GLOBAL NET LEASE, INC. The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements ofGlobal Net Lease, Inc. and the notes thereto. As used herein, the terms "Company," "we," "our" and "us" refer toGlobal Net Lease, Inc. , aMaryland corporation, including, as required by context,Global Net Lease Operating Partnership, L.P. (the "OP"), aDelaware limited partnership, and its subsidiaries. We are externally managed byGlobal Net Lease Advisors, LLC (the "Advisor"), aDelaware limited liability company. Forward-Looking Statements Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements, including statements regarding the intent, belief or current expectations of us, our Advisor and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law. These forward-looking statements are subject to risks, uncertainties, and other factors, many of which are outside of our control, which could cause actual results to differ materially from the results contemplated by the forward-looking statements. Some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward looking statements are set forth under "Risk Factors" and "Quantitative and Qualitative Disclosures about Market Risk" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 37 -------------------------------------------------------------------------------- Table of Contents Overview We are an externally managed real estate investment trust forU.S. federal income tax purposes ("REIT") that focuses on acquiring and managing a globally diversified portfolio of strategically-located commercial real estate properties, which are crucial to the success of our roster of primarily "Investment Grade" tenants (defined below). We invest in commercial properties, with an emphasis on sale-leaseback transactions and mission-critical, single tenant net-lease assets. As ofMarch 31, 2021 , we owned 306 properties consisting of 37.2 million rentable square feet, which were 99.7% leased, with a weighted-average remaining lease term of 8.3 years. Based on the percentage of annualized rental income on a straight-line basis, as ofMarch 31, 2021 , 65% of our properties were located inthe United States ("U.S.") andCanada and 35% of our properties were located inEurope , and our portfolio was comprised of 49% industrial/distribution properties, 46% office properties and 5% retail properties. These percentages as ofMarch 31, 2021 are calculated using annualized straight-line rent converted from local currency into theU.S. Dollar ("USD") as ofMarch 31, 2021 for the in-place lease on the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable. We may also originate or acquire first mortgage loans, mezzanine loans, preferred equity or securitized loans (secured by real estate). As ofMarch 31, 2021 , we did not own any first mortgage loans, mezzanine loans, preferred equity or securitized loans. Substantially all of our business is conducted through the OP, aDelaware limited partnership, and its wholly-owned subsidiaries. Our Advisor manages our day-to-day business with the assistance ofGlobal Net Lease Properties, LLC (the "Property Manager"). Our Advisor and Property Manager are under common control withAR Global Investments, LLC ("AR Global") and these related parties receive compensation and fees for providing services to us. We also reimburse these entities for certain expenses they incur in providing these services to us. Our portfolio is leased to primarily "Investment Grade" rated tenants in well established markets in theU.S. andEurope . A total of 66.3% of our rental income on a straight-line basis for the quarter endedMarch 31, 2021 was derived from Investment Grade rated tenants, comprised of 36.4% leased to tenants with an actual investment grade rating and 29.9% leased to tenants with an implied investment grade rating. "Investment Grade" includes both actual investment grade ratings of the tenant or guarantor, if available, or implied investment grade. Implied investment grade may include actual ratings of the tenant parent, guarantor parent (regardless of whether or not the parent has guaranteed the tenant's obligation under the lease) or tenants that are identified as investment grade by using a proprietary Moody's analytical tool, which generates an implied rating by measuring an entity's probability of default. Ratings information is as ofMarch 31, 2021 . Management Update on the Impacts of the COVID-19 Pandemic The COVID-19 global pandemic has impacted and may continue to impact our business, including our future results of operations and our liquidity. The ultimate impact on our results of operations, our liquidity and the ability of our tenants to continue to pay us rent will depend on numerous factors including the overall length and severity of the COVID-19 pandemic. For a further discussion of the risks and uncertainties associated with the impact of the COVID-19 pandemic on us, see Item 1A. Risk Factors in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . We have taken several steps to mitigate the impact of the pandemic on our business. We have been in direct contact with our tenants since the crisis began, cultivating open dialogue and deepening the fundamental relationships that we have carefully developed through prior transactions and historic operations. Based on this approach and the overall financial strength and creditworthiness of our tenants, we believe that we have had positive results in our rent collections during this pandemic. As ofApril 30, 2021 , we have collected approximately 100% of the original cash rent due for the first quarter of 2021 across our entire portfolio, including approximately 100% of the original cash rent due from our assets inthe United States , 100% of the original cash rent due from our assets in theUnited Kingdom and approximately 100% of the original cash rent due from our assets in the rest ofEurope . This level of collection was consistent with the our level of collections in the fourth quarter of 2021,which was a slight improvement from the level of collections in the second and third quarters of 2020. "Original cash rent" refers to contractual rents on a cash basis due from tenants as stipulated in their originally executed lease agreement at inception or as amended, prior to any rent deferral agreement. We calculate "original cash rent collections" by comparing the total amount of rent collected during the period to the original cash rent due. During 2020 in light of COVID-19 pandemic, we agreed with certain tenants to defer a certain portion of cash rent due in 2020 to instead be due during 2021. Total rent collected during the period includes both original cash rent due and payments made by tenants pursuant to rent deferral agreements. Eliminating the impact of deferred rent paid, we collected 99% of original cash rent due in the first quarter of 2021 across our entire portfolio, including approximately 99% of the original cash rent due from our assets inthe United States , 100% of the original cash rent due from our assets in theUnited Kingdom and approximately 100% of the original cash rent due form our assets in the rest ofEurope . This information about rent collections may not be indicative of any future period. There is no assurance that we will be able to collect the cash rent that is due in future months including the deferred 2020 rent amounts due during 2021. The impact of the COVID-19 pandemic on our tenants and thus our ability to collect rents in future periods cannot be determined at present. 38
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Significant Accounting Estimates and Critical Accounting Policies
For a discussion about our significant accounting estimates and critical
accounting policies, see the "Significant Accounting Estimates and Critical
Accounting Policies" section of our 2020 Annual Report on Form 10-K. Except for
those required by new accounting pronouncements discussed in the section
referenced below, there have been no material changes from these significant
accounting estimates and critical accounting policies.
Recently Issued Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies - Recently Issued
Accounting Pronouncements to our consolidated financial statements in this
Quarterly Report on Form 10-Q for further discussion.
