Global Net Lease, Inc. quarterly report, Q2 FY2021

Global Net Lease, Inc. — Q2 2021 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. The filing covers the three and six months ended June 30, 2021.

Portfolio: 311 properties and 38.2 million rentable square feet.
Occupancy: 99.7% leased; weighted-average remaining lease term of 8.5 years.
Geographic mix: 60% United States and Canada and 40% Europe, based on annualized straight-line rental income.
Property mix: 52% industrial/distribution, 43% office and 5% retail.
Investment-grade tenants represented 64% of quarterly annualized rental income, including actual and implied investment-grade tenants.

Financial Performance and Key Metrics

Metric	Q2 2021	Q2 2020	Six Months 2021	Six Months 2020
Revenue from tenants	$99.6 million	$81.1 million	$189.0 million	$160.4 million
Operating income	$29.0 million	$24.3 million	$54.7 million	$48.1 million
Net income	$2.6 million	$5.5 million	$6.8 million	$15.1 million
Net income attributable to common stockholders	$(2.4) million	$1.0 million	$(3.3) million	$6.0 million
Basic and diluted EPS	$(0.14)	$0.01	$(0.15)	$0.06
Net cash provided by operating activities	Not separately provided	Not separately provided	$57.9 million	$89.7 million
AFFO attributable to common stockholders	$42.8 million	$39.8 million	$83.3 million	$79.6 million

Revenue increased approximately 22.8% in Q2 and 17.8% year to date, primarily from acquisitions and favorable foreign exchange, including a $5.2 million McLaren financing-cost reimbursement recorded as revenue.
Q2 operating margin was approximately 29.1%, compared with approximately 30.0% in the prior-year quarter. The six-month operating margin was approximately 29.0%, compared with approximately 30.0% in 2020.
Net income declined despite higher revenue because of higher interest expense, income taxes, depreciation and amortization, equity-based compensation and a $6.7 million impairment charge.
Interest expense increased to $24.0 million in Q2 from $17.5 million and to $45.4 million for the first six months from $34.0 million, reflecting higher debt, the December 2020 senior notes issuance, the McLaren mortgage and foreign exchange effects.
FFO attributable to common stockholders was $44.0 million in Q2 and $82.8 million year to date. AFFO increased approximately 7.7% in Q2 and 4.6% year to date, although the company cautions that AFFO is non-GAAP and may not be comparable with other REITs.

Balance Sheet, Debt and Liquidity

Total assets were $4.24 billion at June 30, 2021, up from $3.97 billion at December 31, 2020. Net real estate investments were $3.81 billion.
Cash and cash equivalents were $174.9 million, compared with $124.2 million at year-end 2020. Cash, cash equivalents and restricted cash totaled $176.9 million.
Total gross debt was approximately $2.5 billion, compared with approximately $2.3 billion at year-end 2020. Reported debt consisted principally of $1.5 billion of mortgage notes, $167.9 million drawn on the revolving facility, a $293.5 million term loan and $500.0 million principal amount of senior notes.
Debt leverage was 59.1% of total real estate purchase price. Approximately 61% of debt was secured and 39% unsecured.
Approximately 92.1% of total debt was fixed-rate or swapped to fixed-rate; 7.9% was variable-rate. Weighted-average debt interest rate was 3.4%.
Approximately $93.6 million was available for future borrowings under the revolving credit facility as of June 30, 2021. The facility had $167.9 million outstanding, and total credit facility commitments were approximately $1.1 billion based on period-end exchange rates.
Operating cash flow of $57.9 million was below the $94.9 million of dividends and distributions paid during the first six months; the shortfall was funded with available cash and equity proceeds.
Investing cash outflows were $269.8 million, primarily for $264.9 million of property acquisitions. Financing cash inflows were $264.7 million, including common-stock ATM proceeds of $156.0 million and debt proceeds.

Material Changes Versus the Prior Comparable Period

The company acquired five industrial properties for $264.9 million, including the McLaren Group global headquarters campus in the United Kingdom for approximately £170.0 million.
Common-stock ATM sales generated $158.6 million of gross proceeds during the first six months, and Series B preferred-stock ATM sales generated $16.2 million.
Common shares outstanding increased to 100.5 million from 89.6 million at December 31, 2020, reflecting ATM issuance and the issuance of 2.1 million shares to the Advisor upon redemption of earned OP Units.
The company issued 2.5 million LTIP Units under a new 2021 outperformance agreement. The associated fixed fair value of $27.7 million is being expensed over approximately 3.1 years.
The 2018 outperformance agreement ended on June 2, 2021. The Advisor earned 2.1 million LTIP Units, received a $10.6 million priority catch-up distribution and subsequently redeemed the OP Units for common stock.
Two properties were impaired by $6.7 million. Neither property qualified for held-for-sale classification, and no properties were sold during the period.
Common dividends remained $0.40 per share per quarter, or $1.60 annualized, following the reduction implemented in Q2 2020. Series A and Series B preferred dividends accrued at annual rates of 7.25% and 6.875%, respectively.

Outlook, Management Commentary, Risks and Unusual Items

Management expects operating income from existing properties, supplemented by cash on hand, to fund operating expenses and quarterly common and preferred dividends. This expectation is subject to operating performance, debt covenants, acquisition activity and tenant collections.
Management reported approximately 100% collection of original cash rent due for Q2 as of July 31, 2021, or approximately 99% after excluding deferred-rent payments. Management cautioned that future collections, including deferred 2020 rent, are not assured.
COVID-19 remains a risk to tenant credit quality, rent collections, liquidity, debt service, acquisitions and dividends. The company entered into rent deferrals with certain tenants and elected available lease-accounting relief.
A United Kingdom mortgage experienced cash-trap events related to loan-to-value requirements. On July 8, 2021, the company agreed to apply approximately £11.4 million of trapped cash to principal and receive approximately £10.7 million back, curing the cash trap. Future portfolio-value declines could trigger additional cash traps or a covenant breach.
A $98.5 million mortgage was subject to a cash-sweep event after a major tenant failed to renew. The company provided a letter of credit that was increased after quarter-end to the $7.4 million maximum, reducing revolving-credit availability until a replacement tenant is found.
A separate €70.0 million loan entered a cash sweep because collateral weighted-average lease term was below three years. The lender may retain 30% of excess cash flow until specified lease-term conditions are met.
Approximately $26.2 million of mortgage principal was scheduled to mature during the remainder of 2021; approximately $20.9 million was repaid in July 2021 after a loan modification. The filing identifies this as the only debt coming due in the second half of 2021.
LIBOR discontinuation creates potential risks for variable-rate debt and derivatives. The company expects to use the applicable base rate or negotiate a replacement reference rate.
The company had no material litigation, no material environmental claims, no material off-balance-sheet arrangements and reported effective disclosure controls.

Most Important Facts for Investors to Verify

Whether reported rent-collection levels remain sustainable after deferred-rent payments and as COVID-19 effects evolve.
The effect of the McLaren acquisition, its 6% mortgage financing, reimbursement receivable and potential future rent adjustment.
Compliance with United Kingdom mortgage loan-to-value requirements and the status of all cash traps, cash sweeps and letters of credit.
Whether operating cash flow and AFFO adequately cover common dividends, preferred dividends, Advisor distributions, capital expenditures and debt service without continued equity issuance.
The impact of increased leverage, refinancing requirements in 2023–2025, variable-rate exposure and the transition away from LIBOR.
The effect of the $6.7 million impairment and any further property impairments or tenant non-renewals.
The ongoing cost and dilution implications of the external management arrangements, related-party fees and 2021 outperformance agreement.