Global Net Lease (GNL +0.54%) has a huge 10% dividend yield, well more than net lease peers like Realty Income (O +0.03%) and W.P. Carey (WPC +0.55%). But you need to look beyond the yield before you decide whether Global Net Lease is a worthy investment option.
In the end, it doesn't match up to the quality of its peers. Here's why.
A big opportunity
Realty Income has been discussing the growth potential it sees in Europe ever since it dipped its toes into the region a few years ago. Notably, the giant net lease real estate investment trust (REIT) estimates that Europe is an $8 trillion market, with only three publicly traded names in it totaling just $6 billion in enterprise value. (Net lease REITs own properties in which their lessees are responsible for most of the asset-level operating costs, a property investment approach that's still pretty new in Europe.)
The U.S. net lease market, by comparison, is $4 trillion in size, with 14 public companies totaling $145 billion in enterprise value. In other words, Europe is bigger, with less competition.
Image source: Getty Images.
No wonder Realty Income is keen to keep growing its business there. This backdrop also helps explain why the REIT has found itself warmly welcomed by companies in the region. At this point, about 10% or so of Realty Income's rent comes from Europe. Peer W.P. Carey, meanwhile, has been operating in Europe for decades and gets around 35% of its rents from the region.
Either would be a good choice for long-term dividend investors when it comes to adding a globally diversified net lease REIT to their portfolio. Notably, Realty Income is a Dividend Aristocrat, and W.P. Carey is on the verge of joining that elite group. Both increased their dividend each quarter in 2020 despite the pandemic, which caused so many REITs to trim their distributions.
Realty Income's dividend yield is 4.1%, and W.P. Carey's is 5.2%. But if the diversification benefit from having European exposure is so interesting, why not look at Global Net Lease and its over 10% yield? It gets an even greater 40% or so of its rents from Europe, too.
Not a great track record
The first big warning sign comes from the pandemic, when Global Net Lease was forced to cut its dividend by 33% in 2020. That's clearly not a good sign for an investor who's looking for a REIT that can muddle through tough times and still manage to keep paying investors.
To be fair, Global Net Lease wasn't the only REIT to cut its dividend. However, it really had no choice, noting that even after the world started to reopen, the $0.5325 dividend it was paying before the cut would have been materially larger than the $0.44 per share in adjusted funds from operations (FFO) it earned in the third quarter of 2021.
But there's another problem here: The current dividend, which has held steady since the cut, is $0.40 per share per quarter. So the third-quarter adjusted FFO payout ratio is a hefty 90% -- from a REIT with a history of cutting its dividend. For reference, W.P. Carey's adjusted FFO payout ratio was roughly 85% in the third quarter of 2021, while Realty Income's was an even better 78%. And both W.P. Carey and Realty Income have much more impressive dividend histories behind them.
On top of that, as the chart shows, Global Net Lease's debt-to-equity ratio is a lofty 1.4 times or so. W.P. Carey's is materially lower at 0.9 times, with Realty Income at just 0.7 times. The discrepancy between Global Net Lease's leverage and its two peers has been widening as well, which suggests that balance sheet risk is increasing, not decreasing. A higher payout ratio combined with more leverage is not a good sign for investors looking for safe dividend payments.
GNL Debt to Equity Ratio data by YCharts
Other options
While Global Net Lease has exposure to an exciting market (Europe), which sets it apart from many domestic peers, that doesn't mean it is worth owning. Sure, the 10% yield is enticing, but lower-yielding W.P. Carey and Realty Income both have much stronger dividend track records. Sometimes the biggest yield isn't the best option, and this is one of those times where the risks likely outweigh the potential rewards.
