Global Net Lease, Inc. — Q3 2019 Form 10-Q Summary
Business context and reporting period
Global Net Lease, Inc. is an externally managed REIT investing primarily in single-tenant, net-leased commercial properties through sale-leaseback transactions. The unaudited filing covers the three and nine months ended September 30, 2019, with comparisons to the corresponding 2018 periods.
- Portfolio: 264 properties, approximately 28.9 million rentable square feet, 99.6% leased and weighted-average remaining lease term of 8.0 years.
- Geographic mix: 59.0% of annualized rental income from the U.S. and 41.0% from Europe.
- Tenant concentration: no tenant represented at least 10% of annualized rental income; Michigan represented 13.9% and the United Kingdom 17.5%.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue from tenants | $77.9 million | $71.9 million | $229.5 million | $211.0 million |
| Operating income | $24.6 million | $19.4 million | $79.8 million | $59.6 million |
| Net income | $9.9 million | $2.6 million | $33.5 million | $15.2 million |
| Net income attributable to common stockholders | $6.9 million | $0.2 million | $25.3 million | $7.8 million |
| Basic and diluted EPS | $0.08 | $0.00 | $0.30 | $0.11 |
| Net cash provided by operating activities | Not separately reported | Not separately reported | $97.8 million | $103.4 million |
| FFO attributable to common stockholders | $37.9 million | $32.3 million | $110.9 million | $103.1 million |
| Core FFO attributable to common stockholders | $38.6 million | $37.8 million | $113.5 million | $112.2 million |
| AFFO attributable to common stockholders | $40.2 million | $39.6 million | $119.8 million | $110.2 million |
- Approximate operating margin was 31.5% in Q3 2019 versus 27.0% in Q3 2018; approximate net margin was 12.8% versus 3.7%.
- Revenue growth was driven primarily by acquisitions, partly offset by dispositions and weaker average GBP and euro exchange rates.
- Q3 2019 operating results included a $7.0 million gain on dispositions and a $6.4 million impairment charge related to two Netherlands properties subsequently sold in November 2019.
- Interest expense increased to $16.2 million in Q3 and $47.0 million for the nine months, reflecting higher average borrowings.
Balance sheet, debt and liquidity
- Total assets were $3.61 billion at September 30, 2019, including $3.00 billion of net real estate investments and $306.0 million of cash and cash equivalents, compared with $100.3 million of cash at December 31, 2018.
- Total debt was approximately $1.9 billion, comprising $1.37 billion of net mortgage debt, $101.4 million drawn on the revolving facility and $389.9 million of net term-loan debt.
- Debt leverage was 49.7% of real estate investment cost. Weighted-average debt maturity was 5.7 years and the weighted-average effective interest rate was approximately 3.0%.
- Approximately 93.0% of debt was fixed-rate or swapped to fixed-rate; 7.0% remained variable-rate.
- The amended credit facility had total commitments of approximately $1.235 billion, with $101.2 million available under the revolving facility at quarter-end. The amendment extended revolving-facility maturity to August 2023 and term-loan maturity to August 2024, subject to extension rights.
- Scheduled mortgage principal payments were $122.8 million for the remainder of 2019, including $54.6 million of French mortgages scheduled to mature in December 2019 and $68.2 million of German mortgage debt extended to December 2019.
- The company reported compliance with its credit-facility and mortgage covenants as of September 30, 2019.
Material changes versus the prior comparable period
- Revenue increased 8.4% in Q3 and 8.8% for the nine months, while common-stockholder net income increased substantially from $0.2 million to $6.9 million in Q3 and from $7.8 million to $25.3 million year to date.
- Cash flow from operations declined to $97.8 million from $103.4 million despite higher net income, primarily reflecting unfavorable working-capital changes.
- The company acquired 20 properties for $309.0 million and sold 98 properties for $145.8 million during the first nine months, compared with 17 acquisitions for $267.4 million and two dispositions for $25.3 million in the prior period.
- Common shares outstanding increased to 89.5 million from 76.1 million at year-end 2018. The company raised $258.6 million net from common-stock issuance and $31.7 million net from Series A preferred-stock issuance during the first nine months.
- Operating fees to related parties increased to $8.2 million in Q3 and $24.4 million for the nine months, primarily due to higher variable base management fees associated with equity issuance.
- Equity-based compensation increased to $7.0 million for the nine months from $1.2 million, reflecting the 2018 multi-year outperformance agreement and its amendment.
- The company adopted new lease, hedging and nonemployee share-based compensation accounting guidance in 2019. Lease adoption resulted in recognition of operating right-of-use assets and liabilities and changes in revenue presentation.
Outlook, commentary, risks and unusual items
- No formal earnings or acquisition guidance was provided. Management expects to fund operations and dividends through property cash flows, dispositions, debt, equity offerings and cash on hand.
- Four definitive purchase agreements covering 12 U.S. properties totaled approximately $93.5 million; nonbinding letters of intent covered 17 properties totaling approximately $280.0 million. Completion was not assured.
- Management disclosed that dividends may exceed operating cash flow in some periods. For the first nine months, $111.2 million of dividends and distributions were paid, with 88.0% funded by operating cash flow and 12.0% funded from cash on hand.
- The common-stock dividend remained annualized at $2.13 per share, but payments changed from monthly to quarterly beginning in 2019. Series A preferred dividends accrue at 7.25% of the $25 liquidation preference.
- Credit-facility covenants generally limit distributions to 100% of Adjusted FFO over four consecutive quarters, with a limited annual exception permitting up to 105%. Failure to generate sufficient cash could require dividend reductions or additional financing.
- Principal risks include tenant defaults or nonrenewals, refinancing and interest-rate risk, foreign currency exposure, European political and economic conditions including Brexit-related uncertainty, access to capital, REIT qualification, geographic and tenant concentration, and conflicts involving the external manager and related parties.
- The former service-provider litigation was settled in March 2019 for a $7.4 million payment; approximately $1.0 million of additional legal expense was incurred during the first nine months of 2019. No material legal or regulatory proceedings were pending or known to be contemplated at quarter-end.
- The Series A preferred-stock ATM program was terminated effective November 12, 2019.
Important facts for investors to verify
- Ability to refinance or otherwise fund the $122.8 million of remaining 2019 mortgage maturities, especially the French and German obligations.
- Sustainability of dividends given the use of cash on hand for 12.0% of first-nine-month distributions and applicable credit-facility restrictions.
- Impact of continued equity issuance on per-share results, dilution and variable management fees.
- Performance and credit quality of tenants, particularly in the United Kingdom, Michigan and other concentrated markets.
- Effect of currency movements on European property income, asset values and debt.
- Completion and economics of the announced acquisitions and dispositions, including the German sale and pending U.S., Italian and Canadian acquisitions.
- Whether FFO, Core FFO and AFFO remain comparable and sufficiently cover distributions; these are non-GAAP measures and are not equivalent to cash available for dividends.