Global Net Lease Q1 2024 Earnings Call Transcript

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May 8, 2024

Key Takeaways

  • Positive Sentiment: GNL has built a $554 million asset disposition pipeline at a 7.2% cash cap rate on occupied properties, nearing its full-year target of $400 million to $600 million of non-core sales.
  • Positive Sentiment: AFFO per share rose 6% quarter-over-quarter to $0.33, driven by higher Core FFO and reduced European tax expense.
  • Positive Sentiment: Completed a $237 million CMBS refinancing at 5.74%, cutting annual interest expense by $3.5 million and extending debt maturities, while swapping $500 million of variable-rate debt to lower all-in rates.
  • Positive Sentiment: Showcased robust leasing momentum with 1.4 million sq ft of activity in Q1, achieving a 6.1% average renewal rent spread and new leases with a 10.2-year weighted average term.
  • Neutral Sentiment: Portfolio occupancy dipped to 93% due to a furniture-manufacturer tenant vacancy, but the impact on straight-line rent was minimal and two of the five properties are already under contract.
AI Generated. May Contain Errors.
Earnings Conference Call
Global Net Lease Q1 2024
00:00 / 00:00

There are 7 speakers on the call.

Operator

Ladies and gentlemen, good morning, and welcome to the Global Net Lease Inc. First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Operator

It is now my pleasure to introduce your host, Jordan Schoenfeld of GNL. Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and thank you for joining us for GNL's Q1 2024 earnings call. Joining me today on the call is Mike Weil, GNL's Chief Executive Officer and Chris Masterson, GNL's Chief Financial Officer. The following information contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please review the forward looking and cautionary statement section at the end of our Q1 2024 earnings release for various factors that could cause actual results to differ materially from forward looking statements made during our call today.

Speaker 1

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 certain non GAAP financial measures, which we believe can be useful in evaluating the company's financial performance. Descriptions of those non GAAP financial measures that we use, such as AFFO and net debt to adjusted EBITDA and reconciliations of these measures to our results as reported in accordance with GAAP are detailed in our earnings release and in our quarterly report on Form 10 Q for the Q1 2024. I'll now turn the call over to our CEO, Michael Weil. Mike?

Speaker 1

Thanks,

Speaker 2

Jordan. Good morning and thank you all for joining us today. We're pleased to share with you the results of the successful Q1 that included AFFO per share growth, strong leasing momentum, efficient balance sheet execution and continued synergies and internalization savings. As part of GNL's Q4 2023 earnings release, we shared our 2024 business strategy and full year guidance, which we believe will increase long term shareholder value by delevering our balance sheet, reducing our exposure to variable rate debt and lowering net debt to adjusted EBITDA. At the core of this strategy is an asset disposition program targeting $400,000,000 to $600,000,000 in total sale proceeds at a cash cap rate between 7% 8% on occupied assets.

Speaker 2

We're excited with the significant progress we've achieved to date. As of May 1, our closed dispositions plus pipeline totals $554,000,000 at a cash cap rate of 7.2% on occupied assets and a weighted average remaining lease term of 3.9 years. This includes $63,000,000 of successfully closed dispositions at a cash cap rate of 6.8 percent on occupied assets, dollars 482,000,000 of dispositions currently under PSA at a cash cap rate of 7.3% on occupied assets and $9,000,000 of dispositions with executed LOIs at a cash cap rate of 7% on occupied assets. We're very pleased to have built this robust pipeline in the early stages of our strategic disposition effort and expect to identify additional opportunities throughout the year. We believe the 7.2% cash cap rate on the occupied dispositions referenced above offers proof of value of our primarily investment grade portfolio and represents a significant premium compared to where GNL is currently trading on an implied cap rate basis.

Speaker 2

It's important to note that these strategic dispositions primarily consist of non core assets and opportunistic sales, including assets with near term debt or lease maturities. They include the sale of 15 Truist properties totaling nearly $35,000,000 for a cash cap rate of 6.6 percent. Additionally, we have nearly $132,000,000 of vacant property dispositions that are closed or under agreement that we expect will eliminate $3,000,000 of annualized operating expenses, assuming closing of the transactions contemplated by such agreements. In addition to the significant progress we achieved in our disposition program, we're also pleased to deliver a 6% growth in AFFO per share this quarter compared to last quarter. We'll continue focusing on earnings growth in addition to our disposition program, which is expected to be earnings neutral.

