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Global Net Lease, Inc. (NYSE: GNL) is a real estate investment trust that focuses on acquiring and managing a globally-diversified portfolio of strategically-located commercial real estate properties which are crucial to the success of GNL’s roster of primarily investment grade corporate tenants.
Through the execution of this investment strategy, management has built a best-in-class portfolio of premium commercial real estate assets occupied by high-quality tenants and spanning countries including the U.S., the U.K., Germany, the Netherlands and Finland - creating a portfolio which supports investors by helping provide:
October 30, 2017
October 16, 2017
October 10, 2017
Meredith: My name is Meredith Despins. I’m with NAREIT and I’d like to welcome you to this afternoon’s individual company presentation. Global Net Lease is a REIT whose shares began trading on the New York Stock Exchange under ticker symbol GNL on June 2nd. It’s formerly known as AR Capital Global Trust Inc. Global Net Lease is focused on acquiring a diversified portfolio of commercial properties with an emphasis on sales, leaseback transactions involving single tenant, mission critical income producing net-leased assets in the US and Western Europe. It has a portfolio of more than 300 assets located across 5 countries and includes 79 tenants and 35 industries.
Joining us this afternoon from Global Net Lease are Scott Bowman, Chief Executive Officer; Patrick Goulding, Chief Financial Officer; Andrew Winer, President and Chief Investment Officer; Sue Perrotty, the Non-Executive Chair; Andy Backman, Managing Director of Investor Relations and Public Relations; and Gary Wilder, Executive Chairman of Moor Park Capital Partners, GNLs European partner. With that, I turn it over to the team.
Scott: Great. Thanks very much Meredith and thank you all for joining us today. What I think we’ll do is we’ll just have some brief opening remarks, and then we’d really like to open the floor to questions.
As Meredith mentioned, the management team from both sides of the pond from the GNL team in the US and Gary who is the Co-founder and Chairman of Moor Park, our partner in Europe, are here today to talk with you. Let’s just start with some fundamentals about this business.
First of all, we believe that we have a significant advantage because of the fact that we have management in place on both sides of the pond. Our access and our experience and the relationships we have in this marketplace provides GNL with the opportunity to grow and grow accretively through these markets over time. GNL as Meredith had mentioned is a single tenant, net-lease portfolio that is focused on mission critical assets.
What do we mean by mission critical assets? These are assets that are strategically important to the underlying business of our tenants. It is strategically important in the operation of their underlying business. When you really think about an investment, you think about certain key factors; quality of management, proven ability to execute, the quality of the product.
In the end, it’s always about the product, quality of the financials and ability for future growth. I think when you look at GNL in these terms, we measure well. We have a management team and you’ll be able to judge us based on the commentary today, but we have a management team with deep experience on both sides of the pond, in various market cycles the ability to acquire between ARC and Moor Park over $60 billion worth of real estate.
Execution, when you look at the product that we’ve created, it’s a testimonial to the ability to execute. GNL has a $2.4 billion portfolio. That’s 81% investment grade. The 16 1/2 million square feet in this portfolio is 100% occupied. We have 11.2-year average remaining lease term. We have top-tier tenants in this portfolio and 87% by NOI of all of our leases have embedded rent growth in them.
This is a high-quality portfolio that was acquired by this team, great testimonial to the ability to execute and that high quality. The long-duration leases, the high-investment grade tenant provides us with a great balance sheet because we have a predictable cash flow, we have a great financial structure roughly 37% leverage on the portfolio today, we have an ability to not only pay a strong distribution and provide stable income to our investors, but to continue to grow in the future.
On listing, we have a tender offer that’s at $10.50 a share. We have $125 million devoted to backing the tender offer. The tender offer completion date is June 29th at midnight.
Finally, opportunity to grow that embedded rent growth along with available capital to continue to grow that’s on our balance sheet today, the opportunity to access public markets in the future all gives GNL the opportunity to have outsized growth and be a great investment in the long term.
