Global Net Lease, Inc. — Q2 2019 Form 10-Q Summary
Business context and reporting period
Global Net Lease, Inc. is an externally managed REIT focused on commercial properties, primarily single-tenant net-leased sale-leaseback investments. This unaudited filing covers the three and six months ended June 30, 2019, with comparisons to the corresponding 2018 periods.
- Portfolio: 288 properties totaling 28.3 million rentable square feet.
- Occupancy: 99.6% leased; weighted-average remaining lease term of 8.0 years.
- Geographic mix: 57.6% of annualized rental income from the U.S. and 42.4% from Europe.
- As of June 30, 2019, no tenant represented at least 10% of annualized rental income.
Financial performance and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue from tenants | $76.1 million | $71.0 million | $151.6 million | $139.1 million |
| Operating income | $31.2 million | $18.3 million | $55.2 million | $40.2 million |
| Net income | $15.3 million | $7.7 million | $23.6 million | $12.6 million |
| Net income attributable to common stockholders | $12.6 million | $5.3 million | $18.4 million | $7.6 million |
| EPS attributable to common stockholders | $0.15 | $0.08 | $0.22 | $0.11 |
| Cash flow from operations | Not separately provided | Not separately provided | $71.2 million | $71.0 million |
| FFO attributable to common stockholders | $36.8 million | $38.9 million | $73.0 million | $70.8 million |
| Core FFO attributable to common stockholders | $38.4 million | $41.3 million | $74.9 million | $74.4 million |
| AFFO attributable to common stockholders | $40.1 million | $35.5 million | $79.6 million | $70.6 million |
- Q2 revenue increased approximately 7.3%; six-month revenue increased approximately 9.0%.
- Q2 operating margin was approximately 40.9%, compared with 25.8% in the prior-year quarter. The six-month operating margin was approximately 36.4%, compared with 28.9%.
- Q2 net income attributable to common stockholders increased approximately 139%; six-month growth was approximately 141%.
- Q2 AFFO per share was not directly stated in the filing text. AFFO increased 12.8% for the quarter and 12.7% for the six-month period.
Balance sheet, debt and liquidity
- Total assets were $3.495 billion at June 30, 2019, compared with $3.309 billion at December 31, 2018.
- Cash and cash equivalents were $178.7 million; cash, cash equivalents and restricted cash totaled $191.7 million.
- Total debt was approximately $1.8 billion, consisting of $1.286 billion of net mortgage notes, $259.5 million drawn on the revolving facility and $277.4 million of term-loan debt.
- Debt leverage was 49.4% based on total debt as a percentage of the purchase price of real estate investments. Weighted-average debt maturity was 4.6 years.
- Approximately 84.6% of debt was fixed-rate or swapped to fixed rates. The weighted-average effective interest rate on total debt was approximately 3.0%.
- Approximately $90.7 million was available under the revolving credit facility at June 30, 2019.
- The company was in compliance with applicable mortgage and credit-facility covenants at June 30, 2019.
Material changes versus the prior comparable period
- The company acquired 11 properties for $211.0 million during the six months, including nine properties acquired for $187.5 million in Q2.
- The company sold 65 properties for total contract sales proceeds of $92.8 million during the six months, generating a $7.8 million gain. Q2 dispositions included 62 Family Dollar stores, one industrial property and one U.K. property, generating a $6.9 million gain.
- Revenue growth was driven primarily by 21 property acquisitions since June 30, 2018, partially offset by weaker average GBP and EUR exchange rates.
- Operating fees to related parties increased to $8.2 million in Q2 from $7.1 million and to $16.2 million for the six months from $14.0 million, primarily due to higher variable asset-management fees and a larger property base.
- Equity-based compensation changed from a $23,000 benefit in Q2 2018 to $2.4 million of expense in Q2 2019; six-month expense changed from a $0.9 million benefit to $4.5 million of expense.
- Interest expense increased to $15.7 million in Q2 from $14.4 million and to $30.9 million for the six months from $27.4 million, primarily because of higher average borrowings.
- The company adopted ASC 842 and recognized right-of-use assets and lease liabilities for ground leases. It also recorded a $3.4 million write-off of receivables, net of reserves, against opening accumulated deficit.
- The common-stock ATM program raised $150.6 million net from 7.8 million shares sold during January 2019. The company also raised $13.5 million net from Series A preferred stock sales during the six months.
- The common dividend policy changed from monthly to quarterly payments while maintaining an annualized rate of $2.13 per share.
Guidance, outlook, risks and unusual items
- No formal earnings or acquisition guidance was provided. Management expects to continue funding operations, dividends and acquisitions through operating cash flow, asset sales, debt financing and equity offerings.
- On August 1, 2019, after quarter-end, the credit facility was amended. Total commitments increased to approximately $1.235 billion from approximately $906.2 million, maturities were extended, interest-rate margins were reduced and distribution covenants were revised. The post-amendment facility effective interest rate was approximately 2.30% after swaps.
- Mortgage maturities requiring attention included approximately $56.9 million of French debt due in December 2019 and approximately $71.1 million of German debt due in October 2019. Management expected to refinance the French debt and repay the German debt from a pending property sale, but provided no assurance that these transactions would close on expected terms.
- Six properties were acquired after June 30, 2019 for an aggregate base purchase price of $48.7 million. Additional purchase and sale agreements and letters of intent were outstanding, but completion was uncertain.
- The former service-provider litigation was settled in March 2019 for $7.4 million, which had been reserved in 2018. The company incurred approximately $1.0 million of additional legal expenses during the six months.
- Dividends and distributions of $63.4 million during the six months were funded 62.8% from operating cash flow after preferred dividends and 37.2% from cash on hand, consisting of proceeds from borrowings. Dividend payments are discretionary and subject to credit-facility restrictions.
- Key risks include tenant credit and lease-renewal risk, refinancing and interest-rate risk, foreign-currency exposure, reliance on related-party managers, conflicts of interest, access to capital, REIT qualification and geographic concentration, including Michigan and the United Kingdom.
Important facts for investors to verify
- Reconcile AFFO and dividend coverage, including the effect of dividends funded from cash on hand and borrowings.
- Review the October and December 2019 mortgage maturities, refinancing progress and the status of related asset dispositions.
- Assess the post-quarter-end credit-facility amendment, including revised covenants, borrowing capacity, maturities and distribution limitations.
- Evaluate tenant concentration, lease expirations and the credit quality of tenants despite the reported 99.6% leased rate.
- Monitor related-party fees, external management arrangements and the 2018 outperformance agreement, including $4.5 million of six-month equity-based compensation expense.
- Consider the sensitivity of revenue, asset values and cash flow to GBP/EUR exchange rates and variable interest rates.
- Confirm the company’s continued REIT qualification and its ability to meet required distributions without impairing liquidity or increasing leverage.