Good afternoon, and welcome to the Global Net Lease conference call and Q&A to discuss the benefits of the merger and internalization transaction. I would now like to turn the conference over to Sue Perrotty, Non-Executive Chairperson of GNL's Board of Directors, and Mike Weil, incoming Co-CEO of GNL. Please go ahead.
Thank you. This is Sue Perrotty. I am the Lead Independent Director at GNL, and I am joined today by Mike Weil, who is currently the CEO of Necessity Retail REIT, a Board member of GNL, and the proposed Co-CEO of the combined organization. I'd like to begin with a short opening paragraph. ISS acknowledged a critical error in its GNL report. We urge shareholders to read the revised report that ISS issued at 10:00 P.M. this past Friday. The revised ISS report states that ISS's fairness opinion summary table erred when it compared the full cash and stock internalization consideration from both the GNL and RTL transaction to the results of BMO's selected precedent internalization transaction analysis. In fact, as ISS concedes, the consideration is within the range of values observed in precedent internalization transactions utilized by BMO.
Because ISS continues to err in its analysis by comparing the aggregate internalization consideration from both the GNL and the RTL transactions against the consideration to be paid by GNL only, the company strongly disagree with ISS's analysis and recommendation. We look forward to discussing the benefits of the merger and the internalization with our stake, our stakeholders directly. The special committees of both the Board of GNL and RTL maintain that this transaction is in the best interest of our, of GNL and RTL shareholders. We look forward to answering your questions today, but first, let me turn the call over to Mike Weil, who will highlight many of the valuable deal points and benefits of the merger. We will then open the line for Q&A and also address several questions that have been raised and correct the errors in a dissident shareholder's press release this morning.
Thank you for attending, and Mike, I'll turn it over to you now.
Great. Thank you, Sue. I'm just going to highlight a few sections of the investor deck that was filed on the announcement of this merger. For those of you that have the deck open, I will not do a full-page flip because we do want to get to make sure we have enough time for Q&A. When the deal was announced on May 23rd, three things in particular really stood out. We anticipate $75 million of annual synergies expected to benefit shareholders. And again, I just want to reiterate that that is an annual $75 million. The combined company is expected to benefit from substantial scale and cost savings. The transaction is expected to create what will be the third largest listed net lease REIT with a global presence.
It'll improve the company's AFFO payout ratio and is projected to be 9% accretive to the annualized AFFO per share in the first quarter after closing, compared to first quarter of 2023. And I also want to point out that there was a fulsome go-shop that demonstrates the special committee's commitment to a full and fair process. The merger included the go-shop period following the execution of the merger agreement, during which the special committee of the RTL Board of Directors and its advisors actively solicited alternative proposals from over 70 potentially interested third parties, none of which made a superior acquisition proposal. This company, post-merger, will be a sector-leading, diversified net lease REIT, considerably increasing in size, scale, and prominence with $9.5 billion of real estate assets on a combined company basis.
It will be the third largest publicly traded net lease REIT with a global presence and the fifth largest publicly traded net lease REIT. The portfolio diversity will be unmatched by geography, asset type, tenant, and industry, spanning industrial, retail, and office across North America and Europe. Concentration risk will be mitigated through new tenants, property types, and markets. Our top ten tenants will make up only 20% of the straight-line rent of the company, and our largest tenant will be Federal Express at only 2.6% of the straight-line rent, further highlighting the diversification and enhancement of this portfolio. As I said earlier, there will be immediate AFFO accretion and another important note being reduced leverage.
Net debt to adjusted annualized EBITDA will be reduced from 8.3x in the second quarter of 2023 to an estimated 7.6x in the fourth quarter of 2023, as we continue to look to lower leverage in the portfolio with the ultimate goal of an investment-grade balance sheet. From the governance side, it is enhanced corporate governance and alignment, opting out of the classified Board provision of MUTA, declassifying its Board of Directors, repealing the company stockholders' rights plans, and amending the bylaws to delete the requirement that up to two Board members to be managing directors. This is something that we've heard from a number of shareholders to be very critical, as we look to make this a highly recognized REIT in the marketplace. The internalization of management will support the scaled platform.
