Global Net Lease, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Global Net Lease, Inc. is an externally managed REIT investing primarily in mission-critical, single-tenant commercial properties and sale-leaseback transactions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, with comparisons to the same periods in 2019.
- Portfolio: 299 properties, 34.7 million rentable square feet, 99.6% leased, and 8.7-year weighted-average remaining lease term.
- Portfolio mix by annualized straight-line rent: 47% industrial/distribution, 48% office, and 5% retail; 63% in the U.S. and Canada and 37% in Europe.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue from tenants | $82.7 million | $77.9 million | $243.1 million | $229.5 million |
| Operating income | $26.0 million | $24.6 million | $74.1 million | $79.8 million |
| Net income | $4.1 million | $9.9 million | $19.3 million | $33.5 million |
| Net income attributable to common stockholders | $(0.5) million | $6.9 million | $5.5 million | $25.3 million |
| Basic and diluted EPS | $(0.01) | $0.08 | $0.06 | $0.30 |
| FFO attributable to common stockholders | $34.5 million | $37.9 million | $108.2 million | $110.9 million |
| Core FFO attributable to common stockholders | $34.6 million | $38.6 million | $108.9 million | $113.5 million |
| AFFO attributable to common stockholders | $40.9 million | $40.2 million | $120.5 million | $119.8 million |
- Revenue increased 6.1% in the quarter and 5.9% year to date, primarily from acquisitions and, in the quarter, favorable foreign exchange movements.
- Q3 operating margin was approximately 31.4%, compared with 31.5% in the prior-year quarter. Nine-month operating margin was approximately 30.5%, compared with 34.8% in 2019.
- Q3 net margin was approximately 5.0%, compared with 12.7% in 2019; nine-month net margin was approximately 7.9%, compared with 14.6%.
- Cash provided by operating activities was $136.3 million for the nine months, versus $97.8 million in 2019.
- Investing cash outflows were $178.4 million, including $170.8 million for property acquisitions. No properties were sold during 2020, compared with $141.5 million of disposition proceeds in 2019.
- Cash, cash equivalents and restricted cash totaled $300.8 million at September 30, 2020, including $300.0 million of unrestricted cash and cash equivalents.
Debt, liquidity and capital structure
- Total debt was approximately $2.1 billion at September 30, 2020, consisting primarily of $1.4 billion of mortgage notes, $264.0 million drawn under the revolving facility, and $417.1 million of term-loan debt.
- Weighted-average debt interest rate was 3.1%; 90.5% of debt was fixed-rate or swapped to fixed rates, and 9.5% was variable-rate.
- Debt leverage was 57.3%, and weighted-average debt maturity was 5.1 years.
- The revolving credit facility had approximately $92.0 million available for future borrowings. Total credit-facility commitments were $1.235 billion, with potential expansion to $1.75 billion subject to lender consent.
- Mortgage principal payments due in 2020 and 2021 were $2.6 million and $12.8 million, respectively; substantial scheduled maturities begin in 2023.
- Common dividends were reduced from an annualized $2.13 per share to $1.60 per share, or $0.40 per quarter, beginning in the second quarter of 2020.
- The company issued 185,128 shares of Series B preferred stock for approximately $4.5 million net proceeds during the first nine months. No common stock was sold under the common-stock ATM program.
Material changes versus the prior comparable period
- Common-stockholders’ earnings declined to a $0.5 million loss in Q3 and $5.5 million of income for nine months, primarily reflecting higher interest expense, lower derivative gains, higher depreciation and amortization, and the absence of prior-year property-disposition gains.
- Interest expense increased to $18.7 million in Q3 and $52.6 million year to date, from $16.2 million and $47.0 million, respectively, driven mainly by higher average borrowings.
- Q3 2019 included a $7.0 million gain on dispositions and a $6.4 million impairment charge; 2020 included neither item in the quarter. The nine-month 2019 period included $14.8 million of disposition gains and $6.4 million of impairment charges.
- FFO and Core FFO declined year to date, while AFFO increased modestly, partly reflecting adjustments for non-cash items and rent deferrals.
- The company acquired 21 properties for $170.8 million during the first nine months of 2020, versus 20 properties for $309.0 million in the prior-year period.
- In July 2020, the company borrowed $88.0 million secured by six Whirlpool-leased industrial properties. In May 2020, it refinanced French properties with a €70.0 million loan.
Outlook, commentary, risks and unusual items
- Management reported collection of approximately 97% of original cash rent due for Q3 2020, including approximately 99% from the top 20 tenants. Approximately 1% of portfolio rent was subject to approved deferral agreements, with additional amounts under negotiation or otherwise unpaid.
- COVID-19 rent deferrals generally preserved the original lease terms and were accounted for using available FASB and SEC relief. Deferred 2020 rent is generally expected to be paid during 2021, but collection is not assured.
- Management stated that the pandemic could adversely affect tenant credit, rent collections, occupancy, leasing demand, property values, financing access, covenant compliance, liquidity and dividend capacity.
- The company’s U.K. mortgage portfolio experienced a cash-trap event after failing to maintain required loan-to-value ratios. The event was immediately cured through an unsecured corporate guaranty, which remains subject to a liquidity covenant.
- Dividends and other distributions are restricted under the credit facility to specified percentages of Adjusted FFO, subject to limited exceptions. The company used an exception during the quarter ended June 30, 2020.
- Interest-rate and foreign-currency derivatives produced a $2.5 million loss in Q3 2020 versus a $3.0 million gain in Q3 2019. Derivative liabilities totaled $18.5 million at September 30, 2020.
- The company adopted a stockholder rights plan expiring April 8, 2021, generally triggered by a person or group acquiring 4.9% or more of the common stock without board approval.
- On November 5, 2020, after the reporting date, the company acquired four U.S. properties for approximately $153.0 million using cash on hand.
- The company reported no material legal or regulatory proceedings, no material off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Whether tenant rent collections and deferred-rent repayments remain stable as COVID-19 conditions evolve.
- The sustainability of common dividends relative to AFFO, cash flow from operations, credit-facility distribution limits and borrowing needs.
- Upcoming debt maturities, refinancing capacity, covenant compliance and the effect of variable interest rates and LIBOR transition.
- Exposure to U.K., European and other foreign-currency markets, including exchange-rate effects and property-level loan-to-value requirements.
- The impact of related-party advisory and property-management fees, compensation arrangements and potential conflicts of interest.
- The valuation and performance of office properties if work-from-home trends reduce tenant demand or renewal prospects.
- The terms and funding impact of the $153.0 million post-quarter-end acquisition and any additional acquisition commitments.