Global Net Lease, Inc. quarterly report, Q1 FY2021

Business Context and Reporting Period

Global Net Lease, Inc. is an externally managed REIT focused on globally diversified, primarily single-tenant, mission-critical commercial properties and sale-leaseback transactions. This unaudited Form 10-Q covers the three months ended March 31, 2021, with comparisons to the three months ended March 31, 2020.

Portfolio at March 31, 2021: 306 properties, 37.2 million rentable square feet, 99.7% leased and 8.3-year weighted-average remaining lease term.
Portfolio mix by annualized straight-line rent: 49% industrial/distribution, 46% office and 5% retail; 65% located in the U.S. and Canada and 35% in Europe.
Approximately 66.3% of rental income was from actual or implied investment-grade tenants.

Financial Performance and Position

Metric	Q1 2021	Q1 2020	Change
Revenue from tenants	$89.4 million	$79.2 million	13% increase
Operating income	$25.8 million	$23.8 million	8% increase
Net income	$4.2 million	$9.6 million	56% decrease
Net income attributable to common stockholders	$(0.8) million	$5.0 million	Declined to a loss
Basic and diluted EPS	$(0.01)	$0.05	Declined
Operating cash flow	$53.2 million	$41.9 million	27% increase
FFO attributable to common stockholders	$38.9 million	$38.6 million	1% increase
Core FFO attributable to common stockholders	$38.9 million	$38.9 million	Essentially flat
AFFO attributable to common stockholders	$40.4 million	$39.8 million	2% increase

Operating margin was approximately 28.8% in Q1 2021 versus 30.0% in Q1 2020. Net margin was approximately 4.7% versus 12.1%, primarily reflecting higher interest expense, income taxes and lower derivative gains. FFO, Core FFO and AFFO are non-GAAP measures and may not be comparable with similarly titled measures reported by other REITs.

Interest expense increased to $21.4 million from $16.4 million, driven primarily by the $500 million of senior notes issued in December 2020 and higher total debt.
Debt outstanding was approximately $2.3 billion, with a 3.3% weighted-average interest rate, 57.0% debt leverage based on purchase price, and a 5.1-year weighted-average maturity.
Approximately 95.8% of debt was fixed-rate or swapped to fixed rates; approximately 4.2% remained variable-rate.
Cash and cash equivalents increased to $262.9 million from $124.2 million at December 31, 2020. Approximately $88.6 million was available under the revolving credit facility.
Total assets were $4.04 billion and total equity was $1.65 billion at March 31, 2021.
Common dividends were $0.40 per share for the quarter, equivalent to a $1.60 annualized rate. Preferred dividends accrued at annual rates of 7.25% for Series A and 6.875% for Series B.

Cash Flow, Financing and Capital Activity

Operating cash flow was $53.2 million and covered $41.1 million of common, preferred and LTIP distributions, representing 100% coverage from operating cash flow as presented by management.
Investing cash outflows were $4.4 million, consisting primarily of $3.2 million of capital expenditures and $1.2 million of acquisition deposits. No properties were acquired or disposed of during the quarter.
Financing cash inflows were $92.8 million, including $105.8 million of net common-stock proceeds, $16.0 million of net Series B preferred-stock proceeds and $15.0 million of revolving-credit borrowings, partly offset by dividends and mortgage principal payments.
The common-stock ATM program was increased to $500 million in March 2021. The Company sold 5.9 million common shares for $107.6 million of gross proceeds during the quarter.
The Series B preferred-stock ATM program provides for up to $200 million of sales; 641,940 shares generated $16.2 million of gross proceeds during the quarter.
The credit facility’s aggregate commitments were increased by $50 million in February 2021 to approximately $1.2 billion, although borrowing availability remained constrained by the eligible unencumbered asset pool and applicable ratios.

Material Changes Versus the Prior Comparable Period

Revenue increased 13%, primarily from property acquisitions since March 31, 2020 and favorable foreign-exchange movements, partly offset by dispositions.
Net income attributable to common stockholders declined from $5.0 million to a loss of $0.8 million despite higher revenue and operating income.
Interest expense increased $4.9 million, and income tax expense increased from $1.0 million to $2.1 million.
Depreciation and amortization increased to $39.7 million from $33.5 million, reflecting the expanded property base and currency effects.
General and administrative expense increased to $4.1 million from $3.0 million, primarily due to higher professional fees.
Operating cash flow improved, while investing outflows fell sharply because Q1 2021 included no property acquisitions compared with $113.1 million of acquisition spending in Q1 2020.
Common shares outstanding increased to 95.5 million from 89.6 million, primarily from ATM issuance; Series B preferred shares outstanding increased to 4.5 million from 3.9 million.

Outlook, Commentary, Risks and Unusual Items

Management reported approximately 100% collection of original cash rent due for Q1 2021 by April 30, 2021; excluding payments of previously deferred rent, collection was approximately 99%. Management cautioned that future collections and recovery of deferred rent are uncertain.
COVID-19-related rent deferrals were generally accounted for under applicable FASB and SEC relief without treating qualifying concessions as lease modifications. AFFO excluded $0.6 million of straight-line rent associated with rent deferrals.
The Company expects operating income from existing properties and cash on hand to fund operating expenses and quarterly dividends, but dividend capacity remains subject to cash flows, debt covenants, capital needs and board approval.
A United Kingdom mortgage experienced a cash-trap event after loan-to-value requirements were not maintained. The Company provided a £20 million limited unsecured guaranty and was negotiating a cure. A future breach could permit acceleration and other lender remedies; the applicable loan-to-value covenant is 55%.
A separate $98.5 million mortgage triggered a cash-sweep event after a major tenant failed to renew. The event was initially cured with a $3.2 million letter of credit, but additional letters of credit of up to $7.4 million may be required if a replacement tenant is not found before Q4 2021.
Approximately $10.6 million of mortgage principal was due during the remainder of 2021, described as the only debt maturity during that period. The revolving facility matures in August 2023, the term loan in August 2024 and the senior notes in December 2027.
LIBOR transition remains a risk for variable-rate debt and derivatives. The Company was evaluating replacement-rate implications and had not identified a material change in market-risk exposure during the quarter.
Subsequent to March 31, 2021, the Company acquired five properties for approximately $249.9 million, including McLaren Group properties acquired for £170 million, funded with mortgage debt, revolving borrowings and cash.
On May 6, 2021, the Advisory Agreement was amended to align incentive-compensation measurement periods with the fiscal year and extend dates related to incentive-fee hurdle adjustments. On May 3, 2021, the independent directors authorized a new potential $50 million LTIP award to the Advisor.
There were no material legal or regulatory proceedings, material environmental claims, defaults under senior securities or material off-balance-sheet arrangements reported.

Important Facts for Investors to Verify

Whether tenant rent collections remain at the reported levels and whether deferred 2020 rent is collected as scheduled.
The resolution of the United Kingdom mortgage cash-trap event and the risk of a future 55% loan-to-value covenant breach or debt acceleration.
The availability of the revolving credit facility after potential additional letters of credit and the effect of the unencumbered asset borrowing base.
The sustainability of dividends relative to AFFO, credit-facility distribution limits and common-stock dilution from ATM issuances.
The financing, lease terms and tenant-credit exposure associated with the post-quarter McLaren and other acquisitions.
The economic effect of related-party management, property-management and incentive-compensation arrangements, including the new LTIP award.
The impact of interest rates, foreign-exchange movements and the transition away from LIBOR on debt service and derivative valuations.