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 assets in the United States, Puerto Rico and Europe. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
- Portfolio at September 30, 2017: 313 properties, 22.3 million rentable square feet, 99.4% leased and 9.1 years weighted-average remaining lease term.
- Geographic mix based on acquisition value: 50.4% Europe and 49.6% United States and Puerto Rico.
- Annualized rental income concentration: United Kingdom 22.4%; United States and Puerto Rico 51.0%. No individual tenant represented at least 10% of annualized rental income.
Financial Performance and Key Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenues | $64.9 million | $53.3 million | $192.7 million | $161.4 million |
| Operating income | $18.5 million | $15.2 million | $62.2 million | $52.2 million |
| Operating margin | 28.5% | 28.6% | 32.3% | 32.4% |
| Net income | $2.5 million | $9.0 million | $15.1 million | $31.5 million |
| Net income attributable to common stockholders | $2.1 million | $8.9 million | $14.7 million | $31.2 million |
| Basic and diluted EPS | $0.03 | $0.16 | $0.21 | $0.54 |
| FFO attributable to stockholders | $31.7 million | $30.9 million | $98.1 million | $100.2 million |
| Core FFO attributable to stockholders | $32.5 million | $33.4 million | $100.5 million | $102.6 million |
| AFFO attributable to stockholders | $34.8 million | $33.1 million | $105.5 million | $97.8 million |
Revenue increased 21.8% in the quarter and 19.3% for the nine-month period, primarily from the Global II merger portfolio and 2017 acquisitions. Net income declined substantially because of higher interest expense, derivative losses, foreign-currency and hedge ineffectiveness losses, preferred dividends and higher depreciation and amortization. Q3 net margin was approximately 3.8%, versus 16.9% in the prior-year quarter; nine-month net margin was approximately 7.9%, versus 19.5%.
- Rental income was $61.3 million in Q3 and $180.0 million for nine months, compared with $50.8 million and $154.0 million, respectively, in 2016.
- Net cash provided by operating activities was $102.5 million for nine months, up from $90.0 million. Dividends and distributions of $107.2 million were funded 95.6% by operating cash flow, 2.1% by property-sale proceeds and 2.3% by cash on hand.
- Investing cash flow was negative $15.3 million, including $37.1 million for four property acquisitions, $12.4 million of property-sale proceeds and $10.6 million of derivative settlement proceeds.
- Cash and cash equivalents were $71.3 million at September 30, 2017, compared with $69.8 million at December 31, 2016; restricted cash was $5.3 million.
- Real estate investments, net, were $2.78 billion, compared with $2.72 billion at year-end 2016.
Debt, Liquidity and Capital Structure
- Mortgage notes payable, net: $794.9 million; new term loan, net: $226.6 million; revolving credit facility: $418.0 million. Total debt was approximately $1.4 billion, with a reported weighted-average effective interest rate of 2.8%.
- The July 2017 refinancing replaced the prior facility with a $500.0 million multi-currency revolving facility and a €194.6 million term facility. Borrowings outstanding under the new credit facility were $648.0 million at September 30, 2017, with approximately $82.0 million of revolving availability.
- Reported debt leverage was 38.9% based on total debt as a percentage of the purchase price of real estate investments. Approximately 77.9% of debt was fixed-rate or effectively fixed through swaps or caps.
- Gross unencumbered assets were approximately $1.5 billion. The weighted-average maturity of indebtedness was 3.1 years at September 30, 2017.
- The Company issued 4.0 million Series A preferred shares in September 2017, generating $96.3 million of net proceeds. The shares carry a 7.25% cumulative dividend. The ATM program generated $18.5 million of net common-stock proceeds during the nine months.
- Common dividends were $0.1775 per share per month. Series A preferred dividends accrue at $0.453125 per share per quarter. Management stated that operating income was expected to cover current dividends, although dividends are not assured.
Material Changes, Outlook and Unusual Items
- The Global II merger and 2017 acquisitions expanded the portfolio and drove revenue growth, but also increased debt, depreciation, management fees and interest expense.
- The Company recorded $6.6 million of derivative losses and $3.8 million of losses from undesignated foreign-currency advances and hedge ineffectiveness for the nine months, compared with gains in both categories in 2016. Management expected no further GBP excess-advance charges after the July refinancing, although currency risk remains.
- A tenant experiencing financial difficulties resulted in $1.0 million of bad-debt expense for the nine months, an $1.8 million write-off of related lease intangibles and a decline in occupancy from 100.0% at June 30 to 99.4% at September 30.
- The Company recognized a $0.5 million out-of-period rental-income and straight-line-rent adjustment related to an error in calculating rent for a property acquired in 2014. Management concluded the adjustment was not material.
- A fire loss of $0.2 million was recognized for the nine months, net of a $0.3 million Q3 recovery. Management expected insurance reimbursement for remaining losses. Properties with carrying values of $171.2 million were in areas affected by Hurricanes Irma, Harvey and Maria; tenants continued paying rent and insurance coverage was in place.
- Subsequent to quarter-end, the Company issued 259,650 additional Series A preferred shares for $6.3 million of net proceeds and entered into a $187.0 million, 4.369% CMBS loan maturing in 2027. Approximately $120.0 million of that loan was used to repay revolving debt.
- Four additional properties were acquired from October 1 through November 6, 2017 for an aggregate base purchase price of $18.1 million. Three further acquisitions totaling approximately $45.0 million were under definitive agreements but remained subject to closing conditions.
- No formal earnings or dividend guidance was provided. The filing states that future acquisitions, financing and dividends depend on operating cash flow, available cash, debt capacity and capital-market access.
Principal Risks and Contingencies
- Interest-rate, refinancing and liquidity risk, including approximately $79.1 million of mortgage debt maturing between September 30, 2017 and September 30, 2018.
- Foreign-currency and European market exposure, including Brexit-related economic and political uncertainty.
- Tenant credit risk and concentration in office properties, which represented 59.5% of annualized rental income; occupancy declined following one tenant’s departure.
- Dividend coverage risk: the Company used cash on hand and property-sale proceeds for a portion of 2017 distributions, and the credit facility limits distributions generally to 95% of its defined Adjusted FFO beginning with the four quarters ending December 31, 2017, subject to exceptions.
- External-management and related-party conflicts, including management and property-management fees paid to affiliates of AR Global. The Company depends on the Advisor, Property Manager and European Service Provider.
- One mortgage loan was in breach of a loan-to-value covenant at quarter-end, with $7.4 million outstanding. The breach was cured after quarter-end through a £0.8 million principal repayment and did not result in an event of default.
- The filing reports no material pending legal proceedings involving the Company. A related-party lawsuit against AR Global and affiliates did not name the Company.
Investor Verification Checklist
- Reconcile AFFO and Core FFO to GAAP net income and assess dividend coverage after preferred dividends, recurring capital expenditures and debt service.
- Verify post-quarter-end CMBS financing, the $120.0 million revolving-debt repayment and the resulting liquidity and debt maturities.
- Review tenant exposure, the vacated property, bad-debt reserves and the sustainability of 99.4% occupancy.
- Monitor mortgage maturities, credit-facility covenants and the cured loan-to-value breach.
- Assess sensitivity to GBP and EUR exchange rates, variable interest rates and derivative valuations.
- Review related-party compensation, fee waivers and the impact of the externally managed structure on recurring cash flow.
- Confirm the status, funding and expected returns of the announced acquisitions and the Company’s ability to maintain common and preferred dividends.