Q2 2023 Global Net Lease Inc Earnings Call

Good afternoon, and welcome to the global <unk> second quarter 2023 earnings call.

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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 second quarter 2023 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, Mike.

<unk> CEO of necessity retail everything will also be joining us for the question and answer session.

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.

Two filed on February 23, 2023, and all other filings with the SEC after that date for a more detailed discussion of the risk factors that could cause these differences.

Any forward looking statements provided during this conference call are only made as of the date of this call.

As stated in our SEC filings GNL disclaims any intent or obligation to update or revise these forward looking statements except as required by law.

Also during today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating the company's financial performance. These measures should not be considered in life.

Or as a substitute for financial results prepared in accordance with GAAP. A reconciliation of these measures. The most directly comparable GAAP measure is available in our earnings release and supplement which are posted to our website.

You can 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 will now turn the call over to our CEO , Jim Nelson Jim.

Thanks, Curtis and thank you to everyone for joining us on today's call.

Before we get into our results I will provide a brief update on the proposed merger with the necessity retail REIT, which was announced in May and is expected to close. This September we believe that the merger with our T L and simultaneously internalization of Gnl's management and operations paired with numerous governance enhancements we will establish.

Tablets GNL to sector, leading net lease REIT with a global presence uniquely positioned for long term growth. We expect that the first full quarter. After closing the transactions will be 9% accretive to annualized <unk> per share.

Relative to the quarter ended March 31, 2023, and will reduce leverage for the combined company driving net debt to adjusted EBITDA to seven six times in the fourth quarter.

Annual cost savings are expected to be approximately $75 million.

The SEC declared the registration statement for the merger effective in July and we have set a record date of August eight 2023 for the special meeting of stockholders to vote on the proposed merger, which will be on September eight 2023.

Beyond the merger the GNL team continued to make great progress on our key strategic objectives during the second quarter.

We completed 11 lease renewals and one tenant expansion project, resulting in nearly 22 million of new.

Net new straight line rent over a weighted average lease term of six years occupancy was 98% across the portfolio.

Subsequent to quarter end, we signed three additional lease renewals, bringing us to 14 lease renewals since the end of the first quarter.

Nearly 60% of our long term leases are with investment grade tenants and industrial and distribution assets comprised 55% of our portfolio at the end of the second quarter, both based on annualized straight line rent.

Among our office property, 68% are mission critical facility, which is defined as headquarters lab, our R&D facilities and 71% are leased to investment grade or implied investment grade tenants. We believe GNL is well positioned for meaningful capital appreciation with our strong portfolio and upcoming.

Corporate enhancements.

We continue to be substantially insulated from the rising interest rate environment as we benefit from our predominantly fixed rate debt, which minimizes the impact of rate increases as well as a sophisticated hedging program designed to minimum minimize negative impact to our cash flow from foreign exchange volatility and a stronger U S. Dollar.

In the second quarter, our <unk> was $41 4 million.

Or <unk> 40 per share compared to 43 in the second quarter of 2022, but an increase from 38 cents per share in the first quarter 2023.

Revenue increased over $1 5 million compared to the first quarter of 2023, which also helped drive adjusted EBITDA and NOI higher quarter over quarter.

Our performance was driven by ongoing strong leasing activity, which totaled one 7 million square feet of lease renewals and expansion through July 20th 2023.

These leases added $64 1 million of net.

Net new straight line rent over the new lease terms at a positive 0.7% spread compared to the prior leases.

Leases signed during the second quarter included sick leases with X P O logistics in the U S for over 77000 square feet are leased with I D logistics in France for approximately 566000 square feet and an 86000 square foot lease with P. F B, Canada in Alberta.

Thanks to our leasing efforts our portfolio only has 1% of leases expiring during the balance of this year with.

With 73% of our leases not expiring until 2028 or later.

At quarter end, our $4 6 billion 317 property portfolio had a weighted average remaining lease term of seven six years geographically 236 of our properties are located in the U S Canada.

Presenting 60% of annualized straight line rent revenue, we own 81 properties in the U K and Western Europe , which generate 40% of annualized straight line that.

Our portfolio is well diversified with 139 tenants in 51 industries with no single industry, representing more than 12% of the entire portfolio and no tenant exceeding 5% of the portfolio based on annual straight line rent.

Approximately 95% of our leases feature annual rent increases, which increase the cash rent that is due over time from these leases.

Based on straight line rent approximately 61% of our leases feature fixed rate Escalations 27, 5% up Escalations that are based on the consumer price index and 7.1% have escalations based on other measures.

