Q2 2019 Earnings Call
Good morning, and welcome to the global net lease second quarter 2019 earnings Conference call.
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I would now like to turn the conference over to Luis a quarter Executive Executive Vice President. Please go ahead.
Thank you operator, good morning, everyone and thank you for joining us for <unk> second quarter 2019 earnings call. This call is being webcast in the Investor Relations section of GE announced website at Www Dot global net lease dotcom.
Joining me today on the call to discuss the quarter's results are Jim Nelson, Chief Executive Officer, and Chris Masterson, 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 FCC filings, including the annual report on Form 10-K for the year ended December 30, Onest 2018 filed on February 20, Eightth 2019, and all other filings with the S. easy after that date for more detailed discussion of the risk factors that could cause these differences.
Any forward looking statements or portfolio information provided during this conference call are only made as of the date of this call.
As stated in our FCC filings DNL disclaims any intent or obligation to update or revise these forward looking statements or portfolio information, except as required by law.
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 GAAP net income to the non-GAAP measures can be found in our earnings release supplement and Form 10-Q , all 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.
Thanks, Luisa and good morning, everyone. Thank you all for joining us on today's call.
We are pleased to report another quarter of increases in rental revenue adjusted EBITDA and AFFO.
We had a very active quarter, including $187 million of primarily industrial distribution in office acquisitions, which combined with our retail disposition increased our portfolio allocation to the industrial and distribution properties and decreased our retail exposure.
We also refinanced much of our European debt at more advantageous rates.
Extending the weighted average maturity of our debt from 3.3 years to 4.6 years in the last 12 months.
Subsequent to the quarter end successfully completed an expansion of our primary credit facility to over $1.2 billion.
Total revenue for the second quarter was $76.1 million up 7.3% from 71 million in prior year quarter.
AFFO also increased to 40.1 million from $35.5 million in the second quarter of 2018 and up from $39.5 million in the prior quarter on the strength of our recent acquisitions.
On a per share basis, AFFO was 47 cents.
Our second quarter 2019 saw the majority of the $187 million of acquisitions closed in the back end of the quarter.
Thus they only contributed about 1 million of the 3.2 million estimated full quarter rents to our second quarter revenue.
Overall, our 288 property portfolio is nearly fully occupied at 99.6% leased 220 of which are located in the US and 68 are in the UK in Western Europe , representing 58% and 42% of annualized rental revenue respectively.
Our investment grade or implied investment grade tenants make up over 72% of the portfolio.
Please refer to our earnings release for more information about what we consider to be implied investment grade tenants.
Our property mix is currently 53% office, 41% industrial and distribution and 6% retail.
The portfolio has a weighted average remaining lease term of eight years with no near term expirations.
During the quarter, we acquired nine net leased assets comprising about 1.6 million square feet.
For our contract sales price of approximately $187 million.
These assets are leased at an attractive weighted average capitalization rate of 7.67%.
With a weighted average remaining lease term of 11.1 years.
These acquisitions included five industrial properties, three distribution facilities and an office building.
And are all located in the United States. We are very pleased to be acquiring long term leases at what we believe are favorable cap rates and believe that these assets improve the mix of assets in our portfolio I'd like to take a minute to review some of the highlights from these acquisitions.
The office property, we acquired during the quarter is a 200000 square foot headquarters office property located in Birmingham, Alabama, which is leased to encompass health one of the United States largest providers of post acute healthcare services in 36 states in Puerto Rico through its network.
The tenant has a BA three credit rating and the lease continues for 14.5 years.
We crave acquired distribution facilities leased to come dock heat craft and Hanes Leggett and Platte.
Totaling approximately 600000 square feet.
For a total contract sales price of just over $39 million.
Calm dock is owned by Xerox and is a leading distributor of copying and printing equipment.
Pete craft is a leader in the world of commercial refrigeration.
Providing climate control solutions to customers in more than 70 countries.
They produce evaporators condensers merchandise display cases, and other top quality refrigeration products under six market leading brands.
Haynes companies Inc., a division of Leggett <unk> Platt is a diverse supplier converter and distributor of a variety of products and services in multiple markets across North America and Europe .
The industrial properties, we acquired our lease to Union partners, the Sierra Nevada Corporation, He Qt Corporation and metal technologies Union partners as a Chicago based strategic operator of metals and logistic companies Sierra Nevada Corporation creates technology solutions for aerospace and aviation uses and as one of America's fastest growing companies.
He Q.T. Corporation is engaged in hydrocarbon exploration and pipeline transfer transport.
Finally metal technologies as a premier metal casting company.
