Global Net Lease, Inc. — 2017 Q2 Form 10-Q Summary
Business context and reporting period
Global Net Lease, Inc. is an externally managed REIT focused primarily on single-tenant, net-leased commercial properties and sale-leaseback transactions in the United States, Puerto Rico, the United Kingdom and continental Europe. This unaudited report covers the three and six months ended June 30, 2017, with comparative periods ended June 30, 2016.
- Portfolio at June 30, 2017: 312 properties, 22.2 million rentable square feet, 100% leased and a 9.3-year weighted-average remaining lease term.
- Geographic mix by original purchase price or acquisition value: 50.5% Europe and 49.5% United States and Puerto Rico.
- The Company completed a one-for-three reverse stock split on February 28, 2017 and sold approximately 0.8 million shares through its ATM program for $18.3 million of net proceeds during the six months.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $65.0 million, versus $53.2 million | $127.8 million, versus $108.2 million |
| Operating income | $23.4 million, versus $18.9 million | $43.7 million, versus $37.0 million |
| Net income attributable to stockholders | $5.2 million, versus $15.8 million | $12.6 million, versus $22.3 million |
| Basic and diluted EPS | $0.08, versus $0.28 | $0.18, versus $0.39 |
| FFO attributable to stockholders | $32.8 million, versus $39.3 million | $66.4 million, versus $69.3 million |
| Core FFO attributable to stockholders | $33.8 million, versus $39.4 million | $68.0 million, versus $69.2 million |
| AFFO attributable to stockholders | $36.2 million, versus $32.4 million | $70.6 million, versus $64.7 million |
| Net cash provided by operating activities | Not separately provided | $68.9 million, versus $59.9 million |
Revenue increased primarily from the 15 properties acquired in the December 2016 Global II merger and three properties acquired in the first quarter of 2017. Operating income also increased, but reported net income declined because of higher interest expense, derivative losses, foreign currency losses and a favorable prior-year comparison.
- Rental income was $60.2 million in the second quarter and $118.7 million for the six months, compared with $51.7 million and $103.2 million, respectively.
- Operating expense reimbursements were $4.8 million in the second quarter and $9.1 million for the six months.
- Depreciation and amortization was $27.5 million in the second quarter and $54.6 million for the six months.
- Interest expense was $11.6 million in the second quarter and $23.2 million for the six months.
- The filing does not present a conventional gross or operating margin measure. Based on reported figures, operating income represented approximately 36.1% of second-quarter revenue and 34.2% of six-month revenue.
Balance sheet, debt and liquidity
- Total assets were $2.93 billion at June 30, 2017, including $2.76 billion of net real estate investments.
- Cash and cash equivalents were $67.4 million, compared with $69.8 million at December 31, 2016; restricted cash was $5.1 million.
- Mortgage notes payable, net, were $773.0 million; the Credit Facility balance was $722.1 million. The mezzanine facility was fully repaid on March 30, 2017.
- Total debt under mortgage financings and the Credit Facility was approximately $1.50 billion, with a 2.7% weighted-average effective interest rate. Approximately 77.1% was fixed-rate or effectively fixed through swaps or caps.
- Management reported a 48.1% debt leverage ratio based on total debt as a percentage of the purchase price of real estate investments and stated that all debt covenants were satisfied at June 30, 2017.
- Gross unencumbered assets were approximately $1.5 billion.
- Operating cash flow covered 96.8% of $71.2 million of dividends and distributions paid during the six months; the remaining 3.2% was funded from real estate sale proceeds.
Material changes versus the prior comparable period
- Revenue increased approximately 18% for both the quarter and the six-month period, principally due to merger and property acquisitions.
- Second-quarter net income attributable to stockholders declined approximately 67%, and six-month net income declined approximately 43%, despite higher operating income.
- Derivative results changed from gains of $3.8 million in the second quarter of 2016 and $3.5 million for the first six months of 2016 to losses of $3.0 million and $3.5 million, respectively, in 2017.
- Undesignated foreign currency and hedge-ineffectiveness results changed from gains of $4.3 million in the second quarter of 2016 and $4.2 million for the first six months of 2016 to losses of $3.0 million and $3.9 million, respectively, in 2017.
- FFO and Core FFO declined year over year, while AFFO increased, reflecting adjustments for non-cash compensation, straight-line rent, foreign currency items and other non-cash amounts.
- Operating cash flow increased by $9.0 million for the six months, while investing cash use increased to $18.4 million due primarily to $30.3 million of property acquisitions, partly offset by $12.4 million of disposition proceeds.
Guidance, outlook, commentary, risks and unusual items
- No quantitative earnings, FFO or AFFO guidance is provided in the filing. Management expected property operating income to cover operating expenses and the monthly dividend, but stated that dividends are not assured and may be changed or suspended by the board.
- On July 24, 2017, after quarter-end, the Company replaced the maturing Credit Facility with a $500.0 million senior unsecured revolving facility and a €194.6 million, or $225.0 million, senior unsecured term loan. Total commitments were $725.0 million, with potential increases up to $950.0 million subject to lender consent. The revolving facility matures in 2021, subject to an extension option, and the term loan matures in 2022.
- The former Credit Facility was repaid at $725.8 million using $720.9 million of New Credit Facility proceeds and $4.9 million of cash.
- The Company recorded a $0.5 million fire loss in the first six months and expected reimbursement through an insurance claim.
- The Company recorded a $0.5 million out-of-period increase to rental income and unbilled straight-line rent related to an error at a property acquired in 2014; management concluded the adjustment was immaterial.
- The second year of the Multi-Year Outperformance Agreement ended without LTIP units being earned. The resulting valuation change produced $2.2 million of equity-based compensation income in the second quarter and $2.6 million for the six months.
- The Company expects $5.6 million of accumulated other comprehensive loss related to derivatives to be reclassified into interest expense over the next 12 months.
- Key risks include tenant credit and concentration, interest-rate and refinancing exposure, foreign currency volatility, Brexit-related economic and financing uncertainty, reliance on the external Advisor and related parties, conflicts of interest, dividend coverage, REIT qualification and potential litigation involving affiliates of the Advisor.
- A creditor trust related to the bankruptcy of RCAP sued AR Global, the Advisor and other parties. The Company is not named, and the filing states that the Advisor believes the claims are without merit.
- James Nelson was appointed chief executive officer and president effective on or about August 15, 2017, succeeding Scott J. Bowman.
Most important facts for an investor to verify
- Verify the post-quarter-end refinancing terms, available revolving capacity and covenant headroom under the New Credit Facility.
- Assess whether operating cash flow and AFFO sustainably cover the monthly dividend, particularly after debt service, capital expenditures and property acquisitions.
- Review upcoming mortgage maturities, including substantial scheduled principal payments in 2018 through 2020, and the Company’s refinancing plans.
- Evaluate the effect of European exposure, Brexit-related uncertainty and GBP/EUR exchange movements on rental income, asset values, debt and reported earnings.
- Review related-party management and property-management fees, fee waivers, conflicts of interest and the Company’s dependence on the Advisor and Service Provider.
- Reconcile GAAP net income with FFO, Core FFO and AFFO, including the effects of derivative losses, foreign currency items, straight-line rent and non-cash compensation.
- Confirm the insurance recovery related to the $0.5 million fire loss and monitor the materiality of the straight-line rent correction.