Global Net Lease, Inc.
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Good afternoon, and welcome to the Global Net Lease Fourth Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Louisa Quarto. Please go ahead.

[Louisa Quarto:]

Thank you, Operator. Good afternoon, everyone, and thank you for joining us for GNL's fourth quarter and year-end 2020 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 the quarter's results are Jim Nelson, GNL's Chief Executive Officer; and Chris Masterson, GNL's Chief Financial Officer.

[Jim Nelson:]

Thank you, Louisa. And thanks again to everyone for joining us on today's call. I am extremely proud of how GNL has performed throughout the year of unprecedented change and dislocation in the market. Our resilience through the last year is a testament to the strength of our strategy, including the deliberate construction of our portfolio, our focus on mission-critical industrial distribution of our office properties, and the execution of our prudent strategy in prior years to reduce our exposure to other asset classes, such as retail. From this solid base, we launched our inaugural unsecured notes offering in the fourth quarter. The notes received an investment grade rating from S&P of BBB minus, and a rating from Fitch of double BB plus. We continue to acquire high-quality accretive assets and build momentum headed into 2021. This morning, Chris and I will briefly discuss all of these initiatives, as well as our fourth quarter and full 2020 results before taking your questions.

[Chris Masterson:]

Thanks, Jim. We posted improved financial results for both Q4, 2020, annual and quarterly results in comparison to the prior year. As Jim mentioned, for 2020, we reported a 6% increase in adjusted EBITDA and a 7.8% increase in revenue, with net loss attributable to common stockholders of $7.8 million. FFO was $130.9 million or $1.46 per share, and AFFO was $160.5 million or $1.79 per share. The company paid common stock dividends of $155.1 million or $1.73 per share in 2020. Revenues increased primarily due to rental income from acquisitions. As always, a reconciliation of GAAP net income to the non-GAAP measures can be found in our earnings release and supplement.

[Jim Nelson:]

Thank you, Chris. I'm very proud of the way that GNL didn't just weather the storm that was 2020, but actively sought and executed an opportunity to enhance our portfolio and balance sheet. We sourced and closed on over $460 million of accretive acquisitions. We obtained our own credit rating and issued $500 million of unsecured debt that we received an investment grade rating from S&P of BBB minus and a rating from Fitch of BB plus. We didn't slow down our pursuit of these objectives during the pandemic, and we were able to issue these notes in a low interest rate environment and an attractive coupon. We signed early and long-term lease extensions based on the mission-critical nature of our assets, and extended all of the leases that expired in 2020. A true testament to our tenants' commitment to their space and the relationships we have built.

[Operator:]

Our first question is from Nate Crossett of Berenberg. Please go ahead.

[Nate Crossett:]

Hey, good morning, guys. Thanks for taking my question.

[Jim Nelson:]

Good morning, Nate.

[Chris Masterson:]

Good. Morning.

[Nate Crossett:]

I know you guys don't give formal guidance. But I was just wondering if you could give, broad strokes in terms of how we should be thinking about acquisition volumes, deal flow, U.S. versus Europe, industrial versus office, and then your kind of expectation for pricing and releasing spreads?

[Jim Nelson:]

Great question. A lot of different answers embedded in that question. First of all, let me say that we have a very robust pipeline. And as you can see how we ended last year, in the fourth quarter, we can definitely say that, we expect this year to be a very good year as far as acquisitions. Chris, why don't you take a couple of the other points?

[Chris Masterson:]

Sure. So as Jim says, very, very strong pipeline. Unfortunately, in terms of what we can actually disclose, it's what we have under agreements. But there is a lot more that we are working on both the U.S. and Europe. As Jim mentioned a little bit earlier in the script, when it comes to leasing, we've completed 12 lease extensions over the past year, that's something that we are continuing to work on. And as we've done this, we've been very successful, and really keeping ourselves at market rates and building in extensions to these leases. So, that's added a lot of value, I think, to the portfolio.

[Jim Nelson:]

And let me talk about a little bit about U.S. versus Europe. We continue to look in both places. As you can see, by what we bought in the last couple of years, we're buying very high-quality assets in Europe. Whirlpool, and Johnson Controls have been to two companies. We bought a number of assets in Europe. We continue to look. U.S., we have a very, very robust pipeline also. And I think if you look back at what we've bought in the last three years, probably at least two-thirds to three-fourths have been industrial and distribution properties. And we will continue to have our focus very much in the same direction going forward.