These industrial assets total approximately 800000 square feet and were acquired for a total contract sales price of $73.6 million.
Consistent with our overarching strategy each of these assets serve a critical function for the underlying tenants and are subject to long term leases.
Our acquisitions in the quarter increased annual straight line rent allocable to the in industrial distribution segment of our portfolio by 6% over last year.
Reducing our retail and office concentrations by 3% each.
We funded the transactions with our revolving credit facility mortgage debt and net proceeds from our ATM programs.
In addition, we continue to look for opportunities to recycle capital during the quarter, we sold 64 properties, including a portfolio of 62 family dollar retail stores, which were sold for a gain at a 7.25% cap rate.
Reducing GNSS retail concentration.
Prior to the sale, we own 94 family dollar stores, including five dark stores, where rent payments were still being made management along with the board of directors determined that reducing GNS current exposure to family dollar would be best for the portfolio based on recent announcements from family Dollar's parent company dollar tree.
We continue to demonstrate our ability to originate and acquire strategic assets at attractive cap rates and are confident we will continue to redeploy proceeds into attractive transactions.
We believe selling the family dollar assets enhances our portfolio and continues to demonstrate our disciplined and asset management strength of the company.
As we continue to grow and refine our asset mix. We are focused on acquiring primarily industrial distribution and some select office properties, while limiting our ownership of retail properties.
Well, Chris will provide more detail I'll provide a quick update on our continue ability to refinance GNS European debt at attractive rates.
During the quarter, we completed a 51.5 million euro refinancing of five of our German assets. We also borrowed 120 million euros secured by mortgages on three properties in the Netherlands, and Luxembourg that bears interest at a fixed rate of 1.38% and matures in 2024.
The rate on the previous loan was 1.58%.
In addition to decreasing the interest rates of the loan.
The newly negotiated terms extended the maturity of the debt to the second quarter of 2023 in Germany, and 2024 and Benelux.
We also completed an expansion of our credit facility with Keybanc.
Subsequent to quarter end to add an additional 300 plus million of commitments at lower interest rates.
Simultaneously, we extended the exploration of the revolving portion of the facility to 2023 with the option to extend to 2024.
We are pleased with the expansion as we leverage favorable timing to extend the maturity of our existing facility.
We will continue to pursue objectives such as this one that support the growth of GE and Els portfolio and provide opportunities to capitalize on any opportunities, we see to make substantive and accretive acquisitions.
With that I'll turn the call over to Chris to walk through the operating results and our balance sheet in more detail and then I will follow up with some closing remarks, Chris.
Thanks, Jim.
Second quarter revenue was $76.1 million up 2.9% over the first quarter 2019 figure and FFO was $36.8 million up 1.6% over the first quarter.
Moving on core FFO.
Grew 5.3% over the first quarter to $38.4 million and AFFO was 40.1 million up 1.4% over the prior quarter.
FFO per share was down slightly quarter over quarter due to an increase in the weighted average number of shares outstanding in the quarter.
During the quarter, we paid common stock dividends of 14.9 million.
On our balance sheet, we ended the second quarter with net debt, which is debt less cash and cash equivalents of $1.7 billion at a weighted average interest rate of 3% per annum.
Our weighted average debt maturity has lengthened to 4.6 years at the end of the second quarter and improvement from 3.3 years at the close of 2018 second quarter.
This includes $181 million of debt that matures in 2019, which were actively addressing the results of which will be announced in future filings.
The components of our debt includes $259.5 million on the Multicurrency revolving credit facility $280.3 million on the term loan and $1.3 billion of outstanding gross mortgage debt.
This debt was approximately 84.6% fixed rate, which is inclusive of floating rate debt with in place interest rate swaps and improvement over the quarter ended March 31, 2019 were 83.7% more specs.
Our net debt to annualized adjusted EBITDA improved to 7.1 times from 7.4 times last year with a strong interest coverage ratio of 4.1 times.
As of June Thirtyth, 2019 liquidity was approximately $269.4 million, which comprises $178.7 million of cash on hand, and $90.7 million of availability under our revolving credit facility.
Gene out net debt to enterprise value was 48% with an enterprise value of $3.5 billion based on the June 28, 2019 closing share price of $19.62 per common shares and $25.50 per series a preferred shares.
Let me now turn to the European side of our capital structure in May we entered into a loan agreement with Lantus Bank has in our engine doesn't trolley and borrowed 51.5 million euros secured by mortgages on five properties in Germany.
The loan will be interest only with principle due at maturity, which will be in June Thirtyth 2023.
The maturity date may be extended at the company's option to February 29, 2024 subject to conditions.
