Global Net Lease, Inc. — 2018 First-Quarter Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 8, 2018. Global Net Lease is an externally managed REIT focused primarily on single-tenant, net-leased commercial properties. At quarter-end, it owned 327 properties totaling 23.7 million rentable square feet, was 99.5% leased, and had an 8.6-year weighted-average remaining lease term. Approximately 49.1% of annualized rental income was generated in the U.S. and 50.9% in Europe.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $68.1 million | $62.8 million | +8.4% |
| Rental income | $63.8 million | $58.5 million | +9.1% |
| Operating income | $21.8 million | $20.3 million | +7.6% |
| Operating margin | 32.1% | 32.3% | Down modestly |
| Net income | $4.8 million | $7.5 million | -35.4% |
| Net income attributable to common stockholders | $2.4 million | $7.4 million | -68.2% |
| Basic and diluted EPS | $0.03 | $0.11 | Down $0.08 |
| Operating cash flow | $40.7 million | $32.7 million | +24.3% |
| AFFO attributable to common stockholders | $35.1 million | $34.5 million | +1.8% |
Net margin was approximately 7.1% in Q1 2018 versus 11.9% in the prior-year quarter. FFO attributable to common stockholders was $31.9 million, compared with $33.5 million, while Core FFO was $33.1 million versus $34.2 million.
- Balance sheet: Total assets were $3.13 billion, including net real estate investments of $2.91 billion and cash and cash equivalents of $106.7 million.
- Debt: Total debt was approximately $1.6 billion, consisting of $1.04 billion of net mortgage notes and $578.8 million under the revolving and term credit facilities. Reported debt leverage was 49.9%, with a 2.8% weighted-average interest rate and 3.6-year weighted-average maturity.
- Liquidity: Approximately $60.4 million remained available under the revolving credit facility. The company reported compliance with its loan covenants at March 31, 2018.
- Dividends: Common dividends were $35.8 million and Series A preferred dividends were $2.5 million. Total dividends and related distributions were $38.4 million, funded 99.4% by operating cash flow and 0.6% by available cash.
Material Changes Versus Q1 2017
- Revenue increased primarily because the company had acquired a net 15 properties since March 31, 2017, supplemented by favorable foreign-exchange translation.
- Six properties were acquired during Q1 2018 for approximately $63.6 million; no properties were sold. In Q1 2017, the company acquired three properties for $30.3 million and sold one property, generating $12.4 million of proceeds and a gain.
- Operating fees to related parties increased to $6.8 million from $5.7 million, primarily due to higher variable asset-management fees and additional property-management fees.
- Interest expense increased to $13.0 million from $11.5 million as average borrowings and the weighted-average effective interest rate increased.
- Derivative losses increased to $2.9 million from $0.5 million, largely reflecting mark-to-market effects on foreign-currency and interest-rate derivatives.
- Acquisition and transaction costs increased to $1.3 million from $0.7 million, primarily reflecting litigation costs and costs related to refinancing foreign debt.
- Equity-based compensation was income of $0.8 million in Q1 2018 versus expense of $16,000 in Q1 2017, due mainly to a decline in the valuation of the multi-year outperformance agreement.
- Operating cash flow increased despite lower GAAP net income, driven primarily by higher non-cash depreciation and amortization and favorable working-capital changes.
Outlook, Risks and Unusual Items
- Management stated a goal of acquiring approximately $500 million of properties during 2018. The filing does not provide formal earnings or AFFO guidance.
- On January 26, 2018, the company obtained a $32.8 million, fixed-rate, 10-year mortgage loan at 4.32%; approximately $30 million was used to repay revolving-facility borrowings.
- Mortgage principal maturities were $136.9 million for the remainder of 2018 and $302.4 million in 2019, creating refinancing and liquidity requirements.
- The company terminated its European Service Provider effective March 17, 2018. The Advisor and third-party providers assumed management responsibilities for the European portfolio.
- The former Service Provider filed litigation alleging breach of contract and tortious interference. The court denied a preliminary injunction and dismissed the declaratory-judgment claim, while allowing other claims to proceed. The company believes the allegations are without merit.
- Key disclosed risks include tenant credit and concentration risk, interest-rate and refinancing exposure, foreign-currency volatility, Brexit and European-market risk, dependence on related-party managers, conflicts of interest, dividend coverage, access to capital, and maintaining REIT qualification.
- Noncancellable ground-lease payments totaled $52.1 million, including $43.6 million due after 2023. The company reported no material off-balance-sheet arrangements other than future ground-lease obligations.
- The company adopted several new accounting standards in 2018, including revenue recognition and financial-instrument guidance, without a material reported impact. It expected to adopt the new leases standard on January 1, 2019.
Important Facts for Investors to Verify
- Whether acquisition activity and the stated $500 million 2018 acquisition objective can be funded while maintaining dividend coverage and leverage targets.
- The timing and terms of refinancing for the $136.9 million of mortgage maturities remaining in 2018 and the $302.4 million due in 2019.
- The sustainability of common and preferred dividends, particularly because management noted that dividends may in some periods require cash on hand or other capital sources.
- The effect of the former Service Provider litigation and the transition of European portfolio management on costs, operations and tenant relationships.
- The impact of derivative mark-to-market volatility and foreign-exchange movements on GAAP earnings, equity and cash flows.
- The comparability of FFO, Core FFO and AFFO with other REITs, because these non-GAAP measures may be calculated differently by peers.
- Tenant credit quality, lease expirations and geographic exposure, including the concentration of annualized rental income in the United States and United Kingdom.