Speaker 2

We've also achieved significant progress on the capital markets front, completing a $237,000,000 CMBS refinancing in April, secured by 20 U. S. Industrial properties previously financed under the company's corporate credit facility. This is a great accomplishment in the current real estate capital markets environment that we believe reflects GNL's strong and diversified portfolio. The financing is interest only at a fixed all in interest rate of 5.74 percent, representing a substantial 159 basis points reduction compared to the current floating interest rate on the U.

Speaker 2

S. Dollar portion of the company's corporate credit facility. It results in a reduction of over $3,500,000 in annualized interest expense, which will begin to benefit us in Q2 2024 and notably extends our weighted average debt maturity while increasing our exposure to fixed rate debt. This attractively priced financing also addresses our near term debt maturities by proactively increasing flexibility and capacity on our corporate credit facility. As of May 1, we've already addressed 2% of the debt that has scheduled maturities in 2024.

Speaker 2

Specifically, we refinanced 2 mortgages onto our credit facility, including our $129,000,000 McLaren headquarters mortgage that matured in April, as well as $25,000,000 of multi tenant mortgage debt. As mentioned on our Q4 2023 earnings call, we recently completed an $80,000,000 refinancing agreement with Nordea Bank secured by multiple properties in Finland that extends debt maturities of these assets to 2029 at a 5.1% interest rate. We expect that the remaining $155,000,000 of debt maturing in 2024 will be addressed through our disposition strategy or placed onto our credit facility. As for 2025 maturities, no debt is maturing until the Q3 of next year, and we intend on addressing it through disposition proceeds, permanent refinancing, bonds and or availability on the corporate credit facility in the later part of 2024 or early 2025, anticipating a slightly more favorable environment. During the Q1 of 2024, we also showcased our strong asset management capabilities through robust leasing activity and positive leasing spreads, encompassing nearly 1,400,000 square feet with attractive renewal spreads that were 6.1% higher than expiring rents.

Speaker 2

New leases that were completed in the Q1 of 2024 have a weighted average lease term of 10.2 years, while the renewals that were completed in the Q1 of 2024 have a weighted average lease term of 5.8 years. Notably, the single tenant segment completed 13 new leases and renewals highlighted by an 11% renewal leasing spread, demonstrating the strong renewal demand for our mission critical assets while adding $6,900,000 in straight line rent. The multi tenant segment completed 65 new leases and renewals, resulting in a 2% renewal spread, consistent with the high demand we're experiencing at our suburban shopping centers, which increased straight line rent by $10,400,000 Turning to our portfolio. As of the end of the Q1, we owned 1277 properties spanning nearly 67,000,000 square feet with a gross asset value of $9,000,000,000 We believe the diverse composition of our net lease portfolio is unmatched across geography, asset type, tenant and industry and positions GNL to effectively navigate external macro challenges as we move ahead. The portfolio's occupancy stands at 93% with a weighted average remaining lease term of 6.5 years.

Speaker 2

I want to note that our portfolio occupancy experienced a short term impact due to the vacancy of Klausner, a furniture manufacturing tenant that originally occupied 5 properties at only $2.13 of rent per square foot. We were able to re lease 2 of the properties at the same rental rate with no downtime. The 3 remaining vacant properties previously represented only 55 basis points of GNL's total straight line rent, but caused a 2.5% short term decline in overall occupancy, given that it occupied 1,700,000 square feet. 2 of the properties are already under contract to sell and are expected to close in the Q2. The last property is also on the market and we're actively engaged with potential buyers.

Speaker 2

I want to reiterate the minimal impact this has on our straight line rent, further illustrating our highly diversified portfolio with little concentration risk. Additionally, given the public disclosures regarding Family Dollar's intention to close some stores in 2024, I'd like to share that GNL's exposure to Family Dollar represents only 0.09% of SLR. We have not received any indication that any of the stores they currently lease from us are part of the early store closures. This exposure is limited after GNL proactively disposed of $112,000,000 of its Family Dollar Holdings in 2019 as we anticipated potential headwinds for this tenant. Furthermore, given the recent developments regarding Red Lobster's financial troubles, we're pleased to announce that GNL has no exposure to Red Lobster.

