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Edited Transcript of GNL earnings conference call or presentation 9-May-19 3:00pm GMT

Q1 2019 Global Net Lease Inc Earnings Call

NEW YORK May 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Global Net Lease Inc earnings conference call or presentation Thursday, May 9, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher J. Masterson

Global Net Lease, Inc. - CFO, Treasurer & Secretary

* James L. Nelson

Global Net Lease, Inc. - President, CEO & Director

* Louisa Hall Quarto

AR Global Investments, LLC - EVP

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Conference Call Participants

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* Bryan Anthony Maher

B. Riley FBR, Inc., Research Division - Analyst

* John James Massocca

Ladenburg Thalmann & Co. Inc., Research Division - Associate

* Mitchell Bradley Germain

JMP Securities LLC, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Global Net Lease First Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Louisa Quarto, Executive Vice President. Please go ahead.

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Louisa Hall Quarto, AR Global Investments, LLC - EVP [2]

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Thank you, operator. Good morning, everyone, and thank you for joining us for GNL's First 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 this 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.

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James L. Nelson, Global Net Lease, Inc. - President, CEO & Director [3]

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Thanks, Louisa, and good morning, everyone. Thank you all for joining us on today's call. We are pleased to report a great start to 2019 as we delivered strong results across key performance metrics, including increases in rental revenue and adjusted EBITDA. The portfolio continues to grow with $185.3 million of closed and pipelined acquisitions this year with ample capacity to complete additional transactions as attractive opportunities are identified.

During the quarter, we strengthened GNL's high-quality net lease U.S. and Western European portfolio through acquisitions, capital market initiatives and the refinancing of certain European properties at attractive rates. The quarter's results also reflect the full benefit of the $212 million in acquisitions GNL closed late in the fourth quarter of 2018. Total rental income for the first quarter was $70.1 million, up 9.9% from $63.8 million in the first quarter of 2018.

AFFO also increased in the first quarter to $39.5 million, up 12.6% from the $35.1 million first quarter 2018 figure. AFFO per share decreased to $0.48 per common diluted share from $0.52 per share in the first quarter 2018 primarily due to the increase in share count from the $153 million of gross common equity issuances we completed in the first quarter. The real estate acquisitions we have closed so far in the second quarter 2019 and those in our current acquisition pipeline will be funded primarily from the equity proceeds we raised and will resolve the natural timing differences we saw this quarter.

Overall, our 343 global net leased property portfolio is 99.5% leased, up from 327 properties at the same time in 2018. 274 of these properties are in the U.S. and 69 are in the U.K. and Western Europe, representing 55.8% and 44.2% of annualized rental revenue respectively. Our investment grade or implied investment grade tenants make up 75.7% 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 53% office, 39% industrial and distribution, and 8% retail, and the portfolio has a weighted average remaining lease term of 8.1 years with no near-term expirations. GNL is uniquely positioned to take advantage of market conditions in the U.S. and Europe with offices in the U.S., London and Luxembourg. Our access to deal flow from longstanding partnerships with developers and tenants allows us to evaluate and close transactions in an efficient and accretive manner. Our ability to complete transactions is strengthened by our longstanding relationships with a broad set of banks and lenders in both the U.S. and Europe.

We have a healthy balance of U.S. and Western European assets, and for the past couple of years have found the best opportunities to be primarily in the U.S. While that view has not changed, we are also beginning to see some investing opportunities in Europe as well. Our strategy for investing in European assets has been intentionally focused on acquiring office and industrial properties leased to strong corporate tenants and only in those countries with the highest sovereign debt ratings.

Over our history, GNL has leveraged this deliberate focus to take advantage of the opportunities we've seen in the 6 European countries where we own assets. In fact, we see other U.S. REITs now expanding to invest in the U.K. as further validation of the value European real estate can bring to our portfolio. We are continuing to monitor, explore potential European acquisitions and believe the current market may provide attractive opportunities.

