Global Net Lease, Inc. annual report, FY2013

Global Net Lease, Inc. — 2013 Form 10-K Summary

Reporting entity and period: The filing is for American Realty Capital Global Trust, Inc., the predecessor name of Global Net Lease, Inc., for the fiscal year ended December 31, 2013. The company began active real estate operations in October 2012 and was an early-stage, non-traded REIT conducting an ongoing initial public offering.

Business Context

The company acquires and operates primarily single-tenant, net-leased commercial properties, with an emphasis on sale-leaseback transactions. At December 31, 2013, it owned 37 properties totaling 1.4 million rentable square feet. The portfolio was 100% leased, with a weighted-average remaining lease term of 10.2 years, across the United States, United Kingdom and Puerto Rico.

The company had no employees and relied on affiliated entities for advisory, property management, offering, transfer agency and administrative services. It intended to qualify as a REIT beginning with the 2013 tax year.

Key Financial Metrics

Metric	2013	2012
Total revenues	$4.0 million	$30,000
Rental income	$3.9 million	$30,000
Total expenses	$10.0 million	$0.4 million
Operating loss	$6.1 million	$0.4 million
Net loss	$7.0 million	$0.4 million
Net loss per basic and diluted share	$1.28	$6.43
Modified funds from operations	$2.6 million	The filing does not provide a comparable 2012 MFFO value
Cash flow used in operations	$2.7 million	$0.4 million
Cash flow used in investing	$112.4 million	$1.4 million
Cash flow provided by financing	$124.2 million	$2.0 million

Reported results were materially affected by $7.7 million of acquisition and transaction-related expenses and $2.1 million of depreciation and amortization. MFFO is a non-GAAP measure and should not be viewed as equivalent to GAAP net income or operating cash flow.

Balance Sheet, Debt and Liquidity

Total assets were $214.9 million, including $194.6 million of net real estate investments and $11.5 million of cash and cash equivalents.
Total liabilities were $92.2 million and stockholders’ equity was $122.7 million.
Mortgage notes payable totaled $76.9 million, with a weighted-average interest rate of 5.1% and a weighted-average remaining term of 4.9 years.
Debt represented approximately 41.6% of real estate investments at acquisition.
The company had no advances outstanding under its $50.0 million revolving credit facility; unused borrowing capacity based on borrowing-base properties was approximately $31.1 million to $31.3 million, as reported in different sections of the filing.
Scheduled mortgage principal payments totaled $76.9 million, including $57.7 million due during 2017–2018.
The company reported compliance with its debt covenants and no material off-balance-sheet arrangements.

Distributions and Capital Raising

The company paid approximately $3.1 million of distributions during 2013, while operating cash flow was negative $2.7 million.
Management stated that distributions were funded from proceeds from common stock issuance and the distribution reinvestment plan; 57.2% of distributions paid were funded by common stock issuance and 42.8% through the DRIP.
For tax purposes, 51.7% of 2013 distributions, or $0.37 per share, represented a return of capital, while 48.3%, or $0.34 per share, represented ordinary dividends.
The board could reduce or suspend distributions, and distributions were not assured.
Gross IPO proceeds totaled $154.2 million at December 31, 2013. Offering costs totaled approximately $20.5 million cumulatively, including $17.9 million incurred during 2013.
The reported net tangible book value per share was $5.24 versus a $10.00 offering price. The filing states that the offering price was not established independently and did not represent estimated liquidation value.

Material Changes Versus the Prior Comparable Period

The portfolio expanded from one property at December 31, 2012 to 37 properties at December 31, 2013, primarily through 36 acquisitions with an aggregate purchase price of approximately $182.3 million.
Real estate investments at cost increased from $2.6 million to $196.9 million.
Mortgage debt increased from $1.2 million to $76.9 million.
Cash increased from $0.3 million to $11.5 million, while stockholders’ equity improved from a deficit of $0.8 million to $122.7 million, principally due to equity issuance.
Revenue increased substantially as the company moved from an initial operating property to a larger portfolio, but acquisition costs, depreciation and interest expense produced a larger absolute net loss.
Effective January 1, 2013, cash, share and restricted-stock asset management fees were eliminated and replaced with potential performance-based Class B operating partnership units. The board approved 23,392 Class B units during 2013, but the performance condition was not considered probable.

Portfolio Concentration and Operating Risks

Tenant concentration was significant: Encanto Restaurants represented 19.4% of annualized rental income, Western Digital 14.6% and Thames Water 11.7%.
Geographic concentration was significant: the United Kingdom represented 38.4% of annualized rental income, Puerto Rico 19.4% and California 14.6%.
Industry concentrations included technology at 22.8% of annualized rental income, quick-service restaurants at 18.7%, utilities at 11.7% and home maintenance at 9.4%.
Approximately 58% of annualized rental income and 79% of rentable square feet were scheduled to expire by 2023, including 31% of annualized rental income in 2023.
International operations exposed the company to foreign currency, foreign legal, political, tax and economic risks. The company used currency and interest-rate derivatives for hedging.

Guidance, Outlook and Unusual Items

Management expected to continue raising equity and using secured financing to acquire additional properties. It expected operating cash flow to cover a greater proportion of distributions as the portfolio matured, but acknowledged that distributions could continue to depend on equity proceeds, fee waivers, borrowings or other sources.

The company intended to pursue a liquidity event, such as a stock listing, merger or sale, within three to five years after completion of the offering, but provided no assurance that a liquidity event would occur. There was no public trading market for the shares, and the share repurchase program was subject to holding periods, pricing discounts, quarterly limits and board discretion.

Subsequent to year-end, through March 7, 2014, the company acquired six additional properties for approximately $228.8 million, increasing the reported portfolio to 43 properties and 3.2 million rentable square feet. Through February 28, 2014, total gross capital raised had increased to approximately $455.6 million.

The filing disclosed no material pending legal proceedings and no material environmental claims known to the company. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2013.

Most Important Facts for Investors to Verify

Whether distributions are covered by recurring property-level cash flow rather than equity issuance, DRIP proceeds, debt or affiliate support.
The sustainability of tenant rent payments, particularly for Encanto, Western Digital and Thames Water, and the renewal outlook for leases expiring from 2020 through 2023.
Actual fair value and liquidity of the portfolio relative to the $10.00 offering price and the $5.24 reported net tangible book value per share.
Debt maturities and refinancing requirements, especially the substantial principal payments due in 2017 and 2018.
The effect of acquisition fees, related-party fees, strategic advisory fees, currency movements and derivative valuations on recurring earnings and cash flow.
Whether the company ultimately qualifies and remains qualified as a REIT and whether it achieves a listing or other liquidity event.
The accuracy of the reported unused revolving-credit capacity, which is stated as approximately $31.1 million in one section and $31.3 million in another.