Global Net Lease, Inc.

Good day and welcome to the Global Net Lease Inc. Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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. And I'd now like to turn the conference over to Luis Acuarto. Please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for joining us for G&L's second quarter 2020 earnings call. This call is being webcast in the investor relations section of G&L's website at www.globalnetlease.com. Joining me today on the call to discuss the quarter's results are Jim Nelson, G&L's Chief Executive Officer, and Chris Matterson, G&L's Chief Financial Officer. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. We refer all of you to our SEC filings, including the Form 10-K for the year ended December 31, 2019, filed on February 28, 2020, 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 to the most directly comparable GAAP measure is available in our earnings release and supplement, which are posted to our website at www.globalnetlease.com. 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?

Thank you, Louisa. Good morning, everyone, and thanks again for joining us on today's call. I think it's safe to say that the second quarter was unlike any quarter I've experienced in my long career. Despite the challenges that COVID has presented, I am proud of our solid performance. For the quarter, we collected over 98% of cash rents that were payable, including 99% of the cash rent payable from our top 20 tenants. We attribute this excellent collection rate in large part to our historic emphasis on credit quality, underwriting, and due diligence, and to the relationships that we have built with our tenants over the years. On a geographic basis, G&L collected 99% of the cash rent payable from our UK-based assets, 100% from our other European tenants, and 96% from our US-based assets. While we have been successful in collecting rent throughout the COVID crisis, I am equally excited about our achievements on other fronts over the same time. We negotiated and closed on two significant financing transactions during the second quarter and in early July, as we completed the last step in the refinancing of all of our European debt with a 70 million euro loan in France, which was fixed via a swap agreement at the excellent interest rate of 2.5%. We also closed on 88 million of loans at an excellent interest rate of 3.45%, collateralized by our Whirlpool Corporation assets located in the U.S. We completed eight new acquisitions, all in the U.S., and all industrial or office properties, for an aggregate total of 31 million, bringing our total year-to-date acquisitions to almost 145 million. The second quarter acquisitions had an average remaining lease term of 18.1 years and were acquired at a weighted average cap rate of 8.45%. We remain actively engaged in the acquisition marketplace and continue to evaluate opportunities. Since the onset of COVID, the overall deal flow has softened, and although as a buyer we have adjusted our cap rate targets from historical precedents, In many cases, current sellers have not yet made similar changes to their pricing expectations. We believe that over time we will see bids and asks converge to establish a new, potentially more attractive normal. Our $3.9 billion, 296 property portfolio is nearly fully occupied at 99.6% leased, with a weighted average remaining lease term of 8.9 years, up from eight years a year ago. We have no 2020 lease expirations, and contractual rent growth is embedded in over 93% of our leases. 231 of our properties are in the U.S. and Canada, and 65 are in the U.K. and Western Europe, representing 65% and 35% of annualized rent revenue, respectively. Our property mix continues to evolve and is currently 48% office, 47% industrial and distribution, and 5% retail. compared to 53% office, 41% industrial and distribution, and 6% retail a year ago. Contributing to our success is our focus on tenant credit, industrial acquisitions, and retail dispositions over the last several years. Across the portfolio, 65% of straight line rent comes from investment grade or implied investment grade tenants. Industrial and distribution assets have been an increasingly significant segment of our portfolio. growing by nearly 15% year over year to make up 47% of our current assets when measured by straight line rent. This shift was particularly fortuitous in advance of the COVID-19 pandemic, where industrial and distribution businesses in the U.S. and Europe were among the least affected and some of the first employers to bring employees back to work. Our industrial acquisitions have included the sale leaseback transactions we completed with Whirlpool Corporation in the U.S. and Italy, as well as other industrial acquisitions totaling over $87 million year-to-date. These properties are leased to tenants such as CSTK, Metal Technologies, Klausner Industrial, and NSA. Other significant tenants in this segment include Finnair, Ocean, and Grupo Antolin. Though we are always seeking accretive acquisitions that meet our investment criteria, Our focus has been and will continue to be on industrial and distribution assets, along with opportunistic acquisitions of single-tenant, mission-critical office properties leased to investment-grade tenants similar to those that currently populate the office segment of our portfolio. Turning to our financial highlights, our portfolio produced year-over-year increases in revenue from tenants and net operating income. Total revenue was up 6.6% to $81.1 million in and net operating income grew 6.1% to $73.3 million from $69.1 million in the second quarter 2019 and 2% from $71.9 million the previous quarter. On a per-share basis, AFFO decreased year-over-year to $0.44 per share. The company distributed $35.8 million in common dividends to shareholders. AFFO was $39.8 million. With that, I'll turn the call over to Chris to walk through the operating results in more detail before I follow up with some closing remarks. Chris?