Before we go to questions, I wanted to give Gary Wilder an opportunity to talk a little bit about Moor Park, our exclusive partner in Europe.
Gary: Thank you, Scott.
I’m here today representing Moor Park. It’s an independently owned firm of which I’m one of the 3 partners and we are one of the leading independent institutionally European real estate advisory firms specializing in the acquisition and management of net lease real estate in Europe. We have as a firm a significant track record of our performance across the cycles in Europe.
As a firm, we have unrivaled deal origination capability and management capability on a Pan-European basis. The 3 partners who control and run Moor Park have over 66 years of experience in the European real estate markets. We have completed full cycle, some $30 billion of transactions. The team that is headquartered in London is some 35 people of which 25 of those are focused on investing in net lease real estate across Europe.
Our structure is country and geographic focused. We have a team focusing on France, Germany, Switzerland, Luxembourg, Austria, UK, Germany obviously and the Nordics. To some extent, we do focus on Southern Europe. We operate across the full cycle; origination, acquisition underwriting, property and asset management, operations, and ultimately, disposals. Thank you.
Scott: Great. Meredith will open it up for questions.
Meredith: Thanks very much. I am happy to take the question, but maybe to get the ball rolling a little bit, following up on the global nature of your portfolio. How do you plan to execute your strategy going forward and how does that differentiate GNL from your peers in the marketplace?
Scott: I’ll start a little bit and talk about the Europe opportunity, and then I’ll let Gary talk a little bit more about the Europe marketplace. GNL is a portfolio of assets both in the US and in Europe. We focus on Northern and Western Europe. We look at assets again at a mission critical to our tenants. As we look to grow, we are really agnostic as to the market. We are looking for what is the right deal to continue to build on an accretive manner the portfolio that we have within GNL.
Today, the reality is we are in a once in a lifetime buying opportunity in the European marketplace. We can buy low-risk assets meaning highly investment grade tenancy GNL today in Europe’s 91% investment grade tenants over 12 years remaining lease duration on our European assets at cap rates that significantly exceed by about 100 basis points those available to us in the US marketplace. We will continue to look at those opportunities as they are available in the European marketplace. We will look overtime to bring our portfolio to parity today. We’re about 40% Europe and 60% the US and we will continue to grow from there.
Maybe it might be good for Gary to talk a little bit about what the environment in Europe is like.
Gary: Thank you, Scott. From our perspective, Europe represents an outstanding opportunity to create outsized both absolute and risk-adjusted returns. The economic environment has changed dramatically. It’s improving significantly. The impact of quantitative easing though all prices higher consumer demand in just generally growing economies has created a really unprecedented level of opportunity for us in Europe. Combine that with the lowest funding cost that we’ve seen in our history and the most significant yield gap, the gap between where we can buy real estate at and where we can fund our acquisitions which is at a historic high presents an unprecedented opportunity.
Today, our focus is on Northern and Western European territories for a reason. We see the highest level of transaction volume there, the highest level of liquidity, and the highest potential growth in the underlying economies. I don’t think you can look at real estate without looking at the macro environment. The macro environment is extremely positive for investing in real estate.
Ultimately, we expect that to translate into capital growth and rental growth, which ultimately would generate significant returns. Combine that with the fact that if we look at where evaluations are today relative to where they were pre global financial crisis, they’re about 25% below where they were before the onset of the global financial crisis. Compare that to the US which is today, we see evaluations at or above those levels.
Then if you look at the level of inventory that’s available within Europe, there’s about $9 trillion equivalent of available inventory in Europe. Europe has the highest level of owner occupancy of any market in the global economy. Some 74% of real estate is actually owned or occupied in Germany for example, 50% in the UK. Compare that to the US which is around 23, 24%. A significant amount of transference of ownership is taking place in Europe from owner occupies to landlords like GNL.
