Global Net Lease, Inc. (GNL) Earnings Call Transcript & Summary

My name is Bryan Maher. I'm the senior analyst at B. Riley Securities covering Global Net Lease. And with me today, we have CEO, Jim Nelson; and CFO, Chris Masterson. And so why don't we start off with Jim, maybe give a quick overview of the company, and then we'll go into some questions I have. And feel free to raise your hand and ask any questions throughout the presentation if you have any. There's a mic there or you can bring the questions up to me whatever you prefer. Jim?

Thanks. Thanks, Bryan, and thank you, everybody, for coming today. It's good to see all of you here. I'm going to let Chris do a little bit of a brief overview, and then I'll add some color to it after he's done. So go ahead, Chris.

Sure. So obviously, we're Global Net Lease. We have a single tenant net lease-focused portfolio. Many of our properties are what we consider to be mission-critical between headquarters, R&D, major distribution facilities. We have 309 properties, cover 39.3 million square feet. But what's important to note is we actually do have exposure to both the U.S. and Europe. So at this point, we're split about 60% in the U.S., 40% in Europe. Outside of that, just some key highlights, if we do really value the credit quality of our tenants. So at this point, about 60% of our tenants are either investment-grade or implied investment grade. And we really think that speaks to the strength of our portfolio. And where that really did shine through was during all of COVID. We collected between 98% and 100% of our rent. We're currently collecting 100% of our rent. We've done that for probably about 6 quarters in a row. We did no abatements. We did do some deferrals for certain tenants, but they are now paying us back. So really, we think the strength of the portfolio is something that adds a lot of value, and it's really important to us.

Great. So you have an interesting portfolio. I think you talked a little bit about the geographic diversification. I mean, was this done by design? And if so, why? And do you envision the mix shift of those assets changing as we go through the next couple of years?

Well, when Chris and I started -- can everybody hear me okay? Okay. Great. When Chris and I started running the company 5 years ago, we inherited a mix of properties. And it was about 50% in Europe and 50% in the U.S. We're really opportunistic buyers. We look for the value of the property, the quality of the tenant, location, all the good real estate metrics. But we got down to about 35-65, 35% Europe, 65% in the U.S. because we found really the first 3 years, Chris and I were running the company, we found a lot better deals in the U.S. Recently, we found some really terrific deals in Europe. So we're -- right now, we're about 60-40. So it may go up or down every year depending on what we buy and where we buy it, but there will always be that diversification. We have what, 309 properties in 11 countries, and they're all so solid companies with good sovereign credit ratings. As Chris said, we do look to the credit quality of the tenant because even in trying times like during COVID, we collected 99% of our rents. So it does speak to the quality of portfolio. But the mix will shift over time. It could be more U.S., more Europe, really depending on where we find value.

And just to add to that, too, Jim mentioned about the diversification. So of our top 10 tenants, they only make up about 33% of the portfolio and none of the tenants make up more than 6%. So really, we do have a lot of diversification across the portfolio. Also, when we take a look at the asset type, right now, we have about 55% industrial and distribution, 42% office and only 3% retail. 5 years ago, when Jim and I joined the team, we probably had about 30% industrial and distribution at that point. And we've really put a focus on through our acquisitions over the last 4 to 5 years, and try and acquire high-quality industrial distribution properties. I would say each year, it's been about 80% of the properties that we've acquired have been either industrial or distribution. And that's really driven up the percentage from that 30% to the 55%, and that's something that we're going to look to continue going forward.

I also think it's important to clarify the type of office properties that we own. We don't own office properties in the large industrial centers like New York, Chicago or L.A. We own -- our office properties are usually in secondary markets or in suburbs and they're usually headquarter buildings or R&D buildings. So we don't have people commuting on trains and subways which a lot of people are hesitant to do. We don't -- most of our tenants have told us that rather than shrinking their size of their space and usually, they have the whole building. Always they're single-tenant buildings. They're going to spread people out a little more and maybe have people come into the office 2 or 3 days a week. So we feel very confident that the type of office that we have will maintain its value and its occupancy.

Great. And so you have the properties in the U.S. and in Europe and over my 25 years doing this, I've had several REITs who have tried to buy stuff in Europe and ultimately, 5, 10 years later, exited that. What kind of challenges is that presenting to you as a global asset manager doing it in both continents?