Thanks, Jim. We posted improved financial results for the second quarter compared to the prior year. For the second quarter 2020, we recorded adjusted EBITDA of $61 million compared to $58.6 million in 2019. As Jim mentioned, we also reported a 6.6% increase in revenue to $81.1 million from $76.1 million, with net income attributable to common stockholders of $1 million. FFO and AFFO decreased slightly to $35.1 million and $39.8 million respectively, or $0.39 and $0.44 per share due to increased interest expense and additional shares that were issued over the last year. The company paid common stock dividends of $0.40 per share for the quarter. As always, a reconciliation of GAAP net income to the non-GAAP measures can be found in our earnings release. On the balance sheet, we ended the second quarter with net debt of $1.8 billion at a weighted average interest rate of 3.2%. Our net debt to adjusted EBITDA ratio was 7.2 times at the end of the quarter. The weighted average debt maturity at the end of the second quarter 2020 was 5.2 years, which is an improvement from 4.6 years at the closed of the 2019 second quarter. The components of our debt include $344.6 million on the multi-currency revolving credit facility, $403.7 million on the term loan, and $1.3 billion of outstanding gross mortgage debt. This debt was approximately 92% fixed rate, which is inclusive of floating rate debt with in-place interest rate swaps. The company has a well-cushioned interest coverage ratio of 3.9 times. As of June 30, 2020, Liquidity was approximately $331.1 million. Our net debt to enterprise value was 50.1%, with an enterprise value of $3.5 billion based on June 30, 2020 closing share price of $16.73 for common shares, $24.31 for Series A preferred shares, and $22.95 for Series B preferred shares. This ratio was impacted by the market disruption that took place across the industry starting in the last half of February. With that, I'll turn the call back to Jim for some closing remarks. Thanks, Chris.

I'm very encouraged by all that we have accomplished in the second quarter despite the challenging circumstances. We had a great quarter distributing $35.8 million in common dividends to shareholders, generating AFFO of $39.8 million and successfully collecting over 98% of cash rent payable based on the foundations we built through our underwriting and the relationships we formed with our tenants. On these calls over the last several years, we have been emphasizing how our portfolio is built to be durable. Our results this quarter bear this out. Based on this, I hope that our existing stockholders realize that this quarter was an excellent proof of concept and that potential stockholders recognize the value potential we believe is still present in our stock, particularly given our very limited risk exposure. We will continue to focus on our business plan while executing on the activities that are critical to our ongoing success, like arranging favorable financing and maintaining our hedging strategy. We look forward to continuing these efforts in the second half of this year and hope all of you have an enjoyable and healthy rest of the summer. As always, thank you for your continued support. With that operator, we can open the line for questions.

And we will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. And our first question today will come from Brian Mayer with B. Reilly FDR. Please go ahead.

Good morning, Jim and Chris. Appreciate those comments. Two questions. First, on the non-payers of rent, can you tell us how you're handling that? Are they being offered deferrals over what period of time and what are the terms of those? And then I have a second question.

Sure, I can take that. So it's Roughly only about a dozen tenants. And what we've been doing for these tenants is we've deferred the portions of the rent. So in some cases, it's just been the second quarter and a couple other cases, it's been a couple months in the third quarter. And what we're doing is we're having the tenants pay us back those amounts in 2021. And in some cases, it's over the course of three months and up to 12 months. But we're not abating the rent. We are going to get paid back in 2021. Okay.

But to date, no rents have been abated. Is that correct?

Correct. We haven't done rents.

