Global Net Lease, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three months ended March 31, 2015. Global Net Lease was an externally managed REIT focused primarily on single-tenant, net-leased commercial properties. At quarter-end, it owned 309 properties totaling 16.4 million rentable square feet, was 100% leased, and had a weighted-average remaining lease term of 11.6 years. The portfolio was 62% U.S. and 38% European by investment.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenues | $50.0 million | $7.5 million |
| Rental income | $47.4 million | $7.3 million |
| Operating income (loss) | $19.1 million | $(14.6) million |
| Net income (loss) | $25.9 million | $(16.3) million |
| Net income (loss) per share | $0.14 | $(0.43) |
| Comprehensive income (loss) | $18.9 million | $(18.0) million |
| Cash flow from operations | $34.5 million | $(18.5) million |
- Approximate operating margin was 38.2% and net margin was 51.7%; both were affected by depreciation, acquisition activity, derivative gains and foreign-currency items.
- FFO was $47.0 million and modified FFO was $29.1 million. These are non-GAAP measures and should be evaluated alongside GAAP results.
- Cash and cash equivalents were $76.3 million; restricted cash was $4.9 million.
- Total assets were $2.39 billion, including net real estate investments of $2.25 billion. Stockholders’ equity was $1.42 billion.
- Debt consisted of $261.9 million of mortgage notes and $633.4 million outstanding under the revolving credit facility, or approximately $895.3 million in total secured debt. Secured debt leverage was reported at 37.0% of real estate purchase price.
- The credit facility had a $705.0 million borrowing limit and $71.6 million of unused borrowing capacity based on the borrowing base. Its initial maturity was July 2016, with two one-year extension options. The company reported compliance with applicable debt covenants.
- Interest expense was $7.8 million, compared with $1.7 million in the prior-year quarter. A 100-basis-point increase in variable rates was estimated to increase annual interest expense by approximately $0.4 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth primarily reflected the acquisition of 259 properties since March 31, 2014, with aggregate purchase prices of approximately $1.9 billion.
- Two properties were acquired during the quarter for $38.7 million, compared with 13 properties for approximately $311.0 million in Q1 2014.
- Depreciation and amortization increased to $21.1 million from $4.4 million, and property operating expenses increased to $4.1 million from $0.2 million, reflecting the much larger portfolio.
- Acquisition and transaction costs declined to $1.1 million from $16.5 million.
- The company recorded $6.8 million of net other income, compared with $1.8 million of net other expense in Q1 2014. Q1 2015 included $4.2 million of derivative gains, a $1.4 million gain on an ineffective hedge and an $8.9 million gain on non-functional-currency advances.
- Cash flow from operations improved to $34.5 million from negative $18.5 million. Investing cash outflows declined to $30.3 million from $182.1 million, while financing cash flow declined to $7.9 million from $468.6 million because the prior-year period included substantial equity issuance.
Outlook, Commentary, Risks and Unusual Items
- Management expected the maturing portfolio’s rental income to cover operating expenses and monthly distributions, but stated that distributions are not assured and may be reduced or suspended.
- Q1 distributions totaled $31.3 million. Cash operations funded $14.3 million, or 45.6%, while $17.0 million, or 54.4%, was reinvested through the DRIP. Management disclosed that cash flow from operations included a $3.9 million increase in accounts payable and accrued expenses; excluding that working-capital benefit, cash available for distributions would have been lower.
- The company reaffirmed an intended annualized distribution rate of approximately $0.71 per share, subject to board approval and available funds.
- After quarter-end, the company announced plans to list on the NYSE under the symbol GNL, change its name to Global Net Lease, suspend the DRIP, terminate the share repurchase program and commence a potential $125.0 million tender offer at $10.50 per share. Completion of the listing remained subject to NYSE approval.
- The tender offer was expected to be funded with approximately $25.0 million of cash and $100.0 million of credit-facility borrowings.
- Beginning April 1, 2015, the advisory agreement was amended to replace Class B unit issuances with an asset-management fee of 0.75% annually on asset cost, payable in cash or common stock at the Advisor’s election.
- Important risks include tenant concentration, dependence on the externally managed Advisor and affiliates, foreign currency and international operating exposure, variable-rate debt, refinancing needs, limited liquidity of the shares before listing, potential inability to fund distributions from operations, and the requirement to maintain REIT qualification.
- The filing disclosed no material pending legal proceedings, no material off-balance-sheet arrangements and no material changes to previously disclosed risk factors other than the distribution-funding risk.
- Out-of-period adjustments recorded in Q1 included $0.6 million of additional rental income and approximately $0.9 million of taxes related to 2014. The comparative 2014 cash-flow statement was revised for identified presentation errors.
Investor Verification Items
- Verify the timing and final terms of the NYSE listing, corporate name change, tender offer, DRIP suspension and share repurchase program termination.
- Assess whether recurring rental cash flow, rather than DRIP proceeds, can sustainably fund the stated distribution.
- Review the $633.4 million variable-rate credit facility, its July 2016 maturity, borrowing-base availability and refinancing or extension prospects.
- Evaluate the effect of derivative gains, foreign-currency movements and the $19.0 million cross-currency-swap restructuring gain on reported earnings and comprehensive income.
- Monitor tenant and geographic concentrations, including Crown Crest at 14.8% of annualized rental income, the United Kingdom at 21.2%, and Texas at 11.9%.
- Reconcile GAAP net income, FFO and MFFO with cash available for distributions; the filing cautions that FFO and MFFO are not substitutes for cash flow from operations or liquidity measures.