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Global Net Lease Inc (GNL) Q3 2019 Earnings Call Transcript

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Global Net Lease Inc (NYSE: GNL)
Q3 2019 Earnings Call
Nov 8, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Global Net Lease Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Louisa Quarto Executive Vice President. Please go ahead ma'am.

Louisa Quarto -- Executive Vice President

Thank you operator. Good morning everyone and thank you for joining us for GNL's Third Quarter 2019 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 Chief Executive Officer; and Chris Masterson 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 annual report on Form 10-K for the year ended December 31 2018 filed on February 28 2019 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 or portfolio information provided during this conference call are only made as of the date of the call. As stated in our SEC filings GNL disclaims any intent or obligation to update or revise these forward-looking statements or portfolio information except as required by law. 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 GAAP net income to the non-GAAP measures can be found in our earnings release supplement and Form 10-Q all of which are posted to our website at www.globalnetlease.com.

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

James L. Nelson -- Chief Executive Officer and President

Thanks Louisa and good morning everyone. Thank you all for joining us on today's call and a special welcome to D.A. Davidson and Aegis Capital who initiated coverage of GNL last month increasing our coverage to 5 analysts. We are pleased to report another quarter of year-over-year increases in rental revenue cash NOI adjusted EBITDA and AFFO. We had an extremely active quarter, including 102 million of primarily industrial and office acquisitions, which, combined with another significant retail disposition, progressed our strategic goals to increase our portfolio allocation to industrial properties and decrease our retail exposure. We saw a year over year decrease in our net debt to EBITDA ratio. And we also signed an agreement with a fortune top 150 tenant to buy a domestic and international portfolio properties for a total of approximately 182 million before the end of the year. In total, we have 373 million of acquisitions in our pipeline, which brings our total pipeline plus year to date acquisitions to 697 million. Finally, we improved our financial flexibility and ability to execute on acquisition opportunities as we expanded Credit facility to 1.2 billion and entered into a new loan at favorable interest rates that helped extend our weighted average debt maturity and will help fuel our continued growth.

Total revenue for the third quarter was $77.9 million up 8.4% from $71.9 million in the prior year quarter. AFFO also increased to $40.2 million from $39.6 million in the third quarter of 2018 on the strength of our recent acquisitions. On a per share basis AFFO was $0.47 per share compared to $0.57 per share during the same quarter last year due to a large termination fee received in the third quarter of last year and also the increased shares outstanding compared to last year which were offered in order to fund our acquisition pipeline. Cash NOI for the quarter was $68.6 million compared to $65.8 million in the same quarter 2018. EBITDA was $58.7 million in this quarter compared to $48.5 million in the third quarter 2018. Overall our 264 property portfolio is nearly fully occupied at 99.6% leased. 196 properties are located in the U.S. and 68 are in the U.K. and Western Europe representing 59% and 41% of annualized rental revenue respectively roughly in line with our target to reach a geographic distribution of 60% U.S. 40% Europe. Our investment-grade or implied investment-grade tenants now make up over 71% of the portfolio. Please refer to our earnings release for more information about what we consider to be implied investment-grade tenants.

Our property mix is currently 52% Office 43% Industrial and Distribution and 5% Retail. The portfolio has a weighted average remaining lease term of eight years with no near-term expirations. During the quarter we acquired 9 net lease assets comprising of about 921000 square feet for a contract sales price of approximately $102 million. These assets are leased at an attractive going-in cap rate of 6.64% and a weighted average cap rate of 7.68% with a weighted average remaining lease term of 17.1 years. These acquisitions included 7 industrial properties an office building and a lab which are all located in the United States. We are very pleased to be acquiring long-term leases at favorable cap rates while improving the mix of assets in our portfolio. I'd like to take a minute to review some of the highlights from these acquisitions. The office and lab properties we acquired during the quarter are part of a 3 pack of properties leased to VIAVI Solutions in California. The tenant has an implied Baa2 credit rating and the lease continues for 13 years. These assets total approximately 137000 square feet and were acquired for a total contract sales price of $25.7 million. The industrial properties we acquired are leased to C.F. Sauer and SWECO and are located in Kentucky South Carolina California and Florida.

C.F. Sauer is a cooking products business that makes extracts and other food products. SWECO is the world leader in particle separation and size reduction solutions. These industrial assets total approximately 790000 square feet and were acquired for a total contract sales price of $76.3 million. We continue to take advantage of available opportunities to recycle capital and optimize our mix of asset types and credits. During the third quarter we continued to act on this type of opportunities selling a total of 33 properties including a portfolio of 32 Family Dollar retail stores which were sold for a gain at 7.25% cap rate reducing GNL's retail concentration. Last quarter we sold 62 Family Dollar stores. As a part of the company's active tenant evaluation and disciplined asset management strategy we determined that eliminating our current exposure to Family Dollar would be the best for the portfolio. Upon evaluation we were no longer comfortable with Family Dollar's underperforming financials. More broadly retail assets are not our focus and we felt this position was appropriate and increases the quality of our portfolio. The balance of the retail assets in our portfolio are performing and we do not expect to dispose of these assets in the near term. We will continue to evaluate this position going forward as we do for all of our assets and tenants.

