Global Net Lease, Inc. — 2023 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Global Net Lease, Inc. is an externally managed REIT focused on globally diversified, primarily single-tenant, net-leased commercial properties and sale-leaseback transactions. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022.
At March 31, 2023, the company owned 317 properties totaling 39.6 million rentable square feet, was 98.0% leased, and had a 7.8-year weighted-average remaining lease term. The portfolio was 55% industrial/distribution, 40% office and 5% retail; 61% of annualized straight-line rental income was from the U.S. and Canada and 39% from Europe. Approximately 59.6% of annualized straight-line rental income was from actual or implied investment-grade tenants.
Financial Performance and Key Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue from tenants | $94.3 million | $97.1 million | Down $2.8 million |
| Operating income | $30.4 million | $32.8 million | Down $2.5 million |
| Operating margin | 32.2% | 33.8% | Down approximately 160 bps |
| Net income (loss) | $(0.9) million | $10.5 million | Down $11.4 million |
| Net income (loss) attributable to common stockholders | $(6.0) million | $5.5 million | Down $11.5 million |
| Basic and diluted EPS | $(0.06) | $0.05 | Down $0.11 |
| FFO attributable to common stockholders | $31.0 million | $45.6 million | Down $14.6 million |
| Core FFO attributable to common stockholders | $31.1 million | $45.6 million | Down $14.5 million |
| AFFO attributable to common stockholders | $39.8 million | $44.3 million | Down $4.5 million |
| Net cash provided by operating activities | $63.0 million | $61.8 million | Up $1.2 million |
Revenue declined primarily because average GBP and EUR exchange rates were lower against the U.S. dollar. On a constant-currency basis, revenue would have been approximately $97.5 million, or $3.2 million higher than reported.
Interest expense increased to $27.0 million from $24.1 million as the weighted-average effective interest rate on total debt rose to 4.4% from 3.4%. The company recorded a $1.7 million derivative loss in Q1 2023 compared with a $4.6 million derivative gain in Q1 2022. General and administrative expense increased to $5.7 million from $3.9 million, principally because of approximately $1.7 million of legal and other expenses related to the proxy contest and Blackwells litigation.
Q1 2023 operating cash flow covered all reported dividends and distributions of $46.9 million. The company continued paying common dividends at an annualized rate of $1.60 per share, or $0.40 per quarter. Series A and Series B preferred dividends accrued at annual rates of 7.25% and 6.875%, respectively.
Balance Sheet, Debt and Liquidity
- Total assets were $4.04 billion at March 31, 2023, including net real estate investments of $3.67 billion.
- Cash and cash equivalents were $119.2 million, compared with $103.3 million at December 31, 2022.
- Total debt was approximately $2.5 billion, consisting principally of $1.24 billion of mortgage debt, $767.9 million drawn under the revolving credit facility and $493.5 million of senior notes, net.
- Debt increased from approximately $2.4 billion at year-end 2022, primarily because of additional revolving-credit borrowings used to fund acquisitions.
- Approximately 67.0% of total debt was fixed-rate or swapped to fixed rates at an average rate of 3.9%; 33.0% was variable-rate debt at an average rate of 5.3%.
- The revolving credit facility had total commitments of $1.45 billion, matured October 2026 subject to extension options, and had approximately $65.2 million available at March 31, 2023. Its weighted-average effective interest rate was 5.5% after swaps.
- Debt leverage was 58.3% of the purchase price of real estate investments, compared with 56.6% at December 31, 2022. Weighted-average debt maturity was 3.7 years.
- Management stated that operating cash flow and existing cash were expected to fund quarterly dividends and anticipated capital expenditures. The company was in compliance with its mortgage, credit facility and senior note covenants at March 31, 2023.
Investing and Financing Activity
The company acquired eight retail properties totaling approximately 323,730 square feet for $81.4 million during the quarter and made $7.4 million of capital expenditures. No properties were sold. Investing cash outflows were $88.8 million.