The company will have the second lowest G&A in the net lease industry, with an estimated 6% load. So again, as we look to unlock the value, we see internally managed peers trading at 14.3x 2023 estimated AFFO multiples, compared to only 7.9x for externally managed net lease REITs. So again, putting this company on the path to unlock significant value for all shareholders. The enhancement of corporate governance, as we've all talked about many times, puts GNL at the top of the industry. No shareholder rights plan, opted out of MUTA, declassified Board, no managing director required on Board, shareholders can request special meeting, and no cumulative voting. So again, giving the market what it's been asking for.
And as we think about it and see the internally managed peers that are trading at an average of right about 14x versus the about 8x for externally managed REITs, unlocking value that we think will come based on not only the structure of the company, the enhanced governance, but the underlying value of the real estate. As we talk again, many of you refer to it as the poison pill, but the shareholder rights plan being eliminated, really making this a reformed structure and one that we think is the best way to move forward with the company. So before I open for Q&A, just to reiterate the takeaways and the industrial logic of this merger. We see this being 9% accretive relative to GNL's first quarter of 2023 AFFO per share.
We see substantial, immediate, and long-term cost savings and earnings accretion. $54 million will be immediately realized at the close of the transaction from the internalization, with an additional $21 million expected to be realized within 12 months of the transaction close from merger synergies. As I mentioned, net debt to annualized adjusted EBITDA will be reduced from 8.3 x at the end of the second quarter of 2023 to an estimated 7.6 x at the end of the fourth quarter of 2023. A portfolio with enhanced diversification by geography, asset type, tenant, and industry, with the ability to acquire and operate properties in North America and Europe, and the largest tenant being only 2.6% of straight-line rent. The company is positioned for growth. We do have the right internalized management team in place.
The team has been together, and we will be without social issues as this merger is completed. I've spoken quite a bit about the enhanced corporate governance, but I just think it's such an important part of what's ahead for Global Net Lease, and Sue and I are looking forward to that at the close of the merger. That will set us up for the potential trading multiple expansion. Investors recognize the value that will be created through the merger and the internalization. As I said, we all know that internally managed peers can trade at a significantly higher multiple to AFFO. So with that, Sue, I think we'll ask Paul to open up the lines and start taking some Q&A.
Thank you. We'll now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Thank you. Our first question is from Bryan Maher with B. Riley Securities. Please proceed with your question.
Good afternoon, Michael and Sue, and thanks for hosting this call. You know, I think as a sell-side analyst, I probably cover more externally managed REITs than anyone in this country. I'm a little perplexed by some of the opposition here, because when I talk to investors, it seems like everything everybody wants—you're delivering in this transaction, except maybe for the termination fee. Now, we've not seen a copy of the ISS and Glass Lewis reports directly, and I think we can all walk through the termination fee and where they got it wrong. But is there something we're missing that people don't like other than that?
So, Brian, first of all, thanks for taking the time to be with us and for the question. As Sue and I and the Boards talk work that's been done, we think that this is a very thorough merger proposal that whether it is the enhanced governance or the internalization or the potential for higher trading multiples, because everybody has a different set of parameters that they review. We can't find anything that sticks out to us as a reason for this merger not to be easily approved. We've got $75 million of annual recurring synergies, which I do believe has to really get people's attention.
The determination of the management agreements, I think there might only be some confusion because a number, you know, between ISS's error and a dissident shareholder who continues to create an unsubstantiated value for the internalization. The internalization takes into account four contracts. It's the asset manager and the property manager for both RTL and GNL, and it is supported by the work that the special committee of GNL undertook with their financial advisor, Bank of Montreal, BMO. So we see this as a great path forward for GNL to really trade in line with its peers and to really continue to operate as a top REIT in the sector. And we're still very excited about getting this merger completed, and we thought that taking time today to talk to people could be very helpful.
