Global Net Lease, Inc. — 2020 First-Quarter Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 7, 2020. Global Net Lease is an externally managed REIT focused on commercial, primarily single-tenant net-leased properties. At quarter-end, it owned 288 properties totaling 34.2 million rentable square feet, was 99.6% leased, and had a 9.0-year weighted-average remaining lease term.
Financial Performance and Position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue from tenants | $79.2 million | $75.5 million | +5.0% |
| Operating income | $23.8 million | $24.1 million | -1.1% |
| Net income | $9.6 million | $8.3 million | +16.0% |
| Net income attributable to common stockholders | $5.0 million | $5.8 million | -13.0% |
| Basic and diluted EPS | $0.05 | $0.07 | Decreased |
| FFO attributable to common stockholders | $38.6 million | $36.2 million | +6.5% |
| Core FFO attributable to common stockholders | $38.9 million | $36.5 million | +6.5% |
| AFFO attributable to common stockholders | $39.8 million | $39.5 million | +0.8% |
| Net cash provided by operating activities | $41.9 million | $24.8 million | +$17.1 million |
Operating margin was approximately 30.1%, compared with 31.9% before the 2019 disposition-related gain and approximately 30.7% including that gain. Net income margin was approximately 12.1%, compared with 11.0% in the prior-year quarter. AFFO covered reported dividends and distributions of $51.4 million at approximately 77%; operating cash flow covered approximately 81.5% of those payments, with the balance funded from cash on hand and borrowings.
At March 31, 2020, total assets were $3.82 billion and cash and cash equivalents were $343.4 million, compared with $270.3 million at December 31, 2019. Total equity was $1.65 billion. Debt reported on the balance sheet consisted of $1.25 billion of mortgage notes, $399.2 million drawn on the revolving facility, and $390.5 million of term debt, or approximately $2.04 billion net of stated discounts and financing costs. Management reported total debt of approximately $2.1 billion, a 52.1% debt-to-real-estate-cost leverage ratio, a 3.1% weighted-average interest rate, and a 5.4-year weighted-average maturity.
Approximately 89.6% of debt was fixed-rate or swapped to fixed, while 10.4% was variable-rate. Only approximately $23.2 million remained available under the revolving facility at quarter-end. The Company stated that it was in compliance with its debt covenants.
Material Changes Versus Q1 2019
- Revenue increased primarily from acquisitions completed after March 31, 2019, partly offset by dispositions and unfavorable foreign-exchange translation.
- The Company acquired 10 properties for $113.1 million, compared with two properties for $23.5 million in Q1 2019. No properties were sold in Q1 2020; Q1 2019 included a $0.9 million disposition gain.
- Operating fees to related parties increased to $8.8 million from $8.0 million, primarily because of a higher variable base management fee.
- Interest expense increased to $16.4 million from $15.2 million as average borrowings increased.
- Net income attributable to common stockholders and EPS declined despite higher revenue and FFO, principally because preferred-stock dividends increased and the prior-year quarter included a disposition gain.
- Cash flow from operations increased materially, while investing cash use rose to $115.9 million because of acquisitions. Financing cash flow of $153.5 million was primarily driven by $205.0 million of new revolving-facility borrowings.
- Other comprehensive loss was $19.7 million, primarily reflecting a $12.6 million cumulative translation loss and a $7.2 million loss on designated derivatives.
Guidance, Outlook, Risks, and Unusual Items
- COVID-19 collections: Management reported collecting approximately 98% of April cash rent as of April 30, 2020, including approximately 100% from its top 20 tenants. Approximately 1% of April cash rent was subject to approved deferral agreements and another 1% was under negotiation. The filing cautions that April results may not predict future collections.
- Rent deferrals: Typical agreements deferred approximately 30% of monthly rent for April through June 2020 until the first half of 2021. The Company expects to apply available COVID-19 lease-accounting relief and generally does not expect significant revenue or FFO effects if deferred amounts remain collectible.
- Dividend reduction: The common dividend was reduced from $0.5325 per quarter, or $2.13 annualized, to $0.40 per quarter, or $1.60 annualized, beginning with the April 2020 declaration. Management estimated annual cash savings of approximately $48 million.
- Liquidity actions: The Company drew $205 million under its revolving credit facility in March 2020. However, only approximately $23.2 million of additional borrowing capacity was available at quarter-end, subject to borrowing-base and covenant requirements.
- Acquisitions: Two definitive agreements totaling approximately $11.2 million and two non-binding letters of intent totaling approximately $45.6 million were outstanding after quarter-end. The Company may terminate or renegotiate transactions in response to COVID-19-related market disruption.
- Advisory agreement: On May 6, 2020, the Company temporarily lowered the Core AFFO per-share hurdles for incentive compensation and required incentive compensation earned for April through December 2020 to be paid in cash only. No incentive compensation was earned in either first quarter.
- Rights plan: In April 2020, the Company adopted a rights plan generally triggered when a person or group acquires 4.9% or more of the common stock without board approval. The plan expires April 8, 2021 unless earlier amended, exercised, exchanged, or redeemed.
- Key risks include tenant defaults or bankruptcies, rent deferrals and collection reserves, limited remaining revolver availability, refinancing and covenant risk, interest-rate and foreign-exchange exposure, potential impairment charges, dependence on related-party managers, and the continuing uncertainty surrounding COVID-19.
Investor Verification Priorities
- Verify subsequent rent collections, deferral activity, tenant credit quality, and whether deferred 2020 rent is collected in 2021.
- Reconcile total debt, borrowing-base availability, covenant compliance, and near-term maturities, particularly the 2020 and 2021 mortgage maturities.
- Assess whether the reduced common dividend is sustainable relative to AFFO, operating cash flow, debt requirements, and credit-facility distribution restrictions.
- Review the effect of foreign-exchange movements and derivative fair-value changes on comprehensive income, equity, and future interest expense.
- Evaluate the assumptions supporting the absence of goodwill impairment and the collectability of straight-line rent and other receivables.
- Monitor the amended advisory-fee hurdles, related-party fees, and any future incentive compensation.