Subsequent to the end of the second quarter, we announced that we had entered into a definitive agreement to sell a vacant property in San Jose, California for $50 million.

We bought this property for $52 5 million in 2014 with a long term lease in place negotiating the sale of the vacant property for nearly the same price we paid for it showcases the value of our diligent underwriting standards that favors properties with high reuse potential.

Our differentiated investment strategy continues to deliver value and we remain focused on growing our portfolio. Our successful lease renewals speak to the mission critical nature of the properties that we own where the weighted average remaining lease term is nearly eight years.

We are well positioned for the future and I look forward to building on our progress through the merger and the many strategic objectives, we are pursuing.

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.

Second quarter 2023, we recorded revenue of $95 8 million with a net loss attributable to common stock holders.

$31 4 million.

That's that's all was $5 9 million or six per share.

<unk> was $41 4 million, respectively, or <unk> 40 per share.

And I saw was impacted by $15 1 million settlement costs, $7 4 million of proxy related expenses and $6 3 million of merger and transaction costs that are added back to ASF out.

On a constant currency basis, applying your average monthly currency rates from the second quarter 2022.

Revenues in the second quarter of 2023 would have been up by 0.2 million year over year to $96 million.

As always a reconciliation of GAAP net income to the non-GAAP measures can be found in our earnings release, which is posted on our website.

On the balance sheet, we ended the quarter with net debt of $2 4 billion at a weighted average interest rate of four 8% and have liquidity of $374 1 million, including $100 9 million of cash and cash equivalents and $273 2 million of availability under the company's revolving credit.

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Our net debt to trailing 12 month adjusted EBITDA ratio was eight three times at the end of the corner.

The weighted average debt maturity at the end of the second quarter 2023, It was 3.7 years.

Our debt includes $500 million in senior notes 1 billion on the multi currency revolving credit facility and 1 billion of outstanding gross mortgage debt.

That was approximately 72% fixed rate, which includes floating rate debt with in place interest rate swaps and our interest coverage ratio was two nine times.

The company distributed $41 7 million in dividends to common shareholders in the quarter at a rate of <unk> 40 per share.

Our net debt to enterprise value was 65, 2% with the enterprise value of $3 7 billion.

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

Thanks, Chris we are continuing to execute lease renewals and tenant expansions across our portfolio locking in credit worthy tenants with long term leases. Our success is the natural outcome of the deliberate underwriting process. We have applied over many years in a similar way as we continue to move toward the proposed transformative merger with the necessity.

Retail REIT, we believe that it's similarly constructed portfolio.

Primarily retail net lease and open air shopping centers will complement our current assets, we expect that the diversification scale and savings that we anticipate realizing through the merger internalization of management and governance enhancements will unlock value for GNL shareholders and create a strong foundation for GNL to.

When you're growing in the future.

We are pleased that Mike Weil CEO of RTL, who will join me as co CEO GNL pending completion of the merger we will participate in the Q&A session. We look forward to answering any questions. You may have operator, please open the line for questions.

Thank you.

We will now begin the question and answer session.

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At this time, we will pause momentarily to assemble our roster.

Okay.

First question comes from Brian There wed rather yeah. Yeah. Please go ahead.

Thank you and good afternoon, Jim and Chris and Michael.

Hi, Brian .

Couple of questions from me this afternoon.

You know you got very little lease explorations for the rest of the year I think it's less than 1%.

And then maybe 9% or so next year, how much can you get in front of that now and are there any known vacates that are material that we should be thinking about.

Well as you've seen we're extremely proactive in addressing renewals you know we've been doing this for example, we renewed the clean air lease, which still had seven four years left on it and we did a seven year renewal of a few years ago. So we were very very proactively with lease renewals.

I don't know of anyone.

In our portfolio that we're going to have an issue with at this point.

But you know we are continuing to be proactive we're working with a lot of attention a lot of our tenants on lease renewals. So I think you'll be very very pleased as the year ends and we go into next year with what you see.

Okay, and then next from me I'm not.

Not really seen any.

Acquisition activity since the boots deal back Q1I think that was maybe 75 million.

Focus has been at the company simply getting the RTL deal over the.

Finish line or are you not seeing anything terribly compelling out in the market.

Well, we still have a very robust pipeline and we look at a lot of deals, but you know there are there's a R. T. L deal is overwhelmingly positive for us and we do have a certain amount of focus on that but that doesn't mean, we're not looking at other potential acquisitions, but we just haven't found something that we find really exciting to go out and buy so as.