Sue, anything you'd like to add?
No, Bryan, I appreciate your question, and my only comment is that it does take into consideration not only that there were four different contracts, the advisory agreement, the property management agreement in both companies, but also that we were acquiring the competency. And I think, in the dissident shareholder analysis, he's using a hypothetical change of control that does not exist, and he's considering that we could execute that without negotiation. It also assumes, in a change of control, that the other entity would bring those capabilities to the table, and we would not be utilizing the skills and the people that have been developed through our relationship. So we've tried to clarify that. I thank you for asking. I hope that clarifies it.
Yeah, I mean, look, when you first announced the deal, we immediately opened our RTL model, where we calculate the termination fee that we could on RTL, and it was $150 million-$160 million. And given the size of RTL relative to GNL, we applied the same math to GNL, and we came up in the same zip code of, you know, 350-370, that you guys came up with. And not only that, but I could look at a half dozen other externally managed REITs that I cover, all with $several hundred million termination fees, and, you know, that's standard. And so I'm just wondering what I'm missing. You know, is there anything else that anybody's arguing against this deal?
Not from our perspective, Bryan. We think it's pretty well laid out.
Okay. Thank you.
Mm-hmm. Thanks.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question is from Michael Gorman with BTIG. Please proceed with your question.
Yeah, thanks. Good afternoon. I just figured I would ask, 'cause we also have not seen a direct copy of the report, but my understanding from talking with some of the community is that the part of the discussion was around the balance of the transaction between the multiple parties and maybe not as much on the strategic rationale of the transaction. So I'm just curious, you know, given that it's technically a three-party, you know, you just spent some time talking about it. It's a three-party transaction with four different termination agreements, two different sets of shareholders. Is there any... Can you walk us through any considerations that you're thinking about rebalancing certain aspects of the transaction, in light of the reports or before the shareholder vote on Friday?
Mike, do you want to take-
Yeah, why don't you go, and you go right ahead, and I can follow if, if-
But Michael, thank you for your question. I think that from the Board, from the Board's perspective and the special committee, we worked hard to align the interests of all of the parties, and that they did that through their shares. So we negotiated that it would not, in fact, be cash payments, that these would be stock. It would align them. There is a period in which the advisor will be reducing their ownership, that's laid out in the proxy and will be required. So, but will be done in a logical and managed way....
But we felt that by aligning them through the shareholder and giving them stock as part of the compensation, would tie them directly to the improved performance at GNL RTL as a result of the merger. So we felt that we worked pretty hard to align those interests and get them all aligned according to the merger as we proposed it.
And Michael, I'm gonna continue on a little bit, and I may have heard your question a little bit differently than Sue. But first, as I'm sure you've had a chance to review the proxy, there's a lot of detail provided by the special committee, starting on page 116, and going through page 117 and 118, that detail the analysis of how the termination fee was calculated, and then also details about how it was allocated, because it is not- it is part of the overall merger consideration. And Sue, as not only the Lead Independent Director, but also the Head of the Special Committee, she may wanna add some color to that. But I also heard, I think, in your question, is there something that we're contemplating?
Am I, am I correct in that, Michael?
Yeah, correct. Yep.
Okay. So the answer to that is no, because we think that we have proposed a merger that is very thoughtful in all areas, from governance to internalization to ongoing operations, synergies, cost savings, leverage reduction, et cetera. I think what we're proposing is you have two companies in GNL and RTL that operate independently today as externally advised companies, that I think we would all agree have the potential to trade better as one larger company than two slightly subscale companies. I think the internalization, as the special committees of GNL and RTL have taken into account, address. I can't think of anything that they didn't address in the proposed changes to governance, including the full opt-out of MUTA.
So I think as we sit here today, we've got plan A, which is the merger, and potentially we have plan B, which is the company stay as they are. I think that plan A is the way to go.