The loan initially bore interest at a rate of three month, Europe , or plus 1.8% per annum, but following our placement of an easement on one property the loan will bear interest going forward at a rate of Europe or plus 1.55% per annum beginning on October Onest 2019.
We also entered into a swap to fix the interest rate for 80% of the principal amount.
The net proceeds from the loan were used to repay all 35.6 million euros outstanding mortgage indebtedness.
That previously encumbered three of the properties that secured the loan.
The repaid mortgage indebtedness bore interest at a weighted average rate of 1.62%.
In June we entered into a loan agreement with land. This bank has in third engine Jairam trolley and borrowed 120 million euros secured by mortgages on three properties in the Netherlands, and Luxemburg the loan bears interest at a fixed rate of 1.38% and matures on June 11, 2020 for the loan is interest only at what the principle due at maturity.
At the closing of the loan approximately 80.3 million euros was used to repay all outstanding indebtedness Encumbering two of the properties. The repaid mortgage indebtedness bore interest at a weighted average rate of 1.58%.
As Jim previously discussed last week, we completed the recast of our corporate credit facility with Keybanc.
The recast facility has received commitments of 1.2 billion.
$318 million increase from the prior $917 million facility.
There are two components that facility our revolver with a four year term plus two extension options of six months each for a total of five years and a five year term loan.
The pricing for the revolver is 15 basis points lower than the prior facility and the pricing for the term loan is 20 basis points lower than the prior facility. The actual interest rate as a sliding scale based on the amount of leverage deployed we are very pleased with the extended timeline and lower interest rate of this facility finally with respect to the dividend we paid dividends equating to.
53.25 cents per common share for the quarter.
As announced on April Eightth, we modified our dividend policy to more closely align with our peers and start paying a quarterly dividend at the end of the second quarter, we did not change the rate at which we pay dividends, which is still at an annualized rate of $2.13 per share on the common stock with that I will turn the call back to Jim for some closing remarks.
Thanks, Chris we had an excellent quarter from a real estate perspective, and we believe we have put the pieces in place to record a strong second half of the year.
The portfolio and the rental income generated by the portfolio continue to grow we are well positioned with available capital to close on our $149 million pipeline of acquisitions of long term leased primarily industrial assets.
Selling the family dollar portfolio illustrates our disciplined asset management strategy and provides the opportunity to use the net proceeds to improve our asset mix.
We anticipate growth in the portfolio when the proceeds from our second quarter dispositions are fully redeployed and will continue to be a net acquirer of high quality long term net leased office distribution and industrial assets. Finally, as we have discussed our ability to negotiate favorable financings in local markets and at the corporate level meaningfully contribute to our bottom line.
With that operator, we can 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 for a moment to assemble our roster.
And our first question today will come from Mitch Germain of JMP Securities. Please go ahead.
So it looks like.
You have another set of a family dollar stores for sale as well as just the last batch that you own.
Good morning, Mitch.
Yes, it's the last batch we own correct.
And is the pricing.
Comparable.
Pricing is very comparable yes.
And I Miss that cap rate was you said 6.25 could that be it.
No I think with Stephens.
A little over seven.
7.25, if I'm correct.
So it after that it is it safe to say that.
Obviously, your retails now, 6% going down even further.
Is the goal to eliminate that retail entirely at this point.
Well you know as you can see we're very selective and you know the timing is also important so I wouldn't say the goal is to eliminate all of it but we will be very selective in any further reductions beyond the family dollar.
Okay and then.
Okay.
And just in terms of some of the.
Acquisition activity.
In terms of what you guys are looking at in the future.
Is it still that kind of mix of heavy weighted to industrial is that continued to be the goal or.
You know is the pipeline that you're looking at have a you know maybe an increase skewed skewed toward office.
Well definitely not an increase skew towards office you know as you saw we don't we've only purchase one office building so far this year.
But we as we stated before and we will continue to focus on is primarily.
Distribution and industrial properties, that's our primary focus.
Okay last one from me I know about I think it was probably the fall you announced the disposition in Europe .
Is that still pending or is that no longer under consideration.
No it's definitely still pending.
And so but that's not.
On what you guys have that it's not part of the 135 in Germany. That's in addition to correct no no. It's not the 135 in Germany is one building in Germany that that's held for sale and we'll close relatively soon.
Got you. Thank you very much.
Okay. Thanks Mitch.
Our next question will come from Bryan Maher of B. Riley FBR. Please go ahead.
