Global Net Lease, Inc. annual report, FY2015

Global Net Lease, Inc. — 2015 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2015. The filing is an annual Form 10-K, not a quarterly filing. Global Net Lease, formerly American Realty Capital Global Trust, became NYSE-listed under “GNL” on June 2, 2015 after operating as a non-traded REIT. The company owns and externally manages single-tenant, net-leased commercial properties in the United States, Puerto Rico, the United Kingdom and continental Europe.

Business Context and Portfolio

Owned 329 properties totaling approximately 18.7 million rentable square feet at year-end, versus 307 properties at December 31, 2014.
Portfolio occupancy was 100%, with a weighted-average remaining lease term of 11.3 years.
Based on original purchase price, approximately 60.4% of properties were in the United States and Puerto Rico, 20.8% in continental Europe and 18.8% in the United Kingdom.
Property mix was approximately 54% office, 30% industrial/distribution, 15% retail and 1% other.
Annualized rental income was approximately $206.1 million. No individual tenant exceeded 10% of annualized rental income; GSA properties represented 5.6% and RWE AG 5.0%.

Financial Performance and Key Metrics

Metric	2015	2014	Change
Total revenue	$205.3 million	$93.4 million	Up 119.9%
Rental income	$194.6 million	$88.2 million	Up 120.8%
Operating income	$33.2 million	$(43.6) million	Improved
Net loss attributable to stockholders	$(2.1) million	$(53.6) million	Improved
Basic and diluted loss per share	$(0.01)	$(0.43)	Improved
Cash flow from operations	$102.2 million	$(9.7) million	Improved by $111.8 million
FFO attributable to stockholders	$88.0 million	Not clearly provided in the filing excerpt
Core FFO	$127.2 million	Not clearly provided in the filing excerpt
AFFO	$122.4 million	Not clearly provided in the filing excerpt

Operating expenses were $172.1 million, including $90.1 million of depreciation and amortization, $18.7 million of listing fees, $15.2 million of affiliate operating fees, $14.5 million for vesting of Class B units and $6.1 million of acquisition and transaction costs. Interest expense increased to $34.9 million from $14.9 million.

The filing does not present a single conventional GAAP operating margin as a headline measure. Based on reported figures, operating income divided by revenue was approximately 16.2% in 2015, compared with a negative operating margin in 2014. FFO, Core FFO and AFFO are non-GAAP measures and should not be treated as substitutes for GAAP net income or operating cash flow.

Liquidity, Debt and Capital Resources

Cash and cash equivalents were $69.9 million at December 31, 2015, including $3.3 million of restricted cash.
Mortgage notes payable were $531.7 million, compared with $281.2 million at year-end 2014.
Borrowings under the revolving credit facility were $717.3 million against a $740.0 million commitment, leaving approximately $22.7 million of borrowing capacity based on the borrowing base.
Total debt was approximately $1.25 billion before considering related presentation items; reported leverage was 47.5% of the aggregate purchase price of real estate investments.
Approximately 63.4% of long-term debt was fixed-rate or effectively fixed through interest-rate swaps. Weighted-average effective interest on consolidated debt was approximately 2.5%.
The credit facility initially matured July 25, 2016 and included two one-year extension options subject to conditions. Management expected to repay or refinance obligations but stated that refinancing on favorable terms was not assured.
The company was in compliance with its debt covenants at year-end.

