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Global Net Lease, inc (GNL) Q3 2021 Earnings Call Transcript

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GNL earnings call for the period ending September 30, 2021.

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Global Net Lease, inc (GNL 1.41%)
Q3 2021 Earnings Call
Nov 4, 2021, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Global Net Lease Third Quarter 2021 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Louisa Quarto, Chief -- I'm sorry, Executive Vice President. Thank you. You may begin.

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Louisa Quarto -- Executive Vice President

Thank you, operator. Good afternoon everyone and thank you for joining us for GNL's third quarter 2021 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.

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, 2020 filed on February 26, 2021 and all other filings with the SEC after that date for a more detailed discussion of the risk factors that could cause these differences. And these 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 detailed information about what we consider to be implied investment-grade tenant, a term we will use throughout today's call.

I'll now turn the call over to our CEO, Jim Nelson. Jim?

James L. Nelson -- Chief Executive Officer and President

Thank you, Louisa, and thanks to everyone for joining us on today's call. I am pleased to report that GNL had a very strong quarter, steadily making progress on our long-term objectives. Our high-quality mission-critical net lease portfolio is performing as we expect, with occupancy of [Phonetic] 99.1% and nearly 100% rent collection. We are advancing our differentiated international portfolio strategy by continuing to close on accretive acquisitions, increasing portfolio concentration in Industrial and Distribution assets and successfully extending and expanding leases.

We continue to drive growth as the year-over-year cash NOI for the third quarter increased by more than 18% to $87.4 million. Our acquisition pipeline remains robust. Through October 31, we have closed on over $380 million of acquisitions in 2021 at a weighted average cap rate of 9.74% and a weighted average remaining lease term of almost 17 years. With the acquisitions we have in our pipeline, we are on pace to complete over $450 million of acquisitions for the year. Along with our embedded rent growth, we are well-positioned to drive earnings and cash flow growth going forward.

We continue to strengthen our balance sheet. Quarter-over-quarter annualized net debt to adjusted EBITDA improved to 7.4 times from 7.8 times and AFFO per share remained consistent at $0.44. Dividends paid to common stockholders were $0.40 per share. Our unique global capabilities, strong balance sheet and best-in-class portfolio continue to drive GNL's excellent performance. One of the reasons, we remain confident in our strategy is our ability to source and close acquisitions on attractive terms.

I want to take a few moments to provide some additional color on some of the recent transactions we have closed, including the acquisitions of Trafalgar Court during the third quarter and Walmart and Pilot Point Steel early in the fourth quarter. The Trafalgar Court property in Guernsey was acquired at a contract purchase price of $76.5 million based on the exchange rate on the day of closing. When we agreed to acquire this property with a strong tenant base that is nearly 100% implied investment-grade rated, we negotiated an attractive 8.05% going-in cap rate due to a near-term lease expiration for a significant tenant. Prior to closing, we leveraged our strong asset management platform to secure a 15-year lease extension for the expiring tenant, representing 25% of the building space, extending the weighted average remaining lease term for the property to 9.6 years from 5.8 years.

We believe this extended lease, as well as preliminary lease extension discussions with the property's other major tenants gives us the opportunity to unlock millions of dollars of value from the property. We were invited to bid on Trafalgar Court because of our reputation in the U.K. and across Europe for our ability to come to terms and close on significant industrial and office acquisitions. We have continually demonstrated that our team is unmatched when it comes to developing deal structure, closing on time and leveraging our expertise and relationships in local markets to appropriately finance our acquisitions. Notable recent European acquisitions are Whirlpool, where we acquired a portfolio of properties in the U.S. and Italy, and then continuing through the Johnson Controls and McLaren acquisitions, we have shown sale leaseback candidates time and again that GNL is the partner of choice.

Early in the fourth quarter, we closed on the acquisition of the Walmart Learning Center in Bentonville, Arkansas, which serves as the primary digital and on-site training and development facility for Walmart associates worldwide. The new construction training center we acquired is part of the company's new headquarters campus. Walmart has built out the learning center with cutting-edge audio and visual capabilities. Needless to say, we are very pleased to add Walmart, a number one company on the Fortune 500 list to our tenant roster and are happy to play a role in their ongoing investments into their digital transformation.

