Business Context and Reporting Period
Global Net Lease, Inc. is an externally managed REIT focused primarily on diversified, single-tenant, net-leased commercial properties and sale-leaseback transactions. The unaudited Form 10-Q covers the three and nine months ended September 30, 2016, filed November 9, 2016.
- Portfolio: 326 properties totaling 18.6 million rentable square feet; 100% leased with a 10.5-year weighted-average remaining lease term.
- Geographic mix by original purchase price: 60.2% United States and Puerto Rico and 39.8% Europe.
- Common shares outstanding at September 30, 2016: 170.2 million.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenues | $53.3 million, versus $50.3 million | $161.4 million, versus $149.3 million |
| Operating income | $15.2 million, versus $11.5 million | $52.2 million, versus $11.7 million |
| Operating margin | 28.6%, versus 22.9% | 32.4%, versus 7.9% |
| Net income attributable to stockholders | $8.9 million, versus $5.4 million | $31.2 million, versus a $14.4 million loss |
| Net margin attributable to stockholders | 16.8%, versus 10.8% | 19.3%, versus negative 9.6% |
| Basic and diluted EPS | $0.05, versus $0.03 | $0.18, versus $(0.08) |
| FFO attributable to stockholders | $30.9 million | $100.2 million |
| Core FFO attributable to stockholders | $33.4 million | $102.6 million |
| AFFO attributable to stockholders | $33.1 million | $97.8 million |
Rental income increased to $50.8 million in the quarter and $154.0 million year to date, primarily reflecting the contribution from properties acquired during the first three quarters of 2015. Depreciation and amortization was $23.5 million in the quarter and $71.1 million year to date.
- Cash and cash equivalents: $50.3 million at September 30, 2016, down from $69.9 million at December 31, 2015.
- Net cash provided by operating activities: $90.0 million for the first nine months, versus $66.4 million in the prior-year period.
- Net cash provided by investing activities: $13.2 million, including $13.4 million of real estate sale proceeds; there were no acquisitions in 2016 through September 30.
- Net cash used in financing activities: $120.9 million, including $90.1 million of dividends, $42.1 million of credit-facility repayments and $0.6 million of mortgage repayments.
- Dividends and distributions totaled $91.9 million, or 97.0% of operating cash flow; 3.0% was funded from available cash on hand.
Debt, Liquidity and Market Risk
- Credit facility borrowings: $671.0 million, with $69.0 million of unused capacity. The facility has a $740.0 million maximum and was extended to July 25, 2017, with one remaining one-year extension option.
- Mortgage notes payable, net: $502.8 million; gross mortgage debt was $508.5 million with a 3.0% effective rate.
- Total debt was approximately $1.2 billion, with a 45.6% debt-to-real-estate-purchase-price leverage ratio and a 2.7% weighted-average effective interest rate.
- Approximately 63.3% of debt was fixed-rate or effectively fixed through swaps. Interest-rate swaps had a net liability fair value of $16.1 million.
- The company was in compliance with its credit-facility and mortgage covenants at September 30, 2016. Management stated that operating income was expected to cover operating expenses and monthly dividends, but dividend payments were not assured.
Material Changes Versus the Prior Comparable Period
- Revenue increased 6.0% in the quarter and 8.1% year to date, driven primarily by the 2015 acquisitions.
- Operating income rose 32.5% in the quarter and more than quadrupled year to date, largely because 2015 listing fees and Class B Unit vesting costs did not recur.
- Year-to-date net income improved from a $14.4 million loss to $31.2 million of income attributable to stockholders. The 2015 period included $18.5 million of listing fees, $14.5 million of Class B Unit vesting expense and $3.4 million of listing-note fair-value expense.
- Interest expense increased 21.4% year to date to $30.1 million, primarily due to higher average borrowings and debt used to fund 2015 acquisitions.
- Three properties were sold during the first nine months for $13.9 million of contract sales proceeds and a $1.3 million gain. Twenty-four properties totaling $32.0 million net were classified as held for sale at September 30, 2016.
- On September 2, 2016, 1.3 million OP Units were converted into common stock, increasing shares outstanding and reducing OP Units outstanding to 545,530.
Outlook, Transactions, Risks and Unusual Items
- The company entered into a merger agreement with American Realty Capital Global Trust II, Inc. The proposed exchange ratio was 2.27 Global II shares or OP units for each share of company common stock, with estimated merger consideration of approximately $212.6 million based on the October 31, 2016 share price. The merger remained subject to stockholder approvals and other conditions.
- The company expected to issue approximately 28.7 million shares in the merger, resulting in anticipated ownership of approximately 86% for existing company stockholders and 14% for former Global II stockholders. Estimated annual general and administrative cost savings were up to $4.1 million, but realization was uncertain.
- A $150.0 million bridge facility was committed for the merger, but management stated it did not expect to draw it after obtaining required change-in-control waivers.
- Subsequent to quarter end, 27 properties were sold for aggregate contract sales proceeds of $44.5 million. The company also purchased $0.5 million of currency put options on October 31, 2016.
- Key risks include refinancing the $671.0 million credit facility and other debt obligations, interest-rate and foreign-exchange volatility, Brexit-related effects on European property values and financing, tenant credit risk, reliance on external managers and related-party fees, dividend coverage, and the possibility that the merger will be delayed or not completed.
- The filing disclosed revisions to the classification of certain prior-period other comprehensive income items and a prior-period cash/restricted-cash classification correction; management concluded the errors were not material to previously reported periods.
- No material pending legal proceedings were disclosed. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Facts Investors Should Verify
- Whether operating cash flow continues to cover the monthly dividend and distributions without reliance on asset sales, borrowings, cash balances or fee waivers.
- The refinancing or repayment plan for the credit facility, including the July 2017 maturity and remaining extension option.
- The final status, share issuance, dilution, financing effects and expected synergies of the Global II merger.
- The effect of Brexit, currency movements and European refinancing conditions on rental income, asset values and debt service.
- The carrying value and disposition timing of the 24 properties held for sale and the additional properties marketed or under contract.
- The sustainability of AFFO and Core FFO after excluding merger, acquisition, transaction, fair-value and other non-cash items.
- The magnitude and ongoing effect of related-party management and property-management fees, including waived fees that are not deferrals.