Published by Nick McCullum on June 19th, 2017
Real estate investment trusts – or REITs, for short – give investors a method to indirectly own high-quality real estate assets without the hassles and headaches associated with traditional real estate investment strategies.
They are also a great source of dividend income. Thanks to the steady cash flows delivered by rent or lease payments, REITs often have dividend yields well above the average stock in the S&P 500.
Global Net Lease (GNL) is one example of this.
The REIT’s 9%+ dividend yield make it stand out even among the short list of high dividend stocks with 5%+ yields.
Even better, the company pays monthly dividends. This is very rare, as the vast majority of publicly-traded companies pay dividends on a quarterly basis.
Global Net Lease’s very high dividend yield and monthly dividend payments make it an intriguing stock for income-oriented investors.
This article will analyze the investment prospects of Global Net Lease in detail.
Business Overview & Corporate History
Global Net Lease is a triple net lease real estate investment trust that operates in many of the most important global economies, including the United States and various countries in Europe.
Triple net leases are those where the occupant is responsible for paying the three major secondary costs associated with buying real estate:
- Maintenance costs
- Insurance costs
- Property taxes
Triple net leases are also called net-net-net (NNN) leases.
Global Net Lease rents its international property portfolio to various corporations, often investment grade. The trust typically locks in its tenants under long-term contracts – Global Net Lease has a weighted average remaining lease term of 9.5 years.
Source: Global Net Lease May 2017 Investor Presentation, slide 6
Before becoming a publicly-traded investment vehicle, Global Net Lease was a privately-held REIT named American Realty Capital Global Trust.
Importantly, Global Net Lease’s predecessor name is not American Realty Capital Properties (ARCP) – note the slight difference in name. This is a separate REIT that experienced significant negative media attention after both the Chief Financial Officer and Chief Accounting Officer made crucial accounting mistakes that resulted in an overstatement of its adjusted funds from operations in 2014.
With that in mind, Global Net Lease’s name change was possibly done to avoid association with this scandalous (yet separate) REIT.
One of the characteristics about GNL that stands out most to its investors is its global presence.
The company is highly diversified, with operations in the domestic United States as well as Europe. These markets were strategically targeted based on their high sovereign credit ratings, mature & growing economies, and low unemployment rates.
More specifically, Global Net Lease’s current portfolio includes investments in the following countries:
- United States
- United Kingdom
- The Netherlands
More details about the globalized business model of Global Net Lease can be seen below.
Source: Global Net Lease May 2017 Investor Presentation, slide 4
Global Net Lease is definitely a worldwide operation, but its United States portfolio still dwarfs its presence in Europe.
Presently, Global Net Lease has 243 properties in the United States, which compares very favorably to its 69-property presence in Europe.
Source: Global Net Lease May 2017 Investor Presentation, slide 8
Moving on, the next section will discuss the growth prospects of Global Net Lease in detail.
Since its inception in 2012 (as a private entity), Global Net Lease has grown by raising capital through the equity and debt markets and then deploying this new money into additional real estate assets.
In December of last year, the trust also made the needle-moving acquisition of ARC Global Trust II, Inc.
This $3.1 billion transaction was very substantial for global net lease, particularly considering that the acquiring REIT has a market capitalization of $1.5 billion (the stark difference between the two numbers is because we are comparing enterprise value to market capitalization, two fundamentally different metrics).
Source: Global Net Lease May 2017 Investor Presentation, slide 9
Looking ahead, Global Net Lease’s growth will be largely driven by the execution of debt or equity issuances and the subsequent deployment into more properties, generating additional rental income.
Intuitively, this makes sense.
As a real estate investment trust, Global Net Lease is required by law to pay out the majority of its net income as distributions to its shareholders.
Thus, Global Net Lease turns to the public markets to raise more capital and drive fundamental growth.
Competitive Advantage & Recession Performance
Global Net Lease’s competitive advantage comes from its considerable geographic diversification.