During the quarter, we acquired 2 net leased assets totaling approximately 117,000 square feet for a contract sales price of approximately $23.5 million and funded $11.4 million of capital expenditures to expand and remodel 4 properties that are leased to a single tenant in exchange for increased annual rent at the respective properties. These assets are leased at a weighted average capitalization rate of 7.7% with a weighted average remaining lease term of 9.3 years.

The industrial property we acquired during the quarter is 36,720 square foot facility located in Gillette, Wyoming leased to Cummins Inc., a Fortune 500 company that specializes in the design and manufacture of automobile engines and related equipment, and has an investment grade credit rating of A plus and A2 from S&P and Moody's respectively. The office property we acquired during the quarter is an 80,000 square foot headquarter office property located in Fishers, Indiana, which is leased to Stanley Convergent Security Solutions, a division and wholly owned subsidiary of Stanley Black & Decker, which designs, supplies and installs commercial electronic security systems and provides electronic security services.

Stanley Black & Decker, the parent of the tenant but not guarantor, has an investment grade credit rating of A and BAA1 from S&P and Moody's respectively. GNL funded the transactions with cash on hand, which includes proceeds raised in January from our at-the-market program. Consistent with our overall strategy, these assets serve a critical function for the underlying tenants, our under long-term leases with embedded contractual growth and are property types that we like in our portfolio.

We also sold 1 property during the quarter for a gross proceeds of $9.5 million. Subsequent to quarter end, we closed on 3 properties for a contract sales price of $41.9 million at a weighted average capitalization rate of 7.5%, with a weighted average remaining lease term of 9.9 years. Including our $108.6 million pipeline, GNL has closed or identified $185.3 million of investment opportunities year-to-date.

Our $108.6 million pipeline reflects the anticipated acquisition of 8 net lease industrial and distribution properties to be acquired for an aggregate purchase price of $96.1 million at a weighted average cap rate of 8.5% and a weighted average remaining lease term of 11.7 years, plus our schedule funding of $12.5 million in capital expenditures to expand an industrial property located in Houston, Texas in exchange for increased annual rent. The properties in the pipeline also contain embedded contractual rent growth with average annual rent increases of 1.7% per year.

While Chris will provide more detail, I'll provide a quick update on our continuing ability to refinance GNL's European debt at attractive rates. During the quarter, we refinanced the 5 properties we own in Finland for an aggregate EUR 74 million with the Nordea Bank Abp at a 1.7% interest rate, lowering our borrowing costs on these assets by 60 basis points. EUR 57.4 million of the loan proceeds were used to repay all outstanding indebtedness on the properties and the balance after costs was available for general corporate purposes, including additional real estate acquisitions.

Earlier this month, we entered into a definitive agreement pursuant to which we shortly expect to complete a EUR 51.5 million refinancing of all our German assets with the exception of the energy tower in Essen with Helaba Bank. We are working to complete the balance of our European financing with the Netherlands, Luxembourg and French properties remaining.

With that, I'll turn the call over to Chris to walk through the operating results in more detail and then I will follow up with some closing remarks. Chris?

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Christopher J. Masterson, Global Net Lease, Inc. - CFO, Treasurer & Secretary [4]

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Thanks, Jim. This morning we announced first quarter revenue of $75.5 million, up 10.8% over the first quarter 2018 figure; FFO of $36.2 million, up 13.6%; core FFO of $36.5 million, up 10.2%; and AFFO of $39.5 million, up 12.6%. During the quarter, we paid common stock dividends of $43.3 million. As Jim mentioned, our strong first quarter results reflect the effect of a full quarter of results from the $212 million in acquisitions we closed towards the end of the fourth quarter.

On our balance sheet, we ended the first 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 4.2 years at the end of the first quarter, an improvement from 3.6 years at the close of 2018 first quarter. The components of GNL's debt include $260.4 million on the multicurrency revolving credit facility, $273.4 million on the term loan, and $1.1 billion of the outstanding gross mortgage debt.