Speaker 2

We continue to monitor all of our tenants and their business operations on a regular basis. The minimal exposure to these retailers showcases the diversification of our portfolio and our strong underwriting, which we believe limits our credit and concentration risk. Geographically, 80% of our straight line rent is earned and 20% from Europe. The portfolio also features a stable tenant base and a high quality of earnings with an industry leading 58 percent of tenants receiving an investment grade or implied investment grade rating. From a growth perspective, the portfolio includes an average annual contractual rental increase of 1.3%.

Speaker 2

I'd encourage everyone to look at our first quarter 2024 investor presentation on our website for more details on each segment of our portfolio. I'd like to take a moment to highlight the addition of 2 independent and highly distinguished Board members during the Q1. Michael J. U. Monahan and Rob Kaufmann.

Speaker 2

Mike currently serves as a CBRE Vice Chair and brings extensive real estate expertise. And Rob, a Co Founder of Fortress Investment Group possesses a wealth of relevant capital market knowledge. Both have already brought invaluable insight and perspective to the Board, and we look forward to their continued contributions in shaping GNL's future. Looking ahead, we remain committed to executing on our systematic and prudent approach to achieving our financial objectives, which revolve around reducing our net debt to adjusted EBITDA ratio, while organically enhancing NOI through lease up initiatives and contractual rent growth. Our asset disposition program, in which we've made significant progress, is a pivotal component of this strategy and should provide us with incremental capital to deleverage our balance sheet.

Speaker 2

I'll turn the call over to Chris to walk through the financial results and balance sheet matters in more detail. Chris?

Speaker 3

Thanks, Mike. Please note that as always, a reconciliation of GAAP net income to the non GAAP measures can be found in our earnings release, which is posted on our website. For the Q1 of 2024, we recorded revenue of 206,000,000 and a net loss attributable to common stockholders of $35,000,000 compared to $207,000,000 $60,000,000 in Q4 2023, respectively. Core FFO was up 17 percent to $57,000,000 or $0.25 per share in Q1 2024 compared to $48,000,000 or $0.21 per share in Q4 2023. AFFO increased 5% to 75,000,000 dollars or $0.33 per share in the Q1 of 2024 compared to $72,000,000 or $0.31 per share in Q4 2023, representing a 6% AFFO per share increase from last quarter.

Speaker 3

As discussed last quarter, following the successful completion of the European tax restructuring, we've seen a reduction in income tax expense from $5,500,000 in Q4 2023 to $2,400,000 in Q1 2024. Looking at our balance sheet, it's important to note that even though 84% of our debt is subject to fixed rates, the current sustained high interest rate environment does have a temporary effect on the portion of our debt that isn't fixed or swapped. To mitigate this, we have reduced our exposure to variable rate debt through our new $237,000,000 CMBS refinancing, while also extending our weighted average debt maturity. Further increase our level of fixed rate debt and lower our cost of capital, We have also taken the proactive approach of swapping $300,000,000 of the U. S.

Speaker 3

Dollar portion of our corporate credit facility an interest rate that is 120 basis points lower than the current floating interest rate. This swap was effective as of April 1, 2024, and is expected to reduce our annualized interest expense by $3,600,000 Additionally, we entered into $200,000,000 of GBP swaps on March 18, 2024, that are approximately 90 basis points lower than the 1 month Sonya and are expected to decrease annualized interest expense by 2,200,000 dollars We expect to realize the full benefit of these actions beginning in Q2 2024. At the end of the first quarter, our net debt to adjusted EBITDA ratio was 8.4x based on net debt of 5,200,000,000 As expected, net debt to adjusted EBITDA remains unchanged from the prior quarter. At the previous announced dividend reduction, which increases incremental cash used to lower debt, only occurred in April, as well as the majority of our announced dispositions will close in Q2 or Q3 of 2024. Our weighted average interest rate was 4.8 percent and we have liquidity of approximately $175,000,000 190,000,000 of capacity on our credit facility.

