Global Net Lease, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Global Net Lease, Inc. is an externally managed Maryland REIT focused primarily on single-tenant, net-leased commercial properties and sale-leaseback transactions. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018.
- Portfolio: 343 properties, approximately 27.4 million rentable square feet, 99.5% leased, and an 8.1-year weighted-average remaining lease term.
- Geographic mix by annualized straight-line rental income: 55.8% United States and 44.2% Europe.
- Common shares outstanding increased to 83.8 million at March 31, 2019 from 76.1 million at December 31, 2018, primarily from ATM equity issuance.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue from tenants | $75.5 million | $68.1 million | +10.8% |
| Operating income | $24.1 million | $21.8 million | +10.3% |
| Operating margin | 31.9% | 32.1% | Down modestly |
| Net income | $8.3 million | $4.8 million | +72.0% |
| Net income attributable to common stockholders | $5.8 million | $2.4 million | +145.4% |
| Basic and diluted EPS | $0.07 | $0.03 | Increased |
| FFO attributable to common stockholders | $36.2 million | $31.9 million | +13.6% |
| Core FFO attributable to common stockholders | $36.5 million | $33.1 million | +10.2% |
| AFFO attributable to common stockholders | $39.5 million | $35.1 million | +12.6% |
| Net cash provided by operating activities | $24.8 million | $40.7 million | -39.2% |
Net income benefited from higher rental revenue, a $0.9 million gain on a property disposition, and a substantially smaller derivative-related loss than in the prior-year quarter. Interest expense increased to $15.2 million from $13.0 million as average borrowings increased. Q1 2019 included $2.1 million of equity-based compensation expense, compared with a $0.8 million expense reversal in Q1 2018.
- Total assets were $3.32 billion at March 31, 2019, including $2.95 billion of net real estate investments.
- Cash and cash equivalents were $95.3 million; cash, cash equivalents and restricted cash totaled $98.6 million.
- Debt totaled approximately $1.7 billion, consisting of $1.13 billion of mortgage notes, $260.4 million drawn on the revolver and $273.4 million on the term loan.
- Debt leverage was 45.8%, weighted-average debt maturity was 4.2 years, and 83.7% of debt was fixed-rate or swapped to fixed-rate.
- Approximately $149.2 million was available under the revolving credit facility at March 31, 2019.
- Common dividends paid were $43.3 million and preferred dividends paid were $2.5 million. Total dividends and distributions of $45.9 million exceeded operating cash flow, with 51.4% funded from available cash on hand, primarily borrowings.
Material changes versus Q1 2018 and year-end 2018
- Revenue increased primarily from the net acquisition of 16 properties since March 31, 2018, partially offset by weaker GBP and EUR exchange rates.
- The Company acquired two properties for $23.5 million, invested approximately $11.3 million in capital expenditures and sold one property for $9.5 million, generating $9.3 million of net proceeds and a $0.9 million gain.
- Common stock ATM sales generated $150.2 million of net proceeds from 7.76 million shares; preferred ATM sales generated $1.6 million of net proceeds.
- The revolving credit balance declined from $363.9 million at December 31, 2018 to $260.4 million at March 31, 2019, while mortgage debt increased modestly following a $84.2 million Finland refinancing.
- Operating cash flow declined substantially because of unfavorable working-capital movements, including changes in accounts payable and accrued expenses, prepaid expenses and taxes payable.
- ASC 842 was adopted prospectively on January 1, 2019. The Company recorded operating lease right-of-use assets and liabilities for ground leases and combined lease revenue with tenant reimbursements. It also recorded a $3.4 million write-off of accounts receivable, net of reserves, against opening accumulated deficit.
- Adoption of ASU 2017-12 reduced accumulated deficit by $0.3 million and reduced accumulated other comprehensive income by the same amount. New accounting treatment also fixed the valuation of the 2018 outperformance award, rather than remeasuring it each period.
Outlook, commentary, risks and unusual items
- The filing provides no formal earnings or acquisition guidance. Management expects to fund operations and dividends through property cash flow, financing, equity issuance, property sales and other capital sources, but states that dividends are not assured.
- Management identified pending acquisitions totaling approximately $96.1 million under definitive agreements, plus a non-binding $12.5 million capital expenditure and lease amendment proposal. Completion is not assured.
- Subsequent to quarter-end, the Company acquired three U.S. properties for $41.9 million and borrowed $97.5 million secured by 16 properties; approximately $90.2 million of that borrowing repaid revolver debt.
- The Company had definitive agreements to dispose of six properties, including properties in the United States, Germany and the United Kingdom. Completion and proceeds are subject to conditions.
- A planned German refinancing of approximately €51.5 million remained subject to closing conditions as of the filing date, including replacement of an easement. The filing states that completion was not assured.
- The Former Service Provider litigation was settled and dismissed in March 2019. The Company paid the previously reserved $7.4 million settlement and incurred $0.3 million of additional legal expense in Q1 2019.
- Credit facility covenants limit distributions generally to 95% of Adjusted FFO over four consecutive quarters, subject to a limited annual exception. The Company used the exception in Q1 2019 to pay distributions between 95% and 100% of Adjusted FFO.
- Principal risks include tenant credit and lease-renewal risk, refinancing and interest-rate risk, foreign-currency exposure, reliance on related-party service providers, conflicts of interest, dividend sustainability, capital-market access, REIT qualification and European political or economic disruption.
Important facts for investors to verify
- Whether operating cash flow and AFFO continue to cover common and preferred dividends without reliance on borrowings or asset sales.
- The timing and terms of upcoming mortgage maturities, particularly the $214.5 million of scheduled mortgage principal payments during the remainder of 2019.
- Completion and economics of the announced refinancings, acquisitions and dispositions.
- Tenant credit quality, lease expirations and geographic concentration, including the 13.7% annualized rental-income concentration in Michigan and 19.4% concentration in the United Kingdom.
- The effect of additional ATM equity issuance on per-share results, leverage and dilution.
- The sustainability of related-party fees, including $8.0 million of Q1 operating fees and the revised 2018 outperformance award expense.
- Exposure to GBP and EUR movements, variable-rate debt and derivative fair-value changes.