Global Net Lease(US:GNL)2020-05-07 20:20PART I - FINANCIAL INFORMATION Financial Statements This section presents Global Net Lease, Inc.'s unaudited consolidated financial statements for the periods ended March 31, 2020 and 2019 Note 1 — Organization Global Net Lease, Inc. operates as a REIT, investing in single-tenant net-leased commercial properties with a diversified portfolio and high occupancy - The Company is externally managed by Global Net Lease Advisors, LLC and its properties by Global Net Lease Properties, LLC, both related parties under common control with AR Global32 Portfolio Snapshot as of March 31, 2020 | Metric | Value | | :--- | :--- | | Properties Owned | 288 | | Rentable Square Feet | 34.2 million | | Occupancy | 99.6% | | Weighted-Average Remaining Lease Term | 9.0 years | | Geographic Split (by annualized rental income) | 64% U.S. & Canada, 36% Europe | Note 2 — Summary of Significant Accounting Policies This note outlines the company's significant GAAP accounting policies, including revenue recognition, real estate investments, and the impact of COVID-19 on lease modifications - The Company's revenues are primarily from lease contracts, reported on a straight-line basis, with future minimum base rental payments projected at $2.39 billion3943 - In response to COVID-19, the Company utilized FASB and SEC relief to treat pandemic-related lease amendments as provisions within pre-concession arrangements, avoiding full lease modification reassessment7983 - The Company adopted ASU 2016-13 (Credit Losses) and ASU 2018-13 (Fair Value Measurement) on January 1, 2020, with no material impact on its financial statements8586 Note 3 — Real Estate Investments, Net This note details the company's real estate investment activities, including property acquisitions, dispositions, and geographic concentrations of its portfolio Property Acquisitions | Period | Properties Purchased | Cash Paid (in thousands USD) | | :--- | :--- | :--- | | Q1 2020 | 10 | $113,117 | | Q1 2019 | 2 | $23,454 | - The company had no property dispositions during Q1 2020, while one property was sold for a gain of $0.9 million in Q1 201993 Geographic Concentration by Annualized Rental Income | Country / U.S. State | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | United States | 64.4% | 63.0% | | Michigan | 14.4% | 14.6% | | United Kingdom | 16.9% | 18.2% | Note 4 — Mortgage Notes Payable, Net This note details the company's mortgage notes payable, totaling $1.25 billion net, secured by 115 properties, with a 3.4% weighted-average interest rate Mortgage Notes Payable, Net | Metric | March 31, 2020 (in thousands USD) | December 31, 2019 (in thousands USD) | | :--- | :--- | :--- | | Gross mortgage notes payable | $1,263,525 | $1,287,448 | | Mortgage notes payable, net | $1,249,308 | $1,272,154 | | Weighted-average effective interest rate | 3.4% | N/A | - As of March 31, 2020, the company was in compliance with all financial covenants under its mortgage notes payable agreements106 Note 5 — Credit Facilities This note details the company's senior unsecured credit facility, including its revolving credit and term loan balances, maturity dates, and key financial covenants Credit Facility Balances | Facility | March 31, 2020 (in thousands USD) | December 31, 2019 (in thousands USD) | | :--- | :--- | :--- | | Revolving Credit Facility | $399,213 | $199,071 | | Term Loan, Net | $390,450 | $397,893 | | Total Credit Facility | $789,663 | $596,964 | - As of March 31, 2020, approximately $23.2 million was available for future borrowings under the Revolving Credit Facility121 - The Credit Facility restricts distributions to not exceed 100% of Adjusted FFO for four consecutive quarters, with a limited exception allowing up to 105% for one quarter annually123 Note 6 — Fair Value of Financial Instruments This note discusses the fair value measurement of the company's financial instruments, including derivatives classified as Level 2 and mortgage notes payable as Level 3 Fair Value of Derivatives (Level 2) | Instrument | March 31, 2020 (in thousands USD) | December 31, 2019 (in thousands USD) | | :--- | :--- | :--- | | Foreign currency forwards, net | $4,807 | $2,726 | | Interest rate swaps, net | $(13,469) | $(6,082) | - The fair value of the Company's mortgage notes payable was approximately $1.3 billion as of March 31, 2020, classified as Level 3 in the fair value hierarchy135 Note 7 — Derivatives and Hedging Activities The company uses derivatives, including interest rate swaps and foreign currency forwards, to manage interest rate and currency risks, with fair value changes recorded in AOCI or net income Net Fair Value of Derivatives | Type | March 31, 2020 (in thousands