5/10/2023

speaker
Operator

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 telephone keypad. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Curtis Parker, Senior Vice President. Please go ahead.

speaker
Curtis Parker

Thank you. Good afternoon, everyone, and thank you for joining us for GNL's first 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. 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, G&L 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 gap 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'll now turn the call over to our CEO, Jim Nelson. Jim?

speaker
Jim Nelson

Thanks, Curtis, and thank you to everyone for joining us on today's call. We had a strong start to the year, completing a large accretive acquisition and demonstrating continued strong renewal and expansion leasing activity as we continue to advance our differentiated international and domestic strategy. We've maintained occupancy of 98% across the portfolio and nearly 60% of our long-term leases are with investment grade tenants based on annualized straight line rent. Since the beginning of 2020, approximately 80% of GNL's acquisitions have been industrial or distribution assets, which comprise 55% of our portfolio at the end of the first quarter. We believe our best in class portfolio is well positioned for meaningful capital appreciation and that our dividend provides shareholders a very compelling current yield. In this rising interest rate environment, G&L continues to benefit from predominantly fixed rate debt, which minimizes the impact of rate increases, and a sophisticated hedging program designed to minimize negative impact to our cash flow from foreign exchange instability and a stronger U.S. dollar. In the first quarter, our AFFO was 39.8 million, or 38 cents per share, a decrease from the first quarter of 2022 But on a constant currency basis, when we applied the average monthly currency rates from the first quarter 2022, first quarter revenues would have been up by 3.2 million to 97.5 million. Our AFFO was negatively impacted by the strengthening of the US dollar relative to the Euro and pound compared to the prior year. We think our unique global capabilities, strong balance sheet, and best in class real estate assets continue to support G&L's positive performance. In the first quarter, we leased over 675,000 square feet through seven lease extensions at a positive 4.2% spread over the previous leases. These new leases, which were set to expire soon, now have a weighted average remaining lease term of seven years. The year-to-date renewal and expansion leasing adds $39.6 million of new net straight-line rent over the new lease terms. As these leases were signed during the quarter, our first quarter results do not include the full impact of these renewals. Rather, we believe that the renewed leases for properties the company owns in the U.S., U.K., and Germany and that are leased to investment-grade tenants such as the U.S. government and Capgemini will have a positive long-term impact on our portfolio. Thanks to our leasing efforts, our portfolio only has 2% of leases expiring during the balance of this year with 73% of our leases not expiring until 2028 or later. In January, we completed an over $75 million accretive acquisition of eight properties leased to Boots UK Limited, a subsidiary of Walgreens. As we have discussed, although we are not focusing on retail assets, we were able to acquire these properties, which total over 323,000 square feet and have 11.5 years of lease term remaining at an extremely attractive 10.6% going in cap rate. Walgreens has rated BBB and BAA2 from S&P and Moody's respectively, and we are happy to have their credit in our portfolio at such a favorable cap rate. As always, we will continue to evaluate the acquisitions and dispositions that we believe maximize the value of our portfolio. At quarter end, our 4.6 billion, 317 property portfolio had a weighted average remaining lease term of 7.8 years. Geographically, 236 of our properties are located in the U.S. and Canada, representing 61% of annualized straight line rent revenue. We own 81 properties in the U.K. and Western Europe, which generate 39% of annualized straight line rent. Our portfolio is well diversified with 140 tenants and 52 industries with no single industry representing more than 12% of the whole portfolio and no tenant exceeding 5% of the portfolio based on annual straight line rent. Approximately 95% of our leases feature annual rental increases, which increase the cash rent that is due over time from these leases. Based on straight line rent, Approximately 60.5% of our leases feature fixed rate escalations. 27.1% have escalations that are based on the consumer price index, and 7% have escalations based on other measures. At the end of the first quarter, our assets were composed of 55% industrial and distribution, 40% office, and 5% retail, with 60% of annual straight line rent coming from investment grade or implied investment grade tenants. Our differentiated investment strategy continues to deliver value, and we remain focused on growing our portfolio by acquiring highly dependable single-tenant industrial and distribution properties in North America and Europe. 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 rest of the year. With that, I'll turn the call over to Chris to walk through the financial results in more detail before I follow up with some closing remarks. Chris?

