Global Net Lease Inc. (NYSE:GNL)
Q2 2016 Earnings Conference Call
August 8, 2016 11:00 ET
Matthew Furbish - Director, IR & PR
Scott Bowman - President & CEO
Timothy Salvemini - CFO, Treasurer & Secretary
Lenny Howard - Crown Capital Securities
Good morning and welcome to the Global Net Lease Second Quarter 2016 Earnings Call. All participants will be in listen-only mode. After today's presentation, there will an opportunity to ask questions. Please note this call is being recorded.
I would now like to turn the conference over to Mr. Matthew Furbish, GNL's Director of Investor Relations. Mr. Furbish, the floor is yours, sir.
Thank you, Mike. Good morning, everyone, and thank you for joining us to review Global Net Lease's earnings for the second quarter 2016. With me today is Scott Bowman, GNL's President and Chief Executive Officer, and Tim Salvemini, GNL's Chief Financial Officer, Treasurer and Secretary. This morning's call is being webcast on our website at globalnetlease.com in the Investor Relations section.
Before I turn the call over to Scott, I would like to remind everyone that certain statements and assumptions in this earnings call which are not historical facts will be forward-looking and are being made pursuant to the Safe Harbour provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain assumptions and risk factors, which could cause GNL's actual results to differ materially from these forward-looking statements. The risk factors that could cause these differences are more fully discussed in our filings with the SEC.
In addition, the forward-looking statements included in this conference call are only made as of the date of this call. As stated in our SEC reports, GNL disclaims any intent or obligation to update or revise these forward-looking statements except as expressly required by law. Finally, all references to per share earnings including funds from operations, core funds from operations and adjusted funds from operations, are on a basic weighted average share basis.
Now, I'd like to turn the call over to GNL's CEO, Scott Bowman. Scott?
Thank you, Matt. Good morning everyone and welcome to GNL's second quarter 2016 earnings call. During today's call, I'll review our operating results and highlights for the quarter and provide a portfolio update. Tim will review the details of our financial performance and balance sheet, and then we'll gladly take your questions.
Before we begin our discussions regarding Q2, we're very excited to have announced earlier today that GNL will acquire American Realty Capital Global Trust II, or Global II, enhancing our standing as a premier global single-tenant net lease REIT. We expect this to be an accretive transaction and to close before year-end. This brings together two high-quality global portfolios of single-tenant net lease real estate, and enhances GNL's portfolio diversification and scale, as we continue to grow the company. I'll discuss the transaction in greater detail a little later in the call.
Turning to our quarterly results, we are happy to report another quarter of solid performance, growing NOI by 8.7% and AFFO by 23.1% over the prior year, driven by our best-in-class portfolio of primarily mission-critical assets leased to investment-grade tenants on long-term leases. In addition, we continue to make progress in fortifying our balance sheet and diversifying our capital stack, which Tim will discuss in greater detail in a few minutes.
We're proud to have been included in the Russell 2000 and Russell 3000 indexes on June 24, an important step for the company. This inclusion will broaden GNL's ownership base and provide us the opportunity for increased institutional ownership, all helping to enhance shareholder value. Following our Russell 2000 and 3000 inclusion, we have seen increased daily trading volume as well as an increase in activity with institutional investors, and we look forward to building those relationships and supplementing our original, primarily retail shareholder base.
In June, the global financial markets experienced a period of elevated volatility following the United Kingdom's Brexit referendum vote, which tested our strategy to mitigate risk where possible. Due to our in-place foreign exchange forward contracts, we saw minimal effect on our earnings for the quarter. Our weighted average remaining lease term in the U.K. is 14.2 years, and we do not have a lease role in the U.K. before 2022. This long duration in our U.K. leases provides us with some increased protection from short- and intermediate-term market volatility. Tim will talk more about our comprehensive hedging program shortly.
On July 25, we formally extended our credit facility, using the first of two one-year extensions, which will give us the flexibility as we continue to pragmatically grow and look for opportunities to fortify our balance sheet and diversify our capital stack. Our strategy to focus on sourcing debt and acquisitions in both the U.S. and Western Europe allows us to move between market cycles on both sides of the Atlantic. This strategy affords us the ability to invest with outside spreads between acquisition cap rates and cost of debt, which in turn drives our favorable interest coverage ratio of 5.2 times at quarter end.
