Q3 2022 Global Net Lease Inc Earnings Call
A question and answer session will follow the formal presentation.
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I would now like to turn the conference over to Curtis Parker Senior Vice President. Please go ahead.
Thank you good afternoon, everyone and thank you for joining us for Gnl's third quarter 2022 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 this 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 Tori SEC filings, including the Form 10-K for the year ended December 31st 2020.
One filed on February 24, the fourth of 2022 and all other filings with the FCC. 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 measures is available in our earnings release and supplement which are posted to our website. Please also refer to our earnings release for more information about what we consider to be implied investment grade tenants. A term we will use throughout today's call I'll now turn the call over to our CEO , Jim Nelson Jim.
Okay.
Thanks, Curtis and thank you to everyone for joining us on today's call.
Our high quality mission critical net lease office and industrial portfolio continues to perform well.
We are advancing our differentiated international and domestic strategy by increasing portfolio concentration and industrial and distribution assets successfully extending and expanding leases, maintaining 99% occupancy and building a pipeline of attractive acquisitions.
Since the beginning of 'twenty 'twenty over 82% of Gnl's acquisitions have been industrial and distribution assets, increasing gnl's ownership of this asset class to 56% of the portfolio. We believe our best in class portfolio is well positioned for meaningful capital appreciation and then our dividend provides shareholder.
It's a very compelling current yield.
In the third quarter core <unk> grew by nine 6% year over year to $48 3 million or <unk> 47 per share and a S. F. O was $41 3 million or <unk> 40 per share on.
On a constant currency basis, when we apply the average monthly currency rates from the second quarter 2022 revenues would have been up by $1 2 million to $93 8 million.
Using the same constant currency concept a year over year revenues would've been up by $4 9 million to 97.5.
R. A F F O was impacted by the strengthening of the U S dollar relative to the euro and pound. However, our comprehensive hedging program helped reduce the impact of the strengthening and we realized $2 4 million of gains this quarter.
We think our unique global capabilities strong balance sheet and best in class real estate assets continued to support Gnl's positive performance.
One of our areas of focus for 2022 is asset management and we continue to build the leasing momentum in the third quarter. We completed two lease renewals and one tenant expansion project totaling nearly 850000 square feet, bringing our year to date activity to three 6 million square feet.
We also signed one small new lease for our convenience store in the U K.
The year to date renewal and expansion leasing adds 117 million of net new straight line rent over the new weighted average remaining lease term of nine three years up from three five years.
The leases signed in the first nine months of 2022 are for properties. The company owns in the U S U K, France, and the Netherlands and include investment grade tenants such as the U S government the state of Indiana, Fedex and Whirlpool.
Thanks to our leasing efforts our portfolio has only 1% of leasing expiring during the balance of this year with almost 74% of our leases not expiring until 'twenty 'twenty seven or later built.
Building on the strong relationships, we have established with our tenants over time, our asset management team has been very successful signing leases this year in North America and Europe .
At quarter end, our 4.4 billion 310 property portfolio had a weighted average remaining lease term of eight one years geographically 236 of our properties are located in the U S and Canada and 74 are in the U K and Western Europe , representing 66% and 34%.
Annualized straight line rent revenue respectively.
Our portfolio is well diversified with approximately 141 tenants in 51 industries with no single industry, representing more than 12% of the whole portfolio and no tenant exceeding 5% of the portfolio based on annual straight line rent.
Over 94% of our leases feature annual rental increases, which increase the cash rent that is due over time from these leases.
Based on straight line around approximately 64% of our leases feature fixed rate escalations.
25 points of Cat six X escalations that are based on the consumer price index and $4 seven have escalations based on other measures as we mentioned we continue to expand the concentration of industrial properties in our portfolio at.
At the end of the third quarter, our assets were composed of 56% industrial and distribution, 41% office and 3% retail compared to 52% industrial and distribution 43 per cent of office and 5% retail at the end of the third quarter of 2021.
Contributing to our success is our focus on tenant credit industrial acquisitions in noncore retail dispositions over the last several years across the portfolio over 61% of annual straight line rent comes from investment grade or implied investment grade tenants.
Year to date, we have completed $33 3 million in acquisitions. After a very active in Europe, adding properties in 2021 and in anticipation of increased market uncertainty as inflation rates continue to rise we became increasingly selective in 2022.
