Global Net Lease, Inc. quarterly report, Q3 FY2023

Global Net Lease, Inc. — 2023 Third-Quarter Form 10-Q Summary

Business context and reporting period

Global Net Lease, Inc. is a REIT focused on global net-lease real estate in the U.S., Canada and Western and Northern Europe. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023.

On September 12, 2023, GNL completed its acquisition of The Necessity Retail REIT, Inc. (RTL) and internalized its advisory and property-management functions. The transaction added 989 properties and materially changed the company’s scale, portfolio composition, capital structure and expense profile; therefore, period-over-period comparisons are not fully comparable.

Portfolio at September 30, 2023: 1,304 properties, 66.8 million rentable square feet, 96.3% leased and 6.9-year weighted-average remaining lease term.
Portfolio mix by annualized straight-line rent: 32% Industrial & Distribution, 27% Multi-Tenant Retail, 21% Single-Tenant Retail and 20% Office.
Geographic mix: 81% U.S. and Canada and 19% Europe; 58.2% of annualized straight-line rent was from actual or implied investment-grade tenants.

Financial performance and key metrics

Metric	Q3 2023	Q3 2022	9M 2023	9M 2022
Revenue from tenants	$118.2 million	$92.6 million	$308.3 million	$284.9 million
Operating income before disposition gains	$(94.9) million	$28.9 million	$(60.0) million	$76.5 million
Net income (loss)	$(136.2) million	$14.8 million	$(163.3) million	$24.7 million
Net income (loss) attributable to common stockholders	$(142.5) million	$9.7 million	$(179.8) million	$9.4 million
Basic and diluted EPS	$(1.11)	$0.09	$(1.62)	$0.08
Cash flow from operations	Not separately provided	Not separately provided	$88.0 million	$159.6 million
AFFO attributable to common stockholders	$46.9 million	$41.3 million	$128.1 million	$130.7 million

Calculated operating margin before disposition gains was approximately (80.3%) in Q3 2023 versus 31.2% in Q3 2022, and approximately (19.5%) for the first nine months versus 26.8% in the prior-year period. Net margin attributable to common stockholders was approximately (120.6%) in Q3 2023 versus 10.5% in Q3 2022, and approximately (58.3%) for the first nine months versus 3.3% in the prior-year period.

Q3 revenue increased 27.6%, primarily reflecting RTL properties acquired on September 12 and foreign-exchange effects. Nine-month revenue increased 8.2%.
Q3 property operating expenses increased to $13.6 million from $7.8 million; nine-month expenses increased to $30.8 million from $23.0 million.
Interest expense rose to $41.2 million in Q3 from $24.2 million and to $95.8 million for nine months from $71.8 million, reflecting substantially higher debt and interest rates.
Q3 and nine-month impairment charges were $65.7 million, compared with $0.8 million and $17.1 million, respectively, in the comparable periods.
Merger, transaction and other costs were $43.8 million in Q3 and $50.1 million for nine months. Settlement costs were $14.6 million in Q3 and $29.7 million for nine months.
Core FFO was $31.5 million in Q3 and $90.4 million for nine months, compared with $48.3 million and $143.9 million, respectively. AFFO was $46.9 million in Q3 and $128.1 million for nine months.

Cash flow, liquidity and capital structure

Cash, cash equivalents and restricted cash totaled $178.4 million at September 30, 2023, including $133.4 million of unrestricted cash and $45.0 million of restricted cash.
Operating cash flow of $88.0 million funded approximately 61.2% of nine-month dividends and distributions; available cash funded the balance.
Investing cash outflows were $553.8 million, including $450.8 million of cash used in the RTL transaction, $81.4 million for real estate investments and $29.6 million of capital expenditures.
Financing cash inflows were $537.0 million, primarily from $949.9 million of revolving-credit borrowings, partially offset by $261.1 million of mortgage principal payments and $140.6 million of common and preferred dividends.
Total debt was approximately $5.3 billion at September 30, 2023, versus $2.4 billion at September 30, 2022. Debt consisted of $2.6 billion of mortgage notes, $1.6 billion drawn on the revolving credit facility and $881.3 million of senior notes, net.
Approximately 82% of debt was fixed-rate or swapped to fixed rates at a weighted-average rate of 4.1%; 18% was variable-rate debt at a weighted-average rate of 7.2%.
The revolving credit facility was increased to $1.95 billion and had approximately $186.0 million available at quarter-end. It matures October 8, 2026, subject to extension options.
Debt leverage was 63.9% of the purchase price of real estate investments, compared with 56.6% at December 31, 2022. Weighted-average debt maturity was 3.4 years.
Scheduled mortgage principal maturities include $391.1 million in 2024 and $704.0 million in 2025. The company identified $391.1 million of debt bearing a weighted rate of 3.9% as maturing in calendar 2024.

