Global Net Lease - Q2 2023

Transcript

Operator (participant)

Good afternoon, and welcome to the Global Net Lease Second Quarter 2023 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Curtis Parker, Senior Vice President. Please go ahead.

Curtis Parker (Senior VP)

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.globalnetlease.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 Weil, CEO of The Necessity Retail REIT Inc, 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, 2022, 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 isolation or as a substitute for our 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. 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 will now turn the call over to our CEO, Jim Nelson. Jim?

Jim Nelson (CEO)

Thanks, Curtis. 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 RTL and the simultaneously internalization of GNL's management and operations, paired with numerous governance enhancements, will establish GNL as a 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 AFFO per share relative to the quarter ended March 31, 2023, will reduce leverage for the combined company, driving net debt to adjusted EBITDA to 7.6x 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 8, 2023, for the special meeting of stockholders to vote on the proposed merger, which will be on September 8, 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 $20.2 million of 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 comprise 55% of our portfolio as the end of the 2Q, both based on annualized straight-line rent. Among our office properties, 68% are mission-critical facilities, which is defined as headquarters, lab, or 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 minimize negative impact to our cash flow from foreign exchange volatility and a stronger US dollar.

In the second quarter, our AFFO was $41.4 million or $0.40 per share, compared to $0.43 in the second quarter of 2022, an increase from $0.38 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 1.7 million sq ft of lease renewals and expansions through July 20th, 2023. These leases added $64.1 million of net new straight-line rent over the new lease terms at a +0.7% spread compared to the prior leases. Leases signed during the second quarter included SIK leases with XPO Logistics in the U.S. for over 77,000 sq ft.

a lease with ID Logistics in France for approximately 566,000 sq ft, and an 86,000 sq ft lease with PFB Canada in Alberta. Thanks to our leasing efforts, our portfolio only has 1% of leases expiring during the balance of this year, 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 7.6 years. Geographically, 236 of our properties are located in the U.S. and Canada, representing 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 rent.

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 60.1% of our leases feature fixed rate escalations, 27.5% have 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 this 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?

Chris Masterson (CFO)

Thanks, Jim. For the second quarter of 2023, we recorded revenue of $95.8 million, with a net loss attributable to common stockholders of $31.4 million. FFO was $5.9 million, or $0.06 per share, and AFFO was $41.4 million, respectively, or $0.40 per share. FFO was impacted by $15.1 million of settlement costs, $7.4 million of proxy-related expenses, and $6.3 million of merger and transaction costs that are added back to AFFO. On a constant currency basis, applying the 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 4.8% and had 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 facility. Our net debt to trailing 12-month adjusted EBITDA ratio was 8.3x at the end of the quarter. The weighted average debt maturity at the end of the second quarter, 2023, was 3.7 years.

Our debt includes $500 million in senior notes, $1 billion on the multicurrency revolving credit facility, and $1 billion of outstanding gross mortgage debt. This debt was approximately 72% fixed rate, which includes floating rate debt with in-place interest rate swaps, and our interest coverage ratio was 2.9x. The company distributed $41.7 million in dividends to common shareholders in the quarter at a rate of $0.40 per share. Our net debt to enterprise value is 65.2%, with an enterprise value of $3.7 billion. I'll now turn the call back to Jim for some closing remarks.

Jim Nelson (CEO)

Thanks, Chris. We are continuing to execute lease renewals and tenant expansions across our portfolio, locking in creditworthy 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 its similarly constructed portfolio of 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 continue growing in the future. We are pleased that Mike Weil, CEO of RTL, who will join me as co-CEO of GNL, pending completion of the merger, will participate in the Q&A session.

We look forward to answering any questions you may have. Operator, please open the line for questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble a roster. Our first question comes from Bryan Maher with B. Riley FBR. Please go ahead.

Bryan Maher (Managing Director)

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

Jim Nelson (CEO)

Hi, Brian.

Bryan Maher (Managing Director)

Just a couple of questions for me this afternoon. you know, you have very little lease expirations for the rest of this year. I think it's less than 1%, and maybe 9.5% or so next year. How much can you get in front of that now? Are there any known vacates that are material that we should be thinking about?

Jim Nelson (CEO)

As you've seen, we're extremely proactive in addressing renewals. You know, we've been doing this. For example, we renewed the Finnair lease, which still had four years left on it, and we did a seven-year renewal a few years ago. We're very, very proactive with lease renewals. I don't know of anyone in our portfolio that we're gonna have an issue with at this point. You know, we are continuing to be proactive. We're working with a lot of our tenants on lease renewals, I think you'll be very, very pleased as the year ends and we go into next year with what you see.

Bryan Maher (Managing Director)

Okay. Then next for me, you know, we've not really seen any acquisition activity since the Boots deal back in 1Q. I think that was maybe $75 million. Has this focus been at the company, simply getting the RTL deal over the, you know, finish line, or are you not seeing anything terribly compelling out in the market?