It really hasn't caused us any problem. We have a really good team in London and Luxembourg. And having a triple net lease portfolio or a net lease portfolio with single tenants is not the same as having multi-tenant buildings with lots of leases expiring. It's a relatively simple business to run, assuming you have high-quality tenants, which for us is the key. So we're very comfortable with having assets in 11 countries, and it's worked very well for us. We haven't had any issues in the 5 years that I've been here and the years before when Chris and I joined.

Maybe, Chris, you could address how you deal with the debt in both areas and where you skew issuing debt for those assets?

Sure. When it comes to acquiring properties in Europe, typically, what we'll do is we'll take out debt in the local currency. So obviously, in the U.K., we use the pounds, we use the euro in the rest of Europe. We do have credit facility also, which allows us to draw in multiple different currencies. So we really have a lot of access to, as mentioned, the euros or the pounds. What we also do is when we take a look at our exposure in the foreign currencies, we have a hedging program in place to help minimize the risk. Obviously, there's a lot of volatility in the markets. But what we'll do is we'll take a look at our net cash flows, and we'll layer in FX forwards quarterly. So at that point, we know at the end of the quarter, what we'll be converting from euro or pound back to USD. We report in USD, we pay dividends in USD. So it's really important for us to know what cash flow we're actually going to be getting from Europe. And this program that we put in place, we're not looking to really take positions in the currency we're really looking to just really minimize the risk kind of the safeguard.

And let me add just 2 things to that when you buy properties into local currency, it's a natural hedge. And secondly, we're not currency traders. We're looking for stability in pricing. So since we do pay dividends in dollars, we want to know what our cash flow is going to look like on an even level for at least the next 3 years.

And just to add to that, too, given that we are able to take debt out in Europe, we've seen some incredible rates over there. I mean, we have some loans that are 1.4% and average debt maturity on our portfolio is 4 years. So obviously, in this market where the interest rates are creeping up, we have locked in rates that are very favorable for us.

Kind of sticking with the portfolio for a second before shifting gears. You have, I think, 3% or so left in retail. At what point do you just kind of get rid of that and kind of clean it up and just be all industrial office? Or are you happy holding that?

Well, we've been opportunistic sellers of our retail properties. When -- again, when Chris and I started 5 years ago, 10% of our properties were retail, we're down to 3%. So as opportunities arise, we will be disposing of the balance of the retail portfolio. There's no set time on it. But again, we are opportunistic sellers. So when we get the right price, we will be sellers.

And can you talk a little bit about rent escalators in the portfolio? Anything tied to CPI? How do you think about that as we kind of work through high inflationary environment?

Sure. So 94% of our leases have rent escalators. That's something that's very important to us when we enter into a lease. On average, I would say it's about 2% is the annual escalator. That being said, the leases all have different terms. So of the 94% that rent escalators, 30% of them have CPI is with the escalator and many of those with the CPI also have floors.

One of your big recent acquisitions last year was the McLaren headquarters in the U.K. How did you source that deal? I mean it was a pretty big transaction. Why that property?

Well, one of the things about the way we acquire properties. A lot of our acquisitions are relationship deals. Relationships with sellers. We do a lot of sale and leasebacks. We do a lot of continual sale and leasebacks with companies we've done business with before. We have relationships for many years with some of the key brokers in the U.S. and Europe. So we're often able to look at a property prior to them putting it out for bid and preempt the bidding process and make a very quick deal on it. McLaren came to us, even though it was shopped a little bit, our senior management had a relationship with McLaren. As many of you may or may not know, McLaren is owned 60% by the sovereign wealth fund of Bahrain. I have friends that are working with the sovereign wealth fund. So I -- speaking to them found out they're a very big supporter of the company, of McLaren. And when we took a look at it with the risk because they had some issues in -- during COVID, with one of their big moneymakers is selling McLaren cars, they have F1 Racing. They have a research and development. And when we took a look at this facility, it's a very new state-of-the-art beautiful facility but an hour outside of London. We hired an independent firm to tell us if McLaren ever had a problem. Could we re-lease the property at similar rates? And the answer came back, yes, so that gave us a lot of confidence. And because of the relationship we had with senior management of McLaren, we ended up winning the deal. And it is an absolutely stunning property. I mean, it's just an amazing property State-of-the-art, green, with a lot of green around it that can't be built on. There's a lot of parking. So it's a really prime location in a prime property. We're really pleased with that acquisition. It also gave us finally enough, a lot of press in Europe. So our deal flow from Europe after we bought McLaren grew quite a bit, and we've seen a lot more really good deals in Europe than we were seeing prior. So all in all, it worked out very well for us.