Material changes, outlook and unusual items

The RTL acquisition was recorded as a business combination with provisional total consideration of $2.13 billion, including $1.62 billion of equity and $516.0 million of cash. RTL contributed $22.6 million of revenue and a $3.7 million net loss from the acquisition date through September 30.
The internalization terminated external advisory agreements. Related-party operating fees declined to $8.7 million in Q3 from $10.1 million, but GNL now directly incurs employee compensation, benefits and overhead in general and administrative expense.
Four legacy properties were impaired by $65.7 million; three U.S. properties were subject to non-binding letters of intent to sell. Two properties were sold during Q3 at a net loss of $0.7 million.
The company settled proxy-contest litigation and related matters with Blackwells and related parties. It issued 495,000 shares as a settlement fee, 1.6 million shares for consulting services and reimbursed approximately $8.8 million of expenses.
The 2021 outperformance award was accelerated. Of 2.5 million GNL LTIP Units, 883,750 vested and were converted into common shares; 1,616,250 were forfeited. The acceleration contributed to higher equity-based compensation expense and included a $2.9 million priority catch-up distribution.
In October 2023, the board reduced the common dividend to an annualized $1.42 per share, or $0.354 quarterly, from $1.60 annually, or $0.40 quarterly.
Management stated that operating cash flow and existing cash were expected to fund quarterly dividends and anticipated capital expenditures. However, dividend coverage for the first nine months was supplemented by cash on hand.
Subsequent to quarter-end, GNL acquired one property for $52.7 million and disposed of four properties for $4.7 million. It also reported definitive agreements to acquire eight properties for $15.5 million, sell 10 properties for $128.2 million, and non-binding letters of intent to sell 14 properties for $72.4 million; completion is not assured.

Risks and contingencies

Mortgage agreements had certain covenant-related cash sweep events and debt-service-coverage issues, although management reported no uncured defaults or events of default. Letters of credit and cash reserves reduce revolver availability.
Interest-rate and refinancing risk is elevated because of higher leverage, variable-rate debt and significant 2024–2025 maturities. The company may need asset sales, equity issuance or refinancing to meet obligations.
The company is integrating RTL and transitioning to internal management for the first time. Expected cost savings and synergies may not be realized, while direct employment and operating costs may increase.
The 4.50% Senior Notes may require repurchase at 101% of principal upon a qualifying change-of-control and ratings-triggering event. The company stated it may not have sufficient funds if such a repurchase were required.
Dividend payments are discretionary, subject to cash flow, REIT requirements and credit-agreement restrictions. The lower post-merger dividend indicates pressure on coverage and capital allocation.
Real estate values, tenant renewals, occupancy, rent collection, foreign exchange, interest rates and capital-market access remain significant risks. A tenant termination or non-renewal has already triggered several cash sweep arrangements.
The company reported effective disclosure controls as of September 30, 2023, but implementation of a new third-party payroll provider represented a material change in internal controls over financial reporting.

Investor verification checklist

Reconcile post-merger recurring AFFO and dividend coverage excluding merger, settlement, impairment and other unusual items.
Review the provisional RTL purchase-price allocation, debt assumptions and expected integration or internalization costs.
Assess the $5.3 billion debt load, 2024–2025 maturities, $186.0 million of revolver availability and the effect of cash sweep letters of credit.
Confirm the sustainability of the $1.42 annualized common dividend and its compliance with credit-agreement distribution limits.
Track the proposed property sales, impairments and subsequent dispositions, including whether proceeds are sufficient to support deleveraging.
Evaluate tenant renewal, occupancy and concentration risks across the newly expanded multi-tenant and single-tenant retail portfolio.
Review the potential senior-note change-of-control repurchase obligation and the impact of future equity sales by AR Global-related holders.