Okay. And then my second question, it's kind of a two-parter, but Jim, you insinuated that in your prepared comments that gnl's made some changes to its expectations and that maybe sellers have not can you elaborate on what those changes are that you're making is it strictly cap rates is it um you know type of asset or location of the asset and are you seeing any opportunities yet

uh for distressed assets you know mainly in the office side and when i say distress not the asset itself but maybe the owner who's trying to raise capital that might be attractive to you uh thanks brian and good morning to you also um you know what we're seeing we're actually starting to see a a greater deal flow right now we're starting to see a lot more properties whereas i think for the last three four months a number of sellers pulled off the market took their products off the market because they wanted to see where prices uh settled okay uh you know we're we're looking we're still we're still buying the same types of properties that we've been buying for the last three years last two and a half years you know we're buying high quality industrial and distribution properties and we're buying select office properties in secondary markets uh with mostly investment grade tenants and you know i i think uh price wise you know we're looking more at the prices on the office properties and in some cases we've gone back on deals and asked for higher cap higher cap rates because we thought that uh you know the bill there was just a little more risk than there was in the past but taking a look at our portfolio and looking at the high quality tenants that we have you know we're still very confident with what we own and we're very confident in what we're buying So I think all in all, you know, it is status quo and we're going to continue forward. Cap rates will adjust. You know, usually they adjust periodically as interest rates go up and down. And I think we'll see a similar type of process, you know, because of COVID. But I still think, you know, that things will get back to normal and, you know, we'll continue executing on our business plan as we have.

Great. Thank you.

Thanks, Brian.

And the next question will come from Michael Gorman with BTIG. Please go ahead.

Thanks. Good morning. I wonder if you could just talk a little bit. Good morning, Michael. Good morning. I was wondering if you could just talk a little bit about the collection rates, obviously very strong across the board. I'm just wondering the 96% in the U.S., is that attributable? Because if I recall correctly, that's the most of where the legacy retail is located, right? So is that what was driving the relatively lower number in the US versus the UK and Europe?

I don't know if we could actually say that. I mean, you know, there's no one sector that the deferrals have been focused on. You know, it's pretty much spread a little bit across the board. So I wouldn't say that. I would just say, you know, that the US, it seems to have been hit a little harder than Europe has and the way that the US government is dealing with things. Germany, they're back to work. France, they're back to work. The UK is still opening a little slower, I think, than they expected and we expected, but our tenants in the UK are still doing well. I don't think we can really say that it's primarily from retail in America. I just don't think that that's the case. I think it's pretty much spread across the board. Let me define that, our retail. Because as we know, retail in the U.S. has been hit pretty hard. But our retail is still doing pretty good.

Great. Good to hear. And then can you just talk about as you start to see the transaction market settle a little bit and people start to come back out, what the competition looks like across your opportunity set? Obviously, I would imagine industrially you're starting to see more competition on the buyer side, but just maybe what you're seeing in competitive trends there.

Well, you know, our balance sheet is very strong, as we stated. You know, we have the ability to close on transactions around the world. You know, we're still looking and seeing things that are within the parameters that we've set, you know, all along. You know, I think we're being extremely selective because of COVID-19, but we're still finding you know, excellent types of deals to bid on or to, you know, to try to acquire. So I don't think right now prices have changed that much. You know, good investment grade tenants in buildings, you know, still command a little bit better price. And that's what we focus on. But, you know, we're still finding things. You know, I think if you look at what we bought, you know, in the second quarter, you know, there was a, what was it, Chris? The cap rate was 8.51, a total close so far in 2020. 20, the average cap rate is 8.51 with 18.8 years remaining lease term. I mean, that's pretty darn good. So I think we're still able to find great value out there with really good tenants.

That's helpful. Great. Thanks. And one last one maybe for Chris. Obviously, two favorable financing transactions, one in the quarter, one afterwards. You talk about a lot of liquidity on the balance sheet. Just how you guys are thinking about the cost of equity here and then kind of how long you want to keep the cash balance versus the line of credit.

Sure. So I guess the first part of the question, and as you mentioned, we have a ton of liquidity on the balance sheet. So, I mean, based on what we have in the pipeline and even what we're looking at, I mean, we have a lot of cash to be able to use without having to tap, whether it's the equity or debt markets, for some time. I mean, obviously, anything when it comes to equity, we'll have to evaluate kind of on a case-by-case basis, but we have a lot of cash to be able to use. And then, I mean, just in terms of the line of credit and the draw that we did at the end of March, I mean, at this point, we still think it's prudent to keep that cash on the balance sheet We're going to continuously evaluate it, but just given the current state of the economy and the virus progression, at least for the time being, we think it's the smart thing to keep that cash. But also, we're going to keep evaluating that also.