Now let me ask Tim to take us through our financial performance for the second quarter 2016. Tim?
Thank you, Scott, and good morning, everyone. The second quarter of 2016 was another strong one for GNL and our portfolio continues to generate strong underlying cash flows.
Our financial results for the second quarter include net income attributable to stockholders of $15.8 million, or $0.09 per share on a fully diluted basis; net operating income of $49.7; year-to-year -- year-over-year increase of 8.7%; mainly defined funds from operations of $39.3 million, or $0.23 per share; core funds from operations of $39.4 million, or $0.23 per share; and adjusted funds from operations of $32.4 million, or $0.19 per share, a year-over-year increase of 23.1%.
The reconciliation of GAAP net income to the non-GAAP measure can be found starting on Page 8 of our Earnings release, as well as other GAAP financial information. In the second quarter, we maintained our cash distribution at an annualized rate of $0.71 per share resulting in a payout ratio or 94.7% based on our second quarter AFSL [ph]. We continue to make progress in fortifying our balance sheet. As of June 30, the Company had a total combined net debt of $1.1 billion including $513 million of outstanding mortgage debt. Our enterprise value was $2.5 billion based on the June 30 closing price of $7.95, resulting in a net debt to enterprise value of 46%.
We remained focus on actively managing our debt which along with impact of FX movement has lowered our annualized net debt to adjusted EBITDA to 6.7 times in Q2 from 7 times in Q1. The company's total combined debt carried weight, weighted average interest rate of 2.6% consisting of 63.7% fixed rate and 36.3% floating rate debt, and an interest rate coverage ratio of 5.2 times. As of June 30, 856 million or 72.1% of our outstanding debt is denominated in either Euro or Pound Sterling.
Our debt consisted of both local mortgage loans and a company-level revolving credit facility. Even we have a low U.S. Dollar denominated loan exposure; we are less exposed to rising interest rates in the U.S. As of June 30, the Company had $40.5 million of cash and cash equivalence and $56.3 million available under its corporate revolving credit facility, and on July 25, we exercised the first of two available one-year extensions on our $740 million facility. This extension allows us flexibility to look to diverse our capital stock and work towards caring in investment-grade rating. The formal credit rating will provide us with opportunities to diversify our debt structure, latter have our debt maturities, and reduce draws on our corporate facility.
Our management team constantly monitors economic developments to actively manage key financial risks to our portfolio. To do so, we employ a comprehensive hedging program to mitigate risk where possible. Our comprehensive hedging strategy consists of three parts; managing currency risk on earnings low from foreign currency into U.S. Dollar to FX forwards, we also mitigate the impact of currency exposure to the value of our assets to asset liability matching, and finally hedged interest movements through the use of interest rate swaps.
In the second quarter of 2016, Brexit presented a heightened level of risk to the financial markets in Europe, putting significant fluctuations of Pound Sterling to the U.S. Dollar which tested our hedging strategy. In keeping with our strategy to minimize risk and manage cash flows prior to Brexit, we put in place additional hedging instruments extending out to the end of 2019 effectively locking in pre-Brexit exchange rates and minimizing the impact on our earnings.
Our asset liability matching program is another key component of our hedging strategy intended to mitigate risk related to the value of our European portfolio by matching the underlying asset value in local currency against borrowings in same currency, our asset liability matching program effectively allows these values to move in unison with changes in FX rates, providing a natural hedge. The third component of our hedging strategy is the use of interest swaps intended to mitigate the effect of interest rate movements on our floating rate debt. Again, as of June 30, 63.7% of our debt is re-hedged, allowing it to effectively act a fixed rate debt.
This concludes our financial review. I'll now turn the call back over to Scott.
Thank you, Tim. Our diversified real estate portfolio consisted of 329 assets across the U.S. and Western Europe at quarter-end. Key metrics for the portfolio were our occupancy remained at 100%; our highly-diverse portfolio properties are leased to 86 tenants across 36 industries in five countries. Our top ten tenants comprised 36% of our NOI. The property mix based on NOI includes 54% office, 30% industrial and distribution and 15% retail. And our geographic mix was approximately 61% U.S. and 39% in Europe based on NOI.
