Global Net Lease, Inc. annual report, FY2021

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

Business context and reporting period

Global Net Lease, Inc. is an externally managed U.S. REIT focused on globally diversified, primarily single-tenant net-lease commercial properties and sale-leaseback transactions. This filing covers the fiscal year ended December 31, 2021, with comparisons primarily to 2020.

Portfolio: 309 properties and 39.3 million rentable square feet.
Occupancy: 99.0%; weighted-average remaining lease term: 8.3 years, compared with 8.5 years at December 31, 2020.
Geographic mix by straight-line rental income: approximately 60% U.S. and Canada and 40% Europe.
Property mix: 54% industrial/distribution, 42% office and 4% retail.
Annualized straight-line rent: $365.0 million; 93.7% of leases contain contractual rent increases.
Investment Grade tenants represented 62.6% of annualized rental income, including actual and implied ratings.

Financial performance and key metrics

Metric	2021	2020
Revenue from tenants	$391.2 million	$330.1 million
Operating income	$111.9 million	$99.2 million
Net income	$11.4 million	$10.8 million
Net income attributable to common stockholders	$(8.7) million	$(7.8) million
Basic and diluted loss per common share	$(0.20)	$(0.09)
Net cash provided by operating activities	$192.5 million	$176.9 million
FFO attributable to common stockholders	$170.4 million	$130.9 million
Core FFO attributable to common stockholders	$170.6 million	$135.2 million
AFFO attributable to common stockholders	$173.5 million	$160.5 million
Total assets	$4.18 billion	$3.97 billion
Total equity	$1.63 billion	$1.55 billion

Revenue increased 18.5%, primarily due to property acquisitions, foreign-exchange effects and an $8.8 million lease termination fee recognized during 2021. Operating income increased 12.8%, but common-stockholders’ results remained negative after depreciation, interest expense, income taxes and preferred dividends.

Total expenses increased to $280.8 million from $230.7 million, including depreciation and amortization of $163.1 million, related-party operating fees of $39.0 million and impairment charges of $17.5 million.
Interest expense increased to $94.3 million from $71.8 million as debt balances increased and the company added financing related to the McLaren and Trafalgar Court acquisitions.
Operating cash flow covered 2021 dividends and distributions of $187.2 million on a full-year basis, according to management. The filing also states that cash used to pay dividends was generated from operating cash flow and cash on hand.
Cash and cash equivalents were $89.7 million at year-end, down from $124.2 million; restricted cash was $3.6 million.

Debt, liquidity and capital structure

Total gross debt was approximately $2.5 billion at December 31, 2021, compared with approximately $2.3 billion at year-end 2020. Debt leverage was 56.8% of total real estate purchase price.
Debt consisted principally of $1.4 billion of mortgage notes, $225.6 million drawn on the revolving credit facility, $280.3 million of term-loan debt and $500.0 million of 3.75% senior notes due 2027.
Approximately 89% of debt was fixed-rate or swapped to fixed-rate; the weighted-average effective interest rate was 3.4%.
Only approximately $49.8 million was available for future borrowings under the revolving credit facility at year-end. The company also reported $1.5 billion of unencumbered assets, of which approximately $1.1 billion was already included in the borrowing base.
Weighted-average debt maturity was 4.2 years. Significant maturities include approximately $67.1 million in 2022, $507.0 million in 2023 and $636.8 million in 2024, based on the debt maturity table.
The company was in compliance with the covenants under its Credit Facility, Senior Notes indenture and mortgage agreements at December 31, 2021.