There is no vehicle in Europe like GNL with a Pan-European focus. That gives us an extraordinary opportunity to exploit the buying power that we have and possess, and we’ve already demonstrated in terms of the amount of inventory that we’ve been able to acquire over the last 12 months or so. Around about a billion dollars of real estate has been acquired for the GNL portfolio representing a diversified portfolio in the single tenant sector and geography.
The opportunity is huge. Then when you look at where for example the credits that sit within our portfolio in that lease format will trade in the fixed-income markets today. That indicates that 550 basis points differential between where we’ve been able to buy those credits in net lease format against where they trade in the fixed-income markets today, which tells you one thing that the real estate market is fundamentally mispriced and represents an extraordinary buyers opportunity. We have a competitive advantage. We’re a low-leverage buyer; we are effectively a cash buyer as far as the vendors are concerned.
We’ve been able to demonstrate time and time again our ability to meet expectations of vendors and with Moor Park we have an extraordinary footprint of origination across the European markets which enable us to get first look at assets and enables us to compare and contrast value across different markets when we’re allocating our capital to get best relative value.
Speaker 3: Thank you. The future of your company and the business model looks impressive and strong, but as an investor and consultant to analysts and asset managers, I would like to address the maintenance of the dividend. Now, historically, when nontraded REITS go public, dividends are decreased. They drop. Eventually, they do rebound and come back. A couple of questions, the first is how can you guarantee the maintenance and the price level of the dividend now that the stock is trading 14% below your 10.50 price that you want to buyback your shares at? With the volatility in the market, how do future interest rates impact the ability of the stock to rebound?
Scott: Let’s start with your first question. In terms of our payout ratio, why did we decide not to reduce the payout ratio and our ability to cover? Our $0.71 per share distribution was maintained from where we were as a non-traded because we wanted the shareholders that had invested with us when we were a blind pool to not be motivated on distribution rate as to make a decision on whether or not to be a long-term holder.
Second, with the strong visibility we have to cash flow and the quality of our AFFO, we are confident in our ability to now and in the long term cover this distribution. We believe that that will not become an issue and we believe that the share price will rebound, and that this will be a good investment in the long term for our investors.
In terms of where we want to go with an investment in our dividend, we believe that this is the right place to be. Then in a rising interest rate environment, we believe that with the structure that we have today where 87% of all of our leases have embedded rent growth, yet we’re only 37% levered, and we’ve actually -through the financial markets - actually fixed our interest rates, we believe that an escalating rate environment overtime will actually grow our earnings because of the dynamic that we have set in place.
Actually, although I can’t tell you today when I believe interest rates will rise, we believe that that will actually mean that we are in an inflationary environment which would mean we’ll have rising rents. Many of our leases are tied to CPI or RPI and we’ll get the benefit of that in earnings.
Speaker 4: As far as your possible addition to various stock indices, can you give us a sense as to the timing of when that will occur? What do you think we’ll need for a stock demand?
Scott: The question was about trading indices. We believe that we will, try to go through them in my mind.
Speaker 5: This is for you. There’s MSCI which will be about 7 1/2% of our free flow. There’s no guarantee, but our first potential for inclusion to that would be for the November time period. The next one which is possible, but seemingly, potentially unlikely would be the Russell Index and that will be June of the following year. They’ve set it on June 24th. There is a small possibility to have this this year, but unlikely, and I guess these aren’t time ordered. Dow Jones Industrials US Select REIT Index about 1% of our free flow. That’s quarterly reviews will be out for first potential inclusion on September 18th of this year. The S&P 400, that’s about 7.6% of our flow. That’s a discretion of their board every 12 months. It’s possible for late in the year.
Speaker 4: Thank you.
Speaker 6: A couple of questions; 1, on the external management platform, can you talk a little bit about Moor Park and is that an exclusive arrangement? In other words, does Moor Park also acquire assets for its other friends or is it just exclusive to this REIT. Secondly, when does the company anticipate internalizing its operations? Third, if you can talk about Family Dollar larger tenant and we know they’ve recently gone through some changes, so how is that going to impact in your opinion the Family Dollar portfolio.