We wrap up this merger I think its a very exciting time for both companies.

And Jim if I and Brian If you don't mind, if I can just jump in it's Mike while Oh yeah.

As Jim said the focus is definitely been on moving the merger forward as Jim and Chris continue with the operation The day to day operation, but I think it's fair to say that you know neither neither company RTL or GNL has seen any acquisitions that have.

The scale of this merger that could increase the <unk> per share to be 9% accretive.

To have this kind of transformative impact, creating the the third largest net lease REIT with a global footprint. So.

The market Hasnt changed from a sellers perspective enough I think to really get Jim and I are excited about just chasing a deal for the sake of a property acquisition.

Whats going to be happening in the beginning the middle part of September far exceeds.

Anything that either one of us could find just in the broader real estate market.

Well, thanks for that and I'm, assuming the transaction closes in September .

Seeing or hearing anything to dissuade me from thinking that that's going to happen and certainly the markets.

Aiding you guys like that.

What does that maybe this is for Chris what does big acquisition capacity look like for the combined company I mean since it's an all stock deal except for the $50 million you pay to the external manager I mean should we just assume that kind of the liquidity that each company has now.

Add them together subtract $50 million is kind of the dry powder that you have when we hit the fourth quarter or is there something else in the equation that would impact that number positively or negatively.

I would say that that's a fair way to look at it without diving into too much detail in terms of looking at the availability and as you can see we have a significant amount of liquidity at this point. It at you know at the end of the quarter.

We have about $273 million.

Yeah, Okay, and Brian we also.

We also just should point out that.

The the payout ratio is expected to be 85% post merger. So the company's ability from our retained earnings standpoint, and a cat cash availability will get stronger and stronger just from the scale and the result of the merger.

Since you brought that up is that the target of the new board, 85% or is that just the starting point and you would expect that to gravitate lower as the company grows organically.

Go ahead Jim.

It's a good starting point, Brian it's a very good starting point and as we progress and things get better certainly it will change.

For the positive.

Okay. Thanks, that's all for me.

Thanks, Brian take care.

Yeah.

Our next question comes from Barry, Oxford with Colliers. Please go ahead.

Hey, guys. Thanks for taking the call.

Just to build on the acquisition after the merger.

I seem to indicate that there's a wide bid ask spread nothing really that exciting out there.

But is there a particular property type of a particular country, that's looking more attractive right now.

That that you guys might like to execute in or look Barry kind of across the board you know there's a bid ask spreads are wide and right now it just isn't desirable.

Well very well one of the beauties of this merger is it it right. She is right here the RTL side the opportunity to buy really good properties in Europe as S. GNL does it fill it up it opens up a whole new area of opportunity for for that side of our of our new business. So we're very excited about that.

Okay. So you think there might be some opportunities from a retail standpoint.

You saw you saw the boots you saw the boat's acquisition, we did it.

The words out of my mouth.

And hopefully you will find a lot more like that you know, especially with the RTL compounded with that type of asset component.

Right and that's what I was driving at yeah, no. Thanks for the color perfect.

Yeah.

Our next quite have anything else Barry Oh, okay.

Go ahead operator.

Okay.

Our next question comes from Mitch Germain with JMP Securities. Please go ahead.

Thank you and good afternoon.

Chris help me through the.

Quiddity change.

Cause I know you redeemed.

Some of that debt on the credit facility. So I'm curious about how the how the liquidity change quarter over quarter.

So a really big difference here is really driven by the UK bulk on primarily moving onto the credit facility.

<unk> previously.

With the Apple TV in the way that we paid down the debt on that line, we had a much different ratio in terms of what we could borrow on the credit facility versus versus that.

Okay.

That makes sense and what was the timing of that debt redemption was it like.

Early quarter late quarter.

It was about mid quarter.

The quarter Okay.

And then last question for me it seemed like the.

Leasing in the quarter.

It was skewed toward industrial or at least that's the ones that I'm.

Jim you highlighted I'm, just I'm curious, what you're seeing from your office tenants.

With regards to decision, making and willingness to choose.

Recede with.

Lease discussions.

Well interesting enough, which is it's it's really across it's really across the whole portfolio of the success, we're having with re leasing.

Our renewing leases I wouldn't I wouldn't say, it's more favorable than the one sector or another you know we've been having very positive results at all across the portfolio.

In Europe and in the U S. So you know there there's nothing specific that I would point out.

