Global Net Lease, Inc. quarterly report, Q2 FY2016

Global Net Lease, Inc. — 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. This unaudited filing covers the three and six months ended June 30, 2016, with comparisons to the corresponding 2015 periods.

Portfolio: 329 properties, 18.7 million rentable square feet, 100% leased, with a 10.8-year weighted average remaining lease term.
Geographic mix by original purchase price: 60.4% United States and Puerto Rico and 39.6% Europe.
Common shares outstanding at June 30, 2016: 168.98 million.

Financial Performance and Key Metrics

Metric	Three Months Ended June 30	Six Months Ended June 30
Total revenue	$53.2 million, up from $49.1 million	$108.2 million, up from $99.0 million
Operating income	$18.9 million, versus $(20.5) million	$37.0 million, versus $0.2 million
Net income attributable to stockholders	$15.8 million, versus $(45.7) million	$22.3 million, versus $(19.8) million
Basic and diluted EPS	$0.09, versus $(0.25)	$0.13, versus $(0.11)
Operating cash flow	Not separately presented in the filing summary	$59.9 million, versus $44.4 million
AFFO attributable to stockholders	$32.4 million	$64.7 million

Revenue growth primarily reflected 18 properties acquired after June 30, 2015, with an aggregate purchase price of approximately $0.2 billion. Six-month rental income increased to $103.2 million from $94.7 million.

Operating margin was approximately 35.5% in the second quarter of 2016 versus negative 41.7% in the prior-year quarter, and approximately 34.2% for the six-month period versus approximately 0.2%. Net margin attributable to stockholders was approximately 29.6% in the quarter versus negative 93.1%, and approximately 20.6% for the six-month period versus negative 20.0%.

Cash and cash equivalents: $40.5 million at June 30, 2016, down from $69.9 million at December 31, 2015.
Restricted cash: $3.3 million.
Total assets: $2.44 billion; total equity: $1.17 billion.
Mortgage notes payable, net: $507.1 million; credit facility: $673.7 million.
Total debt, including mortgage premium and credit facility, was approximately $1.19 billion; reported debt leverage was 45.1% of real estate purchase price.
Unused credit facility capacity: $66.3 million. The company was in compliance with its debt covenants.
Dividends and distributions paid during the six months: $61.4 million, representing approximately 94.8% of six-month AFFO and 95.5% of reported dividend sources from operating cash flow.

Material Changes Versus the Prior Comparable Period

Results improved substantially because 2015 included $18.5 million of listing fees, $14.5 million of Class B unit vesting expense, and a $4.4 million listing note fair-value charge; none of these costs recurred in 2016.
Interest expense increased to $21.2 million from $15.8 million for the six-month period, primarily due to higher average borrowings and mortgage financing added during 2015.
Operating fees to related parties increased to $9.8 million from $5.3 million for the six-month period, principally reflecting the post-listing cash asset management fee structure.
Depreciation and amortization increased to $47.6 million from $43.2 million.
No properties were acquired during the six months ended June 30, 2016; four properties were acquired for $47.2 million in the prior-year period.
The company revised prior-period presentation of other comprehensive income to correct the classification of certain cross-currency derivative adjustments between cumulative translation adjustments and designated derivative adjustments. Management concluded the historical errors were not material.

Cash Flow, Debt, Liquidity, and Risk Factors

Operating cash flow of $59.9 million exceeded cash dividends to common stockholders of $60.0 million but did not fully cover total dividends and distributions of $61.4 million. Investing cash outflow was only $0.2 million, while financing cash outflow was $87.4 million, including $26.7 million of credit facility repayments and $60.0 million of cash dividends. Ending cash declined by $27.7 million, before a $1.7 million negative foreign-exchange effect.

On July 25, 2016, after quarter-end, the company extended the credit facility maturity to July 25, 2017, with an additional one-year extension option subject to conditions. The company also had substantial 2017 debt maturities, including the credit facility and mortgage obligations, creating refinancing risk.

Approximately 63.7% of debt was fixed-rate or effectively fixed through swaps or caps.
Interest rate swaps had a net liability fair value of $17.2 million at June 30, 2016.
Foreign-currency credit facility draws exceeded related net investments by approximately $88.0 million, exposing earnings to currency movements.
The filing identifies Brexit-related risks to European property values, rental rates, financing availability, refinancing, and foreign-exchange markets.
Other risks include tenant credit and concentration risk, interest-rate increases, reliance on related-party service providers, dividend sustainability, REIT qualification, and access to capital.
No material legal or regulatory proceedings were pending, and no material environmental claims were known.

Guidance, Outlook, and Unusual Items

The filing does not provide formal earnings or revenue guidance. Management stated that operating income from properties was expected to cover operating expenses and the monthly dividend, but emphasized that dividend payments are not assured and may be changed or suspended by the board.

On August 8, 2016, the company entered into a merger agreement to acquire American Realty Capital Global Trust II in a stock transaction at an exchange ratio of 2.27 Global Net Lease shares per Global Trust II share or applicable partnership interest, subject to shareholder and other conditions.
The company obtained a $150.0 million bridge facility commitment for the proposed merger. Draws would bear interest at LIBOR plus 3.25%, subject to stated floors, step-ups, and fees.
On August 4, 2016, the board approved the exchange of 1.726 million OP Units for an equal number of common shares, expected in the third quarter of 2016.
No LTIP units were earned under the Multi-Year Outperformance Agreement as of June 2, 2016.
The company adopted updated debt issuance cost and consolidation guidance without a material impact on the financial statements.

Important Facts for Investors to Verify

Whether the credit facility extension and subsequent refinancing plans adequately address the $673.7 million facility maturity and other 2017 obligations.
Whether recurring operating cash flow and AFFO sustainably cover the current dividend rate of $0.059166667 per share per month.
The effects of Brexit, sterling and euro movements, and European property-market conditions on asset values, rental income, debt service, and refinancing.
The final terms, financing, shareholder approvals, dilution, and integration risks associated with the proposed Global Trust II merger.
The magnitude and ongoing impact of related-party management, property-management, and service-provider fees.
Tenant credit quality, lease renewals, geographic concentrations, and the company’s ability to maintain 100% portfolio occupancy.