Scott: Great, thanks.
Gary: Moor Park doesn’t run any other discretionary funds. We have in the past acted on behalf and continue to manage some assets for institution investor’s sovereign wealth funds, pension funds, and insurance companies. Those transactions are very different from what is included in GNL. They have typically single tenant, multi-asset portfolio, very significant sized transactions, very specific transactions just for that particular investor. We don’t act on a non-discretionary basis for any other than those investors.
The way we operate with GNL and global too is first, refusal on all transactions that we see for board approval and if their transactions are accepted, then that’s where those transactions go. The reality is our businesses shift is so significantly in the last 2 years since we started this process on a meaningful way and 95% of all our activities related to servicing these platforms.
Scott: In terms of internalization and management, so we recently entered into a long-term external advisor agreement with GNL in advance of our listing believing that we are best positioned for the future of GNL and a structure like this for really a number of reasons, but I’ll give you 2 or 3. Sue Perrotty is the Chairperson of our board and led the special committee is also here if there’s specific questions about that.
Number 1; it gives us the ability to have G&A that is managed and continues to be more efficient as we grow. G&A that is significantly below our peer set today and expected in the future.
Second, the ability to have access to a very broad pipeline as a result of this external management structure. At any given time, we have an acquisition’s organization that is looking at $2 to $3 billion worth of pipeline assets. The ability to access that pipeline far exceeds what we would be able to have in an internalized structure NAREIT of our size. It allows us to be highly selective, to add only high quality assets that are highly accretive to our portfolio.
The third thing and I could let Sue talk about this, but when the board was contemplating a new management agreement in conjunction with the public listing; they wanted to make sure that this wasn’t just to meet to ok, they’re getting ready to list, let’s move from this non-traded structure to a traded structure management agreement. Rather, put in controls and place that really set a new standard in the industry, so in a way, you could say that we have internalized because of this structure and what’s been created.
Board has the ability to set management objectives on an annual basis per management. Failure to achieve those management objectives gives the board the right to terminate the agreement. There is a change of control provision that allows the board to terminate the contract on change of control. There’s obviously always the change of control right for cause or termination right for cause. In any other agreement, whether you look at Northstar or what was just announced for RMR or others, they don’t have those controls in place and that gives the board significantly higher control over the advisor, over the manager the same as a board would over a management team.
I don’t know, Sue, if you want to add anything to that.
Sue: The only thing I’d add is that we also put specific provisions to link performance to shareholder value, and that the big benefit to our external advisor does not come unless the shareholders have received at least the same benefit. They are specific targets that are contained in the contract that tie what our advisor can control and that provide specific shareholder value that are linked in the contract. That’s the only thing I would add to what….
Speaker 5: Great, thanks, Sue. I’ll take the dollar one real quick. We were fortunate enough to do that acquisition after they had already announced their potential merger with Dollar Tree. Before it had been approved, there was a direct corporate sale lease back where we selected new assets on brand new 15-year leases with the contemplation that there could be other closings within the Family Dollar chain. No 100% guarantee, but obviously something that they were very comfortable with. They thought they were finding leases on something they would be at.
Meredith: Any more questions from the audience at the moment? Scott, you talked about how robust your potential pipeline is. Maybe you could talk a little bit more about that over the next 12 to 18 months where do you see it from an acquisition standpoint, how do you see your portfolio exchanging in terms of the complexion of domestic or European properties?
Scott: Thanks, Meredith. Next, you’re going to turn that over to Andy who’s a Chief Investment Officer to really talk about that.
Andy: As we’ve announced in our filings, we have a prudent strategy of growth going forward. Our balance sheet is flexible enough at this point. We’re currently sitting at about 37% levered. Without having to tap the capital markets, we’ll deploy about $200 million of new acquisitions for the remaining of the calendar year 2015 that’ll put us in about 40, 41% leverage, and about 6.7 debt to EBITDA with our balance sheet. While lower than where we would like our maximum threshold to be and that allows us to do some acquisitions in 2015 again without tapping the capital markets.