This debt was approximately 83.7% fixed rate, which is inclusive of floating rate debt with in-place interest rate swaps, an improvement over the quarter ended December 31, 2018 where 79.9% was fixed. Our net debt to annualized adjusted EBITDA improved to 6.9x with a strong interest coverage ratio of 4.3x. As of March 31, 2019, liquidity was approximately $244.4 million, which comprises $95.3 million of cash on hand and $149.2 million of availability under the credit facility.

GNL's net debt to enterprise value was 47.8% with an enterprise value of $3.3 billion based on the March 29, 2019 closing share price of $18.90 for common shares and $25.67 for Series A preferred shares. During the quarter, we sold 7,759,322 shares of common stock through our ATM Program for gross proceeds of $152.8 million. Following these sales, which represented the final amounts available for sale under the initial distribution agreement for our common stock ATM Program, we entered into a new equity distribution agreement to continue the ATM Program to raise additional aggregate sales proceeds of up to $250 million. We did not sell any shares during the quarter under the new agreement.

Let me now turn to the European side of our capital structure. In February, GNL entered into a syndicated investment facility loan agreement with Nordea Bank Abp and borrowed an aggregate EUR 74 million. The loan is secured by all 5 finished properties owned by GNL. The maturity date of the loan is February 1, 2024 and it bears an interest rate of 3-month Euribor plus 1.4% with an interest rate for EUR 59.2 million or 80% of the principal amount of the loan fixed at 1.8% by an interest rate swap agreement.

This loan is interest-only with principal due at maturity. This refinancing significantly lowered the borrowing cost from 2.3% to 1.7% per annum. At the closing of the loan, EUR 57.4 million was used to repay all outstanding indebtedness encumbering the properties, with the remaining proceeds after cost and fees related to the loan available for working capital and general corporate purposes.

Later in May, we also expect to complete a EUR 51.5 million refinancing of all of our German assets with the exception of the energy tower in Essen with Helaba Bank. The loan proceeds will be used to repay all outstanding indebtedness on the properties and the balance after the cost will be available for general corporate purposes, including additional real estate acquisitions.

As a quick update to GNL's hedging program, we have continued to use our hedging strategy as a way to offset some movements in interest rates and local currencies for our European portfolio. In regards to currency hedging, the company employs a disciplined strategy of layering hedges against the 2 currencies over upcoming quarters to manage some exposure to both currencies.

Finally, with respect to GNL's dividend, we paid dividends equating to $53.25 per common share in the quarter. Subsequent to quarter end on April 8, we announced that we will be aligning our dividend policy more closely with our peers and start paying a quarterly dividend at the end of the second quarter. This change in no way affected the annualized dividend rate on the common stock of $2.13 per share or the previously announced dividend declaration with respect to the month of March.

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

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James L. Nelson, Global Net Lease, Inc. - President, CEO & Director [5]

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Thanks, Chris. GNL continues to perform well on all fronts. This quarter, we delivered strong results across important metrics such as revenue, adjusted EBITDA, FFO, core FFO and AFFO. The portfolio and the rental income it provides continue to grow. We are well positioned with available capital to close on our already identified $108.6 million of upcoming acquisitions and have ample dry powder to complete additional transactions as opportunities are identified.

We continue to demonstrate a proven ability to source investment opportunities by leveraging direct relationships with landlords and developers to identify off-market transactions, allowing us to achieve what we believe are better than market capitalization rates at more favorable terms than are generally available, generating improved results for the company and our shareholders.

Finally, as Chris just discussed, during the first quarter, GNL's ability to negotiate favorable financing in local markets contributes meaningfully to the bottom line. We are pleased with quarterly results and will remain proactive and disciplined in our acquisition strategy to identify compelling opportunities to acquire net lease assets with a continued near-term focus on U.S. industrial and distribution facilities. We will also remain opportunistic when it comes to selectively adding to our international footprint. We will continue our efforts to deliver steady growth and enhance long-term value for our shareholders.

