Global Net Lease, Inc. — Fiscal 2020 Form 10-K Summary
Business Context and Reporting Period
Global Net Lease, Inc. is an externally managed REIT focused on globally diversified, primarily single-tenant, net-leased commercial properties and sale-leaseback transactions. This Form 10-K covers the fiscal year ended December 31, 2020; quarterly information is included but the filing is an annual report.
At year-end, the portfolio comprised 306 properties totaling 37.2 million rentable square feet, was 99.7% leased, and had an 8.5-year weighted-average remaining lease term. Based on straight-line rental income, 64% of the portfolio was in the U.S. and Canada and 36% in Europe; property types were 49% industrial/distribution, 46% office and 5% retail. The company had 130 tenants across 48 industries, and no tenant represented 10% or more of annualized rental income.
Financial and Operating Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue from tenants | $330.1 million | $306.2 million | +7.8% |
| Operating income | $99.2 million | $114.9 million | -13.6% |
| Net income | $10.8 million | $46.5 million | -76.8% |
| Net income attributable to common stockholders | $(7.8) million | $34.5 million | Declined to a loss |
| Basic and diluted EPS | $(0.09) | $0.40/$0.39 | Declined to a loss |
| Cash flow from operations | $176.9 million | $146.0 million | +21.1% |
| FFO attributable to common stockholders | $130.9 million | $143.3 million | -8.6% |
| Core FFO attributable to common stockholders | $135.2 million | $145.6 million | -7.1% |
| AFFO attributable to common stockholders | $160.5 million | $159.7 million | +0.5% |
Operating expenses were $230.7 million, including $138.5 million of depreciation and amortization, $35.8 million of related-party operating fees and $10.1 million of equity-based compensation. Revenue less operating expenses produced an operating margin of approximately 30.1%, compared with approximately 37.5% in 2019. Net income margin was approximately 3.3%, compared with 15.2% in 2019. The filing does not present a standardized net-lease operating margin.
Total assets were $4.0 billion, including $3.6 billion of net real estate investments. Total liabilities were $2.4 billion and total equity was $1.6 billion. Gross debt was approximately $2.3 billion, or 57.4% of the total purchase price of real estate investments, with a weighted-average effective interest rate of 3.3% and a weighted-average maturity of 5.4 years. Approximately 96% of debt was fixed-rate or swapped to fixed-rate.
Year-end liquidity included $124.2 million of cash and cash equivalents and approximately $94.5 million of available Revolving Credit Facility capacity. Cash flow from operations funded the full $172.9 million of dividends and distributions paid during 2020. However, cash used for dividends in the first quarter exceeded quarterly operating cash flow and was supplemented by cash on hand.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily from property acquisitions and favorable foreign-exchange translation. The company acquired 28 properties for $464.1 million, compared with 39 properties for $562.7 million in 2019.
- Operating income and GAAP earnings declined despite higher revenue, primarily because depreciation and amortization, interest expense, related-party fees, general and administrative expense and other costs increased. The 2019 results also benefited from a $23.6 million gain on property dispositions; the company sold no properties in 2020.
- Interest expense increased to $71.8 million from $64.2 million as gross debt increased from approximately $1.9 billion to $2.3 billion. The weighted-average debt rate increased from 3.0% to 3.3%.
- FFO and Core FFO declined, while AFFO was broadly stable after adjustments for non-cash and non-recurring items. AFFO included $1.8 million related to rent deferrals accounted for under COVID-19 lease relief.
- The common dividend was reduced from an annualized $2.13 per share to $1.60 per share beginning in the second quarter of 2020. Total common dividends declared were $1.73 per share for the year because the first-quarter rate remained higher.
- The company issued $500.0 million of 3.75% Senior Notes due 2027 and used proceeds primarily to repay secured loans, Revolving Credit Facility borrowings and $136.7 million of the Term Loan. Series B preferred stock issuance generated approximately $10.2 million of net proceeds.
- Cash and cash equivalents declined from $270.3 million to $124.2 million, largely reflecting $470.5 million of investing cash outflows, principally acquisitions.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing provides no formal earnings or acquisition guidance. Management expects operating income from existing properties, supplemented by cash on hand, to fund operating expenses and quarterly dividends, but emphasizes that future dividends remain subject to board discretion, cash generation and debt-agreement restrictions.
COVID-19 materially increased uncertainty around tenant liquidity, rent collections, leasing demand, capital markets and debt-covenant compliance. The company collected approximately 99% of original cash rent due for the fourth quarter of 2020, including approximately 100% from its top 20 tenants, but stated that these results may not predict future collections. Deferred 2020 rent remains subject to collection during 2021.
At December 31, 2020, the company had $13.2 million of mortgage principal due in 2021 and $20.5 million due in 2022. A U.K. mortgage experienced another cash-trap event in the fourth quarter because of loan-to-value requirements; management was negotiating a cure. A separate $98.5 million mortgage triggered a cash-sweep event after a major tenant did not renew. The company subsequently posted a $3.2 million letter of credit and could be required to post additional letters of credit of up to $7.4 million if a replacement tenant is not found before the fourth quarter of 2021.
Other significant risks include substantial leverage, refinancing and interest-rate exposure, LIBOR transition, foreign-currency fluctuations, tenant defaults or bankruptcies, single-tenant property vacancies, office-market effects from work-from-home trends, Brexit-related uncertainty, concentration in the U.K. and Michigan, related-party fees and conflicts, dependence on the Advisor and Property Manager, and the requirement to maintain REIT qualification.
Unusual items included a $3.6 million loss on extinguishment of debt, $6.0 million of losses from undesignated foreign-currency advances and hedge ineffectiveness, and a $3.9 million fourth-quarter cumulative adjustment correcting historical hedge-accounting errors in the second and third quarters. Management concluded the prior-period errors were not material. No impairment charges were recorded in 2020, and goodwill was not impaired despite a COVID-19-related triggering event assessment.
Subsequent to year-end, lender commitments under the Credit Facility increased by $50.0 million to approximately $1.2 billion, although borrowing availability remained dependent on eligible unencumbered assets and covenant compliance. The stockholder rights plan was extended to April 8, 2024.
Most Important Facts for Investors to Verify
- Whether approximately 99% fourth-quarter rent collection is sustained and whether deferred 2020 rent is ultimately collected without material reserves.
- The status of the U.K. cash-trap event, the 55% loan-to-value covenant and any resulting liquidity restrictions.
- Whether the tenant replacement for the mortgage subject to the $3.2 million letter of credit is secured and whether additional letters of credit up to $7.4 million are required.
- Refinancing plans for the $331.4 million of mortgage principal due in 2023, the $541.0 million due in 2024 and the $500.0 million Senior Notes maturity in 2027.
- The sustainability of dividends relative to the Credit Facility’s limitation generally restricting distributions above 100% of Adjusted FFO, subject to limited exceptions.
- The distinction between GAAP net loss attributable to common stockholders of $7.8 million and non-GAAP AFFO of $160.5 million, including the effects of straight-line rent, rent deferrals and other adjustments.
- Exposure to tenant credit quality: 33% of rental income was from tenants not rated or below investment grade, while 67% was attributed to actual or implied investment-grade tenants.
- The effect of related-party fees, external management arrangements and the Advisory Agreement’s long term and termination-fee provisions on recurring shareholder returns.