Global Net Lease, Inc. — 2018 Q3 Form 10-Q Summary
Business context and reporting period
Global Net Lease, Inc. is an externally managed Maryland REIT focused on commercial properties, particularly single-tenant, net-leased sale-leaseback investments. This unaudited filing covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
- Portfolio: 336 properties, 26.2 million rentable square feet, 99.5% leased, and 8.6 years of weighted-average remaining lease term.
- Geographic mix by annualized straight-line rental income: 52.9% United States and 47.1% Europe.
- During the nine months, the Company acquired 17 properties for $267.4 million and sold two properties for a total contract sales price of $25.3 million.
Financial performance and key metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenues | $71.9 million | $64.9 million | $211.0 million | $192.7 million |
| Operating income | $21.4 million | $18.5 million | $65.4 million | $62.2 million |
| Operating margin | 29.7% | 28.5% | 31.0% | 32.3% |
| Net income | $2.6 million | $2.5 million | $15.2 million | $15.1 million |
| Net income attributable to common stockholders | $0.2 million | $2.1 million | $7.8 million | $14.7 million |
| Net income margin | 3.7% | 3.8% | 7.2% | 7.9% |
| EPS attributable to common stockholders | Approximately $0.00 | $0.03 | $0.11 | $0.21 |
| AFFO attributable to common stockholders | $39.6 million | $34.8 million | $110.2 million | $105.5 million |
| Cash flow from operations | Not separately presented | Not separately presented | $103.4 million | $102.5 million |
Q3 operating margin improved modestly, while nine-month operating margin declined because expenses, particularly depreciation and amortization and related-party fees, grew faster than revenue. AFFO increased 13.6% year over year in the quarter and 4.5% year to date, although AFFO includes a $3.0 million lease termination fee in 2018.
Balance sheet, debt and liquidity
- Total assets were $3.22 billion at September 30, 2018, compared with $3.04 billion at December 31, 2017. Net real estate investments increased to $2.94 billion from $2.83 billion.
- Cash and cash equivalents were $155.2 million; cash, cash equivalents and restricted cash totaled $158.7 million.
- Total debt was approximately $1.7 billion, consisting of $974.5 million of net mortgage notes, $455.6 million outstanding under the revolving facility and $282.5 million under the term loan.
- Debt leverage was 50.2%, weighted-average debt maturity was 3.8 years, and the weighted-average effective interest rate was 3.0%.
- Only approximately $7.0 million was available for future borrowings under the revolving credit facility at quarter-end. The Company reported compliance with all loan covenants.
- Scheduled gross mortgage principal payments include $237.6 million in 2019 and $209.8 million in 2020; no mortgage principal payments were scheduled for the remainder of 2018.
Material changes versus the prior comparable period
- Revenue increased 10.9% in Q3 and 9.5% for the nine months, primarily from 24 net property acquisitions since September 30, 2017 and a $3.0 million lease termination fee.
- Interest expense increased to $15.1 million in Q3 and $42.5 million for the nine months, from $12.5 million and $35.6 million, respectively, reflecting higher average borrowings and a higher effective interest rate.
- Common-stockholder earnings declined substantially after preferred dividends: Q3 earnings fell to $0.2 million from $2.1 million, and nine-month earnings fell to $7.8 million from $14.7 million.
- Related-party operating fees increased to $7.0 million in Q3 and $20.9 million year to date, partly due to equity issuance-related variable management fees and portfolio growth. No property-management fees were forgiven in 2018, versus $1.2 million forgiven in the 2017 nine-month period.
- Equity-based compensation was a $2.1 million expense in Q3 and $1.2 million expense year to date, compared with income of $0.4 million and $2.6 million, respectively, in 2017. The change primarily reflects replacement of the 2015 outperformance plan with the 2018 plan.
- The Company completed a $95.0 million common-stock offering in August 2018 and received $94.1 million of net common-stock issuance proceeds during the nine months.
- In August 2018, the Company entered into a £230.0 million UK multi-property loan, using proceeds primarily to repay existing mortgage debt. Debt extinguishment costs were $2.6 million in Q3 and $3.9 million for the nine months.
Guidance, outlook, commentary, risks and unusual items
- Management’s 2018 acquisition goal was $500.0 million. A pending acquisition with a stated purchase price of $126.6 million was expected to close in November 2018, subject to conditions; another $9.7 million pending acquisition was terminated in October 2018 and its $0.3 million deposit was returned.
- The Company stated that operating income is expected to cover operating expenses and dividends in the ordinary course, but dividends have also required cash on hand and other capital sources. For the first nine months, $96.0 million, or 82.7%, of common and preferred dividend coverage came from operating cash flow, while $20.1 million, or 17.3%, came from available cash on hand, consisting of borrowings.
- Common dividends were paid at an annualized rate of $2.13 per share, and Series A preferred dividends accrue at 7.25% annually. The board may change or suspend dividends, and credit-facility provisions limit distributions to generally no more than 95% of Adjusted FFO over four consecutive quarters, subject to limited exceptions.
- The Company incurred $1.9 million of litigation costs through nine months related to the former European service provider’s termination. The former service provider’s remaining claims were proceeding, while its request for a preliminary injunction and declaratory relief was denied or dismissed.
- Key risks include refinancing and interest-rate exposure, limited revolving-facility availability, foreign exchange and European property exposure, Brexit-related uncertainty, tenant credit risk, reliance on external managers and related parties, conflicts of interest, and the ability to sustain dividends while funding acquisitions.
- The Company adopted several accounting standards in 2018 without material impact. It expected to adopt the new lease standard prospectively on January 1, 2019; the filing states that the primary expected effect relates to recording right-of-use assets and lease liabilities for ground leases.
Most important facts for investors to verify
- Whether the pending $126.6 million acquisition closed on the expected terms and improved cash flow sufficiently to support debt covenants and dividends.
- The timing and funding plan for the $237.6 million of scheduled 2019 mortgage maturities and the limited $7.0 million revolving-facility availability.
- Whether common and preferred dividends continue to be covered by recurring operating cash flow rather than borrowings or asset-sale proceeds.
- The sustainability of AFFO after removing the $3.0 million lease termination fee and other unusual items.
- Progress and potential financial exposure from the former service provider litigation.
- Effects of higher interest rates, foreign-exchange movements, Brexit-related conditions and tenant performance on rental income and asset values.