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Properties
We acquire and operate a diversified portfolio of commercial properties. All
such properties may be acquired and operated by us alone or jointly with another
party. The following table represents our portfolio of real estate properties as
of March 31, 2021 :
Square Feet (in Average Remaining
Portfolio Acquisition Date Country Number of Properties thousands) (1) Lease Term (2)
McDonald's Oct. 2012 UK 1 9 3.0
Wickes Building Supplies I May 2013 UK 1 30 3.5
Everything Everywhere Jun. 2013 UK 1 65 6.3
Thames Water Jul. 2013 UK 1 79 1.4
Wickes Building Supplies II Jul. 2013 UK 1 29 5.7
PPD Global Labs Aug. 2013 US 1 77 3.7
Northern Rock Sep. 2013 UK 2 86 2.4
Wickes Building Supplies III Nov. 2013 UK 1 28 7.7
XPO Logistics Nov. 2013 US 7 105 2.7
Wolverine Dec. 2013 US 1 469 1.8
Encanto Dec. 2013 PR 18 65 4.3
Rheinmetall Jan. 2014 GER 1 320 2.8
GE Aviation Jan. 2014 US 1 369 4.8
Provident Financial Feb. 2014 UK 1 117 14.6
Crown Crest Feb. 2014 UK 1 806 17.9
Trane Feb. 2014 US 1 25 2.7
Aviva Mar. 2014 UK 1 132 8.2
DFS Trading I Mar. 2014 UK 5 240 9.0
GSA I Mar. 2014 US 1 135 1.4
National Oilwell Varco I Mar. 2014 US 1 24 2.3
GSA II Apr. 2014 US 2 25 1.9
OBI DIY Apr. 2014 GER 1 144 2.8
DFS Trading II Apr. 2014 UK 2 39 9.0
GSA III Apr. 2014 US 2 28 1.7
GSA IV May 2014 US 1 33 4.3
Indiana Department of Revenue May 2014 US 1 99 1.8
National Oilwell Varco II May 2014 US 1 23 8.9
Nissan May 2014 US 1 462 7.5
GSA V Jun. 2014 US 1 27 2.0
Lippert Components Jun. 2014 US 1 539 5.4
Select Energy Services I Jun. 2014 US 3 136 5.6
Bell Supply Co I Jun. 2014 US 6 80 7.8
Axon Energy Products (3) Jun. 2014 US 3 214 3.8
Lhoist Jun. 2014 US 1 23 11.8
GE Oil & Gas Jun. 2014 US 2 70 4.3
Select Energy Services II Jun. 2014 US 4 143 5.6
Bell Supply Co II Jun. 2014 US 2 19 7.8
Superior Energy Services Jun. 2014 US 2 42 3.0
Amcor Packaging Jun. 2014 UK 7 295 3.7
GSA VI Jun. 2014 US 1 7 3.0
Nimble Storage Jun. 2014 US 1 165 0.6
FedEx -3-Pack Jul. 2014 US 3 339 1.8
Sandoz, Inc. Jul. 2014 US 1 154 5.3
Wyndham Jul. 2014 US 1 32 4.1
Valassis Jul. 2014 US 1 101 2.1
GSA VII Jul. 2014 US 1 26 3.6
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Square Feet (in Average Remaining
Portfolio Acquisition Date Country Number of Properties thousands) (1) Lease Term (2)
AT&T Services Jul. 2014 US 1 402 5.3
PNC - 2-Pack Jul. 2014 US 2 210 8.3
Fujitsu Jul. 2014 UK 3 163 9.0
Continental Tire Jul. 2014 US 1 91 1.3
BP Oil Aug. 2014 UK 1 3 4.6
Malthurst Aug. 2014 UK 2 4 4.6
HBOS Aug. 2014 UK 3 36 4.3
Thermo Fisher Aug. 2014 US 1 115 3.4
Black & Decker Aug. 2014 US 1 71 0.8
Capgemini Aug. 2014 UK 1 90 2.0
Merck & Co. Aug. 2014 US 1 146 4.4
GSA VIII Aug. 2014 US 1 24 3.4
Waste Management Sep. 2014 US 1 84 1.8
Intier Automotive Interiors Sep. 2014 UK 1 153 3.1
HP Enterprise Services Sep. 2014 UK 1 99 5.0
FedEx II Sep. 2014 US 1 12 3.0
Shaw Aero Devices, Inc. Sep. 2014 US 1 131 11.8
Dollar General - 39-Pack Sep. 2014 US 21 200 7.0
FedEx III Sep. 2014 US 2 221 3.3
Mallinkrodt Pharmaceuticals Sep. 2014 US 1 90 3.4
Kuka Sep. 2014 US 1 200 3.3
CHE Trinity Sep. 2014 US 2 374 1.7
FedEx IV Sep. 2014 US 2 255 1.8
GE Aviation Sep. 2014 US 1 102 1.8
DNV GL Oct. 2014 US 1 82 3.9
Bradford & Bingley Oct. 2014 UK 1 121 8.5
Rexam Oct. 2014 GER 1 176 3.9
FedEx V Oct. 2014 US 1 76 3.3
C&J Energy Oct. 2014 US 1 96 0.8
Onguard Oct. 2014 US 1 120 9.8
Metro Tonic Oct. 2014 GER 1 636 4.5
Axon Energy Products Oct. 2014 US 1 26 3.6
Tokmanni Nov. 2014 FIN 1 801 12.4
Fife Council Nov. 2014 UK 1 37 2.9
GSA IX Nov. 2014 US 1 28 1.1
KPN BV Nov. 2014 NETH 1 133 5.8
Follett School Dec. 2014 US 1 487 3.8
Quest Diagnostics Dec. 2014 US 1 224 3.4
Diebold Dec. 2014 US 1 158 0.8
Weatherford Intl Dec. 2014 US 1 20 4.6
AM Castle Dec. 2014 US 1 128 8.6
FedEx VI Dec. 2014 US 1 28 3.4
Constellium Auto Dec. 2014 US 1 321 8.7
C&J Energy II Mar. 2015 US 1 125 9.6
Fedex VII Mar. 2015 US 1 12 3.5
Fedex VIII Apr. 2015 US 1 26 3.5
Crown Group I Aug. 2015 US 2 204 2.8
Crown Group II Aug. 2015 US 2 411 14.4
Mapes & Sprowl Steel, Ltd. Sep. 2015 US 1 61 8.8
JIT Steel Services Sep. 2015 US 2 127 8.8
Beacon Health System, Inc. Sep. 2015 US 1 50 5.0
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Square Feet (in Average Remaining
Portfolio Acquisition Date Country Number of Properties thousands) (1) Lease Term (2)
Hannibal/Lex JV LLC Sep. 2015 US 1 109 8.5
FedEx Ground Sep. 2015 US 1 91 4.3
Office Depot Sep. 2015 NETH 1 206 7.9
Finnair Sep. 2015 FIN 4 656 10.0
Auchan Dec. 2016 FR 1 152 2.4
Pole Emploi Dec. 2016 FR 1 41 2.3
Sagemcom Dec. 2016 FR 1 265 2.8
NCR Dundee Dec. 2016 UK 1 132 5.6
FedEx Freight I Dec. 2016 US 1 69 2.4
DB Luxembourg Dec. 2016 LUX 1 156 2.7
ING Amsterdam Dec. 2016 NETH 1 509 4.2
Worldline Dec. 2016 FR 1 111 2.8
Foster Wheeler Dec. 2016 UK 1 366 3.3
ID Logistics I Dec. 2016 GER 1 309 3.6
ID Logistics II Dec. 2016 FR 2 964 3.7
Harper Collins Dec. 2016 UK 1 873 4.4
DCNS Dec. 2016 FR 1 97 3.6
Cott Beverages Inc Feb. 2017 US 1 170 5.8
FedEx Ground - 2 Pack Mar. 2017 US 2 162 5.5
Bridgestone Tire Sep. 2017 US 1 48 6.3
GKN Aerospace Oct. 2017 US 1 98 5.8
NSA-St. Johnsbury I Oct. 2017 US 1 87 11.6
NSA-St. Johnsbury II Oct. 2017 US 1 85 11.6
NSA-St. Johnsbury III Oct. 2017 US 1 41 11.6
Tremec North America Nov. 2017 US 1 127 6.5
Cummins Dec. 2017 US 1 59 4.2
GSA X Dec. 2017 US 1 26 8.8
NSA Industries Dec. 2017 US 1 83 11.8
Chemours Feb. 2018 US 1 300 6.8
FCA USA Mar. 2018 US 1 128 6.9
Lee Steel Mar. 2018 US 1 114 7.5
LSI Steel - 3 Pack Mar. 2018 US 3 218 6.6
Contractors Steel Company May 2018 US 5 1,392 7.2
FedEx Freight II Jun. 2018 US 1 22 11.4
DuPont Pioneer Jun. 2018 US 1 200 11.3
Rubbermaid - Akron OH Jul. 2018 US 1 669 7.8
NetScout - Allen TX Aug. 2018 US 1 145 9.4
Bush Industries - Jamestown NY Sep. 2018 US 1 456 17.5
FedEx - Greenville NC Sep. 2018 US 1 29 11.8
Penske Nov. 2018 US 1 606 7.6
NSA Industries Nov. 2018 US 1 65 17.7
LKQ Corp. Dec. 2018 US 1 58 9.8
Walgreens Dec. 2018 US 1 86 4.7
Grupo Antolin Dec. 2018 US 1 360 11.6
VersaFlex Dec. 2018 US 1 113 17.8
Cummins Mar. 2019 US 1 37 7.7
Stanley Security Mar. 2019 US 1 80 7.3
Sierra Nevada Apr. 2019 US 1 60 8.0
EQT Apr. 2019 US 1 127 9.3
Hanes Apr. 2019 US 1 276 7.5
Union Partners May 2019 US 2 390 8.0
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Square Feet (in Average Remaining
Portfolio Acquisition Date Country Number of Properties thousands) (1) Lease Term (2)
ComDoc Jun. 2019 US 1 108 8.2
Metal Technologies Jun. 2019 US 1 228 13.2
Encompass Health Jun. 2019 US 1 199 12.0
Heatcraft Jun. 2019 US 1 216 7.3
C.F. Sauer SLB Aug. 2019 US 6 598 18.3
SWECO Sep. 2019 US 1 191 14.2
Viavi Solutions Sep. 2019 US 2 132 11.4
Faurecia Dec. 2019 US 1 278 8.0
Plasma Dec. 2019 US 9 125 9.3
Whirlpool Dec. 2019 US 6 2,924 10.8
FedEx Dec. 2019 CN 2 20 8.2
NSA Industries Dec. 2019 US 1 116 18.8
Viavi Solutions Jan. 2020 US 1 46 11.4
CSTK Feb. 2020 US 1 56 9.0
Metal Technologies Feb. 2020 US 1 31 13.9
Whirlpool Feb. 2020 IT 2 196 5.2
Fedex Mar. 2020 CN 1 29 19.0
Klaussner Mar. 2020 US 4 2,195 10.9
Plasma May 2020 US 6 79 10.4
Klaussner Jun. 2020 US 1 261 19.0
NSA Industries Jun. 2020 US 1 48 19.3
Johnson Controls Sep. & Dec. 2020 UK, SP & FR 4 156 11.5
Broadridge Financial Solutions Nov. 2020 US 4 1,248 8.7
ZF Active Safety Dec. 2020 US 1 216 12.6
FCA USA Dec. 2020 US 1 997 9.3
Total 306 37,175 8.3
________
(1)Total may not foot due to rounding.
