Global Net Lease, Inc. — 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 and sale-leaseback transactions. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
- Portfolio at June 30, 2018: 333 properties, approximately 25.0 million rentable square feet, 99.5% leased, and an 8.5-year weighted-average remaining lease term.
- Annualized rental income was geographically divided between the United States (51.4%) and Europe (48.6%).
- Shares outstanding at July 31, 2018: 67,306,615 common shares.
Financial performance and key metrics
| Metric | Q2 2018 | Q2 2017 | Change |
|---|
| Total revenues | $71.0 million | $65.0 million | 9.2% increase |
| Operating income | $20.9 million | $23.4 million | 10.9% decrease |
| Operating margin | 29.4% | 36.1% | Down 6.7 points |
| Net income | $7.7 million | $5.2 million | 48.9% increase |
| Net income attributable to common stockholders | $5.3 million | $5.2 million | 1.7% increase |
| EPS attributable to common stockholders | $0.08 | $0.08 | Flat |
| AFFO attributable to common stockholders | $35.5 million | $36.2 million | 1.8% decrease |
- Rental income increased to $65.6 million from $60.2 million, primarily due to the net acquisition of 21 properties since June 30, 2017 and favorable foreign-exchange translation.
- Operating fees to related parties increased to $7.1 million from $5.7 million. Acquisition and transaction costs increased to $2.4 million from $0.4 million, including litigation, debt prepayment and refinancing costs.
- Interest expense increased to $14.4 million from $11.6 million as average borrowings and the weighted-average effective interest rate increased.
- Q2 results included a $6.3 million gain on derivative instruments versus a $3.0 million loss in the prior-year quarter, materially benefiting net income.
| Metric | Six months 2018 | Six months 2017 | Change |
|---|
| Total revenues | $139.1 million | $127.8 million | 8.8% increase |
| Operating income | $42.7 million | $43.7 million | 2.3% decrease |
| Operating margin | 30.7% | 34.2% | Down 3.5 points |
| Net income | $12.6 million | $12.7 million | 0.8% decrease |
| Net income attributable to common stockholders | $7.6 million | $12.6 million | 39.5% decrease |
| AFFO attributable to common stockholders | $70.6 million | $70.6 million | Flat |
| Cash flow from operations | $69.7 million | $68.9 million | 1.1% increase |
Balance sheet, debt and liquidity
- Total assets were $3.11 billion at June 30, 2018, up from $3.04 billion at December 31, 2017. Net real estate investments were $2.88 billion.
- Cash and cash equivalents were $93.3 million, with total cash, cash equivalents and restricted cash of $96.2 million.
- Total debt was approximately $1.7 billion, consisting of $975.9 million of mortgage notes payable, $458.9 million under the revolving credit facilities and $224.5 million under the term loan, net.
- Weighted-average effective interest rate on total debt was 3.1%, and debt leverage was 50.1% of the purchase price of real estate investments. Weighted-average debt maturity was 3.3 years.
- Only approximately $14.2 million was available for future borrowing under the revolving credit facility at June 30, 2018. The company reported compliance with all debt covenants.
- Six-month investing cash outflows were $168.1 million, including $161.8 million for property acquisitions and $24.6 million of acquisition deposits. Financing activities provided $92.4 million, primarily through net revolving-credit borrowings.
- The company paid $71.7 million of common-stock dividends and $4.9 million of preferred-stock dividends during the first six months. Management disclosed that 84.4% of common and preferred dividend funding after preferred dividends came from operating cash flow, with the balance funded from cash on hand and other sources.
Material changes versus the prior comparable period
- The company acquired 13 properties for $161.8 million during the first six months of 2018, compared with three properties for $30.3 million in the prior-year period.
- The company sold one property for a $20.3 million contract price, generating $1.3 million of net proceeds after mortgage repayment and a $3.8 million loss. The prior-year period included a $0.4 million gain on disposition.
- Debt increased substantially to fund acquisitions, while interest costs rose from $23.2 million to $27.4 million for the six-month period.
- Preferred-stock dividends totaled $4.9 million in the first six months of 2018, versus none in the prior-year period, reducing income attributable to common stockholders.
- The 2015 multi-year outperformance agreement expired on June 2, 2018 without any LTIP units being earned; related 2018 income from equity-based compensation was $0.9 million for the six-month period, compared with $2.2 million of income in 2017.
- Moor Park Capital Partners LLP’s service agreement was terminated effective March 17, 2018. The Advisor assumed responsibility for the European portfolio and incurred related litigation costs.
Guidance, outlook, commentary and risks
- Management targeted approximately $500.0 million of property acquisitions during 2018. At June 30, $24.6 million of deposits related to two properties with an aggregate purchase price of $146.2 million.
- Subsequent to quarter-end, the company acquired an Akron, Ohio property for $21.4 million and sold a Vandalia, Ohio property for $5.0 million. It also reported three pending U.S. acquisitions totaling $189.9 million, expected to close in stages by October 2018, subject to conditions.
- On July 2, 2018, total Credit Facility commitments increased from $722.2 million to $914.4 million. Following the related borrowings, approximately $401.0 million was outstanding under the revolver and $286.0 million under the term loan.
- The company entered into a new 2018 Advisor Multi-Year Outperformance Agreement in July 2018, with a maximum award value of $50.0 million and 2,554,930 LTIP units tied to absolute and relative total shareholder return through June 2021.
- Dividend payments are not assured. The Credit Facility generally limits distributions and repurchases to 95% of Adjusted FFO over four consecutive quarters, subject to limited exceptions. Management warned that insufficient cash flow or failure to complete pending acquisitions could require reduced or suspended dividends or alternative funding.
- Key risks include refinancing and interest-rate exposure, limited revolving-credit availability, foreign-exchange movements, tenant credit and concentration risk, Brexit and broader European market conditions, dependence on related-party service providers, conflicts of interest and maintenance of REIT qualification.
- A former European service provider’s lawsuit remains pending. The court denied preliminary injunctive relief and dismissed the declaratory judgment claim, while other claims and company counterclaims continued. Litigation costs were $1.4 million through June 30, 2018.
Important facts for investors to verify
- Reconcile dividend payments with operating cash flow, AFFO and the Credit Facility’s Adjusted FFO distribution covenant.
- Review near-term debt maturities, particularly $124.3 million due during the remainder of 2018 and $286.1 million due in 2019, and assess refinancing capacity.
- Confirm completion, financing and expected cash-flow contribution of the $189.9 million pending acquisitions.
- Assess the effect of higher borrowings, variable-rate debt, foreign-currency exposure and derivative gains or losses on recurring earnings.
- Monitor the former service provider litigation, related-party fees and the economic implications of the new 2018 outperformance agreement.
- Compare GAAP net income with FFO, Core FFO and AFFO; these non-GAAP measures are not substitutes for cash flow or a guarantee of dividend coverage.
