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  Title	Fitch Affirms Global Net Lease at 'BB+'; Outlook Stable
  ID	2358895
  External ID	7134084470
  Author	Unknown
  Published Date	Sept. 16, 2024, 10:39 a.m.
  Summary	Mon 16 Sep, 2024 - 10:30 AM ET Fitch Ratings - New York - 16 Sep 2024: Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of 'BB+' for Global Net Lease, Inc. (GNL) and its operati
  Tags	None
  URL	https://www.fitchratings.com/research/non-bank-financial-institutions/fitch-affirms-global-net-lease-at-bb-outlook-stable-16-09-2024
  Sentiment	Negative: 0.61588    Neutral: 0.04218    Positive: 0.34194
  Relevance	0.04000

• Content Details

  Content ID	884989
  Key	f3ef13f9-0419-4b20-b296-49530a94a0f9
  Content	Mon 16 Sep, 2024 - 10:30 AM ET Fitch Ratings - New York - 16 Sep 2024: Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of 'BB+' for Global Net Lease, Inc. (GNL) and its operating partnership, Global Net Lease Operating Partnership, L.P. The Rating Outlook is Stable. The ratings reflect the company's high leverage and level of borrowings under the revolving credit facility. GNL's access to capital has also been relatively more challenged compared to peers, as its equity trades at a significant discount relative to consensus net asset value (NAV) estimates. However, this is balanced by the successful execution of its business plan, which is focused on deleveraging the balance sheet through strategic dispositions. GNL's merger with The Necessity Retail REIT Inc. (RTL) afforded some credit positives, including lower expenses and higher cash flows following internalization of management. The merger also increased retail exposure, reduced office exposure on a relative basis and mitigated certain governance elements that had negatively affected GNL's credit profile. Key Rating Drivers Elevated Leverage: GNL's leverage remains high compared to its net lease peers and was above Fitch's negative sensitivity following the merger with RTL. The high revolver amount includes borrowings to pay off RTL's former credit facility. Fitch still expects REIT leverage (net debt before preferred stock to recurring operating EBITDA) to decrease to the mid-7x range by the end of 2024, which is in line with the 'BB+' rating level, and to further decline during the forecast period. This decrease will primarily result from GNL's plan to de-lever its balance sheet through strategic dispositions, which it implemented earlier this year. As of Aug. 31, the company had closed asset sales of $533 million and secured agreements or executed letters of intent (LOI) for another $321 million, bringing the total pipeline to over $854 million (at a cash cap rate of 7.2%). This is well above management's initial guidance of $400 million-$600 million. However, Fitch expects the company to remain challenged in other leverage-reducing opportunities, namely equity issuance, given the large and persistent NAV discount. Enhanced Diversification Post-Merger: GNL's portfolio is better diversified by geography, asset type, tenant and industry. Top 10 tenants based on annualized straight-line rent (SLR) as of 2Q24 was 21%, with no single tenant contributing more than 3.2% of the total, which is strong for the rating. Of its 755 tenants, which operate across 92 industries in the U.S., Canada and Europe, 32% have an actual investment-grade rating (rated by Fitch or other NRSROs). The company estimates an additional 27% of tenants at an implied investment-grade rating, based on parent guarantees or implied by financial metrics. This suggests relatively good tenant credit quality. Increased Retail, Less Office Exposure: Based on annualized SLR as of 2Q24, multi- and single-tenant retail comprised 28% and 21% of annualized SLR, respectively, with industrial/distribution at 31% and office at 20%. Prior to the merger, GNL's exposure to retail was 5% and office accounted for a sizable 40%. Retail has been exhibiting stable to positive fundamentals, which should continue for the foreseeable future partly reflecting low levels of new construction. Meanwhile, the office REIT sector continues to face weakened demand. Management anticipates reducing its office portfolio further through dispositions, targeting exposure below 20% by the end of 2024. Long-Term Leases: The company's mix of stable, long-term net-leased assets results in a favorable lease maturity schedule and a weighted average remaining lease term (WALT) of 6.5 years as of 2Q24, which is solid for the rating. This is lower than the 7.6 years for GNL on a standalone basis as of 2Q23 and the net lease peer average of about 10 years, due to a lower weighted average remaining lease term for RTL. However, GNL has less intermediate term risk to NOI given the reduced exposure to single-tenant office properties. In