Excellent. Thanks for your time, guys.

Thank you. Thank you. And the next question will come from Nate Crosett with Barenberg. Please go ahead.

Hey guys, it's Keegan on for Nate. So first, would you mind touching on the deal flow today versus a month ago? And then on top of that, could you maybe talk about how the pipeline is versus pre-COVID in terms of size?

Well, I think, as I said earlier, we're starting to see a lot more deals. I think sellers are starting to adjust to the current situation. So we are looking at more deals right now. We're still being very selective, which is prudent considering COVID and not knowing you know, how long it'll be before a vaccine or how viable a vaccine will really be and then how long it'll take to vaccinate, you know, the population. What was the second part of your question? Say it again.

So that was the deal flow. But as far as the pipeline today, can we touch on the size versus pre-COVID? Is it getting close to those levels again?

Well, we haven't disclosed the pipeline. So I can't really talk too much about it yet. But, you know, if you follow us, as we send out disclosures, you'll see, you know, the pipeline. But, you know, what we've closed on so far this year, you know, has been good, and we will continue. You know, our business plan is to continue to grow the company and buy, you know, high-quality assets with great tenants. So we certainly will continue doing that.

Okay, thanks. And for a follow-up. Can you maybe touch on the office part of your portfolio a little bit? I mean, I'm sure you're aware there's kind of a shift of more working from home. So is there anything within the portfolio we should be monitoring?

Well, you know, we don't – first of all, let's take a look at the type of office that we have in the portfolio in the U.S. in particular. You know, we have many times they're – well, they're all single-tenant properties. They're all – many of them are investment-grade properties. their headquarters buildings, which are very important to the tenant. And the way we look at it, you know, we're not really so concerned because of the nature of these properties. These are people driving to work. They're not taking public transportation. And even if 15 or 20% of the people continue working from home after the COVID crisis is over, I mean, we feel that'll just give our tenants a little more room in their buildings to spread people out a little more and be a little proactive against future issues. So we're not really concerned. Also, you know, our tenants have budgeted these buildings for very long terms in their budget planning. So, you know, they do need a headquarter building, and, you know, we're very happy to provide it. So we're very comfortable and very confident about our retail properties. I'm sorry, not our retail, our office properties in the U.S. and in Europe, for that matter.

Perfect. Thanks for your time.

Sure.

Thank you. And the next question will come from John Massarco with Leidenberg Salmon. Please go ahead. Good morning. Hey, John. Good morning.

Hopefully you can hear me all right. My reception's been a little choppy, so if I cut out, apologies. Maybe touching a little more on kind of the acquisition pipeline, I know we've talked about it a lot, but, you know, I know you can't comment on the size of the pipeline broadly at this point, but if you look at kind of what's under LOI, not as much maybe as the last quarter or kind of prior quarters. How quickly does it take for you guys to close on things that maybe aren't under LOI or aren't under purchase and sale agreement? And how might that potentially impact the cadence of additional acquisition activity as we look into kind of 2H20?

Well, you know, I think we're very lucky in that regard because of our advisor. I mean, we have tremendous resources at the advisor, which we're put forward in doing rent collections and reaching out with the tenants. So the advisor has really been a tremendous asset, the strength and breadth and width of the advisor's capabilities. As far as closing transactions, we have in-house legal, we have in-house underwriting. So we can close on transactions pretty quickly. So as the pipeline builds up, in a pinch, we've closed in 30 days. probably 45 days is a good norm. But, you know, we have the capabilities to close on assets very, very rapidly as we find them and as we, you know, we conclude the sort of paperwork side of a transaction and the due diligence.

Okay. And then maybe touching on the office portfolio as it stands today, I mean, do you have any kind of requests either, you know, in return for additional rent or even maybe permission? to put additional CapEx into some of these office buildings in lieu of kind of changes that need to be put in place as a result of COVID? And is that, you know, a potential investment opportunity? You know, are you guys potentially able to invest in kind of some of your own properties? And how big potentially could that be if that is something you're looking at or getting reverse inquiries about?