As we continue to grow and refine our asset mix we are focused on acquiring primarily industrial distribution and some select office properties. At the end of the quarter we agreed to terms on a significant U.S. and European sale-leaseback transaction with a Fortune top 150 investment-grade tenant, this $182 million portfolio It was a great fit for us and demonstrates the strength and expertise of our global capabilities to source execute on transactions such as this. inclusive of this portfolio. We have a total of 373 million of attractive assets, which we anticipate closing in the fourth quarter, which will bring our total 2019 acquisitions to approximately 697 million has a 6.88% going in cap rate, a 7.76 average cap rate and 14 years of average lease duration. Recently I along with several other members of our management team were able to attend Expo real conference in New This is the largest real estate conference in Europe and brings together over 24,000 real estate professionals, including owners, brokers and lenders and service providers. This was a great opportunity to efficiently build on our existing relationships and make new connections with vendors from all over Europe. With that I'll turn the call over to Chris to walk through the operating results and our balance sheet in more detail.

And then I will follow up with some closing remarks. Chris?

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

Thanks Jim. Third quarter revenue was $77.9 million up 2.4% over the second quarter 2019 figure. And FFO was $37.9 million up 3% over the second quarter. Moving on core FFO grew 0.7% over the second quarter to $38.6 million. And AFFO was $40.2 million up 0.4% over the prior quarter. AFFO per share was flat quarter-over-quarter due to an increase in the weighted average number of shares outstanding. During the quarter we paid common stock dividends of $45 million. On our balance sheet we ended the third quarter with net debt which is debt less cash and cash equivalents of $1.6 billion at a weighted average interest rate of 3% per annum. Our weighted average debt maturity has lengthened to five, seven years at the end of the third quarter an improvement from three,.eight years at the close of 2018 third quarter. This includes $122.8 million of debt that matures in 2019. The components of our debt include $101.4 million on the multicurrency revolving credit facility $392.5 million on the term loan and $1.4 billion of outstanding gross mortgage debt. This debt was approximately 93% fixed rate which is inclusive of the floating rate debt with in-place interest rate swaps an improvement over the quarter ended June 30 2019 where 84.6% was fixed.

Our net debt-to-annualized adjusted EBITDA improved to 6.7x from 6.9x in the third quarter of 2018 with a strong interest coverage ratio of 4.1x. As of September 30 2019 liquidity was approximately $407 million which is comprised of $306 million of cash on hand and $101 million of availability under our revolving credit facility. GNL's net debt-to-enterprise value was 45% with an enterprise value of $3.5 billion based on September 30 2019 closing share price of $19.50 for common shares and $25.60 for Series A preferred shares. During the third quarter we entered into a CMBS loan to finance 12 properties located in the United States. The 10-year $204 million loan carries a fixed interest rate of 3.65%. We also utilized our ATM programs during the third quarter raising a gross total of $128 million. Approximately $110 million of this was common equity. The remaining $18 million was in our Series A preferred stock. Finally with respect to dividend we paid dividends equating to $0.5325 per common share for the quarter.

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

James L. Nelson -- Chief Executive Officer and President

Thanks Chris. We had an excellent quarter from a real estate perspective and we believe we have put the pieces in place to finish the year very strong. The portfolio and the rental income generated by the portfolio continue to grow. We have a strong balance sheet that allows us flexibility to close on our $373 million of pipeline acquisitions of long-term lease primarily industrial assets. Selling the Family Dollar portfolio illustrates our disciplined asset management strategy and provides the opportunity to use the net proceeds to improve our asset mix. We anticipate growth in the portfolio as the proceeds from our second and third quarter dispositions are fully redeployed and we'll continue to be a net acquirer of high-quality long-term net leased office distribution and industrial assets. Finally as we have discussed our ability to negotiate favorable financings in local markets and at the corporate level have extended our average debt maturity. With that operator we can open the line for questions.

Thank you. Before we go to the question-and-answer session I'd like to turn the call to Chris Masterson for a brief announcement.

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

Thank you operator and good morning everyone. This is Chris Masterson Chief Financial Officer of Global Net Lease. You just listened to our scripted remarks that we recorded a few days ago. Before we begin Q&A I want to let you know that Jim is taking care of a personal health issue and is unable to join us for today's Q&A. Jim expects to return to the office soon and we wish him a speedy recovery. Joining me today for the Q&A is Brian Mansouri SVP of Acquisitions.