addition, there should be improvement as GNL disposes of assets with shorter weighted average remaining lease terms compared to its portfolio average, as well as from new leases and renewal activity. Internally Managed: Concurrent with the merger, GNL's and RTL's advisory and property management functions were internalized, which has resulted in various savings. GNL has already recognized over $74 million of annualized cost synergies and is on track to reach the $75 million that was estimated at transaction close. Management also pointed to a simplified structure, enhanced corporate governance and anticipated trading multiple expansion as additional benefits. However, the internalization of management will not ameliorate GNL's relatively more challenged access to capital, in Fitch's view. Prior to the closing of the transaction, GNL and RTL were externally managed by AR Global, LLC, a $12 billion global real estate asset manager, which Fitch viewed as a modest credit negative. Generally, an external management structure could result in persistent equity valuation discount. Additionally, institutional investors generally favor internally managed REIT structures, given dedicated management and fewer related party transactions and potential interest conflicts. Derivation Summary Post-closing, GNL is more diversified by geography, asset type, industry and tenant. As of 2Q24, the company owned 1,242 properties (64.3 million square feet) across the U.S. and Canada (80%), as well as Europe (20%), with single- and multi-tenant retail, industrial/distribution and office comprising 49%, 31% and 20% of annualized SLR, respectively. The top 10 tenants comprised 21%, with the largest one contributing 3.2% of the total, which is solid for the rating. GNL's portfolio quality is balanced by its less-established capital access and weaker leverage metrics. 2Q24 REIT leverage of 8.2x is weaker than its 'BBB' category peers, including Essential Properties Realty Trust, Inc. (EPRT; BBB/Stable), LXP Industrial Trust (LXP; BBB/Stable), EPR Properties (EPR; BBB-/Stable) and American Assets Trust, Inc. (AAT; BBB/Stable). EPRT is forecasted to operate in the low-5x range, while EPR is low- to mid-5x, LXP is mid- to high-5x and AAT is mid-5x to mid-6x. GNL's credit metrics were negatively affected by a more highly-levered RTL. Although improvement is expected on this front as the company executes its disposition plan and uses the sale proceeds to reduce leverage, Fitch does not foresee leverage reaching comparable peer levels through the forecast period. Fitch rates the Issuer Default Ratings (IDRs) of the parent REIT and subsidiary operating partnership on a consolidated basis, using the weak parent/strong subsidiary approach and open access and control factors, based on the entities operating as a single enterprise with strong legal and operational ties. Fitch applies 50% equity credit to the company's perpetual preferred securities given the cumulative nature of coupon deferral. The instruments are subordinated to debt, lack material covenants and the terms of the change of control do not negate the equity credit judgement. Certain metrics calculate leverage including preferred stock. Of note, Fitch only rates GNL's existing Series A and Series B preferred stock and does not rate the Series D and Series E preferred stock. (In connection with the merger, each issued and outstanding share of RTL Series A and Series C preferred stock were automatically converted into one share of newly created Series D and Series E preferred stock.) Key Assumptions --The company realizes anticipated annual cost synergies of $75 million, reflecting internalization and merger savings; --Occupancy declines approximately 1% in 2024, which is a function of the merger due to RTL's lower-margin portfolio (primarily related to multi-tenant retail) and short-term impacts from certain tenant vacancies, with some improvement in the metric thereafter in 2025-2027; --Assumes average annual rental increases in the mid-1% range and renewal leasing spreads in the mid-single-digits; --Dispositions total over $850 million in 2024, and between $100 million and $300 million each year through the forecast period, the proceeds of which are used to pay down the revolver; --Assumes no acquisitions are completed through the forecast period; --As a result, REIT leverage declines to the mid-7x range by the end of 2024 and continues to decrease each year to eventually trend below 7x towards the end of the forecast period. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade --Evidence of material improvements in EBITDA and reduction of debt such that Fitch expects REIT leverage below 7.0x on a sustained basis; --Meaningful improvements in governance, such that Fitch expects capital access to be commensurate with entities rated 'BB+' or higher; --UA/UD sustaining above 2.0x. Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade --Lack of material improvements in EBITDA and reduction of debt such that Fitch expects GNL's REIT leverage above 8.0x on a sustained basis; --Lack of meaningful improvements in governance, such that Fitch expects capital access to remain constrained for the entity at the 'BB+' rating level. Liquidity and Debt Structure Weak Liquidity: As of June 30, 2024, GNL had cash and cash equivalents of $122.2 million and approximately $98.1 million available for future borrowings under the revolving credit facility. (The availability of borrowings under the revolver continues to be based on the value of a pool of eligible unencumbered real estate assets owned by the company or its subsidiaries and compliance with various ratios related to those assets.) In connection with the merger, GNL amended the credit agreement and exercised the existing accordion feature on the revolving credit facility to increase the aggregate commitments by $500million, from $1.45 billion to $1.95billion, to repay and terminate RTL's credit facility and create additional availability after the closing of the merger. The sublimits for letters of credit and swing loans were also each increased from $50million to $75million. There is about $1.74 billion of outstanding borrowings. The revolver matures in October 2026, though there are two six-month extension options. Additionally, including debt assumed in the merger, GNL has $500 million of 3.75% senior notes due in December 2027 and $500 million of 4.50% senior notes due in September 2028, as well as $2.39 billion of gross mortgage notes payable. For the latter, the company addressed, for the most part, the 2024 maturities but has $527.6 million due in 2025 and $107.0 million maturing in 2026. The company is managing its leverage by using proceeds from strategic or opportunistic dispositions to reduce debt. The company has completed $533.0 million of dispositions year to date, and has an additional $321.2 million of signed PSAs and executed LOIs, which would bring total dispositions to $854.2 million. Historically, the company has also established and used at-the-market (ATM) issuance programs for common and preferred stock. However, GNL shares trade at a wide discount to NAV, which will likely temper equity issuances. Fitch estimates GNL's liquidity coverage ratio to be 0.1x for the period from July 1, 2024 through Dec. 31, 2026, and this is mostly due to the high revolver amount that is due in 2027. Assuming the revolver is amended and extended, the metric would be 0.4x, and 1.4x assuming 80% secured debt is refinanced. As these dispositions are completed, Fitch expects the company's liquidity position and financial flexibility to improve as well as for revolver capacity to increase. Fitch defines liquidity coverage as sources of liquidity divided by uses of liquidity. Sources include unrestricted cash, availability under unsecured revolving credit facilities, and retained cash flow from operating activities after dividends. Uses include pro rata debt maturities, expected recurring capex, and forecast (re)development costs. GNL's unencumbered assets (2Q24 unencumbered NOI annualized divided by a through-the-cycle capitalization rate of 9.0%) covered net unsecured debt (UA/UD) by 1.5x. Typically, the threshold for investment-grade U.S. equity REITs is 2.0x. Issuer Profile Global Net Lease, Inc. is a real estate investment trust (REIT) that focuses on acquiring and managing a global portfolio of income producing net lease assets across the U.S., and Western and Northern Europe. As of June 30, 2024, the company owned 1,242 properties consisting of 64.3 million rentable square feet. Summary of Financial Adjustments Fitch did not make any material non-standard financial adjustments. Sources of Information The principal sources of information used in the analysis are described in the Applicable Criteria. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included. ESG Considerations The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores RATING ACTIONS Entity / Debt Rating Global Net Lease, Inc. LT IDR BB+ BB+ senior unsecured LT BB+ Affirmed BB+ preferred LT BB- Affirmed BB- Global Net Lease Operating Partnership, L.P. LT IDR BB+ BB+ senior unsecured LT BB+ Affirmed BB+ Additional information is available on www.fitchratings.com PARTICIPATION STATUS The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). Corporate Monitoring & Forecasting Model (COMFORT Model), v8.1.0 ADDITIONAL DISCLOSURES ENDORSEMENT STATUS Global Net Lease Operating Partnership, L.P. EU Endorsed, UK Endorsed Global Net Lease, Inc. EU Endorsed, UK Endorsed
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