Speaker 3

Our debt comprises $1,000,000,000 in senior notes, dollars 1,800,000,000 on the multi currency revolving corporate credit facility and $2,600,000,000 of outstanding gross mortgage debt. Our debt was 84% fixed rate, which includes floating rate debt with in place interest rate swaps and our interest coverage ratio was 2.4x. As of March 31, 2024, we had approximately 230,800,000 common shares outstanding. On a weighted average basis, there were approximately 230,300,000 shares outstanding during the Q1 of 2024. Turning to our outlook for the balance of 2024.

Speaker 3

Based on progress to date, we are reaffirming our AFFO per share guidance range of $1.30 to $1.40 and a net debt to adjusted EBITDA range of 7.4x to 7.8x. I'll now turn the call back to Mike for some closing remarks.

Speaker 2

Thanks, Chris. GNL executed well on our near term strategic objectives in the Q1 of 2024. We made significant progress on our strategic disposition plan, building a robust $554,000,000 closed plus disposition pipeline. The 7.2% cash cap rate we're achieving on the announced occupied assets represents a significant premium compared to the implied value of this portfolio based on the current trading price. We're committed to increasing shareholder value and continuing this disposition initiative until we close the gap between the value of our real estate and our stock price.

Speaker 2

I want to reiterate that we plan on using the net proceeds received from these incremental dispositions to continue lowering our net debt to adjusted EBITDA, bringing it more in line with our peers. In addition to our disposition program, we continue to benefit from G and A synergies as a direct result of the merger and internalization. Through Q1 2024, we've realized over $70,000,000 of synergies and we remain on track to achieve the full $75,000,000 annualized cost savings by Q3 2024. We'll also benefit from the $3,000,000 reduction in annualized operating expenses through the sale of vacant assets, $3,500,000 of annualized interest savings from our CMBS refinance and $5,800,000 of annualized interest savings from our corporate credit facility swaps. The AFFO per share growth, continued leasing momentum, strong portfolio performance and significant disposition progress we've achieved this quarter reflects our commitment to enhancing our balance sheet, reducing leverage and positioning GNL for sustainable growth in the future, ultimately creating shareholder value over the long term.

Speaker 2

As always, we're available to answer any questions you may have on this quarter after the call. Operator, please open the line for questions.

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question and answer Our first question is from the line of Bryan Maher with B. Riley Securities. Please go ahead.

Speaker 4

Thanks. Good morning, Brian. Good morning, Michael and Chris. Thanks for taking my questions. Just a couple for me this morning.

Speaker 4

Sticking with the retail landscape for a minute, is there any timing that you can share on the closing of those two properties? And do you guys have any exposure to the Route 21 situation?

Speaker 2

Ryan, the closing of the two properties, I believe, and I will confirm this is the beginning of the 3rd quarter. But it is an executed contract and we're moving forward. So we feel very good about that. Route 21 is a very small tenant in our multi tenant portfolio and they represent 0.12% of straight line rent. So we will anticipate backfilling those moderately sized stores without any problem.

Speaker 2

And as we were very pleased with the leasing in the quarter, 1,400,000 square feet of leasing in the portfolio this quarter. So we have no reason to believe that that small tenant is even going to show up in any kind of material way.

Speaker 4

Okay. And then when we think about your disposition pipeline, kind of two questions here. How long do you think it takes until you complete that in its entirety? And are there any industrial or office assets in the sales mix?

Speaker 2

Yes. It was a wholesome, fulsome review of the portfolio and we looked for what we deem to be non core assets. And one of those definitions, first of all, we are very much looking forward to lowering our exposure to single tenant office. So there are office properties in the pipeline. And then there are just a few industrial properties where through conversations with tenants and different information that we had, the remaining lease term was rather short and we saw great opportunistic dispositions there.