Our forward acquisitions pipeline includes eight industrial properties in the U.S. and the Netherlands for over $70 million. Combined with the acquisitions we have closed year to date, we anticipate total 2021 acquisitions activity to exceed $450 million at a weighted average cap rate of almost 9% and with over 16 years of lease term remaining. Our team is also evaluating strategic disposition opportunities and searching for additional acquisition targets that meet our stringent investment requirements.

Lease extensions remain a focus for our asset management team. Year to date, we have completed nine lease extensions and one tenant expansion project and executed one new LOI. Leasing activity for the year, assuming the LOI leads to a definitive agreement, totals 1.5 million square feet and $15.7 million of annualized base rent. On average, the lease extensions have added almost five years of lease term and represent 4% of GNL's total portfolio.

I am very pleased with the stability of our portfolio and the way we have been able to reduce our exposure to potential lease expirations, thanks to the mission-critical nature of many of our properties and our strong acquisitions underwriting. The vast majority of our leases don't expire until after the end of 2025. Our $4.6 billion, 312 property portfolio is nearly fully occupied at 99.1% leased with a weighted average remaining lease term of 8.2 years at the end of the quarter.

Geographically, 239 of our properties are in the U.S. and Canada and 73 are in U.K. and Western Europe, representing 60% and 40% of annualized straight-line rent revenue, respectively. Our portfolio is well-diversified with 134 tenants in 48 industries with no single industry representing more than 13% of the whole portfolio based on annual straight-line rent.

We also continue to increase the concentration of industrial properties in our portfolio. At the end of the third quarter, our assets were 52% Industrial and Distribution; 43% Office; and 5% Retail, compared to 47% Industrial and Distribution; 48% Office; and 5% 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, over 55% of annual straight-line rent comes from investment-grade or implied investment-grade tenants. GNL is well-positioned for a strong full year 2021 as we close on our pipeline of high-quality acquisitions and continue to see the benefit of the significant acquisitions we've made year-to-date.

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?

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

Thanks, Jim. For the third quarter of 2021, we recorded adjusted EBITDA of $75.2 million up from $63.6 million in the third quarter of 2020. We also reported a 15.8% increase in revenue to $95.8 million, inclusive of the $2.2 million lease termination fee, up from $82.7 million with net income attributable to common stockholders of $2.4 million.

FFO and AFFO for the third quarter were $44 million and $44.3 million, respectively, or $0.43 and $0.44 per share compared to $0.39 and $0.46 per share in the third quarter of 2020. 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 quarter with net debt of $2.2 billion at a weighted average interest rate of 3.4%. Our net debt to adjusted EBITDA ratio was 7.4 times at the end of the quarter. The weighted average debt maturity at the end of the third quarter 2021 was 4.5 years. The components of our debt include $500 million in senior notes; $118.7 million on the multi-currency revolving credit facility; $286.3 million on the term loan; and $1.5 billion of outstanding gross mortgage debt. This debt was approximately 94% 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 3.4 times.

As of September 30, 2021, liquidity was approximately $280.4 million. The company distributed $40.3 million in dividends to common shareholders in the quarter or $0.40 per share. Our net debt to enterprise value was 53% with an enterprise value of $4.2 billion based on the September 30, 2021 closing share price of $16.02 for common shares; $27 for Series A preferred shares; and $27.90 for Series B preferred shares.

With that, I'll turn the call back to Jim for some closing remarks.

James L. Nelson -- Chief Executive Officer and President

Thank you, Chris. I'm very pleased with how GNL has continued to grow throughout this year. Broadly, we have met and exceeded pre-pandemic performance levels across the company, including our rent collection, cash NOI and adjusted EBITDA figures when compared to the first quarter of 2020. More importantly, GNL's reputation as a premier partner for strategic sale leaseback transactions among U.S. and European companies has grown exponentially during the same time. We are well-positioned to continue to execute on accretive, creative and exclusive transactions that further enhance our portfolio. I look forward to closing out this year, strong and carrying that momentum into 2022.

With that, operator, we can open the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hey, guys, good afternoon. Jim, I just want to go back to your commentary around Trafalgar. I'm curious, you guys got it at a little bit over an 8% cap. How much of a premium yield you guys think you got for the kind of uncertainty around the tenants? I'm just trying to kind of put some numbers around the -- you kept saying that you guys think you drove a lot of value by getting that lease done, just trying to put some context around it.

James L. Nelson -- Chief Executive Officer and President

Well, from the experts we've spoken to in the local markets, my guess would be somewhere around a 10% premium, a little more, a little less, but at least somewhere around a 10% premium.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

And are you guys planning on refinancing that to pull proceeds out or how are you going to -- is there a way to kind of extract that value?