Okay. I appreciate that color. That's helpful. And then maybe if I could just stick with your plan A, plan B scenario just for a second. And obviously, you're focused on plan A, so I can understand there may not be an answer to this. But when you talk about the benefits of the transaction and the benefits of the merger, do you have a sense for what the benefits would be if these were two standalone companies that sought internalization, right? You talked about the G&A load at 6%. Kind of what would that look like for GNL if it just internalized independently? The synergies, would there be any synergies just from an internalization versus the merger plus internalization?
Have you walked through that at all, just to kind of doubly, you know, amplify the benefits of the transaction?
The question that you just asked, Michael, is, as you understand, hypothetical.
I have to point out that that really hasn't been looked at because that hypothetical situation isn't an option. Global Net Lease has an advisory contract, and there are certain aspects of that that would allow for an internalization. But in this scenario, it was a direct negotiation that the special committee undertook with the advisor, and the advisor engaged, believing that the alignment created not only for shareholders but with the advisor, the benefits that I've gone through of the size and the scale of the company, made it an undertaking that all were able to come to an agreement on. So I'm not gonna give you a hypothetical for a scenario that doesn't exist.
As we are on this call today, it's the merger that's been proposed, or potentially it's the two companies prior to the announcement of the merger.
Understood. And last one for me, and this was some feedback that we heard from the report as well, that I think I might have understood the logic a couple of months ago, but just based on the conversations we've been having, talking about the strategic rationale, we got the sense that there were some pretty substantial segments of the market that actually liked the, you know, even though it wasn't GNL's traditional strategy, liked the addition of the retail because we all know what's going on in the REIT market right now, and allowing that dilution of the office component of the surviving entity, was actually viewed as a positive. Whereas, you know, I understand the thought process that GNL historically was office industrial.
I'm just curious, the feedback that you've gotten on, on that front as well, whereas not just that the size and scale and the internalization, but also adding those additional verticals into the GNL story and becoming more in line with some of the other broadly diversified net lease REITs out there in terms of product type, you know, I, I think maybe was initially a shock, but it seems like the, there are at least segments of the market that were pleased by it.
Sue, is it okay if I answer that?
Yeah, absolutely.
Okay. So, Michael, great question, and thank you. It does take the straight-line rent exposure to single-tenant office down to 20%, which our office is performing very well with, rent collection, occupancy, et cetera, holding up through COVID and post-COVID. But still, the lowering of that exposure is a positive, but the other side of it is the addition of the retail portfolio, it has also been told to us is viewed as a positive as well. As you probably see, the retail-focused REITs have been trading at a premium, especially to those of office. Slight premium over industrial, but industrial continues to be an asset class that remains in favor. So a couple of things here. One, lowering the exposure to office is viewed as a positive.
The addition of the retail portfolio is viewed as a positive. It also gives Jim and I the opportunity to expand the retail footprint into Europe. As you've heard Jim and Chris talk on their earnings calls, they did a very attractive retail deal in the U.K. with Boots. And that's an untapped market for us. We see a lot of opportunity to continue to buy at very accretive levels. So yeah, I think your point is well taken, and I appreciate you taking the time and reviewing everything because it does make... Excuse me, it does make the company even stronger.
Okay, thanks for the time.
Thank you.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad.
You know, Mike, while we're waiting for the next question, Michael, I would just add, I've done a lot of mergers and acquisitions actually over a number of years, and we monitor the markets obviously all the time. And I think we forget that we've been in a three-year cycle here of great uncertainty, where retail fell out of favor as Amazon was climbing and as the pandemic forced us all back into our homes. Office fell out of favor, so we think that we are responding to the market and anticipating the market as well. So I think this is a great opportunity for the diversification we talk about, but for the opportunities to expand, as Mike said, and take what we've learned here, over to some of the European markets.
Thank you. Our next question is from Michaela Rauscher, with Western International. Please proceed with your question.