The quality of our tenant basis is fundamental to GNLs long-term success and is a key differentiator for us in the equity markets. As of June 30, 70.1% of our portfolio's NOI was derived from investment-grade or implied investment-grade rated tenants which is amongst the highest in our net lease peer group. Further, at quarter-end, our weighted average remaining lease term was 10.8 years with 88.7% of leases by NOI possessing contractual rent increases which are tied to both, fixed or indexed escalators.
GNL continues to employ a unique global strategy, providing the company with some key strategic advantages. These advantages are GNL is a pure play real estate company focused exclusively on equity investments in properties. Our investment strategy affords us the flexibility to invest in the U.S. and in Western Europe. Our portfolio is built on long-duration leases to pre-dominantly investment-grade tenants. We have the ability to access capital markets in both the U.S. and in Europe. Our strong management teams are resident on both sides of the Atlantic.
In summary, we are pleased to present another solid quarter of results and remain confident with the steps we've taken to position the company for long-term success. With that in mind, I will like to talk about the transaction we talked this morning to acquire Global too. A company with approximately $620 million in high quality net lease assets which will create a pro forma company with an enterprise value of approximately $3.3 billion.
Merging these two companies brings together two high quality strategically aligned portfolios and sets a stronger foundation for GNLs future growth. This transaction provides GNL with many benefits including increased scale, realized synergies, enhances our property portfolio and again expected to be accretive in the first year. Increased scale improves our potential for index inclusions and for supporting our discussions with the rating agencies to secure an investment grade rating, immediately realizable synergies of $5.7 million including a reduction in fees and reimbursement pay to the advisor of $3.6 million.
This enhanced property portfolio diversification adds to embedded rent growth in our portfolio, improves key metrics including rent per square foot and brings the US and European portfolio to parity. Looking at the structure of the deal this is 100% stock transaction with the fixed exchange ration whereby Global II shareholders will receive 2.27 of GNL for each share they own in Global II.
Global II will appoint one new director to GNLs board which increases to four the total number of independent directors. Finally, the transaction will eliminate the perceived conflicts for management between GNL and Global II. Again we are excited about this transaction as it represents another positive step to position GNL as the premier Global net lease company and reinforces our efforts to grow accretive to grow shareholder value.
That concludes our prepared remarks and we are now happy to open the call for your questions. While we wait for calls to come in I would just like to remind everyone that our answers to questions regarding today's announcement to acquire Global II will be limited to information found in our investor deck and press release. Mike?
Thank you, sir. [Operator Instructions] It looks like we do have a question that comes from Lenny Howard of Crown Capital Securities. Please go ahead.
Yes. I was just curious about the stock transaction. 2.1 shares of GNL for every share of GNLII and you believe that to be accretive.
Lenny, thanks. First to put the right number in there; its 2.27 and we do believe it's accretive. You will be seeing a lot more information as we do release it, as we move into the proxy period. The companies who had the financial advisors, the independent directors form special committees and the information that was provided to them would largely be disclosed during the proxy period that you can see the analysis that was done.
Okay. Thank you very much.
[Operator Instructions] Well, at this time we are showing no further questions. This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Scott Bowman for the closing remarks.
And thanks Mike and I want to thank everyone for joining us today. We will be holding additional calls and webinars in the future and we will also be providing additional information as we move forward. We again are very excited about the transaction we announced this morning and we believe it moves GNL forward in a way that advantages all of our shareholders.
We look forward to updating you again on one of those calls or webinars in the very near future and with that I will say have a great day and I will turn it over to Matt.
Thanks Scott and Tim and thank you everyone for joining us today. As always our management team is available to speak with you should you have any follow up questions? If so, please don't hesitate to contact me directly at 911-745-2153. Have a great day.
And we thank you Mr. Furbish and to the rest of the management team for your time also. The conference call is now concluded. Again we thank you all for attending today's presentation. At this time you may disconnect your line. Thank you, take care and have a great day everyone.
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