Jim Nelson (CEO)

We still have a very robust pipeline, and we look at a lot of deals. You know, this RTL deal is overwhelmingly positive for us, so we, we do have a certain amount of focus on that. That doesn't mean we're not looking at other potential acquisitions. We just haven't found something that we find really exciting to go out and buy. As we wrap up this merger, I think, you know, it's a very exciting time for both companies.

Mike Weil (CEO)

Jim, if I- and Bryan, if you don't mind, if I can just jump in, it's Mike Weil. You know, as Jim said, the focus has definitely been on moving the merger forward as Jim and Chris continue with the operation, the day-to-day operation. 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 AFFO per share to be 9% accretive, to have this kind of transformative impact, creating the third largest net lease REIT with a global footprint. The market hasn't changed from a seller's perspective enough, I think, to really get Jim and I excited about just chasing a deal for the sake of a property acquisition.

You know, what's going to be happening in the, the beginning, the middle part of September, far exceeds anything that, that either one of us could find just in the broader real estate market.

Bryan Maher (Managing Director)

Thanks for that. And, and assuming the transaction closes in September, and, and I'm not seeing or hearing anything to dissuade me from thinking that that's gonna happen, certainly the market's trading you guys like that. What does... And maybe this is for Chris. What does the, you know, acquisition capacity look like for the combined company? I mean, since it's an all-stock deal, except for the $50 million you paid to the external manager, I mean, should we just assume that kind of the liquidity that each company has now, you know, 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?

Chris Masterson (CFO)

I would say that that's a fair way to, to look at it without diving into too much detail in terms of looking at the, the availability. As you can see, we have a significant amount of, of liquidity at this point at GNL at the end of the, the quarter. I believe it was about $273 million.

Bryan Maher (Managing Director)

Yeah. Okay, thank you.

Mike Weil (CEO)

Bryan, we also just should point out that the payout ratio is expected to be 85% post-merger. The company's ability, from a retained earnings standpoint and cash availability, will get stronger and stronger, just from the scale and the result of the merger.

Bryan Maher (Managing Director)

Since you brought that up, is, 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?

Mike Weil (CEO)

Go ahead, Jim.

Jim Nelson (CEO)

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

Bryan Maher (Managing Director)

Okay, thanks. That's all for me.

Mike Weil (CEO)

Thanks, Brian.

Jim Nelson (CEO)

Take care.

Operator (participant)

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

Barry Oxford (Head of Real Estate Securities Research)

Hey, guys. Thanks for taking the call. Just to build on the acquisitions after the merger, you guys seem to indicate that there's a wide bid-ask spread, nothing really that exciting out there. Is there a particular property type or 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, those bid-ask spreads are wide, and right now, it just isn't desirable.

Jim Nelson (CEO)

Well, Barry, one of the beauties of this merger is it, it gives the RTL side, the opportunity to buy, really good properties in Europe as GNL does. It opens up a whole new area of opportunity for that side of our new business. We're very excited about that.

Barry Oxford (Head of Real Estate Securities Research)

Okay, you think there might be some opportunities from a retail standpoint? I mean.

Jim Nelson (CEO)

Absolutely. You, you saw, you saw the Boots, you saw the Boots acquisition we did.

Barry Oxford (Head of Real Estate Securities Research)

You took the words out of my mouth, Jim.

Jim Nelson (CEO)

Hopefully, you know, we'll find, we'll find a lot more like that, you know, especially, you know, with the RTL component, with the, that type of asset component.

Barry Oxford (Head of Real Estate Securities Research)

Right. That's what I was driving at. Yep, no, thanks for the color. Perfect.

Operator (participant)

Our next question—

Jim Nelson (CEO)

Do you have anything else, Barry? Oh, okay. Go ahead, operator.

Operator (participant)

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

Mitch Germain (Managing Director of Real Estate Research)

Thank you, good afternoon. Chris, help me through the liquidity change, because I know you redeemed, some of that debt on the credit facility. I'm curious about how the liquidity changed quarter-over-quarter.

Chris Masterson (CFO)

Sure. Really, the difference here is really driven by the U.K. fulcrum, primarily moving on to the credit facility. Previously, with the LTV and the way that we paid down the debt on, on that line, we had a much different ratio in terms of what we could borrow on the credit facility versus, versus that.

Mitch Germain (Managing Director of Real Estate Research)

Okay. That makes sense. What was the timing of that debt redemption? Was it like early quarter, late quarter?

Chris Masterson (CFO)

It was about mid-quarter.

Mitch Germain (Managing Director of Real Estate Research)

Mid-quarter? Okay. Last question from me. It seemed like the leasing in the quarter was skewed toward industrial, or at least that's the ones that Jim, you highlighted. I'm curious what you're seeing from your office tenants, with regards to decision-making and willingness to, to proceed with lease discussions.