Speaker 2

More details will be provided as we close on those decisions to dispose and the value that we receive for these assets. And I just want to touch again on the average cap rate of dispositions is 7.2%. And I do think that when we're looking at assets that have remaining lease term of on average less than 4 years and we can still get those types of cap rates, It just highlights this 1300 property portfolio really is consisting of valuable real estate. And the disparity between these values and where we're trading, we're really focused on closing that gap because this company should be trading at a much higher multiple. There's no doubt.

Speaker 4

Okay. And just lastly, is it safe to say that given where you're trying to get to on the leverage front that acquisitions really aren't top of mind anytime soon?

Speaker 2

That is accurate. As I've said in my prepared comments, the velocity that we're executing on our 2024 guidance metrics is very encouraging. The results will prove to be very valuable in what you see in the Q2 and the Q3. I'm comfortable anticipating that. And real estate, this portfolio is a little bit like a big aircraft carrier.

Speaker 2

We've put in all of the appropriate steps and we're executing. And what we expect to see through the balance of 2024 is really exciting. I was happy to see the AFFO growth of 6% per share in the quarter. And that's before a lot of the impact of the things that we achieved because obviously this is a Q1 earnings call and we'll talk about the Q2 in, I don't know, 6 or 8 weeks. So very strong progress and I anticipate results that you and others are going to be pleased with.

Speaker 4

Okay. Thank you.

Speaker 2

Thanks, Brian.

Operator

Thank you. Our next question is from the line of Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Speaker 2

Good morning, Todd.

Speaker 5

Hi, good morning. This is Antara Nakajuri on for Todd Thomas. I was just wondering if you could talk about your plans to continue recycling capital in 2025. So as you execute on this year's disposition plans and looking to reduce leverage further beyond your current leverage range, should we assume another year of $400,000,000 to $600,000,000 of dispositions?

Speaker 2

It's a little bit early to put a number on it like that because we have not put out 2025 guidance yet, as you know. I think it's fair to say that being at approximately $550,000,000 of dispositions either closed or under contract when we put out full year disposition guidance of $400,000,000 to $600,000,000 leads one to draw the conclusion that we very well may dispose of more in 2024. And I think I alluded in my closing comments that as we see the value, when we can sell these assets at an average in the low 7 cap rate on a cash basis, The value in continuing to lower net debt to EBITDA to generate the proceeds from these dispositions and close the gap between the implied value of where we're trading versus the actual value of these assets. I'm very comfortable in telling you that we will continue to have conversations with our Board. And as appropriate, we will look forward to either revising 2024 disposition guidance, or putting out 2025.

Speaker 2

But having just completed the Q1, I don't want to get too far ahead. This is a very slow and steady business. We will execute. I think that you can take away from what we've done in the Q1, the commitment and focus that we have and the ability to execute on what we've said into the market. So please take the Q1 as a sign of what's to come and we will continue to really look to drive value in this company.

Speaker 5

Got it. And so you mentioned that the cap rate range on dispositions was 7% to 8% that you're targeting and you're doing better than that so far, but has there been any change in cap rates as you continue having conversations with potential buyers and work through additional dispose given the recent increase in interest rates?

Speaker 2

So as I said earlier, our guidance for 2024 is $400,000,000 to $600,000,000 of dispositions and you're correct that we targeted 7% to 8%. We're at 7.2% through $550,000,000 And again, we think that the value of the real estate, the value of the tenants that occupy the real estate, the type of real estate will continue to see these types of disposition results. I think that we've seen in the last couple of weeks a very slight release of pressure on the 10 year. It's actually been coming down. And now I see it at about 4.5%, which is a relief to many.

Speaker 2

We started to get close to that 5%. But we were executing at 7.2% in that range. So not being able to tell what the Fed steps are in 2024, I'd like to believe that we still have 1 to 3 rate cuts ahead for 2024, which will further strengthen our ability to execute on what we've laid out. So I think that we've got wind at our back and we're pushing forward and we will continue to execute and deliver results that meet or exceed the market's expectations.

Speaker 5

Okay, got it. Thank you.

Speaker 2

Thank you.

Operator

Thank you. Ladies and gentlemen, we take our last question from the line of Mitch Germain with Citizens JMP. Please go ahead.

Speaker 2

Yes. Thanks a lot.