(2)If the portfolio has multiple properties with varying lease expirations,
average remaining lease term is calculated on a weighted-average basis.
Weighted- average remaining lease term in years is calculated based on square
feet as of March 31, 2021 .
(3)Of the three properties, one location is vacant while the other two
properties remain in use.
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Results of Operations In addition to the comparative period-over-period discussions below, please see the "Overview - Management Update on the Impacts of the COVID-19 Pandemic" section above for additional information on the risks and uncertainties associated with the COVID-19 pandemic and management's actions taken to mitigate those risks and uncertainties. Comparison of the Three Months EndedMarch 31, 2021 and 2020 Net Income Attributable to Common Stockholders Net income attributable to common stockholders was$(0.8) million for the three months endedMarch 31, 2021 , as compared to net income attributable to common stockholders of$5.0 million for the three months endedMarch 31, 2020 . The change in net (loss) income attributable to common stockholders is discussed in detail for each line item of the consolidated statements of operations in the sections that follow. Revenue from Tenants In addition to base rent, our lease agreements generally require tenants to pay or reimburse us for all property operating expenses, which primarily reflect insurance costs and real estate taxes incurred by us and subsequently reimbursed by the tenant. However, some limited property operating expenses that are not the responsibility of the tenant are absorbed by us. Revenue from tenants was$89.4 million and$79.2 million for the three months endedMarch 31, 2021 and 2020, respectively. The increase was primarily driven by the impact of our property acquisitions sinceMarch 31, 2020 and the impact of foreign exchange rates. During the three months endedMarch 31, 2021 there were increases of 7.6% in the average exchange rate for British Pounds Sterling ("GBP") to USD and 9.3% in the Euro ("EUR") to USD, when compared to the same period last year. These increases were partially offset by the impact of our dispositions sinceMarch 31, 2020 . Property Operating Expenses Property operating expenses were$7.6 million and$7.4 million for the three months endedMarch 31, 2021 and 2020, respectively. These costs primarily relate to insurance costs and real estate taxes on our properties, which are generally reimbursable by our tenants. The main exceptions areGovernment Services Administration properties for which certain expenses are not reimbursable by tenants. The increase was primarily due to the impact of our acquisitions sinceMarch 31, 2020 and increases during the three months endedMarch 31, 2021 of 7.6% in the average exchange rate for GBP to USD and 9.3% in the EUR to USD, when compared to the same period last year. Operating Fees to Related Parties Operating fees paid to related parties were$9.6 million and$8.8 million for the three months endedMarch 31, 2021 and 2020, respectively. Operating fees to related parties consist of compensation to the Advisor for asset management services, as well as property management fees paid to the Property Manager. Our advisory agreement with the Advisor (our "Advisory Agreement") requires us to pay the Advisor a Minimum Base Management Fee of$18.0 million per annum ($4.5 million per quarter) and a Variable Base Management Fee, both payable in cash, and Incentive Compensation (as defined in our Advisory Agreement), generally payable in cash and shares, if the applicable hurdles are met. In light of the unprecedented market disruption resulting from the COVID-19 pandemic, inMay 2020 , we amended our Advisory Agreement to temporarily lower the effective thresholds of these applicable hurdles, and we further amended these hurdles and certain related provisions inMay 2021 . The Advisor did not earn any Incentive Compensation during the quarters endedMarch 31, 2021 or 2020. The increase in operating fees between the periods in part results from an increase of$0.3 million in the Variable Base Management Fee resulting from the incremental additional net proceeds generated from offerings of equity securities. The Variable Base Management Fee would increase in connection with any offerings or issuances of equity securities (see Note 11 - Related Party Transactions to our consolidated financial statements in this Quarterly Report on Form 10-Q for additional details). Our Property Manager is paid fees to manage our properties, which may include market-based leasing commissions. Property management fees are calculated as a percentage of our gross revenues generated by the applicable properties. For additional information on our property management agreement with the Property Manager, see Note 11 - Related Party Transactions to our consolidated financial statements included in this Quarterly Report on Form 10-Q. During the three months endedMarch 31, 2021 and 2020, property management fees were$2.0 million and$1.4 million , respectively. During the year endedDecember 31, 2020 and the three months endedMarch 31, 2021 , we incurred leasing commissions to the Property Manager of$1.5 million and$0.5 million , respectively, of which$42,000 was recorded as a property management fee in operating fees to related parties in our consolidated statement of operations for the quarter endedMarch 31, 2021 . The balance is being recorded over the terms of the related leases. 44 -------------------------------------------------------------------------------- Table of Contents Acquisition, Transaction and Other Costs We recognized$17,000 and$0.3 million of acquisition, transaction and other costs during the three months endedMarch 31, 2021 and 2020, respectively. Acquisition, transaction and other costs during the three months endedMarch 31, 2021 and 2020 were due to costs for terminated acquisitions. General and Administrative Expenses General and administrative expenses were$4.1 million and$3.0 million for the three months endedMarch 31, 2021 and 2020, respectively, primarily consisting of professional fees including audit and taxation services, board member compensation and directors' and officers' liability insurance and including expense reimbursements of approximately$0.2 million to the Advisor under the Advisory Agreement for the three months endedMarch 31, 2021 . The increase for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 was primarily due to an increase in professional fees. Equity-Based Compensation During the three months endedMarch 31, 2021 and 2020, we recognized equity-based compensation expense of$2.6 million and$2.5 million , respectively, which primarily related to our multi-year outperformance agreement entered into with the Advisor inJuly 2018 (the "2018 OPP"). Equity-based compensation expense also includes amortization of restricted shares of Common Stock ("Restricted Shares") granted to employees of the Advisor or its affiliates who are involved in providing services to us and restricted stock units in respect of shares of Common Stock ("RSUs") granted to our independent directors. Equity-based compensation expense related to the 2018 OPP is fixed as ofJanuary 1, 2019 and is only remeasured in subsequent periods if the 2018 OPP is amended. InFebruary 2019 , the 2018 OPP was amended in light of the effectiveness of a merger of one member of the peer group. Under the accounting rules, we were required to calculate any excess of the new value of LTIP Units in accordance with the provisions of the amendment ($29.9 million ) over the fair value immediately prior to the amendment ($23.3 million ). This excess of approximately$6.6 million is being expensed over the period fromFebruary 21, 2019 , the date our compensation committee approved the amendment, throughJune 2, 2021 . Depreciation and Amortization Depreciation and amortization expense was$39.7 million and$33.5 million for the three months endedMarch 31, 2021 and 2020, respectively. The increase in the first quarter of 2021 as compared to the first quarter of 2020 was due to additional depreciation and amortization expense recorded as a result of the impact of our property acquisitions sinceMarch 30, 2020 and increases during the three months endedMarch 31, 2021 of 7.6% in the average exchange rate for GBP to USD and 9.3% in the EUR to USD, when compared to the same period last year, partially offset by the impact of our dispositions sinceMarch 31, 2020 . Interest Expense Interest expense was$21.4 million and$16.4 million for the three months endedMarch 31, 2021 and 2020, respectively. The increase was primarily related to interest accrued for the$500 million senior notes issued inDecember 2020 , which accrue interest at 3.750% per year (see Note 6 - Senior Notes, Net for additional details). The net amount of our total gross debt outstanding also increased from$2.0 billion as ofMarch 31, 2020 to$2.3 billion as ofMarch 31, 2021 and the weighted-average effective interest rate of our total debt was 3.1% as ofMarch 31, 2020 and 3.3% as ofMarch 31, 2021 . The increase in interest expense was also impacted by increases during the three months endedMarch 31, 2021 of 7.6% in the average exchange rate for GBP to USD and 9.3% in the average exchange rate for EUR to USD, when compared to the same period last year. As of the quarter endedMarch 31, 2021 , approximately 30.0% of our total debt outstanding was denominated in EUR and 10.0% of our total debt outstanding was denominated in GBP, and as of the quarter endedMarch 31, 2020 , approximately 38% of our total debt outstanding was denominated in EUR and 16% of our total debt outstanding was denominated in GBP. We view a combination of secured and unsecured financing sources as an efficient and accretive means to acquire properties and manage working capital. As ofMarch 31, 2021 , approximately 60% of our total debt outstanding was secured and 40% was unsecured. Our interest expense in future periods will vary based on interest rates as well as our level of future borrowings, which will depend on refinancing needs and acquisition activity. Foreign Currency and Interest Rate Impact on Operations The gains of$1.8 million and$3.1 million on derivative instruments for the three months endedMarch 31, 2021 and 2020, respectively, reflect the marked-to-market impact from foreign currency and interest rate derivative instruments used to hedge the investment portfolio from currency and interest rate movements, and was mainly driven by rate changes in the GBP and EUR compared to the USD. The quarterly average GBP to USD exchange rate increased 7.6% and the quarterly average EUR to USD exchange rate increased 9.3% during the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . We had no gains or losses on undesignated foreign currency advances and other hedge ineffectiveness for the three months endedMarch 31, 2021 and three months endedMarch 31, 2020 . 