Global Net Lease, Inc. quarterly report, Q2 FY2020

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

Business Context and Reporting Period

Global Net Lease, Inc. is an externally managed REIT focused on commercial properties, primarily mission-critical, single-tenant net-leased assets and sale-leaseback transactions. The unaudited filing covers the three and six months ended June 30, 2020, with comparisons to the corresponding 2019 periods.

Portfolio: 296 properties totaling 34.6 million rentable square feet; 99.6% leased; weighted-average remaining lease term of 8.9 years.
Geographic mix: approximately 65% in the U.S. and Canada and 35% in Europe.
Property mix: 47% industrial/distribution, 48% office and 5% retail.
At June 30, 2020, no tenant represented at least 10% of annualized rental income.

Financial Results and Key Metrics

Metric	Three Months Ended June 30, 2020	Three Months Ended June 30, 2019	Six Months Ended June 30, 2020	Six Months Ended June 30, 2019
Revenue from tenants	$81.1 million	$76.1 million	$160.4 million	$151.6 million
Operating income	$24.3 million	$31.2 million	$48.1 million	$55.2 million
Net income	$5.5 million	$15.3 million	$15.1 million	$23.6 million
Net income attributable to common stockholders	$1.0 million	$12.6 million	$6.0 million	$18.4 million
Basic and diluted EPS	$0.01	$0.15	$0.06	$0.22
FFO attributable to common stockholders	$35.1 million	$36.8 million	$73.7 million	$73.0 million
Core FFO attributable to common stockholders	$35.4 million	$38.4 million	$74.3 million	$74.9 million
AFFO attributable to common stockholders	$39.8 million	$40.1 million	$79.6 million	$79.6 million
Net cash provided by operating activities	Not separately provided	Not separately provided	$89.7 million	$71.2 million

Reported operating margin was approximately 30.0% in both the quarter and first six months of 2020, compared with approximately 41.0% and 36.4%, respectively, in the comparable 2019 periods. Net margin attributable to common stockholders was approximately 1.2% for the quarter and 3.7% year to date, compared with 16.6% and 12.1% in 2019. The comparison was affected by the absence of prior-year real estate disposition gains and higher interest, depreciation and amortization expenses.

Real estate investments, net, were $3.29 billion at June 30, 2020, compared with $3.25 billion at December 31, 2019.
Cash and cash equivalents were $316.8 million; cash, cash equivalents and restricted cash totaled $317.6 million.
Total debt was approximately $2.05 billion, consisting primarily of $1.30 billion of mortgage notes, $344.6 million drawn on the revolving credit facility and $399.0 million of term-loan debt.
Total debt was 51.9% of the purchase price of real estate investments. Approximately 86.6% of debt was fixed-rate or swapped to fixed rates; the weighted-average interest rate was 3.2% and weighted-average debt maturity was 5.2 years.
Only approximately $14.2 million was available for future borrowings under the revolving credit facility at June 30, 2020.
Unencumbered assets had a gross carrying value of approximately $1.5 billion, of which approximately $1.3 billion was included in the revolving facility borrowing base.

Material Changes Versus the Prior Comparable Period

Revenue increased 6.6% in the second quarter and 5.8% for the first six months, primarily from acquisitions, partly offset by dispositions and foreign-exchange effects.
Net income attributable to common stockholders declined 92% in the quarter and 67% year to date. The principal factors included no property sales in 2020 versus significant 2019 disposition gains, higher interest expense and higher depreciation and amortization.
Interest expense increased to $17.5 million from $15.7 million in the quarter and to $34.0 million from $30.9 million year to date, reflecting higher average borrowings.
FFO was relatively stable year to date, but Core FFO declined modestly. AFFO was essentially unchanged year to date at $79.6 million.
The company acquired 18 properties for $144.7 million during the first six months of 2020, compared with 11 properties for $211.0 million in the prior-year period. No properties were sold in 2020; 65 properties were sold in the first six months of 2019.
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 stated that the reduction lowered annual cash requirements by approximately $48 million.
Operating cash flow increased to $89.7 million from $71.2 million, while investing cash outflows were $147.1 million versus $135.5 million. Financing cash inflows declined to $103.4 million from $153.1 million, as 2019 included substantial common and preferred equity issuance.

Guidance, Outlook, Commentary, Risks and Unusual Items

Management did not provide formal quantitative earnings or acquisition guidance in the filing. It stated that future results depend substantially on the duration and severity of COVID-19, tenant collections, financing conditions and acquisition activity.
The company reported collecting approximately 98% of original second-quarter 2020 cash rent due as of July 15, 2020, including approximately 99% from its top 20 tenants. Approximately 2% of rent was covered by approved deferral agreements, while a further portion remained under negotiation or classified as other partial/unresolved amounts.
Typical deferral agreements deferred approximately 30% of cash rent for three months, with repayment generally due during 2021. The company retained contractual remedies, but future collection of deferred and current rent is not assured.
The company elected COVID-19 lease-accounting relief, generally treating qualifying concessions as deferrals rather than requiring lease reclassification. AFFO included $1.5 million of straight-line rent associated with rent deferral agreements.
In May 2020, the company refinanced French properties with a €70 million loan, using proceeds partly to repay existing debt and revolving borrowings. On July 10, 2020, it borrowed $88 million secured by six Whirlpool-leased industrial properties; approximately $84 million was used to repay revolving borrowings.
The company adopted a short-term stockholder rights plan in April 2020, generally imposing significant penalties on an unapproved acquisition of 4.9% or more of common stock. The plan is scheduled to expire April 8, 2021 unless earlier terminated or amended.
Key risks include tenant defaults and bankruptcies, additional rent deferrals, COVID-19-related declines in occupancy or rents, limited revolving-facility availability, refinancing and covenant risk, interest-rate and foreign-exchange exposure, access to capital, related-party conflicts and the ability to maintain the common dividend and REIT status.
The company was in compliance with its credit-facility and mortgage covenants at June 30, 2020. No material legal or regulatory proceedings were pending, and management reported effective disclosure controls with no material changes in internal control over financial reporting.

Most Important Facts for Investors to Verify

Whether the approximately 98% second-quarter cash collection rate remains sustainable and whether deferred rent due in 2021 is ultimately collected.
Actual availability under the revolving credit facility, borrowing-base requirements and upcoming debt maturities, particularly the 2023-2025 maturities.
Coverage of common and preferred dividends by recurring cash flow, including the effect of the reduced common dividend and credit-facility distribution limits.
Tenant credit quality, lease expirations, exposure to office and retail properties, and geographic concentration in the United States, United Kingdom and Michigan.
Future acquisition volume, pricing and financing capacity, given reduced transaction activity and limited revolver availability.
Foreign-exchange, interest-rate and LIBOR-transition effects on debt service and reported equity.
The economic effect of related-party advisory and property-management fees, including the amended incentive-compensation thresholds.