Operator we're ready for the first question.

Questions and Answers:

Operator

[Operator Instructions] Today's first question comes from Ben Zucker of Aegis Capital. Please go ahead.

Ben Zucker -- Aegis Capital -- Analyst

Thanks for taking my questions and congratulations on posting some solid improvements in your core operating fundamentals. Real quickly that impairment charge of $6.5 million $6.4 million what asset or assets was that related to?

James L. Nelson -- Chief Executive Officer and President

So the property Achmea in the Netherlands we actually sold it during the fourth quarter. And that was a property they were still paying rent. The lease extended for four years. But they were going to be moving out and we thought that the best option for us was to sell the property now and recycle the capital.

Ben Zucker -- Aegis Capital -- Analyst

Okay great. And while we're talking about the Netherlands could you just quickly give us kind of your view of the total market opportunity in the U.S. versus abroad currently? I think that your acquisitions over the first six months of the year had a strong if not exclusive bias to the U.S. But it looks like some of your 3Q and subsequent activity has picked up overseas a little bit. So just kind of wondering how you're viewing the comparative landscape right now between the 2?

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

Sure. So -- I mean obviously we're still looking at both the U.S. and Europe. And as you can see what we found so far has been primarily based in the U.S. where we found better deals. But there are some European acquisitions that are popping up on the radar and it's something that we're going to keep monitoring. But as you can see we have found some opportunities in Europe and outside the U.S.

Ben Zucker -- Aegis Capital -- Analyst

Very helpful. And so Chris you guys are really flushed with capital at the moment and I'm trying to get a sense of what kind of full deployment looks like for you guys. So how much cash as a percentage of total company equity do you guys generally look to hold for just kind of corporate liquidity purposes? Obviously this value is pretty elevated at the end of the quarter especially with the pace and volume of the ATM program you guys were utilizing. But I'm just trying to get a feel for how kind of -- how far we can stretch portfolio growth with you guys?

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

Sure. So -- I mean probably a simple way to look at it is when we acquire properties we typically look to lever them at 50%. So if you're doing modeling purposes I would say to build that in. From a cash perspective like you mentioned we obviously were elevated at quarter-end. A lot of it had to do with the timing of capital raise and then some sales. But I think probably the easiest way to look at our cash position would be maybe to go back to some previous quarters. And in general we have been pretty consistent in that ballpark of about $100 million in cash on the balance sheet. So I think the historical is probably the best way to look at it right now.

Ben Zucker -- Aegis Capital -- Analyst

That's helpful. And then real quickly lastly just a little bit of housekeeping. With the preferred stock sales do you have any idea kind of is the pace of sales that we saw in 3Q is that something that you would be extrapolating out as we're trying to think about how the preferred interest expense line item should be moving? Or is this something that's a little bit more intermittent than that?

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

Well I'd say that's very hard to say. I mean when it comes to issuing equity it's going to be difficult to necessarily project and we're going to evaluate kind of as needed and as the market is there. [Technical Issues]

Ben Zucker -- Aegis Capital -- Analyst

Understood. Well, that's it for me. So thanks for taking my questions.

James L. Nelson -- Chief Executive Officer and President

Thanks.

Operator

And our next question today comes from Mitch Germain of JMP Securities. please go ahead.

Mitch Germain -- JMP Securities -- Analyst

Thank you, Chris obviously you've been pretty opportunistic in using the European markets for some funding. You've got about a 60-40 mix. Are you kind of tapped out? Or is that a market that is -- or do you have to add some additional assets to be able to use European debt going forward?

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

Well from a European debt perspective we do have the ability to draw on the credit facility in euros and pounds but it's also something that we want to make sure that we don't go too far one direction in a currency if we don't have assets to match up with it. Right now I mean I think we're comfortable where we stand. But we do have opportunities there if we need to tap into them.

Mitch Germain -- JMP Securities -- Analyst

Got you. You talked about the Family Dollar sales reducing your exposure in retail but you've still got about 5% retail and can potentially opportunistically use that retail to buy industrial. So I'm curious about your decision to conclude any sales in that segment for the time being?

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

Well at this point all of the tenants that we have in the retail space are performing. We're happy with them. We're going to obviously keep evaluating them. And if anything changes then we may decide to make decisions but right now we're happy with what we have in the retail space.

Mitch Germain -- JMP Securities -- Analyst

Okay. And then just curious about the competitive landscape. Obviously everybody wants industrial assets. I guess you have the ability to do a sale-leaseback deal that's a little bit unique in both U.S. and Europe. But I'm curious about your ability to source transactions? And how important are the local demographics in terms of your underwriting? Or you're really just talking -- looking more at credit lease term and other factors like that?