James L. Nelson -- Chief Executive Officer and President

Well, the -- we took over an existing mortgage on the property which has a short-term left on it, so we will be refining -- refinancing that sometime in the next year or two.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. And then I wanted to go back to your commentary also evaluating strategic dispositions. As you guys go through the portfolio, you had some good luck with the -- I think the asset in Germany where you were able to extract some value. I mean, are there other -- can you give us a sense of how many other assets in the portfolio you guys will look to get rid of and kind of timing as you look to finance '22 acquisitions?

James L. Nelson -- Chief Executive Officer and President

Yes. Thanks, Craig. That's a good question. As you know, and we've talked about this a number of times over the years, we are selectively selling off the retail assets we have where we -- as good offers come in, we are reviewing them and we have cut our retail exposure by half over the last few years. So we will continue doing that. And there are a few properties here and there. We are long-term holders of good real estate, but again we also are proactive when we see that it would work in our benefit to sell a property. So we are looking at a few properties in the U.S. and Europe right now, but we haven't made any definitive decisions on them yet.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. And then just one last one for me. It sounds like the blended yield on total full year acquisitions is coming down about 0.75% [Phonetic]. I'm assuming it's the industrial assets that are pulling it down, just kind of get a sense of the yield on that remaining 1.25% [Phonetic] and maybe break it out between the industrial and the office assets?

James L. Nelson -- Chief Executive Officer and President

Yeah, it will bring it down a little bit. I think with the Q4 2021 pipeline, the weighted average cap rate is 7.3%, the pipeline. So it's going to pull it down a little bit I think into the, like, 9.5% range. But I think if we look at the overall -- the overall average for the year, then we were really advantaged with McLaren and I think you probably saw that their credit rating has improved, and Trafalgar Court. So between the two of those, we're going to have a very strong average -- weighted average cap rate, going-in cap rate on all the properties for the year. So we're really pleased with how the year is looking.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

And you had mentioned that McLaren's credit rating improved. Is there any thing in motion about resetting the lease now that that's happened or any update there?

James L. Nelson -- Chief Executive Officer and President

No, no. Not yet. We review it periodically, but we're not looking -- making a change yet right now.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Great, thanks guys.

James L. Nelson -- Chief Executive Officer and President

All right. Thanks, Craig.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Bryan Maher with B. Riley Securities. Please proceed with your question.

Bryan Maher -- B. Riley FBR -- Analyst

Good afternoon. Not to take anything away from your stunning 99.1% occupancy, but can you give us a little color on the 60 basis points degradation [Technical Issues] the 99.7% [Phonetic], like, where did that come from?

James L. Nelson -- Chief Executive Officer and President

Chris, you want to give Bryan some color on that?

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

Yeah, sure. So I'll jump in on that. That actually was related to one of our tenants, Trinity Health. They had two properties and they were looking to consolidate to one. So they actually terminated one of the leases but as part of that transaction, they did extend the other lease by an additional 10 years. So while losing one lease, we have...

Bryan Maher -- B. Riley FBR -- Analyst

And what would be the prospects for releasing that property or selling it?

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

So at this point, we are looking to release that property and actively working on that.

Bryan Maher -- B. Riley FBR -- Analyst

Great. And then maybe Jim you could give us a little color on your pipeline of acquisitions, specifically, I don't know how to pronounce this, the Thetford Corporation 4-Pack?

James L. Nelson -- Chief Executive Officer and President

Yeah, it's an industrial 4-Pack, nice -- good company, good properties and I'm -- we are expecting to close that in Q4. They're industry -- it's an industrial 4-Pack. So -- and if you look at the things in the deck that we put out, pretty much everything left in the pipeline is industrial, except for Walmart Leasing [Phonetic] Center, which closed in Q4 wasn't. But the rest of them are industrial, which is really nice because, as you know, and we've also talked about this quite a lot, our focus really is on Industrial and Distribution properties, even though when we find a building like the Trafalgar Court property in Guernsey, it's just a fantastic deal on a great building with super high-quality tenants, we will execute on that. But our focus still remains on Industrial and Distribution.