Thanks, Mitch got my question on the family dollar. So that's good but Jim can you elaborate a little bit more on the European strategy here now with the couple for sale and in really in context of your last quarter comments that you are starting to see more opportunities over there and I forget if it was on the continent or in the UK relative to Brexit, but you can you just give us your thoughts on the UK and Europe right now sure absolutely. Thank you good actually very good question. The UK, we have a wait and see attitude I mean, you know with the way things are going there. It's it's really hard to foretell, what's going to happen.
You know I think I think we have enough exposure in the UK and unless we saw something that was extremely compelling it would be it would be hard to pull the trigger whereas on the continent. We have we're looking very hard to find.
Properties that fit into our.
Strategy, our acquisition strategy and fit our model.
We're working very hard to find properties. There, we havent closed on anything yet this year, but we're looking very very carefully.
Okay, Great and then in the us when it comes to.
The acquisitions here and I understand it's mostly industrial and distribution.
Are there better regions within the country that you are seeing opportunities it seems like.
Over the past several quarters, maybe there was more of a skewing to kind of the Heartland Middle America, Ohio, Chicago, Milwaukee region is that still where there is opportunities or is it shifting elsewhere.
Well, you're absolutely right, that's that's where a lot of the acquisitions have been.
We continue to look across the U.S. and.
We're relatively agnostic to location, it's more the the property values that you assign when you're when you're buying a good property. So we continue to look all across the US we've got a very robust pipeline. So and as you know we've closed about $270 million, where the properties year to date.
So where we're moving ahead very nicely.
And then just lastly for me and this is a little bit of my new issue on the on the office property you acquired in Birmingham was that truly an office building or was it a medical office building how would you characterize that property.
Go ahead, Chris.
Well encompass health. This is there this is there.
Headquarter building, so it's primarily a corporate headquarters.
Strictly office.
And then they have they have a connected office garage to the building, but its really a nice relatively new building that is there is their headquarters.
I mean, the company is there.
Is the health is a healthcare company, but it's their corporate headquarters and I just wanted to differentiate between that and some of US cover healthcare Reits that I've been by medical office buildings I just want to make sure that it was truly an office building and not a medical office building Yeah. We don't buy medical office buildings, we would buy this primarily as a corporate headquarter. So you're absolutely right. It was a great question. Thank you.
Hi, Thanks, Jim Thats all for me.
All right. Thanks, Brian .
Once again, if youd like to ask a question. Please press Star then one the next question will come from John Misaka of Ladenburg Thalmann. Please go ahead.
Good morning.
Good morning, John Hart, John do then.
On the financing front, and then kind of maybe the debt side is it fair to kind of assuming the I think you have one piece of U.S. debt coming due relatively shortly and 19, but outside of that the primary refinancing focused left is just the French.
Mortgages that are out there.
Correct, that's correct, Okay and wood.
When we think about the potential rate on any kind of debt. There I mean is that come in you know.
Over the last couple of months here I mean should we expect kind of a.
On level with where the mortgages that are today or something kind of inside of that.
You know, it's hard to say because the deal hasn't closed, but I think the rates will be within within reason to to where they were and hopefully better.
Okay, and then on the in place portfolio the Deutsche Bank building you own in Luxembourg any impact there from some of their operational changes that I'd imagine it doesn't have.
Too much of an impact given a lot of the focus seems to be on the U.S. side, but just anything there potentially or is that pretty steady Eddie right now.
We havent seen anything I met with the COO there.
Last time I was in Luxembourg for Board meeting.
And their business and Luxembourg is still very good it's a very important office to them. The building was built specifically for them. It's a it's their signature building in Luxembourg, and I think for a lot of their international clients. Luxembourg is very important so we haven't seen it and we don't expect it to have any effect on Luxembourg.
Okay, and then on the kind of.
The kind of new additions to the pipeline or the closed well you have to start that are under kind of purchase agreement or Ela why is any of that European it looks like the last asset you had on there might be European one, but it just kind of following up on the shift the focus maybe to have some more European acquisitions is there anything in the pipeline right now that's European.
Well everything that's in the pipeline right now with the U.S. and as I said on the previous question, we're looking very hard in Europe .
But we don't have any sign of yellow eyes on here to talk about so we havent, we don't really have anything in the pipeline yet to talk about in Europe .
Okay. That's it from me thank you very much.
Thanks, John .
Ladies and gentlemen, this will conclude our question and answer session. At this time I'd like to turn the conference back over to Jim Nelson CEO for any closing remarks.
I want to thank you all for joining us on todays call. We really appreciate your participation and again, thank you very much.
The conference has now concluded we thank you for attending today's presentation and you may now disconnect your lines.