45 -------------------------------------------------------------------------------- Table of Contents As a result of our foreign investments inEurope , and, to a lesser extent, our investments inCanada , we are subject to risk from the effects of exchange rate movements in the EUR, GBP and, to a lesser extent, CAD, which may affect costs and cash flows in our functional currency, the USD. We generally manage foreign currency exchange rate movements by matching our debt service obligation to the lender and the tenant's rental obligation to us in the same currency. This reduces our overall exposure to currency fluctuations. In addition, we may use currency hedging to further reduce the exposure to our net cash flow. We are generally a net receiver of these currencies (we receive more cash than we pay out), and therefore our results of operations of our foreign properties benefit from a weaker USD, and are adversely affected by a stronger USD, relative to the foreign currency. During the three months endedMarch 31, 2021 , the average exchange rate for GBP to USD increased by 7.6%, and the average exchange rate for EUR to USD increased by 9.3%, when compared to the same period last year. Income Tax Expense Although as a REIT we generally do not payU.S. federal income taxes, we recognize income tax (expense) benefit domestically for state taxes and local income taxes incurred, if any, and also in foreign jurisdictions in which we own properties. In addition, we perform an analysis of potential deferred tax or future tax benefit and expense as a result of book and tax differences and timing differences in taxes across jurisdictions. Our current income tax expense fluctuates from period to period based primarily on the timing of those taxes. Income tax expense was$2.1 million and$1.0 million for the three months endedMarch 31, 2021 and 2020, respectively. Cash Flows from Operating Activities During the three months endedMarch 31, 2021 , net cash provided by operating activities was$53.2 million . The level of cash flows provided by operating activities is driven by, among other things, rental income received, operating fees paid to related parties for asset and property management services and interest payments on outstanding borrowings. Cash flows provided by operating activities during the three months endedMarch 31, 2021 reflect net income of$4.2 million , adjusted for non-cash items of$42.0 million (primarily depreciation, amortization of intangibles, amortization of deferred financing costs, amortization of mortgage premium/discount, amortization of above- and below-market lease and ground lease assets and liabilities, bad debt expense, unbilled straight-line rent (including the effect of adjustments due to rent deferrals), and equity-based compensation). In addition, operating cash flow increased by$7.0 million , due to working capital items. During the three months endedMarch 31, 2020 , net cash provided by operating activities was$41.9 million . The level of cash flows provided by operating activities is driven by, among other things, rental income received, operating fees paid to related parties for asset and property management services and interest payments on outstanding borrowings. Cash flows provided by operating activities during the three months endedMarch 31, 2020 reflect net income of$9.6 million , adjusted for non-cash items of$34.5 million (primarily depreciation, amortization of intangibles, amortization of deferred financing costs, amortization of mortgage premium/discount, amortization of above- and below-market lease and ground lease assets and liabilities, bad debt expense, unbilled straight-line rent, and equity-based compensation). In addition, working capital items increased operating cash flow by$2.5 million . These increases were partially offset by a lease incentive payment of$4.7 million related to the signing of lease extensions for four properties leased to Finnair, which incentive was negotiated in exchange for extending the weighted-average remaining lease term on the properties from 4.7 years to 11.0 years. Cash Flows from Investing Activities Net cash used in investing activities during the three months endedMarch 31, 2021 of$4.4 million was driven by deposits for real estate investments of$1.2 million and capital expenditures of$3.2 million . Net cash used in investing activities during the three months endedMarch 31, 2020 of$115.9 million was driven by property acquisitions of$113.1 million , property acquisition deposits of$1.4 million and capital expenditures of$1.4 million . Cash Flows from Financing Activities Net cash provided by financing activities of$92.8 million during the three months endedMarch 31, 2021 was a result of net proceeds from borrowings under our Revolving Credit Facility of$15.0 million , net proceeds from the issuance of common stock of$105.8 million and net proceeds from the issuance of Series B Preferred Stock of$16.0 million . These cash inflows were partially offset by dividends paid to common stockholders of$36.2 million , dividends paid to holders of our 7.25% Series A Cumulative Redeemable Preferred Stock,$0.01 par value per share ("Series A Preferred Stock"), of$3.1 million , dividends paid to holders of our 6.875% Series B Cumulative Redeemable Perpetual Preferred Stock$0.01 par value per share ("Series B Preferred Stock"), of$1.7 million and payments on mortgage notes payable of$2.7 million . Net cash provided by financing activities of$153.5 million during the three months endedMarch 31, 2020 was a result of net proceeds from borrowings under our Revolving Credit Facility of$205.0 million , partially offset by dividends paid to common stockholders of$47.6 million , dividends paid to holders of Series A Preferred Stock of$3.1 million , dividends paid to holders of Series B Preferred Stock$0.6 million . 46 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources The negative impacts of the COVID-19 pandemic has caused and may continue to cause certain of our tenants to be unable to make rent payments to us timely, or at all, which impacts the amount of cash we generate from our operations. During the year endedDecember 31, 2020 , we took proactive steps to collect rent and to otherwise mitigate the impact on our business and liquidity. The future impact of the pandemic on our results of operations, our liquidity and the ability of our tenants to continue to pay us rent will depend on numerous factors including the overall length and severity of the COVID-19 pandemic. Management is unable to predict the nature and scope of any of these factors. Because substantially all of our income is derived from rentals of commercial real property, our business, income, cash flow, results of operations, financial condition, liquidity, prospects our ability to service our debt obligations, our ability to consummate future property acquisitions and our ability to pay dividends, and other distributions to our stockholders would be adversely affected if a significant number of tenants are unable to meet their obligations to us. In addition to the discussion below, please see the "Overview - Management Update on the Impacts of the COVID-19 Pandemic" section above for additional information on the risks and uncertainties associated with the COVID-19 pandemic and management's actions taken to mitigate those risks and uncertainties. As ofMarch 31, 2021 andDecember 31, 2020 , we had cash and cash equivalents of$262.9 million and$124.2 million , respectively. See discussion above for how our cash flows from various sources impacted our cash. Principal future needs for use of our cash and cash equivalents will include the purchase of additional properties or other investments in accordance with our investment strategy, payment of related acquisition costs, improvement costs, operating and administrative expenses, continuing debt service obligations and dividends to holders of our Common Stock, Series A Preferred Stock and Series B Preferred Stock, as well as to any future class or series of preferred stock we may issue. Management expects that operating income from our existing properties supplemented by our existing cash will be sufficient to fund operating expenses, and the payment of quarterly dividends to our common stockholders and holders of our Series A Preferred Stock and Series B Preferred Stock. Our other sources of capital, which we have used and may use in the future, include