Global Net Lease, Inc. annual report, FY2019

Global Net Lease, Inc. — FY2019 Form 10-K Summary

Business context and reporting period

Annual report for the fiscal year ended December 31, 2019, filed February 28, 2020. Global Net Lease is an externally managed REIT focused on sale-leaseback transactions and mission-critical, single-tenant, net-leased commercial properties. At year-end, it owned 278 properties totaling 31.6 million rentable square feet, was 99.6% leased, and had a weighted-average remaining lease term of 8.3 years. Approximately 63% of annualized rental income was from the U.S., Puerto Rico and Canada and 37% from Europe; the portfolio was approximately 49% office, 46% industrial/distribution and 5% retail.

Key financial metrics

Metric	2019	2018
Revenue from tenants	$306.2 million	$282.2 million
Operating income	$114.9 million	$68.0 million
Net income	$46.5 million	$10.9 million
Net income attributable to common stockholders	$34.5 million	$1.1 million
Basic/diluted EPS	$0.40/$0.39	$0.01/$0.01
Cash flow from operations	$146.0 million	$144.6 million
AFFO attributable to common stockholders	$159.7 million	$147.3 million
Total assets	$3.70 billion	$3.31 billion
Total equity	$1.71 billion	$1.43 billion

Operating margin was approximately 37.5%, compared with 24.1% in 2018, while net income attributable to common stockholders represented approximately 11.3% of revenue, compared with 0.4% in 2018. Interest expense increased to $64.2 million from $58.0 million. Total debt was approximately $1.9 billion at year-end, with a weighted-average effective interest rate of 3.0%; 88.2% was fixed-rate or effectively fixed through interest-rate swaps. Cash and cash equivalents were $270.3 million, plus $4.0 million of restricted cash. Approximately $204.1 million was available under the revolving credit facility.

Gross real estate investments at cost were $3.76 billion, with net real estate investments of $3.25 billion. The debt leverage ratio was 49.3% of the purchase price of real estate investments and 51.1% of total assets. The revolving credit facility and term loan had outstanding balances of $199.1 million and $403.3 million, respectively, at year-end.

Material changes versus the prior comparable period

• Revenue increased 8.5%, primarily due to acquisitions, partly offset by dispositions and weaker foreign exchange rates.
• Operating income increased 69.0%, benefiting from a $23.6 million gain on dispositions in 2019 versus a $5.8 million loss in 2018, lower acquisition and transaction costs, and higher portfolio income.
• Net income attributable to common stockholders increased to $34.5 million from $1.1 million. The 2018 result was reduced by $13.9 million of acquisition, transaction and other costs, including a $7.4 million litigation reserve.
• Cash flow from operations was broadly stable, increasing 1.0%, while AFFO increased 8.4%. Core FFO declined to $145.6 million from $149.1 million, largely reflecting the absence of certain 2018 benefits and higher equity-based compensation.
• The company acquired 39 properties for $562.7 million, including capitalized acquisition costs, and invested $17.3 million in capital expenditures. It sold 103 properties for approximately $311.3 million of contract proceeds, generating a $23.6 million aggregate gain.
• Common stock issuance increased substantially: 13.4 million shares were sold through ATM programs for $262.6 million of gross proceeds. The company also raised $35.3 million through Series A preferred stock and $86.2 million through a new Series B preferred stock offering.
• The credit facility was amended and restated in August 2019, increasing total commitments to approximately $1.235 billion, lowering applicable interest margins, revising covenants, and extending the revolving facility maturity to August 2023 and the term loan maturity to August 2024.
• The company changed common-stock dividend payments from monthly to quarterly beginning after March 31, 2019, while maintaining an annualized rate of $2.13 per share.

Outlook, management commentary, risks and unusual items

Management expects operating income from existing and acquired properties to fund operating expenses and dividends, but acknowledged that cash on hand and financing proceeds have been required in some periods and may be required in the future. The credit facility generally restricts distributions to no more than 100% of its defined Adjusted FFO over four consecutive quarters, subject to limited exceptions. During 2019, the company paid $162.0 million of dividends and distributions; $146.0 million, or 90.1%, was covered by operating cash flow and $16.0 million, or 9.9%, was funded from available cash, including borrowing proceeds.

Subsequent to year-end, the company acquired one property for $9.4 million in January 2020 and four properties for an aggregate $38.9 million through the filing date. It also had signed purchase agreements for nine additional properties totaling approximately $184.0 million and non-binding letters of intent for three properties totaling $47.7 million; completion was not assured.

• Tenant credit and concentration risk remain significant. FedEx represented approximately 5% of annualized rental income, while 31.8% of annualized rental income came from tenants that were unrated or below investment grade.
• Geographic exposure includes the United Kingdom at approximately 18% of annualized rental income and Michigan at approximately 15%, creating sensitivity to regional economic conditions, Brexit-related effects and currency movements.
• Foreign exchange risk affects European and Canadian rental income, debt service and equity. The average GBP/USD and EUR/USD rates declined 4.3% and 5.2%, respectively, during 2019 versus 2018.
• Only approximately 3% of total debt was unhedged variable-rate LIBOR debt at year-end, but the company identified uncertainty and potential cost increases associated with the transition away from LIBOR.
• Debt maturities are concentrated in 2023 and 2024, including approximately $563.9 million of total debt maturities in 2023 and $640.6 million in 2024. Refinancing may not be available on favorable terms.
• 2019 included a $6.4 million impairment charge related to two Netherlands properties, $9.5 million of equity-based compensation expense, and a $0.9 million loss on debt extinguishment.
• The company is externally managed by affiliates of AR Global. Related-party operating fees were $33.3 million in 2019, including $27.5 million of asset management fees and $5.8 million of property management fees. Conflicts of interest and limited termination rights are disclosed risks.
• The company settled litigation with its former European service provider in March 2019. It incurred $1.0 million of litigation costs in 2019 and paid a settlement reserve recorded in 2018.
• The company intends to maintain REIT qualification but could incur substantial tax and distribution consequences if it fails to satisfy REIT requirements.

Most important facts for an investor to verify

• Reconcile AFFO and the credit facility’s separately defined Adjusted FFO to total dividends and distributions, particularly because 9.9% of 2019 distributions were funded from cash on hand and borrowing proceeds.
• Review debt maturities, refinancing assumptions, covenant compliance and available borrowing capacity, especially for 2023–2024 maturities.
• Assess tenant credit quality, renewal exposure and the 2024–2025 lease expirations, which represent approximately 18.8% and 12.5% of annualized straight-line rent, respectively.
• Evaluate the sustainability of occupancy, rent escalations and cash collections relative to straight-line revenue; cumulative unbilled straight-line rent was $51.8 million at year-end.
• Review dilution from 2019 common and preferred equity issuance, outstanding preferred-stock liquidation preferences and future ATM capacity.
• Examine related-party fees, the external advisory structure, conflicts of interest and the 2018 outperformance award, which could result in additional equity-based compensation or dilution.
• Verify the effects of foreign exchange, Brexit and LIBOR transition on rental income, debt service, asset values and distributions.