Disconnect in spreads salaries were asking for a relative to our disciplined acquisition criteria also made many opportunities less attractive.
Our selectivity has proven to be prudent as our acquisitions pipeline as of October 31.
Is comprised of a 32 million office property at a much more attractive cap rate than were available at the beginning of the year is consistent with our disciplined acquisition criteria, we decided to close on the properties in the pipeline when combined with the properties. We have already acquired our acquisitions for 2022 would be 66 million.
At a weighted average cap rate of seven 6% was 11.7 years of lease term remaining.
We also sold one property in the U S. During the third quarter and have agreed to terms to sell two additional properties that would bring total dispositions closed or under a game with over 110 million.
Our differentiated investment strategy continues to deliver value and we remain focused on growing our portfolio by acquiring highly dependable single tenant industrial and distribution properties in North America and Europe .
Successful lease renewals and expansions speak to the mission critical nature of the properties that we all were over 61% of rent is derived from investment grade tenants, where the weighted average remaining lease term exceeds eight years we.
We are well positioned for the future and I look forward to building on our progress through the rest of the year 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.
Thanks, Jim.
Third quarter 2022 we recorded revenue of $92 6 million with a net income attributable to common stockholders of $9 7 million.
S F O F F O for the third quarter were $48 2 million and 41.3 million, respectively, or 46 cents and 40 cents per share.
On a constant currency basis, applying the average monthly currency rates from the second quarter 'twenty 'twenty tail revenues would've been up by $1 2 million to $93 8 million.
Using the same constant currency concept year over year revenues would've been up by $4 9 million to $97.5 million.
Core S. F O grew by nine 6% year over year to $48 3 million or <unk> 47 per share and <unk> was $41 3 million or <unk> 40 per share.
<unk> was impacted by the strengthening of the U S dollar relative to the euro and pound. However, our comprehensive hedging program helped reduce the impact of the ongoing turbulence in these currencies.
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 5%.
And $28 million of cash and cash equivalents.
Our net debt to trailing 12 month adjusted EBITDA ratio was eight times at the end of the quarter.
The weighted average debt maturity at the end of the third quarter 2022 it was 4.2 years.
In Poland of art that includes 500 million in senior notes.
$605 1 million on the multi currency revolving credit facility and $1 3 billion of outstanding gross mortgage debt.
This debt was approximately 75% fixed rate, which is inclusive of floating rate that with in place interest rate swaps.
The company has a well cushioned interest coverage ratio of three three times.
As of September 30th Twenty-twenty tail liquidity was approximately $206 9 million.
The company distributed $41.7 million in dividends to common shareholders in the quarter or <unk> 40 per share.
Our net debt to enterprise value was 62.3% with an enterprise value of $3 6 billion based on September 30 of 2022 closing share price of $10.65 per common shares $21.58 for series, a preferred shares and $22.20 for series B.
The preferred shares.
With that I'll turn the call back to Jim for some closing remarks.
Thanks, Chris I'm very pleased with our progress and accomplishments during the third quarter, including our ongoing successful leasing activity on the forward pipeline of accretive acquisitions. We have built in the current market of expanding cap rates are best in class portfolio features long term leases with investment grade and other high quality tenants.
Balanced asset classes and strong geographic and industry diversity are primarily fixed rate debt and comprehensive hedging strategies.
Helped to minimize the impact of recent interest rate and foreign exchange turbulence, allowing us to focus on creating value for shareholders. We believe we are well positioned to continue to enhance our portfolio and grow earnings for shareholders throughout the balance of 2022 and into next year with that operator, we can open the line for questions.
Okay.
Thank you at this time, we'll now be conducting a question and answer session.
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One moment, please while we poll for questions. Thank you.
Thank you and our first question is from the line of Brian Meyer with B Riley Securities. Please proceed with your question.
Oh, good afternoon, Jim and Chris and thanks for all the prepared comments.
Couple a couple of quick questions on that.
Foreign currency, Brian and I know that you guys gave you know the impact on revenues.
But maybe a two part question I don't know, Chris if you have it but you know what what was the impact on F. F O per share and I realize that you guys had some gains from the hedging activity. So that's kind of part one part two is have you considered or would you consider doing more hedges and how costly as that.