speaker
Curtis

Thanks, Jim. For the first quarter of 2023, we recorded revenue of $94.3 million with a net loss attributable to common stockholders of $6 million. FFO and AFFO for the first quarter were $31 million and $39.8 million respectively, or $0.30 and $0.38 per share. On a constant currency basis, applying the average monthly currency rates from the first quarter of 2022, revenues in the first quarter of 2023 would have been up by 3.2 million year-over-year to 97.5 million. Our ASFO was negatively impacted by the strengthening of the U.S. dollar relative to the euro and pound compared to the prior year. However, our comprehensive hedging program helped mitigate the negative impact of a strong dollar on our revenue. As always, a reconciliation of GAAP net income to non-GAAP measures comes down to earnings relief. On the balance sheet, we ended the quarter with net debt of $2.4 billion at a weighted average interest rate of 4.4% and $119.2 million of cash and cash equivalents. Our net debt to trailing 12-month adjusted EBITDA ratio was 8.3 times at the end of the quarter. The weighted average debt maturity at the end of the first quarter of 2023 was 3.7 years. The components of our debt include $500 million in senior notes, $767.9 million on the multi-currency revolving credit facility, and $1.3 billion of outstanding gross mortgage debt. This debt was approximately 57% 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 2.9 times. As of March 31, 2023, liquidity was approximately $184.4 million. The company distributed $41.7 million in dividends to common shareholders in the quarter, or $0.40 per share. Our net debt-to-enterprise value is 60.3%, with an enterprise value of $4 billion based on the March 31, 2023, closing share price of $12.86 for common shares. $20.65 for Series A preferred shares, and $20.92 for Series B preferred shares. With that, I'll turn the call back to Jim for some closing remarks. Thanks, Chris.

speaker
Jim Nelson

The acquisitions and leasing we completed during the first quarter are great examples of how our team continues to execute on our acquisitions and asset management strategies, which we believe create value for our shareholders. Our best-in-class portfolio features long-term leases with investment grade and other high-quality tenants, balanced asset classes, and strong geographic and industry diversity. With primarily fixed-rate debt and comprehensive hedging strategies, we believe we are positioned to minimize the impact of ongoing interest rate and foreign exchange turbulence, allowing us to focus on creating value for shareholders. We look forward to continuing to create value in our portfolio through strategic acquisitions and dispositions through the rest of this year and working with our tenants to renew and expand their leases to meet our mutual goals. With that, operator, we can open the line for questions.

speaker
Operator

Thank you. 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 are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star than two. Today's first question comes from Brian Marr with B Riley FBR. Please go ahead.

speaker
Brian Marr

Great. Thank you. Maybe start off with a question for Chris. On the expense side, GNA was running a little bit hotter than we thought. Was there anything similar to what RTL reported this morning as far as seasonality goes that would have addressed that? And what do you think is kind of a good run rate here going forward? Is it, kind of somewhere in the mid fours for the balance of the year?

speaker
Chris

Sure, Brian.

speaker
Curtis

Well, I guess to start off with the seasonality portion of the question, in the first quarter, typically we do see some potential increases due to finishing off the audit, some of the proxy costs, and then completion of some of the tax work. So that's really what we were seeing in this first quarter. What I would say for the remainder of the year, stripping out the other litigation costs, we probably will end up seeing, on average, similar G&A to what we had last year.

speaker
Chris

Okay.

speaker
Brian Marr

But I'm assuming that litigation will be in there. Do you have any thoughts as to what that could be? And that will be in the G&A line, is that correct?

speaker
Curtis

Correct, that will be in the G&A line. I don't have an estimate for what the second quarter will be, but that's something where we'll make sure to keep breaking it out within our ASFO calculation. So you'll be able to see what those exact numbers are.

speaker
Brian Marr

Okay, and then sticking with ASFO for a minute, I know that you guys do some hedging there, but net of hedging, what was your thought as it related to the ASFO per share impact for the quarter?

speaker
Curtis

So the FX forwards, their impact for IFFO was about $1 million per quarter.

speaker
Brian Marr

Okay. And then maybe sticking with you, Chris, for a second, we noticed that the fixed rate component of the debt went from 70% to 67%. Is there anything going on there? Is that a conscious decision? Did something burn off that you didn't replace? Is it too expensive to replace anything? What's the firm strategy there? It's a little towards the lower end at this point relative to most of the REITs we cover.

speaker
Curtis

Sure. So what we're seeing there is as we've done some of these subsequent draws on the credit line, these draws, for example, for the acquisition that we just had, those have not yet been fixed through swaps. We're currently evaluating adding on any potential swaps for these draws or Once that could be coming up in the future related to refinancing, but that's not something that we've put in place yet.

speaker
Brian Marr

Okay. And then last for me on the lease expirations coming up in 2024, which I think then mitigate a bit, 25 through 27. They're pretty easy then. What are the thoughts and ability to kind of get ahead of the 2024 lease expirations And as far as you guys know, are there any known vacay that are material that we should know?