[Nate Crossett:]

So I guess, all that's helpful. So long-term, kind of the industrial percent of the overall portfolio, should we expect it to be kind of 60-40 plus longer-term?

[Jim Nelson:]

I think that's a fairly decent target. As you can see, by at the end of 2020, we have gone from being a little bit higher percentage in office to a higher percentage in office and industrial. I'm sorry, in industrial and distribution. So we're definitely moving that direction very, very nicely with our acquisitions.

[Nate Crossett:]

Okay. Maybe just last question, you kind of just talk about your office portfolio. Obviously, with COVID, there's some structural questions surrounding, maybe more so CBD office. But can you just kind of remind us why you think your portfolio has been well? And kind of what the competition is like right now to be buying these types of office assets?

[Jim Nelson:]

Well, I'll answer the second part first. There's always competition, when it comes to buying good properties. We focus on very high quality and truly, truly mission-critical properties. And I think the performance of our investment grade tenants and all of our tenants proves that these properties are extremely important to them. And we continue to purchase assets that really have the same metrics built around them. So, I think we're in a very fortunate position with the assets that we have, and certainly with the assets that we would buy in the future. We have a very disciplined underwriting process. And all of these factors are very important, when we buy a property. So, as I said, we're very, very confident of the quality of our portfolio office and industrial distribution. And I think the plan has worked very well for us, and we will continue to buy those accretive properties.

[Nate Crossett:]

Okay. Thank you.

[Jim Nelson:]

Thank you.

[Operator:]

The next question is from Michael Gorman of BTIG. Please go ahead.

[Michael Gorman:]

Thanks. Good morning.

[Jim Nelson:]

Hey, Michael.

[Michael Gorman:]

Hi. I was wondering if you could talk a little bit more, I understand there's always competition for the high quality properties. But I just wonder if you saw a low in the competition last year during some of the volatility, and to the extent that some of that is coming back. And maybe how that's influencing how you think about 2021?

[Jim Nelson:]

Well, I think personally, I think we saw a number of the recent our sector basically sitting on their hands, waiting to see what would happen. We continue to be very, very selective in what we bought. We have very stringent underwriting metrics that we follow. And we found great properties, and we finished the year as we said over $460 million worth of acquisitions. I think, because of the quality of our acquisition team, our position in the market, the huge volume of acquisitions that our platform has done over $40 billion since 2007 in acquisitions, that we have a real advantage. We're known as a very good buyer, we buy a number of properties direct from sellers and sale and leaseback. We buy from developers. So we really have, in a lot of sense, an upper hand at how and where we buy. And we're well known in the markets that we buy in. So, I think, even though competition may be coming back, the U.S. real estate market is so huge, that we certainly can find an abundance of good properties that meet our criteria, and continue on our acquisition pace.

[Michael Gorman:]

That's helpful. Thanks. And then Jim, I noticed your comment about truly mission-critical. And I thought that's interesting, because it is a term that gets thrown around a lot. And I do wonder, as you kind of saw what happened in 2020, have you changed your definition of what lease criteria?

[Jim Nelson:]

Not really. I mean, as you can see, it's worked well for us in the properties that we own. And as we continue to add to the portfolio following our same acquisition metrics, we should be able to continue to have those same types of mission-critical properties joining our portfolio as we move forward. And we do have, as I said a very, very robust pipeline. And we expect to be able to continue doing what we've been doing, very successfully.

[Michael Gorman:]

Okay. Thanks. And then just one follow up for me and I apologize if I missed it. But any color you can provide on the three leases that are set for expiration this year?

[Jim Nelson:]

Chris, you want to take that?

[Chris Masterson:]

Sure. I mean, all I can say is that we are actively working on those leases that are set to expire, in terms of working extensions, in addition to many other leases in both the U.S. and Europe that have even longer dated timeframes. So, we are being very proactive in terms of getting ahead of these lease expirations.

[Jim Nelson:]

And remember, those are three leases out of 306 properties. So we're not overly concerned, but we are working on them.

[Michael Gorman:]

For sure. Great. Thank you very much.

[Jim Nelson:]

Thank you.

[Operator:]

The next question is from John Massocca with Ladenberg Thalmann. Please go ahead.

[John Massocca:]

Good morning. You talked about the size of the pipeline, but if we kind of compare that obviously to what is under LOI in purchase and sale agreement? Should we kind of expect the acquisition cadence this year to be kind of concentrated in 4Q? Or is there stuff that's maybe kind of just out of sight not under LOI not under PSA, but very close?