I think 2016, we’ll have to readdress that as we look at our balance sheet as we start to have conversations with the rating agencies about putting an investment grade rating in place. Now, from the conversation with Scott and Gary, before you get the idea we’re very jazzed about the opportunity set to be buying that lease in the European framework right now. It’s logical to think that 60/40 mix US/Europe gravitates towards 50/50 over the near term.
We feel that our enterprise value here ultimately is the fact that we’re not tied or wedded to any one particular market. It doesn’t matter whether it’s the US or Europe, there are bespoke transactions that we see all the time with our origination teams. It might be in California. It might be in Luxembourg. What sets us apart and what we need to do now is to have a strong portfolio to pay that dividend on a consistent basis, but is make sure that we can handle a changing environment whether it’s rising interest rates or changing liquidity within the markets that we’re in.
We think what sets us apart is the relationship with Moor Park, being the first mover and being able to buy Pan-European, being able to buy across property types. For a REIT vehicle like ourselves, what’s going to drive us in the future is our ability to grow in an external basis. The ability to grow in Europe is a vital part of that and again, sets us apart from our competitors which are announcing moves to go that way. We obviously think that we have a leg up in that direction.
Meredith: Maybe a corollary question with respect to that is how you handle hedging in currency and how does that come into play in terms of …?
Andy: We’re taken a belt and suspenders approach. Remember, we come from a market where we come from the retail investor and before we’ve entered the brave new world of the publicly traded market. They were not looking to take any currency risks, so we’ve deployed asset liability management thanks to JPMorgan and a syndicate of banks. We have a corporate credit facility that allows us to borrow not only in US dollars but also in foreign currencies, Sterling and Euros, the countries where we buy.
We use simple asset liability management to manage our principal exposure to currency risk, and then we layer on some net income hedges on foreign currency trades to make sure that we’re having clean window of an idea of how many dollars we have on a go-forward basis every single investment that we do.
Meredith: Questions from the audience? Got a few more minutes.
Speaker 7: Of the board that you mentioned, you were talking about that looked at their contract. How many of the board members are independent?
Scott: 3. 3 of the 4 directors are independent. Sue is our Chairperson and is independent. Sue, you want to talk a little about the process?
Sue: Yeah, thank you. Only the independent board members were part of the special committee. I chaired that process. We hired outside both financial advisers outside council. We used Moelis as our financial advisor, Shapiro Sher in Maryland as our outside council, and then we retained Stanger to provide us with an independent opinion on the value of the contract.
It was a robust process. We met as a committee. We met 13 times. I probably had 4 times that number of meetings in a short period of time. It was a very robust process. It was a good learning on both sides on what we could accomplish. We are very proud that we put into the market something that really aligns our external advisor with the shareholder value and limits and guarantees some of those returns and gives great control to the board in the future and to whatever board that may be in the future.
Only the independent board members were a part of that. We did report to the full board once we had concluded our process. I would say that we were the reason and our process; we were not willing to shortcut or compromise the process just to meet a timeline. We did take a little longer than we expected and I know that created some real agita inside the organization, but it was the right thing to do, and we believe that we brought to the market an innovative design for future projects, for future external management. Does that answer your question?
Meredith: Maybe, just in the last minute we have remaining and clearly there’s been a lot of thought that’s gone into the process of becoming a publicly traded company. What do you see at the end of the day, at the end of the process to being benefits of becoming a listed company?
Scott: I think the first opportunity is our ability to evolve. We’ve really gone through this as the third stage in our life. We started as a non-traded raising funds. We deployed capital. Really, for long-term future growth access to the public markets and our ability to continue to accretively acquire and grow this portfolio is best served through the public format.
Meredith: With that, thank you very much for a great presentation and thank you all and the audience for your time and interest.