With that, operator, we can open the line for questions.

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Questions and Answers

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Operator [1]

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[Operator Instruction] Our first question comes from Bryan Maher with B. Riley FBR.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [2]

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And maybe this is a question more for Chris. Can you tell us what prompted the increase in the operating fees to related parties in the quarter?

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Christopher J. Masterson, Global Net Lease, Inc. - CFO, Treasurer & Secretary [3]

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Sure. So I would say that the largest driver is actually related to the reversal of the incentive fee in the fourth quarter. So in the third quarter, we had booked $361,000 as part of our quarterly analysis. And then as we went to the fourth quarter and did our quarterly analysis, the hurdle was not met. So that amount was reversed out in 4Q for $361,000. So if you actually just looked at your asset management fees and property management fees, they only increased $300,000 quarter-over-quarter which would equate to the increase driven by the shares that were sold in 1Q.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [4]

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Okay. And then were there any onetime items in the G&A line?

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Christopher J. Masterson, Global Net Lease, Inc. - CFO, Treasurer & Secretary [5]

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So in the G&A line, that's really driven by a lot of activity that took place during the first quarter between the proxy, the filing of all of our tax returns, the VAT tax returns, some additional internal audit work during the quarter, and also completion of the audit. So that's really the driver over the fourth quarter.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [6]

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And what do you think is the G&A run rate for the balance of the year, roughly?

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Christopher J. Masterson, Global Net Lease, Inc. - CFO, Treasurer & Secretary [7]

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For the balance of the year, I don't have any exact number and I don't want to give a forecast. But I would say that this is probably one of both the higher quarters just given the activity volume that took place during the quarter.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [8]

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Okay. And then maybe a bigger picture question for Jim. Do you think that you may make or take a pause in your acquisition appetite given what's going on with the potential trade war with China and its possible impact on industrial assets, logistic facilities in the U.S.? We're seeing some overdramatic moves that would seem in trucking companies or services of trucking companies based upon what's going on this week. How do you think about what's going on this week as it relates to your business and your appetite for acquisitions?

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James L. Nelson, Global Net Lease, Inc. - President, CEO & Director [9]

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Good question, Bryan. And again, thanks for joining the call and it's always good to talk to you. We watch this very carefully. We -- as you know, we buy the best quality properties. We can buy long duration, high-quality tenants, a large percentage of investment grade tenants. So we look very carefully when we underwrite acquisitions and the things we ultimately decide to buy. We are very confident in what we're buying. We will continue our asset acquisition program during the year, but being very, very careful and watching the political outcomes from this trade war with China. But as you know, our pipeline is funded from the equity proceeds we raised and we will -- and those -- we will continue to be very selective and continue to grow the business as appropriate.

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Operator [10]

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Our next question comes from Mitch Germain with JMP Securities.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [11]

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So it seems like retail is not exactly a fit based on how you've been allocating capital. And I'm curious what your thoughts is of the assets that you hold in that segment?

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James L. Nelson, Global Net Lease, Inc. - President, CEO & Director [12]

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Well, I think the assets -- it's also another very good question. The assets that we hold are very good performing assets. They're solid. They are long-term leases in place with good tenants. We continually monitor our portfolio. As you see, the percentage of retail assets we have is declining as the portfolio grows. We're down to 8% now of the overall portfolio. So we're pretty comfortable with the retail assets that we have. And we're not buying any new retail assets as you well know, but I think we're comfortable with what we have and we do watch it very carefully. And they're all performing very well.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [13]

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Got you. And I guess you made the comment that you're starting to identify some prospective deals in Europe. Obviously most of the capital you've been allocating over the last 24 months or so has been targeted to the U.S. I'm curious about what -- has there been a change in the pricing dynamic or has the competitive environment become more favorable to allocate capital, what's spurring that change?