Material Changes Versus the Prior Comparable Period

The company acquired 22 properties in 2015 for an aggregate base purchase price of approximately $255.0 million, compared with 270 properties acquired in 2014 for approximately $2.2 billion of acquisition cost.
Revenue growth primarily reflected a full year of operations from most 2014 acquisitions and incremental 2015 acquisitions.
Operating cash flow changed from a $9.7 million use in 2014 to $102.2 million of cash provided in 2015 as the portfolio became substantially stabilized.
The company listed on the NYSE and completed a tender offer for approximately 11.9 million shares at $10.50 per share, costing approximately $125.0 million. Shares outstanding declined to 168.9 million from 177.9 million.
The DRIP was suspended and the share repurchase program was terminated in April 2015. Consequently, a greater portion of dividends was funded with cash from operations rather than reinvested dividends.
2015 included significant unusual or non-recurring expenses, including $18.7 million of listing fees and $14.5 million related to vesting of Class B units upon listing.
The new advisory agreement established an $18.0 million annual base management fee, a 1.25% variable fee on certain equity proceeds and potential incentive compensation based on Core AFFO.

Dividends, Outlook and Management Commentary

The monthly dividend rate was $0.059166667 per share, or approximately $0.71 annually. Dividends declared per common share were $0.71 for both 2015 and 2014.
Total dividends paid to common stockholders and OP unitholders were approximately $127.0 million in 2015. Cash flows from operations funded 77.5% and DRIP proceeds funded 22.5%.
For tax purposes, 63.1% of 2015 distributions, or $0.45 per share, was classified as return of capital; 36.9%, or $0.26 per share, was classified as ordinary dividend income.
Management expected operating income from the properties to cover operating expenses and the monthly dividend, but emphasized that dividends are determined by the board and are not assured.
The filing provides no formal earnings, acquisition or dividend-growth guidance. Management’s strategy remained focused on acquiring diversified, long-term, net-leased commercial properties with contractual rent escalations or inflation adjustments.

Principal Risks, Contingencies and Unusual Items

Debt refinancing and interest rates: The credit facility had substantial near-term maturity exposure, and variable-rate debt could increase interest expense and reduce cash available for dividends.
Dividend coverage: Dividends exceeded operating cash flow by approximately $24.8 million on a total-dividend basis and were partly funded with DRIP proceeds. Future dividend sustainability depends on property cash flow, financing access and fee waivers.
Tenant and concentration risk: Approximately 27.4% of tenants were unrated or below investment grade. Exposure was concentrated in the United Kingdom, Texas, Germany, Michigan and selected industries including financial services, discount retail, technology and aerospace.
Foreign currency risk: European assets and debt expose the company to fluctuations in the euro and British pound. Foreign-currency credit facility draws exceeded related net investments by approximately $83.5 million at year-end.
External management and conflicts: The company has no employees and depends on affiliates for asset management, property management, financing and administrative services. The advisory agreement has a 20-year initial term and related-party fees may be substantial.
REIT and Investment Company Act compliance: Failure to maintain REIT qualification or the applicable Investment Company Act exemption could materially increase taxes or restrict operations.
Accounting corrections: The company recorded several out-of-period adjustments during 2015 for prior-period straight-line rent, taxes, derivative accounting and operating expense reimbursements. Management concluded these adjustments were not material.
Related-party service disruption: RCS Capital Corporation filed for Chapter 11 bankruptcy in January 2016, and an affiliated transfer agent announced that it would wind down operations and withdraw effective February 29, 2016.
No material litigation or environmental claims were pending or known to management, and the company reported no material off-balance-sheet arrangements other than operating ground-lease obligations.

Important Facts for Investors to Verify

Refinancing, extension or repayment of the $717.3 million credit facility due initially in July 2016.
Sustainability of the $0.71 annual dividend after suspension of the DRIP and considering 2015 dividend coverage.
Tenant credit quality, lease renewal prospects and exposure to the United Kingdom, Texas, Germany and other concentrated markets.
Actual recurring Core AFFO and AFFO after excluding 2015 listing, vesting and acquisition-related items.
Impact of the $18.0 million base management fee, affiliate fee waivers and other related-party arrangements on future cash available for distribution.
Foreign-currency over-hedging, derivative fair values and sensitivity to interest-rate and exchange-rate changes.
Operational transition away from RCS-affiliated service providers and the company’s ability to maintain transfer-agent and administrative services.