Material changes versus the prior comparable period

Acquisitions increased: 25 properties were acquired for $477.4 million in 2021, compared with 28 properties acquired for $464.1 million in 2020.
The largest acquisition was the McLaren Group global headquarters portfolio in the United Kingdom for approximately $236.3 million at acquisition, funded with mortgage debt, revolver borrowings and cash. The leases have 20-year terms and CPI-linked escalators subject to stated caps and collars.
The company sold 21 properties for an aggregate contract sales price of $49.6 million and recognized a net gain of $1.5 million. No properties were sold in 2020.
Common stock issuance generated $214.0 million of net proceeds in 2021 through the ATM program. The company also raised $15.9 million net through Series B preferred stock issuance.
Common shares outstanding increased to 103.9 million at year-end from 89.6 million, creating dilution for existing common stockholders.
Impairment charges of $17.5 million were recorded on three properties in 2021; no impairment charges were recorded in 2020.
Common dividends were maintained at an annualized rate of $1.60 per share, following the reduction from $2.13 per share in 2020. Tax reporting classified $1.01 per share, or 63.5%, of 2021 common dividends as return of capital.
The 2018 outperformance award ended in June 2021. The Advisor earned 2,135,496 LTIP Units, which were converted into common shares; the company paid an approximately $10.6 million catch-up distribution. A new 2021 outperformance plan authorized up to 2.5 million LTIP Units and resulted in $27.7 million of fixed grant-date fair value to be recognized over the service period.

Guidance, outlook, management commentary, risks and unusual items

Management expects operating income from existing properties, supplemented by cash on hand, to fund operating expenses, debt interest, capital expenditures and quarterly dividends. The filing does not provide formal earnings or acquisition guidance.
Management reported approximately 100% collection of original cash rent due for the fourth quarter of 2021, consistent with the first three quarters. Management cautioned that this collection level may not be indicative of future periods.
COVID-19, tenant credit deterioration, bankruptcy, rent deferrals, office demand changes, supply-chain disruption, labor shortages and inflation remain material risks. The company recorded $1.1 million of uncollectible amounts as a reduction of revenue in 2021.
Debt and refinancing risk is significant, particularly for maturities in 2022–2024. Variable-rate debt, LIBOR transition, rising interest rates and foreign-currency movements could increase financing costs or reduce cash flow.
Several loan-level cash sweep or reserve events were active or had occurred, including the United Kingdom bulk loan, a France loan, Multi-Tenant Mortgage Loan III and Multi-Tenant Mortgage Loan IV. These were not reported as events of default at year-end, but they restrict or reserve cash and may reduce borrowing capacity.
The $7.4 million letter of credit associated with Multi-Tenant Mortgage Loan III reduces revolver availability until a suitable replacement tenant is found. A France loan had approximately $2.1 million in restricted cash related to a cash sweep.
The 2021 revenue result included an unusual $8.8 million lease termination fee that was earned in 2021 but collected in January 2022. AFFO also included this fee.
The company is externally managed and paid $39.0 million in related-party operating fees in 2021, including $31.8 million of asset management fees and $7.3 million of property management fees. The advisory agreement and related-party structure create potential conflicts of interest.
Foreign operations represented approximately 40% of rental income and expose results, asset values and cash flows to GBP, EUR and CAD exchange-rate changes. The company uses derivatives and foreign-currency debt to manage portions of this exposure.
The company remains dependent on maintaining REIT qualification and distributing at least 90% of REIT taxable income. Failure to qualify could result in corporate-level taxation and reduced distributions.
No material legal or regulatory proceedings were pending or known to be contemplated, and management reported effective disclosure controls and internal control over financial reporting.

Important facts for investors to verify

Reconcile the $187.2 million of dividends and distributions with operating cash flow, AFFO and the Credit Facility’s separate Adjusted FFO covenant definition.
Review the timing, refinancing plans and available liquidity for the $67.1 million of 2022 debt maturities, $507.0 million of 2023 maturities and $636.8 million of 2024 maturities.
Assess the sustainability of cash flow excluding the $8.8 million lease termination fee and other non-recurring or non-cash items.
Monitor rent collections, deferred rent receivables, tenant credit quality and lease expirations, including $47.4 million of annualized straight-line rent expiring in 2024.
Evaluate the effect of 2021 equity issuance and future ATM activity on per-share AFFO, dividends and common-stock dilution.
Review loan-level cash sweeps, reserve accounts, letters of credit and covenant headroom, particularly for the United Kingdom, France and multi-tenant mortgage loans.
Compare reported AFFO and Core FFO with peer REIT definitions because these non-GAAP measures may not be comparable across issuers.
Examine related-party fees, advisory agreement termination rights, incentive compensation and potential conflicts involving AR Global and its affiliates.