So let's talk about that with your criteria for acquisitions. When you're out there looking at properties, what type of cap rates are you sourcing? I know from having covered you for years, you've put up some acquisitions that I go to my other companies and like, why can't you do this with the cap rates you're getting on some of your industrial assets. What are you focused on? And what gets you kind of over the hump on a deal?

That's a great question because -- and usually, when we talk to investors, one of the things people say is, how do you find such great deals? I mean, how do you buy consistently properties with good cap rates. And it's a -- it's honestly a combination of things. It's relationships quite often. It's being able to come in and close a deal. We draw the cash out of our credit facility. So we can close a deal without any financial worries. And we -- there are a number of companies we bought multiple properties from in sale and leasebacks when they have -- and they do an acquisition or they're expanding. They'll bring the property to us. As I said, a lot of it is relationship based. But we've been very, very fortunate. I would say, on average, Chris, what would you say, about 7.5%, 7.5% cap rate going in for the last 5 years and we bought well over $1.5 billion, close to $2 billion worth of properties in the last 5 years at very good cap rates with mostly investment-grade tenants in great locations. An example would be we bought a distribution facility from Rubbermaid. And the distribution facility is right next to where they manufacture a lot of their products. So it's really important to the tenant. It's right there. It's where they ship everything out of. So it goes from manufacturing to distribution. So when you say is it property important to a tenant, I mean this is important to a tenant. We bought a light manufacturing facility from Fiat Chrysler, and you may scratch your head, Fiat Chrysler, third tier, automobile company, but what's their best-selling product, pickup trucks. I mean that's what they make the majority of their money on. This is a facility that finishes the pickup trucks. So they manufacture it, they roll them over here. This is when they put on the big wheels, the plastic truck beds, the lights. So I mean, it's really a very important facility to Fiat Chrysler because it's where they do -- where they finish their most important products. And we love it because if anything happened to Fiat Chrysler, it will be great for Toyota, it will be great for Ford, everybody who's in the pickup truck business. So that's the type of stuff that we look for. And we've been very, very fortunate in finding a lot of great properties over the years.

All right. So kind of shifting gears off of a very successful last couple of years. We've noticed that your acquisition pace has slowed a bit in the past quarter or 2. Maybe give us a little color on what the pipeline currently looks like? What are you seeing as attractive? And are there any new geographies that you're looking to get into maybe outside of the U.S. and Europe?

Go ahead with the first part of that, Chris.

Sure. So at this point, between what we've closed on the year and what we have in the pipeline, it's about $110 million. The average GAAP cap rate is about 7.5%. This year, so far, it's all been focused in the U.S. But obviously, we are looking in Europe.

Yes. Let me just say that we're being cautious right now. Cap rates are following interest rates going up. I think a number of sellers are thinking what's going to happen. So we think the last half of the year, there may be better bargains out there for us to buy. So we're keeping a lot of dry powder. So that as we see better deals, we'll be able to move on those. We -- and just as an example, last year, we bought an office building in the island of Guernsey, which is a channel island between the U.K. and France. And they call them tax advantage islands because there are better tax treatments and things like that. The reason we bought this building, and it was brought to us by a broker that we know is that there's 2 anchor tenants. It's an unusual building because usually we buy single-tenant buildings. The anchor tenants are Northern Trust, which you all know, great U.S. company, great credit and Aztec, which is another huge servicing company. Northern Trust had a 15-year lease. Aztec had 1.5 years left on their lease. So we bought the property at an 8 cap, a going-in 8 cap, which was a fantastic deal. It's one of the nicest office buildings in Guernsey and 100% occupied. And what we did prior to closing on the building, we went to Aztec and we said we'd like to extend your lease they were unhappy with the previous owner and the previous management company. We made a deal with Aztec to extend their lease 15 years. 2 days after we close the deal, we signed the extension on their lease. That's a great deal for us. And that's why we would buy an office building. Because you've got 2 great tenants, great credit tenants and 15-year leases on a beautiful building at an 8 cap. That's that -- I would buy in office buildings like that all day long. I mean office may be out of favor right now, but there's still great office buildings out there. And it doesn't hurt the portfolio to have 2 great credit tenants performing on leases for 15 years. In an island where there's very little new office space, so there's nowhere for them to move. That's the type of stuff we look for.

I have a bunch of more questions, but if anybody has any questions in the audience, don't hesitate. Sir?

Can you state your cost of capital right now?

Right now?