Yes, hello. My client, or not mine, many more clients, bought August 21, 2013, 2,800 shares in American Finance Trust. Then you changed the name to this RTL, where she is now - $37,795. First, she invested $70,000, now she's negative. So the stock is so much down. She had GNL, she sold GNL because the stock didn't perform. Going forward, we are not happy at all with the way how everything performed here. I mean, what expectation do you have? We mean, based on the current environment, market environment, the market GNL.
So, Michaela, thank you for your question, and I'm sorry that it's been a frustrating investment period for your clients. But what I would say is the structure of this merger, the change from the external advisor to the internal advisor, when we look at the comps of the industry and we see that the internalized companies trade at a much higher multiple to Adjusted Funds From Operations, we believe that this will be what's necessary to unlock the value in the portfolio so that shareholders can see that benefit, and we think it's significant. So that's why we think this merger should be approved and voted for by shareholders. I'm happy to give you more information offline if that would be helpful.
But again, we're committed to finding the path that best suits the shareholders, whether it's stock price valuation that they're focused on, or corporate governance, or structure. So thank you very much.
Thank you. This concludes our question- and- answer session. I would like to hand the floor back over to management for any closing remarks.
Right. Thank you. We would like to make some closing remarks to address today's press release that was issued by Orange Capital, and correct a couple of the areas that were raised by Orange. And I think we've covered a few of these items, but I will reiterate them. To begin with, a change of control was not an option for GNL. There were no offers to acquire GNL by any third party since we listed our shares in 2015, and there was no outreach during the go-shop period that RTL had, which would have opened the door for an unsolicited GNL offer, neither of which occurred.
The hypothetical scenario that a much lower change of control payment would be due to AR Global, in an independent change of control, again, is a hypothetical scenario that fails to include all of the components of the change of control provision and does not address the property management functions, which we are also acquiring. It just does not anticipate or contemplate the RTL advisory or property manager agreements, all of which were included in the internalization transaction. So I don't think we need to go into the specifics, but that $375 million is the aggregate compensation or consideration being paid. It does fall within the range of our special committee review of fairness from our financial advisors, Bank of Montreal, and it was outlined in detail in the proxy. That really covers the internalization.
I can go on to... I'd like to just address a few questions that were raised by Orange, and some work that BMO, our financial advisor, who did a complete and thorough analysis of comparable internalization transactions. I don't think we need to go into specifics. They were included in the tables, and they've been corrected. You can find that within our proxy, but that this fell within the range of reasonable. As to the questions regarding the Board leveraging the inapplicable change of control provisions, as we stated, there is no scenario despite what Orange has suggested. The Global Net Lease Board was insistent that the internalization transaction address both GNL and RTL, and not just the RTL change of control, and that it include the property management agreements.
We also think that this transaction, by bringing all of the employees, the systems, the technology, and the skill set, that it presents no social issues, and there would be a seamless transition to the independent management. And finally, the question raised regarding the internalization and the inaccurate cost referenced by Orange are being used as a smokescreen, really, to avoid the fact that the logic of the combination of these two companies, including the internalization, will lead to significant shareholder value. The proposed merger and internalization will provide the following benefits: lower leverage, which could not be achieved without the proposed transaction, $75 million of GNA synergies, accretion, which we believe this will unleash, and increased diversification, size, and scale. Which again, we achieve all of this with the proposed transaction. We do not know Orange's ownership.
They have not disclosed that, but they continue to question individual components of the transaction. We believe that this is a fully negotiated transaction that brings tremendous value to all of our shareholders, whether you are focused on the enhanced governance, the internalization of the management, or unlocking the trading value. The Board believes this path will continue to unlock shareholder value to all of our shareholders. Without this transaction, we will continue to operate as two externally advised smaller REITs within the same governance structure as is in place. We, at our annual shareholder meeting in June of this year, GNL shareholders overwhelmingly approved the reelection of our standing directors. We hope that you will consider also approving this transaction, and we thank you for your time today.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.