.

The weighted average debt maturity at the end of the third quarter 2021 was for five years.

The components of our that includes $500 million in senior notes $118 7 million on the multi currency revolving credit facility.

$286 3 million on the term loan and $1.5 billion of outstanding gross mortgage debt.

Yes that was approximately 94% fixed rate, which is inclusive of floating rate that with in place interest rate swaps.

Company has a well cushioned interest coverage ratio of 3.4 times.

As of September 30th 'twenty, 'twenty, one liquidity was approximately $280 4 million.

The company distributed $40 3 million in dividends to common shareholders in the quarter or <unk> 40 per share.

Our net debt to enterprise value was 53% with an enterprise value of $4 2 billion based on September 30 of 2021 closing share price of $16.02 per common shares $27 for series, a preferred shares and $27.90 for series B preferred shares with that I'll turn the call.

Back to Jim for some closing remarks.

Uh huh.

Thank you Chris.

I'm very pleased with how GNL has continued to grow throughout this year broadly we have met and exceeded pre pandemic performance levels across the company.

Including our rent collection cash NOI and adjusted EBITDA figures when compared to the first quarter of 2020.

More importantly, gnl's reputation as a premier partner for a strategic sale leaseback transactions among U S and European companies has grown exponentially during the same time we.

We are well positioned to continue to execute on accretive creative and exclusive transactions that further enhance our portfolio.

Look forward to closing out this year strong and carrying that momentum into 2022.

With that operator, we can open the line for questions.

Thank you at this time I'll take conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing.

Mr. Archie.

Our first question comes from the line of Craig Mailman with Keybanc capital markets. Please proceed with your question.

Hey, guys. Good afternoon, Jim I, just want to go back to your commentary around Trafalgar I'm curious you know you guys got it a little bit over an eight cap how much of a premium yield you guys think you got.

For the kind of uncertainty around the tenants I'm, just trying to kind of put some numbers around.

The you know you kept saying that you guys think you drove a lot of value by gaining at least I'm just trying to put some context around it.

Well you know.

From the from the experts we've spoken to in the local markets My guess would be somewhere around a 10% premium a little more a little less but at least somewhere around a 10% premium.

Okay.

And are you guys planning on refinancing that to pull proceeds out or you know how are you going to.

Is there a way to kind of extract that value.

Well.

The day, we took over an existing and existing mortgage on the property, which is a short term left on it. So we will be refining refinancing that sometime in the next year or two.

Okay.

And then I wanted to go back to your commentary also evaluating strategic dispositions as you guys go through the portfolio. You know you had some good luck with the like the asset in Germany, where you were able to extract some value or are there. Other can you give us a sense of how many other assets in the portfolio you guys would look to get rid of them.

Kind of timing as you look to finance 22 acquisitions.

Yeah. Thanks, Craig that's a good question as you know and we've talked about this a number of times over the years you know we are.

Selectively selling off the retail the retail assets we have.

Where we are.

As good offers come in you know we are reviewing them and we you know we have cut our retail exposure by half over the last few years. So we will continue doing that.

And then there are a few properties here and there you know we are long term holders of good real estate, but again you know we also are proactive you know when we see you know that.

That it would work in our benefit to sell a property. So we are looking at a few properties in the U S and Europe right now, but we haven't made any definitive decisions on that yet.

Okay, and then just one last one for me it sounds like the blended yield on total full year acquisitions is coming down you know about three quarters of a point I'm, assuming it's the industrial assets that are pulling it down I'm, just kind of get a sense of the yield on that remaining $1 25 in <unk>.

Maybe break it out between the industrial and the office assets.

Yeah, it'll bring it down a little bit I think I think.

With it with the Q4 2021 pipeline the weighted average cap rate of seven 3% the pipeline.

So you know, it's it's going to pull it down a little bit I think into like nine and a half range, but you know I think if we look at the overall the overall average for the year that we were really advantage with Mclaren and I I think you probably saw that their credit rating has improved and Trafalgar court. So between the two of those.

We're gonna have a very strong average.

Average a weighted average cap rate going in cap rate on all the properties for the year. So we're really pleased with how the year is looking.

And you had mentioned that the Mclarens credit rating improved.

Is there any thing in motion about resetting the lease now that's happened or any update there no.

No not yet we you know we review it periodically, but we're not looking at making a change yet right now.

Great. Thanks, guys.

Alright, Thanks, Greg.

Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad. Our next question comes from the line of Bryan Maher with B Riley Securities. Please proceed with your question.

Good afternoon.

Not to take anything away.

Stunning 90, 91% occupancy, but can you give us a little color on the 60 basis point degradation in the 99, seven like where did that come from.

Chris you want to give Brian some color on that.