Speaker 6

Thank you so much for taking my question. I'm trying to understand the situation with Klausner, I think I'm saying it right.

Speaker 2

So it

Speaker 6

seems like they okay, great. So it seems like some of the issues that they were experiencing began middle part of last year. Were they on your watch list? Or is this something that is this kind of aligned with what you expected? Or will the situation get worse than you anticipated?

Speaker 2

No, this was we were very aware. This was something that we were monitoring. We were in talks with them. It was a manufacturing industrial type facility. So

Operator

I think that it's a

Speaker 2

when you take into account the situation, I think that we've managed to have a good outcome. They're taking, as we said in the call, 2 of the buildings they've released back at the exact same rate. 2 of the properties are already under contract to sell. And most importantly, Mitch, as you know, being an industrial tenant, their rent per square foot was very low. So although it had a kind of a headline impact on occupancy, it really had very de minimis impact on earnings and we're going to see both recover in the Q2.

Speaker 2

So I'm very pleased and again I do think that the strength of our asset management platform and team being able to re lease the 2 properties, sell 2 properties that quickly, I think is validation that we were not caught flat footed. Nobody ever likes to see a bankruptcy. But if I can switch the page on a little bit, I do want to highlight back in 2019, again, looking at our asset management performance, we saw the Family Dollar Dollar Tree merger and frankly didn't think that it made a whole lot of sense. We owned Family Dollar stores and we sold them in 2019 at a very attractive 7.20% cap rate. So avoiding essentially this repositioning that they're going to be undertaking in 2024 2025.

Speaker 2

So the focus on the portfolio on a daily basis is really important, and we never want to be caught flat footed. I don't want to say we're perfect, but being able to proactively manage this 1300 property portfolio is really beneficial in the short term and long term.

Speaker 6

Great. That's super helpful. And I know that we mentioned Roux and you mentioned Family Dollar. And I guess, is there any other Klausner or other situations that exist in the portfolio that kind of we need to be aware of I. E.

Speaker 6

Your is there something on your watch list that might be more actionable versus something that you're just kind of looking for potentially?

Speaker 2

Yes. So the short answer is no. And the longer answer is we have a very close hold on this portfolio and we've taken all that into consideration when we gave guidance for 20 24 that we're very confident in achieving, both on an earnings per share basis and a lowering of net debt to EBITDA. So there can be things that happen in the portfolio, but I don't anticipate anything material. And I think that we're as I said earlier, I'm really excited.

Speaker 2

I don't remember being this excited talking about Q1 results and thinking about the remainder of the year for how we're positioned and what's to come. And I'm very pleased with our execution. I maybe shouldn't say it that way. I hope you all are pleased with our execution in the Q1 because I think it shows the path and these results in the Q1 don't take into account the things that we finished in the Q1 that are going to have a positive impact on not only the Q2, but the remainder of 2024. So this is really momentum that I feel is positive, velocity that I think is incredibly valuable, and a business plan that we're going to be able to execute on because of how well we know our portfolio and all of the aspects of it, including refinancing debt, lowering interest rates, lowering net debt to EBITDA.

Speaker 2

So we're just going to keep pushing forward in this consistent way. Great. Last one for me and

Speaker 6

thanks for everyone's time. Chris, just confirming that hedge, the rate hedge, that goes right to the bottom line. Is that the way to model it? Or is there some sort of accounting intricacies that we need to be aware of?

Speaker 3

It goes right to the bottom line.

Speaker 6

Thank you, everyone.

Speaker 2

Thanks, Mitch.

Operator

Thank you. Ladies and gentlemen, this concludes our question and answer session. I would now hand the

Speaker 2

Great. Thank you, operator. Well, I think I've said a lot in the Q and A and in my prepared comments. So, I appreciate everybody taking the time. We're very excited about directionally where GNL is headed.

Speaker 2

And we think that we're we've done the work, we're showing the results and we look forward to seeing you at conferences, taking any calls that you may have and continuing the conversation. We believe that this is a terrific company and portfolio, and we look forward to seeing the response of this work. So thank you all very much.

Operator

Thank you. The conference of Global Net Lease has now concluded. Thank you for your participation. You may now disconnect your lines.

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