Yeah.
Sure. So I guess, the first part to start with them in terms of the impact on F. O M. We did quarter over quarter.
I have about two point.
67 million a decrease related to primarily at Baxter was about a half a million unrelated to some some opex on a vacant tenant but that was mostly driven by at the opex.
And then in terms of the actual hedge at the realized gains that we recorded for the quarter were 2.4 million.
Last quarter, we actually had one 5 million unrealized gain so we were up almost a million quarter over quarter and the realized gains in in terms of the increasing in the hedging going forward.
I mean, we we have had a pretty consistent strategy for hedging and what we did was we focus on hedging the net cash flows.
Because that is actual foreign currency that we will be bringing in the door and he takes Bert.
So we won't necessarily go beyond our cash flow is because that that's moving us out of our strategy of trying to minimize risk, but we have been consistently evaluating if we did want to increase some of the percentage that we do hedge compared to the exposure and in terms of cost there.
Really very little cost to these hedges.
You don't have to put any cash out the door day, one effectively in terms of the forward contracts. We are locking in spot rates in the future that will be converting the cash back into USD and and like I said, no additional cash going out the door for us.
Okay. Thanks, and then on the disposition, Brian I know you gave us the metrics on that but but maybe a little bit more color again kind of two parts is the goal to kind of divest of non core assets and recycle that into you know a better performing assets and or is it to deleverage or maybe both.
And I think you said your eight times net debt EBITDA you know what is the goal.
Well.
Good afternoon, Brian Good to hear your voice first of all you know, we will divest ourselves of properties when we deem it appropriate as you know we divested a big property in Germany, a few years ago, where we do the tenant was moving out and we had three unsolicited offers on the property and we made a good profit on it.
We are divesting ourselves of a few other things we will continue to divest noncore assets, which is primarily the retail assets, which over time, we are definitely sellers of retail as far as the rest of the portfolio goes and in general all of the portfolio is performing extremely well so we don't sell prop.
Because they're not performing you know we may sell a property if if there are other reasons behind it for example.
If a tenant is moving out and we think it is it's better to sell the property and repurpose the funds it into a new into buying new assets.
But there are a lot of different factors for for us to decide what what to do.
So and you know we will continue to follow that sort of program as we move ahead what was the other part of your question, Brian say it again.
Oh, the leverage level I think you were at eight times now it is there a goal to be meaningfully lower than that or are you flying at eight well ultimately know ultimately we would like to be down into the low to the mid sixes, but you know with the stock price where it is I mean, the easiest way to Delever would be if the stock price was at a at a decent level.
Would be to sell some stock on the ATM and use that to delever.
So you know we we always we always have a goal of getting down into the low sixes.
Right now with where the economy is with inflation potential recession. You know, we're just we're just sticking to our guns here and being very cautious about how we deploy capital and the you know where.
Where we're going forward, we do have we do have a strong balance sheet. You know, we do have some some attractive acquisitions potential acquisitions in the pipeline, but we're being very cautious.
Great and just last from me on the lease renewals, you know renewals or new leases.
How is that dialogue progressing these days I mean has the tone changed at all is there any pushback from the rate increases that you're looking to get and is there any thought to increasing rent escalators you know given the current state of inflation and that's all for me. Thank you.
Well yeah. Thanks, Thanks, Brian and in our new leases were looking at anywhere from a Florida.
2% to 4% you know in a much higher upside so all in all new leases we're building in much much larger escalators, when we renew leases where we're doing the same thing.
And you know it.
Have not had any pushback from from our tenants on any of this so far I think we're very fortunate because of the high quality of our portfolio and the locations of our properties that really give us an advantage in in dealing with our tenants on renewals.
And you know and and looking forward as far as getting them to stay for long periods of time, but thank you Brian appreciate the call.
Yeah.
Thank you next.
Our next question is from the line of James Allen Villard with Ladenburg Thalmann. Please proceed with your question.
Good afternoon guys.
Good afternoon, James Good afternoon.
Yeah, I guess, just kind of big picture have you seen any impact.
In terms of tenant credit health kind of in your European portfolio from kind of the energy cost inflation and how and how are you all thinking about that moving forward.