Financing cash inflows were $39.5 million, including $91.0 million of revolving-credit borrowings, partly offset by $4.6 million of mortgage principal repayments and $46.8 million of common, preferred and other distributions.
Material Changes Versus the Prior Comparable Period
- Reported revenue decreased 2.9%, although constant-currency revenue increased approximately 3.2%.
- Net income attributable to common stockholders shifted from $5.5 million of income to a $6.0 million loss.
- Operating margin declined to 32.2% from 33.8%, while interest expense rose approximately 12%.
- FFO declined substantially, partly reflecting the absence of the approximately $0.3 million lease-termination-fee revenue recognized in Q1 2022, the unfavorable derivative comparison and higher financing costs.
- AFFO declined less sharply than FFO because Q1 2023 AFFO excluded $1.7 million of proxy contest and litigation expenses and adjusted for unrealized derivative and foreign-currency effects.
- The company added eight properties and increased revolving-credit borrowings by approximately $98.0 million from December 31, 2022.
- Seven lease renewals were executed, including a Rheinmetall renewal totaling approximately 0.7 million square feet and $6.8 million of annual net new straight-line rent. Rental-rate changes were not significant.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or financial guidance. Management expects continued higher legal and other costs related to the proxy contest and Blackwells litigation during 2023.
- Debt maturities: Approximately $250.1 million of mortgage principal was scheduled to mature during the remainder of 2023, including $56.0 million in the second quarter and $194.0 million in the third quarter. On May 5, 2023, the company repaid the $56.0 million German mortgage using additional EUR borrowings under the revolving credit facility. Management expected to repay the remaining U.K. bulk loan in May 2023 using additional GBP borrowings, but the filing text does not confirm completion of that repayment.
- Liquidity constraints: The $65.2 million of stated revolving-credit availability was subject to borrowing-base requirements, including a $7.4 million letter of credit and other letters of credit related to mortgage cash-sweep events. The company also had a limited unsecured guaranty of approximately $24.7 million related to U.K. mortgage obligations.
- Mortgage cash sweeps: A debt-service-coverage-ratio sweep trigger remained in place for Multi-Tenant Mortgage Loan III. The company intended to increase the related letter of credit by $1.2 million, with future increases potentially reducing revolver availability until compliance is restored for two consecutive quarters.
- Lease and tenant risk: The portfolio was highly leased, but tenant defaults, lease terminations, non-renewals and concentration in certain markets could materially affect revenue. The United States represented 60.1% and the United Kingdom 21.9% of annualized straight-line rental income; Michigan represented 14.7%.
- Interest-rate and currency risk: Higher rates could increase costs on variable-rate debt. Foreign operations expose the company to GBP, EUR and CAD fluctuations, although the company uses debt and derivatives as hedges.
- Activist litigation: The company and Blackwells had pending litigation concerning board nominations and proxy proposals. The court denied the company’s preliminary-injunction motion on May 3, 2023, and the company filed an appeal on May 4, 2023. The outcome and related expenses remained uncertain.
- Related-party dependence: The company is externally managed by affiliates of AR Global and incurred $10.1 million of related-party operating fees in Q1 2023, including asset and property management fees.
- REIT status: The company intends to maintain REIT qualification but noted that qualification depends on satisfying ongoing tax, organizational and operational requirements.
Most Important Facts for an Investor to Verify
- Whether the remaining U.K. mortgage repayment was completed as planned and the resulting revolver balance, borrowing-base availability and interest expense.
- Current liquidity after refinancing 2023 maturities, including the effect of letters of credit and mortgage cash-sweep requirements.
- The sustainability of common and preferred dividends relative to AFFO, cash flow and credit-facility distribution limits.
- Quarterly FFO and AFFO trends excluding unusual proxy litigation expenses, derivative mark-to-market movements and foreign-exchange effects.
- Progress and outcome of the Blackwells litigation and proxy contest, including any effects on governance, costs or strategic direction.
- Tenant renewal, vacancy and credit trends, particularly for properties with short remaining lease terms or exposure to concentrated markets.
- The impact of higher variable interest rates and the company’s future hedging and refinancing strategy.