Global Net Lease, Inc. annual report, FY2014

Business Context and Reporting Period

American Realty Capital Global Trust, Inc. filed its Form 10-K for the fiscal year ended December 31, 2014. The company was a non-listed REIT focused primarily on single-tenant, net-leased commercial properties and sale-leaseback transactions in the United States and Europe. It completed its initial public offering on June 30, 2014 and subsequently announced its intention to list on the New York Stock Exchange under the symbol GNL and change its name to Global Net Lease, Inc.

At year-end, the company owned 307 properties totaling 16.3 million rentable square feet. The portfolio was 100% leased, with a weighted-average remaining lease term of 11.6 years and approximately 61% of investments in the United States and 39% in Europe.

Financial Performance and Key Metrics

Metric	2014	2013
Total revenue	$93.4 million	$4.0 million
Rental income	$88.2 million	$3.9 million
Operating loss	$(42.1) million	$(6.1) million
Net loss	$(53.6) million	$(7.0) million
Net loss per share	$(0.43)	$(1.28)
Cash flow used in operations	$(9.7) million	$(3.6) million
Cash flow used in investing	$(1.52) billion	$(111.5) million
Cash flow provided by financing	$1.58 billion	$124.2 million

Real estate investments at cost increased to $2.34 billion from $196.9 million; total assets increased to $2.43 billion from $214.9 million.
Cash and cash equivalents were $64.7 million, plus $6.1 million of restricted cash.
Total stockholders’ equity was $1.42 billion, compared with $122.7 million at December 31, 2013.
Mortgage notes payable were $281.2 million and the revolving credit facility had $659.3 million outstanding. Total debt was approximately $940.5 million, representing 39.5% of real estate investments based on the company’s stated leverage calculation.
The credit facility had a $680.0 million borrowing limit and $20.7 million of currently drawable unused capacity. Its initial maturity was July 2016, with two one-year extension options.
Weighted-average debt interest was reported at 3.7%, with a weighted-average remaining debt term of 4.9 years.
Annualized rental income was $189.5 million on a straight-line basis. Major concentrations included the United Kingdom at 22.0%, Germany at 10.9%, Texas at 10.4%, RWE AG at 6.1% and GSA properties at 6.0%.
The company reported modified funds from operations of $59.4 million for 2014. MFFO is a non-GAAP measure and should not be treated as equivalent to net income or operating cash flow.
Distributions paid to common stockholders totaled $80.3 million, including $35.4 million in cash and $44.9 million reinvested through the DRIP. The company disclosed that distributions were funded from common stock issuance and DRIP proceeds rather than operating cash flow.
For tax purposes, 70.4% of 2014 distributions, or $0.50 per share annually, represented a return of capital; 29.6%, or $0.21 per share, represented ordinary dividends.

Material Changes Versus the Prior Comparable Period

The company acquired 270 properties during 2014, compared with 36 properties acquired during 2013 and 37 properties owned at December 31, 2013.
Revenue rose sharply as the portfolio expanded, but acquisition and transaction expenses increased to $83.5 million from $7.7 million, depreciation and amortization increased to $40.4 million from $2.1 million, and interest expense increased to $14.9 million from $1.0 million.
Shares outstanding increased to 177.9 million from 15.7 million, primarily reflecting the IPO and DRIP. Gross IPO proceeds totaled approximately $1.8 billion; cumulative offering costs were $188.2 million.
The company drew substantially on its revolving credit facility in 2014; there were no outstanding credit-facility borrowings at December 31, 2013.
Operating results remained loss-making under GAAP. The company’s cumulative GAAP net loss since inception reached $61.0 million.
The company revised its historical cash-flow presentation for certain rent credits and credit-line draws used directly to acquire real estate. Management stated that the errors were significant but not material to prior-period cash flows.
Fourth-quarter rental revenue was $42.2 million, net loss was $5.2 million, and basic and diluted net loss per share was $0.03. Fourth-quarter MFFO was $29.4 million.

Guidance, Outlook, Risks and Unusual Items

Management did not provide explicit earnings or distribution guidance. The company stated that it expected operating cash flow to fund a greater proportion of distributions as the portfolio matured, but distributions were not assured and could be reduced or suspended by the board.

The company had a limited operating history and had not generated sufficient operating cash flow to fund distributions. All distributions to date were disclosed as having been paid from offering proceeds, borrowings or other non-operating sources, with 2014 cash distributions specifically funded from common stock issuance.
The company’s investment adviser, property manager, dealer manager and other service providers were related parties or affiliates of the sponsor. Related-party fees and reimbursements included $32.9 million of acquisition fees and reimbursements, $6.5 million of financing coordination fees, $1.3 million of property management fees and $561,000 of strategic advisory fees in 2014. The property manager waived approximately $690,000 of property management fees.
There were significant conflicts of interest in allocating investment opportunities, management time and fees among the company and other sponsor-affiliated programs.
There was no established public trading market for the shares. The share repurchase program was subject to holding-period, pricing, volume and funding limitations; the company repurchased 99,969 shares in 2014 at an average price of $9.91.
Interest-rate, refinancing and liquidity risk were material, particularly because $659.3 million was outstanding under a revolving facility with a 2016 maturity. A 100-basis-point increase in market rates was estimated to reduce the fair value of fixed-rate debt by $1.8 million.
International operations exposed the company to currency, political, regulatory, tax and economic risks. The company recognized a $186,000 foreign-currency loss and $1.9 million of gains on non-designated derivative instruments in 2014.
Tenant credit, geographic and industry concentration could affect rental income. The portfolio included substantial exposure to financial services, discount retail, technology, utilities and healthcare.
The company’s REIT qualification depended on continuing compliance with complex income, asset, ownership and distribution requirements. Failure to qualify could result in corporate-level taxation and reduced cash available for distributions.
No material pending legal or regulatory proceedings were reported, and management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2014.
Subsequent to year-end, two properties totaling 136,874 square feet were acquired for $38.7 million, bringing the portfolio to 309 properties and $2.42 billion of base purchase price as of April 2, 2015.

Important Facts for Investors to Verify

Whether the planned NYSE listing occurred on the expected timetable and whether the company completed the proposed name change to Global Net Lease, Inc.
The recurring cash-flow capacity of the portfolio after excluding acquisition fees, straight-line rent, derivative gains and other MFFO adjustments.
Whether distributions are subsequently funded by operating cash flow rather than equity issuance, DRIP proceeds or borrowings.
The refinancing plan for the $659.3 million credit facility maturing initially in July 2016, including available borrowing capacity and covenant compliance.
Tenant credit quality, lease renewal prospects and exposure to RWE AG, GSA properties, the United Kingdom, Germany, Texas and other concentrated markets.
The effect of related-party fees, incentive arrangements, adviser conflicts and any future internalization or strategic transaction.
The accuracy and evolution of property valuations, NAV, intangible lease assets of $462.8 million and the reported net tangible book value of $5.48 per share compared with the $10.00 offering price.
The impact of currency movements, interest rates and derivative positions on earnings, comprehensive income and liquidity.