Well you know you have to remember that a large majority of our tenants are investment grade and you know we have a committee that watches our tenants credit and we have no. One on the watch list right now our European tenants Whirlpool Johnson controls I N. G. You know, they're all they're all in good shape and they pay.
Their rent on time, so we really don't have a concern.
As far as collecting rents I mean energy it basically hurts everyone. You know as we see this inflation, but I think we're very fortunate with the high quality of the tenants our portfolio and we will probably be affected less than a lot of other people. So.
Yeah, and I guess, how is that affecting I guess future acquisitions in Europe .
Well again, you know where we are.
We're being very cautious as I as I said earlier, you know, where we're looking for a higher cap rates, which we're starting to see and we are we are seeing a bunch of stuff that are in the pipeline right now.
No we've been very cautious as I said for the whole year as far as deploying capital because you know there's there's a lot of unknowns out there in the economy today.
But you know we're we're we're seeing stuff that we like at decent prices.
Yeah. That's that's it for me I appreciate it.
Alright, thanks for the call.
Our next question is from the line of Mitch Germain with JMP Securities. Please proceed with your questions.
Hey, guys.
Hey, Mitch good afternoon to both of you can I get a little more detail on the asset sales I guess, one completed right and then two additional.
And I think he gave the amount was 110 do you have like a breakdown of those.
And I might've missed it and and what you provided earlier today, but you have a breakdown of what was sold versus what's for sale.
Chris can you handle that sure.
Absolutely. So the property that was sold during the quarter. It was actually a small property that was roughly about $3 million.
The property that we expect to close on the sale in the fourth quarter that property is approximately 48 million that's a property in France.
And then there is one additional property, which is vacant that sell price is a little over $60 million and that we expect to close next year.
Perfect.
And Mitch just give me a little color there.
And France is an off is a large office building so that will get us started.
Yes that was my next question that will reduce our office exposure.
Great, but you're buying office.
Ah we're buying one small office building.
And the government are things building in Belgium, I think.
Government leased okay. Good government leased long term lease great credit yeah.
Okay makes sense.
You've got some debt funding.
Coming due next year.
What is the planned $231 million.
And what's the plan for that.
So that that is our U K debt. We are currently evaluating our options, but we do have the ability to refinance that using our credit facility and pull those properties onto the credit line as an option.
Yeah.
So much so that's a that's a decision we don't have to make today, because it's not coming due till the middle of next year, but you know we watched the markets pretty closely and obviously, we will try to find the best the best pricing on the debt you know to benefit our shareholders as best we can.
So it's a decision that we'll make a little closer to the due date, but we are watching it very very carefully.
And I know you have a multi currency credit facility.
And I noticed there wasn't much of a change in the average price quarter over quarter, but I suspect because of your European exposure. There. The likelihood is that rate has jumped pretty dramatically at this point is that a good way to think about it.
Or is there some hedging there that I'm not aware of that.
There there is hedging there.
Okay, and and that's partly why you're seeing some of the rates day I'm pretty consistent because we do have have understood. Okay.
So when we have it.
Hedging out further.
Just I am sure you have it somewhere and I'm, probably just read it but how much of your debt is pure variable no hedge.
I'm, just pulling that up I believe its about 25% is the number.
Okay.
Yeah.
That's consistent with what I saw that okay that makes sense.
Hmm.
And Chris help me out here I, just one more question I guess I'm just not understanding.
Some of your language around FX was it a headwind towards the bottom line or was it a tailwind.
And it happened so it pulled down the actual revenue numbers.
Obviously, that's at the Euro and the pound weakened mhm their conversion to U S. D was lower than it was a pretty good ahead of them.
Gotcha, Okay, great. Thanks, guys I appreciate it.
Alright, Thanks Mitch.
Be well.
You too thank you.
At this time I will turn the floor back to Mr. Nelson for closing remarks.
Well I want to thank everybody for joining us on today's call.
This company has operating very solidly we're very pleased with with the gains we've made on leasing.
And in maintaining a strong balance sheet.
The company, we have a great portfolio, we have great tenants and we're actually very proud of the portfolio was built.
Over the last number of years. So thank you very much for calling in today and listening in and we will talk to you next quarter. Thanks, everybody Bye bye.
This will conclude today's conference. Thank you for your participation you may now disconnect your lines at this time.