Global Net Lease, Inc. quarterly report, Q3 FY2021

Global Net Lease, Inc. — 2021 Q3 Form 10-Q Summary

Business context and reporting period

Global Net Lease, Inc. is an externally managed REIT focused on globally diversified, primarily single-tenant net-lease commercial properties and sale-leaseback transactions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparable periods ended September 30, 2020.

Portfolio: 312 properties, 38.3 million rentable square feet, 99.1% leased, and 8.2-year weighted-average remaining lease term.
Geographic mix: 60% of annualized straight-line rent in the U.S. and Canada and 40% in Europe.
Property mix: 52% industrial/distribution, 43% office, and 5% retail.
Approximately 55% of quarterly straight-line rental income came from actual or implied investment-grade tenants; 70% came from tenants with an actual credit rating.

Financial performance and key metrics

Metric	Q3 2021	Q3 2020	9M 2021	9M 2020
Revenue from tenants	$95.8 million	$82.7 million	$284.7 million	$243.1 million
Operating income	$30.8 million	$26.0 million	$85.5 million	$74.1 million
Net income	$7.4 million	$4.1 million	$14.2 million	$19.3 million
Net income attributable to common stockholders	$2.4 million	$(0.5) million	$(0.9) million	$5.5 million
Basic and diluted EPS	$0.02	$(0.01)	$(0.12)	$0.06
FFO attributable to common stockholders	$44.0 million	$34.5 million	$126.9 million	$108.2 million
AFFO attributable to common stockholders	$44.3 million	$40.9 million	$127.5 million	$120.5 million

Q3 operating margin was approximately 32.1%, compared with 31.4% in Q3 2020; nine-month operating margin was approximately 30.0%, compared with 30.5%.
Q3 net margin was approximately 7.7%; nine-month net margin was approximately 5.0%.
Revenue growth was driven primarily by acquisitions, favorable foreign exchange movements, a $2.2 million recognized portion of a tenant termination fee, and a $5.2 million receivable for reimbursable McLaren financing costs during the nine months.
Q3 interest expense increased to $24.9 million from $18.7 million; nine-month interest expense increased to $70.2 million from $52.6 million.
Operating fees to related parties increased to $9.9 million in Q3 and $29.0 million for nine months, from $8.9 million and $26.6 million, respectively, largely because of higher variable base management fees and property management fees.

Cash flow, balance sheet, debt and liquidity

Net cash provided by operating activities was $158.1 million for the nine months, up from $136.3 million.
Investing cash outflow was $309.8 million, including $303.0 million for real estate acquisitions and $6.0 million of capital expenditures.
Financing cash inflow was $207.8 million, supported by $214.1 million of common-stock issuance, $15.9 million of Series B preferred-stock issuance, and net debt proceeds.
Cash and cash equivalents were $176.4 million at September 30, 2021, compared with $124.2 million at December 31, 2020. Cash, cash equivalents and restricted cash totaled $179.1 million.
Net real estate investments were $3.8 billion and total assets were $4.2 billion.
Total debt was approximately $2.4 billion, consisting primarily of $1.5 billion of mortgage debt, $403.0 million under the credit facility, and $500.0 million principal amount of senior notes due 2027.
Debt leverage was 56.9% based on total debt relative to the purchase price of real estate investments. Approximately 62% of debt was secured and 38% unsecured.
At September 30, 2021, 93.9% of debt was fixed-rate or swapped to fixed rates. Weighted-average debt cost was approximately 3.4%, and approximately $104.0 million was available under the revolving credit facility.
Management stated that operating income from existing properties, together with cash on hand, is expected to fund operating expenses and quarterly common and preferred dividends; future acquisitions may require additional debt, equity, property-sale proceeds or other capital.

Material changes versus the prior comparable period

Revenue increased 15.8% in Q3 and 17.1% for the nine months, primarily reflecting property acquisitions and foreign exchange movements.
Common-stockholders’ results improved from a Q3 loss of $0.5 million to income of $2.4 million, but declined from $5.5 million of income to a $0.9 million loss for the nine-month period.
FFO increased 27.5% in Q3 and 17.2% for nine months; AFFO increased 8.3% in Q3 and 5.8% for nine months.
Net income was pressured by higher interest expense, $7.9 million of year-to-date impairment charges, higher general and administrative costs, and increased depreciation and amortization.
The company acquired six properties for $303.0 million during the nine months, including the McLaren headquarters campus in the United Kingdom and Trafalgar Court in the Channel Islands.
Common shares outstanding increased to 103.9 million from 89.6 million at year-end 2020, primarily due to ATM equity issuance and the conversion of earned 2018 OPP units. The company sold 11.9 million common shares for $217.5 million gross proceeds during the nine months.
The common dividend rate remained $0.40 per share quarterly, or $1.60 annualized, after the reduction implemented in 2020.

Guidance, outlook, commentary, risks and unusual items

The filing does not provide formal earnings or acquisition guidance. Management expects existing-property operating income and cash on hand to support operations and declared dividends, but notes that dividend capacity depends on cash flow, debt restrictions and acquisition activity.
Management reported approximately 100% collection of original cash rent due for Q3 2021 as of October 31, 2021 across the portfolio, while cautioning that this may not be indicative of future collections or recovery of deferred 2020 rent.
A tenant termination agreement requires payment of approximately £6.7 million, or $9.0 million, on January 4, 2022. The company recognized $2.2 million of revenue in Q3 before receiving the cash.
Two properties were classified as held for sale and generated $7.9 million of impairment charges year to date. The Conroe, Texas property sold for $3.2 million on October 22, 2021; the Houston property was expected to sell later in Q4.
Several mortgage-related cash sweep or reserve events were active, including a United Kingdom loan cash trap, a $7.4 million letter of credit related to a tenant non-renewal, a France loan cash sweep of $1.6 million, and a lease sweep with a reserve cap of $0.8 million. None was reported as an event of default at September 30, 2021.
After quarter-end, the United Kingdom bulk loan triggered another cash trap of approximately £7.2 million, or $9.9 million at October 31, 2021. The company was working with lenders on a solution.
The company was in compliance with mortgage, credit facility and senior-note covenants at September 30, 2021. Risks include tenant credit and lease renewals, COVID-19 effects, foreign exchange, interest rates, LIBOR transition, refinancing needs, property values and reliance on the external advisor and related parties.
The company recorded $2.7 million of Q3 equity-based compensation and initiated a new 2021 outperformance plan with a maximum grant of 2.5 million LTIP units and fixed grant-date fair value of $27.7 million.

Important facts for investors to verify

Reconcile AFFO and FFO to recurring cash generation, particularly the $2.2 million non-cash-accrued termination fee and $5.2 million McLaren financing-cost reimbursement included in revenue.
Monitor the United Kingdom bulk-loan cash trap, the company’s £20.0 million guaranty, and potential loan-to-value covenant pressure.
Assess debt maturities, refinancing requirements and variable-rate exposure, including the $5.0 million mortgage principal due in Q4 2021 and the $37.7 million Trafalgar Court loan maturing in September 2022.
Evaluate dividend coverage under both GAAP cash flow and the credit facility’s separate Adjusted FFO definition, including the impact of equity issuance and related-party fees.
Track tenant renewals, the terminated lease, held-for-sale properties, impairment risk and the effect of COVID-19-related rent deferrals on future collections.
Review dilution from the ATM programs, the 2021 OPP, restricted awards and preferred stock issuance.