By having global operations, Global Net Lease is exposed to a much larger number of asset acquisition opportunities than its domestic-only counterparts.
The trust also benefits tremendously from its high-quality tenant base.
This REIT also has a very long-dated lease maturity profile. The company has no leases maturing over the next three years and only 11% of its leases expire during the next six years.
More details about Global Net Lease’s tenant base and lease characteristics can be seen below.
Source: Global Net Lease May 2017 Investor Presentation, slide 12
From a debt perspective, Global Net Lease’s positioning is reasonable for a REIT. The company’s net debt to adjusted EBITDA was 7.2x at the end of the most recent quarter. This would be quite high for a traditional corporation but is in line with other net lease REITs.
Further, the company has an interest coverage ratio of 4.6x and a weighted average interest rate of 2.7%, giving it some margin for error in case of a recession or isolated operational difficulties.
Source: Global Net Lease May 2017 Investor Presentation, slide 18
While Global Net Lease did not exist as a publicly-traded real estate investment trust during the last recession of 2007-2009, I would expect that this REIT would perform reasonably well compared to other REITs during an economic downturn because of its high-quality tenant base and long-dated lease expiration schedule.
Valuation & Expected Total Returns
Global Net Lease’s future shareholder returns will be composed of valuation changes, dividend yield, and growth in the trust’s profitability (as measured by funds from operations).
Valuing real estate investment trusts is different than valuing corporations because of the nature of REIT accounting.
Since the primary business of REITs is to own and rent long-lived assets – their properties – they incur significant depreciation charges which impair their GAAP earnings-per-share and make the traditional price-to-earnings valuation metric essentially meaningless.
One useful and practical valuation alternative is to compare a REIT’s current dividend yield to its historical dividend yield.
If the trust’s current dividend yield is lower than normal, then it is overvalued; conversely, if the yield is higher than normal, the REIT is undervalued.
Global Net Lease currently pays a monthly dividend of $0.1775, equivalent to a quarterly dividend of $0.5325 and an annual dividend of $2.13.
The company’s current stock price of $22.69 is trading at a dividend yield of 9.4%. For context, the average dividend yield within the S&P 500 is currently 1.9%. By comparison, Global Net Lease is a fantastic security for generating current portfolio income.
For the purpose of valuation, the following diagram compares Global Net Lease’s current dividend yield to its long-term historical average.
Global Net Lease’s current dividend yield of 9.4% is slightly above its average dividend yield of 9.0% since inception.
Accordingly, the company is very slightly undervalued.
As with any high-single-digit dividend yield, Global Net Lease should be carefully analyzed to ensure the safety & sustainability of its dividend payments.
Global Net Lease reported funds from operations of $0.51 in the first quarter of 2017. The company paid three monthly dividends of $0.1775 during this time, for a total payout of $0.5325.
Some quick math shows that Global Net Lease currently has a payout ratio of 104% using funds from operations. During the most recent quarter, Global Net Lease’s distribution payments were unsustainable.
Looking further back, Global Net Lease had an FFO payout ratio of 93% and 97% in 2016 and 2015, respectively. Based on this, it is likely that the company’s 104% payout ratio in the most recent quarter is an isolated phenomenon. Current and prospective Global Net Lease investors should watch closely to ensure that the company’s dividend coverage is restored.
To sum up, Global Net Lease’s exceptionally high dividend yield as well as its attractive valuation (based on yield) gives investors a solid probability of achieving double-digit returns if the company can return its FFO payout ratio to acceptable levels (below 100%) and avoid a dividend cut.
Global Net Lease has two main characteristics that appeal to a wide variety of income investors:
- An exceptionally high ~9% dividend yield
- Monthly dividend payments
With that said, the trust’s payout ratio (using funds from operations, not earnings) exceeded 100% in the most recent quarter, which raises concerns about the safety of future dividend payments.
If Global Net Lease can return its payout ratio to a more reasonable level, this stock is appealing for investors looking to generate meaningful monthly dividend income.