Global Net Lease, Inc. 2018 Form 10-K Summary
Business context and reporting period
Global Net Lease, Inc. is an externally managed REIT focused on commercial properties, primarily single-tenant, net-leased properties and sale-leaseback transactions. This filing covers the fiscal year ended December 31, 2018; the fourth-quarter results are included in the annual disclosures. The portfolio comprised 342 properties totaling 27.5 million rentable square feet, was 99.2% leased, and had a weighted-average remaining lease term of 8.3 years. Annualized straight-line rental income was allocated 55.7% to the U.S. and 44.3% to Europe.
Financial performance and key metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $282.2 million | $259.3 million |
| Rental income | $265.3 million | $242.5 million |
| Operating income | $68.0 million | $87.1 million |
| Net income | $10.9 million | $23.6 million |
| Net income attributable to common stockholders | $1.1 million | $20.7 million |
| Basic and diluted EPS | $0.01 | $0.30 |
| FFO attributable to common stockholders | $131.4 million | $132.6 million |
| Core FFO attributable to common stockholders | $149.1 million | $134.6 million |
| AFFO attributable to common stockholders | $147.3 million | $140.7 million |
| Cash flow from operations | $144.6 million | $131.0 million |
Calculated margins were approximately 24.1% for operating income, 3.9% for net income, and 0.4% for net income attributable to common stockholders. AFFO increased approximately 4.8% year over year, while GAAP net income attributable to common stockholders declined substantially after preferred dividends and unusual expenses.
At December 31, 2018, total assets were $3.31 billion, cash and cash equivalents were $100.3 million, and total equity was $1.43 billion. Total debt was approximately $1.8 billion, representing 49.3% of real estate investment cost and 54.0% of total assets. The weighted-average effective debt rate was 3.1%; 79.9% of debt was fixed-rate or effectively fixed through swaps. Approximately $42.2 million remained available under the revolving credit facility.
Common dividends remained $2.13 per share annually, or $0.1775 per month. Total dividends and distributions paid were $157.8 million, including $147.4 million to common stockholders and $9.8 million to preferred stockholders. Cash flow from operations after preferred dividends funded 85.4% of total dividends; the remaining 14.6% was funded from cash on hand, including borrowing proceeds.
Material changes versus the prior comparable period
- Revenue increased 8.8%, primarily from the net acquisition of 21 properties after dispositions, lease-related income, and favorable currency translation.
- The company acquired 23 properties for $479.6 million and sold two properties for total contract proceeds of $25.3 million. The acquisitions materially increased investing cash needs compared with 2017.
- Operating income declined 22.0%, and net income attributable to common stockholders declined 94.8%. Key factors included higher depreciation and amortization, higher interest expense, a $5.8 million loss on dispositions, $13.9 million of acquisition, transaction and other costs, $5.0 million of impairment and lease-intangible write-offs, and a $3.9 million debt-extinguishment loss.
- Interest expense increased to $58.0 million from $48.5 million as average debt and borrowing costs increased. The weighted-average effective debt rate rose from 2.8% to 3.1%.
- Operating cash flow increased 10.4% to $144.6 million, but investing cash outflows increased to $457.9 million from $79.0 million because of acquisitions.
- The Credit Facility commitments increased to approximately $914.4 million. Outstanding revolving borrowings were $363.9 million and the term loan balance was $278.7 million at year-end.
- Common equity issuance increased substantially. The company raised approximately $171.8 million net from common stock issuance in 2018, including two underwritten offerings.
- The former European service provider was terminated effective March 17, 2018. The Advisor assumed responsibility for the European portfolio and built a European-focused management team.
Guidance, outlook, risks and unusual items
Management did not provide formal earnings guidance in the filing. Management expects existing-property operating income and future acquisitions to support operating expenses and dividends, but acknowledges that dividends may require cash on hand, additional equity or debt financing, or asset-sale proceeds.
- Two non-binding acquisition letters of intent and one definitive agreement contemplated three U.S. properties totaling $42.0 million; completion was not assured. Definitive agreements also contemplated $11.4 million of capital expenditures for expansions and remodeling.
- Pending dispositions included U.S. and German properties with stated contract prices, but completion and proceeds were subject to conditions.
- The credit agreement generally limits distributions to 95% of Adjusted FFO over four consecutive quarters, with limited exceptions. Lenders permitted distributions between 95% and 100% of Adjusted FFO for the second and fourth quarters of 2018; future waivers were not assured.
- The Former Service Provider litigation remained unresolved. The company incurred $2.9 million of legal costs and recorded a $7.4 million reserve for an anticipated settlement; the final settlement amount, if any, could differ.
- Six related-entity tenants experienced financial difficulties. Four leases were terminated, resulting in a $1.6 million impairment and $3.4 million of lease-intangible write-offs. One property was expected to be sold and three were re-leased or being re-leased.
- Quarterly common-stockholder results were uneven: fourth-quarter revenue was $71.2 million, but net loss attributable to common stockholders was $6.7 million, reflecting the litigation reserve and impairment-related charges.
- Major risks include tenant defaults, limited tenant and geographic diversification, refinancing and interest-rate risk, foreign currency exposure, Brexit and European market volatility, restrictions on dividends, reliance on the external Advisor and Property Manager, related-party conflicts, and the need to maintain REIT qualification.
- Foreign investments represented 44.3% of annualized rental income. The United Kingdom contributed 19.0%, Michigan 13.7%, Germany 7.4%, the Netherlands 6.1%, and Finland 5.4%.
- As of year-end, 21.7% of annualized rental income came from tenants that were unrated or below investment grade. No single tenant exceeded 10% of annualized rental income, although FedEx contributed approximately 5%.
Subsequent to year-end, the company borrowed €74.0 million secured by its Finnish properties, raised $152.8 million gross through January 2019 ATM common-stock sales, increased authorized common shares from 100 million to 150 million, and entered into a new ATM agreement allowing up to $250.0 million of additional aggregate sales proceeds.
Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018. PricewaterhouseCoopers LLP issued an unqualified audit opinion on the consolidated financial statements and internal control over financial reporting.
Most important facts for an investor to verify
- Whether AFFO and cash flow from operations remain sufficient to cover common and preferred dividends without recurring reliance on borrowings or equity issuance.
- The maturity and refinancing plan for approximately $235.0 million of scheduled mortgage principal payments due in 2019, as well as the 2021 revolving facility and 2022 term-loan maturities.
- The final outcome and cash cost of the Former Service Provider litigation relative to the $7.4 million reserve.
- Tenant credit quality, lease renewals, and the effect of the 2022–2025 lease expirations, including approximately 24.3% of annualized straight-line rent expiring in 2024.
- The effect of interest rates, LIBOR transition, foreign currency movements, and Brexit-related conditions on debt service, asset values, and distributable cash flow.
- The economics and dilution from the January 2019 ATM issuance and the new $250.0 million ATM program.
- The compensation, termination provisions, and potential conflicts associated with the externally managed structure and related-party fees.
- The company’s continued compliance with debt covenants and the distribution limitations in the Credit Facility.