speaker
Jim Nelson

Well, to answer the first part of that, we, as you've seen, we're being very, very proactive on renewing and extending leases. So we will continue to do that. I think, you know, there's only 2% outstanding for 2023 and our guys are working on 2024, 2025 as we speak. So, I think we will stay very proactive in lease renewals, and I think you'll see the results announced as we accomplish it. What was the other part of the question, Brian, the last part?

speaker
Brian Marr

I think you pretty much addressed it all, Jim, and that's all for me. Thanks, Jim. Thanks, Chris. Thanks, Brian. All right. Take care.

speaker
Operator

Thank you. And our next question today comes from Michael Gorman with BTIG. Please go ahead.

speaker
Michael Gorman

Yeah, thanks. Maybe just continuing on that, can you just walk us through what the remaining leases this year and next year, how they break down in terms of geography and kind of product type for the balance? And then maybe are there any 2024 expirations that also line up with any of the 2024 debt maturities?

speaker
Chris

Chris, do you have a breakout of that? I don't in front of me.

speaker
Curtis

So I don't have all the specific names, but I do know that the lease maturities are split between both the US and Europe. What I can say is also that we're not aware of any material vacancies or anything that really lines up with the debt maturing in terms of from a vacancy perspective.

speaker
Jim Nelson

And as you probably saw, we did a lease renewal for the really large ING office headquarters in Holland. So, you know, we are getting well ahead of renewals in Europe as we move along.

speaker
Michael Gorman

Got it. Got it. That's helpful. And then maybe just, you know, big picture, if we could step back for a minute, Jim. You know, I think you laid out a lot of the positive points on the thesis and the portfolio for G&L. But kind of before the recent market volatility, you put about $2 billion to work over the past, call it five years or so. But we've seen kind of a bit of a degradation in the FFO run rate, FFO run rate. Can you just kind of walk through what the plan is or what your thoughts are strategically to get the FFO moving in the right direction as we move forward here, whether it's on the capital structure side of the equation, whether it's on additional acquisitions? What gets us moving back towards the mid-40s where we were back in 2021 and 2020?

speaker
Jim Nelson

I think it's a combination of all those factors. It's not any one individual factor that's going to make that work, but it's a combination of everything. It's strategic dispositions as we move along. It's repurposing that capital either to pay down debt or for other acquisitions. So You know, it's a hard thing to put PIN specifics on, but it's a combination of all those factors that will help us do that.

speaker
Michael Gorman

Okay. And then just thinking about the strategic dispositions, I mean, how are you, you know, how do you approach that in terms of thinking about what types of assets would qualify? I mean, if I just look at your weighted average cost of debt, like I would imagine a debt pay down would actually be dilutive at this point, right?

speaker
Jim Nelson

Well, at this point, yes. Again, it depends on the asset. For example, we sold a very large asset in Germany a few years ago because we knew that they were moving out. It was the largest asset in the city that it was in. It was the largest office building. It would have been almost impossible to find a single tenant big enough to take it. To make it a multi-tenant building was extremely expensive because it was built for this specific tenant. So before we even put it up for sale, we had three offers to sell it and we sold it to somebody who funnily enough is turning it into a hotel. So when we do strategic dispositions, there's usually a lot of other reasons behind it, not looking to pay down debt, but, you know, more strategic reasons specific to the property. So, and again, you know, if we do sell things and we buy things, we're buying things at really good cap rates right now. So one would think, you know, that anything we would buy with the funds from a disposition would be very accretive going forward. So that's really how we look at it.

speaker
Michael Gorman

Okay, great. And then maybe just one last one, just as we think about the debt markets between your various geographies, any kind of material differences there in your ability to access debt across your markets that may influence either kind of how you pursue refinancings or how you look at anything that may pop up in the acquisition pipeline that may cause you to prioritize certain geographies over others?

speaker
Jim Nelson

Well, we still have quite a lot of room on our credit facility. anything that needs to be refinanced. Let's say Europe, for example, we look at the cost of mortgage debt versus the cost of debt on our credit facility, and obviously we choose what's best for our shareholders. So I don't really see any jurisdiction restrictions right now. Interest rates are still lower in Europe than they are in the U.S., but you really have to take a look at the spread and see what really works and what's really the most accretive type of acquisitions currently.

speaker
Chris

Okay, thanks for the time, guys. All right, thanks. Take care.

speaker
Operator

And our next question today comes from John Masako with Leidenberg Tholman. Please go ahead.