Global Net Lease, Inc. quarterly report, Q3 FY2015

Global Net Lease, Inc. — 2015 Q3 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. This unaudited filing covers the three and nine months ended September 30, 2015. The company listed its common stock on the NYSE on June 2, 2015, under the symbol GNL, after operating as a non-traded REIT.

At September 30, 2015, the portfolio comprised 329 properties totaling 18.7 million rentable square feet. Properties were 100% leased, with a weighted-average remaining lease term of 11.5 years; 60.4% were located in the United States and 39.6% in Europe.

Financial performance and key metrics

Metric	Three months ended September 30, 2015	Three months ended September 30, 2014	Nine months ended September 30, 2015	Nine months ended September 30, 2014
Total revenue	$50.3 million	$25.9 million	$149.3 million	$47.1 million
Operating income (loss)	$11.5 million	$(20.8) million	$11.7 million	$(39.0) million
Net income (loss) attributable to stockholders	$5.4 million	$(24.6) million	$(14.4) million	$(48.4) million
Net income (loss) per share	$0.03	$(0.14)	$(0.08)	$(0.44)
FFO attributable to stockholders	Not clearly provided for the comparable quarter	Not clearly provided	$51.8 million	Not clearly provided for the comparable period
Core FFO	Not clearly provided for the comparable quarter	Not clearly provided	$94.1 million	Not clearly provided for the comparable period
AFFO	Not clearly provided for the comparable quarter	Not clearly provided	$92.2 million	Not clearly provided for the comparable period

Three-month operating margin was approximately 22.9%, compared with a negative margin in the prior-year quarter. Nine-month operating margin was approximately 7.9%, compared with a negative margin in the prior-year period.
Three-month net margin was approximately 10.8%; nine-month net margin was approximately negative 9.7%.
Rental income increased to $47.8 million for the quarter and $142.5 million for the nine-month period, primarily because of portfolio acquisitions.
Cash provided by operating activities was $66.4 million for the nine months, compared with cash used in operations of $9.6 million in the prior-year period.
Cash used in investing activities was $222.0 million, including $223.1 million for real estate acquisitions and $10.2 million of capital expenditures.
Cash provided by financing activities was $116.9 million. Cash and cash equivalents declined from $64.7 million at December 31, 2014 to $32.1 million at September 30, 2015.
Total assets were $2.56 billion and total equity was $1.24 billion at September 30, 2015.
Debt consisted of $509.4 million of mortgage notes and $735.4 million outstanding under the revolving credit facility. Reported debt leverage was 47.3% of the total purchase price of real estate investments.
The credit facility had a $740.0 million maximum borrowing capacity, only $4.6 million of unused capacity, and an initial maturity date of July 25, 2016, subject to two one-year extension options.
Approximately 67.8% of debt was fixed-rate or effectively fixed through swaps or caps. The weighted-average effective interest rate on consolidated debt was approximately 2.5%.
The company paid or declared $96.7 million of common-stock dividends during the nine months. Approximately 70.5% was funded by operating cash flow and 29.5% by shares issued under the dividend reinvestment plan.

Material changes versus the prior comparable period

The company acquired 22 properties for an aggregate base purchase price of $255.0 million during the first nine months of 2015, compared with 209 properties acquired for $1.5 billion in the prior-year period.
Revenue growth reflected the much larger portfolio, including 83 properties acquired since September 30, 2014, with an aggregate purchase price of approximately $0.9 billion.
Operating results improved substantially, with quarterly operating income of $11.5 million versus a $20.8 million operating loss and quarterly net income attributable to stockholders of $5.4 million versus a $24.6 million loss.
Interest expense increased to $24.8 million for the nine months from $8.4 million, reflecting higher borrowings used to finance acquisitions.
Depreciation and amortization increased to $66.2 million from $27.1 million as the portfolio expanded.
2015 included $18.5 million of listing fees and $14.5 million of expense from vesting of Class B units, neither of which occurred in the prior-year period.
The company repurchased approximately 11.9 million shares in the tender offer for $125.0 million, reducing outstanding shares to 168.9 million at September 30, 2015 from 177.9 million at December 31, 2014.
The dividend reinvestment plan was suspended and the share repurchase program was terminated in April 2015.
Foreign-currency advances under the credit facility were designated as net investment hedges effective May 17, 2015. The restructuring of cross-currency swaps generated an approximately $19.0 million gain retained in accumulated other comprehensive income.

Guidance, outlook, commentary, risks and unusual items

The filing does not provide formal earnings or acquisition guidance. Management expects portfolio rental income to cover operating expenses and monthly dividends as the portfolio matures, but states that dividend payments are not assured and may be reduced or suspended.

Liquidity is constrained by only $4.6 million of unused credit-facility capacity and $735.4 million of credit-facility borrowings scheduled for initial maturity in July 2016.
Dividend coverage remains an important risk: nine-month dividends exceeded cash provided by operations by approximately $30.6 million, with the shortfall partly funded through DRIP share issuance.
The company is exposed to tenant credit, lease renewal, interest-rate, foreign-currency, European-market, credit-market and geographic-concentration risks.
External management creates dependence on and potential conflicts with the Advisor, Property Manager, Service Provider and other affiliates. Related-party operational fees and reimbursements incurred during the first nine months totaled $28.4 million, with certain fees waived.
The Listing Note had a fair value liability of $3.4 million at September 30, 2015; its final value could differ materially because it depends partly on future market value and a valuation model.
The Multi-Year Outperformance Agreement had a Level 3 fair value of $27.2 million and generated $2.3 million of equity-based compensation expense during the nine months.
The company recorded a $2.9 million loss on non-functional foreign-currency advances before hedge designation and $2.4 million of gains on ineffective hedges during the nine months.
The filing identifies non-material out-of-period adjustments and revises the prior-year cash-flow presentation for historical classification errors. Investors should treat prior-period cash-flow comparisons as revised.
There were no material pending legal proceedings, no defaults under senior securities and no material off-balance-sheet arrangements other than operating ground leases.
Subsequent to quarter-end, AR Capital and Apollo terminated a proposed transaction involving AR Capital’s asset-management business. The filing states that the termination had no effect on the company’s current management team.

Most important facts for investors to verify

Whether operating cash flow and recurring AFFO are sufficient to sustain the stated monthly dividend without DRIP proceeds, asset sales or additional borrowing.
The refinancing, extension or repayment plan for the $735.4 million credit facility maturing initially in July 2016.
Actual covenant headroom, borrowing-base availability and the effect of interest-rate increases on debt service.
The final amount and settlement terms of the Listing Note after the required market-value measurement period.
Tenant credit quality, lease expirations and geographic exposure, particularly the United Kingdom concentration of 19.6% of annualized straight-line rental income and Texas concentration of 11.4%.
The sustainability and comparability of management’s FFO, Core FFO and AFFO measures, including the exclusions for acquisition costs, listing costs, non-cash compensation and fair-value adjustments.
The economic impact of related-party fees, fee waivers and the company’s dependence on its external Advisor and affiliates.