Rating Action: Moody's assigns a first-time Ba2 CFR to Global Net Lease Operating Partnership, L.P.; stable outlook
Global Credit Research - 21 Dec 2020
New York, December 21, 2020 -- Moody's Investors Service ("Moody's") has today assigned a first-time Ba2 corporate family rating (CFR) to Global Net Lease Operating Partnership, L.P. (GNL). Concurrently, Moody's has assigned a Ba3 rating to Global Net Lease Operating Partnership, L.P.'s $500 million of seven-year unsecured notes due 2027. The outlook on all ratings is stable.
GNL used the proceeds from the unsecured offering to repay outstanding borrowings under its revolving credit facility, partially repay its term loan, in addition to $88 million of secured loans.
The following ratings were assigned:
Issuer: Global Net Lease Operating Partnership, L.P.
- Senior Unsecured Debt, Assigned Ba3
- Corporate Family Rating, Assigned Ba2
-- Speculative Grade Liquidity Rating, Assigned SGL-3
Outlook, Assigned Stable
The Ba2 CFR is supported by GNL's stable portfolio of net-lease assets which encompasses a growing industrial and distribution portfolio, to complement its single-tenant office portfolio. The rating also considers the REIT's consistently high portfolio occupancy rates, solid revenue and NOI growth, and good fixed charge coverage at 2.7x for the trailing twelve months ended September 30, 2020.
At the same time, the rating is constrained by GNL's high proportion of secured funding in its capital structure and high leverage as measured by net debt to EBITDA. The rating also considers geographic concentration in Michigan state, in addition to the relative size of the REIT's unencumbered pool. Lastly, the rating is constrained by GNL's external management structure which creates potential conflicts of interest between management and GNL investors.
As of September 30, 2020, GNL's portfolio was 99.6% leased with a weighted-average remaining lease term of 8.7 years. 63% of the REIT's assets is located in the U.S. and Canada and 37% in Europe. The REIT relies on new investments to fuel its growth and has successfully executed on almost $1.5 billion in acquisitions over the last few years. GNL continues its strategy to build a portfolio that is more heavily weighted towards industrial, a positive as industrial assets have relatively lower maintenance and operating costs relative to office. GNL's industrial/distribution portfolio represented 47% of rent as of the end of the third quarter, up from 31% for the same period in 2017. Moody's remains bullish on the industrial property sector in the near and long-term as the need for faster deliveries and acceleration in online shopping is leading to pent up demand for well-located logistics assets. GNL also has a diversified tenant roster with no tenant representing more than 4% of SLR (straight-line rent); FedEx, Whirlpool and the GSA are the REIT's largest tenants. Moody's notes that while the REIT's geographic footprint is internationally diverse, there is material concentration in Michigan state which represented 14% of annualized rental income as of 3Q20.
The rating broadly reflects GNL's capital structure with the company's unsecured notes at Ba3, one notch below the CFR as the company has primarily issued secured debt. Leverage as measured by effective leverage and net debt to EBITDA was 53% and 8.6x, respectively for 3Q20. Secured debt as a percentage of gross assets was 48% which is very weak and falls in the B rating category. As of September 30, GNL's unencumbered assets were $100 million. Also, the gross carrying value of GNL's unencumbered assets was $1.4 billion as of 3Q20, of which approximately $1.3 billion was pledged to the borrowing base under its revolving credit facility and term loan. Should the company continue to grow while making a shift towards a more unsecured capital structure, the senior unsecured rating would align with the CFR rating.
The SGL-3 reflects adequate liquidity to support operations over the next 12-18 months. It also takes into consideration the REIT's availability under its line of credit and $300 million of cash and cash equivalents at September 30. GNL's financial flexibility is currently constrained as most of the company's earning assets are encumbered by mortgages or otherwise pledged to the the credit facility. The company's primary source of liquidity is its credit revolver which matures in August 2024 (assumes the company exercises its two six-month extension options). GNL's near-term debt maturities are manageable with no major debt coming due until 2023.
The stable outlook reflects Moody's expectation for stable earnings and revenue growth in the next 12-18 months. It also reflects our expectation that GNL will continue to diversify its capital sources as market conditions allow.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward ratings movement would require maintenance of net debt to EBITDA closer to 7.0x (including Moody's standard adjustments), effective leverage below 45%, and reducing secured debt levels closer to 20% of gross assets. Geographic diversification with no market representing more than 15% of total NOI would also be required. For the CFR and the senior unsecured debt ratings to align, it would require the company to continue to grow while making a shift towards a more unsecured capital structure in addition to increasing unencumbered assets as a percentage of gross assets.
Downward rating pressure would result from effective leverage above 60%, fixed charge coverage below 2.3x, net debt to EBITDA approaching 10x, and or a material weakness in its liquidity position.
Global Net Lease, Inc. (NYSE: GNL) is a publicly traded real estate investment trust focused on acquiring a diversified global portfolio of commercial properties, with an emphasis on sale-leaseback transactions involving single tenant, mission critical income producing net-leased assets across the United States, Western and Northern Europe.
The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1095505. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
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c.With Access to Management: NO
For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
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Alice Chung Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Philip Kibel Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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