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

Well I mean honestly we look at all of it. If any of the pieces are lacking or have problems then typically we probably wouldn't be able to close on it. So it's really -- we have to look at the full picture when we make an acquisition.

Mitch Germain -- JMP Securities -- Analyst

Got you. And then probably last question. It seems like from a funding perspective with the cash on hand plus some debt you're pretty good. What was the -- I might have missed it in your remarks but I know that you raised equity. What was the average price on the last equity raise in the quarter?

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

I don't have the average price with me but it's pretty consistent to where we raised it during the first quarter.

Mitch Germain -- JMP Securities -- Analyst

Gotcha. Okay, that helps us. Thank you. Bye.

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

Thanks.

Operator

And our next question today comes from Bryan Maher of B. Riley FBR. Please go ahead.

Bryan Maher -- B. Riley FBR -- Analyst

Yes. So kind of following up a little bit on the Europe. Nice to see you to bring your toe back in the market there. Are you seeing any movements in cap rates over there in any of the particular countries? And who are you sourcing acquisitions from? How are you being shown things to buy over there?

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

So actually I'll pass that to Brian and he can give you a little more insight on that?

Brian Mansouri -- Senior Vice President, Investments

Sure. So as Chris mentioned we're very active in evaluating opportunities overseas. I think the market generally speaking has been pretty consistent over the past few quarters. Obviously capital is cheap and that's driving cap rates but everything has been pretty consistent as far as we've seen.

Bryan Maher -- B. Riley FBR -- Analyst

Okay. And here in the U.S. I mean you've looked at and made some successful acquisitions in industrial but I think probably everybody on this call knows that everybody seems to want industrial in the U.S. When it comes to the assets individually or in the small portfolios you've acquired who are you bumping up against in the bidding process? And kind of how much are you underwriting relative to how much you're actually getting a deal done on?

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

A lot of what we're seeing in the market right now is coming from relationship-driven opportunities. So we're not butting heads with a lot of the big institutional competitors which we think is great. We're sourcing our deals from long-standing brokers as well as developer relationships and also private equity sponsors on the sale-leaseback side.

Bryan Maher -- B. Riley FBR -- Analyst

Right, great, thank you. That's all for me.

Operator

Thanks, Brian. [Operator Instructions] Today's next question comes from John Massocca of Ladenburg Thalmann. please go ahead.

John Massocca -- Ladenburg Thalmann -- Analyst

Good morning. So on the leverage side you guys have kind of trended down in the last couple of quarters. I know some of that may be simply you raised some ATM in 3Q probably to prefund a pretty robust pipeline here for the rest of the year. But should we expect that to kind of stay at this level maybe trend back up as you deploy the capital? Or just any kind of guidance on where you think leverage is going to trend here for the next 6 to 12 months would be helpful.

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

Well what I would say here is that we're looking to be consistent. We did raise capital at the end of the quarter. Typically from a net debt-to-EBITDA perspective we were roughly about 7% and we're looking to remain consistent for now. Ultimately in the long run it's something we would like to bring down but in the short term we will be consistent.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. So consistent with the current level though generally?

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

With where we've been previously. This current level with the capital coming in at the end pulled it down a little bit.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. And then do you have any update potentially on the timing for closing of the Germany office sales? Is that still a 2019 event or could that slip into 2020?

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

That's a 2019 event.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay perfect. And then more generally speaking there was some office in both the pipeline that you closed this quarter. How much of that is kind of headquarters? Or is any of it more kind of I guess what people on the healthcare REIT side would call MOB or medical office kind of properties?

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

I'll pass to Brian. He'll give you a little more detail.

Brian Mansouri -- Senior Vice President, Investments

Everything we're looking at in the office space is traditional office either headquarter or administrative so nothing that we're doing is medical office in any sense of the word. So yes pretty consistent in terms of the types of office buildings that we're looking at.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay, that's it for me, Thanks.

Brian Mansouri -- Senior Vice President, Investments

Thanks a lot, john.

Operator

Thank you, ladies and gentlemen. Conclusion question and answer session. I'm going to turn the conference back over to Chris Masterson for any closing remarks.

Christopher Masterson -- Chief Financial Officer, Treasurer and Secretary

Okay. Well thanks a lot for everyone for dialing in and hopefully we'll see some of you at NAREIT next week. Thanks. Goodbye.

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

Brian Mansouri -- Senior Vice President, Investments

Ben Zucker -- Aegis Capital -- Analyst

Mitch Germain -- JMP Securities -- Analyst

Bryan Maher -- B. Riley FBR -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

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