Well, it's interesting. In Europe, we've had a number of tenants reach out to us that are looking to expand their properties. So, you know, we are in conversations with a number of people about the potential for expanding existing facilities. And in the U.S., you know, as we get closer to expirations, lease expirations, which, you know, are still a few years away, you know, we're beginning those conversations. And it certainly is an area where we could make good use of capital by, you know, putting investments into the properties. So I think you're 100% right. I think we'll see a lot more of that going forward.

And I guess maybe specifically, I mean, what's the appetite from tenants on your end in terms of maybe providing capital without additional rent but potentially, you know, lengthen out that term on some of those office properties?

It's certainly an option, you know, and we look at all of these options as they come up. You know, we are in constant conversations with our tenants. So it's certainly something that we do consider.

Have those conversations accelerated at all over the last couple of months given what's going on, or has it been kind of relatively similar to pre-COVID?

For us, I think it's been very similar to pre-COVID. You know, like I said, we do have constant communication with our tenants, and, you know, we respond relatively quickly to requests. And, you know, it's an ongoing process, but I don't think it's accelerated for us because of COVID.

Okay. And then just one last one, and if you guys can't provide anything at this point, that's perfectly fine, but any color maybe on July collection broadly or specifically?

I haven't.

Right, so we haven't published the numbers yet for July, but what I would say there is we're not seeing anything materially different.

Okay, that's very helpful, and that's it for me. Thank you all very much.

Thanks, John.

And the next question will come from Aaron Hetch with JMP Securities. Please go ahead.

Good morning, guys. Thanks for taking the question. Hey, good morning, Aaron. Good morning. So 8% plus cap rates, really strong. Wondering how that was split between the industrial and the office side. Where's the spread at? And then, you know, the low end of the range, the high end of the range in terms of cap rates that you're doing deals today.

Go ahead, Chris. You can take that one.

Sure. So I'm looking at the pipeline right now, and there isn't really a distinct difference from what I can see between the office and industrial. It's all pretty consistent across the board.

Okay. And then you guys noted that it seems like industrial is going to be you know, has an incremental focus over office in terms of acquisition volume. Are you biased at all towards the U.S. over Europe right now, or is that also equal weighted?

Well, you know, it's been that way for the last couple of years. You know, I think we've bought two-thirds office, I'm sorry, two-thirds industrial distribution and one-third office for the last few years. And it's been, the majority has been in the U.S., but we're starting to see you know, some pretty good deals in Europe right now. You know, Europe for a long time, Europe, the price has spiked really high the last few years pre-COVID. So it was very difficult to find things that met our underwriting criteria. But we're starting to see a lot more in Europe right now. So, you know, I certainly wouldn't say we're focused on either country, you know, as we're opportunistic buyers where we find, you know, a really good property with a great investment, great tenant. I think, you know, we have, as I said, we have the ability to act. So we're certainly looking in both places, and there are things we like in both places.

Right. And then just to hit on the collections one more time, and sorry to hit a dead horse, but have you seen tenants ask for deferrals or any assistance at an increasing pace that you've had to push back on to get the collections where you have them today, or has the

income uh inbound phone calls from tenants not really changed and and is reflective of the collection volumes well i don't think much has changed i think you know we we were proactive with our tenants you know during this covet crisis as i said you know the advisor put we put a lot of attention to to reaching out and communicating with our tenants i think i think we've come to very good conclusions with the people that needed help So, you know, we have not had the deferral – I mean, we've had the deferral discussion. We haven't abated any rents. And I think, you know, that they've done – we've done a really good job as far as collecting the rents. It's obvious and it's working.

Gotcha. Yeah, good job on the quarter and thanks for the time.

Thank you very much, Aaron. Take care.

Thanks, Aaron. And this will conclude our question and answer session. I'd like to turn the conference back over to James Nelson for any closing remarks.

Thank you, operator. I want to thank everybody for joining us this morning. We do appreciate your listening in, your calling in, and certainly we appreciate the questions asked. And please, everybody, stay safe, stay healthy, and thank you. Bye-bye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.