proceeds received from our Revolving Credit Facility, proceeds from secured or unsecured financings (which may include note issuances), proceeds from our offerings of equity securities (including Common Stock and preferred stock), proceeds from any future sales of properties and undistributed funds from operations, if any. During the three months endedMarch 31, 2021 , cash used to pay our dividends was generated mainly from cash flows provided by operations. Acquisitions and Dispositions We are in the business of acquiring real estate properties and leasing the properties to tenants. Generally, we fund our acquisitions through a combination of cash and cash equivalents, proceeds from offerings of equity securities (including Common Stock and preferred stock), borrowings under our Revolving Credit Facility and proceeds from mortgage or other debt secured by the acquired or other assets at the time of acquisition or at some later point (see Note 4 - Mortgage Notes Payable, Net and Note 5 - Revolving Credit Facility and Term Loan, Net to our consolidated financial statements included in this Quarterly Report on Form 10-Q for further discussion). In addition, to the extent we dispose of properties, we have used and may continue to use the net proceeds from the dispositions (after repayment of any mortgage debt, if any) for future acquisitions or other general corporate purposes. Acquisitions and Dispositions - Three Months EndedMarch 31, 2021 During the three months endedMarch 31, 2021 , we did not acquire or dispose of any properties. Acquisitions and Dispositions Subsequent toMarch 31, 2021 and Pending Transactions Subsequent toMarch 31, 2021 , we acquired five properties, located inthe United States andUnited Kingdom , for an aggregate base purchase price of approximately$249.9 million , excluding closing costs. The largest of these acquisitions was the global headquarters of theMcLaren Group located in close proximity to centralLondon, England andHeathrow Airport .McLaren Group is a group of automotive, motorsport and technology companies. This 840,849 square foot campus consists of three different buildings: a technology center, production center and thought leadership center. These state-of-the-art buildings were designed by renowned architectNorman Foster , have won numerous awards and obtained Carbon Standard recognition from theCarbon Trust for their environmentally conscious features. We acquired these properties for £170.0 million ($236.3 million on the date of acquisition) in a sale-leaseback transaction with theMcLaren Group . We believe the price paid for this property is significantly below replacement cost. The leases have a term of 20 years with annual rent escalators linked to the consumer price index subject to a cap of 4% and a collar of 1.25%. The annual base rent is subject to a one-time contingent adjustment which only occurs upon aMcLaren Holdings Limited corporate credit rating enhancement to B- (or equivalent) from one of S&P, Moody's or Fitch byMay 2023 and if we refinance the debt incurred to acquire the property secured by thereby (the "McLaren Loan") byDecember 2024 . If these conditions are not met, the adjustment will not occur. We are under no obligation to complete a refinancing of this loan, and we do not expect to do so during the first year of the lease. If 47 -------------------------------------------------------------------------------- Table of Contents these conditions are not met, the adjustment will not occur and the initial rent will not decrease. We are under no obligation to complete refinancing of the McLaren Loan, and we do not expect to do so during the first year of the lease. We funded this acquisition with the £101.0 million ($140.6 million on the date of incurrence)McLaren Loan , £52.0 million ($72.2 million on the date of acquisition) in additional borrowings under the Revolving Credit Facility and cash on hand consisting primarily of proceeds from our ATM programs. The maturity date of the McLaren Loan isApril 23, 2024 and it bears interest at 6% per annum. The McLaren Loan is interest-only with the principal due at maturity. We have signed one definitive purchase and sale agreement ("PSA") to acquire one net lease property for a base purchase price of$6.9 million . The PSA is subject to conditions and there can be no assurance we will complete the acquisition, or any future acquisitions, on a timely basis or on acceptable terms and conditions, if at all. Since the onset of the COVID-19 pandemic, the overall amount of available acquisitions has been reduced, and although we have adjusted our historical capitalization rate target, in many cases current sellers have not yet made similar changes to their pricing expectations. We believe that over time, bidding and asking prices will converge to establish a long-term trend of lower prices. Equity Offerings Common Stock We have an "at the market" equity offering program (the "Common Stock ATM Program"), pursuant to which we may raise aggregate sales proceeds of$500.0 million (increased from$250.0 million inMarch 2021 ) through sales of Common Stock from time to time through our sales agents. During the three months endedMarch 31, 2021 , we sold 5,904,470 shares of Common Stock through the Common Stock ATM Program for gross proceeds of$107.6 million , before commissions paid of$1.6 million and additional issuance costs of$0.3 million . Preferred Stock We have established an "at the market" equity offering program for our Series B Preferred Stock (the "Series B Preferred Stock ATM Program") pursuant to which we may raise aggregate sales proceeds of$200.0 million through sales of shares of Series B Preferred Stock from time to time through our sales agents. During the three months endedMarch 31, 2021 , we sold 641,940 shares of Series B Preferred Stock through the Series B Preferred Stock ATM Program for gross proceeds of$16.2 million , before commissions paid of approximately$0.2 million and nominal additional issuance costs. The timing differences between when we raise equity proceeds or receive proceeds from dispositions and when we invest those proceeds in acquisitions or other investments that increase our operating cash flows have affected, and may continue to affect, our results of operations. Borrowings As ofMarch 31, 2021 andDecember 31, 2020 , we had total debt outstanding of$2.3 billion , bearing interest at a weighted-average interest rate per annum equal to 3.3%. As ofMarch 31, 2021 , 95.8% of our total debt outstanding either bore interest at fixed rates, or was swapped to a fixed rate, which bore interest at a weighted average interest rate of 3.3% per annum. As ofMarch 31, 2021 , 4.2% of our total debt outstanding was variable-rate debt, which bore interest at a weighted average interest rate of 2.6% per annum. The total gross carrying value of unencumbered assets as ofMarch 31, 2021 was$1.8 billion , of which approximately$1.8 billion was included in the unencumbered asset pool comprising the borrowing base under the Revolving Credit Facility and therefore is not available to serve as collateral for future borrowings. We intend to add certain of these unencumbered assets to the borrowing base under the Revolving Credit Facility to increase the amount available for future borrowings thereunder. Our debt leverage ratio was 57.0% (total debt as a percentage of total purchase price of real estate investments, based on the exchange rate at the time of purchase) as of March 31, 2021. See Note 7 - Fair Value of Financial Instruments to our consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of fair value of such debt as ofMarch 31, 2021 . As ofMarch 31, 2021 , the weighted-average maturity of our indebtedness was 5.1 years. We believe we have the ability to service our debt obligations as they come due. Senior Notes OnDecember 16, 2020 , we and the OP issued$500.0 million aggregate principal amount of 3.750% Senior Notes due 2027. As ofMarch 31, 2021 andDecember 31, 2020 , the amount of the Senior Notes outstanding totaled$490.7 million and$490.3 million , respectively. These amounts are net of$9.3 million and$9.7 million of deferred financing costs, respectively. The Senior Notes were issued in transactions exempt from registration under the Securities Act of 1933, as amended. See Note 6 - Senior Notes, Net for further discussion on the Senior Notes and related covenants. Mortgage Notes Payable 48 -------------------------------------------------------------------------------- Table of Contents As ofMarch 31, 2021 , we had secured mortgage notes payable of$1.3 billion , net of mortgage discounts and deferred financing costs. Repayments of principal under the mortgage loan secured by all our properties located in theUnited Kingdom began inOctober 2020 based on amounts specified under the loan. InJanuary 2021 , approximately$2.7 million in principal was repaid in accordance with the terms of this mortgage note payable. Approximately$10.6 million (approximately £7.7 million) in principal is due during the remainder of 2021, which is the only debt we have coming due during 2021. Credit Facility As ofMarch 31, 2021 , outstanding borrowings under our Revolving Credit Facility were$125.9 million and the total outstanding balance on our term loan was$287.2 million , net of deferred financing costs. During the three months endedMarch 31, 2021 , we borrowed an additional$15.0 million under the Revolving Credit Facility. As ofMarch 31, 2021 , the aggregate total commitments under the Credit Facility were approximately$1.1 billion , based on the USD equivalent onMarch 31, 2021 . OnFebruary 24, 2021 , following a request by us, lender commitments under the Credit Facility were increased