Jim Nelson (CEO)

Well, interestingly enough, Mitch, it's, it's really across, it's really across the whole portfolio, the success we're having with, with re-leasing, or, or renewing leases. I wouldn't, I wouldn't say it's, it's more favorable in one sector or another. You know, we've been having very positive results all across the portfolio, in Europe and in the U.S. 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 re-lease renewals.

Mitch Germain (Managing Director of Real Estate Research)

Great. That's helpful. Thanks.

Jim Nelson (CEO)

Sure. Thank you.

Operator (participant)

Our next question comes from Todd Thomas with KeyBanc. Please go ahead.

Todd Thomas (Managing Director and Senior Equity Research Analyst)

Hi, thanks. Good afternoon. I guess I just wanted to follow up on, on the, the line of questioning around the, the lease expirations and maybe touch on office a little bit. You, you have done a nice job with the lease extensions and renewals to date. Jim, sounds like you're not eyeing any major non-renewals in 2024, but it is about 10% of straight-line rent that expires. How, how much of that is comprised of, of office assets?

Jim Nelson (CEO)

Chris, do you have that percentage offhand?

Chris Masterson (CFO)

No, I, I, I don't. We'll have to take a look at that. I don't have the exact percentage.

Jim Nelson (CEO)

We haven't broken that out, but we can get back to you with that.

Todd Thomas (Managing Director and Senior Equity Research Analyst)

Okay. Yeah, that'd be helpful. Then if we, I guess, think about the, you know, office exposure in the portfolio, you know, I understand a high percentage is, is mission critical, you know, headquarters office space. Have you had conversations with, with tenants, that, you know, inbound looking to downsize or sublease their space? Is any of the office space today being subleased?

Jim Nelson (CEO)

You know, I think, there's a very few that have small sublet space, but nothing material. You know, we, we are very, very proactive with our tenants. We, 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, a number of, of expansion projects going on, you know, for a number of our tenants. You know, we're, we're in a very positive position as far as our office portfolio. And the loc-- and, and all things considered, with, you know, 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.

Todd Thomas (Managing Director and Senior Equity Research Analyst)

Okay. And just last question, maybe for, for Chris. You know, in terms of near-term balance sheet initiatives, and, and I realize, you know, the balance sheet changes post-merger, but on the GNL side, the, the roughly $340 million of mortgage debt, that matures in 2024, you know, what's the, what's the timing of that in 2024? What's the current thought process there in terms of, you know, refinancing or, or, or paying that down?

Chris Masterson (CFO)

Right. What I would say now is we're obviously gonna gonna 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, is about mid-year. We have a lot of time to look into the options. Obviously, we'll be looking into potential unsecured markets and, and sort of evaluating really what's the most efficient and best option for us in the short term. It's still, it's still in process.

Mike Weil (CEO)

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, and looking forward to with the merger is net debt to adjusted EBITDA is reduced down into the mid-7s as a, a result of the merger. That's ultimately not where we want to end up, but it's obviously an improvement. The portfolio will be much larger. Diversification will be further because GNL is already really nicely diversified. We do think that if the unsecured market comes back a little bit in, in the next couple of quarters, which we have reason to, to believe is very possible, we would like to certainly explore that option.

I think we can, can explore it as a, a larger company, and really be able to take advantage of, of this opportunity to refinance out that mortgage debt at the appropriate time and price.

Todd Thomas (Managing Director and Senior Equity Research Analyst)

Okay, that's, that's helpful. I guess, while we're talking about leverage, so pro forma mid-7s, what is the sort of longer term leverage target for the combined company? What's the timeframe to, you know, reduce leverage toward that level?

Jim Nelson (CEO)

Chris, you want to take that?

Chris Masterson (CFO)

Sure. So over time, we definitely want to push the leverage into the, the 6s. I mean, we, we wanna move towards investment grade, but we do wanna move it over time. In terms of the actual timeframe, I, I don't have an exact number. Part of that's gonna have to do with obviously the equity markets and our, our ability to raise capital, but we think especially with the, the combined company, that, that's gonna be a favorable change for us. It's something that we're, we're definitely gonna push towards.

Mike Weil (CEO)

Yeah. Again, Todd, not to just keep jumping in, but, you know, again, we're, we're thinking about this as a much larger entity post-merger with what we think are gonna be great opportunities. The internalization and the changes to corporate governance, the savings of $75 million to $54 million, which occurs at the closing, is really going to change our position in the market. We think that many of the institutional, owner-type firms, they're gonna see this as an opportunity. We're looking to expand our ownership, and we'd like to see the company start 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.

This merger is really key for GNL and, and our long-term thoughts around driving, net debt to EBITDA further down, and ultimately be looking for an investment-grade rating.

Todd Thomas (Managing Director and Senior Equity Research Analyst)

All right. Thank you.

Operator (participant)

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

Jim Nelson (CEO)

Thank you, operator. I wanna thank, Chris and Mike for joining me on today's call. Appreciate all their great input, and I wanna thank everybody who joined us on the call for joining us today. At this point, operator, thank you. We can close the call.

Operator (participant)

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