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James L. Nelson, Global Net Lease, Inc. - President, CEO & Director [14]

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Again it's a number of factors, one of the factors being that we have our own team on the ground in London now. And they have been really out uncovering some very strong potential acquisitions. And I'd like to give at this point kudos to our acquisition team because they've just done an incredible job bringing us excellent acquisitions, certainly as long as I've been here. And they continue to bring us a very, very strong, very high-quality potential acquisitions. So what we're finding in Europe? We are finding some good opportunities. Again Europe, it was slowing down for a while, but that seems to be abating and Europe seems to be starting to do a little bit better. So I think we're a little more comfortable buying assets in Europe. But all in all, we have a disciplined approach to our acquisitions, both in Europe and in the U.S., and we will continue to follow that.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [15]

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Great. And obviously you -- I believe you acquired a office building this quarter. I'm just curious, it seems like most of the deal still continue to be focused in on the industrial sector. But obviously very competitive out there, particularly when it comes to identifying industrial deals. I mean could we see you potentially be allocating more capital to the office segment going forward?

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James L. Nelson, Global Net Lease, Inc. - President, CEO & Director [16]

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There is no plan to do that. Primarily, we're buying distribution -- industrial and distribution facilities. But there will be the occasional -- potentially, the occasional office property that's a compelling buy. And we certainly have the ability to execute on it. But our focus is primarily on industrial distribution as you've seen from what we've bought in the last year-and-a-half.

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Operator [17]

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(Operator Instructions) And our next question comes from John Massocca with Ladenburg Thalmann.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [18]

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So do you think kind of maybe beyond the current pipeline you listed that given the amount of equity you raised in 1Q that you have additional runway for acquisitions? I mean, I just look at its -- I think I calculated a roughly kind of $173 million, $175 million of stuffs you've closed in 1Q, closed in 2Q, and then have under kind of in the pipeline if you will. And it seems like you might have more runway beyond that just with the equity you have on hand. I mean is that a fair way to think about it or is the equity…

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James L. Nelson, Global Net Lease, Inc. - President, CEO & Director [19]

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That's a very fair -- no, that's a very -- I'm sorry, John. I don't mean to interrupt you, but that's a very fair way to look at it. We do have dry powder. And as I said in the last call, our acquisition team has just been really bringing us a lot of great properties to look at.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [20]

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But essentially the amount you raised in 1Q is not maybe an effort to operate at a lower leverage level than you traditionally have?

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James L. Nelson, Global Net Lease, Inc. - President, CEO & Director [21]

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It wasn't an initial focus.

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Christopher J. Masterson, Global Net Lease, Inc. - CFO, Treasurer & Secretary [22]

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Really the capital raised during first quarter was for the purpose of acquiring additional properties.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [23]

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Okay. And then on the balance sheet side again, with regards to the potential German debt refinancing and kind of understanding you might still be negotiating this. But should we expect a lower interest rate on this debt versus the existing mortgages or relatively the same or maybe higher?

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Christopher J. Masterson, Global Net Lease, Inc. - CFO, Treasurer & Secretary [24]

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It's going to be relatively same. They'll be right around 1.9% or 2%.

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Operator [25]

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This concludes our question and answer session. I would like to turn the conference back over to Jim Nelson for any closing remarks.

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James L. Nelson, Global Net Lease, Inc. - President, CEO & Director [26]

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Yes. I'd like to thank you all for dialing in this morning. We certainly are very pleased with the results that GNL is delivering. We intend to continue delivering outstanding results moving forward. We have a very slow and steady approach to growing this company and we're very careful with what we buy. We focus, as you all know, on high-quality tenants, long lease durations, and we've been very fortunate to be able to buy a lot of good assets and we intend to continue with that program. At this point, I'll just say thank you all for dialing in. And we'll talk to you next quarter. Thank you.

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Operator [27]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.