by$50.0 million with all of the increase allocated to the Revolving Credit Facility, and the total commitments were approximately$1.2 billion based on prevailing exchange rates on that date. This increase was made pursuant to the Credit Facility's uncommitted "accordion feature" whereby, upon our request, but at the sole discretion of the lenders participating in such increase, total commitments under the Credit Facility may be increased, with the aggregate of such commitments not to exceed$1.75 billion . Following the effectiveness of the commitment increase completed onFebruary 24, 2021 , we may request future additional increases to total commitments of approximately$565.0 million , based on prevailing exchange rates on that date, allocable to either or both components of the Credit Facility. The increase in lender commitments did not impact the amount available for future borrowings under the Credit Facility, which is based on the value of a pool of eligible unencumbered real estate assets owned by us and compliance with various ratios related to those assets. The Credit Facility consists of two components, a Revolving Credit Facility and a Term Loan, both of which are interest-only. The Revolving Credit Facility matures onAugust 1, 2023 , subject to two six-month extensions at our option subject to certain conditions, and the Term Loan matures onAugust 1, 2024 . Borrowings under the Credit Facility bear interest at a variable rate per annum based on an applicable margin that varies based on the ratio of consolidated total indebtedness and our consolidated total asset value including our subsidiaries plus either (i) LIBOR, as applicable to the currency being borrowed, or (ii) a "base rate" equal to the greatest of (a)KeyBank's "prime rate," (b) 0.5% above the Federal Funds Effective Rate, or (c) 1.0% above one-month LIBOR. The applicable interest rate margin is based on a range from 0.45% to 1.05% per annum with respect to base rate borrowings under the Revolving Credit Facility, 1.45% to 2.05% per annum with respect to LIBOR borrowings under the Revolving Credit Facility, 0.40% to 1.00% per annum with respect to base rate borrowings under the Term Loan and 1.40% to 2.00% per annum with respect to LIBOR borrowings under the Term Loan. As ofMarch 31, 2021 , the Credit Facility had a weighted-average effective interest rate of 2.5% after giving effect to interest rate swaps in place. While we expect LIBOR to be available in substantially its current form until at least the end of 2021, it is possible that LIBOR will become unavailable prior to that time. The Credit Facility contains terms governing the establishment of a replacement index to serve as an alternative to LIBOR, if necessary. To transition from LIBOR under the Credit Facility, we anticipate that we will either utilize the Base Rate or negotiate a replacement reference rate for LIBOR with the lenders. Our Credit Facility requires us, through the OP, to pay an unused fee per annum of 0.25% of the unused balance of the Revolving Credit Facility if the unused balance exceeds or is equal to 50% of the total commitment or a fee per annum of 0.15% of the unused balance of the Revolving Credit Facility if the unused balance is less than 50% of the total commitment. From and after the time we obtain an investment grade credit rating, the unused fee will be replaced with a facility fee based on the total commitment under the Revolving Credit Facility multiplied by 0.30%, decreasing if our credit rating increases. The availability of borrowings under the Revolving Credit Facility is based on the value of a pool of eligible unencumbered real estate assets owned by us and compliance with various ratios related to those assets. As ofMarch 31, 2021 , approximately$88.6 million was available for future borrowings under the Revolving Credit Facility. Any future borrowings may, at our option be denominated in USD, EUR, Canadian Dollars, GBP or Swiss Francs. Amounts borrowed may not, however, be converted to, or repaid in, another currency once borrowed. The Term Loan is denominated in EUR. Loan Obligations Our loan obligations generally require us to pay principal and interest on a monthly or quarterly basis with all unpaid principal and interest due at maturity. Our loan agreements (including the Credit Facility) stipulate compliance with specific reporting covenants. Our mortgage notes payable agreements require compliance with certain property-level financial covenants including debt service coverage ratios. 49 -------------------------------------------------------------------------------- Table of Contents During the three months endedSeptember 30, 2020 , the borrower entities under the mortgage loan secured by all of our properties located in theUnited Kingdom did not maintain the required loan-to-value ratios with respect to the mortgaged properties, and, as a result, a cash trap event under the loan occurred which was immediately cured when we executed, as required by the terms of the loan, a limited unsecured corporate guaranty of the borrower entities' obligations under the loan of £20.0 million (approximately$27.6 million as ofMarch 31, 2021 ). The guaranty remains in effect and contains a covenant that requires us to maintain unrestricted cash and cash equivalents (or amounts available for future borrowings under credit facility, such as the Credit Facility) in an amount sufficient to meet its actual and contingent liabilities under the guaranty. During the three months endedDecember 31, 2020 , the borrower entities under the same mortgage loan did not maintain the same loan-to-value ratio and another cash trap event under the loan occurred. This does not constitute a breach of the covenant and is not an event of default under the loan. We are currently in active negotiations with out lenders to cure the cash trap event. We anticipate reaching a resolution on the cure to the cash trap event in the second quarter of 2021 but there can be no assurance we will be able to do so on favorable terms, or at all. If the value of the underlying portfolio continues to decline, the loan to value ratio may exceed the financial covenant required under the loan of 55%, which would result in a breach, which could, if not cured, give rise to the lenders' right to accelerate the principal amount due under the loan and other remedies. In that event, our intent would be to cure the breach through various remedies available to them per the loan agreement within the specified time frame under the loan. We do not anticipate that any arrangement required to cure the cash trap that occurred during the fourth quarter of 2020 and still remains in place during the first quarter of 2021 and subsequent thereto will have a material impact on our liquidity. However, if we are unable to maintain this loan-to-value after the next annual lender valuation in the fourth quarter of 2021, we may experience future cash trap events that could adversely impact our liquidity. In addition, during the three months endedDecember 31, 2020 , we also triggered a cash sweep event under one of our mortgage loans with a balance of$98.5 million as ofMarch 31, 2021 , because a major tenant failed to renew its lease. This is not an event of default and instead triggers a cash sweep event. Subsequent toDecember 31, 2020 , we cured this event through one of the available options under the loan by putting a$3.2 million letter of credit in place. We may be required to put additional letters of credit in place up to an aggregate of$7.4 million if we are not able to find a suitable replacement tenant prior to the fourth quarter of 2021, and the letters of credit reduce the availability for future borrowings under the Revolving Credit Facility. 2021 LTIP Unit Award OnMay 3, 2021 , our independent directors, acting as a group, authorized the issuance of a new award of LTIP Units to the Advisor after the performance period under the 2018 OPP expires onJune 2, 2021 . The number of LTIP Units to be issued to the Advisor pursuant to this award will be equal to the quotient of$50.0 million divided by the closing price of Common Stock onJune 2, 2021 . See Item 5 - Other information for additional information. Non-GAAP Financial Measures This section discusses the non-GAAP financial measures we use to evaluate our performance including Funds from Operations ("FFO"), Core Funds from Operations ("Core FFO") and Adjusted Funds from Operations ("AFFO"). A description of these non-GAAP measures and reconciliations to the most directly comparable GAAP measure, which is net income, is provided below. Use of Non-GAAP Measures FFO, Core FFO, and AFFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO, Core FFO and AFFO measures. Other REITs may not define FFO in accordance with the current NAREIT definition (as we do), or may interpret the current NAREIT definition differently than we do, or may calculate Core FFO or AFFO differently than we do. Consequently, our presentation of FFO, Core FFO and AFFO may not be comparable to other similarly-titled measures presented by other REITs. We consider FFO, Core FFO and AFFO useful indicators of our performance. Because FFO, Core FFO and AFFO calculations exclude such factors as depreciation and amortization of real estate assets and gain or loss from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), FFO, Core FFO and AFFO presentations facilitate comparisons of operating performance between periods and between other REITs. As a result, we believe that the use of FFO, Core FFO and AFFO, together with the required GAAP presentations, provide a more complete understanding of our operating performance including relative to our peers and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. However, FFO, Core FFO and AFFO are not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. Investors are cautioned that FFO, Core FFO and AFFO should only be used to assess the sustainability of our operating performance 50 -------------------------------------------------------------------------------- Table of Contents excluding these activities, as they exclude certain costs that have a negative effect on our operating performance during the periods in which these costs are incurred. Funds from Operations, Core Funds from Operations and Adjusted Funds from Operations Funds from Operations Due to certain unique operating characteristics of real estate companies, as discussed below, theNational Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a measure known as FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. FFO is not equivalent to net income or loss as determined under GAAP. We calculate FFO, a non-GAAP measure, consistent with the standards established over time by theBoard of Governors of NAREIT, as restated in a White Paper approved by theBoard of Governors of NAREIT effective inDecember 2018 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding depreciation and amortization related to real estate, gain and loss from the sale of certain real estate assets, gain and loss from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Our FFO calculation complies with NAREIT's definition. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including inflation, interest rates, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation and certain other items may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization, among other things, provides a more complete understanding of our performance to investors and to management, and, when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. Core Funds from Operations In calculating Core FFO, we start with FFO, then we exclude certain non-core items such as acquisition, transaction and other costs, as well as certain other costs that are considered to be non-core, such as debt extinguishment costs, fire loss and other costs related to damages at our properties. The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our core business plan to generate operational income and cash flows in order to make dividend payments to stockholders. In evaluating investments in real estate, we differentiate the costs to acquire the investment from the subsequent operations of the investment. We also add back non-cash write-offs of deferred financing costs and prepayment penalties incurred with the early extinguishment of debt which are included in net income but are considered financing cash flows when paid in the statement of cash flows. We consider these write-offs and prepayment penalties to be capital transactions and not indicative of operations. By excluding expensed acquisition, transaction and other costs as well as non-core costs, we believe Core FFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management's analysis of the investing and operating performance of our properties. Adjusted Funds from Operations In calculating AFFO, we start with Core FFO, then we exclude certain income or expense items from AFFO that we consider more reflective of investing activities, other non-cash income and expense items and the income and expense effects of other activities that are not a fundamental attribute of our business plan. These items include early extinguishment of debt and other items excluded in Core FFO as well as unrealized gain and loss, which may not ultimately be realized, such as gain or loss on derivative instruments, gain or loss on foreign currency transactions, and gain or loss on investments. In addition, by excluding non-cash income and expense items such as amortization of above-market and below-market leases intangibles, amortization of deferred financing costs, straight-line rent and equity-based compensation from AFFO, we believe we provide useful information regarding income and expense items which have a direct impact on our ongoing operating performance. We also include the realized gain or loss on foreign currency exchange contracts for AFFO as such items are part of our ongoing operations and affect our current operating performance. In calculating AFFO, we exclude certain expenses which under GAAP are characterized as operating expenses in determining operating net income. All paid and accrued merger, acquisition, transaction and other costs (including prepayment penalties for debt extinguishments) and certain other expenses negatively impact our operating performance during the period in which expenses are incurred or properties are acquired will also have negative effects on returns to investors, but are not reflective of on-going performance. Further, under GAAP, certain contemplated non-cash fair value and other non-cash 51 -------------------------------------------------------------------------------- Table of Contents adjustments are considered operating non-cash adjustments to net income. In addition, as discussed above, we view gain and loss from fair value adjustments as items which are unrealized and may not ultimately be realized and not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. Excluding income and expense items detailed above from our calculation of AFFO provides information consistent with management's analysis of our operating performance. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gain or loss, we believe AFFO provides useful supplemental information. By providing AFFO, we believe we are presenting useful information that can be used to better assess the sustainability of our ongoing operating performance without the impact of transactions or other items that are not related to the ongoing performance of our portfolio of properties. AFFO presented by us may not be comparable to AFFO reported by other REITs that define AFFO differently. Furthermore, we believe that in order to facilitate a clear understanding of our operating results, AFFO should be examined in conjunction with net income (loss) as presented in our consolidated financial statements. AFFO should not be considered as an alternative to net income (loss) as an indication of our performance or to cash flows as a measure of our liquidity or ability to make distributions. 52 -------------------------------------------------------------------------------- Table of Contents Accounting Treatment of Rent Deferrals All of the concessions granted to our tenants as a result of the COVID-19 pandemic are rent deferrals with the original lease term unchanged and collection of deferred rent deemed probable (see the Overview - Management Update on the Impacts of the COVID-19 Pandemic section of this Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information on second quarter rent deferrals). As a result of relief granted by the FASB andSEC related to lease modification accounting, rental revenue used to calculate net income and NAREIT FFO has not, and we do not expect we will be, significantly impacted by the deferrals we have entered into. In addition, since we currently believe that these deferral amounts are collectable, we have excluded from the increase in straight-line rent for AFFO purposes the amounts recognized under GAAP relating to rent deferrals. For a detailed discussion of our revenue recognition policy, including details related to the relief granted by the FASB and SEC, see Note 2 - Summary of Significant Accounting Policies to the consolidated financial statements included in this Quarterly Report on Form 10-Q. Three Months Ended March 31, (In thousands) 2021 2020 Net (loss) income attributable to common stockholders (in $ (832)$ 5,038 accordance with GAAP) Depreciation and amortization 39,684 33,533 FFO (as defined by NAREIT) attributable to common stockholders 38,852 38,571 Acquisition, transaction and other costs 17 280 Loss on extinguishment of debt - - Core FFO attributable to common stockholders 38,869 38,851 Non-cash equity-based compensation 2,577 2,488 Non-cash portion of interest expense 2,279 1,810
Amortization related to above- and below- market lease intangibles and right-of-use assets, net
59 232
Straight-line rent (944) (1,487)
Straight-line rent (rent deferral agreements) (1) (649) -
Unrealized income on undesignated foreign currency advances and other hedge ineffectiveness
- -
Eliminate unrealized losses (gains) on foreign currency transactions (2)
(1,762) (2,082)
Amortization of mortgage discounts and premiums, net and mezzanine discount
- 10
AFFO attributable to common stockholders $
40,429
Summary
FFO (as defined by NAREIT) attributable to common stockholders $
38,852 $ 38,571
Core FFO attributable to common stockholders $ 38,869 $ 38,851
AFFO attributable to common stockholders $
40,429
