Global Net Lease, Inc. quarterly report, Q1 FY2016

Global Net Lease, Inc. — Q1 2016 Form 10-Q Summary

Business Context and Reporting Period

Global Net Lease, Inc. is an externally managed REIT focused primarily on single-tenant, net-leased commercial properties and sale-leaseback transactions. This unaudited filing covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015.

Portfolio: 329 properties comprising 18.7 million rentable square feet; 100% leased with a weighted-average remaining lease term of 11.0 years.
Geographic mix by original purchase price: 60.4% United States and Puerto Rico and 39.6% Europe.
Shares outstanding: 168.9 million at March 31, 2016 and April 29, 2016.

Financial Performance and Key Metrics

Metric	Q1 2016	Q1 2015	Change
Total revenue	$55.0 million	$50.0 million	10.0% increase
Rental income	$51.5 million	$47.4 million	8.6% increase
Operating income	$18.1 million	$20.7 million	12.6% decrease
Net income attributable to stockholders	$6.5 million	$25.9 million	74.9% decrease
Basic and diluted EPS	$0.04	$0.14	Decrease
Cash flow from operations	$28.1 million	$34.5 million	18.4% decrease
FFO attributable to stockholders	$30.0 million	Not provided in filing text	Not comparable from provided data
AFFO attributable to stockholders	$32.3 million	Not provided in filing text	Not comparable from provided data

Approximate Q1 2016 margins were 33.0% for operating income, 11.8% for net income attributable to stockholders and 58.8% for AFFO. These calculated margins are based on reported total revenue.

Property operating expenses increased to $5.6 million from $4.1 million.
Operating fees to related parties increased to $4.8 million from $1.2 million, primarily reflecting the post-listing cash asset-management fee structure and property-management fees.
Depreciation and amortization increased to $23.8 million from $21.1 million.
Interest expense increased to $10.6 million from $7.8 million due primarily to higher average borrowings and additional 2015 financing.
Other expense was $11.0 million versus other income of $6.8 million in the prior-year quarter, largely because 2015 included foreign-currency and derivative gains that did not recur.

Balance Sheet, Debt and Liquidity

Total assets were $2.50 billion at March 31, 2016, compared with $2.54 billion at December 31, 2015.
Net real estate investments were $2.40 billion; cash and cash equivalents were $45.8 million, and restricted cash was $4.3 million.
Mortgage notes payable, net: $525.5 million. Gross mortgage debt was $532.4 million with a weighted-average effective interest rate of 3.1%.
Credit facility borrowings: $703.3 million under a $740.0 million facility, leaving $36.7 million of stated unused capacity. The company provided notice to extend the initial July 25, 2016 maturity to July 25, 2017, subject to the facility's conditions.
Total debt was approximately $1.2 billion, and management reported a 46.9% debt leverage ratio based on total debt relative to the purchase price of real estate investments.
The company was in compliance with its credit facility and mortgage covenants.
Cash flow from operations was $28.1 million, while total dividends and distributions were $30.9 million; 91.1% was funded from operating cash flow and 8.9% from available cash.

Material Changes Versus the Prior Comparable Period

Revenue benefited from 20 properties acquired since March 31, 2015, with an aggregate purchase price of approximately $0.2 billion. No properties were acquired in Q1 2016.
Net income declined substantially because Q1 2015 included $8.9 million of unrealized gains on non-functional foreign-currency advances, $4.2 million of derivative gains and $1.4 million of gains on ineffective hedges. Q1 2016 instead reflected losses in these categories.
Operating income declined despite higher revenue because of increased related-party fees, property expenses, depreciation and amortization, and equity-based compensation.
Operating cash flow declined as the prior-year period included favorable noncash and working-capital effects; Q1 2016 cash flow was also affected by the timing of taxes and other operating items.
Investing cash use fell to $0.1 million from $30.3 million because there were no acquisitions in Q1 2016.
Financing cash use increased to $51.8 million from financing cash provided of $7.9 million, primarily reflecting $20.0 million of credit-facility repayments and $30.0 million of cash dividends.
Accumulated other comprehensive loss increased to $11.9 million from $3.6 million, primarily due to unfavorable fair-value changes in designated derivatives.

Outlook, Risks, Contingencies and Unusual Items

The filing does not provide quantitative earnings or revenue guidance. Management stated that operating income from the properties is expected to cover operating expenses and monthly dividends, but dividends are not assured and may be reduced or suspended.
Monthly dividends were declared at $0.059166667 per share. Management disclosed that dividends may require available cash, borrowings, additional securities issuance or fee waivers if operating cash flow is insufficient.
Significant refinancing risk exists because the credit facility's initial maturity was July 25, 2016 and substantial foreign-currency credit-facility borrowings were scheduled for repayment at that date, although the company requested an extension.
The company had a net interest-rate-swap liability of $13.9 million and a net derivative liability position of approximately $10.3 million. The company estimated that a 1% increase in interest rates would increase annual interest expense on unhedged variable-rate debt by approximately $4.0 million.
Foreign-currency exposure is material. Foreign-currency draws exceeded related net investments by approximately $91.3 million, and the company had significant Euro and British pound rental receipts and debt obligations.
The company is dependent on its Advisor, Property Manager and Service Provider, all related parties, and incurred $5.4 million of related-party operational fees in Q1 2016. The company has no direct employees.
RCS Capital Corporation, parent of the former dealer manager and certain service providers, filed for Chapter 11 bankruptcy in January 2016. The transfer agency relationship was moved directly to DST effective February 29, 2016.
The company identified a prior classification error involving restricted cash and concluded that prior financial statements were not materially misstated. It also disclosed prior-period out-of-period adjustments and derivative-accounting corrections recorded in 2015.
No material legal or regulatory proceedings were pending, and no material environmental claims were identified as of March 31, 2016.

Important Facts for Investors to Verify

Completion and terms of the requested extension or refinancing of the credit facility, including maturity, availability and covenant compliance.
Whether operating cash flow can consistently cover the monthly dividend, including the effect of debt service, related-party fees and capital requirements.
Reconciliation of FFO and AFFO to later-period results and confirmation of the company's methodology versus REIT peers.
Exposure to Euro and British pound exchange rates, interest-rate movements and the company's over-hedged foreign-currency position.
Tenant credit quality, geographic concentrations, lease expirations and renewal assumptions despite current 100% occupancy.
The economic effect and governance implications of the external-management and related-party fee arrangements.
Whether the company remains qualified as a REIT and continues to satisfy applicable distribution and operational requirements.