But it's a good question and.

The answer is pretty obvious that we're having great success with with our recent lease renewals.

That's helpful. Thanks.

Sure. Thank you.

Okay.

Okay.

Your next question comes from Todd Thomas with Keybanc. Please go ahead.

Hi, Thanks.

And I guess I just wanted to follow up on on the line of questioning around the lease explorations and maybe touch on office, a little bit and you you have done a nice job with the lease extensions and renewals to date.

Jim It sounds like you're not.

Any major nonrenewals in 'twenty four but it is about 10% of straight line rent that expires, how how much of that is comprised of office assets.

Chris do you have that percentage offhand.

No I I don't want to take a look at that I don't have the exact percentage, we haven't we haven't broken that out, but we can get back to that.

Okay, Yeah that'd be helpful.

And then if we I guess think about the.

You know office exposure in the portfolio.

I understand the high percentages as mission critical headquarters office space.

But have you had conversations with with tenants.

That you know inbound I'm looking to downsize or or or sublease their space and is any of the office space.

Today being sub leased.

You know I think there's a very few that have small sublet space, but nothing material.

You know we are very very proactive with our tenants we talk to them, we communicate with them very often we have not had anyone asking to reduce space that I know of as of today and we have a number of expansion projects going on now for a number of our tenants. So we were in a very positive position as far as our office portfolio.

And as I look at and all things considered with more and more people going back to work and the locations of our our office properties. You know we're in a very very positive position.

Okay.

Last question, maybe for for for Kras <unk>.

In terms of near term balance sheet initiatives and I realize you know the balance sheet changes post merger, but on the GNL side, the roughly $340 million of mortgage debt.

That matures in 'twenty 'twenty four.

What's the what's the timing of that in 'twenty, four and what's the current thought process there.

Of you know refinancing or or or paying that down.

Right. So what I would say that now as we're obviously I cut you off.

To be exercising the accordion on the credit facility. So we're going to have a lot more capacity there to use that being said most of the debt maturing next year is about mid year. So we have a lot of time to look into the options, obviously, we'll be looking to potential unsecured.

And sort of evaluating really what's the most efficient and best option for us in the short term. So it's still it's still in process.

And Todd it's Mike if I can just add to what Chris was saying one of the things that we're really focused on and looking forward to with the merger is net debt to adjusted EBITDA is reduced down into the mid sevens as a result of the merger that's ultimately not where we want to end up but.

It's obviously an improvement.

Portfolio will be much larger diversification will be further because GNL has already really nicely diversified. So we do think that if the unsecured market.

It comes back a little bit in in the next couple of quarters.

Which we have reason to believe it is very possible.

We would like to certainly explore that option and I think we can can explore it as a larger company.

And really be able to take advantage of this opportunity to.

Refinance out that mortgage debt at the appropriate time and price.

Okay. That's that's helpful and I guess.

While we're talking about leverage so so pro forma mid sevens, what what is the sort of longer term.

Leverage target for the combined.

Company in and what's the timeframe to reduce.

Reduce leverage towards that level.

Chris you want to take that.

Sure. So so over time, we definitely want to push the leverage the leverage into the six days I mean, we want to move towards an investment grade, but we do want to move it over time in terms of the actual timeframe.

I don't have an exact number part of that's going to have to deal with obviously the equity markets and our ability to raise capital, but we think especially with the combined company that that's going to be a favorable.

Change for us so it's something that we're definitely know touched twice.

Yeah.

And again not to just keep jumping in but.

Yeah again, we're thinking about this as a much.

Much larger entity post merger with what we think are going to be great opportunities on the internalization and the changes to corporate governance, the savings of $75 million 50.

$54 million, which occurs.

At the closing.

It's really going to change our position in the market, we think that.

Many of the institutional.

Owner.

Type firms theyre going to see this as an opportunity and we're looking to expand our ownership and we'd like to see the company started trading much more in line with our peers.

In doing that it's obviously going to open up some strategic doors for us as it relates to equity and debt at the right time. So this is <unk>.

This merger is really key for GNL and our long term thoughts around driving.

Net debt to EBITDA further down and ultimately be looking for an investment grade rating.

Yeah.

Okay.

Alright, thank you.

Yes.

Okay.

Yes.

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

Thank you operator, I want to thank Chris and Mike for joining me on today's call appreciate all there.

Great input and I want to thank everybody, who joined us on the call for joining us today. So at this point operator. Thank you we can close the call.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.