Global Net Lease, Inc. quarterly report, Q3 FY2014

Global Net Lease, Inc. (formerly American Realty Capital Global Trust, Inc.) — Q3 2014 Form 10-Q Summary

Business context and reporting period

The filing covers the three and nine months ended September 30, 2014. The company was an externally managed, non-listed REIT focused primarily on single-tenant, net-leased commercial properties in the United States and Europe. Its initial public offering closed on June 30, 2014.

Portfolio at September 30, 2014: 246 properties, 11.6 million rentable square feet, 100% leased, with an average remaining lease term of 11.3 years.
Gross IPO proceeds, including the distribution reinvestment plan: approximately $1.7 billion.
Shares outstanding: 176.2 million at September 30, 2014 and 176.8 million at October 31, 2014.

Financial performance and position

Metric	Three months ended September 30	Nine months ended September 30
Total revenue	$25.9 million	$47.1 million
Net loss	$24.6 million	$48.4 million
Net loss per share	$0.14	$0.44
Operating loss	$20.7 million	$40.0 million
Acquisition and transaction costs	$29.1 million	$53.9 million
Depreciation and amortization	$15.1 million	$27.1 million
Interest expense	$4.1 million	$8.4 million
Net cash provided by operating activities	Not separately provided	$0.4 million

Cash and cash equivalents were $263.9 million, compared with $11.5 million at December 31, 2013.
Real estate investments, net, increased to $1.665 billion from $194.6 million.
Total assets were $2.0 billion and stockholders’ equity was $1.442 billion at September 30, 2014.
Mortgage notes payable were $172.5 million, and the revolving credit facility had $299.7 million outstanding. Total debt was approximately $472.2 million, excluding mortgage premiums.
The credit facility had total commitments of $415.0 million and unused borrowing capacity of $115.3 million. It matures in July 2016 and includes two one-year extension options.
Secured debt leverage was 27.9% of the purchase price of real estate investments.
Management reported compliance with credit facility and mortgage covenants.
Reported FFO for the third quarter was negative $9.4 million; reported MFFO was $18.2 million. These are non-GAAP measures and exclude or adjust for significant acquisition-related and other items.

Material changes versus the prior comparable period

Third-quarter revenue increased to $25.9 million from $1.2 million, primarily because the company acquired 237 properties after September 30, 2013.
Nine-month revenue increased to $47.1 million from $1.5 million, while the nine-month net loss increased to $48.4 million from $4.4 million.
The company acquired 209 properties during the first nine months of 2014 for an aggregate base purchase price of $1.511 billion, compared with eight properties for $83.5 million in the prior-year period.
Common shares outstanding increased from 15.7 million at December 31, 2013 to 176.2 million at September 30, 2014, reflecting substantial equity fundraising and DRIP issuances.
Debt increased materially from $76.9 million of mortgage notes and no credit-facility borrowings at December 31, 2013 to $172.5 million and $299.7 million, respectively.
Acquisition and transaction costs rose to $53.9 million for the nine-month period from $4.6 million, and depreciation and amortization rose to $27.1 million from $0.8 million.

Outlook, commentary, risks and unusual items

Management expected rental income to increasingly cover operating expenses and monthly distributions as the portfolio matured, but stated that distributions were not assured and could be reduced or suspended.
For the first nine months, $49.0 million of distributions were paid, including $27.3 million reinvested through the DRIP. Only $7.7 million, or 15.7%, was funded by operating cash flow; the balance was funded by equity issuance and DRIP proceeds.
Management disclosed that operating cash flow included a $6.9 million increase in accounts payable and accrued expenses. If those amounts had been paid, operating cash flow available for distributions would have been lower.
Material risks included the company’s limited operating history, dependence on tenants and affiliated service providers, conflicts of interest involving the external manager, illiquidity of non-listed shares, interest-rate and foreign-currency exposure, and the possibility of insufficient cash flow to fund distributions.
The company used interest-rate swaps and foreign-currency derivatives for hedging. A gain of $0.6 million on non-designated derivatives was recognized for the nine months, while foreign-currency losses were $0.8 million.
The company disclosed that recent accounting-error disclosures by American Realty Capital Properties and related broker-dealer suspensions could adversely affect its ability to access future equity or debt capital.
No material litigation, environmental claims, defaults or off-balance-sheet arrangements were reported.
Subsequent to quarter-end, the credit facility was increased to $680.0 million, 44 properties were acquired for $289.1 million, and senior management changes occurred, including Scott J. Bowman becoming chief executive officer.

Most important facts for investors to verify

Whether rental income and recurring property-level cash flow have subsequently become sufficient to cover distributions, corporate costs and debt service without relying on new equity or borrowings.
The sustainability and quality of reported MFFO, particularly after acquisition activity and related costs decline.
Tenant concentration, lease expirations, tenant credit quality and exposure to the United Kingdom, which represented 29.8% of annualized rental income.
Actual leverage, borrowing-base availability, refinancing requirements and compliance with debt covenants as the credit facility matures.
The impact of related-party fees, waived management fees and offering costs, including cumulative offering costs of $188.7 million.
Whether the company’s NAV-based pricing, liquidity strategy and eventual liquidity event provide an exit for investors in the absence of a public trading market.