[Jim Nelson:]

That's a loaded question, John. I don't think. I think it's too early to say the year is going to be back-end loaded for sure. We have a lot of things that we're working on. We have a lot of things that we're looking at. We don't give guidance, but all I can say is, we expect this to be a very good year for acquisitions.

[John Massocca:]

Okay. And then there's been a lot of movements around kind of inflation expectations in the United States, maybe versus Europe. And how has that potentially impacted where you see transaction volume turning out this year geographically?

[Jim Nelson:]

Again, I think it may be a little early to tell, because inflation fears are just starting to edge into the economy. People are talking about it more than they have in a very long time. But I don't think our market has reacted dramatically to that, at all. In Europe, again, we look to buy very, very high quality assets. And I haven't seen anything as far as an effect in Europe at the present time. So we still remain optimistic, and we think things will continue pretty much the way they have been.

[John Massocca:]

Okay. That's it for me. Thank you all very much.

[Jim Nelson:]

Thanks, John.

[Chris Masterson:]

Thanks, John.

[Operator:]

The next question is from Barry Oxford of D. A. Davidson. Please go ahead.

[Barry Oxford:]

Great. Thanks, guys. Quick question. When I was looking at your acquisitions here in the fourth quarter, you mentioned a cap rate of 6.5 going in, and then I think 7.2. How quickly does that become a 7.2 cap rate because 6.5 is a little on the low side for you guys?

[Chris Masterson:]

Sure. Well, what I would say there in terms of the acquisitions that we had during the fourth quarter, the escalators built in are roughly about 2% a year on average for these acquisitions. I don't have the exact time when we'll get to the 7.2, but that's the escalator that we'd be working with here.

[Barry Oxford:]

Is that 7.2 kind of an average over the lease period?

[Chris Masterson:]

Correct. That would be the average over lease period.

[Barry Oxford:]

Okay. Perfect. Thanks so much. That's all I had today.

[Jim Nelson:]

Thanks, Barry.

[Operator:]

The next question is from Bryan Maher of B. Riley Securities. Please go ahead.

[Bryan Maher:]

Good morning. Just most of my questions have already been answered. But we noticed property operating and G&A expenses were a bit higher than our expectations for the quarter. And maybe this is the best for Chris, is there anything going on with those numbers that we should think about? And are the fourth quarter numbers kind of a good run rate to look at for 2021, of course, building in acquisitions as they go?

[Chris Masterson:]

Sure. So, I guess I'll start first with the property operating expenses. Obviously, these fluctuate quarterly, based on acquisitions and activity. But I think the key to point out here, when you're looking at third quarter versus fourth quarter, the increase is roughly about $2 million. But the actual expense reimbursement revenue was also up about $2 million. So, when you're looking at that, that net OpEx, it's effectively are going to be flat quarter-over-quarter. So, it doesn't have much earnings impact. And then the second part of it in terms of G&A, the bump in the fourth quarter, I would say is primarily driven by legal fees that really were occurred for the most part in conjunction with the lease extensions. So obviously, it's something that added value to the portfolio. But that's going to be an activity-based item, and I would say, don't assume that a run rate unless we're significantly working on lease extensions.

[Bryan Maher:]

Great. And then just one question for me on the acquisition. You guys have been pretty thorough with your answers so far. But has there been any meaningful change in your deal sourcing or where you're seeing opportunities from? And are you seeing any stress levels on the part of potential sellers, mainly, as I'm talking about in the part of office, either in Europe or in America, which could skew you to buy in one market over the other?

[Jim Nelson:]

I don't think that there's anything going on that would really skew us to buy in one market versus the other. And I think if you're looking at the high quality type of mission-critical properties that we buy, I think, there's still value there. So, I don't see that part of the office market becoming depressed. But again, we follow it very closely. We're very careful with what we buy. And I'm very confident that we can continue buying really high quality assets through 2021 and beyond.

[Bryan Maher:]

Thanks, Jim.

[Jim Nelson:]

All right. Thanks.

[Operator:]

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

[Jim Nelson:]

Thank you, Operator. Thank you, everybody, for joining us on today's call. It's always a great pleasure to talk to you and to bring forward the results that GNL has accomplished. So, we thank you and we'll talk to you next quarter. Bye-bye.

[Operator:]

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