USD) | December 31, 2019 (in thousands USD) | | :--- | :--- | :--- | | Designated as hedging instruments | $(13,414) | $(6,008) | | Not designated as hedging instruments | $4,752 | $2,652 | - For Q1 2020, a $8.4 million loss on cash flow hedges was recognized in AOCI, and a $0.8 million loss was reclassified from AOCI into interest expense146 Note 8 — Stockholders' Equity This note details stockholders' equity components, including common and preferred stock outstanding, ATM program activity, and the recent common stock dividend reduction - In March 2020, the board approved a common stock dividend reduction to an annual rate of $1.60 per share ($0.40 quarterly), effective Q2 2020163234 - The Company did not sell any Common Stock or Series B Preferred Stock shares through its ATM programs during Q1 2020159162 Preferred Stock Outstanding as of March 31, 2020 | Series | Shares Issued and Outstanding | | :--- | :--- | | 7.25% Series A | 6,799,467 | | 6.875% Series B | 3,450,000 | Note 9 — Commitments and Contingencies This note covers commitments and contingencies, primarily ground leases with $48.9 million in ROU assets and $23.4 million in lease liabilities, and confirms no material legal proceedings Ground Lease Metrics as of March 31, 2020 | Metric | Value (in millions USD) | | :--- | :--- | | ROU Assets | $48.9 | | Lease Liabilities | $23.4 | | Weighted-Average Remaining Lease Term | 33.3 years | | Weighted-Average Discount Rate | 4.33% | - There are no material legal or regulatory proceedings pending or known to be contemplated against the Company174 Note 10 — Related Party Transactions This note details related party transactions, including $8.8 million in operating fees to the Advisor and Property Manager, and recent amendments to incentive compensation terms Related Party Fees Incurred | Fee Type | Q1 2020 (in thousands USD) | Q1 2019 (in thousands USD) | | :--- | :--- | :--- | | Asset management fees | $7,376 | $6,671 | | Property management fees | $1,418 | $1,372 | | Total | $8,794 | $8,043 | - On May 6, 2020, the Advisory Agreement was amended to temporarily lower Core AFFO Per Share thresholds for Advisor incentive compensation due to COVID-19 market disruption184 Note 11 — Economic Dependency This note highlights the company's economic dependency on its external Advisor and affiliates for essential asset, property, and administrative management services - The Company is dependent upon the Advisor and its affiliates for essential services including asset management, property management, and administrative functions203204 Note 12 — Equity-Based Compensation This note describes the company's equity-based compensation plans, including the 2018 Multi-Year Outperformance Agreement and Restricted Share Plan expenses - The Company recorded compensation expense of $2.4 million in Q1 2020 related to the 2018 OPP with the Advisor, compared to $2.0 million in Q1 2019217 - The 2018 OPP allows the Advisor to earn a maximum of 2,554,930 LTIP Units based on absolute and relative TSR performance goals over a three-year period ending June 2, 2021220 - Compensation expense for Restricted Stock Units granted to independent directors was $0.1 million for the three months ended March 31, 2020212 Note 13 — Earnings Per Share This note explains the calculation of basic and diluted earnings per share, detailing the two-class method and the impact of unvested equity awards Earnings Per Share Calculation | Metric | Q1 2020 (in thousands USD, except per share data) | Q1 2019 (in thousands USD, except per share data) | | :--- | :--- | :--- | | Net income attributable to common stockholders | $5,038 | $5,791 | | Weighted average shares outstanding - Basic | 89,458,753 | 81,474,615 | | Weighted average shares outstanding - Diluted | 89,499,294 | 82,798,432 | | Basic and diluted EPS | $0.05 | $0.07 | Note 14 — Subsequent Events This note details significant subsequent events, including a common stock dividend reduction, adoption of a stockholder rights plan, and an amendment to the Advisory Agreement - The board approved a reduction in the quarterly common stock dividend to $0.40 per share, effective with the dividend declared on April 1, 2020234236 - In April 2020, the company adopted a short-term stockholder rights plan, expiring April 2021, to protect against hostile takeovers during COVID-19 market volatility237 - On May 6, 2020, the Advisory Agreement was amended to temporarily lower performance thresholds for the Advisor's incentive compensation due to COVID-19 market disruption238 Consolidated Balance Sheet Highlights | Account | March 31, 2020 (in thousands USD) | December 31, 2019 (in thousands USD) | | :--- | :--- | :--- | | Total real estate investments, net | $3,284,800 | $3,246,141 | | Cash and cash equivalents | $343,447 | $270,302 | | Total Assets | $3,815,353 | $3,701,605 | | Total Liabilities | $2,165,396 | $1,991,647 | | Total Equity | $1,649,957 | $1,709,958 | Consolidated Statement of Operations Highlights | Account | Three Months Ended March 31, 2020 (in thousands USD) | Three Months Ended March 31, 2019 (in thousands USD) | | :--- | :--- | :--- | | Revenue from tenants | $79,242 | $75,468 | | Total expenses | $55,433 | $52,282 | | Operating income | $23,809 | $24,078 | | Net income | $9,601 | $8,276 | | Net income attributable to common stockholders | $5,038 | $5,791 | | Basic and diluted EPS | $0.05 | $0.07 | Consolidated Statement of Cash Flows Highlights | Account | Three Months Ended March 31, 2020 (in thousands USD) | Three Months Ended March 31, 2019 (in thousands USD) | | :--- | :--- | :--- | | Net cash provided by operating activities | $41,895 | $24,751 | | Net cash used in investing activities | $(115,947) | $(26,642) | | Net cash provided by financing activities | $153,539 | $2,387 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial condition and operating results, including the impact of COVID-19, liquidity, and non-GAAP financial measures - Net income attributable to common stockholders was $5.0 million for Q1 2020, compared to $5.8 million for Q1 2019272 - Revenue from tenants increased to $79.2 million in Q1 2020 from $75.5 million in Q1 2019, primarily due to property acquisitions274 Non-GAAP Performance Measures | Measure | Q1 2020 (in thousands USD) | Q1 2019 (in thousands USD) | | :--- | :--- | :--- | | FFO attributable to common stockholders | $38,571 | $36,202 | | Core FFO attributable to common stockholders | $38,851 | $36,464 | | AFFO attributable to common stockholders | $39,822 | $39,504 | - As of March 31, 2020, the company had $343.4 million in cash and cash equivalents and total debt outstanding of $2.1 billion with a weighted-average interest rate of 3.1%297307 Quantitative and Qualitative Disclosures About Market Risk This section confirms no material change in the company's market risk exposure during Q1 2020, referring to the Annual Report for detailed discussion - There was no material change in the company's exposure to market risk during Q1 2020351 Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures, with no material changes to internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2020352 - No material changes to the company's internal control over financial reporting occurred during Q1 2020353 PART II - OTHER INFORMATION Legal Proceedings This section reports no material legal proceedings involving the company during the period - The company reports no material legal proceedings354 Risk Factors This section updates the company's risk factors, highlighting new risks related to the COVID-19 pandemic and the recently adopted stockholder rights plan - A new, significant risk factor addresses the COVID-19 pandemic, which has caused severe disruptions and may worsen, impacting tenant financial health, rent collections, and overall economic activity355 - The pandemic could lead to a sustained shift away from in-person work environments, adversely affecting demand for office space and making it difficult to renew or re-lease properties at favorable rates356 - The stockholder rights plan adopted in April 2020 could make it more difficult for a third party to acquire the company, potentially discouraging offers that might include a premium for stockholders368 Unregistered Sales of Equity Securities and Use of Proceeds of Registered Securities This section reports no sales of unregistered equity securities or repurchases of the company's equity securities during the period - There were no sales of unregistered securities or repurchases of equity securities by the company during the quarter370371 Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the period - The company reports no defaults upon senior securities372 Mine Safety Disclosures This section is not applicable to the company - Not applicable Other Information This section discloses the May 6, 2020 amendment to the Advisory Agreement, temporarily lowering incentive compensation hurdles and changing payment terms - On May 6, 2020, the company amended its Advisory Agreement to temporarily lower performance hurdles for the Advisor's incentive compensation due to the COVID-19 pandemic375 - The amendment changes the payment form for incentive compensation earned between April 1, 2020, and December 31, 2020, to be 100% cash instead of the usual 50% cash and 50% stock378 Exhibits This section lists the exhibits filed with or incorporated by reference into the Quarterly Report on Form 10-Q