Yeah sure. So I'll I'll I'll jump in on that that actually was related to one of our tenants Trinity health. They had two properties and they were looking to consolidate to one.

So they actually terminated one of the leases, but as part of that transaction. They did extend the other lease by an additional 10 years.

So while losing one what would be the one lease we haven't really seen that property are selling yet.

So at this point, we're looking to re lease that property and are actively working on that.

Great and then maybe Jim you could give us a little color on your pipeline of acquisitions, you know specifically I don't know how to pronounce it set for.

Corporation for Paas.

Yeah, It's it's an industrial four pack a nice good company good good good properties.

And we're expecting to close that in Q4, there their industry, it's an industrial four pack.

So.

And if you look if you look at the things in the deck that we put out you know pretty much everything left in the in the pipeline is industrial.

The Walmart leasing center, which closed in Q4 wasn't.

But the rest of them are industrial which is which is really nice you know because as you know and we've also talked about this quite a lot of our focus really is on industrial and distribution properties, even though when we find the building like like the Trafalgar cord property in Guernsey and that's just a fantastic deal on a great building, but with Super high quality tenants we were.

We'll execute on that but our focus still remains on industrial and distribution.

Great.

Jimmy let you close on what's expected and you get to 450 for 'twenty 'twenty. One you know that's going to be another kind of stunning year of acquisition debt really respectable cap rates not looking for guidance per se or a number or a cap rate for 2022 but how do you feel about the cross.

Back for maybe continuing strong momentum as we enter 'twenty two relative to what you're seeing now that you know clearly we don't get to see it until later.

Well when when when I look at the stuff that our acquisition team shows shows me you know I mean, it's a it's a wide variety of properties in multiple locations. You know, we're still looking at a lot of stuff in Europe, and a lot of stuff in the U S. So we get to see Fortunately, we get to see a lot of properties and remember we've talked about.

A lot of our acquisitions our relationship based so you know the relationships that we've built over the years continue to bring us quality properties. So you know I'm I feel very strongly about the future I think we can continue doing what we've been doing for the last four years.

Since Chris and I since Chris and I started running this company you know we've we've added over $2 billion worth of very high quality assets. So I think we can continue doing that into the future I'm very positive about what the future has to hold for GNL.

And not to take anything away from them Mclaren acquisition, which is a phenomenal asset, but I think most people would certainly care drives it is a little unusual should we expect to see some more unusual stuff in gnl's future in the next year or two.

Yeah.

It is unusual is the term that I would use Brian.

You know, it's certainly was a little bit different than most of the transactions we've done but again it shows that we have the flexibility to buy quality properties at good prices.

In the right situations.

I would never say no to anything because.

Who knows I would never say, we're not going to do something like that again, but if if another opportunity arises that's similar to Mclaren, we certainly have the ability to execute on it.

Okay. Thanks, Jim.

Sure Brian take care.

Sure.

Thank you. Our next question comes from the line of Barry, Oxford with calling your Securities. Please proceed with your question.

Great. Thanks could you guys talk a little bit about the cap rate environment over in Europe compared.

<unk> to the U S. So we still are they still experiencing the kind of the cap rate compression that we have experienced over here in the U S or not quite as much or maybe more.

I don't think honestly.

I don't think it's quite as much.

Their their economies opened a little bit slower than ours. So I don't think they've had that sort of rapid return like we've had here in the U S.

But there is there is some cap rate cap rate compression in Europe, I is undeniable, but there's still there's still value there and as you know you know its really changed in Europe over the last four or five years I mean for a long time cap rates compress very quickly then they sort of leveled off and they're in that leveling off period and with interest rates quite.

LOE.

In Europe, it opens up a lot of opportunity for us.

So with that in mind and you have some assets that you've kind of you know tagged for lack of a better word a for sale here in the U S why not accelerate that.

And and get some earnings off the cap rate differential or well.

That simple Berry.

Well, Barry I didn't say that all of our potential dispositions were in the U S. I said, we're looking you know there are potential dispositions in Europe that we're looking at but nothing thats nothing thats held for sale right now.

Okay.

We do we do look for opportunities you know what will be the best thing we can do for our shareholders and if there are some properties in the portfolio that the best option would be to sell then we certainly are looking at that.

Perfect perfect. Thanks, guys.

Alright take care Barry Yeah.

Yep.

Thank you ladies and gentlemen, this concludes our question and answer session I'll turn the floor back to Mr. Nelson for any final comments.

Thank you operator, I want to thank everybody for joining us on today's call as you can probably tell Chris and I are very proud of the success and the growth that we've had of GNL and we certainly intend to continue on the track that we're on so thank you all again for calling in and take care Bye Bye.

Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.