Global Net Lease, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2023. Global Net Lease is an externally managed REIT focused on globally diversified commercial real estate, primarily sale-leaseback and single-tenant net-lease properties. At June 30, 2023, the portfolio comprised 317 properties, 39.6 million rentable square feet, 97.7% leased, and a 7.6-year weighted-average remaining lease term. Approximately 60% of annualized straight-line rent came from the U.S. and Canada and 40% from Europe; the portfolio was 55% industrial/distribution, 40% office, and 5% retail.
Financial and operating metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue from tenants | $95.8 million, versus $95.2 million | $190.2 million, versus $192.3 million |
| Operating income | $4.5 million, versus $14.8 million | $34.9 million, versus $47.7 million |
| Net income (loss) | $(26.3) million, versus $(0.7) million | $(27.1) million, versus $9.8 million |
| Net loss attributable to common stockholders | $(31.4) million, versus $(5.8) million | $(37.3) million, versus $(0.4) million |
| Loss per common share | $(0.30), versus $(0.06) | $(0.36), versus $(0.01) |
| FFO attributable to common stockholders | $5.9 million, versus $49.5 million | $37.0 million, versus $95.1 million |
| Core FFO attributable to common stockholders | $27.7 million, versus $50.0 million | $58.8 million, versus $95.6 million |
| AFFO attributable to common stockholders | $41.4 million, versus $45.0 million | $81.2 million, versus $89.4 million |
| Net cash provided by operating activities | Not separately presented | $84.4 million, versus $105.9 million |
Operating margin was approximately 4.7% in the second quarter and 18.3% for the first six months, compared with approximately 15.5% and 24.8%, respectively, in the prior-year periods. Revenue was broadly stable in the second quarter but declined year to date primarily because of foreign-exchange translation; on a constant-currency basis, revenue would have increased to approximately $96.0 million for the quarter and $193.3 million year to date.
- At June 30, 2023, total assets were $4.0 billion, including $3.65 billion of net real estate investments, and cash and cash equivalents were $100.9 million.
- Total debt was approximately $2.5 billion: $995.2 million of mortgage debt, $1.04 billion drawn on the revolving credit facility, and $493.8 million of senior notes, net.
- Total debt had a weighted-average interest rate of 4.8%; 72% was fixed-rate or swapped to fixed and 28% was variable-rate, with a weighted-average rate of 6.5%.
- Revolving credit commitments totaled $1.45 billion, with approximately $273.2 million available at quarter-end. The facility matures October 8, 2026, subject to extension options.
- Debt leverage was 58.8% of real estate investment cost, compared with 56.6% at December 31, 2022. Management reported compliance with the credit facility, senior note, and mortgage covenants.
- Investing cash outflows were $92.5 million, including $81.4 million for eight property acquisitions and $11.2 million of capital expenditures. No properties were sold during the period.
- Financing cash flow was positive $4.2 million, reflecting $356.0 million of revolving borrowings, partially offset by $257.5 million of mortgage principal payments and $93.5 million of dividends and distributions.
Material changes versus the prior comparable period
- Second-quarter net loss attributable to common stockholders increased to $31.4 million from $5.8 million, driven by higher interest expense, merger-related costs, settlement costs, general and administrative expenses, and derivative losses.
- Interest expense increased to $27.7 million from $23.4 million in the quarter and to $54.7 million from $47.6 million year to date, reflecting higher debt balances and interest rates.
- Merger, transaction and other costs increased to $6.3 million in the quarter and $6.4 million year to date, compared with $0.1 million and $0.1 million, respectively, primarily for the proposed transactions.
- The company recorded $15.1 million of settlement costs in the second quarter, including approximately $8.8 million of cash reimbursements and approximately $6.3 million of equity-related expense associated with the Blackwells settlement.
- General and administrative expenses increased to $10.7 million in the quarter and $16.3 million year to date, primarily because of proxy contest and litigation-related costs.
- No impairment charges were recorded in 2023, compared with $16.0 million in the second quarter and $16.3 million year to date in 2022.
- Revolving borrowings increased by approximately $368.5 million from December 31, 2022, while mortgage debt declined by approximately $237.9 million, principally after refinancing German and U.K. mortgage debt into the revolving facility.
- Second-quarter leasing activity included 11 renewals and one expansion totaling approximately 0.9 million square feet. Annual straight-line rent was $4.6 million, but the new leases reflected a negative 3.1% spread. Year-to-date leasing activity produced a 0.5% positive spread.
Guidance, outlook, commentary, risks, and unusual items
- The company announced proposed mergers with The Necessity Retail REIT and related entities, together with an internalization of advisory and property management functions. The transactions were subject to stockholder approvals, lender consents, financing conditions, and other closing conditions.
- Consideration for internalization included 29.6 million GNL common shares valued at $325.0 million and $50.0 million of cash to AR Global. The company also expected to issue substantial additional common and preferred shares in the REIT merger and potentially additional shares tied to performance awards.
- The company expected to increase revolving credit commitments by up to $500.0 million through the facility’s accordion feature to repay RTL borrowings and provide post-closing liquidity. Exercise depended on lender commitments and customary conditions.
- Management expected operating cash flow and existing cash to fund quarterly dividends and anticipated capital expenditures. During the first six months, operating cash flow funded approximately 90% of dividends and distributions.
- Common dividends were $0.40 per share quarterly, or $1.60 annualized, through June 30, 2023. In connection with the proposed transactions, management expected to reset the common dividend to $0.354 per share quarterly, or $1.42 annualized, subject to board approval and other conditions.
- Liquidity was constrained by mortgage cash-sweep arrangements. A Benelux loan triggered a cash trap involving approximately $2.7 million of restricted cash, and a $7.4 million letter of credit plus additional letters of credit reduced revolving-facility availability. These events were not reported as defaults.
- The company had one signed agreement to sell a property for $50.0 million and one non-binding letter of intent for a $67.0 million sale. Completion was uncertain.
- Key risks include rising interest rates, variable-rate debt, foreign-currency exposure, refinancing needs, tenant renewals and credit quality, lease rollover, cash-sweep triggers, merger execution and integration, dilution from transaction-related equity issuance, and potentially higher costs after internalization.
- If the REIT merger failed under specified circumstances, GNL could owe RTL a $40.0 million termination fee, up to $3.0 million of RTL expenses, and up to $1.5 million of AR Global expenses.
- Disclosure controls and procedures were evaluated as effective, with no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the proposed REIT merger and internalization were approved and completed, including the final share issuance, debt assumed, financing amendments, and lender consents.
- The final post-transaction dividend policy and whether AFFO and operating cash flow support the reduced or any future dividend rate.
- Actual availability under the revolving credit facility after letters of credit, cash sweeps, refinancing activity, and any RTL debt repayment.
- Near-term debt maturities, refinancing terms, interest-rate exposure, and the effect of the proposed transactions on pro forma leverage.
- Tenant retention, lease rollover, renewal spreads, occupancy, and the status of the property sale agreement and non-binding sale proposal.
- The amount and timing of settlement, merger, litigation, integration, and internalization costs, including potential dilution from shares issued to AR Global, Blackwells, RTL stockholders, and award holders.
- The filing’s non-GAAP FFO, Core FFO, and AFFO definitions and reconciliations, which may not be comparable with similarly named measures reported by other REITs.