_________
(1)Represents the amount of deferred rent pursuant to lease negotiations which qualify for FASB relief for which rent was deferred but not reduced. These amounts are included in the straight-line rent receivable on our balance sheet but are considered to be earned revenue attributed to the current period, for purposes of AFFO, as they are expected to be collected. (2)For AFFO purposes, we adjust for unrealized gains and losses. For the three months endedMarch 31, 2021 , gains on derivative instruments were$1.8 million , which consisted of primarily unrealized gains of$1.8 million . For the three months endedMarch 31, 2020 , gains on derivative instruments were$3.1 million , which consisted of unrealized gains of$2.1 million and realized gains of$1.0 million . 53 -------------------------------------------------------------------------------- Table of Contents Dividends The amount of dividends payable to our common stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for dividends, our financial condition, provisions in our Credit Facility or other agreements that may restrict our ability to pay dividends, capital expenditure requirements, as applicable, requirements ofMaryland law and annual distribution requirements needed to maintain our status as a REIT. ThroughMarch 31, 2020 , we paid dividends on Common Stock at an annualized rate of$2.13 per share or$0.5325 per share on a quarterly basis. InMarch 2020 , our board of directors approved a change in the dividend to an annual rate of$1.60 per share or$0.40 per share on a quarterly basis, which was effective beginning in the second quarter of 2020 with ourApril 1, 2020 dividend declaration. Dividends authorized by our board of directors and declared by us are paid on a quarterly basis in arrears on the 15th day of the first month following the end of each fiscal quarter (unless otherwise specified) to common stockholders of record on the record date for such payment. Dividends on our Series A Preferred Stock accrue in an amount equal to$0.453125 per share per quarter to Series A Preferred Stock holders, which is equivalent to 7.25% of the$25.00 liquidation preference per share of Series A Preferred Stock per annum. Dividends on our Series B Preferred Stock accrue in an amount equal to$0.429688 per share per quarter to Series B Preferred Stock holders, which is equivalent to 6.875% of the$25.00 liquidation preference per share of Series B Preferred Stock per annum. Dividends on the Series A Preferred Stock and Series B Preferred Stock are payable quarterly in arrears on the 15th day of January, April, July and October of each year (or, if not on a business day, on the next succeeding business day) to holders of record on the close of business on the record date set by our board of directors. Any accrued and unpaid dividends payable with respect to the Series A Preferred Stock and Series B Preferred Stock become part of the liquidation preference thereof. Pursuant to the Credit Facility, we may not pay distributions, including cash dividends payable with respect to Common Stock, Series A Preferred Stock, Series B Preferred Stock, or any other class or series of stock we may issue in the future, or redeem or otherwise repurchase shares of Common Stock, Series A Preferred Stock, Series B Preferred Stock, or any other class or series of stock we may issue in the future that exceed 100% of our Adjusted FFO as defined in the Credit Facility (which is different from AFFO disclosed in this Annual Report on Form 10-K) for any period of four consecutive fiscal quarters, except in limited circumstances, including that for one fiscal quarter in each calendar year, we may pay cash dividends and other distributions and make redemptions and other repurchases in an aggregate amount equal to no more than 105% of our Adjusted FFO. We used the exception to pay dividends that were between 100% of Adjusted FFO to 105% of Adjusted FFO during the quarter ended onJune 30, 2020 . Our ability to pay dividends in the future and maintain compliance with the restrictions on the payment of dividends in our Credit Facility depends on our ability to operate profitably and to generate sufficient cash flows from the operations of our existing properties and any properties we may acquire. There can be no assurance that we will complete acquisitions on a timely basis or on acceptable terms and conditions, if at all. If we fail to do so (and we are not otherwise able to increase the amount of cash we have available to pay dividends and other distributions), our ability to comply with the restrictions on the payment of dividends in our Credit Facility may be adversely affected, and we might be required to further reduce the amount of dividends we pay. In the past, the lenders under our Credit Facility have consented to increase the maximum amount of our Adjusted FFO we may use to pay cash dividends and other distributions and make redemptions and other repurchases in certain periods, most recently in connection with the amendment and restatement of our Credit Facility inAugust 2019 . There can be no assurance that they will do so again in the future. 54 -------------------------------------------------------------------------------- Table of Contents Cash used to pay dividends and distributions during the three months endedMarch 31, 2021 , was generated from cash flows from operations and cash on hand, consisting of proceeds from borrowings. The following table shows the sources for the payment of dividends to holders of Common Stock, Series A Preferred Stock, Series B Preferred Stock and distributions to holders of LTIP Units for the periods indicated: Three Months Ended March 31, 2021 Percentage of (In thousands) Dividends Dividends and Distributions: Dividends to holders of Common Stock$ 36,213 Dividends to holders of Series A Preferred Stock 3,081 Dividends to holders of Series B Preferred Stock 1,701 Distributions to holders of LTIP Units 103 Total dividends and distributions$ 41,098 Source of dividend and distribution coverage: Cash flows provided by operations$ 41,098 100.0 % Available cash on hand - - % Total sources of dividend and distribution coverage$ 41,098 100.0 % Cash flows provided by operations (GAAP basis)$ 53,220 Net income (loss) attributable to common stockholders (in accordance with GAAP)$ (832) Foreign Currency Translation Our reporting currency is the USD. The functional currency of our foreign investments is the applicable local currency for each foreign location in which we invest. Assets and liabilities in these foreign locations (including intercompany balances for which settlement is not anticipated in the foreseeable future) are translated at the spot rate in effect at the applicable reporting date. The amounts reported in the consolidated statements of operations are translated at the average exchange rates in effect during the applicable period. The resulting unrealized cumulative translation adjustment is recorded as a component of accumulated other comprehensive income in the consolidated statements of changes in equity. We are exposed to fluctuations in foreign currency exchange rates on property investments in foreign countries which pay rental income, incur property related expenses and borrow in currencies other than our functional currency, the USD. We have used and may continue to use foreign currency derivatives including options, currency forward and cross currency swap agreements to manage our exposure to fluctuations in foreign GBP-USD and EUR-USD exchange rates (see Note 8 - Derivatives and Hedging Activities to the consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion). Contractual Obligations Except as set forth in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," there were no material changes in our contractual obligations atMarch 31, 2021 as compared to those reported in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 55 -------------------------------------------------------------------------------- Table of Contents Election as a REIT We elected to be taxed as a REIT under Sections 856 through 860 of the Code, effective for our taxable year endedDecember 31, 2013 . We believe that, commencing with such taxable year, we have been organized and have operated in a manner so that we qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner to qualify for taxation as a REIT, but can provide no assurances that we will operate in a manner so as to remain qualified as a REIT. To continue to qualify for taxation as a REIT, we must distribute annually at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard for the deduction for dividends paid and excluding net capital gains, and must comply with a number of other organizational and operational requirements. If we continue to qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax on the portion of our REIT taxable income that we distribute to our stockholders. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties, as well as federal income and excise taxes on our undistributed income. In addition, our international assets and operations, including those owned through direct or indirect subsidiaries that are disregarded entities forU.S. federal income tax purposes, continue to be subject to taxation in the foreign jurisdictions where those assets are held or those operations are conducted. Inflation We may be adversely impacted by inflation on any leases that do not contain an indexed escalation provision. In addition, we may be required to pay costs for maintenance and operation of properties which may adversely impact our results of operations due to potential increases in costs and operating expenses resulting from inflation. Related-Party Transactions and Agreements See Note 11 - Related Party Transactions to our consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of the various related party transactions, agreements and fees. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that had or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There has been no material change in our exposure to market risk during the three months endedMarch 31, 2021 . For a discussion of our exposure to market risk, refer to Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," contained in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q and determined that our disclosure controls and procedures are effective. Changes in Internal Control Over Financial Reporting During the quarter endedMarch 31, 2021 , there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 56
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