Bryan Maher -- B. Riley FBR -- Analyst

Great. So assuming that you close on what's expected and you get to $450 million for 2021, that's going to be another kind of stunning year of acquisitions at really respectable cap rates. So I'm not looking for a guidance per se or a number or a cap rate for 2022, but how do you feel about the prospects for maybe continuing strong momentum as we enter '22 relative to what you're seeing now that clearly we don't get to see till later?

James L. Nelson -- Chief Executive Officer and President

Well, when I look at the stuff that our acquisition team shows me, I mean it's a wide variety of properties in multiple locations. We're still looking at a lot of stuff in Europe and a lot of stuff in the U.S., so we get to see -- fortunately, we get to see a lot of properties. And remember we've talked about a lot of our acquisitions are relationship-based. So the relationships that we've built over the years continue to bring us quality properties. So I feel very strongly about the future. I think we can continue doing what we've been doing for the last four years. Since Chris and I started running this company, we've added over $2 billion worth of very high-quality assets. So I think we can continue doing that into the future. I'm very positive about what the future has to hold for GNL.

Bryan Maher -- B. Riley FBR -- Analyst

And not to take anything away from the McLaren acquisition, which is a phenomenal asset, but I think most people would certainly characterize it as a little unusual. Should we expect to see some more unusual stuff in GNL's future in the next year or two?

James L. Nelson -- Chief Executive Officer and President

Yeah, I don't know if unusual is the term that I would use, Bryan, but it certainly was a little bit different than most of the transactions we've done. But again, it shows that we have the flexibility to buy quality properties at good prices in the right situation. So I would never say no to anything because who knows. I would never say we're not going to do something like that again. But if another opportunity arises that's similar to McLaren, we certainly have the ability to execute on it.

Bryan Maher -- B. Riley FBR -- Analyst

Okay. Thanks, Jim.

James L. Nelson -- Chief Executive Officer and President

Sure, Bryan. Take care.

Operator

Thank you. Our next question comes from the line of Barry Oxford with Colliers Securities. Please proceed with your question.

Barry Oxford -- Colliers Securities -- Analyst

Great, thanks. Could you guys talk a little bit about the cap rate environment over in Europe compared to the U.S.? Are we still or are they still experiencing the kind of the cap rate compression that we have experienced over here in the U.S. or not quite as much or maybe more?

James L. Nelson -- Chief Executive Officer and President

I don't think -- honestly, I don't think it's quite as much. Their economies opened a little bit slower than ours. So I don't think they've had that sort of rapid return like we've had here in the U.S. But there is some cap rate compression in Europe, it's undeniable, but there is still value there. And as you know, it's really changed in Europe over the last four or five years. I mean, for a long time, cap rates compressed very quickly, then they sort of leveled off and they're in that leveling-off period and with interest rates quite low in Europe, it opens up a lot of opportunities for us.

Barry Oxford -- Colliers Securities -- Analyst

So with that in mind, and you have some assets that you've kind of tagged, for lack of a better word, for sale here in the U.S., why not accelerate that and get some earnings off of the cap rate differential? Or, look, it's not quite that simple, Barry.

James L. Nelson -- Chief Executive Officer and President

Well, Barry, I didn't say that all of our potential dispositions were in the U.S. I said we're looking, there are potential dispositions in Europe that we're looking at, but nothing that's held for sale right now.

Barry Oxford -- Colliers Securities -- Analyst

Okay. Right.

James L. Nelson -- Chief Executive Officer and President

We do look for opportunities. What will be the best thing we can do for our shareholders. And if there are some properties in the portfolio that the best option would be to sell, then we certainly are looking at that.

Barry Oxford -- Colliers Securities -- Analyst

Perfect, perfect. Thanks, guys.

James L. Nelson -- Chief Executive Officer and President

All right. Take care, Barry.

Barry Oxford -- Colliers Securities -- Analyst

Yeah.

Operator

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Nelson for any final comments.

James L. Nelson -- Chief Executive Officer and President

[Technical Issues] Thank you, operator. I want to thank everybody for joining us on today's call. As you can probably tell, Chris and I are very proud of the success and the growth that we've had at GNL and we certainly intend to continue on the track that we're on. So thank you all again for calling in. Take care. Bye-bye.

Operator

[Operator Closing Remarks]

Duration: 25 minutes

Call participants:

Louisa Quarto -- Executive Vice President

James L. Nelson -- Chief Executive Officer and President

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Bryan Maher -- B. Riley FBR -- Analyst

Barry Oxford -- Colliers Securities -- Analyst

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